GTES Q3 Deep Dive: Margin Expansion Amid Volume Pressures and Restructuring Initiatives

Power transmission and fluid power solutions provider Gates Corporation (NYSE:GTES) met Wall Streets revenue expectations in Q3 CY2025, with sales up 3% year on year to $855.7 million. Its non-GAAP profit of $0.39 per share was 5.4% above analysts’ consensus estimates.

Is now the time to buy GTES? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Gates Industrial Corporation’s third quarter was met with a negative market reaction, despite the company’s non-GAAP earnings per share exceeding Wall Street’s consensus. Management attributed the mixed performance to subdued macroeconomic conditions, particularly in its industrial and agriculture end markets, and cited low single-digit growth in the replacement channel and strong Personal Mobility momentum as offsetting factors. CEO Ivo Jurek noted, “Our replacement channel grew low single digits, supported by mid-single-digit growth in automotive replacement,” while acknowledging that demand softness persisted in North American and European agriculture segments.

Looking ahead, Gates’ updated outlook relies on continued execution of its restructuring and cost optimization efforts, as well as growth in strategic verticals like Personal Mobility and data centers. Management expects ongoing factory closures and an ERP system upgrade to temporarily impact margins in the first half of next year, but anticipates that these actions will support margin expansion as demand stabilizes. CFO Brooks Mallard commented that, “We expect our footprint optimization, restructuring and material cost-out activities to generate 0 to 25 basis points overall adjusted EBITDA margin improvement year-over-year for the full year 2026.”

Key Insights from Management’s Remarks

Management cited uneven end market performance, ongoing cost initiatives, and a new share repurchase program as key themes shaping the quarter’s results and future positioning.

• Personal Mobility momentum: Gates’ Personal Mobility segment delivered over 20% year-on-year growth, with management emphasizing design wins and ongoing demand for alternative transportation products. This vertical is expected to remain a driver of above-market growth as electrification and urban mobility trends continue.
• Restructuring and footprint optimization: The company is executing a multi-phase restructuring plan, including factory closures in North America and Europe, labor realignment, and an ERP system upgrade. Management expects these actions to temporarily pressure margins in the first half of next year but ultimately enhance long-term efficiency and scalability.
• End market divergence: While automotive replacement and construction-related segments contributed to growth, management highlighted persistent demand weakness in commercial on-highway and agricultural markets, particularly in North America and Europe. CEO Ivo Jurek noted that, “agriculture got incrementally worse for us in Q3,” but sees signs of stabilization in 2026.
• Material cost savings and 80/20 initiative: The company continues to leverage its 80/20 operational improvement program to optimize pricing and reduce material costs, which helped offset some inflationary and tariff-related headwinds. Management indicated that these efforts are in the early innings and will remain a lever for future profitability.
• New $300 million share repurchase authorization: Gates’ board approved a fresh $300 million share buyback program, replacing the prior authorization. Management cited a stronger balance sheet and reduced leverage as supporting factors for increased capital returns and potential bolt-on M&A activity.

Drivers of Future Performance

Gates’ outlook hinges on stabilization in key end markets, successful execution of restructuring, and growth in verticals like Personal Mobility and data centers.

• Transition period from restructuring: Management expects temporary margin headwinds in the first half of next year due to factory closures, labor realignment, and ERP upgrades, with these costs expected to yield operational improvements and margin expansion in the second half of the year and beyond.
• Personal Mobility and data center growth: Gates anticipates continued strong growth in Personal Mobility, projecting compound annual growth of around 30% over the next three years, driven by design wins and electrification trends. The data center liquid cooling segment, while small today, has a pipeline of over $150 million and is positioned for meaningful growth as broader adoption accelerates.
• End market stabilization and pricing strategies: Management sees signs that key markets, including agriculture and diversified industrial, are approaching a trough and could recover in 2026. The company plans to maintain pricing discipline to offset material and tariff costs, leveraging its 80/20 approach to optimize profitability even in a slow-demand environment.

Catalysts in Upcoming Quarters

Going forward, our team will monitor (1) progress on factory closures and ERP implementation as restructuring ramps up, (2) the trajectory of Personal Mobility and data center revenue growth, and (3) stabilization or improvement in key end markets like agriculture and commercial on-highway. Execution on these priorities, along with discipline in capital deployment, will be central to Gates’ ability to expand margins and support long-term growth.

Gates Industrial Corporation currently trades at $22.61, down from $25.84 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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