Okay. Welcome to the PHINIA presentation. With us today are CEO Brady Ericson, CFO Chris Gropp, and Kellen Ferris from investor relations. We're gonna have a little fireside chat here, Brady, first, if you can offer a brief overview of the business and some highlights from your recent earnings results for anyone joining us today that's new to the story.
Yeah. Thanks for having us. I really appreciate being here. We just came out with earnings last week. Just another consistent performance by the team. The team performed really well in a very dynamic environment. Both our fuel systems and aftermarket segments, you know, performed well year-over-year. A little over north of 10% growth. Decent conversion helped by some FX and some tariffs, but also organic growth. Really reaffirmed our full year guidance for that mid- to mid-single digit growth for the year. Good conversions, expanding margins.
Again, just kind of highlighting how diverse of a portfolio of products, customers and end markets and regions that we serve. Despite a lot of the chaos that goes on around the world, we continue to perform consistently given the diversity of our business going forward. Just to remind folks too, we did have an Investor Day in April as well that went through a lot of our business in a lot more detail that you can go out and look at as well as set a direction of where we're heading for 2030 and beyond, as we continue to shift our business to higher growth markets like industrial, off-highway, Aerospace and Defense, commercial vehicle, medium duty and the such.
Obviously aftermarket is a good solid, you know, over 1/3 of our revenues from the service side of the business. That's a great stability that we have and things that we benefit from in this dynamic environment. Good solid print. Continue to buy back shares. We think we've reached now 23% of our outstanding shares have been repurchased since we spun just shy of three years ago. Returned over $600 million to investors as well. We continue to be good allocators of capital and really focused on driving shareholder value with that capital allocation. That's kind of how things were.
Great. Appreciate that. I was going to see if we could start fuel systems. Margins have been more stable recently. Can you discuss the effect new program launch costs are having on margins there currently? You know, what investors should view as the long-term margin target for that segment once those programs mature.
Obviously the fuel system segment was hit with tariffs and a little more volatility and just timing of recovery. That's now kind of stabilized. I think last year we're in that 10%-11% operating income. Q1 was light just from a seasonality standpoint, and we have actually, you know, a number of launches happening both in Europe and in Asia that we're seeing a little bit of headwind here in the first couple quarters that should subside, you know, towards the latter half.
I do see us, you know, from our standpoint, anything north of 10% is kind of our for the full year is kind of our minimum threshold. We've been kind of trending towards 11% and maybe see that continuing to go up a little bit more as we continue to expand in industrial and off-highway applications and aerospace and defense. We should see that continue to kind of creep up through the decade.
Great. Thanks. You guys announced a win for a jet fuel direct injector program for unmanned aerial drones, the engines with the new aerospace and defense customer. I think it was your second big one. Can you talk about what differentiates PHINIA from competitors as you move into more niche high growth tech like defense and how investors should think about how big aerospace and defense can be in the near future?
I mean, this is a great example of us just leveraging our existing human capital and our manufacturing capital and IP that we have. So it's really not a dramatic change to our existing products. We're just adapting it to their specific fuel and their application as well as their volumes. The nice thing about our business is that we have been in commercial vehicle, industrial off-highway applications. Aerospace and defense is similar, just low volume. We know how to manage it. We know how to support those customers, and we're leveraging our existing, you know, IP and capabilities. So this was a nice win for us 'cause now we have two customers now on the A&D side, for turbine and/or fuel, jet fuel-based injectors.
That's our fourth program. We've got one in production already. Another one's going into production this year, and two other programs will go into production later on this year and end of next year. I think we're starting to get a little momentum. Still relatively small at this point, but I think we've got some aspirations just organically for that to continue to grow towards, you know, an aspirational goal of close to $100 million by the end of this decade. I think we're starting to get some traction. We have a number of our different locations are now meeting with customers.
A number of A&D shows here in North America, creating new contacts, Farnborough, Paris Air Show, you know, those are all things we've been kind of going to and gaining momentum. Now with being in production, four new applications being awarded, two very well-known customers that we've been launched with, and just seeing this ramp. You know, our facility in France was given its quality certification for aerospace quality certification. We've got other locations that are in that process as well. I still think we're in those early innings, but all the momentum is really going for us right now and see this as a key new growth area for us.
You also announced a contract for a CNG fuel rail assembly with a global OEM in India. I think it's the third quarter in a row with a major alternative fuel win in that region. India and China continue to shift toward alternative fuels, do you see competition for these contracts pressuring margins, or will you be able to maintain pricing power?
No, we actually see it as a big advantage because a number of our competitors have left the space and have stopped investing. When we're announcing, you know, that's why we're winning all these natural gas programs in India. We have natural gas and actually SEM, our acquisition, that we did last summer. They're actually doing the ignition coils for natural gas applications for large gensets and large engines.
We've continued to invest in this area, and that's where whether it's natural gas, whether it's E-100 in Brazil, we're also working on dual fuel applications in China that we announced as well. Methanol is another one. We have some customers working with that. We've continued to invest in that space to make sure that we have the leading product, and that's why we continue to gain share.
From a margin standpoint, you know, our margin expectations are really kind of unchanged. If it's not gonna be a good margin program, we're not gonna chase it. We're gonna continue to focus on areas that we can, you know, deliver a good margin and give ourselves a good return on that invested capital. We don't see this as a, as a margin pressure standpoint. We see it as a margin opportunity and where we have unique technology that's allowing us to win these new pieces of business.
Same thing on GDI. We were first to market with 500 bar technology, it launched first in China because China was really demanding it, and it brought a lot of value. It's a, it's a great example. It allowed them to actually reduce their after-treatment costs significantly for a small increase in the fuel injection side. That's a great example of us bringing value to our customers and what's differentiating us.
You talked about some tariff recovery on the earnings call with potentially more on the way. If this additional recovery doesn't materialize as planned or, you know, trade tensions escalate further, you know, can you discuss PHINIA's pass-through ability, you know, whether you have a view on, you know, any limitations or ceiling there without risking volume?
No, I mean, on the OE side, it's basically whatever we're incurring, we're passing through, and if it comes back out, we'll pass it back to those OE customers. From an aftermarket standpoint, you know, I think it was when the inflationary costs were kind of going crazy. I think we passed through four price increases that year. We had a couple price increases again last year related to tariffs. Again, I think we're in a good position versus competition, and it's an industry-wide thing. It's not a question of everyone's passing it through, therefore, we can kind of pass it through to the consumer as well, it kind of gets passed through.
A lot of the components and pretty much all the components that we have are, you know, non-discretionary. If the fuel injector's not working, the car's not driving or the truck's not running. It's not something that can delay that service. It really hasn't affected our aftermarket volumes either. As long as we continue to remain competitive, which I think we have in that marketplace, I think we're in a really good position. I think our overall strategy has always been that we design, develop, source, produce, and sell within the region.
Being USMCA compliant on a lot of our product, having local production in region has been beneficial for us. Do we buy for the aftermarket? Do we buy some product in Asia and ship it over? Yes. We have the option to then say, "Hey, we're gonna go ahead and produce more in our local plants," rather than buying from a third party. We have that flexibility where some of our aftermarket peers don't. Again, I think we're in a pretty good position with regards to all the tariff and disruption in shipping and whatnot.
You guys had a decent amount of buyback in the first quarter. I think net leverage is around 1.4x, you know, very near your target. Can you walk us through how additional share repurchase would balance against acquisitions and what your M&A pipeline looks like from, you know, sizing of targets and what end markets you're looking at?
Yeah, I mean, in general, we're always looking at what's the best use of that cash flow and capital. Whether we're looking at our share price, whether we're looking at an acquisition, whether we're looking at reducing our debt, we're always looking, saying, "Hey, where can I deliver the most value with, you know, reasonable or no risk?" That's where the share price, you know, in our opinion, that's been a great use of capital. That's why we've been focusing most of our capital towards stock share repurchases.
That's why we've returned over $600 million to shareholders since we've spun and bought back more than 23% of our shares because we felt our shares were significantly undervalued and continue to be. When we look at M&A, we're always gonna compare an M&A to buying back our own shares. If it's a similar company with a similar profile, and we're trading at 7x . We're gonna look to pay a good chunk less than 7 x, because any acquisition comes with risk, and they're probably subscale.
That's what we're always gonna evaluate. If it's a pure commercial vehicle or a pure aftermarket or pure aerospace and defense, maybe we pay a little bit higher than our multiple, but it's still gonna be relative to our multiple. Does it make sense? That's how we're gonna take a look at things. We do have a good pipeline of acquisitions now. Obviously, as our multiple has gone from 3.5x or 4x up to 5x, 6x, and now a little over 7x, it opens up the companies we can kind of look at.
We're still going to ensure that whatever price we're paying, it makes sense relative to where we're trading. Size-wise, I think in general we're, you know, probably the $50 million was probably too small, but it was a good first one for us to get our acquisition integration legs. In general, we're looking at, you know, more bolt-on type acquisitions, things that enhance our existing capabilities. From our standpoint, and what we laid out in the Investor Day is, we don't need to do M&A to meet our strategic objectives. We've shown that we can grow organically into the aerospace and defense.
We've shown we can grow our aftermarket, and we've got some, you know, good growth of 2%-4% that we'll continue to see on average through the rest of this decade as we continue to shift our portfolio more to commercial vehicle, off-highway, and aftermarket. That's kind of our base plan, we can just use all of that, you know, $200+ million a year of free cash flow to return to shareholders, That's kind of our base case. Any acquisition that we do has got to enhance, you know, overall value.
You mentioned the Investor Day. There was a moment there where you discussed the path of aftermarket moving into steering, suspension, and braking in North America.
Yeah.
How does PHINIA differentiate itself in non-engine parts from competition in that space and, you know, are there other under-car components you view as, you know, future expansion opportunities?
I mean, We bring that same OE pedigree and thought process on what we expect out of those components, even though we're buying them and selling them. You know, we set the specifications on what we expect from an OE quality standpoint. We work with dedicated suppliers to develop the products to our specification, that gives us the confidence to go ahead and brand them, you know, as the Delphi brand. The Delphi brand is one of the top brands in the marketplace, so when a customer goes out there and they say, "Hey, do I want brand X, white box, or do I want a Delphi?" They're gonna have more confidence in the Delphi brand, so does the installer.
We do a lot of work with technicians and the, and the shops, educating them on how to, how to maintain parts and service parts. They know that we're gonna be around. They know that we have a strong, you know, quality systems and processes and warranties and everything else, and we have a lot of, you know, support for them as well. That's what's allowed us to go into these new markets because of that strong brand. We have a global footprint. We have a strong presence everywhere. You know, it's a $1 billion+ aftermarket, so we're a good size player.
Along with that ability to produce our parts internally for our fuel injection, fuel delivery module, starters, and alternators, and having that OE pedigree, I think has allowed us to differentiate ourselves. Even when COVID was happening, we still maintained, you know, very high first-time fill rates, where, you know, we were still in the 85% and 90% when our competition was in the 60% range. We continually in the 90%, 95% or more, we have parts on the shelf ready for them to service the business. We continue to add to our portfolio.
Again, as many people were exiting, you know, we were out there saying, "Hey, we're committed to combustion, and we're gonna be here, and we can be your partner for years to come." You know, two, three years ago, there wasn't that many people doing that, and even the aftermarket customers were concerned about some of some players exiting the combustion space, and are they gonna have service parts for the decades to come that they need them? I think we continue to try to be that reliable supplier, that reliable customer to our supply base and reliable to our investors and employees as well.
Sounds good. The recent SEM acquisition gave PHINIA access to the large industrial stationary engines, which is seeing increased AI and data center related demand. Can you talk about any qualification cycle here and when you view, you know, AI and data center, you know, related business meaningfully contributing to revenue?
I mean, just to be clear, stationary engines and gensets and backup power, they're no different whether it goes to support a data center or a hospital or a manufacturing facility or, you know, a small town. They're the same technology. There's not a unique genset for data center or an AI data center. It's either gonna be, you know, a large, you know, megawatt Cummins engine or, you know, a GE or a CAT Solar Turbines engine, megawatt plus type thing that's going in there. We're not gonna know whether it goes into a data center or it goes to a hospital for backup and prime power. At least from our standpoint, there's really no difference. It's the same parts.
The example I'll give people, it was three, four years ago, we had a bunch of demand for one of our, one of our pumps as well, and it was going into Perkins for one of their gensets, and we kind of said, "What was driving it?" They were building out a bunch of 5G towers, and they needed a bunch of backup power for 5G towers, and so our volume shot up for a couple years.
It was the same part, whether it was for 5G towers or someone's house. I think people in some cases are being disingenuous saying it's a, it's a genset, you know, specifically for a data center or an AI data center. It could. We have product going into that space, too. I just can't tell you which one goes to a data center and which one's going to a hospital.
That makes sense. As OEMs cut R&D for internal combustion and to fund EVs more, do new technologies from PHINIA like the you mentioned the 500 bar GDI earlier, does that improve your pricing power with existing customers?
Absolutely, because it's giving them value. From their standpoint they're saying, "Hey, I can save $200 bucks in a DeNOx catalyst or some aftertreatment, but I gotta pay an extra $20 bucks," that's an easy sell. They gladly pay more and we're the only ones with that technology, we've been in production for a few years. Are others starting to try to get in? Yes, we've been way ahead of the curve, that's similar with our development on hydrogen, on natural gas and methanol and ethanol. It's put us in a strong position. Customers are looking for that partner who's said, "Hey, I'm gonna be here for you in this space.
I'm gonna continue to invest, and you can count on me to be a good partner for decades to come, if not the rest of the century with combustion technology. They're concerned about other suppliers that said they were going out, and now they're saying they're coming back in until they potentially go back out again, you know.
It's that unknown and as you know, OEMs don't have a bunch of extra engineering resources to requalify new suppliers and switch. Even a few years ago when we were awarded some commercial vehicle business, they were awarding us to be their partner for 2040 and beyond, and that's what they're moving towards, and I think that's gonna bring a lot more stability to them and some good stability to us as well.
You know, recently you noted expectations for the H2 internal combustion, you know, to be, you know, commercial scaling in the 2028- 2030 timeframe. You know, can you discuss any infrastructure milestones investors can look for to signal, you know, when that program can move from a pilot status to mass production?
Yes. I think we may need to push that out a bit. I think the 2028- 2030, I think we're still just going to be doing a lot of demo fleets. They do have the 1 production launch for an off-highway application. We're doing a lot more now even with F1 and racing. I think people are still, you know, getting used to it, and they're seeing the benefits of it.
We've got a H2 van running across the U.S. this year, visiting CARB, going to the EPA, running tests and seeing the benefits of H2 ICE. The low emissions to no emissions, you know, capabilities to where the CO2 coming out of that vehicle is less than the CO2 of the driver in the driver's seat. It's kind of educating folks on that. I think there's still a lot of initiatives going on right now as far as, you know, developing these hydrogen hubs and driving down the price of hydrogen. The U.S. has a target, I think it's around trying to get down to $1/kg .
Even if they get down to $3- $4 per kg, it starts to become a very viable option to even diesel. We continue to work with folks on it. I think it's not gonna be a meaningful ramp-up until probably sometime in the 2030s. I think we need to see hydrogen costs come down, some of the infrastructure come in. It's going to be a lot easier to put in many cases, you know, hydrogen filling stations than EV stations in remote areas and for commercial truck applications. Still a lot of good work going on there. I still think it's probably going to take a little bit longer.
We should also add, for us it's not a cost drag to continue to work on this, the H2 ICE, because it's using the same capital that we had used previously for diesel injectors, and the R&D for it is still within that 3% that we target. We do get a lot of interest from governments that are giving us funding and encouraging us to work on it, but we keep it within a very tight range of what we're willing to spend on it, but continue to develop it as long as we see interest on going with it.
Yeah. That's where the I mean, if you take a look at that H2 direct injector and you put it right next to a gasoline direct injector, you're not gonna be able to tell the difference, you know. It's just slight differences in material on the inside, diameters and sizes of the holes because of the flow requirements is really the biggest difference. It's not a huge spend for us.
Similar how we've converted, you know, that to work on diesel and methanol and ethanol. It's just another fluid that we're managing and work through on how brittle it is, lubricity, the flow rates that we need to have, and the such. We have the optionality to go in any different direction, and some of the lessons learned we had on H2 ICE is what we've been applying for the natural gas in India, too, so there's some synergy there as well.
It sounds exciting. Keep our eye out for it. Brady, that's all the questions I had today. We'll give you a bit of a break before your next meetings, but, you know, any final thoughts for viewers today?
You know, I think we're continuing to build a reputation of being, you know, steady, reliable operators. That's the goal that we have, is to continue to deliver good solid results, to convert on incremental sales, and continue to deliver and do things that are consistent with what we've been telling investors for the last three years.
I think we'll continue to focus and grow our business on the industrial and off-highway and aftermarket and see that grow as a percent of sales and continue to put efforts into the Aerospace and Defense side as well and, you know, are planting, you know, some nice seeds that will then, you know, give us a higher growth, being in higher growth markets for 2030 and beyond. Just continuing to be stable and reliable.
Sounds good. Thanks again, Brady. Thanks for your participation. Thanks, PHINIA team.
All right.
Thanks, guys.
Have a good one. Talk to you then.
Bye.