Gates Industrial Corp plc Q1 FY2026 Earnings Call

Good morning, and welcome, everyone, to the Gates Industrial Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Rich Kwas, Senior Vice President, Investor Relations. Please go ahead.

Greetings, and thank you for joining us on our first quarter 2026 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek; to be followed by Brooks Mallard, our CFO. Before the market opened today, we published our first quarter results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website. Please refer now to Slide 2 of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our annual report on Form 10-K that was filed in February 2026. We disclaim any obligation to update these forward-looking statements. We'll be attending several conferences over the coming weeks and look forward to meeting with many of you. And before we start, please note all comparisons are against the prior year period unless stated otherwise. Now I'll turn the call over to Ivo.

Thank you, Rich, and good morning, everyone. We appreciate your participation on our call today. I will start on Slide 3 with a brief recap of the first quarter. Our team executed well on our business priorities during the first quarter, navigating successfully through a period of business transition. In particular, our Europe team successfully implemented a new ERP system and achieved higher efficiency rates as the quarter progressed. Exiting the quarter, our Europe business has stabilized and was delivering revenues on par with prior pre-ERP implementation periods, although with still somewhat above-normal operating costs. We anticipate our operational efficiency in Europe to stabilize further during the second quarter. On a global basis, our sales dollars and margin rate were broadly consistent with expectations we outlined in February. Excluding the impact of the anticipated headwinds from the ERP transition and the two fewer working days that affected the first two months of the quarter, overall demand trends improved during the quarter. Core sales growth approximated mid-single digits year-over-year in March. We finished the quarter with a book-to-bill solidly above 1. As we sit here today, and based on our present run rate, we feel good about our core sales growth prospects for the year, absent any additional potential escalation of the conflict in the Middle East. In addition, we do not anticipate any material financial impact from the recent revisions in Section 232 tariffs. As such, we are reiterating our 2026 financial guidance. Please turn to Slide 4. Our first quarter sales were $851 million, representing a core sales decrease of 2.9%. Relative to our core sales guidance provided in February, we experienced some small incremental distribution inefficiencies associated with the ERP transition, which led to a build of past-due backlog as we exited the quarter. We expect to recover these sales in the second quarter, and Brooks will go into more detail later on the call. The European ERP transition and working days relative to a prior year period combined represented approximately a 600 basis point headwind to our core sales. Entering 2026, we experienced a positive inflection in industrial OEM orders, and that trend has continued. Adjusted EBITDA was $177 million, in line with expectations, resulting in an adjusted EBITDA margin of 20.8%, down 130 basis points year-over-year. The decrease was primarily driven by inefficiencies related to the ERP transition and the impact of having two fewer working days compared to the prior year period. Our adjusted gross margin was 40.5%, down approximately 20 basis points. Our adjusted earnings per share was $0.35, down slightly. The fewer working days in the quarter and the ERP transition combined to represent a $0.07 headwind to adjusted EPS. Operational performance and a lower adjusted tax rate were modest benefits. On Slide 5, I will cover segment highlights. All year-over-year comparisons were substantially impacted by the ERP conversion as well as the fewer working days. Looking past these items, we saw a very solid trend across both of our segments with noted underperformance in commercial on-highway production common to both. In the Power Transmission segment, we generated revenues of $533 million in the quarter, a decrease of approximately 2.5% on a core basis, primarily driven by the fewer working days and ERP transition in Europe. The Power Transmission segment realized accelerating order trends during March. Personal Mobility expanded 6%, and our growth rate was affected by project timing as well as the ERP transition in Europe, the region with the largest exposure to Personal Mobility. We anticipate a return to our normalized levels in Personal Mobility starting in Q2. Additionally, the construction end market continued to improve and the ag market is recovering. In the Fluid Power segment, our sales were $318 million, with a decrease in core sales of approximately 3.5%. Fewer working days and the year of ERP implementation again contributed to the decline. We realized strong double-digit growth in APAC during the quarter. Broadly, order intake was strong exiting the quarter. I would note that commercial on-highway was relatively weak in the quarter. That said, North American orders have inflected positively to start 2026. Our data center business continues to perform in line with our expectations, and revenue grew approximately 700% from a low base in the prior year period. I'll now pass the call over to Brooks for some comments on our results.

Thank you, Ivo. I'll begin on Slide 6 and discuss our core sales performance by region. In the Americas, core sales declined approximately 2.6% in the first quarter. Two fewer working days in our first quarter relative to the prior year period had an unfavorable impact on growth. North America core sales were down a little less than 2%. Excluding the working days impact, North America core sales would have increased compared to the prior year. In EMEA, core sales declined approximately 8.5% year-over-year, most of which was incurred in February. While production outpaced targets, finished goods shipping lagged production output in February and through the first part of March. This led to slightly lower-than-expected revenues, of around $4 million, and higher pass-through backlog than normal as we exited Q1. Overall, we were pleased with our improvement through the quarter. We delivered positive core growth in EMEA in March, and that trend has continued through the early stages of Q2. We expect to further improve our distribution efficiencies through the second quarter and exit at normalized levels of shipping output and past-due backlog. Our APAC region grew almost 4%; industrial OEM and auto aftermarket both grew nicely and fueled the performance. Slide 7 shows the components of our year-over-year change to adjusted earnings per share. On a combined basis, the temporary headwinds of the ERP transition and fewer working days represented a $0.07 headwind to adjusted earnings per share. Underlying operating performance contributed $0.02 per share. Other items, including a lower tax rate and share count, represented a $0.02 benefit. Slide 8 provides an overview of our free cash flow and balance sheet position. Over the last 12 months, we delivered free cash flow conversion of approximately 101%. Stronger operating cash flow drove positive free cash flow for the quarter. We continue to strengthen the balance sheet, exiting the quarter with net leverage at 1.9x, representing an improvement of approximately 0.4 turns compared to the first quarter of 2025. Our capital allocation approach remains balanced and we repurchased additional shares in the first quarter. In late February, we received a credit rating upgrade from Moody's to Ba2 from Ba3. Our return on invested capital remains strong while incurring margin headwinds associated with the ERP transition and continuing to make investments in our key process and growth initiatives. Turning to Slide 9, we have reiterated our full year 2026 financial guidance. We anticipate core growth to improve over the course of the year. For the second quarter, we are guiding revenue to a range of $905 million to $945 million. At the midpoint, core growth is estimated to be approximately 3.5% year-over-year. We project adjusted EBITDA margin to decline 30 basis points compared to the prior year period, influenced by temporary impacts from the ERP transition and our footprint optimization projects, which we expect to benefit adjusted EBITDA margin performance in the second half of this year. I'll now turn it back to Ivo for closing thoughts.

Thanks, Brooks. On Slide 10, let me summarize our key messages. First, our team executed well and showed a great degree of resilience during a period of significant business transition. We delivered slightly better adjusted EBITDA margin than expected and solid free cash flow on a seasonal basis. Our European business is operating as expected, post the ERP transition, and our team is highly focused on driving incremental efficiencies with the new system in place. We have shifted our operational focus to optimizing customer service fill rates to pre-ERP implementation levels, which were at world class. Second, we continue to see improving demand trends across most of our end markets. Industrial OEM orders are gaining momentum, and we experienced good demand trends in April. In EMEA, our revenue is trending nicely, above expectations to start the quarter. As such, we have good confidence in achieving our core revenue growth guidance where we sit today. Third, we believe our business is in a strong position. We are executing on our footprint optimization projects and anticipate achieving an adjusted EBITDA margin approaching 23.5% in the second half of the year. In addition, our balance sheet is in strong shape. We announced a small acquisition today, acquiring Timken's Industrial Belt business, which we expect to close in the third quarter. The acquisition augments our power transmission position in North America and should supplement growth moving forward. We intend to remain opportunistic deploying capital to enhance shareholder returns. Before taking your questions, I want to thank all of our global Gates associates for their diligence and efforts supporting our customers' needs and executing on our strategic goals. With that, I will now turn the call back to the operator for Q&A.

(Operator Instructions) We'll take our first question from Michael Halloran at Baird.

So maybe we just start where you were leaving off there a little bit, Ivo. So it sounds like growth—core growth would have been positive in the quarter, excluding the ERP and some of the days issues, feels like the trajectory is what you're wanting to see exiting 1Q into 2Q holistically. Maybe just confidence in the sustainability as we sit here today, any areas of concern? What are your customers saying? Just kind of generically help us understand how you think this tracks in the year.

Yes, Mike, thank you for the question. Look, we actually had a terrific quarter, taking into account the quantified issues that we highlighted on our Q3 earnings call last year, outlining that we have a major ERP upgrade that we are going to do on basically 24% of the company's revenues in a big-bang type event, and we have executed in an amazing way. I'm super proud of our Europe team. They have done a fantastic job and the business performed as we anticipated. The business continues to behave in a very strong fashion. Net of the two fewer selling days than the ERP, we would have been basically up 300 basis points on core, which is right in line with what we have expected for the year and is basically trending towards the midpoint of our annual guidance. April, we have exited in a very strong position as well. The order flow is very solid. We have highlighted on the last couple of calls that we have seen a very nice inflection in the industrial OEM order flow that remained throughout Q1 and into April. So as far as I see it today, I feel quite confident that we are in a very good position to be able to achieve our annual guidance. And we've actually put the business in a position to be able to do really well as the revenue generation capabilities and the end markets stabilize. So we're in a very good shape.

Yes. That makes a lot of sense. And maybe just the Timken purchase. Why does it make sense now? What capabilities does it add that you lacked before? And then any sense of size, revenue, profitability, any of that?

Yes. Look, it was very opportunistic. We were approached some time ago about the opportunity to acquire an asset that frankly—when you talk about around the edges of what you do, this is right front and center of what we do. This is highly complementary in nature for us. The business has evolved. I think that there have been some highlights about what that business was about 10 years ago. I think the business has gone through some transitions. We are buying assets and a facility in Mexico that is going to be highly complementary for us. The size—we think that business can add maybe $5 million a month in annualized revenue. So it's highly complementary, and I believe that it will be very accretive to us as we embed it into our operations, and it has the opportunity to continue to accelerate our growth rate.

We'll move to our next question from Jeff Hammond with KeyBanc.

This is David Tarantino on for Jeff. Maybe could you give us a little color on kind of the margin trends if you kind of back out the ERP transition? And maybe give us some color on price versus costs relative to the increased inputs, particularly around any oil-derivative impacts or any tariff impacts you expect moving forward? It looks like the year is kind of playing out in line with expectations overall.

Okay. All right, David. That's a lot to unpack, so get ready. So first, let's start with the margin headwinds. As I look at Q1 conservatively, I would say we had at least 200 basis points of EBITDA margin headwinds. At least half of that was associated with the ERP transition in Europe. So that's a combination of lower sales, as we talked about, and then the impact of higher temporary SG&A cost as we move to the hypercare phase of that go-live. Those costs are temporary. They'll come out as we exit Q2. And then the other half is a combination of the footprint optimization kind of cost-out that we talked about in the first half of the year as well as the impact of fewer days, right, just kind of the leverage part of the fewer days. And so you kind of take that into account we're kind of pushing up towards 23% EBITDA from a one-off perspective. And then I look at Q2, the midpoint, we're at 22.2%—22.3%—22.2%. And I see we still have about 100 basis points of headwind. Again, about half of that coming from ERP, almost entirely coming from hypercare and increased SG&A. And then the rest really coming around the footprint and cost actions. That should be complete by the end of Q2. And so again, before we get—start to get any of the savings or anything, we're approaching 23%. And so as I look at those two data points and I looked at the 23.5% that Ivo talked about for the back half of the year, well, we feel pretty good. We feel pretty good getting through the ERP transition, exiting the way we did, seeing a little core growth in EMEA and then kind of looking at the rest of the business and starting to get a little bit of growth there, we feel pretty good about things. From a tariff perspective, we don't really expect any impact from the Section 232 stuff. Most of ours was classified as automotive. And so that really doesn't impact us at all. We have a little bit of headwind, maybe 20 basis points of kind of dilution as we priced for tariffs. We're not even counting that though in any of our numbers. We're going to get to where we need to get irrespective of that. From—when you think about what's going on in the Middle East and the cost of oil and how that kind of impacts through the enterprise, obviously that's going to impact things like resins and polymers and compounds. It's going to impact things that have high energy use, like aluminum and steel. You're seeing those go up. And then there's ripple effects to the rest of the P&L. When it comes to pricing for inflation, we're very confident on that, right? We've always been able to price for inflation. We're getting out ahead of that. And we learned some lessons as we think back post-COVID and the Russia-Ukraine conflict, and we're really focused on surety of supply for our customers. In addition, we've done a lot of work around our supply base—supplier development, alternative materials, different things like that. And we feel like we're in a very solid position in terms of making sure we can take care of our customers, get surety of supply, not have any kind of interruptions in the business. And then also, as I said, we know we can price for inflation, and we will make sure we take care of that. In addition, we're sticking by our guidance in the second half, and we feel pretty good about it, okay?

Great. That's really helpful. And then maybe following up on the demand trends. Could you just give us a little bit more color on the underlying demand trends relative to the strong order take you highlighted? How do the current customer conversations track with that initial end market framework provided last quarter?

Yes. Look, I don't think that anything really has fundamentally changed. If there was a change, I would say maybe in North America, on-highway, order flow has gotten better than where it was kind of exiting 2025. Outside of that, we see pretty solid demand trends across the portfolio. We see good behavior in automotive aftermarket. We feel well about industrial off-highway. Obviously, commercial construction has been quite strong. Ag's been recovering very, very nicely. Energy and resources have stabilized, so that's kind of more still useful around the edges, but we anticipate that there may be an inflection taking into account what's happening in the Middle East. Diversified industrial is in a good place. Auto is soft. Auto is always soft, but it's such a small part of our business, and it is right where we anticipated. So when I take a look at where we sit, we feel concurrently that the midpoint of our guide for the year is super achievable.

We'll take our next question from Nigel Coe with Wolfe Research.

And by the way, congratulations on the deal. I think this is your first deal as a public company, right, Ivo?

It is. Thank you, Nigel, and it's kind of—it's a very nice tuck-in transaction that fits like a glove. It's right in our wheelhouse.

Yes, it does seem like it fits like a glove. Maybe just a bit more detail on what you're seeing sort of through April. Number one, given the short-cycle nature of your products, I'm just trying to understand why the push from the ERP transition. So I just want to understand how you're recovering those sales because I think we tend to think of a short sort of one-and-done, it lost doesn't recover. So just want to understand that. And then it sounds like you're seeing recovery in industrial OEM. You mentioned on-highway as an area of cover as well. I'm just wondering if some of the strength you're seeing is really being driven by some of this heavy industry recovery.

A lot to cover. So look, why do we feel that we're going to recover the sales in Europe? Because the way to think about it is that we were live basically in the first week of February. And you have to back-flush the system. So no matter what you do, you kind of lose one week of activity, and then you fire back your assets, and you restart them. Everything was going the way that we've anticipated. It just took us—think about it as one more day to restart our distribution centers, and we simply ran out of calendar days in March. Europe revenue in March was on par with prior-year pre-ERP implementation, so they were fully recovered. And frankly, in the month of April, at the beginning of April, they've recovered the revenue from Q1. So actually, our year-over-year business was up almost double digits in the month of April. So they've had full recovery. They are performing well. We are doing a really good job. The team is executing at a world-class level. I feel quite well that we have recovered completely and not really lost any revenue. So again, one day, and that was nicely recovered. When it comes to these demand trends, I believe that what you see on the heavier industry is more in line with that underlying economy around the large projects that are coming out of the ground around data centers and power generation and power infrastructure, and you need lots of construction equipment, earth-moving equipment and so on. We've anticipated that those businesses were quite weak for an extended period of time, and I think that the outlook has been stabilizing, and we are now starting to actually see the outlook turn nicely positive. PMI is above 50%, and that's good for the overall underlying trend. And look, I'm not prepared to declare a victory here, but I feel pretty positive about the demand trends.

ISM 52.6%, I think, this morning. So fourth month above 50%, so it's a bit of a trend now. And then just going back to the previous question about the inflation recovery, is there more price coming into Q2 versus Q1? And then Brooks, the two-day headwind in Q1, does that come back in Q4 to have some tailwind in the back half of the year?

We have an extra day in Q4. So as we move through the year, you'll see it a little bit higher because of that extra day. From a pricing perspective, you might see a little trickle into the end of Q2, but that's mostly going to be a second-half event. So that will evolve over Q2, and we'll give more guidance as we see how things evolve and we start to roll out our Q3 guidance after this quarter.

We'll take our next question from Julian Mitchell at Barclays.

Just trying to understand the sort of ERP catch-up. So I think you had 3% sort of underlying growth ex-ERP in the first quarter. And then you're guiding for around that rate for Q2 and I think for the second half as well. But just wondered if you might have some ERP catch-up that would push up that underlying growth in the balance of the year from the 3% you did in Q1, particularly as your order trends seem pretty good, and you had a good book-to-bill. So I guess I'd say if you're running at 3% every quarter, underlying, but then you should get a catch-up from ERP, and the orders seem better. Why is it 3% every quarter through the year?

Yes. Julien, good question. So the ERP cutover—we were about a day worse than we anticipated. We've lost some working days relative to our plan. The order returns are very, very solid. We are early in the year. I don't think that it is prudent to be making any adjustments to guidance this early in the year. Of course, when you take a look at the order trends, you would—and I think that probably—you feel a lot more positively around where we sit for the year, but it's quite early. We will execute on what is within our control and manage our revenue generation to deliver on the guidance that we have put forward.

Got it. And then just my follow-up around price versus volumes in the revenue line. Maybe I missed it, but did you mention what price was in first quarter? And then I think for the year as a whole, you'd guided one to one-and-a-half points of price. Is that still the case? Or is there a bit extra now because of the higher cost inflation?

Yes. As I said before, Julien, we're kind of seeing how things evolve. We've begun to roll out some price increases and then we're looking at the impact of some other things. So there will definitely be an evolution of price versus volume as we work our way through the second quarter. But this is all relatively late-breaking, and we're still kind of working through some of the numbers. So I would say stay tuned for the second half of the year—we reiterated our guide. We feel comfortable with our numbers, both from a top-line and a profitability perspective. And we'll update you on the components of it as we work through how the oil-driven increase in cost impacts our numbers, okay?

Got it. But in the first quarter, sort of reported price was, what, one-and-a-half points or something?

A little bit higher.

We'll move to our next question from Andy Kaplowitz at Citigroup.

One. I think you said Personal Mobility up 6% in Q1. I know affected by ERP I know you've talked about Personal Mobility growing sort of that high 20s to 30% over the next few years. I think you said Q2 returned to more normalized growth run rates in Personal Mobility. So maybe just update us. Is that the case? Can you get back to those rates? And do you still expect '26 to grow at that sort of normalized high growth rate in Personal Mobility?

Thank you, Andy. Absolutely. We've had some delays with a couple of projects that were supposed to ramp up in Q1. They are ramping up in Q2, and the ERP was an outsized impact because a very significant amount of our revenue base is euro-denominated. That drove a meaningful impact to the Q1 growth rate. But as I indicated in the prepared remarks, we certainly believe that the business is going to grow and deliver that mid-20s growth rate as we committed in our original guidance.

Okay. And I think I have to ask you about that other big growth driver, data centers. I mean, I think you said up 700% off a low base. I don't know that probably puts you at, what, like $10 million for the quarter, maybe a little bit more, you tell me. But is there a way to more directly refine what '26 could look like? And then obviously, we're wondering how you fare versus that $100 million to $200 million rate by '28, like, so how's the progress versus that?

Look, we feel very good about where we sit today. Our order intake and billings are strong in data centers and we're getting a nice acceleration of penetration. It is from a small base last year, but we've started to accelerate our revenue generation and order intake in Q4. We continue to develop a much more wholesome understanding of the infrastructure partners and semiconductor partners, cooling technology and their needs. We continue to tailor our technology for those needs. We are launching new products, and those products, we believe, put us at the forefront of the incremental improvements that are needed to facilitate much better liquid clean flow rates to improve efficiency and to support next-generation chips. We go after an application that is exciting and emerging, develop highly specialized knowledge, tailor our products to offer differentiated performance, and build a sustainable, durable revenue stream on a forward-going basis. We have committed to $100 million to $200 million of revenue by '28, and I believe that we're on that trajectory.

We'll go next to Deane Dray with RBC Capital Markets.

I'd love to circle back on the Timken deal, and congrats. Ivo, can you just give us some color strategically what this brings to Gates. Is this a product-line extension? Because if I look at the SKUs, they're awfully similar. Maybe it's some on the sports equipment side. And does it bring any new distribution partners maybe to the table? I'd like to see the manufacturing facility coming in, but maybe if we could start there.

Deane, those are all very good questions. Think about it more as industry consolidation than anything else. Gates is the global leading supplier of all types of belts in all sorts of different applications, and this was another competitor for us that was small and not at the front and center of what Timken wanted to focus on going forward. It is additive to us across the customer base. The technologies and the type of applications they participated in are complementary, and it's not something that is super new. We will be integrating much of the portfolio into Gates' construct, and the factory is nice to have. So think about it more as industry consolidation. They have some good folks there; it's nice to bring them into our family, and we welcome the employees to Gates with open arms. We just think that it's a good transaction. It's right at the core of what we do, and we feel that we are the right owner and a good steward of that business going forward.

That's really good to hear. I know we don't have the terms. But based upon the seller's previous comments about margins, it looks like this is coming in well below the Power Transmission margins for Gates. So that would suggest there's some nice accretion opportunity. Can you give any color or context there?

Yes. The business is coming in below our company fleet average. A lot of that business is OEM, which naturally has a little bit lower margins. But for us, this is core to what we do. We believe we have a significant opportunity to drive margins to the company fleet average. As we integrate it into Gates' operating system, we expect to improve profitability and that it should be a very good transaction for us.

Our next question comes from Chris Snyder at Morgan Stanley.

I wanted to follow up on some of the commentary on the ERP disruption and potential catch up. And I guess, we assume the ERP was a 3-point headwind in the quarter, I guess it would imply about $25 million, $30 million impact. But then I think, Ivo, you said that Europe has fully caught up on the lost revenue in April. So I just want to make sure I'm understanding that right. Like, was Europe a subsegment of that $25 million to $30 million? Just trying to understand how much catch-up there really was there in April.

Chris, thanks for the question. Let me clarify. We were about $5 million light to the midpoint we guided for Q1. My comments were more around that $5 million gap in Q1, which we have fully recovered, not the incremental $25 million figure you mentioned. The larger impact you referenced is something we anticipate recovering as the year progresses.

And that was built into our original guidance. Ivo was bridging the gap on Q1 versus the balance of the year.

Got it. I felt like the $25 million to $30 million was a lot. So I appreciate that clarification. And then if I could just follow up on data center. It's very nascent for you guys now. And I guess my question is, is this just a nascent market since it's tied to liquid cooling, which is still in the very early stages? Or is there already an established player that's out there in the market that you guys have to go and take share from? Because I think it's understandable why you guys have a right to win there. But then also just the question is, if this market is already developing, why aren't you guys a meaningful share already? But correct me if you already are meaningful share.

Look, it is a nascent market. We all started to talk about liquid cooling much more profoundly about 12 months ago. We've started to quantify our growth rates in that market more meaningfully in the second half of last year. I think our order intake indicates we are taking a fair share of the available revenue. There are established players that compete for the infrastructure build-out, but there are many projects and plenty of opportunity for multiple players to build strong revenue streams as this business becomes mainstream. We didn't pick '28 at random; we feel that by '28 this should transition from emerging to mainstream where liquid cooling is much more widely adopted, and we believe we are on track toward that goal.

Next, we'll move to David Raso at Evercore ISI.

With the second half of the year implying organic around 4.5%, I'm curious: the order strength that you've mentioned multiple times for March and April—can you give us a sense of what the order growth is trending right now year-over-year?

We saw backlog build across the business in Q1; order growth is outpacing core growth in Q1, which is an indication of industrial OEM strength. Orders are on pace to support our core growth number right now. Remember that the second half of the year has an extra day that offsets the two fewer days in Q1, which gives a little higher growth rate in the second half. There's also some catch-up throughout the year on the EMEA side. From an overall perspective, we feel like it's pretty evenly paced throughout the year from a core growth perspective.

What I would also remind everyone is that prior-year comparisons are a little more difficult because we had a big step-up in aftermarket channel business in the first half. The underlying performance in Q1 was quite good.

It's very early in the year.

Appreciate it. And I think if I heard you correctly about the second quarter, while the guide for the margin is around, I think, 22.2%, do you feel there's still about 100 basis points in there of ERP drag, if I heard correctly? Is that the right way to think about this?

Yes, it's about half ERP and half footprint optimization cost-out. So it's kind of similar to what it was in Q1 but half. You progress from 20.8% to 22.2% and you still have 100 basis points of headwind. You're knocking on 23% from an EBITDA perspective when you adjust for the one-offs. Again, we talked about the 23.5% target in the second half of the year. We feel pretty good about that.

We'll move to our next question from Jerry Revich at Wells Fargo.

Ivo, I'm wondering if you could just talk about the difference in demand cadence you're seeing on the replacement market by end market, if you have that type of visibility. We were surprised to hear from somebody else in the supply chain that parts demand in truck applications was really soft in the first quarter. I'm wondering if you're seeing that or if you have that level of granularity and visibility and any other replacement demand trends that you can talk about in terms of cadence would be helpful.

We don't break out our replacement analysis by end market in detail. What I will tell you is that the aftermarket in Q1 was quite healthy, absent the two items we listed—it was running at trend. We didn't see anything out of the ordinary that was not behaving well. The POS data was very healthy. There wasn't any indication of customers pulling demand forward. Sales outpaced our shipments slightly, but everything is behaving in normal operating conditions. I wouldn't call it extraordinary in either direction.

Super. And separately, nice to see the transaction announced this morning. Can you talk about as you look at the M&A pipeline, are there additional opportunities that we should be thinking about over the next 12 to 18 months? What's the range of capital if you do have an active pipeline? What's the range of capital that you think you could deploy beyond the announcement today?

We have a very healthy balance sheet. We spent years working to get the balance sheet durable. We are right in line with what we committed at our last investor day. We feel we have a ton of capacity. Our pipeline is robust; we are doing a lot of work on a number of assets that would be highly accretive—front and center to our portfolio. We're not looking to create a new third leg; we're focused on core extension. There is a very good likelihood of more announcements coming within this calendar year as these opportunities develop.

And we'll take our next question from Tom Sano at JPMorgan.

Could you share your perspective on business opportunities for Gates and robotics, especially humanoid applications? Based on your discussions with the customers and your technology services, what is Gates' potential in this space? And are there any specific technology services you see as a key differentiator?

Yes. We do see opportunities. There are some nice opportunities we already participate in today. We have a very nice small-scale business in China and in Japan in robotics. I would not be prepared to say whether there are specific humanoid opportunities at scale yet. But we do have a robotics power-transmission business with small belts that can be more cost-efficient than alternative technologies. We believe it will be a small accretive end market as it develops going forward.

And just a follow-up on the Timken acquisition: Could you talk about expected impact on net leverage following these acquisitions? And how should we think about the capital allocation strategy with respect to cleaning the balance sheet, please?

It was an opportunistic purchase at a modest price. The acquisition will not be material to our net leverage. We remain disciplined on capital allocation and will continue to balance investment in the business, M&A, share repurchases, and maintaining a strong balance sheet.

And that concludes our Q&A session. I will now turn the conference back over to Rich for closing remarks.

Thanks, everybody, for participating. If you have any further questions, feel free to reach out to me. Otherwise, have a great weekend. Take care.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.