Phinia at Deutsche Bank Auto Conference: Strategic Growth and Stability

On Wednesday, 11 June 2025, Phinia Inc. (NYSE:PHIN) presented at the Deutsche Bank Global Auto Industry Conference, outlining its strategic direction amidst market volatility. The company highlighted its robust global presence and proactive cost management, while acknowledging challenges such as tariff impacts. Phinia remains committed to expanding its commercial vehicle and industrial sectors, with a focus on long-term value creation and disciplined capital allocation.

Key Takeaways

• Phinia’s diversified global presence mitigates North American market fluctuations.
• Commitment to maintaining EBITDA margins within 13-15% despite tariff challenges.
• Strategic focus on commercial vehicle and industrial sectors for growth.
• Strong aftermarket performance in North America and positive outlook in China.
• Emphasis on long-term customer partnerships and disciplined capital deployment.

Financial Results

• Q1 2024 EBITDA Margin: Reported at 12.9%, adjusted to low 13s after $4 million in unrecovered tariffs.
• Full Year EBITDA Target: Midpoint of $470 million, with a margin of 14.1%, consistent with the previous year.
• R&D Spending: Maintained at 3% of revenue, with gross spending at 6% due to external support.
• Capital Expenditure (CapEx): Targeted around 4% of revenue.
• Share Repurchase Program: Over 16.5% of shares bought back since spin-off.
• Debt: Net debt at 1.4 times EBITDA.

Operational Updates

• Regional Performance:

- North America: Light passenger vehicles contribute less than 9% of revenue; aftermarket thriving.

- Europe: Business performance slightly better than expected.

- China: Stronger than expected, driven by plug-in hybrids and range-extending EVs.

• Tariffs:

- Customer negotiations largely resolved by end of Q2.

- Aftermarket price increases in North America to offset costs.

• Cost Management:

- Decentralized approach with plant-level accountability.

- Proactive downturn planning with targeted decrementals and incrementals.

• Automation and AI:

- Extensive automation in manufacturing; AI for inspection and analysis.

Future Outlook

• Combustion Engine Commitment: Belief in the continued relevance of combustion engines, with a shift to alternative fuels.
• Commercial Vehicle Expansion: Aim for these sectors to represent over 80% of revenues.
• M&A Strategy: Focus on commercial vehicle and industrial acquisitions.
• Capital Allocation: Prioritizing share repurchases when undervalued.
• Policy Environment: Support for pragmatic emissions reduction strategies over mandated electrification.

Q&A Highlights

• Long-Term Commitments: Customers seeking long-term partnerships beyond 2030.
• Margin Expansion: Potential in commercial vehicle and aerospace/defense sectors.
• Asian Market: Consistent margins with limited competition in direct injection systems.

In conclusion, Phinia’s presentation at the Deutsche Bank Global Auto Industry Conference reflects its strategic focus on growth and stability. For a detailed understanding, readers are encouraged to refer to the full transcript.

Full transcript - Deutsche Bank Global Auto Industry Conference :

Unidentified speaker, Analyst: Hey. Thanks for being back with us. We have Cynthia Nicks up for this session, a global supplier of few systems and aftermarket components and had spun out of Four Horner a couple years ago. With us are Brady Erickson and Chris Grupp. We will dive into the company it is today, the strategies in the near term and longer term.

So thanks for being with us.

Brady Erickson, Speaker, Cynthia Nicks: Mhmm. Thank you for having us.

Unidentified speaker, Analyst: Needless to say, we’ve seen some very volatile news flow around, you know, trade and policy in the past few months. I hope things have calmed down a little bit. It seems like it. So maybe to start, just wanted to ask how the quarter is unfolding so far across different regions that you’re saying?

Brady Erickson, Speaker, Cynthia Nicks: Yeah. I mean, for us, really consistent. You know, not not a whole lot of change in our build rates. And and, again, the all the noise that we keep talking about is North America focused. And light passenger vehicle in North America for us is less than 9% of our revenues.

So everyone’s reacting to to all the different trades and tariffs and everything else. And from a light passenger vehicle, it’s relatively small. Our aftermarket is is doing quite well in North America, and our commercial vehicle is still running, you know, relatively low, but it’s still, you know, at a consistent number. You know, our European business is is kinda coming in as expected, maybe a little bit better. And then in China, our light passenger vehicle is actually, know, a little bit stronger than we expected.

So we’ve had a very global business in a lot of different markets, and I think a lot of people are kind of overreacting on the North American light passenger vehicle SAAR number and the impacts. And so right now, we’re kind of happy with where we are, and things are kind of steady for us.

Unidentified speaker, Analyst: Yeah. Maybe you mentioned, you know, a little bit weakness in in North America. Can you just talk about how the various different OEMs are responding? Have you been sort of keeping in contact with them? Where do you see them sort of pending on the half?

Brady Erickson, Speaker, Cynthia Nicks: Yeah. I mean, our you know, as far as our EDIs and our build rates, we we see them consistent with where we are kinda right now. Again, we we supply into the engine manufacture engine side of things. Mhmm. So always a little bit of buffer between us, the engines, the engine and the vehicle plants, and the vehicle to to final production.

And those schedules, you know, don’t maybe move around as much. And so at least as far as our order board, you know, things are things are looking solid on the OE side. And and, again, if if the OE as it came in is coming in a little bit softer this year than we originally expected, but our aftermarket is coming in a little bit stronger because the vehicles are getting older and staying on the road longer. So our aftermarket provides us the maximum buffer as well.

Chris Grupp, Speaker, Cynthia Nicks: Yes. And if it’s discussion on the reimbursement of the tariffs, I mean, we discuss with the customers every day, and those are pretty much wrapped up now. We’re getting the last couple of them tied up, but trying to get those tied down before the end of the second quarter is done.

Unidentified speaker, Analyst: In good shape. Is that pretty immediate in terms of the flow through of

Chris Grupp, Speaker, Cynthia Nicks: An immediate in retros going back to when they started.

Brady Erickson, Speaker, Cynthia Nicks: Yeah. This it’s just gonna be an add in to the to the normal invoice that we have.

Chris Grupp, Speaker, Cynthia Nicks: And that’s on the OE side. On the aftermarket side, we already put a price increase across the board for North America only on aftermarket, and that started in mid April.

Unidentified speaker, Analyst: Yeah. Okay. In general, do you think your customers are sort of in a a wait and see mode to make any sort of footprint or production changes? Because, I mean, we see some coming, for example, GM last night. We see them making some changes a few weeks back.

So you’re starting to see that taking place. I’m curious to see, you know, behind the scene, what you’re seeing from maybe your other customers that may not be, you know, as public.

Brady Erickson, Speaker, Cynthia Nicks: Yeah. I think a lot of it is just more tweaks to their existing, you know, production plans. I think most of it is on the vehicle side. Mhmm. And, again, they mean there’s plenty of excess capacity.

And so if you’re running one shift in The US and one shift in Mexico or two shifts in Mexico, do you shift a little bit between those two? Is is I think what you’ll see I don’t see anybody out there saying, hey. We’re gonna shut down the plant in Mexico and build a new plant somewhere else. And so I think people are just shifting between their currently installed capacity that’s in place.

Unidentified speaker, Analyst: So most most of it is

Chris Grupp, Speaker, Cynthia Nicks: more the final assembly, not engine plant movement that we see right now. It change over time? You know?

Unidentified speaker, Analyst: Yeah. What about tariff on, you know, steel and aluminum? Any any sort

Brady Erickson, Speaker, Cynthia Nicks: No real impact to us. Again, most of the components that we purchase are gonna be highly engineered and a lot of value added content, you know, that’s gonna go into that base metal and steel. And so for us, even the the raw commodity, you know, steel, aluminum, resin, copper, you know, it makes up a small percentage of our overall sell price. And so these it’s it’s, again, just a little bit of a noise. Nothing nothing significant for us.

Unidentified speaker, Analyst: Amid all of this, you know, uncertainty, we see supplies across the board launching, you know, whether they call it net performance or whether they call it, you know, self internal health action. Just curious to hear, you know, what you guys are thinking about in terms of that. Any sort of internal, you know, plans in place to to help you manage costs better in all the time?

Brady Erickson, Speaker, Cynthia Nicks: No. I think we’re we’re a very decentralized organization. We expect people to manage costs in all environments. And and so we have some some plants and locations that revenues are going down, and they need a headcount, and they need to manage you know, if they need to reduce some headcount in order to bring their cost structure in line with the new volumes. We have other locations that continue to grow.

And so again, we hold each of our general managers and the plant managers that are running their businesses accountable for having good incrementals and decrementals. You know, on the downside, they try to keep it less than 20%, and on the upside, convert it twenty, twenty five, you know, on the on the upside. And so if if we have to impose something globally, just in my opinion, that means we failed as an organization because each one of our locations should be adapting on a real time basis based on what they’re seeing and not waiting three months to then have me come in and say, hey. You guys need to cut your costs. They know what they need to do, and guess what?

Their bonus is tied to them driving economic value on a year over year basis. So the incentives are there for them to react quickly rather than just kinda waiting.

Chris Grupp, Speaker, Cynthia Nicks: But we did proactively at the end of last year. I mean, it’s been a few years since we’ve had a downturn. Thank goodness. And I probably just changed the fall, but since we’ve had a downturn. So we did during the budget process last year have everybody get out there, you know, 1020% downturn plan and go through the action.

Because there’s certain things you have to do, like looking at how much temp labor you have or look at if you need to do a partial shutdown or and put people on a, you know, a part time benefit. And and each country is different, and they just, you know, get get those out, dust them off, and get ready so that the teams are ready to do what they need to. Thankfully, we haven’t had to to really do much of that, but they’re ready.

Brady Erickson, Speaker, Cynthia Nicks: If they need to locate some of our locations did do an extended shutdown. They shut down, you know, some lines in some areas for for a few days or a week just to adjust, you know, the volumes. Yeah. And they’ve been doing that, you know, since, you know, a lot of downturn that we started seeing was probably q three of last year, especially on some of the commercial vehicle and some of light vehicles. So we’ve been dealing with it for for quite a while.

Yeah. And and, you know, since we’ve spun, you know, commercial vehicle was at a high, and they’ve kinda declined. Light vehicles has been kinda declining year over year. And so Mhmm. At least our view is that we’re kinda getting close to the trough in the cycle.

And so we’ve had, you know, both two thirds of our markets, both CV and light vehicles, now kinda closer to a trough. Aftermarket has always been consistently good for us, and we expect that to continue. And and when they just stop declining and and hopefully have a little bit of upturn Yeah. You know, I think we’ll be kind of hitting on all cylinders at that point.

Unidentified speaker, Analyst: Yeah. What about automation or the use of of AI? Because we’ve been hearing a lot about that, whether it’s manufacturing, whether it’s, you know, humanoids. How how do you think about that in the midst of you know?

Brady Erickson, Speaker, Cynthia Nicks: I mean, we we have a if you look at a lot of our plants, there’s a lot of automation. You know? A lot of our manufacturing processes, we’re holding, you know, plus or minus half a micron. The measurement capabilities, clean room environments, very, very automated. From a from an AI perspective, there’s probably a half dozen to a dozen specific programs that we have running around, whether it’s part inspection, whether it’s warranty analysis, scrap reduction, is where we’re using it more in a in targeted fashion.

You know, we don’t have a lot of, you know, customer service, you know, or chatbot that we’re trying to answer, you know, questions type of thing. And so ours is gonna be more around, you know, can we use it for software? Can we use it to speed up some of our processes and reduce some other waste?

Unidentified speaker, Analyst: Maybe one last question on the near term. So you did deliver 12.9% EBITDA margin in Q1. And the full year, you have a target of 14.5%. Can you walk us through what are the drivers to the improvement?

Brady Erickson, Speaker, Cynthia Nicks: Yes. I think general, our EBITDA, one, it was slightly impacted in Q1 because we had about $4,000,000 of tariffs that was not recovered. So once you adjust for that, we’re in the low 13s. And if you take a look at our history, we’re generally in the 13% to 15% range kind of bouncing around. So I’m not gonna get overly excited or overly pessimistic just because of one quarter.

Mhmm. And so from we we kinda then focus more on the full year. We still have the midpoint at around $470,000,000 EBITDA and 14.1% EBITDA percentage, which is consistent with last year. And so we think we’re in a good position. Q1 is always we haven’t had a normal cycle or seasonality for about five years.

But a normal seasonality is Q1 is going be light, Q2 and Q3 tend to be a lot stronger, and then tails off a little bit from a revenue perspective in Q4. And that’s last year was really strong half, weaker half. If we have that normal cycle, we expect Q2 and Q3 from a revenue perspective to be a lot stronger than Q1 just because of working days with our customers. Aftermarket starts a little bit slower in Q1. We build up some more inventory.

We get more of the sales in the summer months. And then in Q4, we tend to have a good aftermarket as well, and that may help margins in the half as well. So our our view is that we’re still right in line with our guides. Just because you have one one quarter doesn’t mean the whole year is gonna be like.

Unidentified speaker, Analyst: Yeah. May I wanna turn a little bit to the mid to the midterm and longer term? I was wondering if we can talk about the longer IPO. Are you getting calls from Williams on maybe program extensions or cost much more than what’s covered in media, or how how should we think about that?

Brady Erickson, Speaker, Cynthia Nicks: It’s it’s been happening even before spin. People didn’t believe us before spin when we told them, hey. We get a lot of inquiries for people wanting next generation combustion technology, 350 bar GDI, 500 bar GDI. And so that our order board and our RFQs has been really consistent for the last three years three, four years. And so we continue to have a good strong inbound of RFIs and RFQs from customers and as well as winning, you know, a lot of those programs and gaining share.

So we see it continuing. I just think the the press and the perception is catching up with what’s actually been happening in in the in the background. You know, customers are a good example. Three years ago, they would not have announced a billion dollar investment in a in a engine plant. Mhmm.

They did it. They did a billion dollar investment in an engine plant three years ago, but they didn’t advertise it. Now they make a billion dollar investment, and they advertise it. So we’ve we’ve always seen those investments. It’s just now it’s becoming more public.

Chris Grupp, Speaker, Cynthia Nicks: But we do have conversations with especially on the CV side in the last two to three years of very heart to heart discussions Brady’s had with their, you know, their leaders of are are we in it? Are we gonna be there for the long term? Because they are looking for that stability. They’re looking for their suppliers that are gonna be there at 2035. And we’ve actually seen quotes on the LV side come back to us because competitors would not commit beyond 2030.

So it’s it’s a interesting market out there, but, yeah, they’re some of them are looking and asking. We’re seeing a little bit of change on some of the mix. GDI has been one of our fastest growing segments, and so certainly for hybrids and plug in hybrids, that has been a lot of noise for the last three years. Not the last year, but the last three years or more of growth in that area.

Unidentified speaker, Analyst: Are you seeing more of that in certain regions versus others, or is it pretty much

Brady Erickson, Speaker, Cynthia Nicks: I mean, each each region is gonna be a little bit different.

Unidentified speaker, Analyst: It’s Yeah.

Brady Erickson, Speaker, Cynthia Nicks: You know, in our view was that there’s a lot of regions that are not going any battery electric. Mhmm. Mhmm. South America, great example. They’re not going battery electric.

They’re going ethanol. And so we’ve launched a number of e 100 fuel injection systems for them. India is a little more on natural gas and some hydrogen application. Even China’s pulling back on on their battery electric. You know, people talk about, you know, China is over 50% electric.

Well, half of that is plug in hybrid and and range extending EVs that have a combustion engine in it. So and that’s why we’re talking about in China. You know, a lot of our growth in China right now is plug in hybrids and range extending EVs. And so we’re seeing some good pull because the consumer likes that that that type of vehicle. It gives them a lot of flexibility, and it meets their needs.

And I think the the sentiment that I think has changed since we’ve spun from, hey. Electric vehicles are gonna not only take over all of light passenger vehicles, but it’s gonna take over all of commercial vehicle Right. And combustion is dead. So now I think they’re realizing EVs are gonna better electric vehicles are gonna continue to increase in penetration rates, but there’s probably gonna be a point where it becomes more asymptotic. Is that at 25% of penetration, thirty, thirty five?

Wherever it may be, guess what? There’s still 65% of the vehicles out there on light vehicle that still have combustion engines. Mhmm. They’re gonna get cleaner whether it’s through hybrid, plug in hybrid, but also looking at alternative fuels, renewable fuels, and carbon neutral fuels.

Chris Grupp, Speaker, Cynthia Nicks: But China and North America have definitely been the two regions where we’ve had the fastest growth engine. Definitely for us, that doesn’t mean Europe is not, but just for us, we’re definitely seeing a lot more pull out of China.

Unidentified speaker, Analyst: Yeah. In terms of investment into into product development, I’m just curious how how do you sort of manage? Because on the one side, market could very well change very quickly. But on the other side, wanna capture as much of the demand as possible through, you know, better products and things like that. So just curious how how you sort of manage that.

We also recently well, GM, right, I mentioned last night, they they made the announcement that they are putting spending that into ICE. So I guess what are some of the implications here when you, you know, hear some of these announcements? What’s your reaction? How do you sort of, you know, react to it?

Brady Erickson, Speaker, Cynthia Nicks: To be honest, it’s kinda in line with our original expectations. Mhmm. So we’re we’re we’ve been very consistent.

Unidentified speaker, Analyst: Yeah.

Brady Erickson, Speaker, Cynthia Nicks: And so we’re committed to combustion. We thought combustion is gonna and we still believe combustion is gonna be around in transportation for the rest of the century. It’s just gonna change a little bit. Mhmm. Maybe more ethanol, more renewable fuels, carbon free, carbon neutral fuels, But it’s just too inefficient and energy dense of a product.

Chris Grupp, Speaker, Cynthia Nicks: Yeah. But we oh, sorry. But we do. I mean, several when we when BorgWarner took over the Delphi Group, one of the things that was missing was a good engineering tracking system. And so that was the thing that we put in because we needed to understand what projects the engineers were working on because that’s a huge cost.

That’s 95% of your cost on the r and d side. And and putting that back in place enabled us to to look at how much are we spending on hydrogen. Mhmm. And so we’re controlling that. We looked at it last year and at budget what they put forward, and we said, we think that’s a little much.

Let’s pull it back a little bit. But those engineers are redeployable. They can work on hydrogen. They can work you can take that same engineer and put them onto aerospace and work, you know, just a different fuel, but same sort of issues. You can have them working on ethanol.

You can have them, you know, working across the spectrum. So we look at those projects, and we sort of decide what does it look like? Has it changed since last year on the outlook in the next five to ten years? And then we can move them around. And it’s the engineering groups themselves that are really monitoring themselves and regulating that to a big degree.

Brady Erickson, Speaker, Cynthia Nicks: And so we’ve maintained our position that we think R and D is going to be consistently around 3%, plus or minus in that range, CapEx around 4%, and that allows us as we think there’s plenty of of R and D to allow us to go into these new markets, develop the next generation products and be a, you know, a strong supplier for our customers. Now that 3% is a is a net number just to kinda give people an order of magnitude. We actually receive about a $100,000,000 a year from our customers for services and support. And so whether it’s calibration services, giving them a turnkey solution, development of prototypes, and the such. And so we get you know, our gross spend is closer to 6 Mhmm.

Which is a pretty healthy number, but we’re fortunate that we get about half of that covered from customers and or government subsidies.

Unidentified speaker, Analyst: So you guys have spent out of Warner for for a couple of years now. I’m just curious how would that spend? Maybe highlight some big changes that you’re making that’s worth adding anything that

Brady Erickson, Speaker, Cynthia Nicks: I think a I think a a couple things. One is we can actually make an acquisition in combustion. We just announced one yesterday.

Chris Grupp, Speaker, Cynthia Nicks: Small small

Brady Erickson, Speaker, Cynthia Nicks: in nature. Just getting our kind of feet wet, but it generated a lot of excitement internally of of feeling excited about, hey. We’re reinvesting in in interesting areas for us to continue to grow. So that’s kinda one area. I think it’s in in many ways, it’s if you look at the asset when it was originally part of kind of the active Delphi Automotive Mhmm.

This was an asset that was cast off, spun out on its own, had to do a lot of restructuring, got acquired not for our assets, but for the Power Electronics assets, and then cast off again. And so if you think about that, it’s been like a decade since they felt as if, you know, we’re we’re the strength of the company. Yeah. And and so I think the energy level of people is really high. They see it with the acquisition.

They see the consistency of our performance now. And I think people are are really proud to work in Finian, and think we we really difficulty whatsoever attracting talent because people are excited what we’re doing, and and they believe that the combustion engine, in in commercial and industrial applications, is gonna be around for a long

Chris Grupp, Speaker, Cynthia Nicks: So the only other material change we’ve made since then was that we we put back in place the bonus structure that Brady and I both liked, which is everything is based on economic value models. So not only us, everybody down to our plants and our facilities and shop floor, if they’re getting a bonus, it’s based 50% at least on economic value and cash flow. So not only do they have to control their profitability, they also have to make sure that their working capital stays in line, that their capital spending doesn’t go off the rails and stuff. So it incentivizes them to also do the same things that we have to do, which is control the whole business, watch the assets, watch your entire balance sheet and your profitability. That was the only other change.

Brady Erickson, Speaker, Cynthia Nicks: And and and the the one little tweak in there too is on the economic value. It’s it’s really easy to calculate Mhmm. What the bonus target’s gonna be next year. It’s better than last year. I don’t care what the market’s doing.

I don’t care if we’re going into a downturn. We, a as a leadership team and organization, have to figure out a way to create value on a year over year basis, full stop. Mhmm. And so if if the market is down and our economic value goes down, we’re not gonna get bonuses. You know?

And that’s trying to align everything that we’ve done with both TSR for stock based compensation and cash and economic value is we’re trying to tie our incentives as close to what means what’s important to our investors as well and shareholders.

Unidentified speaker, Analyst: Yeah. So you mentioned M and A. Any areas that you’re looking to to close the gap? And then you guys mentioned you did a small deal yesterday, you know, and I think Mhmm. Maybe a quick rationale for that.

Anything else that we should be on the lookout for?

Brady Erickson, Speaker, Cynthia Nicks: I think I think what’s key on we’re not looking to be a consolidator in the light passenger vehicle market. Mhmm. That’s gonna continue to have pressure with electrification, and there’s plenty of capacity. Yeah. You know, why would we go out and buy someone else’s capacity when we have plenty, and we can just win it via conquest with my own designs.

Why go out and pay for it? From the light passenger vehicle side, we just see ourselves just kinda leveraging our existing installed capacity, gaining share to offset any any reductions due to battery electrics. Mhmm. On the commercial vehicle and industrial side, that’s really where we wanna grow and including aftermarket. So, you know, we look at the acquisition.

They’re all commercial, you know, vehicle and industrial focused. It also comes with an aftermarket because they have a lot of service parts that go with it. That’s really where we’re gonna be focusing a lot of our efforts to grow that area. We like light passenger vehicle. You know, it’s about, you know, you know, 900,000,000 to a billion dollars of revenue.

We expect that and want that to continue to kinda stay flat, keep those plants humming, generating a lot of cash as we continue to grow in CV, industrial, aerospace and defense and aftermarket businesses. And our goal is to get, you know, those other areas to close to 4,000,000,000 by the end of the year or or to the end of the decade. And that means our light passenger vehicle side is less than 20.

Unidentified speaker, Analyst: Okay. Maybe as we think about the the current policy environment in both light vehicle and in commercial vehicle side, what do you think are some of the advantages that you can do?

Brady Erickson, Speaker, Cynthia Nicks: Well, I think one of the bigger changes is the fact that they’re not mandating better electric vehicles, especially from from carbon Californian trucks. And they’re saying, hey. Let’s be pragmatic about it, and let’s continue to drive for Mhmm. You know, improvement in c o two and not just mandating one solution. And so we think there’s a lot of advantages there, much more pragmatic.

And so, obviously, I think it’ll you know, rather than seeing a lot of headwinds, you know, that’s slowing the headwinds on the light vehicle side, on the commercial vehicle industrial, most of the segments that we’re supporting is not seeing a lot of electrification rates Mhmm. Just because of the size of vehicles, the weights, and distances they have to go. And so from our perspective, it’s it’s tweaks to the to the emissions regulations and some of the standards, but it’s not gonna fundamentally change our direction in what we’re doing.

Unidentified speaker, Analyst: You mentioned, you know, in Europe, it’s it’s more consistent. Like, with the maybe it’s slight pullback in some of the requirements. Are you seeing a bit more activity there, or or has it been pretty consistent?

Brady Erickson, Speaker, Cynthia Nicks: Yeah. I mean, I think I mean, I think the the automotive what is it? The European supplier conference came out with some recommendations on emission standards, I think, or this morning. You know, saying, hey. Let’s be a little bit more pragmatic.

Mhmm. And I think as we get closer to some of these kinda clip events, I think they’ll maybe ease a little bit. Because I think it’s very difficult for our industry to make sharp ramp ups and ramp downs or changes. And so I think it needs to be a little more more of a trend line. I think the the regulators are kinda coming to that realization as well, and and just the consumer is not buying into going to pure electric either.

So from our from our perspective, you know, things are moving like this. I know industry and reporters think it’s doing this, but it’s really just doing you know, it’s not moving as fast as maybe some of the press release.

Unidentified speaker, Analyst: Yeah. So you have a long term plan to to increase, you know, commercial vehicle market exposure. Maybe dive a bit more into where you are on that path. And in the end, you know, how do you want investors to to view?

Brady Erickson, Speaker, Cynthia Nicks: I think it we’re I think we’re gonna operate very much like an industrial. We have a number of different markets that we’re supporting globally in region, and many are gonna be kinda offsetting. So we see ourselves as a GDP, GDP plus type grower. Mhmm. Consistent cash flow, good margins, and, you know, and a good allocator of capital.

Commercial vehicle, if we if we add the light commercial, medium commercial, heavy duty, and off highway, that’s already making up 38, 39% of our revenues. And so it’s a big portion of it, and we see that as an opportunity to continue to grow north of 40. And we see aftermarket also continue to go from about 34% last year to north of 40%. And so we’re gonna have, you know, north of 80% of our revenues coming from commercial and aftermarket Mhmm. Which is not you know, in in our in our view, our peer group is not light passenger vehicle combustion folks.

It’s gonna be a much more commercial vehicle, industrial, and aftermarket.

Chris Grupp, Speaker, Cynthia Nicks: Yeah.

Unidentified speaker, Analyst: Overall capital allocation strategy, maybe a few comments on that.

Brady Erickson, Speaker, Cynthia Nicks: Very disciplined. Think you’ve you’ve probably seen that we think our share price is low, and we think our shares are a good value, which is why we’ve been buying a lot of them. I think since we’ve spun, you know, it’ll be our two year anniversary on July third of this year. In the seven quarters since then, we’ve bought back over 14 or 16.5% of our shares in that time period, and we still have relatively low net debt at 1.4x. We generate cash flow on a consistent quarterly basis, and we have a strong cash position on hand.

So each quarter, we’re going to sit down and take a look at our cash flow projections, where our debt and net leverage is, do we have any M and A on the horizon, where our stock is trading. And then we’ll say, hey. Based on that, do we repurchase shares and how much? And what would the grid be to re repurchase shares? And so we we generally set it up at one quarter at a time.

If the stock price, goes to $80 a share, we’re probably not buying back shares at that point. There’s probably better allocation. M and A may look more attractive for us at that But I think we’ve been fairly disciplined on the acquisition side, and the one that we just announced is it’s positive. It’s margin accretive, and it was at 4.7 times EBITDA. And and so when we looked at that compared to us trading in the five and a quarter type range, we thought, hey, that was a really good investment.

It was consistent with our commercial vehicle focus, and we see it as a nice product line that we’ll continue to see mid to high single digit growth Mhmm. From as well.

Unidentified speaker, Analyst: Is there from a regional perspective? Is there more exposure that you wanna get into from a more geographic standpoint?

Brady Erickson, Speaker, Cynthia Nicks: We’ll go where the opportunities are. You know, each region has its strengths and weaknesses in those different markets. Yeah. And so based on relationships and technology that they’re looking for, We have a pretty good balance right now of you know, The Americas at front right around 40, Europe right around 40, and Asia at 20. Asia is a little bit lighter primarily because we do have a joint venture on the diesel side in India.

Mhmm. That’s another couple 100,000,000 that we would add to Asia. We’re balancing that a little bit better. Yeah. So we have we have a pretty good footprint.

We have all the, I guess, all the number of plants that we need. We don’t need to do any expansion. We have room to to grow our businesses within our existing footprint. So we’re we’re feeling pretty comfortable with where we’re at.

Unidentified speaker, Analyst: Questions

Brady Erickson, Speaker, Cynthia Nicks: that you have with OEMs where they’re asking if if you sort of commit to being around 2030, 2035 plus. Are they willing to pay for that? So do you see sort of margin upside from your commitment there and, obviously, to some degree, market consolidation? Yeah. I mean, we’ve hopefully, you take a look at our margins.

We have pretty solid margins right now that allows us to continue to reinvest. Is there some opportunity to in the commercial vehicle and aerospace and defense for us to expand margins? I think there is. Obviously, consolidation and other competition is is good or some exiting. But I think we we still have to be competitive.

You know, we can’t, you know, define whatever price we want to. There’s still two other good competitors out there for us. We need to be competitive and provide good value for our customers. And that’s really what we focus on is ensuring that what we’re developing from an R and D perspective actually adds value and what they’re willing to pay more for. And we’ve seen that with our 500 bar technology.

It’s allowing us to continue to gain market share on the light vehicle side. On the commercial vehicle side, market share shifts are not as much. Everyone still is both our two main competitors and us are the three major players, and we’re all still kinda committed there. But we do see opportunities to where we are, you know, the only viable option. And, you know, we we we’re not gonna act like a like a private equity and try to gouge short term.

We’re in it for you know, in many ways, we we want a a piece of business before spin when a customer was asking us, we’re looking for a partner for 2040 and beyond. Mhmm. And so these are long term relationships, and so we wanna treat them fairly, and we wanna be treated fairly. And I think they’ve a lot of our customers have treated us fairly because they’ve given us a lot of noncontractual inflationary pass through. They’re helping us in covering the tariff costs.

And so we we see the relationships shifting to maybe more like the commercial vehicle industrial, where there really are partnerships with our customers, and they’re not looking to swap suppliers every three years as they used to do on the pass car side. And so I think the pass car folks are saying, hey. We want these long term reliable suppliers as well.

Chris Grupp, Speaker, Cynthia Nicks: So the other thing we did a couple of years, probably been four years ago now, is we did short it used to be very common that we won a program and you bought new capital. You’d run the capital over the twelve year life of the capital. But if the program’s only four to five years, we’ve really reinforced with our units. You have to cap you have to amortize it, appreciate it over the life, which means you’re basically doubling your depreciation rate that goes into the quote, and we’re not reducing our return. So it pushed a higher price.

We didn’t lose any business. Effectively, we’ve already managed through that, but some of those programs have come on in the last couple of years at a slightly expanded rate just to protect ourselves. Most likely, we’re gonna get the follow on program, and we’ll continue using that equipment, but we just wanna make sure that especially three or four years ago, there was so much noise. We were just trying to be you know, take some risk out of this scenario.

Unidentified speaker, Analyst: Do we have another question in back?

Unidentified speaker, Questioner: Hey, Brady, Chris. Good to meet you again. My question is just on how do your margins maybe in Asia specifically kinda compare with the the rest of the world? And, you know, are you seeing as Chinese domestic suppliers become maybe a bit more of a force in the, you know, manufacturing side of things? Are you seeing more competition there?

Is are your products something that they are even interested in taking share from from you from?

Brady Erickson, Speaker, Cynthia Nicks: Yeah. I mean, as far as margin between regions, there’s really not a lot of variance. I mean, I I see we see more variance in margin just between a different customer program depending on how it’s launched. So there’s always going to be some noise in there. And so not a whole lot of variance when you take a look at the whole region.

As far as competition, once you go from, I’d say, a port fuel injection to a direct direct injection, 350, 2,000 bar, 3,000 bar type system, you’re really down to the three competitors. There’s no local competitors for direct injection. And so there may be some that have part of the system. Some may do a rail. Some may do a pump, but there’s no local competitor there that does the complete system.

And and there’s really only the us the the three of us that can do the pump, the rail, the injectors, and the ECU and calibration work. And and that’s why we receive about a 190 here from customers. A lot of that is in Asia for a lot of that calibration and services that we provide. And so that also kind of puts a pretty big moat around our business and prevents a lot of individual suppliers that, yeah, they can do a forging and make a rail, but the customer is not just buying a rail. They want to buy the.

Unidentified speaker, Analyst: Thank you. With that, I think we’re up on time. This question is ready. Thank you. Thank you.

Brady Erickson, Speaker, Cynthia Nicks: Alright. Thank you very much.

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