PHINIA Q1 2025 Earnings Call Transcript

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April 25, 2025
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Operator

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finia First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

And I would now like to turn the conference over to Kellen Ferris, Vice President of Investor Relations. Kellen, you may begin.

Kellen Ferris
Kellen Ferris
VP - Investor Relations at PHINIA

Thank you, and good morning, everyone. We appreciate you joining us. Our conference call materials were released this morning and are available on Finneas' Investor Relations website, including a slide deck that we'll be referencing in our remarks. Are also broadcasting this call via webcast. Joining us today are Brady Erickson, CEO and Chris Gropp, CFO.

Kellen Ferris
Kellen Ferris
VP - Investor Relations at PHINIA

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 any undue reliance upon any such forward looking statements. And with that, it's my pleasure to turn the call over to Brady.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Thank you, Kellen, and thank you, everyone, for joining us this morning. I'll start with some overall comments on the first quarter and then provide some thoughts on 2025 and beyond. Chris will then provide additional detail on our financials and discuss our 2025 guidance. We will then open the call for questions. Starting on Slide four of the deck.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

The first quarter developed largely as we expected with highlights including strong business retention and new conquest wins, delivering on our capital return strategy and maintaining a healthy balance sheet. During the first quarter, the macroeconomic environment in the automotive industry continued to show signs of slowing, similar to what we experienced in the second half of twenty twenty four. Our financial results reflect a soft top line, but with good segment adjusted operating margin performance. While the environment continues to evolve rapidly, our teams are managing our priorities and our business well. Both aftermarket segment sales and Fuel Systems segment sales were lower year over year primarily due to lower OEM volumes.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

As a result, net sales in the quarter were $796,000,000 down 7.8% from the same period of the prior year, which included contract manufacturing revenues. Excluding the FX impact and CMA agreements that were in place last year, revenue decreased 4.1%. This was in line with our expectations as we see a softer first half of twenty twenty five on a global basis. We reported adjusted EBITDA of $103,000,000 with a margin of 12.9%, a two sixty basis point year over year decline. The decrease was primarily due to lower sales, added infrastructure costs to support the business as a standalone entity and the strong Q1 twenty twenty four comparison.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Total segment adjusted operating margins were 12.2%, one hundred and forty basis point decrease when compared with the first quarter of twenty twenty four. Adjusted earnings per diluted share excluding non operating items as detailed in the appendix was $0.94 Our team continued to work closely with suppliers and customers in order to efficiently and effectively work through dynamic business conditions. On the capital side, we continue to take steps intended to drive long term value for our shareholders. Our balance sheet remains strong with cash and cash equivalents of $373,000,000 and combined with our undrawn revolver, our total liquidity is approximately 900,000,000 Importantly, our net leverage ratio was 1.4 times, closing in on our approximate target of 1.5 times. And lastly, our solid financial position enabled us to return $111,000,000 to shareholders via share buybacks and dividends during the first quarter of twenty twenty five.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

In fact, we bought back more than 7,500,000.0 shares or roughly 16.5% of outstanding shares since we were spun out in July of twenty twenty three. Let us now move to slides five and six for a discussion of new business wins. We saw sustained momentum in new customer growth and continue to generate growth opportunities in our core business. Additionally, I'm pleased with our efforts around new product development and new customer wins. Our continued focus on deepening our relationship with customers, the expansion of our product offering and our ability to capture new business wins give us many levers to drive the business.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Let me call out a few. A three fifty bar gasoline direct injection system or GDI for an alternative fuel application, which is using E100. It's with a leading international automobile manufacturer for the Brazilian market, which leverages existing high performance Finia GDI technology, while adapting it for decreased carbon emission alternative fuels. Two high volume fuel delivery module or FDM wins in The Americas market for a gas truck platform that continues to expand the use of Finia's robust and versatile FDM technology. A conquest selective catalyst reduction or SCR pump win for the Chinese market securing additional LPV and LCV revenue in China focused on lowering tailpipe emissions.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Aftermarket business wins in the steering and suspension category with a member of a major customer group in Scandinavia and a major Canadian distributor, which will boost our business in Canada and provides opportunities to expand sales and other product categories over time. Business expansion with a major U. S. Distributor, which is a consolidator in the warehouse distribution space further strengthening our relationship increased share of wallet with a major U. S.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Distributor across all product categories growing with them as they expand their business. We are committed to driving expansion and complementary product categories and executing on accretive M and A to drive additional scale in our business. Additionally, we continue to believe that the breadth and scale of our customer base provides a strong foundation for continued growth. Now moving on to Slide seven, capital allocation. Our capital priority is first and foremost to invest in our business for long term profitable growth.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

We return excess capital to shareholders through both dividends and share repurchases. We have a proven track record of being financially disciplined and focused on maximizing long term shareholder value. We have $264,000,000 remaining under our current repurchase authorization and we expect to continue to opportunistically repurchase shares as part of our capital allocation strategy. Finia continues to demonstrate financial stability and consistency and I'm confident in our ability to respond to this challenging macroeconomic environment. Looking ahead and summing up, we have much to be excited about in 2025 despite the dynamic North American market.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

The global nature of our business, the diversity of the markets we serve and our substantial aftermarket business will benefit us greatly. We continue to launch new innovative products around the world and look forward to moving from stabilizing the business post spin off to building on and further improving the foundation we have built. Regarding the evolving North American market, I want to help frame the impact of tariffs on our business. A majority of our North American manufacturing capacity has Mexico for more than thirty years and represents roughly $1,000,000,000 of our revenues or less than 30% of our global revenues. The majority of our products are USMCA compliant and roughly half is sold to customers in Mexico.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

We are also working closely with our customers and suppliers on a number of options to adjust sourcing, sales and logistics flow to mitigate at least some of the impacts of tariffs on products not qualified under USMCA. While we continue to digest the new trade policies and qualified mitigation plans, we feel we have several options and pathways to respond to this dynamic environment. We also believe the diversity of our global business and of our customers has us well positioned to manage the impact of tariffs on our business. I would like to conclude with a few important messages. First, we are navigating near term uncertainty well and appreciate the commitment of our strong global team.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Second, we are very confident in the strength, the resilience and the overall health of our company, which will allow us to continue to invest in our business, make acquisitions and return capital to shareholders. And third, our long term strategy to grow our CV, industrial and aerospace OE business and aftermarket and service offerings remains intact and we believe it will allow us to deliver long term shareholder value. With that, I will hand it over to Chris who will walk us through our Q1 results and discuss our outlook for the year. Chris?

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Thanks, Brady, and thank you all for joining us this morning. As a reminder, reconciliations of all non GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. Moving to slide nine. Our business and financial results demonstrated resiliency and balance sheet strength. As expected, revenue in the first quarter reflects similar market trends to what we experienced in the last half of twenty twenty four.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

We generated $796,000,000 in net sales, down 7.8% versus a year ago. We have experienced some headwinds in U. S. Dollar reported sales which were largely impacted by a continuation of foreign currency devaluation. Excluding the impact from foreign currency and contract manufacturing sales that ended last year, the year over year sales for Q1 were down 4.1%.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Our aftermarket segment sales decreased 3.9% year over year, primarily due to lower OEM sales. Fuel Systems segment sales were down 10.2%, including prior year contract manufacturing sales or 7.3% excluding the effect of contract manufacturing. The decline in fuel systems is attributable to lower OE sales across all regions. Adjusted operating income was $73,000,000 with a 9.2% adjusted operating margin, which represents a year over year decrease of $24,000,000 and two thirty basis points. Corporate costs were higher as we continue to build out the necessary corporate functions to operate as a standalone entity.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

We are taking steps to ensure that costs remain aligned with current needs and are closely reviewing all discretionary operating expenses. Our adjusted net earnings per diluted share in the first quarter was $0.94 which excludes non operating items which are described in the appendix of our presentation. From a core business performance standpoint, our segments reported solid overall margins. Q1 segment adjusted operating margin was healthy at 12.2%. However, this did represent a decrease of 140 basis points year over year primarily related to negative sales mix in the aftermarket segment, a one off retro payment received from a supplier issue in Q1 of twenty twenty four for fuel systems and approximately $4,000,000 in tariff costs from the newly introduced tariff regime in The U.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

S. That are expected to be passed through 100% in the second quarter. The aftermarket segment margin decreased 180 basis points ending the quarter at 16.1% due to negative sales mix as noted and about $2,000,000 of tariff costs that are expected to be passed through to customers via increased sales prices in Q2. Q1 Fuel Systems segment margins were 9.5%, down 130 basis points year over year due to reduced volumes. A prior year retro settlement from a supplier issue received in Q1 twenty twenty four and approximately $2,000,000 of tariff costs that are expected to be charged to customers in Q2 of this year.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Let me now bridge our adjusted revenue and adjusted EBITDA for the first quarter, which you can find on pages ten and eleven in the presentation. Sales in the quarter were impacted by softness in volumes, which was a headwind of $34,000,000 on lower OEM sales across all regions. Compared to Q1 twenty twenty four, FX was also a headwind of 16,000,000 as the dollar strengthened against the Brazilian real and the euro. Moving next to the bridge on slide 11. Adjusted EBITDA was $103,000,000 for a margin of 12.9%, representing a year over year decrease of $28,000,000 and two sixty basis points.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Lower sales, as I just mentioned, was a headwind of $13,000,000 in the quarter. Other cost of sales were affected by the one off supplier recovery. Impact from tariffs and other manufacturing costs totaled $12,000,000 This was partially offset by supplier savings and recoveries of $11,000,000 reflecting our standalone status as of last year combined with other cost increases of $2,000,000 Also of note, excluding the impact of items not related to the company's ongoing operations, the company's effective tax rate associated with ongoing operations was 36% for the quarter ended 03/31/2025, compared to 38% for the quarter ended 03/31/2024. Progress on improving our tax rate is slow and methodical but clouded by pre spin related tax activity. Now for a quick recap of our balance sheet and cash flow.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Our team's unrelenting focus has enabled us to maintain a solid balance sheet that provides us with financial flexibility to support our capital allocation priorities. We ended the quarter with substantial current liquidity. Cash and cash equivalents were $373,000,000 and available capacity under our credit facilities was approximately 500,000,000 Net cash generated from operations in Q1 was $40,000,000 up from $31,000,000 in the same period of the prior year. During the quarter, adjusted free cash flow was flat to slightly negative compared to $13,000,000 in the prior year. The decrease was primarily due to lower net earnings adjusted for noncash items, partially offset by lower interest payments.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

While some uncertainty and risks remain globally, we are confident in our operations and our ability to generate sufficient cash for our needs while also continuing to invest in the future. On the capital allocation front, we paid dividends of $11,000,000 in the quarter and completed share repurchases totaling $100,000,000 We now have $264,000,000 remaining on the $600,000,000 authorized under our share repurchase program. Capital spend of $35,000,000 was 4.4% of sales in the quarter. Funds were primarily used for investments in new machinery and equipment for new program launches. Now moving to slide 12 for a discussion of our 2025 outlook.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

We are reaffirming our 2025 guidance, which you can see on slide 12. Despite headwinds related to tariffs and uncertainty in the markets, we now anticipate reduced headwinds related to exchange rates against the backdrop of changes in the U. S. Dollar to all other currencies. More than 60% of our sales are generated outside of North America.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Related to those North America sales, we expect any new tariffs incurred to fully pass through to customers. On the macroeconomic front, material changes in The U. S. Tariff structure are expected to dampen sales in The U. S.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Uncertainty over emissions regulations in both The U. S. And abroad plus continuation of elevated interest rates point toward continued softness in the commercial vehicle market. However, we expect the industry to experience trends in 2025 that are similar to those in 2024 with the same level of sales in the first half of the year as the last half of twenty twenty four. The company continues to expect its 2025 full year effective tax rate to be between 3842% as we make slow, steady progress.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

I want to reiterate that the foundation of our business is strong and with our diversified portfolio, scalable operating platform and strong balance sheet, we believe we can continue to be successful even in the most challenging external environment. In 2025, we will continue our efforts to position our company for long term success. 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 and A portion of our call. Operator, please open the lines for questions.

Operator

Thank you. We will now begin the question and answer session. You. Your first question comes from the line of Jake Schall with BNP Paribas. Please go ahead.

Jake Scholl
Equity Research Associate at BNP Paribas

Hey guys, thanks for taking my question. It looks like in the first quarter, the tariff headwind was about $4,000,000 for the one month tariffs were in fact. So about $50,000,000 on an annualized basis before we even see the May 3 parts tariffs. So I know you said you expect to be able to pass along these costs to customers, but could you just help quantify what your exposure is both on a USMCA compliant and a non USMCA compliant basis? Thank you.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes. I mean, as we mentioned in the call, the bulk of our North American business is USMCA compliant. So it's over well over half. And so we're in a pretty good position there. And as I also mentioned on the call, more than half of our revenues are also staying within country and supplying to our customers in country.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

So I think we're in a pretty good position. I think your analysis on the current impact level is accurate. And again, we're continuing to work with customers as well as good discussions going on. I think this is going to be easier a little bit easier for us to justify and to document versus maybe what we went through a few years ago on trying to go through electricity and freight costs. And so ongoing discussions are good, and we're confident in our ability to work with our customers.

Jake Scholl
Equity Research Associate at BNP Paribas

Thanks, Brady. And then can you just talk about any shifts you've seen in the underlying production market, especially it looks like the commercial vehicle OE market has softened pretty significantly over the last few months?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Correct. And again, that's kind of all contemplated in our updated, I guess reaffirming our guide as Chris kind of mentioned. There's a bunch of moving parts, but in general we see the softening CV, the softening light vehicle market in North America or maybe I'd say rather than softening CV. We don't see the pre buy coming in the second half. We think that's going to be muted.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

We've taken that into consideration. We've taken into account the impact of passing through the tariffs as well as the impact of the latest FX exchange rates. So there's still a little bit of noise there, but I think the team is working through it. And we still see in general a good order board from our customers. Haven't seen any major impacts.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

As Chris kind of mentioned, I think people need to be careful not to overweight the impact of just North America when there's a lot of our business that's outside of North America or stays in country in Mexico. So I still think we're in a pretty good position.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Yes. And Jake, I also want to point out, we have seen since end of last year, but it continued into this year, our LV market in China has gotten stronger and has really held up. CV has been about the same. Not increased in pulls in China, but still going at about the same rate. But LV has gotten noticeably stronger, and Europe has held up for us quite well.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

So and that's going to be the majority of our book of business.

Jake Scholl
Equity Research Associate at BNP Paribas

Thanks Brady. Thanks Chris.

Operator

Your next question comes from the line of Joseph Spak with UBS. Please go ahead.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Good morning, everyone. I guess just to maybe follow-up on that a little bit. It does sound like there's some moving parts. Is there any way to sort of help quantify like how much FX is sort of better versus prior that's sort of offsetting maybe some of the software end markets you pointed to?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes. I think the I think in our original guide, we had FX as a I think, Chris, about $80,000,000 of headwind. Think that's down to closer to around 20,000,000 now. It's really just the impact in Q1. And we don't see it having an impact in the kind of rest of the year.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

It's kind of in line with 2024. That's then obviously offset with $50,000,000 of pricing on the tariff that could be passed through and then also some volume kind of being a little bit softer in CV than originally expected due to no pre buy. So those are kind of the big three. But then we have some upside, as Chris mentioned, in Asia and Europe still kind of remaining strong for us as well. So those are kind of the little bit of volume here and there in different parts of the world in the FX and the tariff pass through impact.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Okay. That's helpful. I guess given that, would you and I know you sort of reiterated the guidance range though. Would you say like how would you sort of classify like where within that range you think you're trending? And the reason I ask is because if you look at sort of the first quarter and sort of the margins you put up, looks like you need to average about 14.5% EBITDA margins over the remainder of the year, which is obviously higher than the first quarter level, higher year over year as well.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

And you are sort of talking about some lower volumes. So what really drives the margins higher over the balance of the year that would get you to the midpoint? Is the low end a little bit more likely than that?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Mean, remember, when we're talking about both yes, Chris?

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

No, go ahead. Go ahead.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Again, when we're talking about lower volumes, it's lower versus our prior guide. And again, Q1 came in about in line from a revenue standpoint as we kind of expected. And so from a run rate perspective, we're seeing higher revenues that then will convert. And so that's kind of what we're seeing kind of going forward. And again, you've got 50 basis points on the EBITDA that was low because of tariffs that will then come back.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

That we'll get a little bit of that back. So we'll have a little bit of upside there as well and we should have some upside with higher revenues on a run rate perspective in the second half in the next three quarters. We also were expecting that Q1 was going to be soft just because of the start of the year was kind of mid week and a lot of the customers kind of eased into coming back online in that first week. And so we were expecting that to kind of flow through. And so again, I think we're still seeing us solidly in the mid range of our guide.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Chris?

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Okay.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Yes. For a lot of reasons, Q1 is our weakest quarter. On the aftermarket side, if you go backwards, Q1 has always been the weakest quarter for aftermarket. And after Q1, it consistently rises as you get into summer season, warmer season, more driving in the seasons. Aftermarket is consistently much higher in Q2, Q3, usually in Q4, but that's going to depend also on weather and driving.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

For the fuel system side, it's usually also one of the weaker quarters. It's going to depend on what the OEs are doing. But right now, our units are seeing some good numbers, but this market, we're trying to be as conservative as we can be, but it's really hard to tell right now what the markets are going to do because we're seeing still good pulls and still good demand from the OEs. We realize that that can change on a dime. So we're watching really close.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Okay. Thanks. Fair enough. May maybe last one, Brady. I know, as you guys have highlighted, there is sort of, maybe increasing uncertainty out there.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

I know, you know, tuck in M and A is part of your mid longer term strategy. How do you sort of view this uncertainty in the context of that M and A? I mean, is it sort of a time where you want to maybe try to preserve some cash? Or is some of this uncertainty creating some opportunities for you?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

I think it's I mean, again, we're in a really strong position. We still have a strong cash on hand and a lot of liquidity, and we continue to generate free cash flow even in this environment. So again, we have a lot of confidence there. Again, the targets that we're looking at are going to be smaller in nature as well. And so we're not going to do a deal that's going to lever us up to two times or more.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

That's not what we're looking for. And so we're looking on looking for those kind of tuck in acquisitions, and they're going to be acquisitions that are going to be cash flowing. They're not going to be cash burning entities. So we're looking at things that are opportunistic, but we're also going to always compare that to what our share price is and whether that kind of makes more sense as we do kind of every quarter.

Joseph Spak
Joseph Spak
Managing Director at UBS Group

Okay. Appreciate it, Bree.

Operator

Your

Operator

next question comes from the line of Bobby Brooks with Northland Capital Markets. Please go ahead.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Hey, good morning, guys. Thank you for taking the question. So you mentioned that the year over year decrease in EBITDA was in part driven by non recurrence of the supplier settlement and increased stand alone costs as you exit from TSAs. So those seem more one off in nature. I was just curious, when would you expect those headwinds to subside?

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

And also, is the supplier settlement something that you can maybe come back to and become a tailwind? Or is that really more one off?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

No, that was a it was actually it was a headwind for us in 2023. And we settled that agreement with that supplier and got some retro recovery, which then hit our Q1 of twenty twenty four. Again, as I try to remind a lot of folks is the year over year is there's always going to be some noise in it. I try to look at more of our operating performance and I think the units from an operating segment performance standpoint performed pretty well. Our fuel systems was sub double digit, which is kind of our threshold.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

But again, that was a little bit due to tariffs. Without that, they're right close to double digits. And our aftermarket had really strong performance at over 16% and even with a few million of tariff impact. And so from a segment perspective, think they continue to perform really, really well. And again, I'm also not going to get overly concerned from one quarter because we're always going to have some noise of whether aftermarket some volumes get pushed out or pulled in.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Same thing with timing of shutdowns and adjustments in the market based on the quarter end. And so as you've seen over the last few years, we can have some decent swings, plus or minus a couple of hundred basis points of margin for the segments. But then over the full year, it still kind of balances out where we expect it to be. And so we're still confident in the ability of our business to continue to deliver strong results on a full year basis.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Fair enough. That's a really good call. And then just maybe just to follow-up on it. The TSAs, is that going to be do you expect that to kind of continue to be a headwind the next couple of quarters? Could you just maybe remind us of when you look at the time line of when you expect to get out of all those?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Well, we're out of just so we're clear, we're out of all TSAs as of kind of Q2 of last year. What was mentioned was when we compare to Q1 of last year, the CMA and the TSAs were still partially in place in Q1 of last year. And so now they're we're fully out of all the CMAs, we're out of all the TSAs. And so it's just more from a comparison standpoint when we look back to '24. So I think there was $16,000,000.17000000 manufacturing that we had in our revenues in Q1 of twenty twenty four.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

That's not in this number. And that's why the revenue reduction is probably more, you know, from a net perspective, it was, you know, over 7%. But when we take out CMA, was, you know, closer to 4%. And so those were kind of low margin, no margin. I think the most of that is it continues to go down next quarter.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And I think it was basically completely out or only $1,000,000 in Q3 of twenty twenty four. So it's kind of phasing out. And so really from a year over year perspective, I think once we're to Q3, there's really pretty much all the noise from 2024 TSAs and CMAs are out.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Thank you for that clarification there.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Let me clarify one thing on the corporate cost and the TSAs. These are all gone. In fact, we were doing some reverse TSAs for BorgWarner. That is all out as of now. So in terms of the corporate costs, they are running higher.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

Some of it you have to remember that we do project those based on what our units are projecting in terms of their activity and performance. And that we're on EV, economic value added, and the units are really pushing hard to achieve their numbers. Right now, their volumes are good, but they're also looking at their working capital and everything else, and they're fighting hard to make sure they keep the EV in line. And they're doing a good job, but we project based on that. So it may look elevated now if volumes come down, obviously, depending on how we do with EV, there's ways to achieve your numbers even within a falling volume, but it's a lot harder.

Chris Gropp
Chris Gropp
VP & CFO at PHINIA

But taking out expenses and making sure your working capital and your balance sheet is in line is what the units are doing.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

That's really helpful color. Thank you, Chris. Then you called out kind of the number of business wins in the first quarter. I was just hoping to maybe double click on that, specifically with the three fifty bar GDI in Brazil. Could you maybe discuss the timeline of the initial discussions to eventually winning that deal?

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

And then secondly, you mentioned the increased wallet size with a major U. S. Distributor. Could you maybe just give us a sense of how much that wallet expanded? Like did it go from 10% to 14%?

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Maybe it's not that specific, but I was just hoping to hear that type of color.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes. I mean, typical first, we'll go with the Brazil. We've been doing you probably heard a number of different announcements where we're seeing E100 and alternative fuels in different markets. And again, I think we're continuing to invest in Brazil. We see a lot of opportunities.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And in general, are programs that we've been working on for over a year doing development and prototypes and now we're being awarded. They'll be then going into production in the next two to three years is a typical kind of timeframe. And so it's nothing unique, but we are seeing more and more interest in alternative fuels around the world for things that are capable of running to an E100 technology. And so this is another key win for us as well and see more opportunities moving forward. As far as share as wallet, we won't share the exact amount, but I think it's a key area for our growth and how we're continuing to gain market share in that segment.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And anything that we're going to put on this list, we think is meaningful and is going to help drive our revenues and allow us to continue to grow organically. And so it's another just a good example of another key for our aftermarket team as they continue to perform well.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Awesome. And then just last one for me is, I know you had mentioned like in the reaffirmed guidance that any tariff impacts are going to get passed through to customers. And I'm sorry if I missed this, but could you maybe just dive a little bit deeper? So like what gives you the confidence that you'll that these any tariff impact will be easily be pushed through the customer? Just kind of wanted to hear the reasoning through that.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

I mean, we already have we've already had been having discussions with them for months and we already have a number of agreements already in place. And so the team has done a really nice job of leveraging our systems to make the audit process a lot more seamless with our with adding it into both our invoices as well as into our into our IT systems in order for us to track it more accurately. And and again, the teams are doing a good job working collaboratively with our customers to try to mitigate, you know, things going forward. And so we're we're not at a at a position where you're saying throwing our hands up and saying, hey. You've gotta pay for it, but it's yeah.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

You need to pay for it, but let's work on ways that how could we mitigate it for them and save them the money as best as possible, which is one way is going through the, what they call, a virtual impedimento to where we're working with customers to not get double tariffed, having our parts go back to The U. S. To have a tariff and then back to them. And that's why the fact that we're sending a lot of our revenues go directly to our customers in Mexico is one way that we're really helping them mitigate the impact.

Bobby Brooks
Vice President, Senior Equity Research Analyst at Northland Capital Markets

Fair enough. Thank you for the color and I'll return to the queue.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Thank you.

Operator

Your next question comes from the line of David Silver with C. L. King. Please go ahead.

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

Yes. Hi, good morning. I'll just preface my remarks by saying I due to some technical difficulties, joined a little late. So I apologize in advance if I'm making you repeat yourself. I did want to follow-up maybe from a different angle on your reiterated full year guidance.

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

But I think in general and again, I apologize if this is a gross oversimplification. But I think the companies that I speak with understand the direct tariff impacts on their business pretty well, but maybe the uncertainty is in terms of customer behavior and things like that. And so along those lines, my first question would be about your the pace or any changes in your collaborative work either on R and D or product development or moving a program from the drawing board into production. So has customer caution or rethinking or just delaying or pausing while tariff and trade policy issues might shake out. Are you seeing that in your business in any significant degree?

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

Or is it pretty much full speed ahead on the development activities? Thank you.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

It's full speed ahead. We really haven't seen any changes. The RFQs and the new business requests and quotes is really kind of continuing as normal. Again, as we've seen, we've actually seen some increases just from people realizing that electrification is not going to be 100% or at least battery electric vehicles are challenged. And we continue to see increased interest in extending combustion programs as well as a few customers talking about updating engines and new engine programs for hybrid and plug in hybrid applications.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

So we really haven't seen any reductions or delays and continue to see a strong book of business coming our way.

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

Okay. Thank you for that. And then I did want to ask, I believe last quarter you mentioned that you had regarding your efforts in aerospace, you had mentioned that you had received a key license that would be a precursor milestone to moving forward with the customer order. I was just wondering about an update, but

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

do you think that

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

the movement towards qualifications or licenses as the case may be, does that indicate over, let's say, the medium term that there will be incremental aerospace business or key business in other newer areas for the company?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes, absolutely. And again, that was actually our quality certification that's ongoing this month. And so we're still making great progress there. And so for us, it's starting to pick up even more. And so we're actually been engaging and had a number of additional customers coming and visiting us and evaluating our capabilities.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And the reception has been really, really good. And so we're expecting to continue to invest in that area and see continued opportunities there.

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

All right. Then last one from me. But I believe last year in terms of new products coming to market, I think the number was 3,600 SKUs or in that range. I just wanted to circle back on that. But in your plans for this year, how does new product commercialization

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

And has anything changed in that regard, let's say, from the first of the year till today? Thank you.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

No. I think we continue to expect to add a couple thousand plus SKUs a year, both replacing as some come off as we then add new programs. And so that's a key area again for us to continue to drive market share growth is to ensure that we continue to quickly add those new product lines as they become available. So that's a continued focus for us. We've got a dedicated team.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

That's really all they work on every single year. So we expect to continue on that couple of thousand plus units of SKUs being added a year.

David Silver
Senior MD & Director - Equity Research at C.L. King & Associates

Okay, great. I appreciate the color. Thank you.

Operator

Your next question comes from the line of Federico Morandi with Bank of America. Please go ahead.

Federico Merendi
Federico Merendi
Equity Research Associate at Bank of America

Good morning, everyone. One quick question on the commercial vehicle environment. So from my understanding, the export from I mean, the import from China is coming down significantly. And I guess that because of the impact of the tariffs, other volume for some of your some of the commercial truck customers is expected to come down. And on the top of that, earlier this week, the administration has vented possibility of an investigation for heavy duty trucks, which may result in tariffs.

Federico Merendi
Federico Merendi
Equity Research Associate at Bank of America

I know that it's still very uncertain, but did you have any conversation with some of your customers? What's the sentiment there?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes. Mean, again, I think the bulk of their sentiment is CV volumes for primarily in North America are not going to have that pre buy effect, which is why we've kind of adjusted our numbers or expectations as well. Regarding China, we don't export anything from China from a CV perspective into the North American market. And so we're not concerned with that. As Chris mentioned, our CV business in China is still stable.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And so we'll continue to kind of keep a monitor on the CV side of things, primarily in North America. But at least at this point, other than not seeing a pre buy in the second half, we haven't seen any significant changes in their expectations. Had a TV was already kind of especially in North America and Europe was soft second half of last year. We're continuing to see that softness in the first half of this year. We think it will pick up a little bit in the second half, but it's not going to be to the level that we expected before.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

And so we're seeing year over year being relatively flat, plus or minus.

Federico Merendi
Federico Merendi
Equity Research Associate at Bank of America

And do you have any thought on the potential tariffs for heavy duty trucks?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

It's anyone's guess at this point. I mean, I think with truck manufacturing, we still see a lot of that is in The U. S. There's not a tremendous amount of engine production either for those commercial vehicle engines in Mexico. We see them predominantly in The U.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

S. As well. So we'll continue to monitor it. And but it's anyone's guess on what will or will not happen.

Federico Merendi
Federico Merendi
Equity Research Associate at Bank of America

Thank you. And one last is on your free cash flow, which, yes, it's expected to be positive. But given the high level of uncertainty, how should we think about return of capital to shareholders? More specifically, what should we expect for share buybacks?

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Yes. Mean, again, as we tell a lot of folks, we'll look at it every single quarter and look at the M and A pipeline, look at our share price and look at our cash flow forecast and kind of where we are. And so we'll do that each quarter and then make an assessment. As a reminder for everybody, we do have one limitation is the tax matters agreement that should be wrapping up on July 3 that limits us to maximum repurchasing upwards of 20% of our shares. And so we're getting pretty close to that limit.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

So that would be the only kind of limiting factor here in Q2. But again, as we say, we don't give a specific number. But hopefully, our history kind of shows that we're good stewards of capital and looking to maximize shareholder value.

Federico Merendi
Federico Merendi
Equity Research Associate at Bank of America

Thank you, guys.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Thank you.

Operator

And that concludes our question and answer session. And I will now turn the conference back over to Brady Erickson for closing comments.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

Great. Thank you, everybody. Really appreciate it. It's obviously a challenging time, but I think in general, our teams are working very closely with our customers and our suppliers and are doing the right things. And we'll continue to execute as an organization and think our long term strategies are still in place and are continuing to win new business and look for opportunities for further growth.

Brady Ericson
Brady Ericson
President and CEO & Director at PHINIA

So really appreciate your support. We'll talk to you soon. Thank you. Have a good day.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.

Executives
    • Kellen Ferris
      Kellen Ferris
      VP - Investor Relations
    • Brady Ericson
      Brady Ericson
      President and CEO & Director
    • Chris Gropp
      Chris Gropp
      VP & CFO
Analysts
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Key Takeaways

  • First-quarter net sales of $796 million were down 7.8% year-over-year, with adjusted EBITDA of $103 million (12.9% margin) and adjusted EPS of $0.94 reflecting softer OEM volumes and standalone infrastructure costs.
  • The company returned $111 million to shareholders via $100 million in share repurchases and $11 million in dividends, ending Q1 with $373 million in cash, a 1.4x net leverage ratio, and $264 million remaining under its repurchase authorization.
  • Finia secured key new business wins, including a 350-bar GDI E100 system for the Brazilian market, high-volume fuel delivery modules in The Americas, an SCR pump award in China, and aftermarket expansions in Europe and Canada.
  • Management expects to fully pass through new U.S. tariff costs to customers, noting that over half of North American revenues are USMCA-compliant and that more than 60% of global sales occur outside North America.
  • The company reaffirmed its 2025 guidance—anticipating H1 sales in line with H2 2024, a full-year effective tax rate of 38–42%, and continued investment in R&D, M&A and capital returns under its long-term growth strategy.
AI Generated. May Contain Errors.
Earnings Conference Call
PHINIA Q1 2025
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