Q3 2022 Gates Industrial Corporation PLC Earnings Call
Correct.
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 will turn things over to Eva.
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.
<unk> 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 remained positive with largely stable order rates across most of our markets and a book to bill ratio does remain well above line.
Our backlog stayed elevated primarily as a result of incremental raw material availability challenges and labor disruptions as well as stable order rates.
Our profitability improved sequentially in the quarter.
Inflation moderated in certain areas is remain elevated overall and we saw notable acceleration of energy and specific petrochemical input costs.
The inflation in the quarter was higher than our expectations. However, the pricing actions we have implemented.
US to exit the quarter in a margin neutral price cost position.
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 this situation continuing in the fourth quarter.
While we expect these disruptions to moderate next year.
<unk> outlook for 2022 to reflect their impact as well as that of the incremental inflation and additional FX.
Although end market demand remains largely supported in light of the current macro uncertainty.
Initiating the next phase of our footprint optimization plan, the details of which Brooks will cover later in our presentation.
As we prepare to enter 2023.
We believe our business is well positioned.
We anticipate starting the year with a robust backlog that will supplement the prevailing demand levels of our mission critical products.
We also are in a positive price cost position with expected carryover benefits and incremental pricing actions that we believe will offset the elevated levels of inflation we have seen.
Finally.
Any easing of the supply chain impediments will reduce the substantial headwinds we have experienced in 2022.
Moving now to slide four.
Our total revenue was $861 million with core growth of seven 6% offset by FX headwind of approximately 8%.
We saw core growth in all of our end markets with the highest growth rates in industrial.
Our mobility business delivered another quarter of solid growth in the energy end market continued to benefit from increased activity in the field.
AD and construction applications included in our off highway end market.
Also remained robust.
Third quarter, adjusted EBITDA was $178 million or a margin of 26% representing sequential improvement of 70 basis points.
Incremental negative FX impact supply chain disruptions and escalation in material and energy input costs were offset by solid pricing performance and cost controls globally.
Adjusted earnings per share were <unk> 31.
<unk> to the prior year quarter.
Moving now to slide five and our segment level results.
Our power transmission segment had revenue of $523 million in the quarter, including core revenue growth of 5% and negative FX impact of 10%.
Excluding the suspension of our business in Russia, which was almost entirely within the segment core growth was over 8%.
The segment was also disproportionately impacted by the shortage of the petrochemical inputs.
All regions had positive core growth led by the industrial end market with energy of highway and mobility, showing the strongest growth.
Our fluid power segment had revenue of $338 million in the quarter.
Including core growth of 12% and negative FX impact of 4%.
We saw solid performance across all end markets with the strongest growth coming in energy on highway and automotive replacement.
The industrial first fit business also performed well with growth in the high teens and a key design win in off highway and on highway applications.
Prior investments in innovation continue to pay off with core growth from new products of over 20% in the quarter.
With respect to profitability.
Power transmission segment was impacted primarily by operating inefficiencies related to raw material shortages. This startup of new production capacity and incremental negative FX as well as the escalation of petrochemical input costs.
Despite these challenges the segment saw sequential margin expansion of 60 basis points.
Our fluid power segment generated strong margins in the quarter with.
With much less exposure to material availability challenges and those startup inefficiencies the segment delivered year over year margin expansion of 300 basis points.
I will now turn the call over to Brooks for additional color on our results Brooks.
Thank you Eva moving.
Moving now to slide six 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 full year core growth. Despite the polymer supply headwinds COVID-19 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-19 driven decline in Q2.
Underlying demand in the automotive first fit market remains 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 end 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 execute in the face of ongoing operational disruptions.
Moving now to slide seven and some details on key balance sheet and cash flow items.
Our free cash flow in the quarter was $73 million, representing a conversion rate of 82%.
Significant increase from the second quarter as working capital investments began to stabilize even as we continue to deal with supply chain challenges.
Net leverage declined from three three times in Q2 to three two times in Q3, and we continue to expect to see net leverage at or below three times at the end of the year.
Moving now to slide eight and our full year guidance.
While the overall demand environment remains largely constructive.
Have not seen the anticipated improvement in our supply chain situation, which has negatively impacted our production volumes.
Accordingly, we are modifying our outlook for core revenue growth, which we now expect to be in the range of five 5% to 8%.
We are also updating our adjusted EBITDA and adjusted earnings per share outlook to reflect the impact of lower production volumes as well as incrementally negative FX.
Inflation and greater than anticipated operational inefficiencies.
Our expectation is for adjusted EBITDA to now be in the range of $660 million to $690 million with adjusted earnings per share expected in the range of $1 seven.
Two $1 15 per share.
While we're pleased with how we're executing through these external issues and believe they are largely temporary in nature, we do expect it to take longer than originally anticipated to see that normalize.
With respect to free cash flow, we anticipate our conversion to be approximately 50% of adjusted net income due to the continued supply chain initiatives.
Moving now to slide nine and the footprint optimization plan Evo mentioned earlier.
As we have stated before we continually look for opportunities to simplify and strengthen our operating model in addition to reducing costs.
This phase of the plan involves spending approximately $45 million in restructuring costs and the balance of 2022 and in 2023 to achieve approximately $25 million in annual savings.
We expect to hit the full run rate of savings in the first half of 2024, and ultimately see a total cash payback of less than two years.
With that I'll turn it back over to Evo for some final thoughts.
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 and our global gates associates for their grit determination and effort because they continue to deliver strong performance in the face of the challenging macro environment.
While significant uncertainty remains we stay focused on managing what is 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 well into the future.
The pace of positive secular 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 will now turn the call back over to the operator to begin the Q&A.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Interest of time, we ask that you. Please limit yourself to one question and one follow up question. Thank you.
First question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning, Andy.
You mentioned that book to Bill is still significantly over one we know you are still significantly constrained by supply chain, 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 you could 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, let's say, maybe even better than what you would have anticipated taking into an account of the challenges that you see in these.
In the markets globally.
Personal mobility is very strong we continue to be on the pace of substantial additions sulfur.
Of revenue to our backlog its probably one of the areas that we have been most impacted with our.
Lack of ability to tweak the backlog is perhaps.
Dissipated at the end of Q2.
If there's one area of that.
That is somewhat more choppy or perhaps a little bit softer I would say that Europe industrial replacement, we do start seeing some some choppiness there.
But it's in my mind less related to channel Destocking and more related to some.
Weakness that slowing in India.
Industrial replacement.
Segment of our business so.
But outside of that China is recovering nicely East Asia is doing fine.
I would say Latin America is very very strong in North America is very solid as well.
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.
<unk> inventories.
That everybody would.
Field at that elevated but in my mind the channel inventories remain more.
More or less in line with the underlying end market demand so.
From a demand perspective, I think it's reasonably alright.
Got it and then Evo to the point of supply chains is it possible to quantify how much production inefficiencies are hurting you in Q3 and during Q4, given your new guidance and you did suggest that supply chain to get better as you go into 'twenty. Three are you getting any more visibility towards polymer.
Variability as you go online late this year.
Yes, so look.
I would say that it's.
The inefficiencies.
Primarily associated with lack of supply of kind of India in our 300 350 basis points of top line.
Thats, probably a good number to use and I would say that I mean, we do see improvements in.
In our ability to get to source raw materials that is.
That is a fact.
On the metal side of our business metals are really not an issue.
We are seeing.
Lead time shrinking.
And the ability to secure those materials is quite alright.
When it comes to polymers I think thats 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 spot in this of supply. So you may get the polymer that you need but you may get it two weeks.
<unk> than you anticipated than the supplier has committed.
That drives very significant set of issues for you. These are the ability to not lose production days of output.
So I would say that.
The polymer.
Polymer issues.
Im 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 it could be less of a headwind for us for 23 should be less of a headwind for us.
From the polymer side without also saying I know that you didn't ask the question, Andy but I'll also say that the.
The inflation on polymers.
Certainly not abating and so we're taking that into an economy, where pricing for it and we continue to roll rollout more more price increases too.
To keep up with inflation that we see in our polymers in particular.
I appreciate the color. Thanks.
Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open hi.
Hi, good morning.
Two questions one im just trying to understand the fourth quarter margins. It looks like you expect core growth to be better than the third quarter and the revenues are comparable but the margins are down considerably 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.
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 decline like in that did that continue into this quarter.
Okay.
Hey, John Let me, let me take the first part of that question.
So from a from a margin perspective, there's really a couple of things. One is as we talked about there is more inflation rolling through particularly on the polymer side and we've seen polymers continue to go.
On quarter kind.
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.
As we get into the first quarter, we rolled out our.
New year's 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 bps.
A range of.
Of course, no both from an external and then kind of an internal perspective, although it is not insignificant, but those are the two primary drivers of the distillery in profitability from one quarter to the next I'll, let ego pick up the second part, yes, so Jamie on the on the industrial replacement in Europe .
We saw choppiness.
That's different than.
A decline in that business still grew mid single digits.
In the quarter, so I don't want to say that the business is falling off.
A trajectory of growth, but we just see kind of softness in certain areas and it represents about 8% of revenue.
Okay. Thank you.
Yeah.
Our next question comes from Deane Dray from RBC capital markets. Please go ahead. Your line is open.
Good morning, everyone and want to thank bill for all of his help and wish him all the best.
Morning Deane.
Hey can we.
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 for Q 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.
So if you looked at our Q3 cash conversion that 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 VAT receivables rolling in that I talked about last quarter and so that's given us kind of I think we've talked about a $40 million.
Favorable tailwind, which to your point it 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 as though as we start to move forward, we'll be back to Lee.
On this big.
Working capital investment with all the inflation of the inventory in 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 with the.
Changing your guidance, there's 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 Evo to the extent that you can can you.
Flesh out the plans for the footprint optimization, maybe at 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 thats that would be a quicker.
Payback, so just some context and color any specifics you can provide would be helpful.
Yes.
Thank you for the question, we will provide greater color on our next call Dean.
We're still working through some regulatory approvals and announcements.
We're engaged here.
Our four wall. So we would we would like to get through that before we gave you a breakdown on the number of facilities, where those facilities are located in these projects that great project, It's a terrific payback.
As you as you stated.
And this is just a continuation of.
The cycle of productivity improvements that we see we still have available.
For our franchise, we will continue to do that as we see fit and we are seeing the opening now to be able to start executing on a couple of these projects.
So we feel we feel great about being able to have the opportunity to execute them.
I fully appreciate you gotta make all those announcements first.
And just lastly, I might've missed it but the extent any color.
On October .
Yes look I think in 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.
<unk> Europe industrial replacement against spotty, not not falling off the cliff, but spotty.
And.
Still dealing with the headaches and in supply chain that we have outlined in Q3.
We are able to keep up with our customer demand, which is which is really terrific. This is probably for the first time in in.
In a while that we have been able to do that so the servicing our service rates are improving but unfortunately, we're just not able to eat up into our backlog than we've anticipated when we set our original guidance in.
In July so October more or less the run rate that we have seen in the third quarter.
We are working through some of these issues and executing well.
I'm proud of how our global gates team is executing out 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.
Best of luck to you Bill.
So just just on the.
You talked about the supply chain issues, but I think you mentioned labor as well and just wondering if youre seeing any kind of improvement there the labor market getting a little.
Is it a looser.
Just as you think about kind of supply chain and labor into 'twenty three like is that 50% to 350 basis point headwind kind of the comp and how much of that do you think kind of goes away into 'twenty three.
Yes, great great input Jeff. Thank you for your question so look.
I would say that the labor shortage is getting better.
I don't think that the labor shortages, and we don't intend to say that the labor shortages.
Arthur.
The major impediments, but I would say that labor.
Our labor shortages, particularly in distribution centers in North America still spotty.
We are still having difficulties.
Ed.
Ensuring that we have all of our shift staffed up and we got.
All the people at the right setup distribution centers that we need.
And so I would say that that's probably the biggest issue on labor, particularly in North America as I said.
Out of 350 bps of.
Of lost productivity in the second in the second half or in Q4 here.
Our sense is that.
We should start seeing that ebay as we enter.
The front end of 2023.
Not in a position to be able to tell you that it's going to be gone by January one, but we are seeing improvement.
It's just the reliability and predictability of when that supply generally speaking land senior facility.
And 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.
Combination of these things should abate.
As you start seeing greater stability globally.
Across the outputs as well as across moving goods from 82 point B. So now, let's say first half of the year it's not.
It is not unreasonable that in the first half of 2023, you should start seeing this debate.
Okay, Great and then just.
As you think of 2023 and yes, it sounds like Theres still inflationary pressures just talked about.
Pricing, you're contemplating into 'twenty, three and then any carryover.
Yes.
Yes.
Okay.
Kind of broke up at the end there can you repeat the back half of that question.
Yes, just I mean just pricing.
Next year, what your thoughts are.
Okay.
Okay.
So.
You still got broke up at the end.
Soon with what you are asking about is just the pricing into next year. So.
Again.
We've done a phenomenal job with pricing.
<unk>.
In the third quarter and in the second half of the year, we're going to be at EBITDA margin neutrality as we suggested in actually a little bit ahead of schedule.
We've got additional price increases that we rolled 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.
Ben probably more heavily affected by some of the polymer 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 would 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 at our sites 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 youre 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.
Okay.
So the pricing actions for next year have been communicated.
Through to the channel.
<unk>.
We anticipate that we will continue to roll them forward.
I would say Dave that some areas that are more impactful than others.
We are now being much more selective and as Bruce said, we've got two margin neutrality price cost lives earlier than what we've anticipated. 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 the trajectory of flattening. So I just want to make that clear and I'll, let brooks to chime in on your price on specific pricing.
Yes, so most of the price.
No.
Most of the organic growth year over year Q4 to Q4.
Is priced right, but let's not forget.
We still have the Russia headwinds, we still have material headwinds Evo has talked about that being a 350 bps I mean, thats kind of the right number of 350.
<unk> $50 to 400 bps and then also FX is a huge headwind still but as we headed.
Into Q4 year over year, So I would say, 80% to 90% of the organic.
The core growth is going to be price.
But then also remember that you've got that 400 basis points of volume headwinds really related to Russia and material supply issues.
And I know you don't want to give margin guidance for 'twenty three but if you were in our shoes trying to think about what you know today.
Assume no further degradation in the supply chain.
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.
Yeah.
Well I mean restructuring add back and so we're still working through the timing of when some things are going to be announced at where we're going to take some of those charges I think from a from a cash perspective, it probably will be de minimis, but I don't know that for sure.
But we're really not contemplating that in our guidance right now.
Does that answer your question on the margin question for 'twenty.
Yes. Thank you for the fourth quarter clarification, but on thinking about Incrementals for next year and again, incorporating what youre thinking about regarding pricing. Obviously, you have some carryover currency as well and think about but if you could just give us some framework because it sounds like the savings were highlighted as a 24 event. So I wasn't sure. If we can think about any savings in <unk>.
<unk> three so if you can just kind of wrap it all together.
Look 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 and I know, it's not a great seasonal quarter for margins just how to think about incremental margins for 23. Thank you.
Well, David I think that.
I would stress that we are still going through.
Our financial planning for 2023 as you can appreciate.
Predominantly driven by the volatility that you see right I mean, we saw.
We adjusted our guidance.
In July we have seen a very substantial incremental headwind associated with FX and some more disruption in.
Supply chain and labor and so on so for that we all certainly appreciate it and anticipated that we will get better so I would I would.
For a better conversation after our Q4 outlook.
Look we do anticipate if we're going to we're going to get a small amount of savings from the restructuring in the back half of next year and we will inform you more effectively about would we anticipate vis vis 23 after our Q4 call.
I appreciate that thank you and bill. Thank you for all your health 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.
I'm wondering can you just talk about conceptually nice to see that you folks are pricing too.
Offset inflation, but we are not able to offset the higher logistics cost with the current pricing actions based on third quarter results and guidance and so conceptually for a business with a strong of a market position that you folks have whats keeping you folks from taking a more aggressive stance on pricing so that we're not only offsetting.
The inflationary impact on commodities, but the operating challenges that you spoke about on the call.
How are you thinking about potentially pricing for those.
As you think about 2003.
Yeah, So John let me, let me kind of.
Correct correct.
Sure.
Mark here. So we are we are definitely getting price for the.
The uptick in freight costs from an inflationary perspective, so we're getting freight.
We are getting.
And quite frankly in fact, we've started to incorporate energy into our into our framework in terms of getting price what we what we haven't fully cover.
As both the internal and external disruptions that are causing some of our operational inefficiencies and then also some of the volume impact.
And that flows through and the causes of margin dilution. So from an inflation perspective, right. We're getting price and then more to get to EBITDA margin neutrality, what we're not getting is the operational efficiency and volume offset from a pricing perspective, and quite frankly, we think thats kind of the right approach to take.
Yes, so Brian as you and I are saying the same thing.
So youre offsetting inflation, but this is a really hard operating environment.
Bodies facing what you're facing in 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 another two points.
Essentially pricing this risk of further inefficiencies from getting the right materials to the right place.
Given COVID-19 zero policies and other supply disruptions.
So Gerry let me, let me take it a little different tact.
We are fully recovering inflation across.
All of the inputs.
Inflation price material economics, including energy and logistics is not the issue.
Our issue has been the disruption that the lack of supply.
We see in our manufacturing facilities and we just don't believe that that's something that our customers should 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 taker.
Taking into an 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 abating across all of our inputs.
But that being said.
The headwinds that we have highlighted for Q4 are more operationally driven.
Sure.
Availability of raw materials than anything else and I think.
That's how you should think about it and inflation, we will offset inflation.
And even though when do the operational challenges improve is there a range of tight components that you're tracking or polymers etcetera can you just give us a sense on what.
What's your best sense today on.
When that availability might improve.
Well, Jamie 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 stay that perhaps the availability is getting.
But the reliability and predictability of when it will arrive is not and as I said earlier, Jerry I thing that.
Second half sorry, first half of 2023, we should start seeing abatement of these issues.
Again, both we are seeing improvement in logistics and reliability, which has been.
Our real issue again, we are moving large quantities Vienna moving.
Small boxes of <unk>.
Good I mean, we are moving.
1000 <unk>.
Hello grams of polymers.
Two.
Reasonable amount of facilities globally. So I think as we see improvement in logistics and reliability, we will be seeing improvements in our performance, but I will say.
Is that when you take a look and you almost have to think about it in.
<unk>.
Vis vis product lines segment. So you take a look at our <unk> segment, and we have done tremendous amount of work in that.
17, 18, 19 timeframe, making investments in NPI, making investments in material science and engineering and we have engineering lots of these.
Overly deep and then single source.
Really constrained polymers out of our supply chain and Youll see that.
That's been that's 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 Lauren and Behold, we got we got a terrific core growth.
And.
Strong level of profitability that is.
Filtering true because we have limited almost nonexistent.
<unk> you will see all of that aimed back rolling into our power transmission segment and we are now in process of frankly doing the same thing that we have done on PD, we're making investments in incremental more efficient capacity, we are making significant investment in NPI innovation, we are engineering lots.
These highly constrained polymers out, giving us an opportunity to have much broader much broader supply chain and raw material availability to support the production as needed when needed where needed and we are feeling very confident that we will see sort of.
Coming cycle, the same level of benefit in <unk> and we have delivered.
Okay I 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 thanks to Bill for all the help the last few years.
Maybe just a first question around the any color you could give on the segment.
<unk> you have that 200 bps decline in Q4 sequentially from wide any color on how that affects each of the two segments.
Just trying to understand the capacity aspect here, so you're adding capacity.
PT I think and there's some inefficiencies there and then you're sort of taking out capacity as well as the capacity reduction in.
Both divisions or more centered on fluid power, because you're adding more in power transmission.
So let me take the front end of that question Joanne.
Capacity under capacity attribute so the capacity that we're adding.
In PT is predominantly focused on product lines, where we see a tremendous amount of growth and also really substantial growth in.
Backlog and past due backlog, so, particularly associated with personal mobility and industrial chain to belt.
Business continues to grow tremendously our design wins in that space, continuing to grow tremendously in and for better or worse.
Past due and the backlog continues to escalate quite quite dramatically Dara. So the capacity is very specifically focused on.
On that subsegment of.
Our end markets in our transmission business. The other capacity that we are refreshing frankly in pts capacity on on.
Our industrial and automotive micro V belt will be.
<unk> 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 shouldnt really think about our moves as moves that will extinguish capacity.
We are not.
Capacity rich, we are keeping with our 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 our 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.
We will be and how they will be impacting the various.
Segments of our business.
And on the first part of the question.
Don't really want to get into the guidance by segment, but just take into account what <unk> said about each of the segments and how they are 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.
<unk>.
Our forecasting by segment.
Fair enough and then just my follow up on China.
I think you had.
Insightful perspective back in the early summer.
Ana was wood was not having a V shape.
Recovery after the Shanghai Lockdowns.
So you had low single digit growth in the quarter in Q3, how you're 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.
It's probably going to see mid single digits.
Growth in Q4.
And so it's definitely getting better but let's.
Let's remind ourselves that there is quite a bit of.
Set of challenges that are coming out of China with this well.
The rollout of with Covid.
Zero zero.
<unk> policy in almost every day, you see a new city getting impacted and so we are cautious about what's going to happen in China and.
We feel that the business is recovering more more or less in line with what our anticipation was and we don't certainly anticipate that it's going to be.
The dramatic growth that youre going to see that.
We will truly require lifting of those.
Amit 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 it is still very challenging there.
Yes.
Great. Thank you.
Yes.
Okay.
Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.
Hey, good morning, everybody, it's pads on for Mike.
Good morning question.
Morning, just a quick question going back to the supply chain side of things I will take a little bit of a different approach.
It's my understanding that theres not very many suppliers for these highly engineered polymer could 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 spot.
That theyre 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.
That frankly are dealing with the the core of the call. It the feedstock that then ultimately get subjugated to incremental processing.
And number of the suppliers in Europe , and a number of suppliers is facing extremely challenging conditions.
Associated with a dramatic escalation of energy inputs.
And as you probably may know may not know.
The petrochemical industry is extremely energy.
Intensive inside thing that that's that's one set of attributes driving.
Their desire and ability to process as much material, while they are ramping post COVID-19.
And ultimately you certainly see some.
Some restrictions, particularly in Europe with the supply of the feedstock.
That in the past used to come from.
Russia.
Now the scramble more and try to get elsewhere. So I would say that that's a big that's a big attribute and then the second attribute is saying look I mean, it's.
From end market perspective from days lots of demand for.
Refining petrochemicals.
Specialty polymers and so we are dealing with that.
Our engineering some of these polymers out.
Engineering around this as you can appreciate that it's not.
And over.
Simple tasks, we produce products that are mission critical and generally speaking operating in harsh and hazardous environments.
To be very thoughtful about it.
Engineering these things out.
Substituting just materials with.
More effective solutions, we have done that on the <unk> side.
Those products also obviously operating in harsh and hazardous and.
Mission critical applications.
We're making great progress on <unk> side as well.
It is it is.
Complex challenge to solve.
That color is super helpful. Thank you.
And switching gears, a little bit it seems like there was a bit of a divergence in first fit versus aftermarket trends could you maybe provide a little bit of color on what youre seeing between those two applications specifically.
Sure. So I mean first fitness.
<unk> continues to.
Grow in.
The team and the replacement side of our business is growing in mid single digits, what I would.
Slide two.
Point out is that.
We've had a very strong business in Russia.
<unk>.
It all went Mo.
Most of it went through the replacement channels. So if you if you kind of think about it ex Russia.
Our core growth would have been 300 basis points higher.
Sure.
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, Bob 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 <unk> for any closing remarks.
Well. Thank you very much for joining us for our Q3 earnings call again, we truly appreciate bill saw support over the last four plus years, we will miss him here, but I will be making additional announcements about.
The replacement for Bill.
<unk> here at gates, and I, certainly look forward, having the opportunity to share with you our results.
In early February .
Q4, thank you and enjoy your holidays.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Yeah.
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Okay.