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, you know, a topic that's been exercising a lot of people's minds this week, is around what green shoots, you know, 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.
Yeah. 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.
You know, 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 OEMs, and so we have seen that. I spoke about some strength in commercial construction equipment makers.
Yeah.
We've talked about ag being less bad, but recovering.
A nd I think, you know, there are certain components of the ag makers that, 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.
T hat 2026 should be a much better year than the last couple of years that we have, we have operated in.
As you said, you've seen, you know, a lot of cycles down the years. With this particular sort of emergence from that, you know, two-year plus soft patch, you know, what do you think were some of the drivers of that? Was it just kind of deferred stocking or, you know, relief that the tariffs weren't a bigger problem? You know, how do you see some of the kind of root causes of this acceleration that we've seen recently?
Well, well, you know, you really had more than three years of pretty negative industrial, underlying industrial economy, you know, frankly, absent of a couple of very specific end markets, right? So the general industrial business has not been very healthy for over three years, and, y ou know, the PMIs have been negative, basically more or less 38 months. You've got to go back all the way to World War II to see that type of a negative performance. The underlying health of the industrial economy wasn't good. And so I think that, you know, to me, that felt like it was a result of that massive restock post-COVID.
Generally, you know, a malaise-type industrial economy, economies globally. You know, we didn't have China to pull the rest of the world out of that. China was pretty weak over the last three years as well. You know, obviously, Europe wasn't great, and, you know, the U.S. wasn't really a real engine of growth. So I, I think that you're just getting from a period of weakness.
You know, I certainly am not qualified to call it a, you know, a V-shaped recovery or of any, 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, you know, we all have operated in a pretty negative, end markets, and so a, stop deceleration or a small re-acceleration almost feels like a V-shaped recovery to us.
Yeah. And, you know, when you think back historically, you know, 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 conversations with distributors kind of telling you right now?
Yeah, 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 a better confidence for the channel partners to see that there is a need for them to carry more robust or more, you know, more ready inventory, so that they can support the demand. And that will, generally speaking, you know, result in more of a carry through of that upcycle. My sense is that that, generally speaking, happens kind of one to two quarters out. I do think that you need to see firming of the PMIs.
You know, I'm a big believer that you have to see that manufacturing PMI component of that survey to firm up for maybe two or three more months. When that happens, I think it just gives folks a better confidence that, you know, the economy has firmed up, the manufacturing economy has firmed up, and, you know, 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, you know, I think that you just need to see the validation, particularly taking into account that you had a couple of head fakes the last couple of years, right?
Mm-hmm. Yeah. But to your point, I guess you feel, I think you were always quite skeptical the last two years about a recovery. This time you've seemed, as you said, cautiously optimistic about it, so.
I am. Look, I mean, I don't wanna 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. That just gives me much greater degree of confidence that we should see a follow-through. But, you know, a couple more months, time will tell, and that happens, I think good things will happen to the manufacturing economy. I think that you hear it from many different folks in-
Yes
-very different segments. I mean, I think that, you know, for us, the diversified industrial end market is reasonably good at, good exposure for us, over 20% of our revenues. You know, it, it's good to hear the Rockwells of the world and, you know, the Parkers of the world to talk about in-plant recovery of demand.
So, you know, you can start seeing that follow-through that will be good for the broader general economy.
And then I think, you know, some of the sort of extremes on demand, I think very strong market and company growth in data center, to 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 I'll finish on the data center question that you had. But in personal mobility, look, we—you know, we have created a new market. We are competing against non-traditional competitor for Gates, which is an industrial chain. We have developed a by far better solution, more elegant solution, for two-wheel applications. We have been at it from, you know, 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 three years ago, it was about 3% of our overall revenue, so, you know, 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 invoiceable revenues.
That's coming through, and, you know, we've committed to our shareholders on the Street that we anticipate to deliver kind of high twenties, 30% compound annual growth rate between 2025 and, and 2028. We've talked about delivering about $300 million of revenues by 2028, and, you know, we are, we are very nicely on that trajectory presently. Look, for me, I will say that that's kind of a opportunity for the next 50 years, because even at $300 million, that will represent maybe three, 4% of penetration, of two-wheel applications. 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 chain drive, that will further open more opportunities. So I'm pretty bullish about the long term not just the midterm, opportunity to grow that personal mobility space.
On data, 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 fluid through the liquid cooling applications. As the liquid cooling applications then take hold, and, you know, everybody's talking about liquid cooling, obviously.
You know, the liquid cooling applications are just on the front end of being adapted. And I, you know, 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 had 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, at the exit of 2028, we should be kind of at a $100 million-$200 million run rate of revenue.
So we're very firmly focused on executing to that, and we will continue to talk about our pipeline by design wins. So very similarly to what we have spoken about in personal mobility, and then we will hopefully start talking about it being, you know, a couple of points of revenue in our diversified industrial quantified market presence.
Hmm. And then, you know, switching maybe to automotive, you know, you had a really, I think, since joining Gates, a sort of steady, you know, reduction deliberately to auto OE, and that, you know, the cost of that has been a headwind to the overall company growth rate. You know, where are we on that kind of continuous pruning of OE exposure? You know, near the end of it, or no, it's a continuous-
Look, our OE, 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 pretext that we can't make appropriate returns. Look, I, 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 a organic growth rate of about 3% over a seven-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, our, about our growth. We feel excellently about our opportunity to deliver accelerated organic growth in the next three to four to five years. The opportunities are outstanding. Many of those opportunities are new, and they are accelerating, so we feel quite good about where we sit.
Lastly, kind of on the end market front, you know, automotive aftermarket, a very large one for you, how do you see kind of the top line, you know, playing out this year, and how does your strategy there differ from the OE auto side?
Yeah. So look, that's a fantastic end market to participate in. It's a very steady market. You know, if I chart that presence of our company in that market, that market is really non-cyclical. It constantly, you know, chugs along at kind of a GDP plus growth. We do have occasional years where we take a nice amount of market share, and we had that year last year. W here 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 a big actually comp in Q1.
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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 will, we still anticipate that we will 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 a, you know, low to mid-single-digit core growth over the long term.
Sort of self-help front around margins and operations. You know, where are we exactly on that European ERP rollout? And are we sort of past the point of maximum risk now?
Yeah, absolutely. Well, thank you for asking that question. We are definitely past the point of maximum risk. You know, the biggest risk is when you press the button for go. We've pressed the button, and you know, the engine started. I am pleased to say that, we are taking orders. We are... You know, we are, processing manufacturing orders. The materials are moving, and we are manufacturing things. They're moving into the warehouse. We're shipping, we're invoicing. So all of those things are proceeding maybe better than what we've anticipated, candidly speaking. You know, there's still an efficiency that needs to improve.
There's gonna be an efficiency headwind for kind of a one, one and a half quarters for us 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, you know, outside services that might 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. We've spoken about that. To our shareholders, so we feel very well where we sit. I think that we are now on a trajectory of just driving the efficiencies to the prior operating capability.
Then footprint optimization, you know, this has been, in a way, going on, you know, through your whole tenure at Gates. So kind of, you know, what's different about this latest stage, and, and when should this round be complete? Will there be, you know, another round thereafter?
Look, we have a, you know, 115-year-old company, so the company has been around for a long time. And, you know, I will make sure that the company is around for the next 100 years, right? And so what we have done, and you're, you are correct, Julian, we have been resetting our, structural costs. Look, I am super proud, of the fact that we are exiting a downcycle, 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 upcycle. Our exit from a downcycle 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, you know, a 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. 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 a second, third quarter of this year. And as we have indicated, that's gonna give us a nice earnings benefit in the second half of this year into 2027. So, you know, it's just another step in a journey. If history is a guide, I will tell you that there's probably more to come.
Yeah. And then on the sort of shorter term, you know, more variable cost side of things, you know, a lot of inflation on metals and so forth, some chips as well. You know, do you see any sense of kind of price fatigue among customers, or no, you're pretty confident these costs can be passed through?
Yeah. Look, we actually don't see a lot of inflation, interestingly enough, in the materials. There is inflation, and maybe more severe inflation in labor and energy costs. So utilities and you know, and direct labor in certain regions of the world. And look, we will continue to price... Over 65% of our revenue comes from aftermarket, where I think that it's a little bit easier to pass, you know, inflationary costs through. Not that you certainly wanna continue to do that, but, you know, we have demonstrated that we can, and we will, to do just that.
And, you know, we are frankly also quite, intent to pass inflation on to the OEMs. We certainly do that with the other guys and we will continue to do that, and, we'll be pretty pragmatic about what needs to be done. But, you know, 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 go give ourselves an opportunity to lower our cost through productivity of better materials.
And, you know, that journey is not complete. We, you know, 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, yeah, we're certainly deploying it there.
You know, there's a lot of moving parts at the moment. The, you know, the ERP, the footprint optimization, the volume environments seems to be getting better. So kind of rolling it together, it, 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, you know, how do you feel about the seasonality of earnings this year and kind of the confidence in that guide with that kind of weighting?
Yeah, you know, there's 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 know, 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, you know, we have some headwind in first quarter.
Half of that headwind is just because we simply have two less days in first quarter of this year versus prior years, 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 one day back in a second in a December quarter. From those two days. So, you know, and if you say that our guidance is embedding 2.5% decline in Q1, that would, you know, analytically tell you that we are growing at 2.5% organic growth rate, absent of those two headwinds.
We've basically embedded a 2.5% growth rate across the entire calendar year. We have a very level-loaded year. We don't have a hockey stick in the second half. Coming back to the, you know, 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, you know, around that zone. We will benefit from about $10 million-$15 million of improvement in earnings through the footprint realignment project that we have discussed. So we actually... You know, I feel very, very good about where we sit, underpinning the guidance through kind of that organic growth of about 2.5%.
You know, 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, incremental should be very high because you have footprint savings, plus the early part of the recovery tends to offer richer operating leverage?
Absolutely. I mean, I think we've quantified it in the first 12 months. So kind of think about second half of 2026 into the first half of 2027. You know, we've kind of quantified it. Our incremental should be 45%-50%. A nd then, you know, as we exit, you know, into maybe a second half of the year, I mean, you know, our incrementals should be kind of in that 35% plus, on a normalized basis.
Capital deployment, yeah, has been sort of steady reduction in leverage down the year. So you have certainly, you know, good flexibility now, versus ever before. You know, the stock's pretty cheap, so I can see the, the buyback appeal. You have that, the ROIC hurdle in the twenties seems, you know, quite demanding for much M&A to, 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, you know, 1.8 times levered, right? So... And again, we-- just to remind everybody, we delevered about half a turn a year. So, y ou know, leverage is not really an issue that I will ever, hopefully have to speak about again. We generate a ton of free cash flow. You know, reminding everybody, we have over $800 million sitting on a 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're working through, you know, 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 wanna 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, you know, as I see it, Julian, we would do deals that are highly accretive.
Those deals need to generate decent return 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. You know, 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, you know, around sort of uses of excess cash from here.
So mostly buyback focused. And again, yeah, no need for debt paydown anymore, which is good to see. Next question is on valuation. You know, what's the appropriate kind of year one PE that Gates should trade at?
So, kind of high teens PE. And then last question, you know, 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.