Phinia at BofA Securities Automotive Summit: Strategic Expansion Amid Tariff Challenges

On Tuesday, 15 April 2025, Phinia Inc. (NYSE: PHIN) presented its strategic initiatives at the BofA Securities Automotive Summit 2025. The company outlined plans to mitigate tariff impacts while expanding its aftermarket business and diversifying into new sectors. Despite challenges, Phinia remains optimistic about its growth prospects, leveraging its strengths to navigate market fluctuations.

Key Takeaways

• Phinia aims to grow its aftermarket business to over 40% of total revenue by 2030.
• The company is expanding into commercial vehicle, off-highway, and aerospace sectors without increasing R&D or CapEx.
• Tariff impacts are estimated to be manageable, with significant exemptions and compliance measures in place.
• Phinia plans to achieve $5 billion in revenue by 2030 through organic growth and acquisitions.
• A focus on reducing the tax rate to below 30% and maintaining a strong balance sheet is emphasized.

Financial Performance and Capital Allocation

Phinia has set a long-term revenue target of $5 billion by 2030, with organic growth expected to be between 2% and 4%. The company plans to generate approximately $700 to $800 million in revenue through acquisitions. CFO Chris Rauff highlighted a strategy to reduce the company’s tax rate to below 30% over the next few years. Phinia aims to maintain a net leverage ratio of 1.5 and a minimum cash level of $200 to $250 million, even during economic downturns. The company allocates around $40 to $50 million of free cash flow to dividends and is initially focusing on smaller, bolt-on acquisitions.

Operational Updates

CEO Brady Erickson emphasized the growing importance of Phinia’s aftermarket business, aiming for it to exceed 40% of total revenue by 2030, potentially reaching 50%. The aftermarket segment, which is more profitable than the fuel systems sector, is expected to provide stability against market fluctuations. Phinia is leveraging its existing capabilities to expand into commercial vehicle, off-highway, and aerospace sectors, securing new awards in aerospace and converting existing lines for off-highway applications.

Tariffs and Market Disruption

Phinia estimates the impact of tariffs to be in the "tens of millions" rather than "hundreds of millions," thanks to various exemptions and compliance measures. Approximately 70% of the company’s revenue from Mexico is USMCA compliant, and commercial vehicle components are often exempt from higher tariff rates. The weakening dollar is expected to provide a translational tailwind, as two-thirds of Phinia’s sales occur outside the U.S. market.

Future Outlook

Phinia is strategically positioning itself as a reliable partner for both original equipment and aftermarket customers, as competitors reduce their exposure to combustion-related technologies. The company is also preparing for regulatory changes that could impact commercial vehicle replacement cycles. Phinia’s focus on propulsion-agnostic aftermarket products, which now account for 25% of the portfolio, enhances its resilience to market shifts.

Conclusion

For further details on Phinia’s strategic plans and financial outlook, please refer to the full transcript below.

Full transcript - BofA Securities Automotive Summit 2025:

Unidentified speaker: Good afternoon, everybody. Today here with us, we have Finia, and we have the CEO, Brady Erickson, and CFO, Chris Rauff. Finia is a global supplier of automotive parts, commercial vehicle parts I mean, fuel system, not parts, sorry, and aftermarket parts. So the question that everybody’s asking is what about tariffs? And I have to ask you the same question.

Could you break it down for us and how you think about tariffs both for your fuel system and aftermarket?

Brady Erickson, CEO, Finia: Sure. I think I think when everybody heard the tariffs come out and you take a look at our America’s revenue of about 1,300,000,000.0, the initial shock, you take the 1.3 and you multiply by 10 or 25%, and I think people’s hair No. Kinda catch on fire and know, it’s the end of the world. And then you start breaking it down into its pieces. A couple hundred million of our of our Americas revenue is in Brazil, so you knock off that couple hundred million, another hundred million of reman, in The United States.

You knock that off, and that gets us down to about a billion dollars of revenue that we produce in Mexico. Well, then you gotta start breaking it down from there and say, well, half of that revenue actually stays in Mexico. And so we’re not gonna be the one subject to the tariff that goes directly to our customers. And so we’ve done the virtual pedimento, which allows us to do it virtually and not have to do the tariffs, and so that knocks it down by half. About 70% of our total in Mexico is USMCA compliant, so that knocks it down even more.

And then we also have the commercial vehicle is actually exempted. And so although the HTS codes are the same between commercial vehicle and light vehicle, but there’s a, I think, section 99 subsection B, whatever that says, hey, if it’s for a gross vehicle weight over 6,000 pounds or commercial vehicle, you can then go back to the normal 10% tariff rather than the 25% tariff until that knocks it down. Then oh by the way, it’s not on revenue, it’s on cost of goods sold, that knocks it down even more. So now we’re down into the tens of millions, which is a lot more manageable than hundreds of And we’re working with customers. I think we have a good process in place.

They’re already starting the audit process to go through the numbers to understand it. And again, I think we’re in a very strong financial position that, you know, we don’t have to be overly aggressive in order to get the money quickly, but we are going to make sure that we get our recoveries. So we’re working with them on options to further reduce it, But it’s no worse than COVID and the inflationary costs that we went through a few years ago, and we’ll continue to work with our customers to manage it.

Chris Rauff, CFO, Finia: The fact that you said it was a 10% normal, you go to the 10% normal tariff tells you where we’ve come.

Unidentified speaker: We’re not super normal right now.

Unidentified speaker: That’s a good walkthrough because I think people are overestimating the amount of impact.

Brady Erickson, CEO, Finia: Well, think it’s, as we mentioned, the 10 to 20, we were joking about it, now we’re talking about 70140%. And now if you tell people that we’re going to settle at 10 to 20, they’re like, wow, what a great solution. It’s only 10 to 20, it’s something we can manage. And so I think we’re going through that. I think also to kind of remind folks as far as our light vehicle OE business in the North American market is only 15% of our revenues, and so if that market is down 20% because of tariffs and volume and everything else, it’s only a 3% global hit.

And we’re seeing, you know, Europe remains strong for us. We’re seeing some some positive numbers out of there. China’s looking good. Southeast Asia’s looking good. South America, our aftermarket continues to remain consistently strong.

And from a translational standpoint, the weakening dollar from a translational standpoint is gonna be a big tailwind for us because two thirds of our sales are outside of The US market.

Chris Rauff, CFO, Finia: And we are having the discussions with our customers to pass through. I mean, that’s the expectation is a % of the tariff goes through, because it’s not something that we can bear for sure.

Unidentified speaker: Yeah, basically, the impact from tariff is is small, but as you said, the there might be market disruption on the volumes, but you have a very large aftermarket component. Mhmm. And I would assume that people, if they cannot buy the immediate term of new vehicle, will fix it, so they will buy more aftermarket. So how should we think about that business of yours? I mean, how do you sell also these aftermarket products?

What’s the channel?

Brady Erickson, CEO, Finia: Yeah, mean we sell through all different channels, and so whether in US market are we working with the NAPAs, the O’Reilly’s, AutoZones? Yes, we are. We also work through the large distributors, and we also have some direct to consumer as well depending on the product. And so that’s kind of The US market. In Europe it’s probably more the large master distributors or buying groups, the LKQs of the world.

So we’re not restricted on any one. So we actually, probably a third of our aftermarket revenues are going through the OEs, through the OES channel. So it’s about 10% of our revenue. So we’re going through them as well as a lot of different distribution channels, not only with our OE product, but also with all makes and services and support and test equipment and the such as well. And

Unidentified speaker: if I remember correctly, you expanded the amount of SKUs that you’re selling, and you are diversifying into propulsion agnostic components, I mean, parts. So what’s the plan? I mean, how do you see aftermarket evolving in the next, you know, three to five years?

Brady Erickson, CEO, Finia: Mean, see an aftermarket as probably the largest portion of our business going forward. It’s already 34%. We see that continuing to grow kind of in all markets, and we see any acquisitions that we’re going to do, it needs to be a product line that has a good aftermarket, that’s going to have, two to four parts over its lifetime after the OE part, and so it’s going to provide a good aftermarket. And we’re looking at 100% pure aftermarket companies as well. As we’ve highlighted, we wanted to see our aftermarket by 02/1930 at over 40.

I see a pathway of us getting closer to 50. And I think that would be a nice balance for our organization because as we’ve seen last year, when fuel cells or fuel systems was down 3%, aftermarket was up 3%, but because aftermarket was a smaller percentage, we had a little bit of headwind there. And so getting at 50% or more, I think would be a nice position to be at. The combustion engines, vehicles in operation continue to increase and average age decreases. So we don’t see any headwinds from that.

And with that being said, our propulsion agnostic aftermarket is now at 25%. It was close to 20% a year or two ago. So we’re still seeing a lot of growth and adding a lot of those new SKUs is adding a lot of propulsion agnostic you know, aftermarket force that we don’t care where the market’s going, whether it’s going better electric plug in hybrid, range extending, or just pure combustion. And so that’s adding a lot more resiliency to our aftermarket as well.

Chris Rauff, CFO, Finia: And at a segment level, aftermarket is more profitable. So even if it is a smaller piece, is balancing out everything if fuel systems goes down.

Unidentified speaker: Is it possible to see some opportunities within that from an organic standpoint, also from inorganic? Are there assets you could take a look at and buy?

Brady Erickson, CEO, Finia: Oh, absolutely. We’ve got a long pipeline of things that we’ve been looking at, but we’re being financially disciplined in what we’re willing to pay and making sure it’s a right fit to our portfolio. You know, adding, you know, people ask, we want it to have CV and industrial and aerospace exposure, a large aftermarket exposure, but it also wants to be somewhat synergistic with our existing portfolio. So doing instrument clusters doesn’t make a whole lot of sense because it doesn’t have a good aftermarket that goes with it, and there’s not a lot of operational synergy. So, you know, products that are part of the overall combustion system, that have precision machining, fluid management, systems, calibration influences, low voltage electronics, those are areas that I think we can leverage and there’s a lot of different assets out there.

And I think there’s going to be more interesting assets out there as the year goes on. And so we think there’s some interesting opportunities out there.

Unidentified speaker: And you said that light vehicle is still a fairly large component of your sales and revenue, but you are diversifying away from that, and you’re creating expanding your footprint in commercial, and you’re considering off highway and even aerospace. So what allows you to do that? I mean, you talk more about your expertise and your capabilities in fuel system and what allows you to do this versus the competitive landscape?

Brady Erickson, CEO, Finia: I mean first is we’re not exiting light vehicle fuel systems. We like the business, we think we can keep the revenue at $800,000,000 a billion dollars and keep those plants full and running. So we’re continuing to develop next generation technology, 500 bar alternative fuels for that light vehicle, but we just see it as a relatively flat revenue over the decade. As the market goes down a little bit, we’ll pick up some share. So we like that portion of the business because it gives us some good volume that we can then leverage and use those capabilities to enter these new markets.

And the strategy that we have is really leveraging our existing human capital and our manufacturing capital to enter these new markets. And so what’s clear is the engineers that we have that were developing light vehicle diesel and GDI are the same engineers that were applying to aerospace and applying to off highway and industrial applications. And so in many ways it’s not a light vehicle GDI capability, it’s precision fluid management and system control capabilities.

Chris Rauff, CFO, Finia: Including alternative fuels.

Brady Erickson, CEO, Finia: Right, and so that whether it’s using sustainable aviation fuel that we’re managing or ethanol or methanol or ammonia or diesel or natural gas, we’ve got that core competencies. We understand how to do coatings, precision machining, and we’re leveraging a lot of those core competencies that go in those new markets. And that’s why we’ve communicated to folks that, you know, as we enter these new markets, we don’t need to increase our R and D as a percent of sales. We don’t need to increase our CapEx as a percent of sales because we’re able to move our existing human capital and manufacturing capital. We’ve converted a lot of our manufacturing capital that was doing light vehicle.

It’s now doing off highway and aerospace. A lot of the same lines. We can just kinda convert them over and be very very efficient in how we’re using our capital.

Unidentified speaker: And how would you say that your competitors are operating in this environment? Because one of the concerns, at least when you went public, was like, yeah. Light vehicles are going to be under heavy pressure from BEV. Mhmm. But because you’re a pure player in this space, you’re laser focused on executing.

So can you talk more about how you’re approaching these markets versus your competition?

Brady Erickson, CEO, Finia: Yeah, mean, customers want both on the OE side and on the aftermarket side, they want a supplier they can count on for decades to come because they have to be able to service these vehicles. Light vehicle, maybe another ten, fifteen years after production. Commercial vehicle, they want someone’s committed for thirty to forty years after OE production. And if you look at some of our competitors’ websites, you can’t find fuel systems on their website. They’re even communicating that they’re trying to exit and reduce their exposure.

So do you want to pick them as your long term supplier or someone who’s really focused on continuing to invest in next generation technology for the combustion side of things. And so that’s where I think we’ve seen a lot of shift towards us, people knocking on our doors, asking us to quote on new business that maybe others are walking away from, because their capital allocation strategy is putting it into infotainment or semiconductors or other things, and therefore they’re starving maybe some of the combustion side. And so we see ourselves as a very reliable and trustworthy partner, both on the aftermarket side as well as on the OE side.

Unidentified speaker: The trend is actually your friend right now because EV is, in the future it’ll certainly be here, but it’s absolutely a lot slower than people predicted. Each year it just gets pushed out.

Brady Erickson, CEO, Finia: Yeah, and again that was after probably eight years of people increasing their estimates of what EVs were going to be, and now they’re consistently decreasing. When we were spun off, we were trying to convince folks that, hey, EV is not going to 100%, and we were laughed at, and we couldn’t get debt, we were wrong type of thing. EVs are gonna continue to grow and share. They’re just, in my opinion, they’re not going to a %. I think we’re already starting to see that plateau a little bit in China.

You know, they’re pure we gotta always remind people, don’t say electric vehicle, say battery electric vehicle to make sure that people are clear because they’ve mixed those two terms up. And so their battery electric vehicle in China is kinda starting to plateau a little bit around that 25, 30 percent level. Yep. Is that gonna be the global average moving forward? Maybe.

But I don’t see it going over 50 anytime in the next couple of decades.

Unidentified speaker: I think The US is like eight or 9%.

Brady Erickson, CEO, Finia: Currently,

Chris Rauff, CFO, Finia: yeah. But even when we were spending two years, two and a half years ago or two years ago, two years ago, we were having some of the Chinese big OEs that are considered pure EV coming to us and asking us for injectors because they needed a hybrid, a plug in hybrid to put into their portfolio. That was two years ago. We’re finally starting to see that in The USOEs where they’re starting to add more hybrids back into theirs because they realized, okay, hopped too quickly. We also had a quote that we wouldn’t go down on price.

We lost the quote about a year, eighteen months ago. They’ve come back because the supplier that went with them, they went with said, Well, I’m not going to commit to you beyond 02/1930. And they said, We can’t do this. Our plans are longer than that, so now that’s coming back to us. It’s interesting.

If

Unidentified speaker: I could inject on the hybrid side, how does your portfolio play with not BEV but a hybrid vehicle?

Brady Erickson, CEO, Finia: It has a combustion engine, whether it’s hybrid, plug in hybrid, or disappear combustion. Generally it’s a GDI type system and we support it. And so in some cases there’s applications that the same part goes into their combustion, that goes into a hybrid, that goes into a plug in hybrid. Our parts may not change Because again, a lot of those applications they still need the engine to provide full power at times, and so the power requirements and the performance is still there. The biggest change for some of the hybrids and plug in hybrids is some of the transient response.

They can use the electric motor to help on the stop start, they can help it for launching some of the transient response, but that’s really not going to have an effect on our fuel injection system. It may have an effect on other components.

Unidentified speaker: A good attribute. And so and that’s on the light vehicle side. I would assume that on the commercial side it’s even harder to go electric. So sounds like that you have a much longer tailwind there also in terms of aftermarket.

Brady Erickson, CEO, Finia: Yeah, absolutely. Again, I mentioned, the commercial vehicle, you have the aftermarket for thirty years after production, that they want to keep that fleet up and running. Even before Respun, we were being selected for a fuel injection system for a large CV customer, and their point to us was that, hey, we’re looking for a supplier for 2,040 and beyond to supply them fuel injection systems. They fully believe that combustion engines and even diesel engines are going to be a large portion of the commercial vehicle fleet for decades to come.

Unidentified speaker: So basic and we we discussed earlier that some of the OEMs are also pushing the the existing programs for longer. How does that play for fee? I mean, are do you get more pricing? Are you able to basically lever the depreciation on those programs better?

Brady Erickson, CEO, Finia: Yeah. I mean, even even if they’re extending them, there’s always gonna be some little amount of of renewal or upgrade, you know, as far as a performance standpoint. I think now with tariffs and supply chain challenges and everything else, there’s always going to be, you know, new supplier launches and revalidation to kind of drive productivity. I do think we’ve gone from a from a state of customers expecting two, three, four percent annual AIFs to now, hey, we’re kinda okay. Just keep it flat, you know, over over the life of the contract.

And so we are seeing some changes there, and I think that’s primarily due to because, you know, we don’t see this increasing volume. So they could push the volume when we had, you know, 4%, you know, light vehicle combustion volume increases, they could drive more productivity and get more AIFs. But I think on some of these programs, now the AIFs are being pretty much eliminated. And, you know, we’re not giving AIFs because we’re offsetting inflation because there may be less productivity that we can drive and additional AIFs from our supply base. So I think it’s becoming in many ways closer to commercial vehicle partnerships.

Think with light vehicle OEMs, they know that we both need to be successful and profitable. In our space, you know, overall competition is declining, so it’s not as if they’ve got 10 to choose from. You know, there may be one or two to choose from. And so I think it’s causing the relationships to be a lot closer and more collaborative. And I would

Unidentified speaker: like to touch upon off highway in the aerospace. For aerospace, you just won two new awards, and you should be certified by the end of the year if I’m learning correctly. So how are you tackling that market for the off highway? I mean, why didn’t you enter into that market just ago, for example?

Brady Erickson, CEO, Finia: Well, think, again, our prior parents, you know, they were light vehicle focused, and maybe they worked on some commercial vehicle and some off highway, but everything was really driven and focused on light vehicle. I think when we looked at our portfolio of products when we spun, it was a much different portfolio than our prior parents. And I think you see that with a third of our revenue at aftermarket. CV is significantly higher as a portion of our sales. And just to clarify is is we do have a lot of off highway in industrial companies now, whether it’s Polaris, JCB, Caterpillar, John Deere.

We’ve been with those players, but they just haven’t been highlighted or talked about. And it hasn’t been an area where people are saying, hey, let’s try to grow that business. We we got the business or took it because, hey, it was just available, but now I think it’s really one of our focuses to grow it and ensure that we have the right product portfolio to support those customers. And that’s one of the good examples where we converted one of our light vehicle GDI lines to kind of a poor man’s direct injection low pressure application. So it’s a GDI for diesel.

So it’s a three fifty bar system that we’re using the same basic design, but we’ve converted from gasoline to diesel, and it’s for off highway applications. As they start going to tier four and tier five emissions, they need to upgrade from their legacy injection systems that are thirty, forty years old, and now they’re going direct injection in common rail, and they’re getting a significant amount of fuel efficiency, which is not as important to them, but a significant reduction in emissions and improved performance is really advantageous for them.

Unidentified speaker: So for commercial and also light vehicle it’s important, the regulation on emissions, and given the latest developments, especially in The US, what should we think about in terms of replacement cycles for commercial vehicles? Do you think that there is some the pull forward of demand is going to be delayed because some of these regulatory requirements are changing?

Brady Erickson, CEO, Finia: Yeah. I think going kind of going into the end of last year, there was still an assumption that we’re gonna have a pre buy of some sort in The US latter half of this year. I think our expectations are probably tempering quite a bit. I think the hockey stick, we still think the revenues are going to or the volumes are going to go up from where we are in Q1 and Q4 of last year, but it’s maybe not going go up as much. And I think that’s for a couple of reasons.

Obviously, the fleets are a little bit concerned on demand. Are we going into a recession? Do they want to finance, you know, a bunch of new trucks? And I think people are moderating the impact of the next generation of emissions. I still think it’s going to go into place, but I think the cost impact and the potential impact on fuel economy, they’re coming to a realization that it’s not that different.

And therefore, if you’re not, if the new vehicles may even be more fuel efficient, you don’t need to pre buy because there’s not a detriment for going to the next generation, which is very different than, you know, the consent decree that came out, what, 02/2001, ’2 thousand and ’2, where the next generation, because they had to rush through EGR and a bunch of other emissions devices, they were seeing a 7% fuel economy hit. And so of course they did a lot of pre buy because they didn’t want those less efficient applications that have, you know, also had lower reliability.

Chris Rauff, CFO, Finia: Any kind of pause in the OE buy is obviously going to help our service and aftermarket because they are going to have to replace those. It all depends on how much they’re on the road. As long as they’re driving and they’re putting miles on those injectors, at a certain point you do have to do a replace.

Brady Erickson, CEO, Finia: Whether it’s a new vehicle driving miles or a used vehicle driving miles Yeah. Is the key for us.

Unidentified speaker: What’s the typical replacement for truck, like a commercial truck, during the lifetime, I don’t know, two, three times?

Brady Erickson, CEO, Finia: Yeah. At at least. Because, again, they’re doing, say a heavy duty truck is doing upwards of a hundred thousand miles a year, you know, and so, you know, if these things are going anywhere from, you know, four or 500,000 miles before they’ll do a full engine rebuild, which will include the injectors, and again, what’s kind of interesting is we actually sell our injectors in six packs. And so rather than getting the beer, can get their six pack of injectors and they’ll do

Unidentified speaker: the

Chris Rauff, CFO, Finia: have a beer too, just don’t recommend doing

Brady Erickson, CEO, Finia: the best of it’s against the same thing with a lot of the aftermarket is the bulk of the cost of that repair is not necessarily the injectors. It’s the labor and the downtime of that vehicle. And so that’s why they generally replace all six rather than try and replace one or two. They’ll just replace them all to make sure that everything’s right and continue to go forward. The same thing is true of, you know, in the aftermarket on the light vehicle side.

If you look at your repair bill for your vehicle, if you need to replace some injectors, the largest portion is going be labor. And so if the injectors, you know, if the parts are $200 and it’s a thousand dollars in labor and now the parts are $2.50, it’s not gonna change the consumer’s question of whether they change the injectors or not. And so that’s they’re going be shocked by the labor, they’re not going be shocked by the parts. And you know, in our case, again, you’re tearing apart the engine you don’t want to replace one or two injectors if you got that much in back. They’re going to change the whole set.

And our parts are non discretionary in the fact that if the injectors aren’t working your vehicle’s not running. And so it’s not as if they can say well I’m going to delay later, well that means you’re not driving.

Unidentified speaker: And one of the strengths that Fenia has is the brand in the aftermarket part. Do you leverage your brand, the Delphi brand, across the geographies?

Brady Erickson, CEO, Finia: Yeah, mean it’s a global brand, I mean you put Delphi in about any component and people are going to think it’s OE quality because probably at one point in their career or lifetime Delphi made that part, And so whether when we add it to steering and suspension, we don’t make it, but we buy it, but we still qualify it to our OE specifications. We put a Delphi label on it and we can get a premium for that product. A lot of our customers are asking us to even say, hey, even raise the price because you have a premium brand. The way that we also draw it from the mechanics and the workshops is we have a lot of YouTube videos and training. We have a lot of, if you look at some of our LinkedIn links as well, we’ve got training centers that we’re certifying.

A lot of these technicians are flying people in from all over Europe to come in and get certified at our locations, not just on our products, but how to properly and safely disconnect the battery, how to disconnect a plug in hybrid, how do you service it? So we do a lot of work that’s continuing to build on that brand and that reputation, and they know that we’ve kept our first time fill rates at north of 95%, so they’re saying, hey, we know we can get it, we know it’s good quality, it’s OE, and I know when I fix it, it’s gonna get fixed right, and these guys are helping me ensure that when I do a repair for the mechanics, they know they have the right tools and support in order to do it correctly.

Unidentified speaker: And from what I remember, most of your sales in aftermarket are North America and Europe, and, usually, they are still is they have a small footprint. What what what’s your your plan? Are you planning also to have a similar growth in in Asia and have I don’t know. And how would you do that? Do you want to increase the parts that you offer or you try to leverage the brand also in that region?

Brady Erickson, CEO, Finia: I think it’s all of the above, whether it’s continuing to add SKUs. I think it’s a different market because the average age of the vehicle in China and Asia is much younger. I think the competition, technology there is still a lot older. I mean, there’s still a lot of PFI where there’s a lot of competitors, the market isn’t nearly as robust. I think once it starts going to more direct injection, then I think we start to have a lot more advantage to where they’re gonna really don’t have a choice other than going with one of the big three that provide that product, and so I think it’s gonna take some time for that car park to kind of further age in the amount of miles.

There is a lot more competition in China locally. Obviously IP regulations are a little bit different, a little bit more lax, and so you can get competitors coming in maybe a little bit faster using your IP. But we still have a dedicated team there. Still see a lot of growth, you know, outside of China as well, but we think it’s just a less mature market.

Chris Rauff, CFO, Finia: But to be clear, right now there’s no one that we’ve found in China that can do injectors, because it’s a very complex part to do. Also, it’s a fragmented market. They don’t have in China surprisingly yet an AutoZone, an LKQ, or any kind of buying group. That market has not matured to the point that they actually have that kind of

Brady Erickson, CEO, Finia: Do it yourself, and again, Delphi was a little bit late on the fuel injection business getting into China, and so I think our main competitors were there a lot sooner, and so we’re still probably in the last ten years and still kind of ramping up. And so the age of our products is still probably much younger than most But as Chris mentioned, if you have the direct injection business, you’re going to get the service business because it’s difficult to do a drop in replacement. With that said, the average cost of vehicles in China is a lot less, and so whether to repair or not repair and how much they’re willing to spend to repair changes quite a bit too. Mhmm.

Unidentified speaker: And so in the aftermarket, I would assume that at least for the fuel system part, you’re the manufacturer. But for the propulsion agnostic, like suspension steering, you you make you you blend your sourcing, maybe part of a source, then the other one is made by you. So going forward, if you want to push the expansion of the aftermarket business, what would you focus your attention on? Would you rather buy or, like, build facilities to manufacture these parts, or you would rely more on third parties?

Brady Erickson, CEO, Finia: I think the from an acquisition standpoint, if we do an acquisition in the aftermarket, they need to have manufacturing. Buying a distributor, I don’t think makes a lot of sense for us. We can do it on our own. If I say, hey, I’m gonna hire 10 more engineers that I want you to launch another rather than 3,000 SKUs, I want you to launch 5,000 SKUs, we can just do that. So buying someone who’s just a distributor doesn’t make a whole lot of sense for us.

We can do that more organically. I think if we do an acquisition and or vertically integrate, you know, adding some manufacturing capability makes sense. Right now about 50% of our aftermarket revenues comes from our OE plants. You know, we produce it and that generates about half the revenue. The other half will buy from third parties during suspension braking, and we’ll use third parties to ensure that we’ve got 95% coverage of a particular product line.

So it’s our injectors and some others injector to make sure we can offer a full coverage for them as well.

Unidentified speaker: And so I remember that when you the last time you reported earnings, had fairly high tax rate.

Chris Rauff, CFO, Finia: And Still have a fairly high tax rate.

Unidentified speaker: But I guess that the plan is try to optimize that. Right? And from what you said in the past is that there is a problem of of a tax structure. I think it was specifically in Europe. Yes.

So what what’s the plan there? How what should we think of in terms of timeline for a reduction of the tax rate, and where and how low can it go?

Chris Rauff, CFO, Finia: It’s gonna take a couple of years, and it’s just doing very boring stuff structurally that we have to do. We got one hurdle completed in q one. There’s another hurdle that we have to get through in at the end of Q2, early Q3. And it’s just literally the team just chunking away and going after that. It’s going take a couple of years.

We’ve had we have all the experts out there. They’re all starting to come together and coalesce and and we know the path, But it’s going to take a couple of years to get all that undone. It’s not due to lack of trying. It’s just as we try to exit some of these plans and get out of some of these holding companies in these jurisdictions, you have to wait for the government as you start to exit or or shrink down something in a jurisdiction. They’re obviously going to take stand back and take a look at it.

You have to go through all the steps, get through that, and then move to the thing. So it’s just a slow, very boring process to get through, but we’ll get there. It’ll be sub 30 in a couple of years, slowly over time.

Brady Erickson, CEO, Finia: Probably going over time. So it’ll be a tailwind from a cash perspective for the next

Unidentified speaker: few years.

Chris Rauff, CFO, Finia: So tailwind for cash.

Brady Erickson, CEO, Finia: It may be high now, but it’s gonna be coming down and it’ll be a tailwind for us going forward. Yeah.

Unidentified speaker: And going to cash flow indeed, you generate a significant amount of cash. What how do you plan to allocate that cash? Like, organic growth, m and a, or, like, just returning it to to shareholders? And to follow-up as a follow-up on that, what’s your cash balance that you need to operate the business properly?

Brady Erickson, CEO, Finia: On on capital allocation, I think, you know, first and foremost, we wanna continue to support our base business capital investments to support our, you know, organic growth. That’s kinda number one. Number two is we want to make sure we keep a strong balance sheet. So we have a target of 1.5. I think we’re at 1.1 right now.

So we’ve got a strong balance sheet.

Unidentified speaker: Which is net leverage, right?

Brady Erickson, CEO, Finia: Net leverage, yeah. It’s very, very good. Yep. We’re then looking at liquidity as well, and so we want to make sure that we have between our undrawn revolver and cash, dollars 700,000,000 plus is what we would like to see. Then we start going down, you know, further down.

We want to maintain a, you know, a good dividend for shareholders. I think we’ve targeted, you know, right around that, you know, 40 to 50,000,000 of our free cash flow for dividends, which is why we bumped up our dividend order to kind of stay in that range as we continue to buy back shares. We need to bump up a dividend to kind of stay in that range. And then the final is going to be the M and A and share repurchases. And so we’ll sit down with the board every quarter, take a look at our cash balance, take a look at our cash needs going forward, see what the M and A opportunities are, see where our stock price is, and then make a decision there on what we want to do for the next quarter.

The good challenge we have is we have a very large amount of cash on the balance sheet. We have low leverage and we have a cash generating business on quarterly basis. So every quarter, you know, it’s going to increase cash balances unless we do something from a capital allocation standpoint.

Chris Rauff, CFO, Finia: And we’ve built that into our overall bonus structure because we don’t I’ve never cared for bonus structures that were based on EBIT or EBITDA returns because the you know, if you get into a market condition where everything dives, you can get to a point where the business doesn’t care because they you know, you’re down, you know, everything’s out. So, we’re out of the money, so nobody cares. But if you’re on an EV, which is what we’re on, the business has to drive the balance sheet too. So they have they have a vested interest in if the market goes down, I’ve gotta get my inventory down. I’ve gotta get my receivables down.

I’ve got to drive my working capital to a good level that keeps in line with whatever’s happening in the market, and they’re incentivized, and they know that. So for me, EV’s always been a really good way to drive the entire business and to get all the employees going in the same direction and making sure that their focus is making sure the balance sheet’s good and clean and that we’re driving as much cash as possible in the business. And

Brady Erickson, CEO, Finia: what were your last portion of the question?

Chris Rauff, CFO, Finia: The minimum levels. I mean, if you went into a really, really bad downturn over three years, we’d want to keep 200,000,000 and $250,000,000 range, but that’s still pretty healthy.

Brady Erickson, CEO, Finia: And that’s just the way that we’re currently operating right now. I mean, there’s a lot of our peers that take it down to 10,000,000, but they may have a larger revolver and they tap into the revolver in and out and they try to maintain as little cash as possible and just go in and out of the revolver. That is something we could do. Obviously we’re global but right now we’re kind of saying, hey without having to tap into the revolver on a regular basis if we’re around Of cash, that’s pretty comfortable for us.

Unidentified speaker: And one last is on the m and a. So given the the current environment, what would you do in terms of like, what would be would be a good target for you? Like, would you go for a bolt on small target just to increase your capability marginal capabilities in some air specific area, or you would you also consider something a little bit larger that can help you to achieve your targets faster?

Brady Erickson, CEO, Finia: Yeah. I mean, think where we’ve been focused for the last, since spin, is really on smaller bolt on acquisitions, smaller in nature that we can fund just from cash on our balance sheet. I think we have to first both prove internally that we have the processes of doing M and A, that we have a good due diligence, that we can integrate them well, and then prove to investors that we can do a good job before doing something transformational or something larger. If we go out and twelve months after spinning with an unproven track record and do something transformational, we thought we were just going to get crushed at that point. And so we want to focus proving to folks that we can do a smaller, whether it’s a couple hundred million in revenue or less, get that done and then that may kind of open up.

Obviously as the quarters go on, we continue to get, I guess, more of a track record of being good operators and good capital allocators, that as time goes on, that also then kind of opens things up. And so I think over time, we’ll be able to do larger deals. I’d like to see the stock price up a lot more before doing a larger deal, because we more likely do use some equity. Because we don’t want to lever up, that’s kind of a key focus for us. Would we lever up a little bit above 1.5?

Maybe a little bit, but we’re not going to be ones that are going to lever to two, two and a half because that can quickly become three and a half to four and cause a lot of challenges.

Unidentified speaker: And very last one, could you remind us of your long term targets?

Brady Erickson, CEO, Finia: As far as split of the business or revenue?

Unidentified speaker: Like, your financial targets, like, long term 02/1930 something.

Brady Erickson, CEO, Finia: Yeah. Think we’ve we’ve updated that, I think, last summer where we think comfortably we can get to about 5,000,000,000 by 02/1930 with our existing cash flows. That’s going to be averaging around two to 4% organic with maybe about seven to eight hundred million of revenue being acquired. And we think we can support that with our strong cash flow. Because again, if we average 200,000,000 plus a year in free cash flow the next five years, there’s a billion dollars plus, that’s gonna generally buy at an EBITDA in our similar range of five to six times.

We can pick up 700,000,000 and continue to give dividends and buy back shares in that time period.

Unidentified speaker: Thank you very

Brady Erickson, CEO, Finia: much. Great. Thank you. Yeah,

Unidentified speaker: that’s great.

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