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 second quarter 2025 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 would like to turn the conference over to Callan Ferris, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on Finneas' Investor Relations website, including a slide deck that we'll be referencing in our remarks. We are also broadcasting this call via webcast. Joining us today are Brady Erickson, CEO, and Chris Groff, CFO. 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. We caution listeners not to place undue reliance upon any such forward-looking statements. And with that, it is my pleasure to turn the call over to Brace.

Thank you, Kellen, and thank you, everyone, for joining us this morning. I will start with some overall comments on the second quarter and then provide some thoughts on 2025 and beyond. Chris will then provide additional details on our financials and discuss our 2025 guidance. We will then open the call for questions. Earlier this month, we celebrated the two-year anniversary of the spinoff from our former parent. We've accomplished a lot in that short period of time, expanding into new markets, establishing a strong foundation, refinancing our debt, and notably returning over $464 million of shareholders in the form of dividends and share repurchases. For all their hard work and dedication, I want to say thank you to our entire FINIA team. Now, our results in the second quarter highlight the strength and resiliency of our business in the face of a challenging and unpredictable environment. Before getting into the specific operating results and commentary, I want to highlight a few key messages from the quarter. We returned approximately $50 million to shareholders via share repurchase and dividends. Our balance sheet remains healthy. We're moving into new markets and winning new business, including conquests. We recently announced our first acquisition. Both segments performed well as we managed tariffs. And lastly, we were refining to a narrow 2025 guidance. Now let me discuss each of these in more detail. During the second quarter and for the first time since the spin, both aftermarket segment sales and fuel systems segment sales were higher on a year-over-year basis, albeit benefiting from favorable FX and customer tariff recoveries. It was still nice to see. Net sales in the quarter were 890 million, up 2.5% from the same period of the prior year. which included contract manufacturing or CMA sales. Excluding the impacts of foreign currency and CMAs that ended in 24, sales increased 1%. Both segments also had strong adjusted operating income performance. Aftermarket again over 16% and fuel systems returning above 10% to 11.5%. While the external environment continues to evolve, Our results reflect our strong operational execution, along with our diverse products, markets, and customers we serve, which drive more stable and predictable results. We reported adjusted EBITDA of $126 million with a margin of 14.2%, a 60 basis point year-over-year expansion. Our EBITDA margin expansion highlights the success of the actions we are taking, which include an increased focus on pricing, supplier cost savings efforts, and productivity improvements. Total segment adjusted operating margin was 13.4%, 120 basis point increase when compared with the second quarter of 2024. We are also starting to show solid progress on reducing our tax rate and have adjusted our expected range for the full year accordingly. Adjusted earnings for diluted share, excluding non-operating items as detailed in the appendix, with $1.27, up from 88 cents in the same period of the prior year. In an uncertain market, our performance in the first half was solid. Let me now provide a quick update on the impact of tariffs. Our strategy to source and produce in the same region where we sell to customers not only results in improved customer service, but also limits our exposure to tariffs. The diversification of our customer base and our geographic footprint puts us in an advantage position. To the extent we have direct tariff exposure, we believe we have substantially mitigated the current tariffs with customer price increases, tariff recoveries from OEMs, and supply chain initiatives. We still had a net headwind in Q2, but substantial progress has been made, and we expect further progress in Q3, including completing the necessary customer audits. As a reminder, The majority of our products produced in Mexico are USMCA compliant, and we continue to work with customers and look at our operations for ways to drive our compliancy higher. Our strong financial performance in the quarter is a testament to our team's disciplined execution in a highly dynamic environment. We remain nimble and focused on delivering positive revenue growth while managing costs in a deliberate manner and leveraging our global sourcing infrastructure could definitely respond to geopolitical and market uncertainties. Let us now move to slides five and six for discussion of new business wins. We continue to leverage our strengths, particularly during these uncertain times, offering our customers great products manufactured at state-of-the-art facilities, industry-leading SKU coverage, and order fill rates. Our well-recognized brands and high-quality products are helping us secure new customers and increasing share of wallet with existing customers. We are privileged to work with a diverse and innovative group of customers. Now let me highlight a few recent business wins on page five. New business award for gas direct injection or GDI fuel rail assembly and pump for a leading domestic Chinese OEM to be applied on new hybrid engine platform for multiple vehicle models within China and for a Brazilian market flex fuel E100 application. First GDI pump business with a leading North American OEM. A port fuel injection or PFI compressed natural gas injector for a major Indian OEM. Our first PFI application with this customer. Moving next to our aftermarket business, which is an important driver of sales. As shown on slide six, We're also winning both new business and expanding relationships with existing customers. We highlighted an aftermarket business win with a new diesel fuel injection service with major off-road equipment supplier in our earnings release. But as shown on this page, there were other key wins across product lines and geographic regions, including shared wallet gains with customers, growing our propulsion agnostic braking and suspension technology. The outlook is encouraging for non-discretionary aftermarket parts for the internal combustion engine market. According to industry reports, the average age of U.S. light vehicles increased by two months for the second consecutive year and rose to roughly 12.8 years, according to the same report. We're focused on leveraging our ability to offer a broad range of products for all makes and models, not only light passenger vehicles globally, but also light commercial trucks, medium duty trucks, and heavy-duty Class A trucks. Tariffs continue to cause uncertainty, but despite these challenges, we expect rational prices for our products from our customers. We remain committed to offering quality products and being a reliable partner. This, combined with exceptional value-added services, will continue to distinguish our company. Our expanded portfolio of innovative solutions has further diversified our end markets. As I mentioned on a previous call, we're now winning new business in the aerospace and defense industry, and we're actively pursuing additional opportunities across both military and civil aviation. To support this initiative, we recently exhibited at the Paris Airshow, our first time as an exhibitor. We are bringing our expertise for high-performance applications to this industry and are committed to becoming a long-term, high-value partner in the global aerospace supply chain. As a reminder on slide seven, our long-term strategy is to grow our CV industrial and aerospace OE business and aftermarket and service offerings, which currently account for 73% or roughly $2.5 billion of our revenues, while maintaining our light vehicle OE sales level at roughly $900 million through market share gains. Favorable long-term industry dynamics continue to bode well for the company and we're well positioned for sustainable top and bottom line growth. Now moving on to slide eight, capital allocation. Consistent with our capital allocation priorities to invest in our business for the long-term profitable growth, we invested $34 million in capital expenditures during the quarter. I'm also pleased that in June we announced our first acquisition with plans to acquire Swedish Elektromagnet Invest, or SEM, a 100-year-old leading provider of advanced natural gas, hydrogen, and other alternative fuel ignition systems, injector stators, and linear position sensors for the commercial vehicle and off-highway sectors. This strategic transaction brings together two industry leaders in alternative fuel technology. SEM also opens up adjacent market opportunities for us, as well as providing customers with a wider range of products and turnkey solutions. We will pay approximately $47 million for SEM, which is expected to generate approximately $50 million in annual revenue and approximately $10 million of annual adjusted EBITDA. We expect the transaction to close in the third quarter. Also on the capital allocation front, during the quarter, we returned $50 million to our shareholders, including $10 million in quarterly dividends and $40 million in share repurchases. We have $224 million remaining under the current repurchase authorization, and we expect to continue to look at what's best for our shareholders on a quarterly basis. Since the spinoff in July of 23, we have repurchased approximately 18.6 of the outstanding shares. We have a solid balance sheet with cash and cash equivalents of 347 million, and combined with our undrawn revolver, our total liquidity is approximately 850 million. Importantly, our net leverage ratio remained at 1.4, just under our 1.5 times target. Looking forward, global economic activity remains subdued, but we continue to perform well and are maintaining our full year outlook, which Chris will discuss in more detail. To wrap up, we're pleased with our solid first half performance and the momentum we carry into the second half of the year. This reflects the operational improvements we've made and continue to make throughout the business. Despite ongoing economic uncertainties, we are optimistic and encouraged by our team's execution. Looking to Q3, I look forward to another milestone when we compare our results to a clean numbers from Q3 of 2024, as we had substantially exited all TSAs and CMAs by then, along with all corporate costs being in place. With that, I'll hand it over to Chris, who will walk us through our Q2 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. Looking at slide four, our business and financial results were solid and in line with our expectations in the face of a challenging geopolitical economic environment. we generated 890 million in net sales, an increase of 2.5% versus the same period a year ago. In contrast to the first quarter, we experienced favorable foreign exchange tailwinds and began recovery of new tariff regimes from customers. Excluding the impact from foreign currency and contract manufacturing sales that ended last year, sales increased 1% year-over-year, reflecting the noted tariff recoveries and improved pricing. Our aftermarket segment sales were up slightly year-over-year, primarily due to favorable SX, tariff recoveries, and volume increases in the European aftermarket. This was partially offset by lower OE volumes in North America, mainly related to heavy-duty product lines. Fuel system segment sales were up 3.7%, including prior year contract manufacturing sales, or 4.7%, excluding the effect of contract manufacturing. The increase in fuel systems was also attributable to favorable effects and customer tariff recoveries. From a core business performance standpoint, our segments reported solid overall margins. The Q2 segment adjusted operating margin was healthy at 13.4%, up 120 basis points from the same period of the prior year. This was primarily related to favorable volume and product mix combined with positive supply chain savings offset by net tariffs and other costs. Our adjusted net earnings per diluted share in the second quarter were $1.27. which excludes non-operating items, which are described in the appendix of our presentation, and influenced by lower share count as we continued share repurchases. Moving to slide 10, adjusted operating income was 94 million, or 10.6%, up 90 basis points. Corporate costs were higher, mainly on increased employee stock compensation plans. The aftermarket segment margin increased 100 basis points, ending the quarter at 16.1%, benefiting from favorable product mix. This was partially offset by some slower customer tariff recoveries, which we expect to recover via pass-through to customers in the coming months. Q2 fuel system segment margins were 11.5%, up 140 basis points year-over-year, primarily due to supply chain savings productivity improvements, and favorable foreign currency impacts. Let me now bridge our adjusted revenue and adjusted EBITDA for the second quarter, which you can find on pages 11 and 12 in the presentation. Beginning with revenue. Compared to Q2 2024, FX was a tailwind of 18 million as the dollar weakened mainly against the British pound and euro. Revenue in the quarter also benefited from tariff recovery of $5 million. Overall, we saw strength in sales with an independent aftermarket in Europe, light passenger and light commercial vehicle sales in China, while commercial and heavy duty vehicle sales remain flat to down in all regions. Moving next to the bridge on slide 12. Adjusted EBITDA was 126 million with a margin of 14.2%, representing a year-over-year increase of 9 million and 60 basis points. Higher sales created a tailwind of 6 million in the quarter on positive product sales mix. Corporate costs were higher by 4 million, reflecting increased employee costs. Foreign exchange created gains of 8 million. Supplier cost savings were a tailwind of $6 million offset by net tariff cost of $2 million and other costs of $5 million. Now for a quick recap of our balance sheet and cash flow. Maintaining a healthy balance sheet is a priority for us and provides the financial flexibility to support our growth initiatives and capital allocation priorities. We ended the quarter with substantial current liquidity. Cash and cash equivalents were $347 million. while available capacity under our credit facilities remained at approximately half a billion dollars for resulting liquidity of approximately 850 million. Net cash generated from operations in Q2 was 57 million compared to 109 million in the same period of the prior year. During the quarter, adjusted free cash flow was 20 million compared to 108 million in the same period of the prior year. Working capital was negative in the quarter, as our aftermarket segment added strategic inventory to help ensure full product coverage over the busy summer season, in addition to timing for capital spend. We continue to remain confident in our ability to generate full-year adjusted free cash flow in the $160 million to $200 million range as noted, and reiterated in our 2025 outlook. Capital spend was 34 million or 3.8% of sales and 69 million or 4.1% of sales for the three and six month periods respectively. Funds were primarily used for investments in new machinery and equipment for new program launches. Now moving to slide 13 for a discussion of our 2025 outlook. As a reminder, more than 60% of our sales are generated outside of the US. And our strategy is to source and produce in the same region where we sell to customers, which reduces our tariff exposures. Also, as a reminder, we have not closed on the announced SEM acquisition, so our outlook does not factor in the proposed transaction. With all this in mind, we are refining our outlook on net sales to increase the low end from 3.23 billion to 3.33 billion. and keeping the high end of our range the same at 3.43 billion. This projection tightens our expected sales range and acknowledges the increased sales as a result of tariffs and foreign exchange, offset by continued softness in our CV business. Adjusted EBITDA and adjusted EBITDA margin are projected to be 455 million and 13.7% of sales, to $485 million in 14.1% of sales. Adjusted from our previous guidance of $450 million in 13.7% of sales to $490 million in 14.5% of sales. The performance of our segment gives us confidence that we can achieve our originally stated adjusted EBITDA. However, the addition of tariff revenue with zero margin will result in a slightly lower percentage of sales return. We project no changes to our full-year adjusted free cash flow guidance, which remains strong despite minor delays related to timing on tariff recovery. Our adjusted tax rate is now projected to be an improved 36% to 40% range from our original projection of 38% to 42%. As ongoing tax structuring projects gain traction and progress, we do not expect this will have a material impact on our cash taxes in 2025. Our diverse and global customer base continues to provide resilience to our business in the face of a challenging macroeconomic environment. This strong foundation combined with our performance year to date and our outlook for the second half gives us a high level of confidence in our trajectory for the remainder of the year. We remain extremely proud of the focus and execution demonstrated by our teams who continue to drive value for our customers and shareholders alike. We will continue to execute on our strategic priorities in operating with excellence and driving productivity. We are pleased with our financial performance to date. and are optimistic about the second half of the year as the teams are expected to welcome and work to integrate the SEM business into CINEA. In closing, we remain firmly committed to building sustainable value for all our stakeholders. Thank you all for your attention today, and we will now move to the Q&A portion of our call. Operator, please open the lines for questions.

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 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We'll take our first question from Bobby Brooks at Northline Capital Markets.

Hey, good morning, guys. Thank you for taking my questions. So it was really great to see such a strong bounce back in the business from the first quarter. And you guys touched on it a little bit, but I was curious if we could dive a little bit deeper on the dynamics driving that. Obviously, you guys had very good visibility on the bounce back, but maybe it was more so dynamics in the first quarter that were dragged and alleviated in 2Q. Just curious to hear more discussion on this.

Yeah. As we, as we kind of explained at the end of Q1 call, you know, things came back, uh, from the kind of the Christmas holiday shut down a little bit slower. Uh, and it took a little bit of a while to kind of, for folks to kind of ramp up as they did some inventory adjustments. And we kind of saw that, uh, and tried to communicate that into Q1 and which is why we had confidence in us still hitting, you know, our, our, our H1 kind of expectations, uh, and with what the order board that we saw for, for Q2. Um, obviously he had a little bit of benefit with, uh, with FX, uh, a little bit of benefit with terrorists. But again, we saw some of that already coming in, uh, at the end of Q1. So we, we continue to see, you know, good momentum going into the second half as well, which is why we, we upped the lower end of our revenue guide as well.

Got it. Um, and then, so you mentioned you hosted the booth for the first time of the Paris air show during the quarter. I was just curious to hear what were the conversations like there and maybe remind us on the timing and what exactly are some of those aerospace certifications you're working towards this year for launching your first product or producing your first products in the fourth quarter?

Yeah, we've got our first launch in the fourth quarter, our second launch in Q1 of next year. Things are progressing well. I think at the Paris Air Show as well, we got our kind of first piece kind of plaque from our, from our customer. Saffron is the one that we're working with. And so had a great meeting with them as well as great meetings with a number of other folks while we were there. Our certification process is going well. We had another audit here this past month or actually earlier this month went well, and we're just kind of going through that process. And so we're on pace to get, you know, fully certified and approved and You know, I think the final certification will come a little bit after SOP because they want to see some of the production going through, but everyone's very confident and excited about our progress so far.

Got it. And then could you just, for my last one, could you just dive a little bit deeper on the strategic rationale behind the SEM acquisition? Do you guys see significant cross-sell opportunities to your current commercial vehicle customer base? And maybe how should we think about the growth opportunity with this? Because it seems like a really unique technology you could leverage.

Yeah, I mean, obviously, they're focused on a lot of alternative fuels, you know, hydrogen, natural gas, and others. That's an area where we have a lot of fuel injection, and we have the engine control unit. We have a number of applications and test engines that we have going on or with customers that has the SEM ignition system, our injection system, and our ECU that's controlling the calibration of both the ignition as well as the fuel injection. And so we see this as a nice opportunity to provide greater system solutions for our customers because we're already doing a lot of the calibration work on these components. And so this is a way for us to, you know, provide better service to them. And two, SCM is a small company and they've had a difficult time, you know, expanding globally. And so we can leverage our existing manufacturing sites, our existing engineering teams that are in all of the different regions to support customers locally and accelerate their growth. Our view is that on the commercial vehicle and industrial side, you know, alternative fuels, more carbon neutral and carbon free fuels are a good trend. And so we see opportunities for this product line to continue to grow along with our alternative fuel injection systems.

Appreciate the call as always, Brady. Thank you very much. And I'll return to the queue. Thank you.

We'll move next to Jake Scholl at BMP Paribas.

Hey, guys. First, I just wanted to ask about the Ford recall announced in the quarter. So Ford announced a recall of 850,000 vehicles for a potentially faulty fuel pump. Finia was the supplier named in the recall. So could you talk about just any impact you expect to have on your financials this year from the recall? Thank you.

Yeah, I mean, there's nothing. We've updated our We didn't update our disclosures, and there's really nothing for us to kind of say. I think this is a Ford issue. They made a decision. They're working with NHTSA on that decision, and we're comfortable with our numbers at this point. Any specific questions on, you know, the cause or why, we would reference to the Ford Motor Company.

All right. Thanks, Brady. And then can you talk a little bit about your capital allocation intentions for the rest of the year? You did $42 million in buybacks in the quarter when most of the suppliers didn't do anything. And we also have the SEM acquisition closing later this year. So how do you think about repurchases for the remainder of the year? Thank you.

Yeah, I mean, just to clarify, I think the total was actually 40. I think there was 2 million of tax, I think, on there, the excise tax. that comes with some of those buybacks. But, I mean, again, as we mentioned in the call, we're going to continue to look at it. You know, we still have a very strong balance sheet. We have plenty of cash. Cash flow was a little bit, you know, lighter than we wanted in Q2 because of some of the working capital, but we're confident that we'll work through that throughout the year. And so we'll still have, you know, plenty of cash flow even after the SEM acquisition. We're still under our leverage target as well. And we still feel that, you know, as we purchased in the quarter, we thought it was, you know, a good investment for shareholders to continue to purchase our shares at these prices. So I think we'll continue to look at it on a quarterly basis and take a look at our cash flow and our expectations and make a decision, you know, on our repurchase plans for the quarter. But I think we've mentioned in the last one, I don't, SEM is not going to, I mean, it'll take some of our cash, but it's not, it's maybe a typical one quarter of our cash flow. And so we don't feel pressured on our cash or our balance sheet at this point.

All right. Thanks, Brady.

Thank you. And as a reminder, if you would like to ask a question, please press star one. We'll go next to Joseph Spack at UBS.

um good morning uh everyone um i guess just uh chris maybe just uh uh confirm i'm just going through some of the notes you said um the tariff recoveries was you said you know um six i'm sorry i think you said about six or five million recoveries i i'm my notes actually a little bit uh um a little bit uh shaky here but i just want to confirm that that was related to tariffs And then you said the net tariff was minus two. So are you talking about the same thing there when you're talking about recoveries and the net tariff, Edwin?

Morning, Joe. So the total tariff is, I mean, you can see it in our queue pretty clearly. In the quarter, we recovered $9 million, and then we had $11 outgoing. So that's the net of two negatives. Um, that combines with the 4 million that we had in Q1. So we, um, we see we're going to get it back all full year, but, uh, so right now, I mean, so 9 million is the starting point for starting to recovery, but there's just a little bit that's lagging.

Yeah, I think the team did a good job. I think we closed the gap. I think, as I mentioned, we're, we still got a little bit of work to do here in Q3 to kind of finalize that out. But team's making good progress. Just a one note, I don't think the queue's out yet, so you may not have the queue. Oh, true. Sorry. So, sorry about that, Joe.

I live in my own world.

Well, yeah, so then I guess, okay, yeah, so I guess, okay, so that, then if I like to like slide, okay, 12, how does that, you said supplier savings are recovering 6 million. So, I guess, how does that sort of tie into sort of the numbers you just gave? Like, that's sort of where I'm confused.

Supplier savings is just GSM material savings. So, that is not the same thing. Then if you go down, it says tariff cost net of recovery of two. So if you go to the preview, I mean, so we're not laying out the tariff in here. When the queue comes out, you'll see it very plainly because it's in the walk. So here it's a little bit more, but the supplier savings is literally just our GSM guys, you know, working on cost savings and material cost down.

Okay. Okay. And then... I guess since the queue is not yet out, but Brady, in relation to an answer earlier about the fuel pump issue with Ford, you mentioned you updated your disclosures. Is there anything else you could tell us there? Was there a change to your accrual balance? Just broadly, When issues do arise, how does the rule of thumb for like who's responsible for what works, like parts versus labor, or is that just a negotiation with your customers and maybe NHTSA?

Yeah, I guess in the queue, there's no change to our disclosures and no change to our expected accruals. They're kind of in line. This is just unique in the fact that it's public. There's a lot of different discussions we have with customers. And it's a complex system. And so we were just gotten involved here just recently in that. And we'll leave it to Ford to kind of have any specific response to that. But at this point, there is no change on our side.

OK. But is that conversation with Ford finalized at this point, or is that still an ongoing discussion?

I mean, they haven't announced a fix yet, so they don't have a solution of how they're going to solve it. So it's still an ongoing discussion, as we have many ongoing discussions in general.

Okay. Thanks so much, Tim.

Thank you. Thank you. And that concludes our Q&A session. I will now turn the conference back over to Brady Erickson for closing remarks.

Great. Thanks, everybody. Thanks for the questions. Really appreciate it. And again, just want to thank all of our employees around the world. A good solid quarter. We're kind of taking a look at things and, you know, I think it's one of our revenue-wise, one of our best quarters since we've spun. Really good EPS from the team as well and really good solid performance in a relatively challenging market. And we expect to continue to operate in a very efficient manner kind of going forward and really, really thank the team for that. So thank you very much and we'll talk to you soon. Thank you.

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