PHINIA Inc.

Good morning, my name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the FINIA third quarter 2024 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I'd like to turn the conference over to Kellen Ferris, Vice President of Investor Relations.

Thank you, 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 via webcast. Joining us today, Brady Erickson, CEO, and Chris Graup, CFO. 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 violings. And with that, it's my pleasure to turn the call over to Brady.

Thank you, Callan, and thank you to everyone for joining us this morning. I'll start with some overall comments on some key accomplishments in the quarter and provide a brief discussion of our third quarter financial performance. We'll provide additional detail in our financial review before we'll open up the call for questions. Our performance during the most recent quarter reflects the ongoing successful execution of our long-term strategy, the resilience of our business in challenging environments, and the strong operational performance of our team. This includes launching exciting new products, expanding our business in growing markets, and developing partnerships in our aftermarket segment. With respect to our P&L, I'm pleased to share another quarter of consistent results driven by the strength of our aftermarket segment, which accounts for about 42% of our sales, and the resiliency of our fuel system segment. This led to another strong quarter of adjusted free cash flow. Finally, we strengthened our balance sheet by replacing high-cost debt with new unsecured long-term notes. Exited all material contract manufacturing agreements, or CMAs, with our former parent, We have published our first sustainability report. Now moving on to the third quarter results, starting on slide four. Before I begin, one item of note. This is the first time we are comparing standalone quarterly financials on a like-for-like basis post-spin. During the third quarter, the macro environment remained dynamic as inflation, geopolitical tensions, and currency volatility persisted. Despite these range of factors, our third quarter financial results were in line with our expectations and reflect resilience and strong execution within our business segments. Lower fuel system sales were partially offset by strong aftermarket segment sales. In turn, net sales in the quarter were $839 million, down 6.4% from the same period of the prior year, or down 3.7% on an adjusted selling basis, which includes the CMA sales. As mentioned, we've now exited all material CMAs with our former parents. We reported adjusted EBITDA of $120 million, a 90 basis point year-over-year increase. This reflects growth and positive profit conversions in our aftermarket segment and solid performance in the fuel system segment. Combined with cost controls in both segments led to margin expansion. Despite the reduction in sales in fuel systems, There was no degradation in segment operating income. We also continued to build the right capabilities and strengthen our internal systems and processes. Our adjusted free cash flow remained healthy at $60 million. Our balance sheet remained strong with cash and cash equivalents of $477 million, up from $365 million at year-end 2023. And our total liquidity is approximately $1 billion when taking into account our undrawn revolver. This performance enabled us to return $85 million to shareholders via share buybacks and dividends. Now let's move to slide five. We leverage our proprietary research and engineering expertise to ensure we support what our customers value. This is, once again, clearly shown by our recent wins across product lines and geographies. Let me call out a few. Second product line win in the off-highway diesel market with an electronically controlled low pressure common rail injection system for compact diesel engines for use in excavators, forklifts, and generators. Conquest win in India's growing combustion market with a European automaker for a light vehicle GDI pump. A Conquest GDI system win with a US automaker for use in a high volume application for light duty trucks and luxury SUVs. And moving on to slide six, our aftermarket segment renewed our agreement with one of our largest global independent aftermarket customer groups, signed a first-time agreement with a major customer group in Europe, and signed a new agreement with a North American customer to expand cooperation into their business in Mexico. Our customers trust us to give them innovative quality products. In turn, we're forming deeper relationships with new and existing customers. The success we are having winning conquest business and expanding our aftermarket segment offerings is further evidence of our leading technology and trusted brands. Now let's move to slide seven for discussion of our capital allocation actions. We took steps in the core to further bolster our already strong balance sheet by replacing high cost debt with the issuance of 450 million senior unsecured notes due in 2032. We have now extinguished both our term loan A and term loan B loans. We've also amended our credit agreement, which, among other items, is now less restricted with respect to dividend payments and share buybacks. As shown on slide seven, given the lower rates, we're comfortable with targeting a net leverage of approximately 1.5 times. Additionally, during the quarter, we opportunistically repurchased 75 million of our outstanding shares, after the board increased our share repurchase authorization by 250 million. As of the end of the quarter, 188 million remains open on the total of 400 million share repurchase program. In total, we spent 212 million to repurchase approximately 5.3 million shares, or 11.2% of our original outstanding shares since our spin in July of 2023. We also paid a quarterly dividend of 25 cents per share. These actions are indicative of the company's commitment to returning value to shareholders and our confidence in our long-term growth potential. Our strong cash position highlights the efficiency and strength of our strategies and execution of our team. We will continue to be disciplined and balanced with our deployment of capital as we prioritize investing in the business to drive long-term growth. both organically and via potential M&A transactions, as well as returning cash to shareholders via opportunistic share buybacks and paying competitive dividends. The last topic I want to touch on today is ESG. As always, our goal is to grow and operate in an even more efficient, sustainable, and impactful manner. During the quarter, we published our first sustainability report, which highlights our 2023 sustainability performance. strategies, and initiatives. We encourage all of you to read the report, which can be found on our website. As a mission-driven business, we will continue to focus on profitable growth, creating long-term value for our stakeholders by living our values and continuing to embed corporate responsibility throughout our business. In summary, we are encouraged by the resilience of the business given the ongoing macro headwinds. Furthermore, we are pleased with the progress we made in strengthening our balance sheet as well as being a fully independent company. We are well positioned to capitalize on the growth opportunities that are still ahead. As such, we will continue to invest in these long-term strategies, leveraging our strong balance sheet and healthy free cash flow while maintaining disciplined expense management. This will allow us to continue to deliver value for our customers, invest in our employees, support our communities, and create attractive returns for our shareholders. With that, I'd like to hand it over to Chris, who will walk us through our future results and discuss our outlook for the year. Chris?

Thanks, Brady, and thank you all for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. Moving to page nine on the deck, Revenue in the quarter reflects similar market trends as the prior two quarters as we generated $839 million in sales, down 6.4% versus a year ago. Excluding the effect of contract manufacturing, the reduction in sales is 3.7% versus a year ago. As Brady noted, we have effectively completed all material contract manufacturing agreements with our former parent as of the end of this quarter. Our aftermarket segments benefited from higher pricing and volume for a year-over-year increase of 6%. Sales continued to benefit from higher volumes in Europe with a mild increase in revenue in the Americas during this quarter. The fuel system segment sales, by contrast, were down 13.7% or 9.7% excluding the effects of contract manufacturing. Our fuel systems group was impacted by lower commercial vehicle sales or CV revenue in Europe and China offset by increased pricing as we continue to work with customers to correct some lagging commodity and non-commodity pricing issues within Europe and the Americas. Our adjusted diluted earnings per share was $1.17. We earned 87 million and 10.4% in adjusted operating income and margin. which represents a year-over-year increase of 5 million and 100 basis points. Adjusted EBITDA was 120 million and a margin of 14.3%, representing a year-over-year increase of 3 million and 90 basis points. Margins benefited from positive pricing for both the fuel systems and aftermarket segments. and positive supplier savings and recoveries that offset all inflation and employee cost increases. Year-over-year conversions were affected, as expected, by standalone corporate costs of $5 million. From a core business performance standpoint, our segments reported strong overall margins. Q3 segment adjusted operating margins were healthy at 13.2%, up 160 basis points year-over-year, with our aftermarket segment margins expanding by 210 basis points and ending the quarter at 15.8% on the back of inflationary price pass-throughs and positive product sales mix. Q3 fuel system segment margins were strong at 11.4%, up 110 basis points due to pricing, supplier cost reduction, and cost controls. Our sales performance in the quarter was affected by softness and volume, which was a headwind of 51 million due to lower CV sales in Europe and China, partially offset by ongoing strength in aftermarket sales in Europe. It was also affected by the wind down of contract manufacturing sales with our former parent. Excluding contract manufacturing, our sales were down 32 million, 3.7%. Similar to the trends we saw in Q2, on a year-to-date basis, our adjusted sales are down year-over-year less than 2%, with a decrease in fuel systems of 5.6%, largely offset by increases in aftermarket sales of 4.4%. Let me now bridge our adjusted revenue and adjusted EBITDA, which you can find on pages 10 and 11 in the presentation. For adjusted EBITDA, the quarter saw a negative volume and mix on sales of 8 million, or a 16% contribution margin. Pricing was positive 18 million in the quarter, while continued strong supplier savings and recoveries of 11 million offset increases in employee and other manufacturing costs of 10 million. Corporate costs increased by 5 million as expected, along with increased R&D and other spending of 3 million. Now for a quick recap of our balance sheet and cash flow. We have substantial current liquidity with cash and cash equivalents and available capacity under our credit facilities of approximately $1 billion. As Brady mentioned, in the third quarter, we replaced floating rate secured debt with the issuance of fixed rate unsecured notes due in 2032. This was the second refinancing we completed this year. And as a result, a portion of our debt maturity profile has been extended by four and a half years and with more favorable interest rates. Net cash from operations in Q3 was 95 million. During the quarter, we generated adjusted free cash flow of 60 million as we continue to be disciplined in management of our working capital and drive optimization of resources and processes on a daily basis. Capital spend of 25 million was less than 3% of sales in the quarter and was 3.3% year to date. We are projecting spend to come in just below our 4% target for the year. Now moving to slide 12. With respect to 2024 guidance, we expect the market softness seen in our third quarter results to continue into the fourth quarter and to be greater than previously anticipated. We are therefore revising our guide the adjusted sales range is now expected to be between 3.34 billion and 3.39 billion, while adjusted EBITDA is projected to be 470 million to 490 million, an EBITDA margin of 14.1% to 14.5%. The rest of our guidance remains the same as we shared in the prior quarter. With adjusted free cash flow and adjusted tax rate, coming in at the high end of the range. Overall, we expect solid earnings and cash generation in 2024 as we continue to drive operational efficiencies and search for new areas of growth in both segments. In closing, our team's unrelenting focus and ability to flex operations and overheads to meet changing market needs has enabled us to report a solid result. Our strong balance sheet provides us with financial flexibility to support our current and future growth initiatives. I am confident in our ability to continue to generate meaningful cash flow as the strategic actions we have undertaken are expected to drive sustainable growth. And as Brady mentioned, we are very focused on creating value for our shareholders, customers, communities, and employees. With that, we'll now move to the Q&A portion of our call.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We'll take our first question from Jake Scholl at BMP Paribus.

Hey guys, congrats on another strong quarter. So my first question is, can you just provide a little bit of color on how you're thinking about the outlook to markets, pre-run markets in the fourth quarter, and how we should really think about sales and earnings by segment.

Yeah, I think first on the outlook, our expectation is that things are going to be soft. I think in Q4, we saw some softness in Q3. I think it's kind of a tale of two halves. The first half was still relatively strong. Second half is being a little bit weak. I think that will continue a little bit into 25 before recovery.

It's mainly CV.

CV, light vehicle, I think is going to be kind of consistent. I think it may have a little bit of an uptick kind of next year. But again, I still think it's going to be relatively flat. From a margin expectation standpoint, we expect, as we've said, we continue to expect our aftermarket teams to have a good performance around 15% operating income and want our fuel systems group north of 10% and managing that on the downside from a revenue perspective. So I think if you take a look at the numbers, I think it's a little bit softer in Q4 versus what we saw in Q3 from a revenue perspective and just trying to hold our margins.

Thank you. And then, uh, so as you, as you, as you said, there was kind of a, there was a kind of market step down from, uh, the first half of the second half, uh, just kind of at the midpoint, uh, your guide implies a step down from about 248 million EBITDA to 232 in the second half. Uh, so how should we think about maybe that the second half of this year is a run rate into 2025 or, um, Thank you.

Yeah, I think as I mentioned, I think things are – our fuel systems is the one that's primarily affected. Our aftermarket continues to see, you know, solid year-over-year growth. I think the fuel system segment will continue to have, you know, soft sales similar to Q3. uh into into q4 uh and then i think it's just uh i think in 2025 what we're expecting is that cv will remain soft in the first half and whether it's q2 or q3 we're starting to hear indications that the recovery will then start on the cv side whether that's pre-buy for the north america um EPA 27 or other applications. And we also have some additional launches coming in the next year as well. So I think it's just going to probably be similar, a tale of two halves this year. First half was stronger, softer in the second. And I think next year will be softer in the first half and stronger in the second.

Great. Thank you. And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. We'll pause just a moment. And at this time, we have no further questions. I would like to turn the conference back over to Brady Erickson for closing remarks.

Great. Thanks, everybody, for joining. I know there's a lot of earnings coming out today. I know we have a lot of follow-up already kind of lined up with a lot of folks, but do appreciate you all joining. Looking forward to kind of continue our journey of delivering kind of consistent results and continuing to be financially disciplined in how we allocate our capital. And hopefully everybody has a happy Halloween. So stay safe. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.