Gates sets Q2 sales record, 'cautiously optimistic' for months ahead

DENVER—Gates Corp., one of the top three hose manufacturers in the world by net sales in 2022, expressed 'cautious optimism' despite expected headwinds entering 2023.

The power transmission and fluid power company has responded with resilience, notching record second-quarter sales of $936.3 million in net sales for the three months ending July 1.

"We executed well in the first half of 2023," Ivo Jurek, CEO of Gates, said in an Aug. 4 conference call. "As we enter the second half, our business prospects remain constructive and the operating environment continues to normalize. We are maintaining the midpoint of our adjusted EBITDA guidance and offsetting slower demand trends in the back half of the year.

"Long-term, I am confident in our growth, margin and cash flow generation potential and our ability to improve our balance sheet while investing in our growth initiatives and returning meaningful capital to shareholders."

The Q2 2023 net sales represented a 3.3-percent increase over net sales of $906.8 million in Q2 2022, including a 3.9-percent core revenue increase (which was partially offset by unfavorable foreign currency impact of 0.6 percent).

Overall Q2 2023 growth predominantly was driven by a 5.7-percent increase in net sales in the power transmission segment ($574 million for Q2 2023), specifically through products in automotive, on-highway and construction markets.

Adjusted overall company EBITDA for Q2 2023 was $197.3 million compared to $180.1 million in Q2 2022, according to Gates. The Q2 2023 adjusted EBITDA margin of 21.1 percent demonstrates a 120-point increase compared to Q2 2022.

"The increase in adjusted EBITDA margin stemmed largely from favorable pricing slightly offset by lower volumes," Jurek said.

Second quarter net income from continuing operations was $71.3 million, or 7.6 percent of net sales, compared to $59.3 million, or 6.5 percent of net sales, in Q2 2022.

"The margin improvement was fueled primarily by increased operating income partially offset by higher net interest expense," Jurek said.

This year's second quarter dividend to shareholders was 23 cents (against 19 cents in the second quarter of last year).

Gates is up in year-over-year growth for the first half of 2023 as well, with $1.83 billion in net sales in the first six months of this year, compared to $1.8 billion in net sales in the first half of 2022.

Gates operates with two main business segments, fluid power and power transmission. Both segments serve an array of industries, from automotive to oil and gas and industrial markets.

Products in the fluid power and hydraulic markets include hydraulic hoses, couplings and adapters, along with many other products.

Offerings in the power transmission and belting markets include synchronous and asynchronous belts, along with the myriad accessories required for the construction, agriculture and energy markets.

In Q2 2023, power transmission led the way with $574 million in net sales, a 5.7-percent increase over the $543 million Gates saw in Q2 2022.

The highest growth in power transmission was in automotive, which is predominantly aftermarket for Gates, according to Jurek.

Fluid power netted sales of $362.4 million in Q2 2023, a slight decrease against the $363.8 million in net sales that fluid power saw in Q2 2022.

However, the fluid power segment did see core revenue growth in construction, energy and on-highway markets, Jurek noted.

Regionally, Gates' growth is evident in the graphic taken from the investor report, with only North America seeing a decline year-over-year. The strongest growth at 28 percent year-over-year was seen in China.

Gates, which manufactures power transmission belts and fluid power products for the automotive replacement (31 percent), industrial off-highway (21 percent) and diversified industrial (20 percent) markets, among others, saw 2022 net sales jump 2.3 percent to about $3.55 billion, over 2021 net sales of $3.47 billion.

Core revenue growth came in at a higher rate at 7.6 percent over 2021 year-end financials, according to Gates.

Year-end EBITDA was $680.6 million for 2022 (a 19.1-percent margin) against $735.8 million (a 21.2-percent margin) for 2021.

According to Rubber News' 2022 Ranking of Hose Manufacturers, Parker-Hannifin ranked as the No. 1 hose producer both globally and in North America in 2022, and the Cleveland-based conglomerate again found itself at the top of the listing.

However, Parker had some company under the new format of grouping the firms within a sales range.

Parker was joined by both Danfoss and Gates as companies with more than $1 billion in hose sales worldwide.

Parker and Danfoss play prominent roles in both the industrial and hydraulic sectors of the hose industry, while Gates also is a major player in automotive.