PHINIA Inc.

Thank you for standing by, and welcome to the FINIA Q3 Earnings Call 2023. I would now like to welcome Michael Heifler, Vice President of Investor Relations, to begin the call. Michael, over to you.

Thank you, Mandeep, and good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on FINIA's Investor Relations website. including a slide deck that we will be referencing in our remarks. We are also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO, and Chris Gropp, CFO. Today, we will discuss our Q3 results and updated forecasts for full year 2023. Please keep in mind when we make year-over-year or second half 2023 to first half 2023 comparisons, We are comparing our standalone results, including actual or expected corporate costs, to pro forma results with corporate allocations when we were part of BorgWarner. During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. and with that, it's my pleasure to turn the call over to Brady.

Thanks, Mike. Thank you for joining us this morning. I'm pleased to share our first earnings report as an independent company and proud to represent our nearly 13,000 employees who remain focused on delivering quality products for our customers and delivering solid financial results in the quarter. I'll get into some of the numbers shortly and then hand it over to Chris for more details. Let me first provide some color on our journey so far. Throughout the past several months, I've spent considerable time with customers, employees, and investors. The feedback externally and internally has been universally supportive and positive about Finia's focus on its core business and strategy for the future. Customers appreciate our commitment to combustion products and that we're going to be a reliable partner to them for decades to come. They are aligned with our efforts to develop robust, practical solutions for today and the carbon neutral and carbon free solutions of tomorrow. Our employees are excited that our profits and resources are being reinvested in our product lines and our operations to further strengthen and grow our business. Finally, investors are supportive of our strategy, commitment to being financially disciplined, and our focus on total shareholder returns. continuing to deliver solid financial performance and executing on our strategies will be key to building shareholder confidence. With regards to the transition from a former parent, the team has been hard at work editing Transitional Services Agreements, or TSAs, and IT, cloud services, HR, facilities, operations, procurement, sales, and IP, and have been making strong progress. IT-related services make up the majority of the cost and will take the longest to exit. We expect to close out all these TSAs by the middle of next year. As we are negotiating independent services and hiring key talent, we are prioritizing establishing strong, efficient, long-term solutions against the backdrop of inflationary pricing. As such, we're working to keep as close as we can to the $80 million of annual corporate costs discussed at the time of the spin. Given what we know now, we see the potential for higher costs, but we believe our longer-term overall margin goals are still quite attainable. Chris will speak to our corporate costs and other metrics shortly. We are also still on pace to exit all contract manufacturing agreements, or CMAs, by the end of 2024 in a stepped and managed fashion. Providing great products and service for our customers has allowed us to continue to win new business across all product lines, and at all regions in support of our strategies. A few examples are Finneas expanding into new markets by being selected to supply fuel injectors to a major aircraft equipment manufacturer. Finneas is broadening its zero carbon product solutions with its first major award to supply hydrogen fuel system components for a large OEM's medium duty truck hydrogen fuel cell electric vehicle. Finneans helping customers reduce carbon emissions today while increasing our market share with a significant GDI program award from a prominent domestic Chinese OEM for its new light vehicle plug-in hybrid programs. These business wins are proof points on how we are diversifying and growing by leveraging our product leadership, global footprint, and proven capabilities. Our quote activity and new business wins remain robust, We believe we have the right strategy to achieve stable, long-term growth. We think our exposure to commercial vehicle, industrial, and aftermarket businesses is going to allow us to continue to grow through this decade and beyond. Our new business wins are supported by our product leadership strategy of bringing new technology to market that provides value for our customers. such as market leading 500 bar GDI technology helping customers improve efficiency, reduce emissions, and lower costs. Leveraging our GDI technology and capital to provide a value-focused solution for our off-highway diesel applications and hydrogen ice that differentiates us from our competition. Additionally, we are providing customers with complete system solutions from the injector to the ECU and calibration services. We can provide a complete turnkey solution for our customers that will help drive additional efficiencies and increase the value we provide. Finally, we're helping our customers move towards carbon neutral and carbon free fuels with solutions using ethanol, biofuels, and Hydrogen as it's our view that a liquefied or a gaseous fuel is going to be a key element of our journey to carbon neutrality. There are just too many applications where a battery electric solution is suboptimal and where hydrogen or renewable fuel will provide an economical, practical and carbon neutral solution. As summarized in our earnings deck on slide four, there's a lot of activity around hydrogen. Many governments and industry participants around the world are working on commercializing hydrogen solutions. I participated last month in the Hydrogen America Summit in Washington, D.C., along with other leaders from private industry and government officials, including Energy Secretary Jennifer Cranholm, to discuss future hydrogen initiatives. A significant development occurred shortly after when the Biden administration allocated $7 billion in appropriations for seven hydrogen hub projects. Combined with over $40 billion in private funding, the DOE expects the projects to produce 3 million metric tons of clean hydrogen by 2030. We are investing prudently in hydrogen, leveraging our core technologies and resources, as we see this opportunity not being a substantial part of our revenues until 2030 and beyond. In the near to medium term, our focus is on growing and optimizing our core OEM and aftermarket businesses. We believe our business is resilient, with about one-third of our business going to the OES and aftermarket, providing a nice balance under all macro conditions. Our commercial and industrial business, making up nearly a quarter of our sales, provides a stable and growing opportunity. And in the light vehicle business, We see our increasing market share and the higher market penetration rates of GDI, especially in hybrids, supporting our positions that our light vehicle business has staying power. We also tend to be weighted more on the larger SUV, van, and truck segments, which will be among the last segments to convert to full BEV. We're going to grow in a financially disciplined way. Our objectives are to continue to maintain low leverage and making all decisions based on maximizing return on invested capital while always exceeding our internal hurdle rates. Now moving to Q3. Our core operations continue to perform well with posted segment, total segment adjusted operating margins in line with our first half average results. As we previously discussed, Our fuel systems segment faced a difficult year-over-year comparison with Q3 last year as it benefited from retroactive inflationary customer recoveries. Consequently, our fuel systems adjusted operating margins were down 540 basis points versus a year ago at 10.3%. However, when viewed versus our first half of 2023, adjusted operating margins were actually up 40 basis points. As Chris will discuss shortly, we've been working proactively with our customers to achieve recovery and fair pricing against overall inflationary cost pressures. Our aftermarket segment margins were down 110 basis points from last year and down approximately 90 basis points from our first half results due to primarily to higher inflationary costs and negative mix. We expect this dynamic to continue into Q4, but have actions to recover in 2024. Q3 adjusted segment results demonstrate positive underlying momentum in our business. As we discussed in our Q2 call, we expect a headwind in our adjusted operating income line from increasing corporate and synergy costs. Q3 corporate costs came in at $19 million, in line with our expectations of approximately $20 million per quarter. We expect these costs to be somewhat higher in Q4 as we build out our independent services. Over time, as we grow our top line, we'll be able to leverage these costs and reduce their impact on our margins. Revenues have softened below our expectations in Q3, primarily due to the continued weakness in CV demand in China. Although the CV market in China is recovering, our customer demand is well below prior year and our previous expectations. We do not see this recovering until the middle of next year. We're also seeing some signs of slowing demand in our European CV business versus our prior expectation. While strikes in the U.S. had a minimal impact on our business in Q3, a more substantial impact is expected in Q4 from the strikes across the Big Three light vehicle OEMs and Mack Volvo. Current expected impact in Q4 is around 25 to 30 million, or about a 3 to 4% reduction in senior revenues for Q4. Although some tentative settlements have been reached, timing to ramp up to full capacity is still unknown. Finally, we're also seeing FX effects from a stronger U.S. dollar from when we provided our guide. Consequently, we're revising our full year 2023 adjusted sales, adjusted EBITDA, and adjusted EBITDA margin guidance range, the 3.4 billion to 3.45 billion, 465 million to 475 million and an evened out margin range of 13.6 to 13.9 respectively. We're also revising our 2023 tax guidance to 34% from 27%. As we exit our TSAs and CMAs and achieve better alignment of our business operating model with our post-spend legal energy structure, We see our effective tax rate coming back down towards our original 27% expectation. We're generating strong free cash flow and have a solid financial position. In the quarter, we generated free cash flow of $118 million, and we ended September with $367 million of cash on hand. We continue to work collaboratively with our former parents that some of this cash will be payable to them and we will also have some cash receivable from them. Our balance sheet remains under one times net lever. Our confidence in the business led the board of directors at the end of August to authorize a 25 cent per share quarterly dividend and $150 million share repurchase program. During the month of September, we bought back $9 million of our shares at an average price of just over $27. In total, $21 million was returned to shareholders in the quarter. As we previously articulated, our focus will be to maintain our strong balance sheet and maximize total shareholder returns. This will include dividends, optimizing our debt structure, at the right time making rapidly accretive and high ROIP acquisitions to grow our commercial, industrial, and aftermarket businesses, and opportunistically repurchasing shares. With that, I'd like to hand it over to Chris who will take us through our Q3 results and our outlook for the rest of the year.