PHINIA Inc. (PHIN)
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16th Annual Wells Fargo Industrials & Materials Conference

Jun 10, 2026

Summary

Sales are guided up 1%-7% with stable margins and minimal raw material cost impact. Growth is driven by share gains, aftermarket expansion, and a shift toward commercial and off-highway markets. M&A and buybacks are balanced, while technology and product development focus on alternate fuels, aftermarket, and new market entries like aerospace.

Moderator

I kick off the next session, post lunch session, hopefully everyone's still awake with PHINIA. Today, we're pleased to be joined by CEO Brady Ericson and CFO Chris Gropp. PHINIA is a global leader in fuel systems, notably direct injection systems, but more importantly, they're very diversified. Less than half of their sales are light vehicle, with the majority coming from commercial truck and aftermarket. The stock has also been a very strong performer, up 80% just in the last year. At least the last time you were here at our conference last year. Maybe just to kick it off with some of the numbers. You're guiding to sales up 1%-7%. Why the large range? Is that driven by some of the uncertainty in some of those commercial truck markets?

Brady Ericson
CEO, PHINIA

No, it's more of, it's ± $100 million-

Moderator

Yeah

Brady Ericson
CEO, PHINIA

on $3.6 billion. You're ± 3%. That includes organic revenues changes, but a little bit of FX and tariffs. We gave ourselves a little bit of range because it's been a little bit volatile the last couple of years, so-

Moderator

Sure

Brady Ericson
CEO, PHINIA

We thought it was prudent to have a little bit larger range.

Moderator

Got it. If I look at the Q1 margins, EBITDA was 13.1%. It's a bit below the midpoint of the full year, I think 13.7% of 14.3%. What was driving the weak Q1 start, and how should you think about the rest of the year from here?

Brady Ericson
CEO, PHINIA

Yeah, I think in general, last year was probably the normal cadence that we'll see throughout the year. Q1 generally being the lightest from a margin and revenue standpoint. Q2 and Q3 are stronger, and then a little bit lighter in Q4. Last year, our Q1 was 12.9%. I think we ended up at 13.7% for the full year. This year, our Q1 was 13.1%, a little bit better. We're still confident in the second half or the second three quarters of the year.

Moderator

If I take the midpoint of your guidance, it's like a 20% conversion. That seems pretty normal.

We've seen some raw material costs and other issues. Are there any other major puts and takes? Is raw material just going to be completely recovered?

Chris Gropp
CFO, PHINIA

The raw material is not really hitting us. I looked at it a couple of days ago against forecast, even if I took all the risks that we see and blew it in, it would be less than 1% of our total material cost, we more than offset that with cost reductions. Our commodity hits are very minimal, mainly because we get 100% pass-through and automated on the majority of them. For us, it's not a big thing because we're doing precision parts, the actual commodity content of those is quite minimal overall.

Moderator

When you say 1% of-

Chris Gropp
CFO, PHINIA

Of material cost

Moderator

Of material cost.

Chris Gropp
CFO, PHINIA

Of total material cost.

Moderator

Is the increase this year?

Chris Gropp
CFO, PHINIA

Would be the increase if all of the risks came through.

Moderator

Wow.

Chris Gropp
CFO, PHINIA

But-

Moderator

That's pretty small. Okay.

Chris Gropp
CFO, PHINIA

Yeah, it is very small. Yeah, overall.

Moderator

Okay. What are your biggest raw materials? Just steel, I guess, or-

Brady Ericson
CEO, PHINIA

Aluminum, copper.

Chris Gropp
CFO, PHINIA

Some resin-

Brady Ericson
CEO, PHINIA

Yeah

Chris Gropp
CFO, PHINIA

overall, yeah, it's really poly. I can't see it.

Brady Ericson
CEO, PHINIA

Some stainless steel.

Chris Gropp
CFO, PHINIA

Some of the-

Moderator

Okay

Chris Gropp
CFO, PHINIA

resin-type materials and things.

Brady Ericson
CEO, PHINIA

Yeah, it has some oil in it, yeah.

Chris Gropp
CFO, PHINIA

Yeah.

Moderator

Okay. I think you had a big Investor Day in February. Growth, you targeted 2%-4% through 2030. That's above, I'm pretty sure, all the markets you're in, like the commercial and aftermarket. A lot of your light products are internal combustion engine driven, not BEV, so that's also an additional drag. What is driving all of that sort of outgrowth relative to your markets through 2030? What are the big sort of pieces of-

Brady Ericson
CEO, PHINIA

For a couple of things. One is we're definitely on the light passenger vehicle and light commercial. We continue to see share gains. A lot of the smaller players were exiting combustion, and that's opened up opportunities. Customers are also looking to diversify over some of the major players, like Bosch and DENSO. We've been going from the low teens to the mid-teens and continue to see that growing through the decade on light passenger, light commercial. Commercial vehicles-

Moderator

You're doing a market share low teens-

Brady Ericson
CEO, PHINIA

Market share

Yep. We see the medium-duty, heavy-duty on-highway business being relatively consistent. See a little bit of growth there. We see some content increases as well with the new emissions regulations, more advanced technology. A little bit of share as well there. We see them over the decade being in that 2%-4%. Aftermarket, we actually see it 3%-6%-

Moderator

Wow

Brady Ericson
CEO, PHINIA

Through the decade. 1%-2% is price, 1%-2% is market, 1%-2% is again, expanding our portfolio and gaining a little bit of share. They've been probably in the 5% range for so far this decade, so they've been performing well. The last one, the off-highway industrial and other, which includes ag, construction, aerospace, and defense, has been close to double digit. That's why we broke it out in our Investor Day because it finally got to a point that it was a significant percentage of our revenues, that it made sense to call out. It went from 4% of our revenues in 2024 to 6% of our revenues in 2025.

Moderator

That was the-

Brady Ericson
CEO, PHINIA

Off-highway, industrial, and other.

Moderator

Okay. All right.

Brady Ericson
CEO, PHINIA

Which includes ag, construction, A&D. It's an area that hasn't been a huge focus in legacy, I guess, prior to our prior owners. It's an area that we've been focused on in the last three, four, five years, and we're starting to see that really kick in.

Moderator

Is it a different competitor set there, or is it the same?

Brady Ericson
CEO, PHINIA

A little bit different competitor set, but still the main competitors in that space. We may start getting into some of them and going to larger engines. You may see the Woodward of the world come in that space as well. As the emissions regulations get tighter and tighter, it's going to go back towards direct injection. And there's really those three main competitors on those smaller engines.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

Bosch, DENSO, and ourselves. A really good example of that is us taking our gasoline direct injection, our GDi lines and product, and converting it to diesel for off-highway applications for Kohler, for their Kohler gensets. A lot of that old technology, the gensets, the emissions regulations aren't that significant. They were doing indirect injection, low technology, and they're saying, "Hey, we need to get better." They can't go from say, a couple of hundred bar to 2,000 bar, because the cost is way too expensive. We can leverage our high volume gasoline and give them 350 bar- 500 bar at a reasonable price to get them to a common rail design. That gives them a lot of benefit and flexibility as well.

It also helps on their calibration and their time to market, because if they're using a mechanical pump and injection system, each application takes a lot of time, versus on a common rail, it's just a calibration and it's just a software change. It saves them a lot of time on launching new product as well.

Moderator

Okay. The margin targets, you're targeting 14%-15%. I think the midpoint of the current guide is 14% anyway. Is it just really growth driving that, or are there additional cost elements that?

Chris Gropp
CFO, PHINIA

Yeah, just our normal incremental, high teens, 20% incrementals on the growth is what we expect. Usually the follow-on question is, with our aerospace, those are at higher margins. Those won't be meaningful till after 2030 coming on. Through the end of the decade, we're sort of just targeting keeping in that reasonable 20% incremental margin range.

Brady Ericson
CEO, PHINIA

That should get us, as we continue to convert, that'll kind of get us towards that 15%, kind of the higher end of that range by the end of the decade. Our expectation is that that becomes our new floor, and we continue to grow with aerospace and defense and.

Chris Gropp
CFO, PHINIA

Yeah

Brady Ericson
CEO, PHINIA

conversion, that'll continue to inch up a bit. We did have a bit of a probably lower than we were expecting. That's why we were, what, 13.7% last year.

Chris Gropp
CFO, PHINIA

Yeah.

Brady Ericson
CEO, PHINIA

We had headwinds from tariff pass-through, which was dilutive.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

It was dilutive from a percentage standpoint, not dilutive from a cash or an EBITDA dollar perspective.

Moderator

Got it. You mentioned aerospace. What is the latest update on that market opportunity? What are you providing? It's in that sort of 6% of sales, I guess. How large is it today? It's pretty small, I imagine, right?

Brady Ericson
CEO, PHINIA

Yeah. The aerospace and defense is just ramping up now, the first one. Of that 6%, it's zero as of last year.

Moderator

Okay.

Brady Ericson
CEO, PHINIA

It's starting to increase, and we launched our first one in Q1, second one this quarter, our third one with our one customer launches beginning part of next year. Then we just announced our second customer for an unmanned drone application for fuel injection as well. We're starting to get that momentum, starting to get more customers, getting out to all the different aerospace shows, whether it's Farnborough in the U.K., Paris, some of the U.S. applications, getting to all the engine manufacturers, the four or five major engine manufacturers. They're doing tours of our facility. They're seeing our capabilities. They see that we're in production now, and we're performing well, I think it's going to continue.

Moderator

These are for the drones and larger applications, is it?

Brady Ericson
CEO, PHINIA

Yeah. There's a large jet engine for a military application that's pre-combustion, post-combustion injectors, as well as a fuel control valve that we're doing for them, and content is going to be really high from a dollar content per engine. Not a lot of engines, but I think it's proving that we can support them with their lower volumes. Longer term, it will come with some of the MRO and kind of the service business that comes with it as they start replacing them over time, because for them, it's just around number of hours of usage, and then they'll replace it. Again, our hope is as we continue to make inroads and prove that we're capable, we'll continue to grow that as a percent of business.

The really nice thing about it is that it's the same engineers, the same manufacturing capital, and there's really no increase in R&D or CapEx spend or anything else that we need to do to support a lot of these new markets. We're just leveraging what we have and our know-how.

Moderator

Cool. At your Investor Day, I was actually slightly confused. You also have a $5 billion target in addition to the four two for 2030. Is the $5 billion including acquisitions? Is that where we're getting at?

Chris Gropp
CFO, PHINIA

Yes.

Moderator

How are you thinking about it?

Brady Ericson
CEO, PHINIA

Yeah, the $5 billion, it wasn't by a specific date.

Moderator

Okay.

Brady Ericson
CEO, PHINIA

It was more of around, hey, as we trend towards $5 billion, whether it's with some M&A, whether it's just organic, this is how we think the company splits will change over that time. Light passenger vehicle will be less than 20%. Light commercial vehicle is going to be in the 10%-15%. Aftermarket's going to be north of 40%. Off-highway, industrial, and other will be north of 10%. We're kind of going down that path to try to give an indication to investors how our portfolio and end markets are shifting over time. Whether it's continuing to focus on organic in those areas or we do M&A, we may get to $5 billion a lot sooner than 2030 if the right M&A comes up at the right price that's in the right end markets that we want to be in.

Moderator

I assume it's mostly non-auto. There's not much to acquire.

Brady Ericson
CEO, PHINIA

Oh, absolutely. It's commercial vehicle, medium duty, heavy duty, off-highway, industrial, ag construction, or even pure aftermarket companies. We are not going to be a consolidator of light passenger vehicle combustion engine components. That's not who we are.

Moderator

There's no hopes to consolidate either end. You said earlier that some of the smaller players are falling out as is.

Brady Ericson
CEO, PHINIA

They're falling out and demand's going down. For us to go and acquire one of our smaller players, it doesn't make any sense because their product is different than ours, and why would I pay anything for them when I can just win it organically through the next RFQ? There's no reason for us to go and try to acquire other fuel injection folks. What I was also trying to make a point of was we're not going to buy other product lines that are only focused on light passenger vehicle combustion.

Moderator

Okay. Got it.

Brady Ericson
CEO, PHINIA

There are other players out there that says, "Hey, we're going to be a last person standing. We're going to consolidate these different assets of light passenger vehicle." That's not what we're doing. We're shifting our portfolio more to off-highway industrial.

Moderator

Okay. Is the pipeline pretty rich on those assets? I would assume it's a little smaller on the sort of non-aftermarket and maybe bigger on aftermarket in terms of size of opportunity.

Brady Ericson
CEO, PHINIA

There's a lot out there to choose from. It just needs to be something that we think is synergistic with our portfolio, is focused all on aftermarket or off-highway and commercial vehicle applications. It has to be at, hopefully a good margin, good cash flow, being EPS accretive, synergistic with our portfolio, and the price has to make sense versus our own share price. That's what we did with SEM, CV focused, off-highway, natural gas, gensets, good strong margins. Growth profile was a little bit higher than our 2%-4%, and we got it for 5x. That makes sense for us. Those are the types of assets, especially if they're similar in mix to what ours is. If now we're trading, that was when we were trading maybe at 6.5. Now we're closer to 7.5.

That opens up things that we may look at. If we see an asset that's a pure aftermarket, would we pay a little bit more than seven and a half? We probably would, especially if it takes our aftermarket sales from 35% to 45%. That starts changing our portfolio as well. We're always going to take a look at it and compare an acquisition multiple and what it does for us versus just buying back our own shares.

Moderator

How are you thinking about that near term between buybacks and M&A?

Brady Ericson
CEO, PHINIA

We continue to do a lot of buybacks. We bought back over 23% of our shares since we've spun, because we still think it's a very good investment. I think our average price was what? $46 bucks a share?

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

Of what we bought back, 23% of the company. We think that's been a pretty good deal.

Chris Gropp
CFO, PHINIA

The target. Obviously it's going to be dividends first, and we've kept those steady in terms of total dollars and raised that a couple of times. It's going to be prioritizing.

Brady Ericson
CEO, PHINIA

Organic

Chris Gropp
CFO, PHINIA

Share buyback, organic. Share buybacks, M&A just kind of balanced out together. It depends on what comes up. M&A is very specific. You have to find that unicorn and that idea that is a good idea for us. That doesn't come fast and easy, and you can't schedule those out, right?

Brady Ericson
CEO, PHINIA

Chris and I have been involved in a lot of acquisitions and some divestitures prior, and there are some good ones, and there's some.

Chris Gropp
CFO, PHINIA

Bad ones.

Brady Ericson
CEO, PHINIA

disasters. We don't have rose-colored glasses on thinking, "Hey, acquisitions are this cornucopia of greatness." We're very pragmatic and Chris is a lot more pragmatic and

Chris Gropp
CFO, PHINIA

Because I've done a lot of

Brady Ericson
CEO, PHINIA

Than I am

Chris Gropp
CFO, PHINIA

integration of bad ones.

it's a nice-

Getting them better.

Brady Ericson
CEO, PHINIA

Yeah.

Chris Gropp
CFO, PHINIA

Yeah.

Brady Ericson
CEO, PHINIA

It's a nice balance. Again, our view is our base case is growing our 2%-4% to $4.2 billion, continuing to buy back our shares, having a good dividend, maintaining good leverage, generating a bunch of cash. That's our base case. Any acquisitions has to deliver more shareholder value than our base case. If we're trading at multiples that we think are lower than what it should be, we're going to continue to buy back shares.

Moderator

If we could dig into GDi. Where is penetration today? Where do you expect that to go? Is that going to actually give you sort of the next five years additional growth even if internal combustion engines slows?

Brady Ericson
CEO, PHINIA

It may help a little bit. They're in the 60, 65, depending on where it is. We're actually seeing not a lot of increase, maybe a little bit of increase in GDi penetration globally. Partially because as they ship some of our natural gas wins in India are port fuel injection, and so it's alternate fuel. Same thing in Brazil, our Heated Tip Injectors for 100% ethanol. They're more the port fuel injection than the direct injection. We see also with the range extending EVs, they're going to look to a more basic, and they're trying to make it as cheap as possible. They may stay port fuel injection as well. See a little bit of mix in there, but maybe a little bit more towards port fuel. The hybrids, the pure combustions, they're more and more going to direct injection. It's a little bit of mix.

I don't see a huge swing in GDi penetration rates that are going to drive our revenues. I think alternate fuels is going to be where we see a lot more penetration and growth.

Moderator

Content per vehicle. I guess that would imply it's going to be pretty similar then.

Brady Ericson
CEO, PHINIA

Yeah, it's going to be similar on the alternate fuels. The Heated Tip Injectors add more value than just a standard injector. Alternate fuels are going to have different materials that add additional content as well.

Moderator

Can you talk about it earlier, you said low teens to mid-teens market share in injection systems. I mean, do you really have just the top three? How much is left that's fragmented, and have there are examples of companies that have actually closed shop, or is this just more quietly?

Brady Ericson
CEO, PHINIA

Yeah, Vitesco's sold off some of their lines and closed up shop. Marelli's still kind of going through a bankruptcy and is only in a couple different spots. Continental as well. Now some people have bought their lines maybe for aftermarket and whatnot, but there's not another major player that has more than a couple percentage points. Especially when you go to direct injection, it's the three majors that people are really focused on. What's nice about this is because there's such high barriers to entry from the machining and designing capability and the whole system integration, there's not a low-cost Chinese competitor in this space either. When we're in China producing in China, most of our customers are the local Chinese OEMs. The BYD, the Li Auto, the Changan, the Dongfeng, the Weichai, those are all the people that we're supporting for that local market.

When people ask us, "Hey, are you concerned when the Chinese are going into Europe?" We kind of say, "No, because we're on the content in China, and when they ship it to Europe, that's okay for us, too.

Moderator

Okay. I imagine it makes sense in China. They haven't led an internal combustion engine, you haven't really seen any competitors emerge there.

Chris Gropp
CFO, PHINIA

No.

Brady Ericson
CEO, PHINIA

No, the other challenge is if you take a look at our numbers as well, we get about $100 million from customers for non-recurring engineering. Calibration support, software support, development, integration. Especially in China, they were farther behind on combustion, so they outsourced a lot to suppliers. We'll design and develop the complete system from the high-pressure pump to the high-pressure rail, to the fuel injection, to the ECU, to the software and the calibration. We'll do all of it. The Chinese competitors, they may be able to do one component. They can machine a rail, but they can't do the injector. They can't do the high-pressure pump. They don't have the software and electronics capabilities all under one shop. We've got a really strong position there as well.

We see that benefit coming to the Western OEMs as well, because when they made their big shift to electrification, many of them fired or let go all their combustion and calibration engineers. Now they're having to try to find them again and/or outsource it to suppliers to help them in that process, and we see that as advantageous as well.

Moderator

Good. You mentioned earlier you're actually taking some share from DENSO and Bosch as well.

Why do you think that is? They've been solid players for-

Brady Ericson
CEO, PHINIA

I think I mentioned with some of the investors earlier is when people thought battery electrics were going to take over the world, they said, "Hey, let's consolidate down to one supplier. We can only manage one on the ramp down rather than managing two or three on the ramp down." Bosch's market shared over 50%.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

Now that they're realizing, hey, these engines are going to be around for decades to come, we may want a second supplier rather than being reliant only on one. We're seeing a lot of opportunities. We saw even more wins probably in the 2022, 2023 timeframe, as both Bosch and DENSO were de-emphasizing it, and they were going a lot of different areas. I think they've started to come back a little bit and say, "Hey, we'll support more," but customers are still looking to move to a two-supplier strategy.

Chris Gropp
CFO, PHINIA

We've also had customers come back because they would not commit to being in place beyond 2030. In other words-

Moderator

With DENSO? Yeah

Chris Gropp
CFO, PHINIA

of supporting the programs beyond 2030, obviously, especially if you're a CV player or pass car, you have to have that support that goes on beyond the end of the decade. We actually had customers come back and say, "Okay, we can't place this program with them, so let's revisit your bid because we have to have somebody here after 2030.

Moderator

Some of your competitors won't support post-2030.

Brady Ericson
CEO, PHINIA

They won't commit.

Chris Gropp
CFO, PHINIA

Won't commit.

Brady Ericson
CEO, PHINIA

If you take a look at their annual report saying, hey, they're trying to reduce combustion exposure by half.

Moderator

Oh, good for you.

Brady Ericson
CEO, PHINIA

Again, if you take a look at both the two major competitors, their fuel injection business is a really small portion of the total company.

Moderator

Fair enough.

Brady Ericson
CEO, PHINIA

For them to exit, it's not a big deal. Customers, both OE and the aftermarket, they come to us, they know that we're not going anywhere. They know they're going to be to rely on us for decades to come. That was actually one of our customers a few years ago when they were quoting us for a commercial vehicle. They said, "We're looking for our partner for 2040 and beyond." If you have someone who's saying they want to reduce their combustion exposure or is not going to give you a commitment beyond 2030, you're kind of out of the game.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

Even if you've been known to sell off different parts of your assets and you're not sure if they're going to sell that business to a private equity or to another unknown party, that's risky, especially in the commercial vehicle and industrial world where relationships that last for decades because of all the service parts requirements.

Moderator

What about diesel? I haven't heard that mentioned in a while. Is that flatlined? Is that actually maybe even a tailwind now, or is that?

Brady Ericson
CEO, PHINIA

Medium

Moderator

I know a couple of years ago, it was a bit of a drag, I think.

Brady Ericson
CEO, PHINIA

The light vehicle diesel has been a drag, but it's pretty much plateaued now in Europe.

Chris Gropp
CFO, PHINIA

It's flat, yeah.

Brady Ericson
CEO, PHINIA

It was $700, $800 million of our revenue, I think in the mid of the decade before the issue kind of came up in Europe on light passenger vehicles. We've seen it come down probably close to $500 million, but we see it kind of flatlining now

I think our European business was declining almost every year for the last four or five years. I think we finally see that stabilize.

Chris Gropp
CFO, PHINIA

It's flat and now going back up

Brady Ericson
CEO, PHINIA

flatten out and they kind of going back to growth, and that was a headwind for the first three, four years of the decade.

Chris Gropp
CFO, PHINIA

Yeah. Our total diesel portfolio, if you cut it across service, aftermarket, CV, and light vehicle, it's still a third of our business, and it's basically flat still. It's still a sizable chunk, and depending on what happens with CV for the rest of this year, next year, it'll actually go up a bit.

Moderator

That makes sense. Yeah.

Chris Gropp
CFO, PHINIA

It's still healthy.

Moderator

It's still what?

Chris Gropp
CFO, PHINIA

It's still a healthy business overall, so still good.

Moderator

Yeah, I imagine the commercial side in particular.

Chris Gropp
CFO, PHINIA

Yeah.

Moderator

What about ECUs? I think it was a year ago, or more than that, you talked about how you're going to develop your own powertrain ECUs. Any progress there or any update there? Is that

Brady Ericson
CEO, PHINIA

Yeah, we've actually have already started to launch some of them. Again, they're our designs, our software, but we're still using our former parent and looking at others who are more the EMS provider for our new designs. We continue to, and I think we've announced a few of those wins from a complete system standpoint. We're just too small to manufacture them in-house. Until you get to that $1 billion of revenue from electronics, it's very difficult for you to go to the semiconductor folks and buy components directly. You're going to be buying through distributors. We're still using them and launching new designs as well.

Moderator

Okay. Is this more of a revenue opportunity, or is it more of just a cost savings because you're integrating it, or both?

Brady Ericson
CEO, PHINIA

It's a little bit of both. Obviously, when we got spun, the products that we were buying from our former parent, the pricing was set by them. There was really no margin in that. I think as we develop our own designs, that will allow us to then get a little bit of margin over time as we go to our designs, and then we can look at other third parties as saying, "Hey, can you make this build-to-print for us?" Where in the past, as when we were integrated with them, it was kind of their design, our design. As we got spun off, we took all the IP and a lot of those low voltage engineers, and that's what we've used to develop our next generation product.

We've had to add more pins, and we had to make it capable for alternative fuels, and we had to make it capable for Heated Tip Injectors and other things. We brought a lot more features to those new designs as well.

Moderator

Got it. Okay. What do you see as the opportunities in the commercial vehicle market in particular? Because you are hoping to grow there. What is your view on where EV goes in that market? It feels like it has a longer life, but I think Tesla's ramping its semis, we'll see how that does.

Brady Ericson
CEO, PHINIA

I think when you're talking about, again, most of our business in long-haul trucking, and the weights and the variability of how these vehicles are being used, I still think it's a long way away. Tesla's been talking about their truck for a long time.

Moderator

Yep.

Brady Ericson
CEO, PHINIA

I still don't see a lot of penetration. We see a lot of electric vehicles came to buses, delivery fleets. Some worked out well, others in mountainous regions or cold environments struggled from a TCO standpoint. A lot of customers said, "Hey, I don't want to spend four times as much for the bus. I need two of them to do what I can do with one diesel or natural gas." We see on more the heavy duty commercial vehicle looking more to alternative fuels. We see a lot more on natural gas. We see a lot more doing testing in hydrogen than trying to do pure battery electrics. I know in China, on the heavy duty side, they're trying to do the battery swap to try to address it.

That still has some challenges, one of the bigger challenges is fast charging commercial vehicle trucks.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

Ask them, "Hey, I need power to fast charge five or six Tesla trucks at a time." We don't have the power.

Moderator

Yeah

Brady Ericson
CEO, PHINIA

In remote parts of the world and remote parts of the country, to where our OEM partners said, "Yeah, we want to do it, but I couldn't put in a fast charging station because that'd take the entire power of the town." Now we have demand for fast charging not there. We have data and AI data centers where we don't have enough power, and we're firing up more coal-fired plants and natural gas plants. If you're doing it via coal, are you really benefiting by going electric? I think the dynamics are changing. I think people are realizing things are changing a bit, and the assumption on electric vehicles made a lot of sense when you use 100% green energy. We're nowhere close to being even close to getting to all green energy.

If you look at the CO2 and the emissions that come from producing an electric vehicle, which is substantially more than a combustion, it becomes a tough case to say you're actually reducing CO2.

Moderator

How about on the aftermarket side? There's established players there already. How do you kind of broaden in that market? I just feel it's structurally just a different market than light vehicle, just because you need more distribution.

Brady Ericson
CEO, PHINIA

Yep.

Moderator

How are you thinking about that opportunity? Is it product expansion? Is it just more just bolting on new customers there with retail outlets?

Brady Ericson
CEO, PHINIA

It's kind of all of it. I think we continue to gain share. We've added new product lines. Steering suspension and braking is one that's been driving a good chunk of our growth. It's already in the 25%-30% of our revenues and it's propulsion agnostic. We're doing it for both combustion, hybrid, and better electric vehicles. So it's been a good expansion for us. We have the OE pedigree because customers know we're an OE manufacturer, so it's going to be good quality. We have a very strong brand in the Delphi brand. About whatever we put it on, customers are going to be drawn to that brand because they know it's a strong brand, it has a great history. Our team's done a really nice job on making sure that we've got 95% coverage in any particular product line.

We're keeping our first-time fill rates in the 92%-95% range. We're making sure it's on the shelf to support them. We do a lot of training videos, our Garage 360 programs to go directly to the technicians, help train them not only on our products, but just how to properly service a vehicle. It's a global business as well, which we think is unique for us as well. I think the team has done just a nice job continuing to grow the business.

Moderator

Just a basic question. You're not manufacturing those new products, right? You're finding other partners.

Brady Ericson
CEO, PHINIA

The steering, suspension, and braking, correct. Again, we have a team of engineers, and we go through validation testing as we do if we built it. We have built a lot of those products in the past. We know what the specs are going to be. We know what the needs are. In some cases, it's not just replacing an existing one. It's saying, "Hey, these are used for delivery vans and they're just getting abused. We need something more robust." We'll design a product that's more robust, work with the supplier to make it, brand it as Delphi, and sell it through our distribution system.

Chris Gropp
CFO, PHINIA

It's got OE specs. We're asking the supplier to do OE specs and live up and test to an OE spec. It's not just an off-the-shelf substitute. It is literally an OE spec'd part.

Brady Ericson
CEO, PHINIA

Correct

Chris Gropp
CFO, PHINIA

To be able to go out as a quality product with our brand on it.

Brady Ericson
CEO, PHINIA

There are some folks in the aftermarket that they just go out there and say, "Hey, I'll just buy those and I'm just going to put a brand on it and sell it." That's their model.

Moderator

Yeah.

Brady Ericson
CEO, PHINIA

We don't do that. We generally go out and define a product, what we want it to be, what the specification's going to be, and then develop that supplier to make it to our specifications. We're not just going out there and buying an off-the-shelf product, slapping a label on it, and shipping it.

Moderator

Got it. Does the margin lower, though, since another.

Chris Gropp
CFO, PHINIA

No

Moderator

supplier, you're still able to capture-

Brady Ericson
CEO, PHINIA

No

Moderator

the same margin even though you're-

Chris Gropp
CFO, PHINIA

No

Moderator

doing the physical-

Chris Gropp
CFO, PHINIA

The margin's not lower. The investment's lower obviously, but no, the margin's not lower.

Brady Ericson
CEO, PHINIA

There's engineering costs and development costs that we have in there, but our expected return on investment is the same on whether it's that or whether it's produced internally. Our internal hurdle rate is 15% expectation. Aftermarket margins may be higher, but they carry a lot more inventory and/or have more operating investment, and therefore, they have to have added margins in order to deliver the return on investment. That's how we take a look at things.

Moderator

Any color on your tariff exposure? Any impacts there? Has that been recovered? Is that all passed through at this point?

Chris Gropp
CFO, PHINIA

No, it's about the same as last year. It was running somewhere in the $20 million-$25 million a quarter range. We're getting pass-through. We got a little bit of the pass-through in Q1 that was related to last year, that was basically even. The IEEPA tariffs have not affected us that much. We are going to go back and, because they were substituted, it didn't change that much for us on a run rate. The only thing that we're in place right now is going back and trying to get the IEEPA tariffs. On the IEEPA tariffs, as we get those, it's a pass along back to our customers, except in the case of aftermarket, which it will be a little bit of a tailwind for us as those go forward. Honestly, we don't expect to get those settled this year.

We think that's going to be a longer process overall.

Moderator

Probably should have thrown it out earlier. Any last questions? Cool. I think we're at eight seconds left, I think we'll

Chris Gropp
CFO, PHINIA

That's very good

Moderator

Wrap it up there.

Chris Gropp
CFO, PHINIA

Close.

Moderator

Okay.

Brady Ericson
CEO, PHINIA

Great. Thank you very much.

Chris Gropp
CFO, PHINIA

Well, thank you.