Gates Industrial: Inflecting into an Industrial Recovery with Data Center Optionality
Record Q2 sales and raised guidance signal early-cycle strength; margin target within reach as growth engines rev.
GTES · Earnings Call · 2026-07-31
The Inflection Arrives
Gates Industrial is finally seeing the long-awaited upturn. The specialty industrial machinery maker reported record second-quarter sales of $942 million and core growth of 4.9%, while raising its full-year guidance. More tellingly, management declared the start of a cyclical recovery, with strength building across most end markets and a notable acceleration in high-growth niches like personal mobility and data-center liquid cooling.
We have entered the early stages of an industrial recovery.
The inflection is broad-based: Industrial OEM sales grew low-double digits, led by mid-teens growth in the channel globally, while aftermarket demand firmed. The Fluid Power segment delivered 4.2% core growth despite temporary footprint realignment costs. EMEA was a standout with 6.4% growth, APAC accelerated to 11.5%, and North America exited the quarter at a mid-single-digit rate.
Growth Engines
Personal mobility remains a powerful driver. “we have not really changed our mind about delivering 25% to 30% core growth in personal mobility over the next couple of years” — Ivo Jurek, Chief Executive Officer (CEO) · 2026-07-31 – a commitment that is finally translating into results, with growth of roughly 25% in the quarter.
Data centers are the other new growth vector. The company's data center business more than doubled year-over-year, and management expects a step-up in the second half as high-value projects launch. The target of $100-200 million in revenue by 2028 is gaining credibility.
Margin Trajectory
Margins are inflecting as well. Management guides to at least 23.5% adjusted EBITDA margin in the second half, well above the 22.5% delivered in Q2. CFO Brooks Mallard described the incremental trajectory: “for Q3, we're implementing pricing to offset some of the oil-related cost increases... we expect them to be in the 35% to 40% range... then move back to 45% plus as we move into Q4.” — L. Mallard, Chief Financial Officer (CFO) · 2026-07-31 The company's operating margin has recovered substantially from the trough: Operating Margin now sits at 13.0%, supported by a 39.7% gross margin and disciplined cost control.
The ERP transition that dragged on the first half is largely behind them. The Q2 catch-up was de minimis, and management now expects organic growth to accelerate. As Ivo Jurek noted, the company is "in a good position to deliver against the midterm margin target" from the 2024 Analyst Day.
From prior calls, the theme of managed headwinds is consistent. In Q1, they quantified ERP and footprint costs: “we actually had a terrific quarter, taking into account the quantified issues that we highlighted... outlining that we have a major ERP upgrade...” — Ivo Jurek, Chief Executive Officer · 2026-05-01 And in Q4, Brooks laid out the path to growth: “you should expect organic core growth each quarter as we move through the year.” — L. Brooks Mallard, Chief Financial Officer · 2026-02-12
Stock Disconnect
That promise is now being realized. The raised guidance implies 6% core growth in the second half, a significant step-up from 1% in the first half. The stock, however, has pulled back about 13% from its August 4 high, despite the improving fundamentals. This divergence may present an opportunity if the recovery continues.
The company's balance sheet is in excellent shape – net leverage at 1.8x, free cash flow conversion above 90%, and a repurchase program that bought back $22 million in the quarter. With the cycle turning, Gates appears well positioned to generate attractive incremental EBITDA margins and potentially revisit its 24.5% margin target sooner than expected.
In summary, Gates Industrial is inflecting. The combination of a recovering industrial economy, company-specific growth initiatives (personal mobility, data centers, chain-to-belt conversions), and operational self-help is creating a powerful operating leverage story. The recent pullback in the stock may offer a compelling entry into a name that is finally seeing its efforts pay off.