Welcome back, everyone, to the UBS Industrials Conference. Super pleased to have with us, PHINIA, with us from PHINIA. We have Brady Ericson, CEO, and Chris Gropp, the CFO. So thanks for joining us again at this year's conference. Always a pleasure to have you. You know, there's a bunch of topics I want to sort of run through. You know, mostly relating to sort of where you know PHINIA's strategy and where we sort of go from here.
But, you know, I wouldn't be sort of doing justice if I didn't sort of take an opportunity to sort of ask you just, you know, with roughly three weeks left in the year to go and a quarter to go, like, how have things sort of, you know, played out relative to sort of what you talked about, you know, at the end of the third quarter?
Yeah, I mean, really no changes. I think things are continuing to kinda chug along. As you kinda see on the slide here, the number of end markets and regions and customer diversity that we have keeps us pretty, pretty resilient in kinda every market. And so, you know, commercial vehicle North America's still pretty soft, but we're seeing signs, you know, more positive in Europe, light vehicle in China. Aftermarket continues to perform well for us. And so there's a lot of different diversity, so there's not any one thing that really drags the business down.
Yeah.
in any way. And so we're confident in our guide, and we're looking forward to another strong 2026.
And as we begin to sort of think about 2026, I know we're not gonna get guidance from you here right now, but clearly you're at least have begun, if not sort of right in the thick of sort of the planning and budgeting process for.
Yeah.
For 2026, you know, and look, what you sort of budget for might ultimately end up being different than sort of how you communicate, you know, the guidance to the street. But you know, how are you sort of thinking about the markets for 2026, especially since, you know, I fully appreciate that you're sort of diversified here by end market and by geography, but there has been a lot of volatility in the market. Yeah.
It's, you know, how do you sort of go about planning for that when we've seen this level of volatility? Do you expect that level of volatility to slow down at all?
No, I think, I mean, we always do a full bottoms-up every single year. So every plant is gonna look at every SKU. They're gonna talk to their customers, see what their production plans are, as well as, you know, compare that to what the market expectations are.
Mm-hmm.
And as Chris kinda pointed out in a number of our meetings, if you take a look at our guide for this year, we're almost dead nuts.
If you strip out tariffs and our acquisition and stuff.
Yeah.
We're within 2%. So.
Yeah.
It's not that every market hit. It's just that, for us.
Diversification play.
Yeah. Well, if aftermarket goes down, OE goes up. OE goes down, aftermarket goes up. So.
Yeah.
Yeah.
So we have nice diversity. I think the positive, again, that we've seen is, you know, we tend to look at halves, tend to be more comparable than quarters, and we're getting back to, I think, our normal seasonality to where Q1 and Q4 are lighter, Q2 and Q3 are stronger, but if you compare first half to second half, those are probably more comparable, and so with our current guide right now, our second half is a bit stronger than the first half, which is probably a good indication of us going into 2026.
So you think that is a solid run right into.
Yeah. I think it's a good starting point for us. You know, for us, since we've spun, you know, we've gone from a peak cycle of CV and industrial and even some of the light vehicle to now we're closer to the bottom of the trough.
Mm-hmm.
And so we're only halfway through a normal cycle. And so for us, if the OE just stops declining, that's good for us.
Right.
You know, because then our aftermarket is then growing and we'll be back into growth and when the market does come back more to equilibrium.
Mm-hmm.
We're gonna have even better growth.
Yeah.
And now with, you know, the relaxation of some of the CAFE requirements and other things, we've already seen that trend where customers are gonna be keeping combustion engine on the light passenger vehicle side.
Yeah.
which is a nice opportunity. And again, it's around 27% of our business globally. And we think it's, you know, a good solid business for us.
So it's definitely, you know, been a ICE stronger for longer thematic, which is something you guys have, I think maybe secretly sort of thought all along. But when you did sort of spin, you did have some different assumptions for sort of how ICE would trend within the light vehicle market. So, you know, what's sort of your current thinking on that? Because, like, the old math was sort of like you need to win a certain amount of business, right, on injectors to sort of offset the headwind.
Correct.
It seems to me like you might still be getting that same amount of incremental business.
Sure.
Share gains, but you're not having the headwind you thought.
Correct. Again, when we spun out, we were still part of our former parent.
Mm-hmm.
Our messaging had to be consistent with what our former parent was saying.
Mm-hmm.
They presented in the morning. We presented in the afternoon.
Such a good child.
We were still employees of that company.
Yeah.
So we had to be fair. We still had an obligation to our former parent. So that's a little bit different. Now, again, most of our leadership team, myself included, raised their hands and says, "Hey, we wanna go with this combustion asset.
Yeah.
Because we believed in it.
Mm-hmm.
Our view is still that, you know, battery electrics are still gonna continue to gain share. It's just our view they're gonna plateau. We're already seeing it plateau in China with the incentives no longer there. We're seeing it slow down in the Western markets. We're seeing adjustments in Europe as well. EVs make a lot of sense for some applications and for some families, but they don't make a lot of sense in a lot of regions of the world, in a lot of regions of the U.S. and in Europe. Eastern Europe, Africa, Southeast Asia, Central South America, you know, even China is not going full BEV.
Mm-hmm.
They'll get a certain percentage, in some of these Western markets. But in Brazil, we're doing 100% ethanol.
Mm-hmm.
That's now their solution for carbon neutrality rather than going electric, and so they're using sugarcane, processing that into ethanol, and now with our heated tip injectors, they no longer have to have a dual fuel, and they can just run 100% ethanol for those cold environments.
So it's been, you know, a decent amount of time since that spin and since that sort of initial analysis. I mean, this is sort of a refresh of where we stand now given that a lot has changed.
Mm-hmm.
Not just from a macro and regulatory development, but also, you know, you have a track record now at.
Yep.
At PHINIA. So, is that something we should expect, in 2026?
Correct. We are planning an investor day, and we'll have a notice coming out here later on this week, early part of next week.
Mm-hmm.
to be, in February of 2026, at the New York Stock Exchange.
Okay. Perfect. We'll look forward to that. You mentioned, you know, CAFE regulation. There's also, obviously, you know, EPA and CARB. It's a very complicated regulatory environment here in the U.S. Today we did get sort of the new, you know, CAFE fuel economy rules, and they, I think, lowered down to, like, you know, I think you gotta go to like 35 and a half or something by, by, you know, the end of the decade from 50-plus prior. So, you know, you mentioned the absence of, like, the need to move to EV.
But also, is there - and this we were just discussing a little bit before we got started - but is there also any change to products for even ICE vehicles that would historically make them more fuel efficient, like just a less of a need to do that because, you know, the bar is not as onerous?
Yeah. I mean, we think customers and we still support, you know, incremental improvements on fuel efficiency. Why not?
Mm-hmm.
You know, we have to do it in a cost-effective way, that makes it affordable for the consumers because I think a lot of the technology and things were being forced on them was driving the cost to where it became unaffordable for people to buy a new vehicle. And if you're trying to reduce overall emissions, you know, having people stay in 15-year-old vehicles longer isn't necessarily the best for CO2.
Mm-hmm.
Why not continue to, you know, improve the fuel efficiency? Now, there are some technologies we're actually launching the first 500 bar. We launched it just over two years ago in China that actually improved the combustion process and actually allowed them to reduce the cost of the vehicle because they didn't need as much after treatment because during the combustion process it was actually that much more efficient with the 500 bar technology.
Mm-hmm.
So it's been really, really beneficial for them. And so I think we'll continue to see customers strive for additional fuel efficiency. And I think now, the consumer's no longer afraid of hybrids and plug-in hybrids 'cause in the beginning, it was they had to we actually had to sell the hybrid at a lower cost than the combustion because people were afraid of the maintenance costs and the wear and tear and is it gonna work and is it gonna fail. And I think everyone's now it's, you know, you know, seamless.
Mm-hmm.
As far as they're concerned, and so as we were talking about, all my kids drive hybrids, you know, and they get 35, 40, 45 miles a gallon, and they just think that's normal.
Mm-hmm.
It's completely transparent to them. I think that's a good solution for us to significantly reduce CO2 very efficiently with our existing infrastructure.
Okay. Maybe we could talk a little bit about this, you know, chart you put up and sort of the diversified business model. And, you know, look, I think individually, any one of these markets can have volatility and might be difficult to forecast. You know, for them all to sort of move in the same direction, it seems like something would need to go fairly wrong in the world.
Yeah.
Maybe, maybe you disagree. But let's just sort of, you know, talk about the strategy from either a growth or improving profitability perspective by the market. So if we start with light vehicle OE, how would you sort of describe which I think, again, you said is 27% of the business.
Yep.
How would you sort of describe the strategic view there?
I mean, our view there is that we're gonna continue to gain market share. And we've been winning market share and announcing that we'll continue to gain that, you know, 1% of market share, you know, per year over the decade. And that's offsetting the slight decline.
Mm-hmm.
To your point, you know, our original expectation was we're gonna see maybe a 4%-5% decline in combustion engines in light passenger vehicle. Now it's maybe only 2%.
Mm-hmm.
So some of those share gains, it's gonna allow us to maybe increase the total revenue number for light passenger vehicle OE. With that said, it's roughly around $900 million of our revenue right now. We'd like to keep it around there, maybe up to about $1 billion and just keep those lines running full speed, generating a lot of cash.
Is that because that's what you're capacitated for, or could you do a little bit more?
We can do a little bit more. But again, what I don't wanna do is in a market that's still flat to declining, adding a bunch of capacity.
Yeah.
In something that already has too much capacity.
Mm-hmm.
And so we already have a number of our competitors on that side that are exiting or not investing. And so capacity's coming out.
Mm-hmm.
which is a good thing. And so we don't wanna start adding capacity until, you know, the industry needs it, you know, with our technology.
Do you have any stats you could share about maybe how much share you've gained even in the period since you've sort of spun till now on?
Yeah. We were in the low, low double digits, earlier in the decade, and we're probably mid, mid, mid teens right now.
Okay.
on the GDI side. That's where most of the share gains are happening.
Yep.
Where three of our small competitors that had low- to mid-single-digit market shares just exited.
Mm-hmm.
Even some of the larger players that we compete against are questioning whether they wanna continue to invest in the next generation technology, whether that's 100% ethanol going to 500 bar technologies, other alternative fuels. We think there's some advantages there for us to continue to win.
And the regions for that LV GDI are China and the Americas.
Mm-hmm.
That's where that's grown the most for us.
Yeah.
Europe, not so much on that, but.
So I know this is probably a little bit difficult, but I mean, if I'm doing some, you know, very rough sort of mental math in my head as I hear you speak, like, and again, it's difficult to know because you're, I'm sure you're not invited, you know, to look at everything out there. But is it possible that, like, in your bookings or backlog or whatever you wanna call it, your share is maybe closer to 30% at this point?
Closer to.
30%?
30%? No. I would not estimate that high.
But you just said, like, you had three competitors that were in the single digits all drop out, right? So.
There were, you know, some smaller players that dropped out, but you still have the two big players that are at 50 and 20-some.
Right. So if everyone sort of gets their fair share of that.
Oh.
Right. So I'm not in the future, not today.
I'm not saying today.
But going into the future, like, if you're looking at their, like, are you winning at closer to, let's say, a 25% or 30% market share?
Correct. Yeah. And I think we're again picking up, as I said, about a point of market share a year through the decade.
Mm-hmm.
We expect to be close to 20.
I didn't mean in a year you'll be at 30% or anything like that.
Right.
I meant, like, yep. When you're looking at the business that you're quoting, which again, some of us won't launch for years, it seems like your share of the wins is significantly higher than your share.
Correct.
In marketplace today.
Correct. We, I mean, we continue to be at a 100% win rate for our existing carryover business.
Mm-hmm.
We've been anywhere from 20%-50% of conquest for the last several years.
Okay.
We continue to see those market share gains.
Okay.
I think the other thing that makes it difficult for us to forecast is we'd originally assumed some programs ramping down.
Yep. And now.
And customers are saying, "Hey, they're staying," and they're actually ramping up.
Mm-hmm.
And so that may change the dynamics. And so there's been some silent extensions and silent increases.
Mm-hmm.
You know, from customers that, you know, we're adapting to as well.
Okay. Maybe on the commercial vehicle OE portion, you know, again, like, you know, you talked even in some of your opening remarks about the different regions, Americas a little bit tougher, maybe some of the other regions doing a little bit better. Is that regional mix roughly in line with the overall regional mix you have for the entire company within that segment?
Yeah. I mean, I think the light passenger vehicle is overweight Americas and China.
Mm-hmm.
Commercial vehicle, probably more overweight Europe and North America.
Yep.
a little bit lighter in the Asian region as far as, you know, percentages.
Uh-huh.
Aftermarkets and that OES, original equipment service that goes through the dealerships and the independent aftermarket. It's actually about 50/50.
Okay.
commercial vehicle and light vehicle.
Okay. And so, similar sort of line of thinking for the OE commercial vehicle business. I mean, this business is, like, arguably even more cyclical than the light vehicle business. And obviously, at least in the U.S., we're at a little bit of a downswing. But how are you sort of viewing that, going forward?
I think the nice thing about commercial vehicle is it's, you know, our aftermarket's driven by the number of miles driven.
Mm-hmm.
Obviously, commercial vehicle drives a lot of miles for a lot of applications. That's, I think, when you take a look at a typical commercial vehicle engine component. They're probably 60% OE, 40% service and aftermarket. Even though you have that cyclicality, a greater cyclicality of the commercial vehicle, you have a larger portion of aftermarket that's really stable.
Mm-hmm.
And so that ratio is really good. If you take a look at our, you know, some of our key customers and take a look at their business, they're probably around that 60/40 between their parts business and their OE business.
Mm-hmm.
That's because of, you know, the 100,000 miles a year they're driving these things. We'll get anywhere from, you know, two-to-four replacements over the lifetime of that truck.
Yeah.
And so, although the OE is more cyclical, the aftermarket is a larger portion of their base business. We're on light passenger vehicle at maybe 90/10.
Mm-hmm.
You know, on typical. Now, the reason why our aftermarket light vehicle aftermarket is actually so big is because we also do all makes, and we added additional product lines: steering, suspension, braking. Those are gonna be propulsion agnostic components, and they're, you know, not something that we're doing on the OE side, but because we have a strong brand, we have an OE pedigree, and a good reputation, we've been growing that as a part of our aftermarket business quite substantially in the last few years.
Sorry. And then the LCV portion, maybe just for definitional purposes, what is that just mostly van? Like, what are you including in that?
That's like the class one through class four type vehicles, delivery vans, you know, up 10,000-pound trucks type of thing.
Okay.
That'll be in China. They'll probably go a little bit smaller.
But not like a heavy-duty pickup truck that you or do you put that in that?
Some of the larger, not probably the.
Not a .
Not the one-ton type thing, but it's gonna be more the larger trucks than that. It's really focused on these are vehicles that we would consider commercial in nature for businesses.
Okay. And then the final area, sorry about that. I mean, the sort of, you know, industrial types of business. And I know this is an area that's near and dear to you and a big focus of where you wanna sort of bring the business, going forward. So again, maybe it's just the strategy and the outlook and what you wanna accomplish in that business.
Yeah. We'll deep dive that a little bit more in the investor day. And so the kind of that other OE, which will include marine, construction, ag, gensets, some aerospace, marine application, it's now growing to where it's becoming significant enough that we start to call it out. And so we're gonna call it out, you know, in our investor day. And that kind of threshold is probably in the close to the mid single digits.
Okay.
As far as our revenue, once it kind of gets there, it probably makes sense to give additional color to investors, and that's an area that we think is probably gonna be our fastest growing segment.
I was just gonna say, maybe as a sneak peek, like, is that a market or a business for you that's sort of growing in line with those end markets or faster? It sounds like you're saying faster.
It's growing much faster toward getting a lot faster.
A couple things. One is the competitive landscape and the technology that we have is very good versus the competitors that are in that space, and typically, when they're coming with Tier 4, Tier 5 emissions, they're looking to improve the quality and delivery of those vehicles, but they need something that's cost-effective.
Mm-hmm.
And so that's been some of our announcements with Polaris, with JCB and Kohler and aerospace companies. We're winning a lot of these things because we're one of the few that kept investing in these technologies. And they say, "Wow, this one of the gensets that we have is what we call a GDI for diesel." And so it's taking our light passenger vehicle direct injection systems and converting it over to diesel for an off-highway excavator and genset application.
Mm-hmm.
And so it gives them a cost-effective solution, gives them a common rail design, electronically controlled, but it gives it to them in a cost-effective 'cause that's gonna be running at 350 bar to 500 bar. So that's as you go up in pressure, the price goes up almost, you know, exponentially. And so they can't afford the 2,000-bar medium duty or 2,500-bar heavy-duty type systems. They need something that makes more sense for their application. Obviously, those are probably less sensitive to fuel economy.
Mm-hmm.
As a heavy-duty truck because heavy-duty trucks are running a lot of miles. They're so focused on fuel efficiency. For an excavator, they're not as.
Right.
concerned.
Right. And is the competitive set much different? I mean, you mentioned that people haven't invested in this, but is it the same set of players or?
It's similar. There's also some smaller players out there and some legacy players, because some of these technologies are still mechanical systems that have been around for 30 years.
Mm-hmm.
But as you go to direct injection, the competitive landscape comes down dramatically.
Okay.
It's the same thing, like on port fuel injected engines for gasoline application. There are a lot of players out there. It's a relatively simple technology. You can use it in a lot of different places. There's plenty of capacity out there, a lot of individual players. But once you go to direct injection, the tolerances, the engineering.
Mm-hmm.
Technology that's required, it really reduces the landscape.
Maybe you could remind us and give us a sense, like, how accurate some of these injectors are, right? I think the needs to sort of give, there was.
Yeah. Yeah, we kind of joke is like, when people say, you know, that our commercial vehicle product is not aerospace technology, and we say, "You're absolutely correct. It's so much more difficult than some of the aerospace technology." And we're talking about, you know, tolerances in these injectors for diesel that are plus or minus half a micron, which is the tolerance, which is plus or minus a little bit larger than a virus.
Right.
You know, these things have five to six injections per combustion cycle. And so it's going up and down within each combustion cycle five or six times. They have to last, you know, a billion and a half cycles, you know, to match up with our customers' needs. They have to be working hot environments, cold environments, biodiesels, you know, a variety of different fuels and additives around the world, and they have to last, you know, 500,000 miles.
Mm-hmm.
and so they're just incredible devices.
Mm-hmm.
I've been in turbos for a long time, but this fuel injection is just a whole different level.
Yeah.
Of capabilities. You know, there's, you know, not only the tolerances, but the pressures that we're dealing with. And when people say, "Oh, it's 2,500 bar," and people kind of go, "Okay. What's that mean?" That's like 40,000 PSI.
Right.
You know, when you think about, you know, you pop a tire and it kind of explodes and it shocks everybody. Well, that's like at 40 or 50 PSI.
Right.
This is 40,000.
Yeah.
You know, range between our 2,500-3,000-bar type system. So this is super high pressures, super high durability, really tight pressures, and the speed at which we have to move these things is incredible. So it's really, really complex.
Yeah. On the aftermarket side, you know, it's, it's been a pretty stable business, which I think you sort of, you know, alluded to would be. This year, the organic growth does seem a little bit more challenged. Can you just sort of remind us, like, what, what, what sort of is happening this year? Is there anything sort of one-off? Is it more some of this timing we're seeing through the year? And what's sort of the view going forward?
I think that's the OES and independent aftermarket, this 34%.
Mm-hmm.
That people see there, that does not tie directly to our aftermarket segment.
Okay.
Our aftermarket segment, Chris, is what, 40%?
Yep.
And so you could say, "Well, your aftermarket segment is 40%, but you're only showing 34%. What's the difference?" Well, our aftermarket segment has some OE business in it.
Okay.
The Delco Remy starter and alternator business was in that segment.
Mm-hmm.
That's predominantly North American CV.
Okay.
North American CV is probably the most down market of any of our markets.
Mm-hmm.
So, that's actually embedded a large portion of that OE business is embedded in the aftermarket segment.
So excluding that, you still think that, well, I think it's.
Our OES and aftermarket is still, you know, in that 35%-36%.
Yeah.
You know, is what we expect to be in our sales. And there is a little bit of the OES that's in our fuel system segment. So there's a little bit of puts and takes in there.
Mm-hmm.
But I think our aftermarket team is still doing very well. It's still very resilient for us.
Okay. Does this chart portend that there's a resegmenting coming or?
I think what we've said is that it was spun that way when we got spun out. We didn't wanna change it in that time period, and we're waiting for more of a more significant event or a larger acquisition that would then make sense for us to then resegment the businesses. We are gonna provide a lot more clarity and specifics at the next investor day just so people can set their modeling up correctly.
Okay.
to address this, but we'll kind of see going forward.
On the acquisition front, and I'll tie in and I'll give, you know, Chris here an opportunity to sort of, you know, talk about, and boast about the sort of cash flow profile of the company. But cash flow has been strong. You have many different options for what to do with that cash, because as you're sort of pointing to your handout on the slide, like you already have the footprint, right?
Yep.
You don't really need the footprint. M&A has been a focus. You've done one, your sort of first acquisition. Maybe you can sort of update us just on how that's progressing, how the integration's gone, what you learned about the organization through this sort of first deal as a standalone company.
Mm-hmm.
and what you look for in the M&A pipeline going forward.
Sure. I mean, first and foremost.
Let's let Chris talk about the cash flow.
I mean, cash flow has been good. Obviously, it's been held steady. You know, last year it was slightly better just because of the debt deal we did and some just timing changes, and so that slightly lighter than last year, but I think everybody's gonna be really pleased where we come in by the end of the year. We have been, and so we just wanna use that cash flow judiciously, if I can even say that word. But so we've been really careful with, you know, what we're looking for in acquisitions. You know, for sure we need to do some acquisitions going forward, but we don't have to, so we're looking for things that tie into our business as it currently runs, and things that make sense to tie into our business. SEM tied in really well with our product, with our capabilities.
It has a really long runway and something that we can expand upon and improve upon over time. Very small, but Brady and I have both been parts of integrations, and it's very important to get them right. So we just needed to get everybody into that mode of, "Okay, this is what we need to do. Let's fall on our face in a safe with a small one first and then make sure we have the playbook right for going forward." So after that, we'll just, you know, take our cash and look at what's the best uses.
Yeah. I think Chris had all the exact points that it's we intentionally did one small in order to get that muscle memory going in a new organization.
Mm-hmm.
So built our relationships with third parties, going through due diligence, the integration, getting people kind of, you know, going through that process and putting together the playbook for future ones going forward. But we're always gonna take a look at an acquisition and compare it to buying back our own shares and saying, "Hey, what, what's gonna drive the most shareholder value?" And, and so if we're trading at six, us going out and paying 12 times for an asset that looks similar to us, it doesn't make sense. Why wouldn't I just continue to buy back my own shares when that business plan I have a lot more confidence in than any acquisition that I do?
Mm-hmm.
I think the decision process around S.E.M. was in the right market. It was alternative fuels, commercial vehicle focus, has gensets. It's synergistic with the overall system and the calibration work that we do. It was at a valuation that was lower than our multiple. It's a product line that we think can, you know, have much higher growth rates than our base growth rates.
Mm-hmm.
And so it checked a lot of those boxes and the size, and those are the types of assets that we're looking at. And so, as Chris mentioned, we don't need to do an acquisition. So just continuing to buy back our shares as we bought back close to 20% of our outstanding shares since we spun.
Mm-hmm.
And that's just a testament to all the cash flow and Chris's, you know, focus on the team on, you know, working capital, and the, you know, financial incentives that we put in place for all the executives.
Yeah. Brady hit on an important point. One of the last is changing our bonus metrics to EVA. For us, it just made common sense. It's what we grew up with in our former parent. And using that metric, at least for me, as being just a, you know, a controller for years, the easiest way for me to get everybody thinking in the right direction and making sure they're taking as much care of their working capital and getting that to be efficient is if their bonus is based on it. So we just had an off-site management meeting, and, you know, one of the things we said is, "Everybody's done great. You know, our returns in the P&L are great. However, everybody needs to make sure they're not missing the focus and getting that working capital.
Make sure we have inventory, but make sure it's working efficiently." And they get that. Everybody gets that.
That goes into effect for 2026, you said, or?
No, we've had it. We've had it.
From the beginning of the sorry.
We did it.
I thought you said there was a recent change.
No, no, no. Sorry.
The change we got spun out.
One question.
I'm sorry. I misunderstood.
Our incentives are well aligned. It's Economic Value, and it's an easy discussion.
Exactly. Yeah.
We have to increase Economic Value on a year-over-year basis. There's no negotiation. There's no relief if the market's softer. There's no anything. We've got to increase Economic Value. If we do that well, we get paid.
Mm-hmm.
It's cash flow.
Mm-hmm.
People love our cash flow, and we gotta continue to deliver it, which ties in with our Economic Value, and our longer-term incentive is TSR.
Mm-hmm.
So we think our incentives are well aligned with investors.
Can we just sort of talk about margins? You know, I guess overall, I mean, if you wanna sort of get into some of the segment stuff, you can. But, you know, I think like a high-level sort of heuristic model for suppliers, right, is it's a volume game, right? And you sort of, you know, you have this fixed cost base. You get more volume. You have strong incrementals. Your margins go, go, go higher.
Yep.
You know, when I hear you talk, and I know, I know there's some differences between some of the segments, right? CV can be cyclical. It's cyclically down. So there will eventually be sort of cyclical growth there. But then even on the light vehicle side, I mean, you're basically saying you wanna sort of stay in that $900 million to, you know, $1 billion level. So, you know, it looks, I guess when you sort of put it all together, it seems like what you're still saying is you can get to sort of 2% to 4% growth.
Mm-hmm.
So you are sort of converting on.
On the incremental revenue.
On that. But in the absence of the growth, right, in let's say that, like, light vehicle, like, what are the cost levers to sort of drive margins? Or are or is that sort of just the level we should think margins remain at given that revenue level?
Yeah. I think in the past, if you weren't growing at least 3 or 4%, your margins were declining.
Right.
And so we've had to change the structure of saying, "Hey, that's not acceptable anymore." We've gotta ensure that we're not giving away 3-4% pricing in order to, you know, keep the business, and therefore you had to grow in order to offset that. I think that's kind of gone away. And so we've shown in the last couple of years, we've been able to maintain margins on relatively flat sales.
Right.
Driving productivity, working with our supply base on strategic partnerships, working with our customers to pass through some of the excess inflationary costs, repricing product where we have some pricing power, aftermarket being a big portion of it with annual.
Mm-hmm.
You know, price increases has shown that even flat, we're able to continue to maintain margins and generate significant amounts of cash flow.
Mm-hmm.
Once we start getting back into that growth rate, we expect to convert, you know, incremental revenues at that 20% level, and that will allow our margins to keep going back up.
Yeah.
Now, that's even been in the face of, you know, probably a 30 basis point headwind this year because of tariffs.
Right.
And so, yeah, we were able to pass through, you know, 90%-95% of the tariff cost, but it was still diluted to our margins, although we've held EBITDA dollars.
Mm-hmm.
We did announce in Q3 our restructuring program. Not a massive restructuring, but it's all related. The majority of it is related to our IT infrastructure, which when we spun out was not fit for size.
Mm-hmm.
So we're having to strip that back a little bit, spend a little bit of money, and then shrink that down. We'll get a less than two-year payback in getting that done. It's just part of the necessary.
Yep. It's a great segue to my next question, which is, are there additional opportunities for restructuring? I think like one of the regions that, you know, could come to mind, and please correct me if I'm wrong, but I think it's an area that's been a topic of discussion among investors is just Europe. And I even here on this slide, right, you know, right off the bat, 52% best cost country. So it seems like there's maybe some opportunity for footprint rotation in that region. But even beyond that, and I know this is maybe more, I think you said the commercial vehicle business over-indexes to Europe, but there is light vehicle business there as well.
I think there's some concerns that, you know, irrespective of, you know, whether European vehicle demand ever really comes back or not, like even if it sort of stays at these levels, like who the which customers are providing that level of demand might change going forward, and that some of the legacy European customers might continue to sort of lose share over a period of five-plus years. If that happens, do you need to restructure, and are you sort of taking some maybe proactive actions to get ahead of that?
I think the one thing is because of our decentralized type structure, we're always asking every plant manager to be assessing the how efficient their operations are.
Mm-hmm.
And not wait for, "Hey, we're gonna take out 10% headcount." That means you've waited too long, which means you weren't adjusting it on a monthly and weekly basis to adjust your cost structure. So that's kind of one side of it. Two is Europe. There was, Chris, you were doing the tail end of the restructuring where there was hundreds of millions of dollars of restructuring done in Europe.
Mm-hmm.
to clean up a lot of the ex-Delphi structure.
Yeah.
To right-size it. And again, when Chris first came into the fuel systems group in 2020, they were. That fuel systems business was break-even.
Mm-hmm.
Zero. And now we're double-digit.
Yeah.
Because a lot of that restructuring, a lot of the remaining facilities in Europe are primarily commercial vehicle-focused.
Okay.
All of our light passenger vehicle, is really already in low-cost locations.
Yep.
And then some of the locations we need to be there to support some of the aerospace and defense business, we have to be in country.
Mm-hmm.
And so for us, you know, we don't see any major restructuring needs. If anything, you know, we're starting to see where Europe, because of a lot of the diesel scandals earlier last in the mid-last decade, that light commercial, that light diesel OE business was a headwind.
Mm-hmm.
For multiple years, and we're starting to see Europe from our OE side actually start to plateau and starting to come back up again, and so we're actually, although it's the, you know, at 52%, but we still see things naturally kind of shifting. We've moved a few things around without having to do a major restructuring.
Yeah.
And so we just continue to optimize, without having to, you know, have a big ticket to go with it.
What about labor and automation? So I guess like maybe you could just remind us like what percent of either COGS or revenue labor, you know, labor is. And is there an opportunity to sort of get more automated, which might not only yield labor savings, but also efficiency, yield, quality improvement?
I mean, absolutely. There's a lot of work on cobots and automation within our locations. The interesting thing is, you know, in the U.K., where we have a number of our plants, it's actually quite cost-competitive.
Yeah.
You know, from a labor standpoint, I think total labor costs.
Total.
That includes salaries.
Including benefits.
Is it 720?
No, it's just right at 20.
Right.
A little over $20.
But that's including salary and direct in Europe.
Which is not bad. Yeah. No, in the U.K.
Oh, sorry. In the UK.
It's higher than that, obviously, in France and some of the others, but in Romania, it's very reasonable.
Yeah.
Poland.
Yeah. It gets mixed up 'cause sometimes there's like in our France facility and one of our UK facilities at an R&D center there too.
Yep.
So it artificially kinda increases. But in general, the two countries have been very supportive of engineering credits, and supporting engineering and subsidizing engineering headcount.
Overall, what % of COGS would you say is labor right now?
Overall, it runs about 12%-ish.
Yeah, and is that lower than has that come down versus five years ago? I mean, I guess it's difficult for you to know.
It's five years ago, definitely.
Yeah.
because as Brady said, there was about a $200 million restructuring that was done right about the right before acquisition from Delphi and right after. Went for about a year, year and a half after that.
Mm-hmm.
So yes, it's come down.
If you're onto sort of, you know, more automation, more software, more cobot sort of use, like, what inning would we say we're in? Are we early innings or has this sort of started to work its way through some of the plants?
I think we're past the middle innings on a lot of that.
Yeah.
A lot of that work. Again, we've also done a very nice job of moving capacity around the world to where it's needed. So we're not sitting with excess space and excess equipment in regions that have been declining. So we moved a lot of the GDI lines, excess lines that we had in Europe, and moved them to Asia and the Americas, and so our equipment and our manufacturing processes are such that we can move around where the demand is. So it's not like we're stuck and we have to scrap it all out. We can move it where we have demand. You know, I think the repurposing of existing equipment has also been, you know, very, very beneficial because the aerospace business that we're launching in France is a converted low-volume light vehicle diesel line.
Yeah.
You know, so the process.
Is some of that equipment reusable too or do you?
Oh, yeah.
Yeah.
Yeah. I mean, machining, grinding, drilling, you know, diamond light coating applications, those are all the same processes. And so, our overall kinda strategy is we're not trying to revolutionize the company. We're trying to evolve our human capital and our manufacturing capital into these new markets. And so the engineers that I have on GDI are the same engineers I can put on aerospace because the concepts are the same. You know, it's precision fluid management. It's dealing with erosion, with wear, durability testing. And we're in a unique position that not only do we manufacture a lot of the components, but we also know how to assemble it, validate it, and test it and give customers a certified system.
Leverage your core capabilities into new end markets and applications.
Correct. And so again, yeah, we're not trying to. We're not gonna fire all our mechanical engineers and hire a bunch of power electronics engineers. I don't have to shut down my you know machining plants and build all new electronic plants.
Mm-hmm.
And so I think that's a much more boring and simple transition than trying to convert to something completely new.
Great. We are out of time. Brady, Chris, thanks so much for joining us again. Always a pleasure to have you. Thanks again for joining us.
Yep.
All right. Thank you much.
Take care.
Good. Thank you.