Gates Industrial Corp. outlook revised to positive by S&P Global Ratings

Investing.com -- S&P Global Ratings has revised its outlook for Gates Industrial (NYSE:GTES) Corp. PLC, a U.S.-based manufacturer of power transmission and fluid power solutions, to positive from stable. The company’s ’BB-’ rating was affirmed, reflecting its solid performance in 2024 and prospects for maintaining steady credit metrics over the next year.

In 2024, Gates Industrial Corp. demonstrated operational discipline that outweighed demand headwinds across several end markets. This discipline resulted in improved S&P Global Ratings-adjusted debt to EBITDA, which ended the year at 2.8x, and stable free operating cash flow (FOCF) to debt at about 15%.

S&P Global Ratings anticipates that these credit metrics will remain largely unchanged over the next 12 months under the base case forecast. The forecast predicts S&P Global Ratings adjusted debt to EBITDA in the high-2x-area at year-end 2025 and FOCF to debt of about 15%-17%.

Despite persistent weakness in Gates’ end markets for agriculture, construction, heavy-duty trucking, and diversified industrial, the company’s continued price increases, operational streamlining, and stable cash generation are expected to offset these challenges.

The positive outlook indicates that S&P Global Ratings could elevate the company’s ratings if Gates maintains leverage below 3x and FOCF to debt of at least 10% over the next 12 months, despite the weakness in certain end markets. This follows the affirmation of all ratings on Gates, including the ’BB-’ issuer-credit rating on Gates Industrial Corp. PLC and Gates Global LLC, and the ’BB-’ issue-level rating on the senior secured facilities and the ’B+’ issue-level rating on the senior unsecured debt, both issued by subsidiary Gates Corp.

S&P Global Ratings withdrew its issuer credit rating on subsidiary Gates Global LLC due to the entity’s dissolution.

Over the next year, S&P Global Ratings predicts that Gates’ operational discipline will continue to outweigh top-line headwinds, supporting the high-2x-area S&P Global Ratings-adjusted debt to EBITDA. Despite anticipated weakness in the company’s end markets and a strengthening U.S. dollar, S&P Global Ratings expects Gates to maintain solid operating performance. This is expected to be driven by continued price increases, realization of net benefits from operational initiatives--including material cost optimization and footprint rationalization--along with healthy cash generation.

The company’s revenue is expected to contract by a low-single-digit percentage in 2025 due to end-market weakness and currency headwinds. However, operational initiatives are predicted to buoy S&P Global Ratings-adjusted EBITDA margins and support steady absolute earnings.

Gates is also expected to continue generating healthy FOCF, with S&P Global Ratings-adjusted FOCF predicted to increase to about $350 million in 2025, largely driven by lower interest costs and easing cash outflows from working capital.

The positive outlook could be revised back to stable if S&P Global Ratings expected leverage of higher than 3x or if the company was unable to consistently generate FOCF to debt of 10% or higher across the business cycle. Conversely, the rating could be raised if Gates maintained S&P Global Ratings-adjusted leverage below 3x and consistently generated FOCF to debt of 10% or higher across the business cycle.

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