Good morning, everyone, and welcome to CJS Securities' 25th Annual New Ideas for the New Year Conference. For those of you who don't know me, I'm Justin Ages, a research analyst here at CJS. Thanks again for joining us today. Our next presentation is from PHINIA. My pleasure to introduce Chris Gropp, Chief Financial Officer and Executive Vice President, and Kellen Ferris, VP Investor Relations. PHINIA is a leading developer and manufacturer of components designed to increase efficiency and reduce emissions for internal combustion engines and hybrids. We'll start with a 10- 15 minute overview for management. Following that, I'll kick off Q&A. Please feel free to submit any questions you might have through the portal. With that, Chris, Kellen, thank you very much for being with us today, and the floor is yours.
All right, thank you, Justin. So I'll get Kellen if you can advance to the next slide. We'll get started. So you can see we are PHINIA. We're a leading developer and designer manufacturer of integrated components for Fuel Systems. Our products, as Justin said, optimize performance, increase efficiency, and reduce emissions. We go on both combustion and hybrid propulsion, and we go across commercial vehicles, light vehicle, off-highway, aerospace, and recreational markets. We have globally recognized brands with design and manufacturing capabilities that go across the globe. We can go to the next slide. We have two basic segments. We have the Fuel System segment, which is about 60% of our revenue, and it provides advanced fuel injection systems and components, fuel delivery modules and canisters, sensors, electronic control modules, and associated software.
Aftermarket provides about 40% of our revenue and offers product to more than 4,000 customers in the Americas, Europe, and Asia-Pacific. Customers include Independent Aftermarket, OE service, and OE manufacturers. We also provide calibration and testing services, plus software development. And you can see we go across multiple fuels. We go from diesel to gasoline to CNG, LNG. We can also do, at this time, hydrogen and have launched on both hydrogen fuel cells and hydrogen direct injection components. We're a combustion company with diverse end markets, regions, and customers. Over half of the business is CV and Aftermarket, and we work with the alternative fuels that I just noted. And we can also go across multiple power generation platforms. As I said, aerospace is one that we launched last year. We can go across gensets, so generators, recreational vehicles on-highway, off-highway.
Aftermarket, besides CV, is actually our fastest growing area. So Aftermarket CV, the fastest growing. And the majority of our Aftermarket is non-discretionary and resilient through cycles for both light vehicle and commercial vehicle sales. Just so it's an understanding because some people have a hard time with this, but our Fuel System segment sells into our Aftermarket segment. So over half of the sales that go through our Aftermarket segment actually originate from production on the Fuel System side. So we can move forward. So this shows you just the diversity of our end markets and our regions. From a region perspective, we're pretty balanced. We're about 40/40, Europe and Americas each, and then Asia-Pacific the other bit. And across customers, we don't have a large concentration in any one customer. GM is our largest customer at around 15%.
After that, you're talking very small percentages of the total pie, and you can see the Aftermarket and some of the components that we see there. In terms of the dynamics on Aftermarket, the one thing that we have seen in the last year with the OE sales down, Aftermarket provides us a really good ballast overall. We're down 2% year over year in 2024, which is not something that we're extremely happy about being down. However, compared to the rest of the market, it's quite low, and it's mainly because on the Fuel System and the OE side, we're down, and it's almost completely offset by our Aftermarket because as OE goes down, Aftermarket has a tendency to go back up. We can go to the next slide. Kellen?
There we go.
Long-term vision for us is to be product leaders. We inherited, as most of you know, we are kind of a product of Delphi that went to BorgWarner and then spun off of BorgWarner. So we have technology that came from the Delphi, really good engineering base with stable growth, but we picked up financial discipline from our legacy BorgWarner side. We are really focused on return on investment and shareholder return. So we take that strong history, knowledge base, and engineering base from Delphi, Delco Remy, and Hartridge brands, and then take the financial discipline, which was our heritage from BorgWarner, and then package it all up. Moving to the next slide. So these are actually getting a little stale.
This is third quarter, but this is about all I can get into. We had a really good quarter for the third quarter, $838 million in sales, 14.3% EBITDA margins, 13.2% segment margins. As I said, as OE goes down and Aftermarket goes up, Aftermarket tends to be the more profitable segment for us. So as those sales go up, it's just a really good mix for us. We really believe in strong balance sheets. We spin off a lot of cash, and we try to be very, very disciplined and diligent about how we're employing that. We have low leverage at 1.1 times leverage. We refinanced all of our almost, well, we didn't finance all, refinance all of our debt that we inherited at spin.
We redo all that in the last year and put that into a better position. So in a really good position to go forward into the rest of 2024 and into 2025. Can move to the next slide. We also continue to win business, and these are just a few just from the third quarter new business in terms of off-highway compact diesel engines, and yes, we are continuing to receive RFQs and quote diesel in areas that it's applicable, so this one in particular was for an off-highway product. We also continue to win conquest business, which has picked up over the last three years, and for a third year in a row, we're winning 50% or more of any conquest business that we're going after.
In the middle, you can see this was a light vehicle GDI, which is being sold to a European automaker, but going into the India market, and then the third one is for a U.S. automaker, light-duty trucks, SUVs, which is our one of our biggest markets, is our biggest market for GDI in terms of expansion. If we go to the next slide, you can see Aftermarket. We continue to expand in the Aftermarket arena with contract extensions, new business wins across Europe and the Americas. And our business in China is continuing to slowly increase for Aftermarket also. And you can just see a few areas where that's expanding. And finally, disciplined capital allocation.
As I said, this is really our heritage that we're pulling forward from the BorgWarner days, strong balance sheets, robust liquidity, competitive capital returns, and making sure that we are very focused on giving dividends back to our shareholders and doing opportunistic share repurchases. We are looking at M&A, and I know this question's going to come up. We are looking at strategic M&A, but until we can find something that is actually as valuable as where we think we are with our share price, we will continue to do share repurchases and with that, I think I will actually try to leave more.
This is just another throughout the decade, and this is what we're targeting for growth, 2%-4%. Nothing exciting, but continue just a long tail as we go from what I call birth to death, from beginning of production to when it rolls into Aftermarket, and just a solid growth of 2%-4%. We continue to maintain good EBITDA margins, solid cash flow, and we do show a net leverage target of 1.5x, but that's only if we see an M&A target or some really true reason that has a good return on it to push us up to that, but right now, we're just over 1x , and with that, I will turn it back to Justin.
All right. I appreciate that, Chris. Thanks for that overview. So I think a good place for us to start is the Fuel System segment. So can you give us a little more detail on some of the primary products in that segment, as well as how they relate to the mix between light vehicles and commercial vehicles?
Sure, so for Fuel Systems, as we had seen, we do fuel injection systems and components. We also do fuel delivery modules and canisters. We do sensors. We do electronic control modules and the associated software, and coming from the Delphi days, we've always done the software, which is a big component, and that allows us also to get into the calibration and testing, not get into. We've always done the calibration and testing, and for some customers, they come and ask us to do additional calibration and testing across multiple platforms. All of those products are for the Fuel System side, but those go also into the Aftermarket side, so in other words, once it goes out of production, then it goes into our Aftermarket for service and then eventually moves into independent Aftermarket.
In addition, for the Aftermarket side, we sell steering and suspension test equipment. We do remanufacturing of mainly CV injectors. We do training, and we also do test equipment. Now, the split on those is LV for us is about 44% of our portfolio. CV is 25%, and Aftermarket is 31%. And then you saw the regions where we're about 40/40, Americas and Europe, and then 20% Asia-Pacific.
Yeah, that's helpful. I was going to ask about the geographic mix. And does that change or set a different mind? Does the geographic mix change mix of LV and CV? So is the Americas more weighted heavily towards LV or CV? And what are the trends like in other geographic regions?
If you look strictly at our financials, then our Americas are more heavily weighted toward LV. However, it's a little bit deceiving because all of our CV, almost all of our CV product is produced in for the American market, is actually produced in Europe. So our biggest customers on the CV side are Volvo and the DAF PACCAR Group. And we produce for them in Europe, sell to them in Europe, and then they ship their product into the U.S. So even though it's produced and for us, it shows as a revenue in Europe on the CV side, it actually goes into the American market and, well, I should say America's market. In terms of China, we actually produce CV and ship, and it's almost an equal split in China. The CV and LV is an almost exactly equal split between LV and CV.
Great. That's helpful. And then in terms of the products that you outlined, can you get into PHINIA's manufacturing capabilities, how those capabilities have changed over the years and barriers to entry for the segment? Can anyone come in and produce similar products to what you're doing?
Our manufacturing capabilities, probably the things that are the most difficult, are the precision laser drilling, coating, grinding. We deal in a lot of material understanding, understanding of how fluids affect materials. I mean, that's really the expertise in this area. Then we also have the software side of it, so controlling all of the units and how they are actually inserting the fluids or the fuels into the engines. We do precision manufacturing, complex manufacturing, so that's the basis. But to me, for the barriers to entry, it is expensive to get into this business, but the knowledge base is one of the most difficult things because we have engineers that have worked in this area for years. They're expensive, and they're a resource that is well suited to the space, but it's not something you can easily replicate.
The biggest competitors are Bosch. Bosch has this technology and this ability. Denso for the Asian side of it. There's a few smaller ones. There's none in China that can do a fuel injector. So it's not an easy area to get into. I'm going to say more from knowledge base than anything else. You could figure out how to do some of the precision laser drilling and some of that stuff, but it's not easy. It's not something that is simple to get into. And just by means of how few competitors there are out there would tell you how difficult it is to get into.
Yeah, Justin, we've seen some competition leave the market over the past year, year and a half or so with just some of the competitors that are sub 10% market share have decided to kind of sell off and focus on other aspects, whether it's EV, software, etc. But they've been exiting kind of the Fuel Systems market.
Yeah. And along those lines, are there certain, I guess, plants that you guys have around the world that are producing these systems? And are they distributed aligned with kind of the revenue geographic split?
We mostly produce in region. Other than the CV example that I gave you where CV is produced mainly in Europe for the Americas and for Europe, but in that case, we're shipping it to the customer, and then they're shipping it to the region that they want it to go to. Otherwise, we really do produce in region. We source in region, and we have engineering resources respectively where those regions are. Now, it can change a little bit. Our FDM and canister is really centered in the knowledge base, is centered around both the Americas and Europe, not as much in China.
For LV injectors for passenger car, we have the same capabilities in the Americas as we do in Europe, as we do in China, with the only difference being that there are slight differences in terms of where the OEs in those regions are. In terms of CV, we have capabilities in Europe, and that's the most heavily heavy area where we have the concentration, but we also have capabilities in China also.
All right. That's a good kind of comprehensive take there, and one more question on Fuel System products. Well, I'm sure we might come back to it if there's time. In selling to the customers, are they dual sourced? Are they single sourced? Just any information there would be helpful.
On the CV side, it's going to be single sourced. If you are on a CV truck, they do not split those apart, and they're going to design their entire engine around one source for those. So those are going to be single sourced. On the LV side, they will dual source. And in fact, that's been the one area where we've won more business where Bosch is going to have 50% of the market, and they don't want to give any more business to a Bosch. That's where we've had some inroads where we're having customers come to us and ask us to become a second source because they don't want to add any more risk by giving any more of the market to a Bosch.
Yeah, I can certainly see the reasoning behind that. So taking a step back from the product, can you get into PHINIA's plan to win more share in what's been characterized as the slowing ICE market?
Well, I mean, it's just ongoing day-to-day quoting and getting into things. It's been kind of an interesting thing. Even before it's been, the market that's moving the fastest has obviously been China. And even before we spun away from BorgWarner, we were getting quotes from Chinese domestic OEs and large ones that most people would consider just an EV player coming to us and asking us to provide them with a solution for fuel injection because they needed to put a hybrid in their portfolio. So we need a hybrid in our portfolio, and we need you to launch in the next 12- 18 months. So that's been happening for a while. We had domestic customers in China coming to us about range-extending vehicles. So we've won quotes on that. So that's been some of the expansion, for sure.
We are also seeing on the CV side, as the emissions regulations are increasing, it does increase. We have to provide a more upgraded or a next-gen solution, which has given us increase in terms of CPV and content per vehicle. And so that's obviously adding on to the portfolio. But just in general, the hybrid, as long as the hybrid is going to move as fast as it is in terms of rising and expanding, it is certainly a point for us to move into and expand with.
Justin, on that, on the competitive landscape a little bit, I think we touched on it, but Chris hit it on the head. Bosch has about 50% market share. Denso's 20%. Denso has actually communicated to the market that on the LV side that they're not going to pursue next-gen technology or go after conquest business on the LV side. That could change, obviously. So essentially, we're the number three market share player. Everyone behind us that Chris mentioned, like the Vitescos, the Marellis of the world, are mid-single digits and just capital-wise don't really have enough to kind of get double digits.
One of the things in China that stood out, at least so far, that's caught my attention a little bit is the almost increased desire to source full systems from suppliers like us rather than piecemeal it together because there aren't as many engineers, manufacturers, etc., that can really put these things together for them. But yeah, on the LV side, we're seeing we expect to be able to grow our market share from mid-teens to probably low 20s by just continuing to invest in next-gen technology and being good with quotes, etc. But also it's because of Denso isn't really pursuing anything conquest-wise. So that's another thing that just kind of stood out on the competitive landscape side.
But we're also looking at different markets too because alternative fuels. We're getting a big pull from South America where they want to go into alternative fuels because they don't see where EV is really going to pick up. And they're much more interested in that. And we can use the same equipment to produce for alternative fuels such as ethanol for South America. Hydrogen has been a pull, especially on the CV side of things, off-highway and recreational, where customers are asking us for solutions that include hydrogen. And instead of fuel cell, we do have fuel cell, but also the hydrogen ICE has been interesting. And then, outside of automotive, aerospace. We've announced our first wins in the aerospace market. So we can use the same equipment, the same engineers, the same knowledge base to go across all of those markets.
That's some really helpful color. Thank you. You touched on commercial vehicles a bit, and I want to get your thoughts on some of the key issues that are preventing increased penetration of electric vehicles within the commercial vehicle space.
It all comes down to energy density, effectively. I mean, everybody understands that there are certain applications where an EV will work. If it's a bus or a delivery vehicle that's doing milk runs in a city or something and they have regular go back to base, recharge, go back out, those applications work and it's understood. When you start getting into where we mainly play, which is your Class 8 large trucks, energy density, it's very difficult or almost impossible to have a truck that has batteries and can carry a load and be able to run on any of the road systems that are in any region, either in Europe or the Americas or China.
It just doesn't work. At this point, you don't have the energy density. You don't have it. It doesn't give you range. It doesn't give you. There's no infrastructure out there to really be able to put those into place, and those are the things that are holding it back at this point.
That's helpful. And I want to touch on the Aftermarket segment. And you outlined how the Fuel Systems segment is obviously integrated with that. Can you size the Aftermarket opportunity for us and break it down into the different geographies that you operate in?
So we operate in all regions, but our largest market is Europe and then the Americas, although they're fairly balanced and then very similar to the 40/40/20. It's almost that across the Aftermarket with our size in China, much less. The Aftermarket in China is much less defined as opposed to Europe and the Americas where everybody knows you either go to an O'Reilly's, a LKQ, an Advance Auto. That's very defined in Europe and the Americas, less so in China. From a product standpoint, as I said, we're providing the steering and suspension, which is mainly that's a pull from our customers.
They like our brand. So if you're going to go into if a customer is going to go in and buy something, they trust the Delphi brand. So we get a lot of pull from our customers to expand our ranges. And we will, but only if it makes sense and there's a really good business case for adding more to our portfolio and then rebranding it, doing production and rebranding it with the Delphi brand.
Okay. And then within the segment, and maybe this is a point of clarification, what portion of the Aftermarket segment is OEM branded versus white label, let's say, and what percentage of sales are to dealer versus retail and wholesaler?
I'm going to break it down just a little bit differently than you asked it. So what I would call white branded is only 15%-20% of the whole portfolio. So the rest of it would be, and I can't break it out between all. The rest of it would be either going straight to an OE, either a service, or even as reman. We do reman, and that's about 10% of the total Aftermarket. And then you're going to get a whole mix in between all of that between the OEs, OE service, and the Independent Aftermarket. But it's hard to break down in between each one of those because even if we're selling to the OEs or the OE service, then they will sell on sometimes even into their service areas. But that's sort of the general breakdown of it.
Okay. And then you touched on PHINIA's solid free cash flow generation. So I want to talk about capital allocation. So can you give us a sense of how management balances buybacks versus dividends? And then we'll follow up from there.
Okay. I mean, our first priority is to make sure we have adequate liquidity, and we do throw off a lot of cash, and so our units and our whole focus is on making sure that we maintain that. We're very committed to competitive dividends. We've been doing reasonably aggressive buybacks over since spin, and so we've reduced the number of shares out there, so we're going to have to go back and look at whether we increase the dividend at some point because there's fewer shares out there, but we're committed to the dividend. In terms of share buybacks, I mean, I think we've demonstrated that we understand the value in that, and as long as we have cash sitting around and we aren't finding any M&A opportunities that we think are better deals than our own stock, we'll continue to do buybacks.
So we continue to look at M&A opportunities, but it's just like anything that we're quoting, we're trying to make sure that it has the same ROIC and return criteria that we have on anything that we're investing in. So we just kind of are trying to be very disciplined and make sure that we're being very disciplined and employing the cash that we have in a way that our shareholders would appreciate.
Yeah. I can certainly understand that. And one question that we're asking all our participants is if you and PHINIA had an extra, call it $300 million for M&A only, is there a certain area that you would invest it in and why?
Yeah. Where we're really concentrating is if we're going to expand, we would prefer to have something that's either heavy CV or LV that has a very strong Aftermarket component to it, either a current Aftermarket component or could turn into something that we can then move into the Aftermarket because we like the balance of having Aftermarket as an offset to the OE in case you have cyclicality in the market. We just think it's a very good model. It's worked very well for us so far. So if we had it, we're really focusing on CV and Aftermarket or at least an LV that has a very good Aftermarket capability.
That's very helpful, and then another question that we're asking all our participants is, what do you see as the company's biggest specific milestones or catalysts this year to help your stock outperform? And what about the biggest risks?
I think for us, it's only been 18 months since spin. But what I tell our people all the time is you're only as good as your last quarter. So we just have to consistently perform. The markets are the markets, and everything comes down to how you react to the markets. This year to date, the markets have been a little bit weaker than everybody expected. And we're down 2% through the end of the third quarter. But if you dig into that, and I think I said this earlier, which is if you take that 10% and then dig into it, Aftermarket is actually up, offsetting what the OE on the Fuel System side is down. So it's all in how you react. And the Aftermarket has performed really well.
But our Fuel Systems, on the flip side, has actually, even with sales down, held their margins despite the reduction in their sales. Having the Aftermarket, which is more profitable, is also a good mix for us, including for the Fuel System side because as they sell more Aftermarket and service parts into the Aftermarket, it's really positive for them. So for us, it's just continuing to perform and react to the markets. Biggest risk we see is what I think everybody sees. It's chaos in the market because every quarter, everybody's watching to see what's happening with EV, what's happening with hybrid, what's happening with internal combustion. So that's a lot of chaos to deal with. And then with the incoming administration, of course, everybody's very interested in what's going to happen. And we're as interested as everybody else on that one.
Yeah. That was definitely the lead into my next question about how has the company been preparing for the possibility of tariffs. And you mentioned you do a lot of manufacturing in region, but wanted to ask what the company is thinking around the tariffs question.
On the tariffs, I mean, we have consultants out of Washington that are giving us a lot of their knowledge and insight into things. But it's hard to understand exactly. But if I just took China, for instance, if there was an additional 10% tariff on China, the effects would be quite minimal for us because we don't source a lot out of China coming into the U.S. And over 80% of what we source out of China to the U.S. is for our Aftermarket. If you ended up with a China tariff, we would either look to move that sourcing directly into the U.S., or you would just pass on the price increase. And if we're passing on the price increase, everybody else is too. So don't necessarily like to increase prices to our Aftermarket, but it is what it is.
It would be what we would have to do. On the Mexico side, that one would become a much bigger deal. However, because we have the majority of our product is USMCA compliant, if it's only on the non-USMCA compliant product, it's not that big a deal for us. It's not massive. But we're already in discussions with our customers on passing those on, and they know that. If it happens that they actually break down USMCA and cancel that and put tariffs on everything, it would be not only catastrophic for us, it'd be catastrophic for everybody. So let's see where that goes. But you'd have to push it onto the OEs, and the OEs would then, of course, push it on to the final end product. But I have a hard time seeing them pushing that through. But stranger things have happened with.
Yeah. That's true. That's true. Well, we're a little over time, but I want to make sure I turn it back to you for any closing thoughts that you might want to add just on the PHINIA story. I really appreciate your participation.
I think we went through most of it. We came out of the gates from BorgWarner understanding that we have really good product and really good engineers and resources. And we also have a really good legacy from BorgWarner that we needed to build upon in terms of our discipline and our financial management. And I think we've demonstrated it. But as I said earlier, you're only as good as your last quarter. So we just have to continue to perform, continue to develop product, and just continue to return as much to our investors as we can.
That's great. Thank you so much, Chris. Thank you, Kellen.
Thank you. Thanks, Justin
Thank you.