Good morning. Thank you, PHINIA, for joining us at our Chicago Industrial Summit. We are excited to have Brady, Chris, and Gordon with us today.
Thank you.
For purposes of this fireside, we will go through some prepared slides. Brady will kick off on that, then we will go to Q&A. I want this to be as interactive as possible. Thank you for joining us here again. With that, I will let you kick off on the slides.
Great. Thanks, Brian. Thanks everyone for joining. We will flip through a couple quick slides here, kind of give you a quick overview of the company and our strategy, and then go from there. First up, is how we go to market is through product leadership. We continue to try to ensure that we have some of the best products that provide the greatest value to our customers. We think we have strong positions in all the product lines that we are participating in, whether it is fuel injection, starters and alternators, and aftermarket businesses. We are leveraging a lot of that capability. We are not what we consider a commodity. We try to win on our technology and our performance of our products.
We go to market and we actually service a bunch of different markets out there, and that is why we can really consider it more of a diversified industrial because of the variety of end markets that we serve. We then couple that with a lot of our financial discipline, where we evaluate every single quote that we have out there, expectations on return on invested capital. Our minimum hurdle rate is 15%, is what we expect to deliver on any of our new programs, and continue to drive that as part of our business. All of our decisions are really around how do we maximize shareholder return. That is where our financial discipline, that stable growth, our capital allocation strategies is really going to shine through, is where we are focusing on that shareholder return.
When we talk about the diversity, I think this slide here really kind of goes through a lot of our strategy. Not only do we have diversity around the regions, we also have diversity in our customer base. Our top five make up 37%. Our top one is in the high teens, like 16%, 17%. Two through five are all in the mid-single digits. So we have a lot of diversity in our customer base. Then finally, as I mentioned, a real diversity in our end markets. Service, which will include original equipment service as well as independent aftermarket, makes up 35% of our revenue. So that is actually the largest end market that we serve. That is followed by light passenger vehicle at 25%, medium and heavy duty on highway commercial vehicle at 15%, light commercial vehicle at 19%. Then probably our fastest growing segment is the off-highway industrial.
Other that will include the aerospace, the gen sets, the ag, the construction. People will ask us a lot about going into all the different end markets. What is interesting for us, it is really the same engineers and the same manufacturing equipment. For us, we are able to leverage our human capital and our manufacturing capital to go to these different end markets. So we are not having to invest a bunch of money now in the hope of delivering additional revenue and profitability later because we are able to repurpose a lot of our existing lines. There is actually a light passenger vehicle diesel line that we repurposed to do some of the aerospace work, because the processes, the materials, the precision machining, the final assembly of the test is all similar. The same thing with the engineers.
We are not converting mechanical engineers and trying to have them do power electronics. We are having mechanical engineers, and it is a pre and post injector for a turbine engine. So it is fluid management, it is precision engineering. It is the same engineers that we have on aerospace, commercial vehicle and light vehicle, because it is the same basic technology. It is just different flow rates, different pressures. So we are able to shift our resources depending on where the growth is coming. That, in our view, is going to deliver a consistent growth rate, and make us very resilient in a relatively volatile market. We did just recently announce the acquisition of stoba here at the end of June, gave a little bit of more insight in our latest earnings calls. You will see here, we see it as consistent with our strategy.
It's going to add another aerospace and defense certified location in Germany. Very precision machine components. They have a lot of intellectual property and trade secrets on how they manufacture the products, the tight tolerances that they're holding. They're one of our largest suppliers, a critical supplier for us. Although their third party or total revenues are about $200 million, $120 million, that was to us. We see that as not only as a way to get some critical technology inside, but also make our supply base a little bit more resilient. As we've seen in many of the European supply base and others, there's a lot of concerns with the financial viability. These small to midsize companies are a concern.
We saw this as an opportunity to not only expand our exposure into aerospace and into different customers, but also to solidify our supply base as well. We think it was a fair multiple at 6 x EBITDA. We think that will just nicely kind of slide right into our organization. Their plants are close to our plants as well, and it gives us some ability to continue to optimize their manufacturing footprint with ours as well. Just a quick highlight. We did report earnings a few weeks ago as well. Another good solid quarter, $130 million of EBITDA, $940 million of sales. Another strong sales quarter for us. Year-over-year growth versus prior year EPS continuing goes up around 20% adjusted EBITDA from prior year. We continue to maintain a strong balance sheet. Share repurchases continue even with the acquisition that's coming.
Our leverage is pretty conservative at 1.3 x. Our target's around 1.5x, so we have a little bit of room there as well. Again, the 1.5x plus or minus we think is a good level right now. As we shared at the investor day, as we continue to grow and as we continue to get our interest rates maybe a little bit lower, maybe we go from 1.5x - 2x. But we still want to maintain a relatively conservative balance sheet. We're not going to be levering up to 3 x and what we consider excessive because there are going to be some cycles that we have to weather. I think this is a nice summary of our discipline and financial discipline and capital allocation discipline. Since we've spun, we just had our third anniversary back in early July.
In that time, we bought back close to 24% of our shares, returned $665 million to shareholders. We've increased our dividend. We established a dividend and increased our dividend twice already. Maintained good leverage. We produce predominantly in low-cost countries. We've seen some nice organic growth rate and also now with the SEM acquisition integration last year, now the stoba acquisition, we're finding those nice little tuck-in at reasonable prices that continue to support our business kind of longer term. We think this is a really strong slide for us on how we have a good strong foundation. We're investing for the future growth. We're disciplined in that area. Again, I think some of our capital return to shareholders has also been extremely strong over that period. That then kind of leads into what our overall expectations have always been for the decade.
Through the cycles, we will see that average organic growth rate in that 2%-4%. I think this year we are right around 3%, 3.5% this year. Cash flow continues to remain strong. We still have some opportunities to continue to grow EBITDA, and we expect that to be solid in the 14%-15% range. Then that target modest leverage at 1.5. So, I think if you take a look at what we have delivered over the last three years, I think our goal is to be consistent kind of in the ups and downs. Even with the commercial vehicle market being really hit pretty heavy over the last couple of years, we still kind of held our numbers. We are relatively flat to maybe a little bit up. Continue to deliver good, strong cash flows. That is one of the benefits of the diversity of the markets that we serve.
There is no one market that is going to really drive or one platform that is going to drive our revenues. So I know people are more excited about light vehicle or more around CV, but again, medium heavy duty CV is still only 15% of our revenue. So yeah, we will see a little bit of uptick there. We are seeing a little bit of headwind in light passenger vehicle in China. India is now really kind of ramping up, and we are building a new plant there as well to support that growth. Alternative fuels is really growing well, whether it is natural gas, ethanol, methanol, both light vehicle and commercial vehicle, hydrogen as well. We think there is a lot of opportunities for us to continue to grow in these different markets and different regions of the world.
With that, I will pass it back to you, Brian.
Good. Thank you for taking us through that, Brady. Just some questions to get started as we move to the Q&A session. You talked a lot about diversity of end markets in terms of tier. So when you think about that end market exposure as it continues to evolve, we talk about kind of the industrial aspects of that and again, getting away from and industrial, it is not just industrial from an industrial state, but also on highway from commercial vehicle standpoint, other non-pass car and then aftermarket.
Yep.
As you position that from like kind of a core growth and margin engine for the company, talk about that just organically and inorganically as you take it forward.
Yeah. We're going to be disciplined on the inorganic. Are we looking for opportunities on the aftermarket side from an acquisition standpoint? Absolutely. It's got to be at the right multiple and fit with our portfolio. From an organic standpoint, we expect our aftermarket and our service business to grow from that roughly 35% to probably closer to 40% organically between now and the end of the decade. That's primarily made up of three major components. One, as we were talking earlier, the average age of vehicles continues to increase. The number of vehicles in operation continues to increase, and as long as people are driving, our aftermarket in general, the market itself is growing 1%-2% a year. So that's just the overall market. Pricing is generally 1%-2% a year on average as well.
We've been continuing to gain a little bit of market share. As we continue to diversify our product portfolio and our offerings, that's another 1%-2%. That's where we see our aftermarket in that 3%-6%, 4%-6% type of growth rate. If we continue to grow that's going to allow us to increase our service and our aftermarket business as a percent of sales. If you take a look at our recent earnings, our aftermarket segment is already delivering roughly half of our profits.
Although the revenues may be a little bit lower, it's already about half of our profitability. The aftermarket segment, I think we were just right around 17%, 17.1%
Yep
I think in the quarter. It's a good solid number for our aftermarket segment. Our fuel systems is right around 11%. Our goal has always been for fuel systems to stay double digit. Hopefully the new floor is around 11%. Aftermarket was at 15%, maybe 16% is now kind of the new floor, and continue to grow the business. We see these as real strong businesses, very profitable businesses, and ones that deliver great cash flow too.
Can you push further on the industrial front? The great thing is that the industrial aftermarket tends to be more profitable and stickier.
Yeah. If you look at the numbers, our aftermarket, as a segment, half of that 35% is more on the heavy truck, and the other half is on the light passenger side. So, absolutely agree with you. On the commercial vehicle side, we may get two to four replacements over its life cycle. Where on the light passenger vehicle, we may get one to two. We do see a much larger, just because of the miles driven, and the severity of some of those applications, that we tend to get more service parts over the life of the vehicle.
Yeah. Just a little bit more on the aftermarket side. When you think about just key operational levers there, SKU expansion, brand conquest wins, what else is helping drive the outperformance there?
Well, I think the SKU is the overarching, but as we do this, we have continued to add different product lines into different regions, and we are doing it in a disciplined manner to where we will launch it in one region, get penetration, see if we can get some success in there. If it continues to grow well, we will then take it to other regions. So steering, suspension, braking, was one of those things that has really been growing well for us. Now we are taking it to kind of all markets.
I think having the OE pedigree and the quality, I think also helps us. We are definitely the premium product. People know the Delphi brand. The Delphi brand is probably in the top five brands out there in the aftermarket, that people recognize it, they appreciate it, and they are willing to pay a premium for it because they know it is a good quality product.
We leverage that. The nice thing about the Delphi brand is that at some point they probably made about every single component in the vehicle. We have the flexibility to go into those different areas, apply the Delphi brand to it, and really get a premium for that product and actually helping a lot of the mechanics and the shops. They put that Delphi brand, they can sell the Delphi brand easy.
They make more money because they are doing a markup on our product. A markup on $50 is not as good as a markup on $70.
They actually make more money. Again, with many of our components, labor is actually the bigger component. When you start tearing apart an engine, if you have seen some of the labor rates in some of these shops, they are probably going to spend more time in labor than they do in parts.
They are going to want to ensure that they put the best quality parts on it. They are not going to go with the cheaper brand just to save a few bucks because if the mechanic that is putting it on, if something goes wrong, they are on the hook for their labor to replace it for the customer.
That is where they really know they can rely on the Delphi product and the brand, and they can easily upsell their customers to get the higher quality part.
There is a similar dynamic on the Delco Remy on the CV side, where you are literally specced in by the fleets to sell the Delco Remy. So whichever brand you are going with, whether it is Delphi, which can go across both the CV and the light vehicle and the light commercial, then you have the Delco Remy that is more skewed toward the CV side also. But as.
Any questions? I do not want to monopolize. I can keep going.
Your margins are 13.5%, so I'm just saying for the marketplace service. Usually they're more for service.
Yep.
Why would you mind this style working?
I don't think they necessarily will. I want to get solidly into 14%, 15% before I make a commitment to go 15%, 16%.
That's probably more of the rationale behind it, because the EBITDAs aren't that much different. When we talk about the 17%, that's operating income. There's not a lot of depreciation in the aftermarket segment, so it only adds maybe 1% or 2% where it's 4% - 5% on the fuel system side. So the fuel systems is not that much different. It's only a few points less. I think in general, as we continue to grow, as we continue to expand into the off-highway industrial and some of the aerospace business, I think that will then allow us to kind of take that margin up a bit, kind of going forward.
That makes sense.
It is really small. We launched our first program with Safran earlier this year. The second one launched in Q2. Third one launches
In 2027.
2027.
Early 2027, yep.
The fourth one, I think, is end of 2027 as well. That's now kind of something we've been working on for about four or five years now. Our facility in France got their aerospace quality certification in Q4 of last year. Now we've been going to a lot of the air shows, and now that we have a big customer, a credible customer, and with our quality certifications, the doors are really starting to open up. There's probably a dozen programs that we're currently quoting on right now and supplying prototypes for. The stoba acquisition will add, they have an aerospace certified location as well, as well as customers that we aren't in right now. That'll open up some more doors for us as well.
A key theme of the conference is obviously how to build up a data center footprint in terms of what's there. Can you talk a little bit more about, think about what PHINIA's doing on the stationary power generation side of things, industrial applications, some of that lineage you just talked about, Delco Remy, the commercial vehicle standpoint, the alternative fuel research that the team's been doing, how you're able to capitalize on that macro theme?
Yeah. I think some people kind of I think over-hype the data center side of things if we're doing generators. We work with the CATs, we work with the INNIOs, we work with a lot of the genset providers.
The genset market in totality is now increasing, but it's not doubling in size. Certain applications are doubling, but the volumes are still relatively small.
We have been on gensets for 30, 40 years, whether it is CAT/Perkins, whether it is any
Power
one of these others. We do see some increase in it, but it is still a relatively small percentage of our overall business. We cannot say that the genset is going to a data center because it is just a genset. It could be going to a factory, it could be going to a hospital. Really what we know is, "Hey, it is a 20 L genset. It runs on natural gas and is it designed for prime power or backup power?" That is what we supply our parts to. In general, our parts are going to be the same, whether it goes to a data center or whether it goes to a hospital or a factory.
We are seeing some tailwinds. We saw some tailwinds in gensets business a number of years ago when they were building out 5G towers. They needed a bunch of gensets backup power for the 5G towers, and we had a big surge in our genset business for a few years, and it came back down again in a cyclical market. I think with the data centers and some of that demand, rather than being a cyclical business, I think it is going to turn into more of a consistent long-term growing business.
We do think there are opportunities there. The SEM acquisition is one of them that is benefiting from that, because a lot of their ignition coils is for natural gas applications.
That is where a lot of these large prime power are going to be on natural gas.
We do see some opportunities there as well.
Just picking up on the stoba acquisition in terms of, again, broadening the exposure on both off-highway and industrial, as you have mentioned. As you think about just taking that and then fruition the existing relationship you have with them, how does that best further accelerate what you are doing into non-automotive in terms of those industry? You talked about aerospace
Yep
Supply chain in terms of enhancing that.
Well, I think it opens doors to customers that we've been trying to knock on and haven't been able to get into. They're already working with Liebherr and Woodward and ZEISS and a number of different customers that we're not in right now. It's going to open up some doors there. With the build-out, with the military spending increasing in Europe.
Having a certified location in France, having a certified location in Germany. We have locations that are working on the certification in the U.K.
We think we're going to be well-positioned to support those customers. As people know, the military sector and the aerospace sector are not the best at managing their supply base, and there's a lot of challenges. Us going in there, the doors have been kind of wide open. They're excited about it. Their main concern was always, "Can you guys, do you understand our lower volumes?
We say, "Yeah, we're doing gensets, we're doing off-highway, we're doing marine already. We know the low volumes, and we can support it." As we're continuing to build a strong relationship with the customers, they're giving us more and more opportunities.
If you think about some of the manufacturing processes around the components in our fuel injection, we are talking about plus or minus half a micron. We are talking about pressures in our injection systems that are in excess of 40,000 psi, close to 3,000 bar. Laser ablation, laser drilling, EDM drilling, the micron, the shapes that we are controlling. The aerospace specs that we have are quite easy compared to what we are doing on commercial vehicle diesel injectors.
The capability, the types of materials we are using, the super alloys, it fits directly in with our capabilities. That is why it was easy for us to win these first couple programs. One is a pre-injector, one post-injector for a turbine engine. For us, it was the same basic machining, assembly lines, and we were able to convert an existing line.
That is why we think this is an area that we can shift into and allocate additional resources to, without having to increase our CapEx, without having to increase our R&D as a percent of sales. We are leveraging our same existing human capital as well, so we can move them from commercial vehicle to aerospace. I think another couple good examples of that is we also converted one of our light vehicle diesel lines, because obviously Europe light vehicle diesel kind of went off a cliff. We have a GDI for diesel, so we actually converted one of our GDI lines for diesel applications for Kohler for an off-highway application. We have converted some of those diesel lines down for South America and other locations, so now we are 100% ethanol applications.
South America seems to be going more that way. You have heard a lot of different new business wins in natural gas in India. India is going heavily into natural gas, both light vehicle and commercial vehicle. So we are moving lines down there as well. What is nice about it, not only do we have flexibility on our human capital, but a lot of our manufacturing lines, one, we can convert from gas to diesel, and we can easily move them from Europe to South America or Europe to China to Mexico, depending on where the demand is. These are things that we can move capacity around to where it is needed as well.
And just picking up on what you are hitting on from a nat gas standpoint, that fits into just some of what you are capitalizing on in terms of alternative fuel demand in core markets. So, there is different chapters here, ethanol, methanol, hydrogen. Can you talk about how you are being able to capitalize on that opportunity?
Well, again, from an engineering standpoint, it is just a different viscosity and different flow rates and pressures.
You just have to make some slight, whether it is a nitriding, whether it is a coating, whether it is a diameter, you got to open up to allow more flow. It is the same basic technology. Probably a few years ago, people were more excited about hydrogen, so we were investing a little bit more there. I think the excitement has kind of leveled off a little bit, and I think there is still a lot of work going on there, but there is not the overhype, so we backed off a little bit, moved some more of that to natural gas. Some of the lessons learned that we had on hydrogen, we are able to apply to natural gas and ethanol-
Yeah
applications. For us, every time we work with a different fluid, we learn some new things.
We can then apply some of those lessons learned to other applications as well, whether it's a different type of coating, a nitriding, a flow rate, corrosion. Obviously, 100% methanol is a very corrosive fuel to deal with. Getting something to live with methanol over the life of the vehicle is a challenge. We learn a lot and we can apply some of those lessons learned to other applications.
The investment is the same. The capital equipment that it takes to produce those parts is the same. It's more in the materials themselves that our engineers have to work through and deal with. It's the same engineers, and they understand and try to figure out the flow rates and how you work with the materials and, as Brady said, the coatings and things. The cost to get into those areas is approximately the same, and it doesn't take a big spike in spending to move to those alternate areas.
You let off your prepared comments about product technology. At ACT Expo, you had introduced the first homologated H2ICE LCV.
Just again, product leadership, technology leadership. Can you just talk about how that's, you've been able to leverage that with the OEMs and then looking for that near zero emission combustion pathways?
Well, I think that's a great example of we're not just a component supplier, we supply a complete system.
We were able to convert on our own the complete vehicle from a diesel to a hydrogen. The tanks, the safety systems, the homologation, the calibration, certified, and everything else. That vehicle's been running around the U.S. now. That's a good example of some of the influence we're having. We talked to CARB and the EPA two, three years ago about hydrogen internal combustion, and they didn't want to talk to us because they were so focused on better electric and/or fuel cells. We kept talking to them and talking to them, and they really started to say, "Hey, let's take a look at it. Maybe it has some value." They wanted to test it, and they were able to test the vehicle for a month in their own labs to get their own feeling for it.
That's how we're starting to have some influence on the EPA and some of their thinking. Then our customers will then come back to us and kind of say, "Hey, you got CARB to test the vehicle. Maybe we can work on some test fleets." We have a number of customers we're working with to do some demo fleets in different parts, whether it's buses. I think our CTO, Todd, met with some of the transit authorities in California, where they're saying, "Hey, these battery electric buses aren't working for us. It can't last a full day. It loses speed on some of the elevations and the hills." It's not meeting their expectations.
They're asking us, saying, "Hey, would we be interested in doing some hydrogen ICE demo fleets?" I think that's where we see that coming to where I think we're going to be doing more and more kind of demo fleets. They're going to want to get two or three years of experience, see what the total cost of ownership is going to be, how they perform, does it meet their duty cycle requirements. Then I think it's probably going to be something more in the 2030s. With that said, I think we were just in Le Mans as well, and the Le Mans is now going to open up hydrogen for the 24 Hours of Le Mans, I think in 2031. Formula One is now working with it. Trucks are working with it. We've got a- hydrogen working on actually a tanker.
It's a diesel engine that they're supplementing with 10% hydrogen, and that's helping them reduce their emissions and improve things. We're supplying them with some technology as well on the injector side. There's a lot of different things that are working on there with hydrogen, whether it's a mix, whether it's a blend, whether it's 100%. I think it's a very interesting solution, especially for the Western Hemisphere that doesn't have the battery infrastructure. Whether it's Europe or North America, OEMs, they're probably some of the leaders in combustion technology. It'd be a lot smarter if they just replace the fuel and keep the leadership in combustion technology, keep all those engine plants, keep all the mechanics that know how to repair these things in place rather than going to a battery electric that they're way behind. They're going to lose.
They're 20 years behind or 10 years behind the Chinese and their technology and the vertical integrations they have. I think it's going to be very difficult for the Western OEMs to compete.
I have some final questions around capital allocation, but just want to go back to the group for any follow-up questions.
Sure. I have one. It's interesting that you point out the kind of time that it sells, something like that might bridge between total internal combustion after the vehicles. I guess the pushback there is, there are at least one of the few trucking companies that have been playing around with it for a few years and it hasn't been as commercially viable as they hoped. I suppose the question that I have is what's changing with this next set of vehicles where it would be more of a commercially viable technology? Is that something that you're working with [Russ] or-
Yeah, the fuel cells, I don't think is a bridge technology. I think they thought that was going to be the solution, and I think a lot of the fleets have struggled with the performance of the fuel cell, the liability of the fuel cell. Looking at, "Hey, I need a Class 6 or Class 7 truck, but to get the power that I need, I got to go to a Class 8?" It just didn't make sense. I think the other challenge with fuel cells is that they require liquified hydrogen and very pure hydrogen. If you don't have pure, you can damage the fuel cell, and it becomes an issue. The nice thing about hydrogen ICE is we can handle the contaminants. We don't need it to be in a liquified form. It can be in a gaseous form.
If they want to transport it via piping or by pipe, no problem. Fuel cells can't because it picks up a little bit of contaminants along the way in the pipes. It becomes a challenge. We've actually worked with the fuel standards organization to come up with a new grade of hydrogen that can have some contaminants in it. That should hopefully also lower the cost of the hydrogen, because that's one of the bigger challenges, the cost of hydrogen right now and to get to that purity level. We're saying, "Hey, for hydrogen ICE, we don't need that purity." That could probably almost cut the cost in half over time versus the pure version because you don't have the storage cost. You don't have to keep it in a cryogenic state.
You can pipe it, you can truck it, you can store it in more reasonable applications. Our view is that a hydrogen ICE is a more robust solution. I think the fuel cells make sense if you're in space or you're in a data center that's a very controlled environment. But once you go on the road and go into trucking, we can't get biodiesel consistency across the country that causes issues. That's what these vehicles have to deal with, and so you're not going to get the purity of hydrogen. You're not going to assume that everything's going to be perfect once it goes out in the field, and that's what they ran into with the fuel cells.
Got it. So I guess to get to that stage, do we expect to see this higher level of R&D with this technology relative to applicable risk?
For us, it's relatively applicable. Again, we're in production with JCB with hydrogen. It's using the same basic technology. It's either going to be a version of our port fuel injector if they're going low pressure, and if they're going higher pressure, they're basically using a GDI, our direct injection, 300, 350 bar type injector. For us, again, it's not any different from an R&D. We've been supporting for the last five years, hydrogen, ammonia, methanol, ethanol, natural gas, all those things is already in our numbers. We've been doing it, so we don't see any need to have to, "Hey, we need to increase R&D another percent of revenue in order to meet this." In general, in a lot of these applications, we're getting a lot of either government and/or customer funding to support it as well.
You can meet the emissions level, but you don't have to go to some extreme. We've had to say since coming out three years ago, combustion is not the enemy. You can combust and still come back to a zero emissions or very neutral emissions level product. It's not combustion that's the enemy, and we know how to do that. There's a lot of people out there. It's a better technology, and you can get where you need to be without going crazy and spending piles of money.
It's a practical solution too, because again, we can convert them relatively easily. It's not crazy, other than the tank is the biggest thing. There's a lot of applications out there that are already natural gas. They have the same kind of size tanks and packaging. From our standpoint, we think it's a very practical solution. We were joking at first, the EPA and CARB, well, it's not zero because there's a little bit of oil that gets past the piston ring that will combust, and it gives a little bit of CO2 and a little bit of emissions. We joked with them and said, "Well, you know that guy sitting in the driver's seat? He's spitting out more CO2 than is coming out the tailpipe." Let's be a little bit practical. Let's be rational in the application.
I do think they're starting to be a little bit more rational, and people are looking at it as an alternative. Do I see it significantly impacting our revenue this decade? No. But I do see it as a pathway of why combustion engines will probably have a lot longer life than people think.
Okay. Then capital allocation-wise, you talked about leverage levels in terms of the target where you are at right now, balancing organic versus inorganic. Obviously, stoba was an attractive entry point as related to, I think you said fair to your word in terms of the purchase multiple.
Yep.
Obviously, as you talk about those long-term growth rates that target 3%-6%, that is all organic, so inorganic would be on top of that. How do you balance continuing investment for growth as you think about capital allocation relative to returning capital? Because you talked about repurchases and dividends as well.
Yeah, first and foremost is supporting our organic growth. That is the R&D at 3% net, CapEx at roughly 4%. I think we are running maybe 3%, 3.5% this year.
We are being disciplined in that side of it. When I say on the R&D, it is 3% net, but it is actually closer to 6% gross. We get about $100 million from our customers for services, development, prototypes.
Government grants too.
Government grants. We are actually spending quite a bit on a pure R&D standpoint, and that is also a testament to the value that we provide and the overall system level support that we give our customers. That is first and foremost. The next is then our dividend, although our dividend, we increased it twice, it still stays around that $40 million-$50 million that we allocate to dividends. From the rest of it, we will take a look at our debt levels, we will take a look at where our share price is, and we will take a look at where some of the opportunities are. When we are taking a look at acquisitions versus share buybacks, we are going to look at it the same. Where can we maximize shareholder returns? Acquisitions obviously bring more risk with it than investing in ourselves.
When we took a look at both at SEM, we were trading maybe in the 6x-7x range of enterprise value over EBITDA, and we did SEM at 5x. They actually have a longer term growth rate. We actually saw a better growth rate in their business than ours. We thought, hey, it is lower than our multiple. They have a higher growth rate, and they have good margin business. That makes sense rather than buying back our shares.
We are now trading seven-ish.
7x, 7.5x . stoba's at 6x.
Kind of a multiple. It was a vertical integration as well, relatively low risk. We knew their business opens up some aerospace and defense that maybe give us a little bit higher growth rate than our base growth rate. That made more sense.
We are always going to take a look at it compared to our own share price. If we were trading at 5 x, it makes a lot more sense just to buy back more shares because we think we are extremely undervalued. That is how we take a look at it. What we have seen even this year with stoba, we can acquire stoba and still continue our pace of roughly $200 million in share buybacks and still be at 1.5 x.
One doesn't preclude the other either. Our net debt went from, I think, [$140 million down to $130 million].
Yep.
We continue to grow our EBITDA, we continue to generate a lot of cash flow. It's given that opportunity, and so we can do stoba, continue our share repurchases, and still be at roughly 1.5 x.
Look, I think highly accretive acquisitions like those that you've been able to identify and complete show on the back end, that's obviously going to drive further credit in terms of the inorganic growth on top of the organic and the foundation.
Yep
That is great.
Yep.
I trust that there's a ready pipeline in terms of what the team is looking at.
Yeah, we've probably gone through 200 by now since we've spun. Again, there's probably 80%, 90% of them we throw out right away. There's maybe 10%, 20% of them that we dig in a little bit deeper. We've put in some initial offers on probably over a dozen.
We're not going to chase them. This is what it's worth to us, and if they don't want to transact, they don't transact. I'd say probably less than half are for sale too. So we're targeting different companies that we think would be a good fit as well, building relationships with them. That's what we did with stoba. That's what we did with SEM. They weren't for sale.
These are ones that we developed relationships with.
We continue to build relationships with companies we would like to integrate. We do look at some that are for sale as well. We are going to remain disciplined in what we are willing to pay. We are not going to chase it.
Yeah. I know you mentioned just having hit the third anniversary, but the reality, the background on this company goes back 100 years.
100 years, yeah.
The point is that the relationships that the team has with other players in the sector to see things that other people don't see. You don't wait for processes to come to you go find them.
Yep. Exactly.
I don't have anything else unless there's other questions in the room for follow-up.
Great. Thank you very much.
Thank you, PHINIA.
Thanks.
Okay.
Thanks, Brian.