Good morning and welcome to the Gates Industrial Corporation Q3 2022 Earnings Call. All callers are in listen-only mode. . As a reminder today's conference is being recorded. It is now my pleasure to turn the call over to Bill Waelke, Head of Investor Relations. Please go ahead Mr. Waelke.

Thank you for joining us this morning on our third quarter 2022 earnings call. I'll briefly cover our non-GAAP and forward-looking language, before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our third 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. We disclaim any obligation to update these forward-looking statements. With that, I'll turn things over to Ivo.

Thank you, Bill. Good morning, everyone, and thank you for joining our call today. Before we begin, I would like to take this opportunity and thank Bill for his support over the last four years in helping Gates to stand up and operationalize our investment relations structure as a public company. Bill is moving on to a new role at a different company upon completion of this quarter's earnings cycle, and we will be making further announcements about the IR leadership role transition over the next month or so. With that, I'll begin on slide three of the presentation. Our global teams executed well and delivered high single digit core growth, while facing an operating environment that was incrementally more challenging. The underlying demand for our products remain positive with largely stable order rates across most of our markets, and a book to bill ratio that remained well above . Our backlog stays elevated primarily as a result of incremental raw material availability challenges and labor disruptions, as well as stable ordered rates. Our profitability improved sequentially in a quarter. While inflation moderated in certain areas, it remained elevated overall. And we saw notable acceleration of energy and specific petrochemical input costs. The inflation in a quarter was higher than our expectations. However, the pricing actions we have implemented allowed us to exit the quarter in a margin neutral price cost provision. While the availability of some supply chain inputs improved, we continue to face supply disruptions associated with highly engineered polymers in particular, and we anticipate the situation continuing in the fourth quarter. While we expect these disruptions to moderate next year, we are updating outlook for 2022 to reflect their impact, as well as that of the incremental inflation and additional effects. Although end market demand remains largely…

Thank you Ivo. Moving now to slide 6 and the regional breakdown of our core revenue performance. Underlying demand remained broadly stable and we delivered core growth in all regions. We are tracking to deliver solid four year core growth despite the polymer supply headwinds, COVID shutdowns in China, and suspension of our business in Russia. In North America, we had double digit core growth in nearly all industrial end markets, led by energy on highway and off highway. From a channel perspective, we saw the largest growth in sales to OEM customers. Backlog in North America remains elevated due to engineered polymer supply issues, and labor availability challenges that resulted in operational disruptions and impacted our ability to drive the anticipated reduction to our past dues within the quarter. Demand trends in EMEA have also remained supportive, and we delivered solid 6% core growth in the quarter. We saw double digit core growth in all industrial end markets led by energy, mobility and off highway, as well as in the automotive replacement business ex-Russia. Our business in China had positive core growth, representing a significant acceleration across all end markets from the large COVID driven decline in Q2. Underlying demand in the automotive first fit market remained solid, which is where we saw the highest growth rate in the quarter. Lastly, our businesses in South America and East Asia and India had varied results in the quarter. South America delivered another strong performance with core growth of 18%. We saw double digit core growth across all in markets, led by energy diversified industrial and off highway. In East Asia and India, we saw modest growth as the region continues to see supply chain disruptions and longer lead times. We are pleased with our performance overall as we continue to…

Thanks, Brooks. Moving now to the summary on slide 10. I would like to wrap up by thanking our customers and suppliers for their partnership in our global Gates associate put our grit, determination and effort as they continue to deliver strong performance in the face of the challenging macro environment. While significant uncertainty remains, we stay focused on managing what has been in our control and continuing to drive incremental improvements across our enterprise. Given the ongoing challenges associated with raw material, logistics and labor, we are proactively pivoting to the next phase of footprint optimization, and business simplification projects to drive the efficiency of our business while into the future. The base of positive sector industry trends continues to accelerate, and we are well-positioned to capture future demand in these secular opportunities. We will continue to direct investment in innovation and business simplification towards higher margin NPI and end markets, giving us confidence in executing upon our midterm growth strategy. With that, I'll now turn the call back over to the operator to begin the Q&A.

Thank you. Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Good morning, everyone.

Morning, Andy.

Ivo, you mentioned that book to bill is still significantly over one. We know you're still significantly constrained by supply chains. But have you seen any bigger demand slowdown in any of your large end markets? I mean, it doesn't seem like you have seen any weakening of demand, for instance, in personal mobility, maybe give us more color on channel inventories as well?

Sure. Look as I said, in my prepared remarks, we see the demand remained actually quite stable. I would say maybe even better so then what you would have anticipated taking into account the challenges that you see in the markets globally. Personal mobility is very strong. We continue to be on a pace of substantial additions of revenue into our backlog. It's one of the areas that we have been most impacted with our lack of ability to treat the backlog as we've perhaps anticipated, at the end of Q2. If there's one area that is somewhat more choppy, or perhaps a little bit softer, I would say that a year of industrial replacement. We do start seeing some choppiness there, but in my mind, less related to channel destocking and more related to some weakness that's rolling in, in the industrial replacement segment of our business. So outside of that China is recovering nicely. East Asia is doing fine. I would Latin America is very, very strong, and North America is very solid as well. So it's not an issue of demand for us at this point in time. We certainly recognize that that can change, but that's not the situation. Channeling inventories I think that everybody would feel that that elevated, but in my in my mind, the channel inventories remain more or less in line with the underlying and market demand. And so from a demand perspective, I think it's reasonably all right.

Got it. And then Ivo to the point of supply chains, is it possible to quantify how much production in efficiencies are hurting you in Q3 and/ or in Q4, given your new guidance? And you did suggest that supply chain could get better as you go into '23? Are you getting any more visibility toward polymer availability as you go late year this year?

Yes. So look I would say that it's the inefficiencies and primarily associated with lack of supply are kind of in the 350 basis points of top line, that's probably a good number to use. And I'd say that, I mean, we do see improvements in ability to get to source raw materials, that is a fact particularly on the metal side of our business, metals are really not an issue. And we are seeing lead time shrinking and the ability to secure those materials is quite a right. When it comes to polymers. I think that's kind of a bifurcated story. We actually are able to secure the polymers that we need to support our customers’ run rate business. The issue is the spottiness of supply. So you may get the polymer that you need, but you may get it two weeks late than you anticipated or the And then the supplier has committed and that tries very significant set of issues for you vis-à-vis your ability to not lose production days of output. And so I would say that the polymer, the polymer issues, a big headache for us, we do believe that it is improving somewhat, and we are more cautiously optimistic that into Q1 it could be less of a headwind for us. So '23 should be less of a headwind for us from the polymer side. But I'll also say and I know that you didn't ask that question Andy. But I'll also say that the inflation on polymers is certainly not abating. And so we are taking that into account we are pricing for it. And we continue to roll out more price increases to keep up with inflation that we see on a polymer in particular.

Appreciate the color Ivo. Thanks.

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead, your line is open.

Hi, good morning, I guess two questions. One, I'm just trying to understand the fourth quarter margins, it looks like you'd expect core growth to be better than the third quarter and the revenues are comparable. But the margins are down considerably from the fourth quarter relative to the third quarter. So just trying to understand that cadence there. And then my second question to Andy's Q&A you said the European industrial replacement business was weaker? Can you just help us understand how big that is for your business? What were the declines like in that did that continue into this quarter? Thanks.

Hey, Jamie. Let me take the first part of that question. So from a margin perspective, there is really a couple of things. One is, as we talked about, there's more inflation rolling through, particularly on the polymer side, and we've seen polymers continue to go up quarter-on-quarter kind of in the low double digit range, I think around 10%. And the pricing for that tends to lag a little bit. So we'll price for that as we get into the first quarter, we rolled out our new year price increases. I think the second piece is a combination of additional operational efficiencies that we've talked about. Q4 is always going to be a little bit tougher from a seasonality perspective. And then you roll in the additional operational inefficiencies which are really costing us kind of in this 250, bips, range of cost both from an external and then kind of an internal perspective. So it's not insignificant, but those are the two primary drivers of the decelerating profitability from one quarter to the next. I'll let Ivo pick up the second part.

Yes. Jamie on the industrial replacement in Europe. I said we thought we saw choppiness that's different than the decline. I mean, the business still grew mid single digits in a quarter. So I want to say that the business is pulling off a trajectory of growth, but we just see kind of softness in certain areas, and is represents about 8% of revenue.

Okay, thank you.

Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning, everyone. And I want to thank Bill for all his help and wish him all the best.

Good morning, Dean.

Hey, can we start with free cash flow? Cutting the guide this has been a sector wide phenomenon. It's not a Gates issue singularly it's everyone. Can you give us a sense of your line of sight on free cash flow conversion for 4Q? It looks like it's about a 300% conversion, which is only a little bit above your historical average. So it does not look like it's heroic, but maybe just your line of sight what has to happen, right in terms of receivables, backlog conversion and so forth?

Yes, Deane. So if you looked at our Q3 cash conversion, it was above 80%. So we're starting to get back in the area where we want to be not there yet in Q3 but getting closer. And then Q4 is going to be one of the better cash conversion quarters that we've had in the company since we've been public. Now remember, we've also got the bad receivables rolling in that I talked about last quarter. And so that's given us kind of I think we talked about a $40 million favorable tailwind, which to your point makes the numbers for Q4 look a little bit better. So when you look at the back half of the year we feel like we're starting to get more stable and more normalized. So as we start to move forward, we'll be back to less on this big kind of working capital investment with all the information and the inventory, the supply chain issues. And as we head into 2023, being a much more stable position. So we like where we are in the second half of the year obviously, changing your guidance is not great, but we really like where we are in the second half of the year from a cash conversion perspective.

Good. I appreciate that color. And then for Ivo the extent that you can, can you flush out the plans for the footprint optimization, maybe the timing, the regions, the number of plants? If I look at the payback, it's just under two years. So it really does look like all real estate, not people, because that's, that would be a quicker payback. So just some contacts and color any specific she could provide to be helpful.

Yes, Deane, thank you for the question. We will provide greater color in our next call Deane. We are still working through some regulatory approvals and announcements within Gates here, we would like to get to that before we give you a real breakdown on the number of facilities where those facilities are located. And these projects a great project. There is a terrific payback. As you as you stated, and it is just a continuation of the cycle of productivity improvements that we see we still have available for our franchise. So we will continue to do that as we see fit, we are seeing the opening now to be able to start executing a couple of these projects. And so we feel great about being able to have the opportunity to execute them.

Good. I fully appreciate you got to make all those announcements first. And just lastly, I might have missed it, but the extent any color on October?

Yes, look, I think that October has been more or less in line with what we have seen kind of in Q3. So again, bookings remain stable. I would say again, kind of what I said, about a year of industrial replacement against spotty not falling off the cliff but spotty. And still dealing with the headaches and supply chain that we have outlined in Q3. We are able to keep up with our customer demand, which is really terrific. This is probably the first time in a while that we have been able to do that. So we are servicing our service rates are improving. But unfortunately, we're just not able to eat up into a backlog that we've anticipated when we set our original guidance in July. So October more or less the runway that we have seen in the third quarter. And we are working through some of these issues and executing well and really proud of how our global Gates team is executing so far.

Thank you.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead. Your line is open.

Yes, hi, good morning.

Good morning Jeff.

Best of luck to you, Bill. So just on the -- you talked about the supply chain issues, but yes, I think you mentioned labor as well. And just wondering if you're seeing any kind of improvement there the labor market getting a little looser, then just as you think about kind of supply chain and labor into '23 like, is that 250 to 350 basis point headwind kind of the comp and how much of that do you think kind of goes away into '23?

Yes. Great, great input Jeff. Thank you for your question. So look the labor shortage is getting better. I don't think that the labor shortages, and we don't intend to say that the labor shortage is the major impediments. But I will say that labor shortages, particularly in distribution centers in North America still spotty. We are still having difficulties with ensuring that we have all of our shifts staffed up, and we got all the people at the right set of distribution centers that we need. And so I would say that, that's probably the biggest issue on labor, particularly North America, as I said. Out of the 350 bips of lost productivity in the second year, in the second half, or in Q4 here our sense is that, we should start seeing that evade as we enter the front end of 2023. I'm not in a position to be able to tell you that it's going to be gone by January 1, but we are seeing improvement. It's just the reliability and predictability of when that supply, generally speaking lands in your facility. So that's going to be the area of focus for us. Logistics is improving, obviously, so the reliability of logistics is getting better. That has been a real issue for us and so I would say that the combination of these things should evade as you start seeing greater stability globally, across the outputs, as well as across moving goods from point A to point B. So I'd say first half of the year, it's not unreasonable that in the first half of 2023, you should start seeing this evade.

Okay, great. And then just as you think, at 2023, and it sounds like there's still inflationary pressure, just talk about pricing you're contemplating into '23. And then any carryover .

Kind of broke up at the end there. Can you repeat the back half of that question?

Yes. I mean, just pricing in the next year, what your thoughts are. .

So you still kind of broke up at the end, but I'm going to assume that what you're asking about is just pricing in the next year. So look again we've done a phenomenal job with pricing. We are in the third quarter, in the second half of the year we're going to be at EBITDA margin neutrality, as we suggested, and actually a little bit ahead of schedule we've got additional price increases that we roll out at the beginning of the year. We're going after all segments, all regions, all customers. In addition we're looking at some specific areas that have been probably more heavily impacted by some of the polymer and supply chain issues. And we're going to go a little bit more there. So we're very confident in our ability to continue to get price to offset inflation as we move forward into 2023. And we really, as we think about our issues, as we move forward, we don't really see the pricing is a big issue. We think we've got that kind of square in our sights, and we feel comfortable with where we are.

Okay, great. Thanks so much, guys.

Our next question comes from David Raso from Evercore ISI. Please go ahead, your line is open.

Hi, thank you. I was curious, the pricing that you're seeing now, how much of the fourth quarter organic growth is pricing and the pricing actions for next year have they been communicated yet to the channel?

So the pricing actions for next year have been communicated through to the channel. And we anticipate that we will continue to roll them forward. I would say that there are some areas that are more impactful than others. So we are now being much more selected. And as Brooke said we've got to margin neutrality price cost wise earlier than what we've anticipated. So we've also seen escalation of inflation, particularly when it comes to energy costs in Europe. And certainly, the polymer, the engineered polymers and petrochemicals continue to be on a trajectory up, not even on a trajectory of flattening. So I just want to make that clear and I'll let Brooks to chime in on your price, on your specific pricing.

So most of the price, most of the organic growth year-over-year Q4-to-Q4 is price right, but let's not forget we still have the Russia headwinds, we still have material headwinds. Ivo has talked about that being 350 bips, I mean, that's kind of the right number of 350 to 400 bips. And then also FX is a huge headwind still, right, as we head into Q4, year-over-year. So I would say kind of 80% to 90% of the organic core growth is going to be priced. But then also remember that you got that 400 basis points of volume headwind, really related to Russia material supply issues.

And I know you don't want to give margin guidance for '23. But if you were in our shoes, trying to think about what you noticed today, let's assume no further degradation in that supply chain, the actions you've communicated on pricing for next year, how should we think about incremental margins next year and one clarification, the fourth quarter does not include any restructuring charge in the guidance? Is that correct?

Well, I mean, restructuring is an add bag. And so we're still working through the timing of when some things are going to be announced and where we're going to take some of those charges. I think from a cash perspective, it probably will be deminimis. But I don't know that for sure. So we're really not contemplating that in our guidance right now. Does that answer your question?

Yes, thank you for the fourth quarter clarification, but on thinking about incremental for next year. And again, incorporating what you're thinking about regarding pricing, obviously have some carryover currency as well think about. But if you just give us some framework, because it sounds like the savings were highlighted as a '24 event. So it wasn't sure if we can think about any savings in '23. So if you can just kind of wrap it all together, just like we can have our own thoughts on the top line, the price carryover, just trying to get a sense of looking at that fourth quarter margin, I know it's not a great seasonal quarter for margins, just how to think about incremental margins for '23. Thank you.

Look David, I think that I would stress that we are still going through a financial planning for 2023, as you can appreciate, predominantly driven by the volatility that you see, right. I mean, we set out, we adjusted our guidance in July. And we have seen a very substantial incremental headwinds associated with FX and some more disruptions in supply chain and labor and so on, so forth, that we all certainly appreciate it and anticipated that will get better. So I would probably defer a better conversation after our Q4. Look, we do anticipate we're going to get a small amount of savings from the restructuring and the back half of next year. And we will inform you more effectively about what we anticipate vis-à-vis '23 after our Q4 call.

I appreciate that. Thank you. And Bill, thank you for all your help and best of luck.

Thanks David.

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead, your line is open.

Yes, hi, good morning, everyone.

Good morning Jerry.

Ivo. I'm going to go can you just talk about conceptually not to see that you folks are pricing to offset inflation. But we're not able to offset the higher logistics costs with the current pricing actions based on third quarter results and guidance and just so conceptually for business with a strong of a market position that you folks have what's keeping you folks from taking a more aggressive stance on pricing so that we're not only offsetting the inflationary impact with commodities, but the operating challenges that you spoke about on the call? And how are you thinking about potentially pricing for those, as you think about '23?

Yes. So Jerry, let me let me kind of correct the framework here. So we are definitely getting price for the uptick in freight costs from an inflationary perspective. So we're getting freight. We're getting material. And quite frankly, in fact, we've started to incorporate energy into our framework in terms of getting price. What we haven't fully covered, is both the internal and external disruptions that are causing some of our operational inefficiencies, and then also some of the volume impact that flows through and then causes some margin dilution. So from an inflation perspective we're getting price and then more to get EBITDA margin neutrality. What we're not getting is the operational efficiency and volume offset from a pricing perspective. And quite frankly, we think that's kind of the right approach to take.

Yes. So of course, you and I are saying the same thing. And so you're offsetting inflation. But this is a really hard operating environment and everybody's facing what you're facing. And other companies are just being more aggressive in pricing for the logistics challenges. And I'm just wondering, given your market position, how are you folks thinking about what we need to push pricing and other two points to essentially pricing this risk of further inefficiencies from getting the right material to the right place given COVID zero policies and other supply disruptions?

So Jerry, let me take it a little different tact. We are fully recovering inflation across all of the inputs. There's not the inflation in price macroeconomics, including energy and logistics is not the issue. Again, our issue has been the disruption, that the lack of supply that we see in our manufacturing facilities and we just don't believe that that's something that our customers should pay for. This is something that we've got to deal with and we are dealing with those issues. We continue to take price taking into account that we are in a inflationary environment that is not slowing down, perhaps, despite popular belief. And we will continue to do that, until such time that we see inflation evading across all of our inputs. But that being said, the headwinds that we have highlighted for Q4 a more operationally driven through the availability of raw materials than anything else.

And I think that that's how you should think about it. And for inflation, we will offset inflation.

And Ivo, when do the operational challenges improve? Is there a range of tight components that you're tracking or polymers etc? Can you just give us a sense on what your best sense today on when that availability might improve?

Well, Jerry, I thought in July, I thought that the availability is going to improve in August and September and October. And clearly that call was not the right call. And I would, again, I would probably say that perhaps the availability is getting better, but the reliability and predictability of when it will arrive is not and as I said earlier, Jerry, I think that second half, I mean, sorry, first half of 2023, we should start seeing abatement of this issues. Again, both we are seeing improvement in logistics reliability, which has been a real issue. Again, we are moving large quantities, we are not moving small boxes of goods I mean, we are moving 10s of 1000s of kilograms of polymers to a reasonable amount of facilities globally. So, I think as we see improvements in logistics reliability, we will be seeing improvements in our performance. What I'll say is that when you take a look, and you almost have to think about it in vis-à-vis your product line segments, so, you take a look at our SP segment, and we have done a tremendous amount of work in that '17, '18, '19 timeframe, making investments in NPI, making investments in material science and engineering and we have engineered lots of these overly dependent single source, highly constrained polymers out of our supply chain. And you see that that's been, really paid off, I mean, we have not seen the same level of supply chain issues. We have not seen the same level of disruptions and Lord and behold, we got we got a terrific quarter growth and strong level of profitability that is filtering through, because we have limited almost non-existent shortages there. You see all of that impact, rolling into our power transmission segment. And we are now in the process of, frankly doing the same thing that we have done on PT. We're making investments in incremental more efficient capacity. We're making significant investment in NPI innovation. We are engineering lots of these highly constrained polymers out, giving ourselves an opportunity to have much broader supply chain and raw material availability to support the production as needed when needed, where needed. And we have feeling very confident that we will see through the coming cycle, the same level of benefits in PT that we have delivered in FP.

Appreciate the discussion, thank you.

Our next question comes from Julian Mitchell from Barclays. Please go ahead, your line is open.

Thanks for squeezing me in and thanks to Bill for all the help the last few years. Maybe just the first question around the any color you could give on the segment margins? You have that 200 bips decline in Q4 sequentially firm wide. Any color on how that affects each of the two segments? And just trying to understand the capacity aspect here. So you're adding capacity in PT, I think there's some inefficiencies there and then you're sort of taking out capacity as well. Is the capacity reduction in both divisions are more centered on fluid power, because you're adding more in power transmission?

So let me take the front end of the other questions Julian on the capacity attributes. So the capacity that we are adding in PT is predominantly focused on product lines, where we see a tremendous amount of growth, and also really, rather substantial growth in our backlog and fast do backlog. So particularly associated with personal mobility and industrial chain developed. Business continues to grow tremendously, our design wins, in that space continue to grow tremendously. And for better or worse our past due and the backlog continues to escalate quite dramatically there. So the capacity is specifically focused on that sub segment of our end markets and power transmission business. The capacity that we are refreshing, frankly, in PT is capacity on our industrial and automotive micro V belts, we have developed a new manufacturing process, that gives us a fundamental improvement in substantial drive towards productivity. So I would say that those are the two areas where we are adding capacity. We are really, you shouldn't really think about our moves as moves that will extinguish capacity. We are not capacity rich. We are keeping with a growth of our business presently. And our desire is really not to extinguish capacity. Our desire is to drive productivity, reduce the complexity of our business and reduce the complexity of our footprint. And I think that that's kind of how you should think about it. And we will give you more color about that on the next quarter's earnings call as we get through all of our approvals, and all of our announcements internally so that we can give you a clear cut delineation of where these projects will be and how they will be impacting the various segments of our business.

I know the first part of the question, we don't really want to get into the guidance by segment. But just take into account what Ivo said about each of the segments and how they're performing and what the drivers are. And I think you can draw your own conclusions from that. But we don't want to get into forecasting by segments.

Fair enough. And then just my follow up on China. I think you had a very insightful perspective back in the early summer that China was not having a V shaped recovery after the Shanghai lock downs. So you had low single digit growth in the quarter in Q3. How are you assessing the slope of that China recovery today?

Julian, I think it's a steady recovery. I mean, I think that we see month-on-month improvements. We anticipate that probably going to see single digit growth in Q4. And so it's definitely getting better. But let's remind ourselves that there is quite a bit of set of challenges that are coming out of China with this the rollout of the COVID zero policy and almost every day you see a new city getting impacted and so maybe it'll be. So we are cautious about what's going to happen in China. And we feel that the business is recovering more or less in line with what our anticipation was. And we don't certainly anticipate that it's going to be any dramatic growth that you're going to see that will truly require lifting of the zero COVID policies and I just don't see anything that is actually occurring in China. We are hopeful that it will occur, but so far it is still very challenging.

Great, thank you.

Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.

Hey, good morning, everybody. It's on for Mike.

Good morning.

Good morning. Just a quick question going back on to the supply chain side of things. I'll take a little bit of a different approach. It's my understanding that there's not very many suppliers for these highly engineered polymers. Can you maybe just provide a little color on your discussion on the suppliers and maybe what some of their limitations have been, that are causing some of the spottiness that they're seeing and causing delivery issues?

Look, I think that the biggest factor that you see is that there are fewer very large global companies that frankly are dealing with the core of the call it a feedstock that then ultimately gets subjected to incremental processing. And numbers of the suppliers in Europe and a number of these suppliers is facing extremely challenging conditions associated with a dramatic escalation of energy inputs. And as you probably may know, or may not know the petrochemical industry is extremely energy intensive. And so I think that that's one set of attributes that's driving their desire and ability to process as much material while they are ramping post-COVID. And, ultimately, you certainly see some restrictions, particularly in Europe, with the supply of the feedstock that in the past used to come from Russia, that now they scramble more and try to get elsewhere. So I would say that's a big attribute. And then the second attribute is, hey, look, I mean, it's from end market perspective, there's lots of demand for refined petrochemicals and specialty polymers. And so, we are dealing with that. We are engineering some of these polymers out. We are engineering around this. As you can appreciate, that is not an over simple tasks. We produce products that are mission critical, and generally speaking, operating in harsh and hazardous environments. So, we've got to be very thoughtful about engineering these things out of or substituting these materials with more effective solutions. Now, we have done that on the SP side. Those products also obviously, operating in harsh and hazardous and mission critical applications. And we are making great progress from the PT side as well. But it is complex challenge to solve.

That color is super helpful Ivo. Thank you. And switching gears a little bit. It seems like there is a bit of a divergence in first bit, first, after market trends. Can you maybe provide a little fit of color on what you're seeing between those two applications specifically?

Sure. So I mean, first fit continues to grow in teens, and the replacement side of our businesses is growing in mid single digits. What I would try to point out is that we've had a very strong business in Russia, and it all went up, most of it went through the replacement channels. So if you kind of think about it, ex-Russia of course growth would have been about 300 basis points higher. So kind of low double digit growth, and most of that would have come through the replacement channels. So absent Russia the replacement business actually is doing quite well too.

Got it. That's super helpful. Thank you Ivo. And thanks, Bill for all your help.

Thank you.

We have no further questions in queue. I would now like to turn the call back over to Ivo Jurek for any closing remarks.

Well, thank you very much for joining us for our Q3 earnings call. Again we truly appreciate Bill's support over the last four plus years. We'll miss them here but I will be making additional announcements about the replacement for Bill's role here at Gates and I certainly look forward having the opportunity to share with you our results in early February post Q4. Thank you and enjoy the holidays.

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