Phinia Aktie

Good morning. Thank you, PHINIA, for joining us at our Chicago Industrial Summit. We're excited to have Brady, Chris and Gordon with us today. For the purposes of this fireside, we'll go through some prepared slides. Brady will kick off on that, then we'll go to Q&A. I want us to be as interactive as possible. So thank you for joining us here again. And with that, I'll let you kick off on the slides.

Great. Thanks, Brian, and thanks, everyone, for joining. We'll flip through a couple of quick slides here, kind of give you a quick overview of the company and our strategy and then go from there.

First up, it's how we go to market is through product leadership. We continue to try to ensure that we have some of the best products that provide the greatest value to our customers. And we think we've got strong positions in all the product lines that we're participating in, whether it's fuel injection, starters and alternators and Aftermarket businesses. And we're leveraging all of that capability. And so we're not just -- we're not a what we consider a commodity. We try to win on our technology and our performance of our products.

We go to market and we actually service all a bunch of different markets out there, and that's why we can really consider it more of a diversified industrial because of the variety of end markets that we serve. We then couple that with a lot of our financial discipline. We evaluate every single quote that we have out there, expectations on return on invested capital. Our minimum hurdle rate is 15% is what we expect to deliver on any of our new programs and continue to drive that as part of our business.

And then all of our decisions are really around how do we maximize shareholder return. And that's where our financial discipline, net stable growth, our capital allocation strategies is really going to shine through is where we're focusing on that shareholder return.

When we talk about the diversity, I think this slide here really kind of goes through a lot of our strategy. Not only do we have diversity around the regions, we also have diversity in our customer base. Our top 5 make up 37%. Our top 1 is in the high teens, 16%, 17%. Two through 5 are all in the mid-single digits. So we have a lot of diversity in our customer base. And then finally, as I mentioned, a real diversity in our end markets, service, which will include original equipment service as well as independent aftermarket, makes up 35% of our revenue. So that's actually the largest end market that we serve. That's followed by light passenger vehicle at 25%. Medium- and heavy-duty on-highway commercial vehicle of 15%. Light commercial vehicle at 19%. And then probably our fastest-growing segment is the off-highway industrial and other that will include the aerospace, gensets, the ag, the construction. And people will ask us a lot about going into all these different end markets.

What's interesting for us, it's really the same engineers and the same manufacturing equipment. And so for us, we're able to leverage our human capital and our manufacturing capital to go to these different end markets. So we're not having to invest a bunch of money now in the hope of delivering additional revenue and profitability later because we're able to repurpose a lot of our existing lines. And so there's actually a light passenger vehicle diesel line that we repurposed to do some of the aerospace work because the processes, the materials, the precision machining, the final assembly of the test is all similar.

And the same thing with the engineers. We're not converting mechanical engineers and trying to have them do power electronics. We're having mechanical engineers, and it's a pre- and post-injector for a turbine engine. So it's fluid management. It's precision engineering. And so it's the same engineers that we have on aerospace, commercial vehicle and light vehicle because it's the same basic technology. It's just different flow rates, different pressures. And so we're able to shift our resources depending on where the growth is coming. And that's, in our view, is going to deliver a consistent growth rate and make us very resilient in a relatively volatile market.

We did just recently announce the acquisition of stoba here at the end of June, gave a little bit of more insight in our latest earnings calls. And you'll see here, we see it as consistent with our strategy. It's going to add another aerospace and defense certified location in Germany, very precision machine components. And they have a lot of intellectual property and trade secrets on how they manufacture their products, the tight tolerances that they're holding. They are one of our largest suppliers and a critical supplier for us. And although their third-party or total revenues are about $200 million, $120 million of that was to us.

So we see that as a not only as a way to get some critical technology inside, but also make our supply base a little bit more resilient. As we've seen in many of the European supply base and others, there's a lot of concerns with the financial viability. And so these small- to mid-sized companies are a concern. And so we saw this as an opportunity to not only expand our exposure into aerospace and into different customers, but also to solidify our supply base as well. And so we think it was a fair multiple at 6x EBITDA, and we think that will just nicely kind of slide right into our organization. Their plants are close to our plants as well, and it gives us some ability to continue to optimize their manufacturing footprint with ours as well.

Just a quick highlight. We did report earnings a few weeks ago as well. Another good solid quarter, $130 million of EBITDA, $940 million of sales, another strong sales quarter for us year-over-year growth versus prior year. EPS continuing, I think it was up around 20% adjusted EBITDA from prior year. We continue to maintain a strong balance sheet. Share repurchases continue even with the acquisition that's coming. And our leverage is pretty conservative at 1.3x. Our target is around 1.5. So we have a little bit of room there as well. And again, the 1.5 plus or minus, we think, is a good level right now. As we shared at the Investor Day, as we continue to grow and as we continue to get our interest rates maybe a little bit lower, maybe we go from 1.5 to 2, but we still want to maintain a relatively conservative balance sheet. We're not going to be levering up to 3x, and what we consider excessive because there are always going to be some cycles that we have to weather.

I think this is a nice summary of our discipline and financial discipline and capital allocation discipline. Since we spun, we just had our third anniversary back in early July. And in that time, we bought back close to 24% of our shares, returned $665 million to shareholders. We've increased our dividend. We established a dividend and increased our dividend twice already, maintain good leverage. We produce predominantly in low-cost countries. We've seen some nice organic growth rate and also now with the SEM acquisition integration last year and now the stoba acquisition, we're finding those nice little tuck-in at reasonable prices that continue to support our business kind of longer term. So we think this is a really strong slide for us on how we have a good, strong foundation. We're investing for the future growth. We're disciplined in that area. And again, I think some of our capital return to shareholders has also been extremely strong over that period.

And that thing kind of leads into kind of what our overall expectations have always been for the decade. Through the cycles, we'll see that average organic growth rate in that 2% to 4%. I think this year, we're right around 3%, 3.5% this year. Cash flow continues to remain strong. We still have some opportunities to continue to grow EBITDA, and we expect that to be solidly in the 14% to 15% range. And then that target modest leverage at 1.5x.

So I think if you take a look at what we've delivered over the last 3 years, I think it's -- our goal is to be consistent kind of in the ups and downs even with the commercial vehicle market being really pretty heavy over the last couple of years, we still kind of held our numbers. We're relatively flat to maybe a little bit up, continue to deliver good, strong cash flows, and that's one of the benefits of the diversity of the markets that we serve. There's no one market that's going to really drive or one platform that's going to drive our revenues.

And so I know people are more excited about light vehicle or more around CV. But again, CV is still only -- medium-, heavy-duty CV is still only 15% of our revenue. So yes, we'll see a little bit of uptick there. We're seeing a little bit of headwind in light passenger vehicle in China. India is now really kind of ramping up, and we're building a new plant there as well to support that growth. Alternative fuels is really growing well, whether it's natural gas, ethanol, methanol, both light vehicle and commercial vehicle, hydrogen as well. We think there's a lot of opportunities for us to continue to grow in these different markets and different regions of the world.

So with that, I'll pass it back to you, Brian.

Good. Thank you for taking us through that, Brady. Just some questions to get started as it relates to the Q&A session.

You talked a lot about diversity of end markets in terms of tiers. So when you think about that end market exposures as it continues to evolve, we talk about kind of the industrial aspects of that and again, getting away from -- and industrial, it's not just industrial, but industrial state, but also off-highway, on-highway from a commercial vehicle standpoint, other non-pass car and then aftermarket. And as you position that from like kind of a core growth and margin engine for the company, talk about that just organically and inorganically as you should take it forward.

Yes. I mean, we're going to be disciplined on the inorganic. And so are we looking for opportunities on the aftermarket side from an acquisition standpoint? Absolutely. It's got to be at the right multiple and fit with our portfolio. From an organic standpoint, we expect our Aftermarket and our Service business to grow from that roughly 35% to probably closer to 40% organically between now and the end of the decade.

And so -- and that's primarily made up of kind of 3 major components. One, as we were talking earlier, the average age of vehicles continues to increase. The number of vehicles in operation continues to increase. And as long as people are driving, our Aftermarket in general, the market itself is growing 1% to 2% a year. So that's just the overall market.

Pricing is generally 1% to 2% a year on average as well. And then we've been kind of continuing to gain a little bit of market share. And as we continue to diversify our product portfolio and our offerings that's another 1% to 2%. And so that's where we see our Aftermarket in that 3% to 6%, 4% to 6% type of growth rate. And so if we continue to grow that, that's going to allow us to increase our Service and our Aftermarket business as a percent of sales.

If you take a look at our recent earnings, our Aftermarket segment is already delivering roughly half of our profits. And so although the revenues may be a little bit lower, it's already about half of our profitability. The Aftermarket segment, I think we were just right around 17%, 17.1%, I think, in the quarter. It's a good solid number for our Aftermarket segment, and our Fuel Systems is right around 11%. So our goal has always been for Fuel Systems to stay double digit. Hopefully, the new floor is around 11%. Aftermarket was, hey, at 15%, maybe 16% is now kind of the new floor and continue to grow the business. And so we see these as real strong businesses, very profitable businesses and ones that deliver great cash flow, too.

And you push further on the industrial front. The great thing is that the industrial aftermarket tends to be more profitable and stickier.

Yes. I mean, if you look at the numbers, our Aftermarket as a segment, half of that 35% is more on the heavy truck and the other half is on the light passenger side. So I absolutely agree with you. On the commercial vehicle side, we may get 2 to 4 replacements over its life cycle, while, on the light passenger vehicle, we may get 1 to 2. And so we do see a much larger just because of the miles driven and the severity of some of those applications that we tend to get more service parts over the life of the vehicle.

Just a little bit more on the Aftermarket side. When you think about just key operational levers there, SKU expansion, brand conquest wins, what else is helping drive the outperformance there?

Well, I think the SKU is the overarching. But as we do this, we've continued to add different product lines into different regions. And we're doing it in a disciplined manner to where we'll launch it in one region, get penetration, see if we can get some success in there. If it continues to grow well, we'll then take it to other regions. So steering, suspension, breaking is one of those things that has really been growing well for us. And now we're taking it to kind of all markets.

I think having the OE pedigree and the quality, I think, also helps us. So we're definitely the premium product. And people know the DELPHI brand. The DELPHI brand is probably one of the top 5 -- in the top 5 brands out there in the aftermarket that people recognize it, they appreciate it and they're willing to pay a premium for it because they know it's a good quality product. And so we leverage that. And the nice thing about the DELPHI brand is at some point, they probably made about every single component in the vehicle. So we have the flexibility to go into those different areas, apply the DELPHI brand to it, and really get a premium for that product and actually helping a lot of the mechanics and the shops. They put that DELPHI brand, they can sell the DELPHI brand easy. And they make more money because they're doing a markup on our product.

And so a markup on $50 is not as good as a markup on $70. And so they actually make more money. And again, with many of our components, labor is actually the bigger component. And when you start tearing apart an engine, if you've seen some of the labor rates in some of these shops, they're probably going to spend more time in labor than they do in parts. And so they're going to want to ensure that they put the best quality parts on it. And so they're not going to go with a cheaper brand just to save a few bucks because if something goes -- if the mechanic is putting it on, if something goes wrong, they're on the hook for their labor to replace it for the customer. And so that's where they really know they can rely on the DELPHI product and the brand, and they can easily upsell their customers to get the higher quality part.

And there's a similar dynamic on the DELCO REMY on the CV side, where you're literally spec-ed in by the fleets to sell the DELCO REMY. So whichever brands you're going with, whether it's DELPHI, which can go across both the CV and the light vehicle and the light commercial, and you have the DELCO REMY, that's more skewed towards the CV side also, that adds...

Any questions? I don't want to monopolize. I can keep going.

[indiscernible]

I don't think they necessarily will. I want to get solidly into 14%, 15% before I make a commitment to go 15%, 16%. That's probably more of the rationale behind it because it's -- the EBITDAs aren't that much different. When we talk about the 17%, that's operating income. There's not a lot of depreciation in the Aftermarket segment. So it only has maybe 1% or 2%, where it's 4% to 5% on the Fuel Systems side. So the Fuel Systems is not that much different. It's only a few points less.

But I think in general, as we continue to grow, as we continue to expand into the off-highway industrial and some of the aerospace business, I think that will then allow us to kind of take that margin up a bit kind of going forward.

It's really small. We launched our first program with Safran earlier this year. The second one launched in Q2. Third one launches?

In '27. Early '27. Yes.

'27. And then the fourth one, I think, is in end of '27 as well. So that's now kind of -- it's something we've been working on for about 4 or 5 years now. Our facility in France got their aerospace quality certification in Q4 of last year. And now we've been going to a lot of the air shows and now that we have a big customer, credible customer. And with our quality certifications, the doors are really starting to open up. There's probably a dozen programs that we're currently quoting on right now and supplying prototypes for.

And then the stoba acquisition will add -- they have a number of aerospace -- they have an aerospace certified location as well as customers that we aren't in right now. And so that will open up some more doors for us as well.

A key theme of the conference is obviously how to build out a data center footprint in terms of what's there. Can you talk a little bit more about -- think about what PHINIA is doing on the stationary power generation side of things, industrial applications, some of that lineage, you just talked about DELCO REMY, from commercial vehicle standpoint, the alternative fuel research that the team has been doing, how you're able to kind of capitalize on that macro.

Yes. Yes. I think some people kind of, I think, overhype the data center side of things if we're doing generators. I mean we work with the Cats, we work with the INNIOs, we work with a lot of the genset providers. But the genset market in totality is now increasing, but it's not doubling in size. Certain applications are doubling, but the volumes are still relatively small. We've been on gensets for 30, 40 years, whether it's Cat, Perkins, whether it's INNIOs and others. And so yes, we do see some increase in it, but it's still a relatively small percentage of our overall business.

Now what -- we can't say that the genset is going to a data center, because it's just a genset. It could be going to a factory. It could be going to a hospital. And so really, what we know is, hey, it's a 20-liter genset, it runs on natural gas and is designed for prime power backup power. And so that's what we supply our parts to. And in general, our parts are going to be the same, whether it goes to a data center or whether it goes to a hospital or a factory.

So we are seeing some tailwinds. We saw some tailwinds in gensets business a number of years ago when they were building out 5G towers. They needed a bunch of gensets, backup power for the 5G towers, and we had a big surge in our genset business for a few years, and it came back down again in a cyclical market. I think with the data centers and some of that demand rather than being a cyclical business, I think it's going to turn into more of a consistent long-term growing business. And we do think there's opportunities there.

The SEM acquisition is one of them and we're benefiting from that because a lot of their ignition coils is for natural gas applications. And that's where a lot of these large prime power are going to be on natural gas. And so we do see some opportunities there as well.

Just picking up on the stoba acquisition in terms of, again, broadening the exposure on both off-highway and industrial, as you mentioned. As you think about just taking that and then pushing the existing relationships you have with them, but how does that best further accelerate what you're doing into non-automotive in terms of those industrial? You talked about aerospace, supply chain in terms of enhancing that...

Well, I think it opens doors to customers that we've been trying to knock on and haven't been able to get into. And so they're already working with Liebherr and Woodward and Zeiss and a number of different customers that we're not in right now. And so it's going to open up some doors there. With the build-out, with the military spending increasing in Europe, having a certified location in France, having a certified location in Germany. We have locations that are working on the certification in the U.K. We think we're going to be well positioned to support those customers. And as people know, the military sector and the aerospace sector are not the best at managing their supply base, and there's a lot of challenges. And so us going in there, the doors have been kind of wide open. They're excited about it.

Their main concern was always, can you guys -- you understand our lower volumes. And we say, yes, we're doing gensets, we're doing off-highway, we're doing marine already. We know the low volumes, and we can support it. And as we're continuing to build a strong relationship with the customers, they're giving us more and more opportunities.

And if you think about some of the manufacturing processes around the components in our fuel injection, we're talking about plus or minus 0.5 micron. We're talking about pressures in our injection systems that are in excess of 40,000 psi close to 3,000 bar. Laser ablation, laser drilling, EDM drilling, the micron, the shapes that we're controlling. The aerospace specs that we have are quite easy compared to what we're doing on commercial vehicle diesel injectors.

So the capability, the types of materials we're using the super alloys, it fits directly in with our capabilities. And that's why it was easy for us to win these first couple of programs, one is a pre-injector, one post-injector for a turbine engine. For us, it was the same basic machining, assembly lines, and we're able to convert an existing line. And that's why we think this is a -- it's an area that we can shift into and allocate additional resources to without having to increase our CapEx, without having to increase our R&D as a percent of sales, and we're leveraging our same existing human capital as well, so we can move them from commercial vehicle to aerospace.

And I think another couple of good examples of that is we also converted one of our light vehicle diesel lines because, obviously, Europe light vehicle diesel kind of went off a cliff. We actually converted -- we have a GDi for diesel. And so we actually converted one of our GDi lines for diesel applications for Kohler for an off-highway application. We've converted some of those diesel lines down for South America and other locations. So now we're 100% ethanol applications. South America seems to be going more that way. You've heard a lot of different new business wins in natural gas in India. India is going heavily into natural gas, both light vehicle and commercial vehicle. So we're moving lines down there as well.

And so what's nice about it, not only do we have flexibility on our human capital, but a lot of our manufacturing lines, one, we can convert from gas to diesel, and we can easily move them from Europe to South America or Europe to China, China to Mexico depending on where the demand is. So these are things that we can move capacity around to where it's needed as well.

And just picking up on what you're hitting on from a nat gas standpoint. I mean, that fits into just some of what you're capitalizing on in terms of alternative fuel demand in core markets. So I mean, there's different chapters here, ethanol, methanol, hydrogen. Can you talk about how you're being able to capitalize on that opportunity?

Well, again, it's -- from an engineering standpoint, it's just a different viscosity and different flow rates and pressures. And so you just have to make some slight -- whether it's a nitriding, whether it's a coating, whether it's a diameter, you got to open up to allow more flow. It's the same basic technology. And so we were -- probably a few years ago, we were probably people were more excited about hydrogen. And so we're investing a little bit more there. I think the excitement has kind of leveled off a little bit. And I think there's still a lot of work going on there, but there's not the overhype. So we backed off a little bit, moved some more of that to natural gas and some of the lessons learned that we had on hydrogen, we're able to apply to natural gas and ethanol applications.

And so for us, every time we work with a different fluid, we learn some new things, and we can then apply some of those lessons learned to other applications as well, whether it's a different type of coating, a nitriding, a flow rate, corrosion, I mean, obviously, 100% methanol is a very corrosive fuel to deal with. And so getting something to live with methanol over the life of the vehicle is a challenge. But obviously, we learn a lot and we can apply some of those lessons learned to other applications.

But the investment is the same. The capital equipment that it takes to produce those parts is the same. It's more in the materials themselves that our engineers have to work through and deal with. But it's the same engineers, and they understand and try to figure out the flow rates and how you work with the materials and as Brady said, the coatings and things. But the cost to get into those areas is approximately the same, and it doesn't take a big spike in spending to move to those alternative areas.

You led off your prepared comments about product and technology. And so at ACT Expo, you had introduced the first homologated H2ICE LCV. Just again, product leadership, technology leadership. Can you just talk about how that's been able to leverage that with the OEMs and then looking for kind of that near zero emission combustion pathways?

Well, I think that's a great example of we're not just a component supplier. We supply a complete system. And so we were able to convert on our own the complete vehicle from a diesel to hydrogen, the tanks, the safety systems, the homologation, the calibration, certified and everything else. And so that vehicle has been running around the U.S. now. And that's a good example of some of the influence we're having. We talked to CARB and the EPA 2, 3 years ago about hydrogen internal combustion. They didn't want to talk to us. And because they were so focused on battery electric and/or fuel cells. And we kept talking to them and talking to them and they really started to say, "Hey, let's take a look at it. Maybe it has some value."

And so they want to test it, and they were able to test the vehicle for a month in their own labs to get their own feeling for it. So that's how we're starting to have some influence on the EPA and some of their thinking. And then our customers will then come back to us and kind of say, "Hey, you got CARB to test the vehicle, maybe we can work on some test fleets." And so we have a number of customers we're working with to do some demo fleets in different parts, whether it's buses. I think our CTO, Todd, met with some of the transit authorities in California, where they're saying, "Hey, these battery electric buses aren't working for us. It can't last the full day. It loses speed on some of the elevations and the hills." They just -- it's not meeting their expectations. And so they're asking us saying, "Hey, would we be interested in doing some hydrogen ICE demo fleets."

And so I think that's where we see that coming to where I think we're going to be doing more and more kind of demo fleets. They're going to want to get 2 or 3 years of experience to see what the total cost of ownership is going to be, how they perform, does that meet their duty cycle requirements. And then I think it's probably going to be something more in the 2030s.

Now with that said, I think we were just in Le Mans as well, and they have -- the Le Mans is now going to open up hydrogen for the 24 hours of Le Mans, I think, in 2031. Formula 1 is now working with it. Trucks are working with it. We've got a hydrogen working on actually a tanker that there -- it's a diesel engine that they're supplementing with 10% hydrogen. And that's helping them reduce their emissions and improve things. And so we're supplying them with some technology as well on the injector side.

So there's a lot of different things that are working on there with hydrogen, whether it's a mix, whether it's a blend, whether it's 100%. I think it's a very interesting solution, especially for the Western Hemisphere that doesn't have the battery infrastructure. And so whether it's Europe or North America OEMs, they're probably some of the leaders in combustion technology. And so it'd be a lot smarter if they just replace the fuel and keep the leadership in combustion technology, keep all those engine plants, keep all the mechanics that know how to repair these things in place rather than going to a battery electric that they're way behind. They're going to lose. They're 20 years behind or 10 years behind the Chinese and their technology and the vertical integrations they have. I think it's going to be very difficult for the Western OEMs to compete.

I have some final questions around kind of capital allocation, but I just want to go back to the group for any follow-up questions.

It's interesting that you point out the [indiscernible], something like that might bridge between total internal combustion after the [indiscernible]. But I guess the pushback there is, there are at least one of the few trucking companies that have been playing around with it for about few years and it hasn't been as commercially viable as they [indiscernible]. So I suppose the question that I have is, what's changing with this next set of vehicles where it would be more of a commercially viable technology? Is that something that you're working to address or...

Yes. I mean the fuel cells, I don't think is a bridge technology. I think they were hope -- they thought that was going to be the solution. And I think a lot of the fleets have struggled with the performance of the fuel cell, the reliability of the fuel cell [indiscernible] looking at, hey, I need a Class 6 or Class 7 truck, but to get the power that I need, I got to go to a Class 8. It just didn't make sense. I think the other challenge with fuel cells is that they require liquefied hydrogen and very pure hydrogen. And if you don't have pure, you can damage the fuel cell and it becomes an issue.

The nice thing about hydrogen ICE is we can handle the contaminants. We don't need it to be in a liquefied form, it can be in a gaseous form. If they want to transport it via piping or by pipe, no problem. Fuel cells can't, because it picks up a little bit of contaminants along the way in the pipes. And so it becomes a challenge. And so we've actually worked with the fuel standards organization to come up with a new grade of hydrogen that can have some contaminants in it. And that should hopefully also lower the cost of the hydrogen because that's one of the bigger challenges, the cost of hydrogen right now and to get to that purity level.

And so we're saying, "Hey, for hydrogen ICE, we don't need that purity." So that could probably almost cut the cost in half over time versus the pure version because you don't have the storage cost, you don't have to keep it in a cryogenic state. You can pipe it, you can truck it, you can store it in more reasonable applications. And so our view is that a hydrogen ICE is a more robust solution.

I think the fuel cells make sense if you're in space or you're in a data center that's a very controlled environment. But once you go on the road and go into trucking, and I mean, we can't get biodiesel consistency across the country that causes issues. That's what these vehicles have to deal with. And so you're not going to get the purity of hydrogen, you can assume that everything is going to be perfect once it goes out in the field, and that's what they ran into with the fuel cells.

Got it. So I guess to get to that stage, do we expect to see a bit higher level of R&D with this technology relative to...

For us, it's relatively applicable. Again, we're in production with JCB with hydrogen. And again, it's using the same basic technology. It's either going to be a version of our port fuel injector, if they're going low pressure. And if they're going higher pressure, they're basically using a GDi or direct injection, 300, 350 bar type injectors. So for us, again, it's not any different from an R&D. And so we've been supporting for the last 5 years, hydrogen, ammonia, methanol, ethanol, natural gas, all those things are already in our numbers. So we've been doing it. So we don't see any need to have to, hey, we need to increase R&D another percent of revenue in order to meet this. And so -- and in general, in a lot of these applications, we're getting a lot of either government and/or customer funding to support it as well.

So you can meet the emissions level, but you don't have to go to some extreme. So we've had to say, since coming out 3 years ago, combustion is not the enemy. You can combust and still come back to a zero emissions or very neutral emissions level product. So it's not combustion that's the enemy, and we know how to do that. And there's a lot of people out there. It's a better technology, and you can get where you need to be without going crazy and spending piles of money.

And it's a practical solution, too, because, again, we can convert them relatively easily. It's not crazy other than the tank is the biggest thing. But there's a lot of applications out there that are already natural gas, and they have the same kind of size tanks and packaging. And so from our standpoint, we think it's a very practical solution. We were joking at first, the EPA and CARB, well, it's not 0 because it's a little bit of oil that gets past the piston ring that will combust and it gives a little bit of CO2 and a little bit of emissions. And we joked with them and kind of said, well, you know that guy sitting in the driver seat, he's spitting off more CO2 than it's coming off the tailpipe. So let's be a little bit practical. Let's be rational in the application.

So I do think they're starting to be a little bit more rational and people are looking at it as an alternative. Do I see it significantly impacting our revenue this decade? No. But I do see it as a pathway of why combustion engines will probably have a lot longer life than people think.

Okay. And then capital allocation-wise, you talked about leverage levels in terms of the target where you're at right now, balancing, organic versus inorganic. Obviously, stoba is an attractive entry point as it related to -- I think, it's fair to say, to pick your word in terms of the purchase multiple. Obviously, as you talk about those long-term growth rates that target 3% to 6% that's all organic, and so inorganic would be on top of that. But how do you balance continued investment for growth as you think about capital allocation relative to returning capital because you talked about repurchase and dividends as well.

Yes. I mean the first and foremost, is supporting our organic growth. And that's the R&D at 3% net, CapEx at roughly 4%. I think we're running maybe 3%, 3.5% this year. So we're being disciplined on that side of it. When I say on the R&D, it's 3% net, but it's actually closer to 6% gross because we get about $100 million from our customers for services, development, government grants. So we're actually spending quite a bit on a pure R&D standpoint, and that's also a testament to the value that we provide and the overall system level support that we give our customers.

And so from -- that's kind of first and foremost. The next is then we've -- our dividend, although our dividend, we [indiscernible] it twice, it still stays around that $40 million, $50 million that we allocate to dividends. And then from the rest of it, we'll take a look at our debt levels, we'll take a look at where our share price is, and we'll take a look at where some of the opportunities are. And so when we're taking a look at acquisitions versus share buybacks, we're going to look at it on the same, where can we maximize shareholder returns. And acquisitions obviously bring more risk with it than investing in ourselves.

And so when we took a look at both at SEM, we were trading maybe in the 6 to 7 range of enterprise value over EBITDA, and we did SEM at 5x. And they actually have a longer-term growth rate. We actually saw a better growth rate in their business than ours. So we thought, hey, it's lower than our multiple. They have a higher growth rate, and they have good margin business. That makes sense rather than buying back our shares.

We're now trading 7-ish, 7, 7.5. Stoba is at 6, kind of a multiple. It was a vertical integration as well, relatively low risk. We knew their business opens up some aerospace and defense that maybe give us a little bit higher growth rate than our base growth rate, that made more sense. We're always going to take a look at it compared to our own share price. If we were trading at 5x [indiscernible] a lot more -- it makes a lot more sense just to buy back more shares, because we think we're extremely undervalued.

And so that's how we kind of take a look at it. And what we've seen even this year with stoba, we can acquire stoba and still continue our pace of roughly $200 million in share buybacks and still be at 1.5x. So one doesn't preclude the other either, because we -- our net debt went from, I think, 1.4 to kind of 1.3?

Yes.

Because we continue to grow our EBITDA. We continue to generate a lot of cash flow. So given us that opportunity, and so we can do stoba, continue our share repurchases and still be at roughly 1.5x.

Look, I think highly accretive acquisitions like those that you've been able to identify and complete shown on the back end, that's obviously going to drive further credit in terms of the inorganic growth on top of the organic and the foundation, which is great. I trust that there's a ready pipeline in terms of what the team is looking at.

Yes. I mean we've probably gone through 200?

A lot.

By now, since we've spun. But again, there's probably 80%, 90% of them, we throw out right away. There's maybe 10, 20 of them that we dig in a little bit deeper. We've put in some initial offers on probably over a dozen. But then we're not going to chase them. This is what it's worth to us. And if they don't want to transact, they don't transact. I'd say probably less than half are for sale, too.

So we're targeting different companies that we think would be a good fit as well, building relationships with them. That's what we did with stoba, that's what we did with SEM. They weren't for sale. These are ones that we developed relationships with. And so we continue to build relationships with companies we would like to integrate. We do look at some that are for sale as well. But again, we're going to remain disciplined in what we're willing to pay. But we're not going to chase it.

So I know you mentioned just having hit the third anniversary, but the reality, I mean, the background on this company goes back 100 years.

100 years. Yes.

So the point is that the relationships that you have -- that the team has with other players in the sector, to see things that other people don't see, you don't wait for the processes to come to you, you go find them?

Yes. Exactly.

I don't have anything else unless there's other questions in the room to follow up.

Great. Thank you very much.

Thank you, PHINIA.

Thanks, Brian.

Good morning, and welcome, everyone, to the PHINIA Second Quarter 2026 Earnings Call. Today's conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the conference over to Brady Ericson (sic) [ Gordon Muir ], Vice President and Treasurer. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's Investor Relations website, including a slide deck that we'll be referencing in our remarks. We're also broadcasting this call via webcast.

Joining us today are Brady Ericson, CEO; and Chris Gropp, CFO. During this call, we will make forward-looking statements, including comments related to our 2026 guidance, which are based on management's current expectations and are subject to risks and uncertainties.

Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements.

And with that, it's my pleasure to turn the call over to Brady.

Thank you, Gordon, and thank you, everyone, for joining us this morning. I'll start with some highlights on the second quarter and some key developments in the quarter that support our strategy.

Chris will then provide additional details on our second quarter results and discuss our 2026 financial outlook. We will then open up the call for questions.

The second quarter developed largely as we expected with highlights including continued revenue growth from both Fuel Systems and Aftermarket, leading us to a refinement of our full year guidance. We were also excited to announce that the company has entered into a definitive agreement to acquire the stoba Group, a global technology partner specialized in high-precision components, systems and integrated solutions globally.

As Slides 6 and 7 detail, stoba has operations in 4 countries, expect a run rate third-party revenue of approximately $80 million and accretive EBITDA of approximately $25 million. We expect the integration of the stoba Group to expand our exposure in off-highway, industrial and other customers and markets and drive synergistic profit expansion through supply chain ownership, integration of key capabilities and cost efficiencies.

This will also add an additional aerospace and defense qualified location to our portfolio as well as greater exposure to these customers. Excitingly, these assets support the global semiconductor industry with high-performance equipment components, opening another avenue of growth and diversification. Closing of the deal is expected in the fourth quarter of 2026 and will be funded with available liquidity.

Returning capital to shareholders is a key component of our capital allocation strategy. And with a healthy balance sheet, we continue paying dividends and repurchasing shares. We are confident of our operational and financial performance that allows us ongoing run rate capital returns to our shareholders.

While the environment continues to evolve rapidly, our teams are managing our business well and delivered results that strengthen our long-term foundation. Our diversification across regions, customers, end markets and products helped offset variability in any single region or segment.

And finally, we continue to adapt to ongoing changes in government policy governing tariffs, and as such, with expected net refunds during the quarter, with some cash settlements already received. Chris will discuss further details in her commentary.

Turning to Slide 8. PHINIA continued to demonstrate resilience in a mixed macroeconomic environment. Demand conditions across key end markets remain steady, supported by durable replacement cycle fundamentals and ongoing positive results in the commercial vehicle industry.

We continue to navigate ongoing geopolitical and trade-related uncertainty, tariff changes, as previously noted, shipping challenges and regional production variability. Through strong operational execution and disciplined cost management, we've managed these challenges effectively.

We continued our streak of year-over-year growth in both Aftermarket and Fuel Systems segments. Total net sales in the quarter were $940 million, up 5.6% from the same period of the prior year. Excluding FX impacts, the impact of tariff recoveries and the contribution of SEM, revenue was up 2%.

We reported adjusted EBITDA of $130 million for the quarter, up $4 million, representing a margin of 13.8%. Total segment adjusted operating income was $125 million or 13.3% margin.

The Fuel Systems segment delivered a strong quarter with sales of $584 million, up 5% and adjusted operating margin of 11%. The Aftermarket segment had sales of $356 million, up 6.6% with adjusted operating margin of 17.1%.

Adjusted earnings per diluted share, excluding nonoperating items, was $1.53 for the quarter compared with $1.27 in the same period of the prior year, a 20.5% increase year-over-year.

From a balance sheet perspective, PHINIA continues to demonstrate financial stability and consistency. We exited the quarter with a cash position of $370 million and a total liquidity of $820 million.

Our net leverage ratio was 1.3x, which is under our target of 1.5. We returned $53 million to shareholders in the form of share repurchases and dividends. Our balance sheet continues to provide the financial flexibility to support growth initiatives while returning capital to shareholders.

In summary, while the external environment continues to evolve, we remain focused on the current and future of the business. The second quarter performance underscores the durability and resilience of our business amid a rapidly changing global environment by serving a broad mix of regions, customers, end markets and products.

Moving to Slide 9. I am pleased with the success we are having with respect to gaining new business. The second quarter was another good quarter for us, reflecting continued progress across multiple fronts.

Importantly, we're continuing to grow with our existing customers, adding new ones and gaining real traction in new areas of our portfolio. This quarter included notable wins across OE and aftermarket channels, reinforcing customer trust, technology differentiation and PHINIA's ability to deliver premium solutions to our customers.

Launch progress on important programs in our portfolio, including aerospace, off-highway, heavy-duty truck, continue at an advanced pace, which will support our progress through the end of the decade and beyond. Key Fuel Systems wins in the quarter include a new business for a heated tip MPFI system, supporting light passenger vehicle engine application, further expanding PHINIA's alternative fuel portfolio; a 24-volt starter program supporting a Class 8 commercial vehicle platform, reinforcing PHINIA's long-standing position in the heavy-duty on-highway market; a complete common rail system program for agricultural applications, highlighting the strength of PHINIA's integrated fuel system portfolio and reinforcing our position in the growing off-highway sector.

Turning to Slide 10. Our Aftermarket business continues to be a steady and reliable contributor to our results. Demand remains consistent, driven by an aging fleet and a growing vehicle park. As vehicles stay on the road longer, customers around the world rely on our quality parts and service more than ever.

Our strong and recognizable brands, broad and consistently expanding product offerings and focus on customer service are helping us build deeper relationships and win new opportunities.

Recent wins were across diverse geographies, further strengthening our position in the independent aftermarket. A few notable changes during the quarter include open vehicle electronic distribution with a leading pan-European distributor, significantly expanding market access across the EMEA region; expanded the global aftermarket footprint through new customer acquisitions, branch expansion and increased distribution penetration across North Africa, Eastern Europe, North and South America, China, Southeast Asia and Oceania.

We introduced more than 2,650 new SKUs globally during the first half of 2026, while adding more than 150,000 cross-references to regional catalogs, expanding vehicle coverage and enhancing customer access to PHINIA products.

These wins show consistent progress towards seamlessly diversifying into higher-growth end markets by leveraging our existing human and manufacturing capital. Additionally, we had several significant product launches this quarter, including a 500bar GDi system, showcasing our full system capabilities and continued leadership in advanced gasoline technologies; a fuel delivery module in India, broadening our CV portfolio and supporting growth in a key strategic market; and a next-generation GDi pump reinforcing our position in passenger and light commercial vehicle applications.

Moving next to capital allocation on Slide 12. Our approach remains unchanged. We are staying disciplined and balanced and are continuing to invest in our business to support long-term growth, both organically and through strategic opportunities that strengthen our competitive position and expand our long-term opportunities.

At the same time, we are committed to maintaining a healthy balance sheet and returning cash to shareholders through dividends and share buybacks, which do not slow down despite striking the deal for the stoba acquisition.

This approach reflects our strong financial position, our confidence in the path ahead and our focus on long-term value creation. During the quarter, we returned $53 million to shareholders in the form of dividends and repurchases. $216 million remains under our current share repurchase authorization.

Since the spinoff in July 2023 through the second quarter of this year, we repurchased $534 million worth of shares, representing approximately 24% of our original share count and paid $131 million in dividends. In total, we have returned $665 million to shareholders through share buybacks and dividends since July 2023.

We've achieved all of this while keeping net leverage below our target, preserving strong liquidity and continuing to fund the growth of our business.

Finally, I want to thank and congratulate all of our employees as we just surpassed our third anniversary as an independent publicly traded company. It's been a great journey so far and look forward to many more years to come.

I'll now turn the call over to Chris to discuss our financial results in more detail and discuss our 2026 outlook.

Thanks, Brady, and thanks to all of you 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.

In the second quarter, we delivered results in line with our expectations and that reflect both the strength of our diversified portfolio and the benefits of our operational discipline.

Diving into the details, which you can find on Slides 13 and 14 of the presentation, I will bridge our revenue and adjusted EBITDA for the second quarter.

Specifically, during the quarter, we generated $940 million in net sales, an increase of 5.6% versus a year ago. Compared to Q2 2025, our top line rose 2.4%, unfavorable foreign exchange of $21 million as the Chinese renminbi, euro and Brazilian real strengthened against the U.S. dollar.

We saw a positive contribution from volume and mix of $18 million or 2% on positive customer pricing and higher sales in the Americas aftermarket. Revenue in the quarter was reduced from net tariff pass-through of $7 million, affected mainly by anticipated tariff refunds from the government expected to be passed through to customers who had previously reimbursed us for portions of the impact.

Finally, SEM contributed sales of $18 million in the quarter. Excluding the FX impact, SEM contribution and tariff pass-throughs, sales were up 2% in the quarter.

Moving next to the bridge on Slide 14. Adjusted EBITDA was $130 million in the quarter with a margin of 13.8%, representing a year-over-year increase of $4 million and a 40 basis point decrease in margin. Net tariff expense and anticipated refunds were an $11 million contribution to earnings in the quarter.

Contribution from SEM was $3 million or a 16.6% margin in the quarter. Product mix, partially offset by supplier savings and cost control measures, was a $1 million headwind.

Other costs, including corporate costs, were up approximately $9 million, primarily due to adjustments for short- and long-term incentive compensation. All changes are related to previously published incentive compensation schemes for PHINIA associates, which reward improvements in economic value and the cash generation of the business.

We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with the potential for strategic accretive M&A. Cash and cash equivalents at quarter end were $370 million, while available capacity under our credit facility was approximately $450 million for a resulting liquidity of $820 million.

Cash flow from operations was $91 million, an increase of $34 million over second quarter 2025. Adjusted free cash flow was $74 million, with capital expenditures of 2.3% coming in below our target of 4% and efficient uses of working capital in the quarter, including approximately $1 million in cash tariff refunds received.

Share repurchases and dividends represented our primary use of capital with value back to our shareholders of $42 million and $11 million, respectively, in the quarter for year-to-date totals of $98 million and $22 million, respectively.

As Brady noted, we announced the purchase of stoba Group in late June with an expected close date of Q4 2026, dependent upon normal regulatory approvals and customary closing conditions. With a purchase price of approximately 6x EBITDA, we expect the inclusion of the business to be accretive on a run rate EBITDA basis, adding approximately 40 basis points on an annual basis.

While full stoba Group sales were approximately $200 million, this balance includes sales to PHINIA operations, which upon consolidation are eliminated as intercompany sales. On a third-party basis, this asset will add full year sales of approximately $80 million and $25 million or 31% in adjusted EBITDA.

We are excited to welcome the group into the PHINIA family, strengthening capabilities, expertise and future growth opportunities in multiple markets and product lines.

We continue to generate strong free cash flow, supporting our near- and long-term capital allocation priorities. Our broadening portfolio of products, solutions and services, coupled with our healthy balance sheet, will enable us to continue to deploy capital with discipline, focused on delivering long-term sustainable profitable growth, creating value for our shareholders.

Moving next to Slide 15 to comment on our 2026 outlook. As we move through the year, we're refining the full year guidance we issued earlier this year. Specifically, we're tightening the range of revenue while keeping the midpoint of our revenue outlook range.

At $3.57 billion to $3.67 billion, we would expect an increase in net sales in the mid-single-digit range, inclusive of FX. Excluding expected FX, our growth is projected to be in the low single-digit area.

We are now guiding adjusted EBITDA to be $485 million to $515 million, with an EBITDA margin of 13.5% to 14.1% as sales impacts from FX and net tariff recoveries as well as product mix have had a slightly dilutive impact on margins.

We believe the business is well positioned to continue generating meaningful free cash flow, and we've updated our 2026 outlook for adjusted free cash flow to $210 million to $250 million. We expect the adjusted tax rate to be in the 30% to 33% range as meaningful progress has been made in addressing legacy tax structure headwinds.

Overall, we expect to continue to deliver strong results in 2026 as we drive operational efficiencies and search for new areas of growth for both segments. As a reminder, our outlook does not account for potential impacts from changes related to the announced stoba acquisition in addition to recent or future government policy changes or other risks described in our filings with the SEC that could influence our operations or technical centers.

This includes measures such as additional tariffs, tax reforms or any other policies that might either increase or decrease our revenue assumptions and/or alter our cost structure.

With that said, we believe PHINIA is well positioned to navigate global market conditions and changes, and we are confident in our operations and our ability to generate sufficient cash for our needs while also continuing to invest in the future. As we look forward to the rest of the year, we look forward to managing the business as demand, risks and opportunities develop while providing solid returns to our shareholders.

We want to thank you all for joining us on this call today, and we are ready to open up the call to questions. Operator, please open the lines.

[Operator Instructions] We'll go to our first question from Christian Zyla at KeyBanc Capital Markets.

First question for me is just on the guide lower amid what seems like a positive backdrop. So LPV might be better than expected on higher volumes and/or mix. Commercial vehicle orders in the last 3 months have been positive.

The industrial backdrop on IP and PMI is positive. So just can you kind of frame out like how much of the guide down, kind of, as we think about 2026 and then even into '27, like how much is that positive backdrop weighing like the guide down? I'm just trying to kind of square those two.

Yes. I mean from a revenue standpoint, we kept it flat. And so really no change. We're always expecting the back half of the year to be a little bit stronger than the first half. CV, as you mentioned, is looking a little more positive.

I think light vehicle globally a little bit weaker, seeing some weakness in China light vehicle market. I think you see that local market down in the mid-teens. So seeing some challenges there. But all in all, we kept our overall revenue flat or guide flat.

Let me add one area, Christian. The tariff refunds that we're getting, there's a big chunk of those, in fact, about half of what we booked will go back to customers. That's a reduction in sales. So that's about a $7 million hit on the revenue. It's not extremely material, but that is also an effect that we did not have at the beginning of the year.

Got it. And then for my follow-up, if I can just ask about stoba. So is the right way to think about the incorporation of the business, like $80 million in sales and, I don't know, $10 million in EBITDA? Or is there something special to think about in terms of the EBITDA dollars that you get from the deal?

No, you have the right -- $80 million is the revenue, the $25 million is the EBITDA. And it's just the -- because again, we've got $120 million of revenue that was from stoba to PHINIA. And when it gets eliminated as intercompany, but we still have the profit from it.

And so the right way to look at it is $80 million of additional revenue, $25 million of EBITDA. And that's why Chris kind of highlighted that given that, it's actually going to be EBITDA margin accretive by close to 40 basis points.

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

Can you provide a little bit more detail on what drove your decision to acquire stoba? And then how should we think about potential synergy-driven upside to that $25 million in EBITDA?

Yes. I mean, stoba has some really unique operational capabilities and manufacturing. They were obviously a key supplier to us. We've known them for a long time, and this is also part of our kind of just making sure we have a stronger supply base, and we're protecting our customers.

They were obviously a small organization, only $200 million of sales roughly. And we thought this kind of made sense to solidify our own manufacturing capabilities as well as opening up additional customers for us.

And so one of their sites is aerospace and defense certified. So that's going to open up some additional customers there. They have customers that we currently don't support.

So I think that's going to be an interesting opportunity there. And then finally, I think as far as synergy, the $80 million and the $25 million is what we expect them to be relatively quickly. As with the SEM, that also includes some dissynergy to bring them kind of up to speed to our capabilities and systems and processes and controls. And so that kind of considers some of the synergy as well as the dissynergy.

I think longer term, we see opportunities for higher growth. And again, from our standpoint, it solidifies our supply base and our manufacturing supports our customers, expands their off-highway and industrial and other kind of exposure end markets at a fair valuation. And we think the longer term, there may be some synergies that we'll be able to get from them as well. So we thought it was a nice acquisition and a nice tuck-in for us.

Then could you guys just help us understand the bridge to $10 million in higher free cash this year? And then as we look at stoba's customized machinery business, it looks like they provide or they could provide a lot of the precision and laser machine equipment that you guys use. So does stoba make up a material portion of the CapEx? And is there potentially an outsized free cash impact from the deal?

I think they can help us on the equipment side. They do some of their own machine building, and that's what some of their capabilities are, and that's some of the equipment that we need as well. So there's some additional synergies there.

I think you see from the cash side, I think that it continues to be a real positive story. I think you see our working capital as a percent of our revenues kind of continue to be improved. The team is doing a good job managing that working capital.

Cash tax rate continues to come down a little bit. And again, that's CapEx coming in a little bit lighter that's helping our cash flow as well. So there's a lot of little different things that are going into it.

But I think in general, from our -- as Chris mentioned, from the employee costs and the short-term incentives for the employees, economic value is around being more efficient. And that's driving the teams to really drive operating investment down, questioning some of the CapEx and the investments, ensuring we keep our working capital down.

And with the increased profitability of the business, they're doing a nice job there. And with that improved working capital and being more efficient, that drives additional cash flow as well. And so that's why we've increased that.

If you see our first half of the year so far, we're at over $100 million. So I think we're a large chunk ahead of where we were -- close to $80 million, I think, above where we were last -- through the first half of the year. So the team is doing a really nice job there.

I do think we have some timing benefits that got pulled into Q2 that's giving us some benefits. But I think the team is really focused on generating strong cash, and that's allowed us to continue to return money to shareholders and support an acquisition at the same time.

[Operator Instructions] We'll go next to Joe Spak at UBS.

Maybe just a couple of clarification points. So first on stoba. Is the right way to think about this like -- because I know you're saying it's margin-accretive, but when it was stand-alone, it was like 12.5% margin. Is the right way to think about this, it's like $10 million of EBIT to external and then like $15 million of vertical integration savings?

Yes, that's probably a fair way to say it.

Okay. So that's how you get to being sort of margin-accretive because you're basically you're saying, right, the sales don't count, but then you get some vertical integration savings?

Yes.

Okay. Okay. And then the tariff recovery that helped by $11 million in the quarter, was there always an expectation in your outlook of a tariff recovery? And I guess, similarly, like the employee compensation you're mentioning, was that also what was previously baked into the outlook? And then maybe is there any more of either left in the back half?

All right. I'll start off, maybe you're...

I don't think --

Or do you want to go or...

All right, Chris.

I'll get started and then you can fill in, if I can now remember the questions. Let me go back. The tariffs that we're recovering, these are the IEEPA. The majority of it this quarter was the IEEPA.

And no, that was not in guide because it was quite unclear, obviously, until the Supreme Court decision. So it wasn't until some people started the GM4 and started booking some at the end of Q1. For us, it wasn't clear until we started doing the filings with customs and what was going to be coming back in, and then we actually started getting cash in.

Once all of the -- what they call K1, 2 and 3 were put in and accepted then working -- we felt confident it's estimable, it's probable. We know we're going to get those in. And we also know how much we will then have to refund to our customers who funded those upfront. So no, that was not anticipated in the original guide.

And on the -- then the bonuses, yes, we did have a lot of that baked in, but there's one item, there's the stock comp, and it's not massive, but about $2 million in the first half of the year on our stock comp, which -- because our stock price is higher, we needed to revalue that and bump it up.

The rest of it is on bonuses. We are bumping those up. We had target bonuses in our original guide and our expectations. However, because the teams have really been working on working capital and cash flow, which are big components of our overall EV, economic value models, and our -- their merit to know what they have to achieve, that we had to bump that up.

So it's not going to be over -- we will be booking additional in the back half of the year, but not materially more than we have in this half of the year unless we have even higher increases.

Okay. So maybe just to summarize then, if we think about your full year guidance, the good guy relative to prior is the tariff, which wasn't in there, but that's at least partially offset or I guess, maybe more than offset by those higher compensation costs. Those are the two changes? Or are we missing any other factors?

Those are the material ones. So yes, going into the back half, we will not have additional IEEPA. However, in the back half, we do have additional global supply chain savings and other productivity improvements that will offset any additional bonuses.

Okay. So maybe that answers my last question, which was, like, if we back out the tariff gain, the $11 million in the quarter, then it does seem like margins step up about 100 basis points half-over-half on flat sales, but it's driven by what you just mentioned, which is the productivity?

Yes. Yes.

We'll take our next question from Bobby Brooks at Northland Capital Markets.

I thought something that was very meaningful from stoba acquisition is that it has an A&D qualified location. And so I was curious to hear more on that. Does it already have the right type of capital equipment installed there to fulfill your current programs that you're on? Where is the location? And how much slack capacity is available there?

Yes. From their A&D location, yes, we're excited about that one, too, that gives us the second one that's actually in Germany. As we kind of highlighted, there's 7 manufacturing sites in the U.K., China, Czech Republic and Germany.

The bulk of those are in Germany, close to their customers, which we think is good as well because I think with the increased investment in A&D in Europe, I think being in France and Germany is going to be one of the requirements. We think they have plenty of capacity.

So all of it is already kind of installed. Obviously, they do a lot of detailed machining, as you see from one of the pictures there. It's a very advanced process. But we think we're going to be able to utilize some of their excess capacity as well to kind of help our global business as well.

So we're not concerned about having significant additional capital to meet those needs, and we think they're in a really spot for us. Some of those customers, the [ Wilbers ], even the Dyson, the ZF, the Dysons, there's a lot of different customers out there that are going to be new for us that's going to allow us to open up additional opportunities with them. So we're kind of really excited about that opportunity as well. Do you have anything?

Yes, that was very helpful. I guess just kind of double-clicking on that. Of the $80 million that were third-party sales for stoba, just curious to hear how much of that, like, the split of off-highway, industrial aerospace or other similar companies to yourself? Just curious to get a sense there.

Yes. I mean we're not -- we don't have the exact details that we're going to share. But again, it's going to increase our percentage of off-highway, industrial and other as a percent of revenues.

There is a decent chunk with some of our competitors and/or peers. And so there's a little bit of risk there, but not one that we're overly concerned with. We want to continue to support them, and we'll firewall off that to protect their IP.

But we see it as a nice opportunity. And again, those customers I just highlighted are new for us in our group, and we think it's going to be exciting to continue to grow with them. But it should help us in our focus of expanding our commercial vehicle, off-highway, industrial and other as a percent of our revenues.

Got it. And I apologize, this -- kind of already touched on this, but, obviously, the 23% gross margins you posted in the second quarter, those were a record for the company since going public. And I believe some of that -- there is some benefit baked in there from the tariff recoveries.

And I know it's like $11 million was a benefit in the quarter. But just curious like how much of that helped drive those record gross margins. And it seems like volume was a benefit, but so just curious to hear if you could touch on any other factors that led to the strength there because I thought that was a meaningful number.

Yes. I mean, you saw from both the Fuel Systems and the Aftermarket, operating income was really strong. I think the SG&A and some other items where all the employees was more of the headwind.

From a gross margin, again, I think they're doing well. I guess, Chris, if you want to answer that one as far as the flow-through of the net tariff because it did affect our sales as well.

Yes. And probably hit it. But on the tariffs, so the IEEPA portion of the tariffs was $7 million benefit, and then the rest would be just the other -- the normal tariff pass-through that we're getting -- benefit that we get as we've been doing for the last number of quarters.

But then the other -- I mean material is SEM certainly contributed. They weren't in there last year, and they came in at just short of 17% AOI in the quarter. So that was another positive that you would have to add in that's a benefit and will be an ongoing benefit, obviously.

Got it. And then just last one for me. Obviously, shareholder returns have been a key story for you guys and have been robust. But should folks expect buybacks might subside a bit with the pending stoba closing? Or just any color on your thoughts there?

I mean, as I highlighted in the script as well, we don't see this as affecting our capital allocation strategy. I think we're still at 1.3 I think is what we ended the quarter at. The stoba acquisition is going to add additional EBITDA as well.

So it's going to help us from an EBITDA perspective on a run rate basis. And so we still think that if we see a good opportunistic share to repurchase, we'll continue to do that. So there's nothing that's going to materially change how we've been acting.

We'll go to a follow-up from Christian Zyla at KeyBanc Capital Markets.

Just one question kind of generally. I guess, how long were you guys courting stoba? Like was this part of the pipeline or did this kind of recently come into your lap? And then just as we think about SEM and stoba, more of these like tuck-in companies, is your pipeline -- does your pipeline have more of these little tuck-ins? Or with the first two, should we kind of expect a little bit of a lull in future deals and M&A activity?

No. I think we've got -- we've been talking with stoba for a while about this. Again, with any acquisition, I'd say most acquisitions will take probably close to a year from initial conversations to getting alignment on agreeing on a path forward and agreeing on a price and then going through a due diligence process. And so I'd say all acquisitions, there's nothing that's going to be falling into lap that's going to happen real quickly.

As far as the pipeline is concerned, there's still a very robust pipeline. And again, I think we continue to pursue options. Our kind of M&A team is extremely busy, vetting a lot of different options.

There's still a strong pipeline. It's always just ensuring that it meets our criteria as far as enhancing our commercial vehicle and off-highway business, industrial, other aftermarket type areas, and it's at a price that makes sense.

And so from our standpoint, we still have a large pipeline of companies out there. Some of them, we continue to have discussions with. Other ones we have on the monitor list saying, hey, let's wait for that right time or when they're ready, we'll be ready. So it's still pretty active. I don't see any lull in any activity in our group.

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

Great. Thanks, everyone, and thanks for the great questions. We feel we delivered a really strong start to the year, reflecting the benefits of our diversified portfolio, our disciplined execution and the strength of the markets we serve.

I want to thank our teams around the world for their continued commitment and execution. We began the year with solid results, remain focused on delivering consistent growth, expanding profitability and building a stronger PHINIA for the long term. Thank you for joining us this morning, and have a nice day.

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

Good morning, and welcome to the PHINIA First Quarter 2026 Earnings Call. I am Frans, and I'll be the operator assisting you today. [Operator Instructions]

I would now like to turn the call over to Kellen Ferris, Head of Investor Relations.

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

During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements.

And with that, it is my pleasure to turn the call over to Brady.

Thank you, Kellen, and thank you, everyone, for joining us this morning. I will start with some highlights on the first quarter and discuss our strategy at a high level. Chris will then provide additional details on our first quarter results and discuss our 2026 financial outlook. We will then open the call for questions.

The first quarter developed largely as we expected with highlights including solid revenue growth from both Fuel Systems and Aftermarket, keeping us on track to achieve our full year guidance. At the same time, we've maintained a healthy balance sheet while paying dividends and repurchasing shares. While the environment continues to evolve rapidly, our teams are managing our business well and delivered results that strengthen our foundation for the long-term. Our diversification across regions, customers, end markets, and products helped offset variability in any single region or segment.

Now let's jump into the first quarter results on Slide 5. In the first quarter, PHINIA continued to demonstrate resilience in a mixed macro environment. Demand conditions across key end markets remained steady, supported by durable replacement cycle fundamentals and some encouraging green shoots in the commercial vehicle industry. At the same time, we navigated ongoing geopolitical and trade-related uncertainty, including tariff volatility, shipping disruptions, and regional production variability. We faced these challenges with strong operational execution and disciplined cost management.

For the fourth consecutive quarter, we delivered year-over-year growth in both the Aftermarket and Fuel Systems segments. Total net sales in the quarter were $878 million, up 10.3% from the same period of the prior year. Excluding FX impacts and the contribution of SEM, revenue was up 3.6%. we reported adjusted EBITDA of $115 million for the quarter, up $12 million and a margin of 13.1%.

Total segment adjusted operating income was $107 million with a 12.2% margin. The Fuel Systems segment delivered a strong quarter with sales of $549 million, up 12% and adjusted operating margin of 9.3%. The Aftermarket segment had sales of $329 million, up 7.5% with adjusted operating margin of 17%. Adjusted earnings per diluted share, excluding nonoperating items, was $1.29 for the quarter compared to $0.94 in the same period of the prior year, a 37% increase year-over-year.

Closing now with a comment about our balance sheet. PHINIA continues to demonstrate financial stability and consistency. We exited the quarter with a cash position of $328 million and total liquidity of $808 million. Our net leverage ratio was 1.4x, nearing our target of 1.5x. We returned $67 million to shareholders in the form of share repurchases and dividends. Our balance sheet provides financial flexibility to support future growth initiatives and return to shareholders.

During the quarter, we also hosted a successful Investor Day in New York, 2 days after historic blizzard, which in hindsight, may have been the universe's way of testing whether our investors were truly committed. They showed up, so did we. We were able to showcase the diversity of our products, our business model, and our long-term growth outlook. We had more than 200 live viewers watching from 30 countries. So all in all, it was a great experience for us and want to thank everyone who helped make such a wonderful inaugural Investor Day.

In summary, while the external environment continues to evolve, we remain focused on the things that we can control. The first quarter performance underscored the durability and resilience of our business amid a rapidly changing global environment by serving a broad mix of regions, customers, end markets, and products.

Moving to Slide 6. We had a good quarter when it comes to new business, which reflects continued progress across multiple fronts. Importantly, we are continuing to grow with our existing customers while also bringing in new ones, and we're starting to see real traction in some newer areas for us. Aerospace and Defense is an area where we are incrementally winning business and building a presence with customers. Recent wins highlight the strength of our offering and our ability to compete and win in adjacent markets with the same manufacturing and human capital as well as an important long-term growth opportunity.

During the quarter, we were awarded a new program with a new customer for use in unmanned aerial drone. The program leverages our GDi injector technology to power the drone engine. It highlights our growing capabilities in advanced propulsion solutions in the aerospace and defense market. It is encouraging to see our capabilities translate into success in this new market as we continue to expect to see additional announcements in the future.

Additionally, this quarter included notable wins across Fuel Systems and Aftermarket channels, reinforcing customer trust, technology differentiation and PHINIA's ability to deliver premium solutions to our customers. In addition to the aerospace and defense win I just highlighted, notable fuel system wins in the quarter include compressed natural gas fuel rail assembly with a leading global OEM, marking our third consecutive quarter of a major alternative fuel program win in India, direct injection fuel rail assembly with a major Chinese OEM supporting a luxury SUV platform equipped with a dual fuel injection V8 engine.

Now to Slide 7. Our Aftermarket business continues to be a steady and reliable contributor to our solid results. We're seeing consistent demand driven by an aging fleet and a growing vehicle parts. As vehicles stay on the road longer, we are well positioned to support our customers around the world with the quality parts and service they depend on every day. Our strong and recognizable brands, broad and consistently expanding product offerings, and focus on customer service are helping us build deeper relationships and win new opportunities.

Recent wins were across diverse geographies, further strengthening our position in the independent aftermarket. A few notable wins during the quarter include expanding our product portfolio with a major warehouse distributor in the Americas by adding steering and suspension and vehicle electronics, adding 2 new customers in Europe and growing our propulsion-agnostic program within the Asia-Pacific region. We're doing a start-up program with a global commercial vehicle on an off-highway OEM, reinforcing our long-standing presence to supply starters for civil duty and long-haul applications. These wins show our consistent progress towards seamlessly diversifying into higher-growth end markets by leveraging our existing human and manufacturing capital.

Now moving next to Slide 8. This is from our Investor Day deck and is a reminder of the diversification of our business across regions, customers, and end markets. Off-highway, industrial, and other, which includes aerospace and defense and power generation, is our fastest-growing end market followed by service. We expect both of these end markets to become larger parts of our overall business in the years to come.

Customer and regional diversification has also been beneficial for us. We've highlighted numerous natural gas fuel injection wins in India and have strong relationships with the Chinese OEMs as roughly 80% of our revenues for China are for the local OEMs, putting us in a favorable position as they look to grow their market share globally, which we expect to be a tailwind for us. As we highlighted in prior calls, several regions of the world are not switching to electric as quickly as previously expected and some markets like South America and India are leaning into ethanol, natural gas, and alternative fuels rather than battery electric altogether. As we shared in our Investor Day, we see our business continuing to diversify further as well as moving towards higher long-term growth markets.

Moving next to capital allocation on Slide 9. There's no change in how we're thinking about capital allocation. We're staying disciplined and balanced, continuing to invest in our business to support long-term growth, both organically and through strategic opportunities to strengthen our competitive position and expand our long-term opportunities. At the same time, we are committed to maintaining a healthy balance sheet and returning cash to shareholders through dividends and share buybacks. This approach reflects our strong financial position, our confidence in the path ahead, and our focus on long-term value creation.

During the quarter, we repurchased approximately $56 million worth of shares and paid $11 million in dividends, with $258 million remaining under our current share repurchase authorization. Since the spin-off in July 2023 through the first quarter of this year, we have repurchased $492 million worth of shares, representing approximately 23% of our original share count and paid $120 million in dividends. In total, we've returned over $600 million to shareholders through share buybacks and dividends since July 2023.

We've achieved all of this while keeping net leverage below our target, preserving strong liquidity, and continuing to fund the growth of the business. I will now turn the call over to Chris to discuss our financial results in more detail and discuss our 2026 outlook.

Thanks, Brady, and thanks to all of you 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.

In the first quarter, we delivered results in line with our expectations and reflect both the strength of our diversified portfolio and the benefits of our operational discipline.

Diving into the details, which you can find in Slides 10 and 11 of the presentation, I will bridge our revenue and adjusted EBITDA for the first quarter. Specifically, during the quarter, we generated $878 million in net sales, an increase of 10.3% versus a year ago. Compared to Q1 2025, our top line rose 4.9% on favorable foreign exchange of $39 million as the Euro, Chinese Renminbi, British Pound, and Brazilian Real strengthened against the U.S. dollar. We saw a positive contribution from volume and mix of $17 million or 2.1% as higher sales in the Americas and Asia offset flat sales in Europe. Revenue in the quarter also benefited from tariff recovery of $12 million, while SEM contributed sales of $14 million in the quarter. Excluding the FX impact and the SEM contribution, sales were up 3.6% in the quarter.

Moving next to the bridge on Slide 11. Adjusted EBITDA was $115 million in the quarter with a margin of 13.1%, representing a year-over-year increase of $12 million and a 20 basis point increase in margin. Supplier savings and cost control measures were a $6 million tailwind. Net tariff pass-throughs were $3 million. volume mix, SEM, and all other changes were an additional $3 million year-over-year. The operational performance of our segments and functions was solid and in line with our high expectations.

We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with the potential for strategic accretive M&A. Cash and cash equivalents at quarter end were $328 million, while available capacity under our credit facilities remained at approximately $0.5 billion for a resulting liquidity of $808 million.

Our strong cash generation enabled us to continue returns of capital to our shareholders through cash dividends and buybacks. In January, our Board approved increases to both our quarterly dividend and share repurchase program, reaffirming their confidence in our disciplined approach to capital allocation. Cash flow from operations was $53 million, an increase of $13 million over the first quarter of 2025.

Adjusted free cash flow was $42 million, our best first quarter since becoming a stand-alone company with capital expenditures of 3.6% coming in below our target of 4% and efficient uses of working capital in the quarter. Share repurchases and dividends represented our primary use of capital with value back to our shareholders of $56 million and $11 million, respectively, in the quarter. We remain confident in our ability to generate strong free cash flow to support our future capital allocation priorities. Our broadening portfolio of products, solutions, and services, coupled with our healthy balance sheet will enable us to continue to deploy capital with discipline, focused on delivering long-term sustainable, profitable growth, creating value for our shareholders.

Now moving next to Slide 12 to comment on our 2026 outlook. We had a solid start to the year and reiterate the full year guidance we issued earlier this year. Specifically, at the midpoint of our revenue outlook range of $3.5 billion to $3.7 billion, we would expect an increase in net sales in the mid-single-digit range, inclusive of FX. Excluding expected FX, our growth is projected to be in the low single-digit area. We are guiding adjusted EBITDA to be $485 million to $525 million with an EBITDA margin of 13.7% to 14.3%. We believe the business is well positioned to continue generating meaningful free cash flow and our 2026 outlook for adjusted free cash flow is $200 million to $240 million. We expect the adjusted tax rate to be in the 30% to 34% range.

Overall, we expect to continue to deliver strong results in 2026 as we drive operational efficiencies and search for new areas of growth for both segments. As a reminder, our outlook does not account for potential impacts from recent or future government policy changes that could influence our operations or technical centers. This includes measures such as additional tariffs, tax reforms, or any other policies that may either increase or decrease our revenue assumptions and/or alter our cost structure.

It should be noted, however, we do not see a material change in our tariff position based upon the recently issued Section 232 tariff clarifications. We are also not currently experiencing any material supply chain or revenue disruptions related to the conflict in the Middle East.

As we look forward to the rest of the year, we are taking disciplined actions to manage controllable factors, including optimizing costs, aligning supply with and where current demand exists while preserving financial flexibility. PHINIA is well positioned to navigate global market conditions and changes, and we are confident in our operations and our ability to generate sufficient cash for our needs while also continuing to invest in the future.

We want to thank all of you for joining us today on the call. We're ready to open the call. Operator, please open the lines for questions.

[Operator instructions] And your first question comes from the line of Joseph Spak from UBS.

Chris, maybe to start, just the negative mix that weighed on the EBITDA line relative to the positive volume growth. Maybe you could sort of give us a little bit of sense of sort of what really drove that? What sort of products or anything? And I'm assuming that's in Fuel Systems, not Aftermarket, but maybe you could provide some clarity there.

Hello, Joe. Yes, a little -- it's mainly going to reside in the Fuel Systems and it's relating to some programs that are launching and have not gotten fully up to full ramp. There's also -- well, he's talking just about the mix on it. But yes, there's FX and tariffs. But yes, it's some programs that we're launching. They're not up to full volume. It's mainly in Europe and Asia-Pacific. They will get up to a better volume mix, but it's going to take about a year until they're at their full capacity, and then this should go away. Not a concern for us. We knew this was going to be an issue as they ramped up.

So we should expect that sort of softer flow-through to persist for the next couple of quarters? Is that the view?

Maybe for another quarter or so, it gets better as the year goes on because this is obviously going to how the year flows in automotive, you start off and you get going and then third quarter, you hit full volume. So it gets better as the year goes on.

Yes. And then, Brady, you mentioned some green shoots in commercial vehicle. Like have you actually revised some of your outlooks for the different end markets? Like is that considered in your view? Or if things start to come in better, does that portend some upside?

Yes. I mean it's still early in the year, but we are seeing positive signs on order boards as far as orders for trucking in North America. China is actually already starting to see some uptick in their revenues on the CV side. So early indications are positive. As you know, the CV forecast was very back-end weighted. And so at least right now, we're feeling good that we're starting to see some positive signs that that's coming, and we'll probably evaluate again maybe later on this summer once that order board fills in for the second half of the year.

Yes, we really saw it in Europe and Asia-Pacific. In China specifically, pass car was down slightly, but our CV more than made up for it. And then in Europe, the same thing. It was rather flat for us in Europe, but CV was actually up.

Last question, just can you remind us roughly like how much you paid in IEEPA-related tariffs last year? And have you filed for a refund? And if you get that, do you think you can keep any of that? Or is that something you're going to have to give back to your customers who reimbursed you for it maybe prior?

It's about $40 million.

$40 million in total for the 3 quarters. I think they've replaced that with other tariffs kind of going forward. I mean our expectation is most of those IEEPA tariffs will flow back to our OE customers once we get that. So we're already in conversations with them. It will then have an effect on revenue, no effect on EBITDA. So it will be accretive to margin, no effect on EBITDA dollars.

And have you filed for that refund already? Or is that still a work in progress?

Yes. I mean we're still working through that. So some of them have started to go through. The process is going to be slow. but we're not booking anything until we receive the cash.

Your next question comes from Bobby Brooks from Northland Capital Markets.

Sorry about that, guys, some technical issues. Yes. Congrats on the strong quarter. The first question I was looking to hear on was it was nice to read about the fuel injector win for the drone engine. Just was curious on, is that -- like first, is that a specific drone company or an aerospace company making drones? And second, is this for a product that is going into commercial production? Or is it still in the testing phase?

It's going into commercial production. It's for the engine manufacturer that's also making the drone as well. It's defense. And so it's a larger combustion -- internal combustion engine. So it's for a larger [indiscernible].

And so that would be now your third customer like in the aerospace defense market?

Second customer fourth program.

Second customer fourth program. Thank you for that clarity. And then there's a little bit of a sequential step-up in SG&A. Could you maybe -- Chris, could you maybe just expand a little bit more on what drove that and maybe how to think about it turning forward?

Most of it was just going to be the normal bonus and some of the other comps that we're seeing come through this year, some of the shares, it's the third year in session. And so it's the third year tranche of the performance and other shares that go into effect for the management teams going down. So that's the biggest issue. That kind of -- that acceleration sort of stops overall and stays flat from here on out. But we also did -- we were down a little bit on some of our IT costs. So the restructuring program that we announced last year is going into effect. And we are seeing some reductions in our IT structure area. So that did offset a little bit.

So probably safe to think it's flat or a touch down going forward?

I'd say flattish.

Yes, I mean sequentially, I think we were -- sequentially Q4 corporate costs were $29 million. Are you talking about just SG&A or corporate costs?

I'm talking about SG&A like overall.

Yes.

I guess I should have said on a year-over-year basis, that's my bad. But just -- and last one for me. I was just curious, obviously, you guys had like a $12 million benefit in the first quarter from tariff recoveries. How should we think about that going forward? Is that -- I would guess it's not all you have available and might continue in the second quarter? Just trying to get a sense of how that trends.

So we did have a $12 million benefit. We had $12 million in tariff pass-through. We had a $3 million positive drop to the bottom line where we recovered some that were related to last year's expenses. Going forward, we see the tariffs on a quarterly basis in roughly the same pass-through area, even with the 232 changes. But I don't see really a tailwind going forward. It will be pretty much flat. So...

Yes, year-over-year, I mean, pretty much immaterial. So you won't see that from a year-over-year perspective. So really, I think as we get into Q2, tariff becomes immaterial and FX is kind of at a similar to [indiscernible] as well. I would say mainly the 117.

Yes, yes.

And again, the benefit that we've seen in FX for the last 3 or 4 quarters actually kind of gets us back to an FX rate where it was in '22 and '23 when we first started coming out. So anywhere in that 115 to 120, we think is more a normal when it really dropped down to the 121, 105 in 2024 was more of the abnormal.

[Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Brady Ericson for the closing remarks. Please go ahead.

Great. Thank you. We delivered a solid start to the year, reflecting the benefits of our diversified portfolio, our disciplined execution, the strength of the markets that we serve. I want to thank our teams for their continued commitment and execution, just keeping this solid performance consistently in a very, very dynamic environment. We continue to remain focused on delivering consistent growth and profitability while building a strong PHINIA for the long term.

So thanks, everybody. Thanks for joining us this morning and have a nice day.

Thank you, everyone, for joining the conference. That concludes our meeting for today. All participants may now disconnect. Thank you.

Good morning, everyone. My name is Kellen Ferris. I'm VP of Investor Relations at PHINIA. I'm excited to be your host this morning for today's this morning's event. Thank you for joining us here in New York and all of us who are joining virtually around the world.

Hosting an Investor Day, 2 days after [indiscernible] has been a challenge, we were determined to be here with you today. It's great to see a number of familiar faces in the room, along with some new ones. We appreciate you taking the time to spend the morning with us, especially those of you we've seen quite a bit over the last few months on the conference circuit. We have a lot -- we're looking forward to sharing with you all this morning, including how we're thinking about the business, where we see opportunity across our end markets and how we're positioning the company for long-term value creation.

Before we get into it quickly, I'll quickly take a bit of a required housekeeping on the legal side. Today's presentation and material will include forward-looking statements that are based on management's current expectations and assumptions subject to risks and uncertainties, and factors relating to our business and operations. Factors that could cause actual results to materially differ from the expectations laid out today are more fully described in our 2025 10-K and other SEC filings. Please refer to our cautionary note on forward-looking statements included in today's materials for additional detail.

You'll also hear references to certain non-GAAP financial measures this morning. Reconciliations to the most directly comparable GAAP measures can be found in the appendix of today's presentation materials, which will be available following this event on our Investor Relations website.

As you can see in the agenda on the screen, we'll begin with an overview of our strategic vision from Brady, followed by Todd Anderson, who will walk through our product leadership and technology innovation road map. From there, Neil Fryer will take you through a market overview of our independent aftermarket business before [ Pedro Bru ] discusses our OE strategies by end market. We'll then take a short break where you'll have the opportunity to visit our booth displays and engage directly with PHINIA leadership team. Following the break, Chris Gropp will walk through our financial framework and capital discipline priorities. Brady will return for some closing remarks and will conclude the formal presentation with a Q&A session with members of our leadership team.

We expect to wrap up the formal program around 11:45, followed by a box lunch, and additional time to connect with the team. If you look at the slide on the screen, we've also included a glossary slide that defines a number of the acronyms used throughout today's presentation. That can be accessed using the QR code, and the slide will also be available in our full presentation deck on our Investor Relations website.

With that, I'll turn it over to our President and Chief Executive Officer, Brady Ericson.

Thank you, Kellen, and welcome. We appreciate your time today and look forward to sharing the progress we've made since the spin and more importantly, where we're headed.

Just to level set us, let's take a quick snapshot of PHINIA today. PHINIA is a diversified industrial company with about $3.5 billion in 2025 sales, attractive margins and solid adjusted free cash flow. Our team of 12,000 employees around the world keeps us close to our customers and the markets that we serve. We have a broad product portfolio and our brands are strong, helping us open doors to new growth opportunities and to attract top talent. We've been a steady and reliable performer.

Now let's start our journey by going back to 2023. Needless to say, the expectations for PHINIA in the broader market environment are very different from when we held our first Investor Day in 2023. We also have a lot more people interested in our story with so many more people in the room and registered online than we had just a few years ago. Again, thank you for joining us, making it through all the weather. Really appreciate it.

Much of what we've outlined has been achieved. A few broad themes stand out. Combustion technology is here to stay. It will play a key role on the path toward carbon neutrality for the broader transportation and industrial markets. Advancements in efficiency, performance, integration with hybrid technologies, and in alternative fuels will keep combustion technology as a core technology and transportation for the rest of the century. The practicality and utility of a liquefied or gases fuel remains strong, from the ease of transporting to storage, being able to utilize and establish infrastructure and its energy density.

With that said, we do expect to help our customers on the journey of the carbon neutrality by supporting the transition from carbon-based fossil fuels to lower carbon and zero carbon fuels of tomorrow. Such fuels such as ethanol, methanol, natural gas, synthetic fuels, sustainable aviation fuel and hydrogen. We are winning new business and gaining share across all regions, products and end markets. From expanding our coverage in the independent aftermarket, the 500bar fuel systems for hybrids, long-life heavy-duty starters and alternators, to ignition systems for natural gas power generation.

Our commitment, investment and focus on combustion products has been key to our customers awarding us new business with both OEM and aftermarket customers. We also have a proven -- we've also proven our ability to expand successfully into new end markets, including aerospace and defense, by leveraging our existing capabilities, human capital and installed manufacturing capacity. To date, we've been awarded 3 programs, launched 2, and received our [ EN 9100 ] aerospace quality certification. We're doing this in a disciplined way by expanding our portfolio to these growing markets while not sacrificing our financial performance today. Finally, we've also established a track record of financial discipline, consistent operational performance and capital allocation that focuses on long-term value creation and maximizing shareholder returns. We are committed to maintaining this reputation.

Now let me set the stage for what's to come. Our long-term value-creation pillars remain unchanged. I'll provide a quick highlight on each before handing it over to the team to walk you through them in more detail. Todd Anderson will cover how we will go to market via our product leadership strategy, providing customers with market-leading technology that delivers value, whether this is in the product itself, through our manufacturing processes, system integration, software and calibration, or a full offering of new and reman service parts.

Neil and Pedro will cover the broad array of end markets that provide opportunities for us to deliver stable growth. The diversity of our end markets, regions, customers and products will provide us the opportunity to deliver consistent growth and reliable free cash flow through this decade and beyond. Chris Gropp will then take you through how we have and we'll continue to maintain our financial discipline, whether it's evaluating opportunities based on economic value added using our internal hurdle rate of 15%, our focus on cash generation or our capital allocation decisions. We feel our strategy execution and discipline will deliver long-term value creation and strong total shareholder returns.

Now a quick reminder of what we shared a few weeks ago during our earnings call and issued in our 10-K. First, to improve operational efficiency and reduce administrative efforts we moved some of our OES sales from our aftermarket segment to the Fuel Systems segment. Second, we've changed our cash conversion calculation, which better aligned with industry norms. It's not a change in our cash generation expectations, just a different formula. Third, we provide a greater end market segmentation with the addition of off-highway, industrial and other, which will include construction and agricultural machinery, vocational vehicles, marine, industrial applications, power generation, aerospace and defense and various other applications. Finally, we provided additional breakdowns of our segments. Much of this is in the appendix.

Now let me give you a quick overview of each of the pillars before I hand it over to the team. Our go-to-market strategy is unchanged. Deliver products and services that create tangible value for our customers, whether it's through efficiency, performance, durability or cost, we leverage our proprietary manufacturing capabilities including precision machining to submicron tolerances, diamond-like coatings and laser drilling and ablation to differentiate ourselves. We complement our products and processes with robust system integration, software and calibration support.

Finally, in order to keep these applications running cleaner and longer, we provide service support with new and remanufactured components, technical training, inventory management and test equipment. All of this brings an extra level of support that makes us a critical supplier partner.

Here is how we've expanded segmentation of the end markets we serve, starting with our largest end-use segment, which is service. This includes both new and remanufactured products for distribution through our OE partners, dealerships, or OES, and various independent aftermarket channels, or IAM. It then goes from light passenger vehicle to light commercial vehicle to medium- and heavy-duty commercial vehicles and finally, to the fast-growing off-highway, industrial and other segments. Neil and Pedro will walk you through each area, providing insight into the market drivers, opportunities and competitive landscape, and how we will differentiate ourselves and grow.

Here is an overview of the diversity of our business across regions, customers and end markets. It provides resiliency as each has its own unique cycles and dynamics. Our efforts to grow in new and emerging markets are bearing fruit as we leverage our existing manufacturing and human capital. This has allowed us to continue to deliver strong margins and cash flow today, while positioning us for higher growth in the future. This is core to our expectation of being a stable and consistent performer under various economic conditions, performing as a diversified industrial company.

After solid performance through 2023, broad cyclical declines across several industries temporarily pushed us outside our target average sales CAGR range. Although we don't see much recovery in the markets we serve in 2026, we do expect PHINIA to outgrow the market and get back into the range, albeit on the low side. As economies in these industries recover, we continue to expand into new end markets and with our increasing market penetration, we expect to move higher in the range.

At the midpoint of the sales CAGR range, we expect to grow sales to $4.2 billion by the end of the decade. To be clear, $4.2 billion in 2030 assumes no M&A or other portfolio adjustments. I'll also come back to this $4.2 billion in closing.

Financial discipline remains a foundational and key pillar of our strategy. We are focused on increasing economic value on a year-over-year basis and strong cash flow generation, both of which anchor our annual incentive programs. With an internal hurdle rate of 15%, cash conversion of over 40%, moderate leverage and ample liquidity, we believe we are well positioned to perform consistently through industry and economic cycles. The same financial discipline guides our capital allocation decisions.

First, we allocate the necessary capital to support, protect and grow our core business. Second is ensuring we deliver on our dividend commitments. From there, we look to utilize the remaining capital to further enhance shareholder returns. Given our valuation, we have prioritized share repurchases. Buying back more than 9.8 million shares, or nearly 21% of our total number of shares outstanding at spin, at an average price of just above $44. Adding in $109 million of dividends we've returned over $0.5 billion to shareholders.

We also completed our first acquisition. It was at a valuation that made sense when compared to our own valuation, with synergistic with our portfolio, helps us grow into new markets with new customers, and would strengthen our long-term growth outlook. We will continue to allocate capital in a way that we feel will drive long-term shareholder value and maximize shareholder returns. We believe our execution over the last few years provides a good template of what to expect moving forward. The prior 3 pillars of product leadership, stable growth and financial discipline are all focused on our final pillar, delivering strong shareholder returns over the long term. Now let's see how we've been doing.

The first thing that needs to be said is a big thank you to all of our PHINIA employees who helped deliver reliable and consistent results. Without it, we would not have seen the returns shown here. We also need to thank our customers who put their trust in us, suppliers who partner with us and our investors who are enjoying the journey with us. And I say with us on purpose. Because when I travel around the world meeting with our teams, they are just as interested in our stock price as our investors, whether they own shares or not. They ask what drives our stock price. What we need to do better and why is stock price appreciation important? [indiscernible] that our stock has been performing well because of all of their hard work and dedication to delivering consistent and reliable results. We need to continue to drive efficiency in everything we do to help increase economic value and free cash flow.

Strong share price appreciation creates a more secure work environment, opens up opportunities and gives us the right to continue to invest in our business, both organically and through acquisitions. It's a testament to the results we're delivering and the trust our investors have in us. Our culture of financial discipline, PHINIA values and our [ gold ] operating model, globally optimized and locally driven, [indiscernible] us grounded, resilient and adaptable to overcome challenges and quickly grab opportunities. It is because of the strong foundation that we are confident in the direction we are headed and welcome those who want to join the journey with us.

And with that, I'll hand it over to Todd to take us through the first pillar of product leadership.

Thank you, Brady. I'm glad to discuss PHINIA's foundational value of product leadership. Our focus on product leadership drives us to deliver innovative solutions to the industry, which add value to our customers and bring profitable business to PHINIA. Supported by a global team of around 1,600 engineers, scientists and technicians, our roots go deep with over a century of experience as a global product leader. We demonstrate product leadership in 4 major categories.

Product, process, system software calibration and services. Product leadership results in PHINIA innovation, or commercialize creativity that adds value to our customers as we supply customized solutions that meet specific market needs. It is supported by core competencies in innovative design, technology development, world-class manufacturing processes, high-performance components and full system solutions, underpinned with experienced software programmers, system integrators, calibration and controls engineers. These activities have resulted in a strong and growing intellectual property portfolio with over 350 patents granted since PHINIA was formed. With these competencies, we're able to design, develop, validate and provide technical support in every region in the world, close to customers in regional markets.

Our product leadership includes a focus on remanufacturing -- and extends beyond our OE portfolio and business. To service part needs, whether an independent aftermarket, or [indiscernible] service parts. Our technology development process is tied to product line strategies that are [indiscernible] by customers, market, operational teams. Product line strategy teams are the foundation of our technology road map and an adaptive avenue to define targeted growth areas unique to each product line. Our approach gathers information from customer reviews, tech days and industry events. Commercial team input on opportunities and advanced research development ideas. These three areas provide information which then help define the technology road map per product line.

In support of a continually changing market, we have detailed product road maps each product line. In our technology planning and resource allocation, we [ look ] across product lines with agility to flex resources and focus based on market needs. These cross-functional global teams ensure we have input from across the globe and all areas are aligned. Technology, sales, purchasing, manufacturing, finance. This approach ensures that we not do technology development in a vacuum and focuses our technical innovation on providing real business value.

PHINIA operates across a diverse and resilient range of markets with a comprehensive product and system portfolio. We focus our growth efforts on our commercial and industrial portfolios, but still have a sizable share in the light vehicle market, especially in hybrids. We have a balanced global technical footprint and are recognized as industry experts in our product categories, including both traditional fuels of gasoline and diesel as well as alternative fuels such as biofuels, hydrogen, ethanol and [indiscernible]

We have flexibility in our technology development and product portfolio, which is a key differentiator for PHINIA, and supports and protects our future growth, while providing a level of protection against competitive threats. We expect reliance on gasoline and diesel fueled high systems to continue for light vehicles in the short and medium term. Commercial vehicles and other demanding segments will continue to depend on ICE technologies for the longer term, even through the rest of the century.

We continually invest a healthy level of funding to our R&D efforts at approximately 6% of sales on a gross basis. This includes investment in current products, efficiency improvements, customer programs, advanced development and future technology. Our investments in alternative fuel technologies support the transition to lower carbon and zero carbon fuels. In fact, 89% of our R&D budget is spent on efficiency improvements.

Alternative fuels is a great example of this, including hydrogen. We leverage our existing technology and skills to supply alternative fuel solutions, including our recent acquisition of [ SEM ], adding ignition systems as a complementary product line. Underlying and supporting each market area are our skills and expertise in system integration, software and calibration, and increasingly rare competency in the industry is required to realize the full performance of high-quality products. Over 1/3 of our revenue in 2024 and 2025 comes from service in the OES and independent aftermarket channels. We continue to build our technology footprint in these markets with strong new to range releases and product programs.

PHINIA's products and processes contain advanced precision technology to operate in extreme environment that's inherent with fuel systems. From operating pressures of 40,000 psi, it's almost 3x the pressure seen in the deepest part of the ocean, to the need to cycle in milliseconds for a vehicle, which is operating over 1.6 million kilometers. Our product must have the highest standards of quality and precision.

One key factor is the submicron tolerances of our products and manufacturing processes. For scale, if we consider the chart from the right of the slide, the rope looking item represents the size of a human hair. Our tolerances can be less than 1 micron, or [indiscernible] of a meter, reflected by the red arrow in the lower left of this chart, somewhere between wildfire smoke and the [ corona virus ].

As an example, the heart of one of our products is the nosel control valve. The pin for this valve is made from hardened and coated alloy steel. And while smaller than a pencil led, it has over 20 key control characteristics for manufacturing and product performance, and is produced at high volume with tolerances less than 1 micron. Our team is doing an excellent job at making these reliably at high and low volumes, having outstanding single-digit parts per million quality performance. You'll have an opportunity to explore this more deeply in our product booth.

For our parts to operate durably for billions of cycles, we incorporate a diamond-like carbon, or DLC coating in key areas of the parts. This process has evolved and continues to evolve as product requirements become even more demanding. We have significant experience, skills and competencies including high-volume production manufacturing processes in the DLC coating process. The example shown on the right depicts a production equipment, and a schematic of multiple layers of hardened coating, which is applied to specific features in the valve guide shown in the fixture on the right.

We require high technology and precision not only in our products but also in our manufacturing processes. Another example of our proprietary high-technology production process is that of laser ablation. We accomplished this process through the use of highly precise [indiscernible] lasers to remove exactly the amount of material needed in the right places without touching the part with no resulting [ burs ] or metal chips remaining. As an example, we produce precisely controlled parallelism on key injector features, which results in better performance and durability. This innovation enables us to use lab precision metrology repeatedly in our high-volume production processes for tens of thousands of parts every week.

Another example of PHINIA's process innovations are our laser drilling techniques, where conventional drilling processes struggle to produce consistent holes in hardened steel that are less than 100 micrometers. We regularly use laser drilling to make precise holes less than that in repeatable and consistent ways. This allows our design engineers to incorporate features to drive fuel efficiency and product performance in ways that were not possible just a few years ago. As a result of this competency, we have a competitive advantage in what is possible for our suite of products and solutions.

Not only do we produce market-leading products and develop high technology processes, but using our software system integration and calibration and testing services allows us to offer full turnkey solutions to the markets that we serve. This key differentiator creates tight customer relationships and provides value to customers, including those who may have under-invested in this combustion area and need additional support and guidance. Supported by hundreds of [indiscernible] software and calibration engineers across multiple regions are software, system integration and calibration expertise enables full turnkey solutions.

Linking our strong OE technology to our excellent aftermarket service organization provides a first-to-market advantage in many production introductions. Our aftermarket service team is strongly focused on meeting market needs and delivering excellent service to our customers wherever they are around the world. Key customer groups are technicians who work with our products every day and distribution partners who make sure that the parts they need are available for them when they need them. We have extensive training material available for technicians through our masters of motion in [ Garage 360 ] programs, which have hundreds of YouTube training videos in an online learning platform for longer-form digital training courses. We also offer in person training and certification programs for our loyal customers in facilities around the world.

Consequently, our service team has intimate market and customer knowledge to guide our advanced technology development efforts. The result is a leadership position in the aftermarket, with high levels of market coverage in key product lines identified in cataloging systems, which makes it easy to identify the right part for any given repair every time. By continuing to expand our product basket with thousands of new to range releases every year, we demonstrate product life cycle management, including many first-to-market releases for new vehicle service parts that keep our customers ahead of the competition. All these embedded activities and processes support our competitive advantage and lead to stable, sustainable growth.

In addition to strong technology competencies, PHINIA's technical leadership is evident in multiple ways. First, we've significantly contributed to the industry by researching and publishing publicly available emissions booklets for both heavy-duty and light vehicle emission standards around the world. We've collaborated with other industry partners in this effort.

Second, as a leader in the industry, PHINIA is keenly aware of the impact of global emissions regulations. Through 2025 and continuing in 2026, we've seen changes in these regulations and follow closely the developments for emissions legislation across multiple regions. PHINIA employees create, publish and share technical papers and studies, which are presented at industry conferences and audience events with government agencies around the world. This includes, but is not limited to U.S. EPA and CARB, the European Commission, the France Ministry of Technology, the U.K. [ Minister ] of Transportation, the U.K. Advanced [ Proposing ] Center, the Korea Hydrogen Consortium and others.

Third, our focus on intellectual property, consisting of both patents and trade secrets in product technology and manufacturing processes further increases the strength of our organization. This is across all markets, and I'm pleased to share that we've been granted over 350 patents in the first 2 years of PHINIA's existence, supported by over 200 inventors, which builds on our approximately 2,000 active patent portfolio.

[ Reflects ] our technology and resources across multiple markets and fuels. This includes the ability to design, develop, source, validate, produce, sell and service in region, ensuring that we're meeting the local regional needs with flexibility, while remaining consistent with our global standards. Consider PHINIA's legacy, traditional fuel, engineering and manufacturing resources and assets, these tools for internal combustion engines provides significant value and competitive advantage. In addition, we can shift resources in assets from traditional fuel solutions in locations to future alternative fuel systems to other markets, including aerospace, and realign production locations.

Let me share 4 examples of this flexibility. First, gasoline product designs have been utilized to move technology forward with ethanol in compressed natural gas fuels. Second, our team in [indiscernible] France have utilized historical diesel resources to support other markets in marine, industrial, stationary power generation and aerospace. Third, production assets have been reallocated from Europe to China in the Americas to streamline our footprint and provide in-region support to a changing marketplace. And fourth, software system integration and calibration, skills and services have been allocated to multiple programs across regions, product lines and markets in support of achieving business growth and value. So this seamless flexibility of product technology and manufacturing processes strongly supports the position of PHINIA in the market.

Well, all of these prior efforts that I've talked about only matter if they turn into new business and growth. So building on strong new product launches and portfolio expansion in 2024 and in 2025, PHINIA has actionable brands to continue this performance. Product launches will continue in 2026 and beyond. Fuel Systems are strengthened via our [ GDI ] 500bar system and alternative fuels. Growth in ignition systems, which leverages synergies with fuel systems will take place. We'll expand into new end markets, including aerospace, power generation, marine. We'll provide full system solutions to an industry which has reduced skill in capacity. And further product line expansion in other areas such as 24-volt starters and alternators, brushless motors, fuel delivery modules. With PHINIA's value of product leadership, we have strong future opportunities for sustained growth, protected by a broad and resilient product portfolio.

Now I'll hand it over to my friend and colleague, Neil Fryer.

Thank you, Todd, and good day, everybody. I'm now going to review the addressable markets that make up PHINIA's continued growth opportunity. As you can see from the chart, that we have 5 key segments, and we look at the evolution from 2024 to 2035, working out goods from the bottom of the chart.

First, service, which consists of original equipment service and independent aftermarket. Its PHINIA's largest addressable market, representing over 60% of the total in 2024, and growing to 68% by 2035. This growth is driven by 3 global tailwinds. An increasing number of vehicles in operation, rising average vehicle age and more miles driven per vehicle.

Next, light passenger vehicles, which are a declining market because of electrification trends. However, as the [indiscernible] for [indiscernible] of internal combustion engines are relaxed in Europe and North America, we see growth opportunities in the midterm, driven by higher DDI penetration rates, which Pedro will talk about later in the presentation. The light commercial vehicle market shows the electric vehicle impact as well, owing to growth in the sales of battery electric last-mile delivery vehicles, which travel limited [indiscernible] roots and usually return to the same point at the end of each day.

Medium and heavy-duty commercial vehicles, there's growth in this market in the midterm before the market starts to decline with increased electrification. We expect city buses will be the main driver of electrification while long-haul on-highway trucks continue to use internal combustion engines for years to come. And we expect to see opportunities for our alternative fuel products in this segment through the 2030s, although the relative long-term market share for different [indiscernible] technologies is not yet clear.

Finally, the gold section of each column shows tangible opportunities as we expand into new end markets and with our core technology. Historically, we focused on-highway applications, but tighter emissions regulations for sectors such as agriculture, construction, marine, industrial and aviation are creating new opportunities for our fueling technology. So when we look at all the markets we serve, PHINIA's total addressable market will grow to $121 billion despite the impact of declining light passenger vehicle sales, and we know that there are still more opportunities to explore in adjacent markets.

Now let me turn to the service market in more detail. The total market, including products like tires, lubricants and crash parts is worth well over $1 trillion globally. PHINIA's addressable market totaled $66 billion of that with the product portfolio we have today. The core offered market, that's the market for the products in our portfolio in all the territories we sold them into today, is worth $41 billion, which is a sizable opportunity to capture market share in itself and expanding our market reach will fuel further growth. So the size of the [ salable ] market, the long life cycles of our products, the tailwinds I mentioned earlier and slower than previously expected electric vehicle penetration, all favor us in the independent aftermarket, and we've defined plans to take advantage of this, which I would now like to talk through.

But before I do that, let me show you a video explaining our go-to-market approach.

[Presentation]

I'd like to clarify that everything you saw in the video and everything I'll discuss in the next few minutes is focused on the independent aftermarket. You see here the products we sell. Our offer is built out from the PHINIA Fuel Systems OE programs for diesel and gas fueling that you see on the left-hand side of the chart. We supplement the offer with the additional products on the right-hand side of the chart, vehicle electronics and chassis products.

In the center, you see workshop solutions which helped to create demand for our products. These offerings keep us top of mind with technicians so that they're more likely to look for [indiscernible] products to complete a repair or maintenance job. We take the portfolio to market through a global distribution network that puts inventory close to customers -- over 4,000 customers across the globe. That way, we can deliver excellent off-the-shelf availability to retailers, warehouse distributors and online players wherever they are. We operate globally with about half our sales in Europe and 40% in the Americas. The rest of the world accounting for the remaining 10%. We make sure that we're set up to meet the differing needs of our customers in those regions day in, day out.

And remanufacturing is an important part of the program as well. [ Reman ] diesel fuel injection products and starters and alternators have been part of our business for many years. They are a way to deliver cost-effective solutions to vehicle owners right through the life cycle, as well as being sustainable solutions that reduce waste, and energy use compared to new replacement parts. Our product sourcing is balanced between fuel systems, aftermarket manufacturing and third-party suppliers to build ranges that can cover over 95% of the vehicles on the road in each category. Fuel Systems starters and alternators and aftermarket parts manufactured internally account for approximately 50% of sales. The remainder comes from products sourced from third-party suppliers. And our strong customer relationships in the independent aftermarket across multiple channels, such as international buying groups, individual wholesalers, retailers and online players, help us gain share of wallet and capture new opportunities.

We also leverage our independent aftermarket competencies in supply chain and product management to deliver value to manufacturer service programs for certain original equipment customers. Our mission as an aftermarket business is to deliver best-in-class products, services and customer experience. Solving the challenges of today and preparing for a cleaner tomorrow. You heard Todd talk about precision manufactured fuel systems products that help our OEM customers meet increasingly stringent emissions requirements. When we sell these products in the aftermarket, we aim to make sure that vehicles continue to perform the way they did the day they left the production line so that emissions are minimized. Similarly, third-party source products we sell are produced to our exacting standards so that fitting one of our products to a vehicle ensures it performs as it was designed to throughout its life.

We take the products to market with the trusted brands, Delphi, Delco Remy and [ Heartridge ] which have many years of original equipment heritage. A key criterion for technicians is whether they can fit and forget the parts they use every day. They don't want customers to come back because replacement parts aren't fit for purpose, and they know they can trust our brands and solutions.

Our business model is built on the 3 pillars I just talked about. The portfolio, the sourcing approach and brands customers can trust. To win in the market we take a customer-centric approach. We have two target customer groups, our distribution partners and the technicians who fit our products to vehicles every day. 5 key areas of product leadership, [indiscernible] PHINIA value to deliver what distribution partners need.

First, we aim to have market-leading coverage in the categories we offer targeting to have the widest range of any competitor for the vehicles on the road. This way, we provide complete solutions to our customers so they don't need supplementary supply sources to complete their product offerings.

Second, we strive to be first to market with [indiscernible] for new vehicles. so that our distribution partners are always able to offer repair and maintenance solutions for every vehicle that a technician may encounter in their daily work.

Third, our product life cycle management teams are focused on making sure we offer solutions for vehicles right through their lifetimes. The average age of vehicles in operation globally is in excess of 12 years in many markets. So we aim to cover both newly introduced vehicles and those that have been on the road for 25 years or more in some cases.

Fourth, cataloging excellence. Distribution partners and technicians need to be able to identify the correct part for any given repair first time. So an easy-to-use, accurate and comprehensive catalog is central to their requirements. Finally, when products are in the catalog, it's key to be able to deliver them to the customer who needs them as soon as possible anywhere in the world. This drives our obsession with off-the-shelf availability from our warehouses. Together, these 5 pillars cement customer relationships with distribution partners.

At the same time, we work to create demand for our products, and this is where training and workshop solutions come in. We want our product brands, Delphi and Delco Remy, to be top of mind for technicians. We communicate directly with them, offering advice on solving problems with the vehicles they encounter in their daily work. We launched a communication program specific to technicians in Europe in 2022, which is now being rolled out across all regions to reinforce our brand presence. Our online learning platform and face-to-face training help technicians develop their skills further and deepen our relationship with them.

I've covered our value proposition to distribution partners and technicians in some detail. Now I want to talk about market dynamics and aftermarket agility. As I mentioned, the average age of vehicles in operation is over 12 years in many markets, whether they're passenger or commercial vehicles. This means we're dealing with trends at the opposite ends of the spectrum, catering for new and aging vehicles. Aging vehicles need appropriate solutions. We must satisfy the owner of a 25-year-old truck who wants a value for money repair. So we've worked on developing a value proposition for private label programs targeted at those customers. In the same way, our remanufactured products can deliver OE performance at lower cost. Together, these offerings allow us to remain competitive in supplying parts for older vehicles.

At the same time, we're rapidly expanding our coverage for newer vehicles. PHINIA's propulsion-agnostic chassis parts programs feature extensive coverage for battery electric and hybrid cars plus light commercial vehicles. And last year, we introduced over 4,300 new part numbers in these categories to remain competitive. That's 75% of the new products we introduced overall. We've also capitalized on rapid development by Chinese vehicle manufacturers in markets across the globe to reinforce our first-to-market credentials. There are about 220 million vehicles produced by Chinese OEMs in operation today. That's almost 15% of the vehicles in operation in the world. We focused engineering and product development on introducing products for these vehicles, which are capturing market share in South and Central America, Europe and Southeast Asia so that we can satisfy demand as it develops. And this is what aftermarket agility means. We respond to emerging aftermarket trends to stay relevant and ahead of competition.

We've outgrown the IAM independent aftermarket since 2022 through greater penetration of the markets we sell to by extending our reach to underserved markets and by selectively extending the product offer where we have a right to win. Market penetration includes capturing a greater share of wallet with our existing customer base, winning business with new customers and broadening our market coverage within product categories to complete our offer. To expand our market, we focus on selling the existing product portfolio in new geographies. As I mentioned earlier, we don't sell all of the portfolio in every region today. So we're executing plans to introduce selected ranges into those regions.

We're also working to enter channels such as e-commerce, where we have not served them in the past. We expand our product offer by remanufacturing competitive products, building on our strong supplier relationships to cover new product categories and by identifying opportunities to manufacture more products in-house using existing capabilities and production capacity more efficiently.

We also see opportunities to grow inorganically, and we look at them critically. But with our clear opportunities to grow organically, we would be very selective about any acquisitions. We've already proved that we can deliver organic growth with a low-risk model, and I want to talk about how we do that. We launched a new product range in one new region at a time, limiting financial exposure and the risk of management distraction. We only move on to other regions once execution is successful, and we see that we have traction.

Here's an example. Steering suspension is a significant product category that was not historically offered in North America. We entered the market with our European range to cover import vehicles in the U.S. and Canada. And based on positive customer feedback, we took the decision to expand and offer a full range covering domestic, Asian and European vehicles, leveraging our existing supply base to create market coverage and the strength of the Delphi brand to enter the market through existing distribution channels.

In our latest step towards becoming a full solution provider in this category, we launched a severe duty program of steering and suspension for work trucks and last-mile delivery vehicles in late 2025, with the goal of penetrating a market segment that demands specific harder wearing, longer-life products than the OE equivalents. Steering and suspension sales in the region have increased year-on-year since 2019 and now represents 16% of our independent aftermarket sales in North America. With the full year impact of a recent new business win, we expect this to be close to 20% in 2026. And we've now started to launch steering and suspension in South America using the same approach.

So what I've shown you today is PHINIA's approach to winning in the independent aftermarket. We stand out as a strong competitor because we're global, and we combine Tier 1 supplier expertise and technology with the agility of an aftermarket specialist supplier. Our customers know they can trust our strong go-to-market brands and rely on our product management, marketing and supply chain capability to deliver what they want consistently every day. Our fuel systems product ranges and starters and alternators have longevity in the aftermarket because of long product life cycles. And together with our propulsion-agnostic products, they're well positioned to make us a relevant supplier for all types of vehicles in the future.

We're a profitable growth engine with significant organic opportunities to grow, which can be supplemented by selective acquisitions if the conditions are right. We've delivered profitable growth through the last 3 years and are positioned to continue to grow above market to the end of this decade and beyond.

Thank you. And now I'd like to hand over to my colleague, Pedro, to talk about OE strategies.

Good morning, all. So Neil has took us through the PHINIA total addressable market and more deeply its aftermarket outlook. And so we are now going to briefly review PHINIA's strategies for its OE business. I will be presenting you with an overview of the 4 different OE markets we operate in. We will start with light passenger vehicles, followed by light commercial vehicles, then on-highway, heavy-duty and medium-duty commercial vehicles; and lastly, off-highway, industrial and other applications. In each of them, I will be highlighting their main developments, their competitive landscape, major key developments and PHINIA road map to address them as well as our estimates for future sales.

Future sales estimates will rely on an aspirational target to become a $5 billion company in the years to come. This goal is comprised not only of future organic sales, but also includes hypothetical M&A activity focused on the commercial vehicle, aftermarket and industrial segments. We will start with light passenger vehicles. This market, which is one of the largest ones within the OE automotive industry is undergoing a major transformation, driven by electrification, shifting consumer preferences and evolving global production dynamics. The latest industry forecasts highlight rapid growth in hybrid and electric vehicles. Strong demand for SUVs and ongoing adjustments to global supply chain disruptions.

As automakers respond to regulatory and trade pressures, seems to be broadly accepted that although growth is rapid, the pace of adoption of battery electric vehicles or PEPs has slowed in recent outlooks, resulting in larger-than-expected market shares for both hybrid and pure ICE powertrains for a longer period. We are seeing smaller competitors exiting and the larger players are prioritizing other areas, namely electrification. This has allowed us to opportunistically gain share, and we anticipate that we will keep doing so. Pursuit of higher efficiency, higher performance, cost-effective and optimized carbon technologies remain key development trends within this market. PHINIA has the ability with its portfolio to support our customers to meet all these needs and trends.

Global light vehicle production also continues to adjust to shifting factors, including, among others, U.S. trade policies, supply chain shifts and regional market dynamics. OEMs are reshoring or regionalizing production to reduce geopolitical risks. PHINIA sees growth opportunities in the short to medium term within this market, specifically from GDi penetration rates, a technology that is key to further improve overall powertrain efficiency on ICE and hybrid vehicles. We are also seeing the adoption of alternative fuels and declining competition.

On the left-hand side of the slide, you can see IHS projections for the passenger car market for 2030 split by propulsion type. The bar on the left is a projection from July 2024. And on the right, you can see the exact same data and market, but based on their projection from October 2025, 1.5 years later. Between the 2 projections, the outlook for market share for pure battery electric vehicles in 2030 worldwide decreased 900 basis points from 40% to 31%. ICE and hybrid powertrain share outlook on the other hand, has increased by the same 900 basis points from 60% to 69%, with GDI increasing 700 basis points from 37% to 44%. This highlights how the core ICE light vehicle technology will be dominant for a much longer period than was previously assumed.

Our strategy remains equal. We want to strive as one of the limited number of global suppliers capable to provide solutions for applications where reliability and emissions compliance are nonnegotiable, bearing in mind that enhancements and new challenges might be ahead. We will keep supporting our customers, leveraging our decades of customer intimacy and enlarging our client base. Within light passenger car segment, BEV adoption will increase in years to come. This is undeniable, but some regions are focusing on lower carbon and zero carbon fuels as their pathway to carbon neutrality rather than BEV. The reasons vary, but include availability of renewable power, infrastructure challenges, national security and energy independence. A clear example of what I just mentioned is PHINIA having been recently nominated in India by 3 major local OEMs for more than 1 million compressed natural gas injectors per year of brand-new programs to be launched in the next couple of years.

Similarly, we have won with brand-new customers, brand-new programs in the recent past 500 power GDI applications entering currently into production within the Chinese market. We believe we are well positioned to increase share within this market. Total available market is expected to decrease, but with our product portfolio, we pledge to keep supporting our customer needs as well as record of recent nominations, which stands our intention to remain with a flat revenue estimation for this segment in the years to come.

We will be moving on now into the light commercial vehicle market. This market is characterized by 2 main type of vehicles, trucks and vans. Vehicles in this category have a maximum gross vehicle weight of around 3.5 tons. They are mostly dedicated to small business logistics, service fleets, utility services, rental fleets and last mile delivery. We are ending a decade defined by electrification, rapid e-commerce expansion and a major shift towards fleet-centric ownership models. But while electrification increases, hybrid, gasoline, diesel and alternative fuels, namely CNG, LPG, ethanol, methanol and certainly hydrogen remain highly relevant for certain regions and applications. PHINIA is focused on customers from this segment in Europe, Asia and Americas, with the majority of its business actually based here in the U.S.A. This includes 2 prominent U.S. OEMs and their main truck models.

The light-duty on-highway commercial vehicle market is a very significant segment of the global commercial vehicle industry, as I said, driven by e-commerce, urban logistics and expanding fleet operations. Vans are mainly used by professionals, whilst trucks have a more dual usage, serving for professional and private purposes. Within the van segment, BEV penetration will consistently increase in the years to come, and it's expected to come close to a 50% share by 2037, in line with some of the more optimistic outlooks for the passenger car market. For trucks, the market is expected to have a more moderate BEV penetration, peaking shy of 20% in the later years of the next decade.

One of our main priorities is obviously to retain our strong U.S. truck market position, which is less exposed to electrification. And we also want to leverage both portfolio and manufacturing assets to target new customers and applications with sustainable longevity. The total market available to PHINIA is expected to slightly decrease in the next few years, whilst our outlook revenue is for it to remain roughly flat around $0.5 billion. Our expectation is to maintain absolute revenue at 2025 levels for the years to come. The longer ICE market tail, our minimal exposure to the van segment and targeted customers and programs for market expansion gains will support this goal.

We will now move over into the medium and heavy-duty commercial vehicle segment. PHINIA currently has a range of customers within this market spread across the world. We are building on our reputation for market-leading technology to extend our business into new customers and to increase share of wallet within the ones we already operate with. Our extended portfolio of fuel injection, fuel handling, starters and alternators and ignition systems as well as our capability to integrate this to deliver complete system solutions distinguishes PHINIA from the majority of its competitors. The majority of our competitors have switched their focus either to electrification, minimizing commitments and investments to support customers within the ICE landscape.

One of the main characteristics of the segment is the nondiscretionary nature of purchases by its operators. On the left-hand side of this slide, you can see how resilient this market is. The market quickly recovered from the 2008 global financial crisis as well as rebounding fast from the worldwide COVID disruption in the early 2020s. This market will be clearly dominated by internal combustion engine technology for the decades to come despite some BEV penetration, especially in China and urban or regional applications. The overall market is expected to grow in the low single digits year-over-year, with internal combustion engine volumes expected to remain more or less stable at around 3.2 million units per year for at least the next decade. This means internal combustion engines will still represent just shy of 80% of the total commercial vehicle market by 2035. The takeaways is that ICE powered with diesel as well as with lower carbon and zero carbon alternative fuels will continue to dominate with relatively moderate levels of BEV.

PHINIA's strategy is to focus on customer needs, as always, deliberate partnerships and utilizing and optimizing existing assets supported by financially disciplined investments. Tiny incremental improvements in engine efficiency can translate into huge annual savings for the operators when vehicles are traveling hundreds of thousands of miles every year. We have the technology to support these improvements. Our main goal is to increase share through incremental content per vehicle and by conquering brand-new customers and applications. In an overall flat total addressable market, PHINIA is committed to increase its share within this segment. We have an aspirational target of roughly doubling our revenue in the next years, reaching EUR 1 billion of sales.

Lastly, we will be reviewing the off-highway, industrial and other segments we operate in. In recent years, PHINIA has planted seeds to grow beyond the automotive landscape. As a result, we now have customers from aerospace, marine, stationary engines, agriculture and industrial backgrounds. This expansion into new end markets with our core technology, existing assets and engineering know-how was a very logical thing to do. The same drivers for tighter regulations, optimized efficiency, higher performance and carbon neutrality in off-highway applications are exactly what we have addressed in the on-highway space. So we are perfectly placed to support our off-highway customers that are facing these challenges.

PHINIA has an exceptional level of skill and technology in high precision, high-technology machining and manufacturing owned over many years of development in the automotive market. We are finding that these are exactly the competencies that customers are looking for in adjacent markets like aerospace and industrial applications. These sectors are lower volume than automotive, but are characterized by higher content per vehicle, and they highly value our automotive experience and standards. Significant market growth expected in this segment for the next 10 years with civil aircraft production expected to double and defense spending increasing with geopolitical tensions.

Aerospace engine manufacturers are looking for new partners. There are many small suppliers still in the industry that might become a bottleneck, and that is where our right to play comes in. We are well placed to assess this market with our hydraulic components. It aligns perfectly with our existing capabilities. Market we expect to serve operates with similar machining tolerances and requirements as the one we operate in currently. PHINIA expects to more than double its revenue within this segment in the years to come. We have a goal to attain 10% of sales of our aspirational EUR 5 billion target. We expect to go from EUR 200 million of sales in 2025 to EUR 500 million year of sales in the years to come.

Two industry sectors that PHINIA is now successfully penetrating are both the aerospace and the power generation markets. In aerospace, PHINIA won recently several fuel component programs with a major global engine manufacturer. We have an objective of reaching EUR 100 million sales by 2030. We have also been attending and will continue attending several air shows, like the Farnborough Airshow, the Paris Airshow and quite recently, the Aero Americas here in the U.S.A. Goal is to reach out to customers and make them aware of our capabilities. We have been able to promote ourselves and several customer leads are ongoing with positive prospects.

The industry is heavily certified, a hurdle that PHINIA has already overcome. We got the EN 9100 certification some weeks ago and are fully compliant to deliver our products to aero engine builders. Some context from the industry is that the costs involved with resourcing are quite significant. The product sourcing cycles are around 15 to 20 years versus a cycle of 3 to 5 years within the automotive industry. The level of enthusiasm and number of projects we are working on within this market encourage us to proceed and assure us our right to play is real.

In industrials, PHINIA has gained access to new customers for large stationary engines with the acquisition of SEM in 2025. We are seeing increased demand for these large stationary engines, driven in particular by demand for AI data centers. And we are well positioned to support these kinds of applications. We have also recently supported the launch of a brand-new agro application with an hydrogen engine from a U.K. customer. Alternative fuels will also play a key role within industrial applications. At the other hand of the scale, the SEM acquisition has also increased our exposure to the small engine market, which continues to grow, especially in South Asia.

Time to bring it all together. After Todd's presentation on product leadership, Neil taking us over the unique growth prospects of our independent aftermarket and myself briefly sharing information about what PHINIA intends to do in its OE segments, it's time for a wrap-up. We intend to create value, leveraging our technology and our know-how. We aim to use our innovation capabilities, resilience and adaptability to navigate within legacy markets and pursue new target end markets. Here are just a few examples of our strategy in action. We are continuing to develop the right technologies to help our customers achieve their goals, including launching as worldwide first-to-market gasoline injection at 500 par with Shanghai in 2024.

Higher pressure in fuel injection means smaller droplets of fuel, which have a higher overall surface area, which burn cleaner and more efficiently. We continue to retain our existing customers with major new programs across our product portfolio. We have successfully launched our first aerospace applications and have set ourselves aggressive targets for continued growth. We have made our first acquisition with SEM and extended our ability to access industrial markets. All of this demonstrates that we have the ability to evolve as our markets evolve. We will continue to transition our human capital and capital equipment to focus on CV, aftermarket, adjacent markets and carbon-neutral fuel technologies as the market demand arises.

In summary, PHINIA is deploying an action plan to ensure stable and steady growth across the independent aftermarket and its OEM markets. We will be doing so by nurturing and redeploying resources and assets effectively. We will continually seek new customers, regional and product diversification. We are committed to leveraging and enhancing our aftermarket business and its strong brands, assume ourselves as a CV top-tier player, maximize and increase share in both light passenger vehicle and light commercial vehicle. We are also targeting new markets like aerospace, industrial and stationary engines, where we clearly seem to have a right to play.

As Neil showed you some minutes ago, PHINIA total addressable market is growing. We expect to be operating in a more than $121 billion market by 2035. We want to strive and grow and aim to do so by generating value to our shareholders. We are one of very few competitors able to operate with expertise and address strict OEM specifications. Scarcity value for what we do is increasing due to few players' ability to operate with such rigorous and stretched technical challenges. We are obtaining significant business wins and expect to grow organically in next years due to our technological differentiation factors. We are pursuing targeted end markets while optimizing value in our legacy markets. PHINIA does have a clear viable path to deliver consistent growth on the years to come.

Thank you very much for your attention.

We will be doing now a break, and we will be returning at -- 10:45, we resume. Thank you very much.

[Break]

Welcome you all back from our short break. We have a couple more speakers here before the Q&A. And with that, I will bring up, Chris Gropp, our CFO. Thank you very much.

All right. We're in the home stretch, everybody. So glad everybody is here. I can tell you that for us, it was almost planes, trains and automobiles to get here today, but we're happy all of you got here. All right. And just a reminder, so I'm going to go through surprise, surprise financial discipline. And then we're going to bring Brady back up to wrap everything up. And then the fun part is Q&A.

So as PHINIA was coming together, even before we knew what the name of the company was going to be. We knew integrity, accountability and financial discipline were nonnegotiable for the company. We believe our 2025 results speak to that as the business delivered adjusted diluted earnings per share of $4.96, growth of 28.5% over 2024 and adjusted EBITDA of $478 million on $3.5 billion in sales or 13.7% adjusted margin. It is our responsibility and commitment to deliver quality industry-leading parts to our customers and equally deliver industry-leading returns regardless of the changes or turmoil in the markets.

Our segments have delivered on this, providing 2025 segment adjusted operating returns of just over 16% from our aftermarket business and just over 11% from our Fuel Systems business. This amid a backdrop of softness in the CV and LV global market, compounded by hesitation in the market as new government policies were introduced, revised and absorbed and now again revised and absorbed. Our results enabled us to return more than $40 million in dividends to our shareholders in 2025, along with repurchases of $200 million, all while maintaining a consistent strong balance sheet and solid liquidity.

Our diversified end markets have provided stability and results regardless of market and regulatory dynamics, as we continue to emphasize is if OE markets are down, aftermarket sales remain strong as our results have demonstrated over the past 3 years. The resulting stability and balance enable investment into new technologies and industries as outlined by Todd, Neil and Pedro, providing a path to future growth and end market diversity. This is reinforced by our 2026 projected sales by region, customer concentration and end market diversity. We do all of this underpinned by financial discipline with data-driven decisions that include reuse and redeployment of existing human and hard capital across regions, helping us maintain a target spend of 3% net R&D or 6% on a gross basis, as Todd noted, and 4% capital spend. These targets across product lines and regions to ensure the highest flexibility and product footprint, also, as Todd outlined, and targeted return on investment, all while ensuring future profitable growth.

As Brady noted, cyclical declines -- that's hard to say, cyclical declines across several markets have meant our organic CAGR has been slightly behind our original expectations. While no one loves a down market, we did outpace market performance by 260 basis points. And the shifts in market provided a window into why our business segments make sense together. They create balance and drive each other to expand margins. Neil referred to the fact that half of the supply to our aftermarket segment are for products produced internally by PHINIA. This means the bulk of our sales, including aftermarket, we supply from original equipment to service to aftermarket for products in the field, creating a durable extended life cycle for our systems and products.

We're proud of the performance our segments have delivered. Expanded margins on relatively flat revenues that include external dilutive pressures requires skill, diligence and just plain hard work. And as we also keep saying, it requires discipline and baseline returns that the entire team understands and works toward.

As guided in our Q4 results call, we expect revenue growth in 2026 of just under 4% year-over-year, including FX changes. Over 3 years since 2024, this would result in a 3.4% revenue CAGR. We also project healthy conversion on the additional revenue and solid adjusted EBITDA returns of above $0.5 million on the $3.6 billion in sales. We are confident we have the right teams in place to achieve this through continued diligent disciplined work from all areas of the business and focus on expansion and diversification into new end markets and products. I think the snow background is sort of appropriate for this week, but that was just a fluke.

A key to our success is our people. We have deep technical bench strength within our engineering, operational and administrative teams. Our operational and functional teams have continued their disciplined approach to streamline and optimize operations and processes, ensuring footprint of facilities and infrastructure are correctly sized and reside in optimal proximity to customers with the best cost labor force. Near and dear to my heart is the work our administrative teams have taken on since spin. As a reminder, shortly after spin, our legal and corporate structure resulted in an effective tax rate that was memorable for all the wrong reasons. impressively high and with an underlying structure that was complicated and unwieldy. I want to call out to all of our teams and associates who have worked hard and diligently to improve, dropping to 32.5% in 2025 from our 2024 rate of 41.5%. This financial discipline and perseverance resulted in reduction in cash taxes paid by more than 35%, and we're not done.

Our IT and operations teams are working together on a multiyear process to streamline our ERP systems into one consolidated platform to drive process consolidation and efficiencies. These teams are also focused on rightsizing the existing infrastructure while expanding AI capabilities to enhance business processes and expertise. In addition, embedded recurring savings opportunities for supply chain and operational productivity are organic daily processes driven by expert teams and have resulted in productivity savings in addition to approximately $60 million in cumulative global supply chain savings from 2023 to 2025.

Results of our drive and focus on financial discipline deliver high-quality free cash flow and free cash flow conversion against earnings compared to our peers, regardless of peer group considered. In fact, since inception, the PHINIA results for free cash flow conversion have exceeded industrial aftermarket and Tier 1 peers consistently. We accomplished this by continually driving improvements, streamlining working capital processing and as noted on the previous slide, striving for simplicity and reasonableness in our structure. All projects, whether driven by the management team or our functional teams or down to our operations are analyzed for required return and payback period expected.

As Brady noted and as discussed in our Q4 earnings webcast, we did recast some portions of our segment revenues in 2025 as we streamlined sales and distribution processes to reduce administrative burdens. In short, we choose to analyze and revise structures continuously to reduce the burden of large one-off restructuring events, redeploying assets efficiently to enable reinvestment of resources in new and expanding products and markets, all leading to a disciplined capital allocation model based upon our strong products and brands and demonstrated by managing growth and diversifying our portfolio into emerging fuel applications and industries. This occurs while the company returns material amounts of value back to shareholders in the form of dividends and share repurchases.

We maintain a strong balance sheet with robust levels of liquidity and low leverage. With continued focus on our priorities of dividends and share repurchases, which accumulated since inception are approximately 21% of total shares outstanding. In dollar terms, this means share repurchases and dividends back to shareholders of more than $0.5 billion over that period.

With more than $2 billion in cumulative free cash flow projected from 2023 to the end of the decade, we expect to maintain a disciplined data-driven approach to prioritization of dividends, share repurchases and growth via strategic accretive merger and acquisition targets. Every financial decision we make is driven by economic value-added models with minimum levels of return that ensure we can meet our revenue growth and return on capital targets, which in turn fuels our capital allocation priorities.

As a management team, we are proud of what we've accomplished over the past 3 years and have worked hard to build trust in our products, our returns and our commitment to our shareholders, all evidenced by shareholder return of just above 116% over the last years, market-leading free cash flow yield and adjusted diluted earnings per share growth more than 5x that of our peers. And yet we feel we still have untapped value.

Our financial fundamentals are strong, and we believe provide a compelling basis for our stock price. But we're at the start of our journey. We expect our results will continue to differentiate us from our peers and move us to a valuation that truly reflects our products and company value.

And finally, to reiterate our 2026 guide, which was presented in our Q4 earnings call. The growth landscape is expected to continue to be challenging in 2026, although starting to recover some product lines and markets. We are well positioned to achieve the targets we laid out almost 3 years ago with 2026 sales expected in the range of $3.5 billion to $3.7 billion, adjusted EBITDA of $485 million to $525 million for return on sales in the range of 13.7% to 14.3%. This will, in turn, lead to adjusted free cash flow in a range of $200 million to $240 million and an adjusted effective tax rate of 30% to 34%.

It's been an exciting 3 years out of the gate of PHINIA. And as we enter the next chapter of growth, we look forward to continued success as we focus on profitable revenue growth, product innovation in new markets, business wins, continued disciplined capital allocation and delivering shareholder value.

And with that, I told you I'd be short. So I am going to hand it back to Brady to let him wrap things up.

All right. Thank you, Chris, Todd, Neil and Pedro. Now let's do a quick recap as well as provide you some insights on where we're headed. As I started with and the other is built around, we believe product leadership through product, process and service puts us in a strong competitive position to continue to win new business and expand into new markets, leveraging our existing capabilities and capital. The diversity of our regions, customers, products and industries we serve will provide us with stable and reliable growth opportunities through this decade and beyond. This is also supported by a growing total addressable market with service and off-highway industrial and other making up over 75% of our TAM later this decade.

We're also investigating additional markets where we could leverage our capabilities and resources. Our financial discipline is focused on delivering year-over-year improvements in economic value, generating cash and being efficient allocators of capital. We've established a solid track record as a consistent and reliable performer. Combine this with our core values and gold operating model, we're confident in our ability to deliver long-term shareholder value and maximize shareholder returns.

Now let's talk about where we're going. We put this together to show what we expect to deliver over the decade based on the following assumptions: No M&A or other portfolio changes, sales CAGR at the midpoint of our targeted 2% to 4% range over the decade, solid EBITDA conversion on incremental sales, maintaining CapEx at 4% and net R&D at 3% of our revenues, driving our adjusted effective tax rate down to a reasonable 27%, cash conversion of 45% and increasing the net leverage target to 2x EBITDA given our larger scale and consistent performance. This is provided we see value in doing so.

With these assumptions, we would have about $1.9 billion of cash available for capital allocation from 2026 through 2030. This comes from $1.3 billion of adjusted free cash flow, from operations and another $600 million of debt with the increase in annual adjusted EBITDA dollars and net leverage going to 2x. To be clear, this $1.9 billion is after the roughly 4% of sales for CapEx to support organic sales growth of 3% over the decade.

We're also committed to our dividend. With our current dividend and share count, we will need around $225 million of dividends, leaving just under $1.7 billion to allocate over the decade. Of note, we've raised our dividend twice since the spin. But with our share count reduction, our annual obligations have stayed into the $40 million to $47 million range. We will continue to use our financial discipline and focus on driving long-term shareholder value when allocating this capital, whether it's to drive growth through acquisitions or higher organic growth or to return additional capital to shareholders through higher dividends and share repurchases.

If we don't see good returns from either of these, we're going to stay patient and maintain either a lower net leverage or higher cash balance and liquidity. Investors have asked how we make our capital allocation decisions. My response is it's a dynamic process that we review on a quarterly basis internally and with our Board of Directors. We look at our leverage, our cash balances, cash flow generation forecast, our market valuation versus our internal valuation and the acquisition pipeline.

When deciding between share repurchase and acquisition, we're always going to compare valuation multiples, long-term growth expectation and risk on execution. Paying a higher multiple for a business that has similar future expectations, along with uncertainty is not a decision we would make as repurchasing shares would deliver the same or more value with less risk. If we decide to repurchase shares, we generally establish an amount we're comfortable with purchasing in the quarter, and we then establish a pricing grid in which we will purchase various amounts on a daily basis.

Other structures may also be used. Again, our decisions are going to be based on delivering long-term shareholder value and maximizing shareholder returns. Although the assumptions and the math are simple to put on a page, we understand that we must continue to execute well on a quarterly basis, year in and year out in order to deliver on these expectations. As we grow organically and look at acquisitions, we're focused on continuing to transition our business and end markets with long-term growth to long-term growth opportunities.

Our target business distribution when we reach $5 billion will be to have over 80% of our revenues coming from service, commercial vehicle, off-highway, industrial and other applications, putting us in a more favorable position for consistent and higher long-term growth. With this as our new foundation, we are projecting the following at $5 billion of revenues. With an improved distribution of sales across higher opportunity end markets, we expect to have higher sales CAGR range moving forward. This will also allow us to drive higher adjusted EBITDA margins, stronger cash conversion and adjusted free cash flow while still maintaining a moderate level of debt -- moderate level of net leverage and strong liquidity.

Again, this is all about being a consistent, reliable, financially disciplined and value-focused company. And with that, I'd now like to move us to the Q&A session. Thank you.

First, I'll open up to the floor and see if anybody wants to lead off with a question. I have several questions I can ask up here, but I just wanted to open up to the floor and see if anyone wants to get started. Joe?

Joe Spak from UBS. First question is just on the $5 billion 2030 target, which I know that includes M&A. It's also a number you've given out, I think, in mid-'23. And I just want to -- maybe I was wondering if you could help us at a higher level, summarize and understand what's changed because you just sort of spent a good part of the day messaging that some of the underlying factors in the markets are actually moving more in your favor, yet that number is pretty similar. It actually looks like maybe even organically, it's a little bit lower. I understand you're maybe at a lower base because you're maybe a little bit behind. But why sort of a similar level of some of these factors are moving more in your direction?

Yes. I think there's a couple of things. One is we got a lot of feedback, too, of saying, in order to get to the $5 billion by 2030, you have to do an acquisition. Are you going to do an acquisition no matter what? And we tried to lay out here, no, we're not going to do an acquisition. We're only going to do it if it makes sense and it meets our criteria.

So that's one of the reasons why we kind of went away from the $5 billion by 2030 as a firm target. So just to give us some more flexibility. If our stock price stays low and we have good organic opportunities, we'll just continue to buy back shares. if we think that's going to create more value for our shareholders. I think from that 2023 time frame, I think the markets have been a lot lower, too, from those original expectations. And so rather than continuing to grow in '23, '24 and '25, we actually started to kind of plateau a little bit. And so we have to catch up to that. And that's why that organic CAGR was at the low end or actually outside the 2% to 4% range. And again, these are just assumptions based on getting to 3%. I think our close to 4% forecasted growth in 2026, I think, is a good omen for us to get back into that range and hopefully push us towards the high end of the range towards the end of the decade.

Okay. And just to follow up on that, like if we look at the organic levels, 25% to 30%, the 4.2%. It's like a little bit over 3.5% organic growth. I think one of the slides showed your addressable market is about 1.4%. So can you just help us understand what's sort of driving the performance relative to that? Is it continued market share gains? Is it pricing? Or how much is being assumed?

Yes. It's definitely the market share gains and us entering that off-highway industrial and other markets. As you kind of noticed, I think it was over 2/3 of it or 75% of the addressable market in those out years is coming from aftermarket. And if you look at Neil's independent aftermarket and some of the -- in the appendix, the independent aftermarket grew 6%, 7% for us last year. So I think that independent aftermarket will continue to be a strong grower. And I think our growth in the off-highway industrial group is also going to be very high growth. And with CV recovering from being on a down cycle, I think, is also going to help us quite a bit, too.

Which would -- so Neil can address it better, but that does mean some of that growth would be so price because in aftermarket, there's always going to be a pricing component that builds into that. So...

Yes. A little differently to the OE business, we would expect to recover inflation in our pricing year-on-year. But we are growing -- have been growing at least twice as fast as the market in volume terms through the last 3 years.

I think we walked you through that before as far as the drivers is 1% to 2% price, 1% to 2%, just the market is growing in the aftermarket with age of fleet and number of vehicles. And then Neil and his team have been doing a great job on picking up additional share and bringing new product lines and new markets. And that's where we expect them to be in the 3% to 6%, and they've been on the high end of that the last couple of years.

Brian Sponheimer from Gabelli. Just a question more in the near term. We had a pretty substantial aftermarket supplier run into some significant issues this year. Just wondering if you've seen anything change regarding your relationship with your customer base regarding supply chain financing or any of your payables programs that you otherwise have enjoyed over time.

To split the question a couple of ways. First of all, we've definitely seen opportunities to pick up more business as a result of that supplier failing. And we are actively working on a list of new customer acquisitions for some of our products. So that's positive for us. At the moment, we have not seen any change in supply chain financing arrangements. And I think that most of our customers, probably all of our customers approach that in a very responsible way. So we haven't seen a large kind of aftershock from what's happened in the market.

No. And ours is fairly minimal because most of that financing is based on the North American and some of the practices there. I mean you can see it in our K, it's about $160 million a year for us, which is not a big amount. It's only because of the particulars on working capital related to a few of our customers in the North American aftermarket. We don't look to expand that at all.

I know Brian has one.

I mean, sorry...

Jake Shol, BNP. So I appreciate the...

Expected end market mix at $5 billion in sales, but obviously, that requires some level of M&A. So how should we think about what that would look like in the absence of M&A organically at $4.2 billion, especially as we think about the industrial and aftermarket businesses?

I mean I think the aftermarket and the industrial, I think we've got a good plan to get there organically. It may take a little bit longer than 2030 to get to those percentages. And again, our expectation, whether we do M&A or not, we're going to get there if we do it organically, just maybe a few years later than 2030. So that's really where we're still driving a lot of our new business wins and the effort of the of the team. I think we've seen it with the off-highway and industrial business. It was, I think, 4% in '24. We're up to 6% in '25. I think with Chris' numbers, it's going to go up as a percentage of our sales again in 2026. So I think we've got a pretty good path for that off-highway industrial to get to that 10%. And I think Neil's team in the aftermarket and service business has been picking up almost a percent of share of our FHINIA sales as well. So I think they've got a good path. I think those are the 2 that are probably have the most confidence in as far as getting there sooner. I think the other ones, it's going to depend on some of the cycles. how quickly does CV recover? When do we see that really kind of recovering? And again, on some of them, we're not going to turn away light passenger vehicle business if more customers want to award us more or if battery electric penetration rates continue to go down. And so those are the ones that may have a little bit more kind of flex in between them in the outer years.

And in terms of M&A, I mean, Pedro should really address that, and he basically said it in what he said and what we're targeting.

Yes. And there, nothing has changed. I think we were very vocal about it, that all our M&A activity is focused around the CV aftermarket and industrial arena. So no news. We keep on monitoring. Since inception, we have looked more than 100 to 150 opportunities. We keep on our scanning. We're going to be financially disciplined. And if it is the right segment, right fit for our portfolio, right footprint for the right price. So there's a lot of rights here that have a lot of tick marks that have to occur. That's why M&A is so difficult. We might move along. If not, we'll stay patient.

And then I know it was a lot of work to get the tax rate down pretty significantly last year. Do you guys still think 27% is the right long-term rate once you're fully past this headache?

It's the next hurdle rate to get to my tax guy probably online dying for what I'm going to say next. But no, I mean, we're going to continue to drive it down, but it just does take a lot of time. So I think mid-20s is a good number that we're shooting for. Would we go lower than that? Yes, but we're not going to do something silly to get there.

It has to be something that's sustainable that makes sense and that is not only lowering the rate, but the cash taxes paid and all of the other things.

Yes. I mean we try -- hopefully, you guys have learned from us that we try to be kind of steady and reliable. We're not taking very aggressive positions, both on our taxes, both on our projections and anything else. And so we're trying to be as consistent, reliable and continue to build on the reputation that we deliver on what we say.

Dan?

Dan Levy, Barclays.

I wanted to double-click on the push into the off-highway, industrial and other end markets. And I know that we're only talking about your longer-term aspiration has increased 4 points of market segment mix. But maybe you could just give us a sense of how truly adjacent these end markets are as far as leveraging the technologies, leveraging the capabilities. I know you're saying that it's the same core technology, but how much incremental effort is there for you to tap these markets? And maybe you could just give a sense of how you stack up versus some of the competitors here versus your positioning in the core light vehicle and CV space.

Sure. I'll pass that off to Todd in just a second. But I guess if you go out there and take a look at some of those injectors, you won't be able to tell the difference between one that's for marine, one that's for JCB and hydrogen or 100% heated tip injector for ethanol in South America or natural gas. And so it's very much the same. And maybe, Todd, if you can expand on that.

Yes. When we look at those markets, the reason they're adjacent is because they're using similar technology. If you have a combustion engine to power a vehicle or a combustion engine to power a stationary power generation or a boat engine, that technology is quite portable between those different applications. So the expertise of our engineers, the manufacturing production processes are quite similar between them, and then we're able to adjust for system supply or component supply in those adjacent markets based on where the needs are. So quite flexible in terms of technology resources, production resources and the capability that's required to serve those adjacent markets.

And again, maybe, Todd, you can expand a little bit on -- as an example, if you're going from a gasoline to 100% ethanol or methanol, it's very corrosive. The design is pretty much the same, but we may have to add a DOC coating or a different material to it to adjust for the corrosive nature of it or depending on the viscosity or the energy density, the holes rather than 60 microns, maybe 80 microns to allow greater flow. Those are the small little changes that are needed in order to then adapt to those new markets. Todd?

Yes. Yes, that's precisely right. So whether it's materials or internal geometry, different flow rates, we adjust those for different vehicle engines, and we can also adjust those for different alternative fuels or different applications. And it does come down to understanding what the material requirements are, what the flow requirements are and being able to adapt the design. But the basic principles are the same principles that we're using across these different applications. It's the adjustments where our expertise and our knowledge kicks in to be able to do that seamlessly regardless of what market is being served.

Okay. As a follow-up, I just want to double-click then on another end market shift that you have and your mix of light passenger vehicle and light commercial vehicle on-highway are going to shrink, but you're telling us that revenue is going to be flat today versus the out year. So there's a share component here. What's the confidence that the share gains will continue to increase and just the positioning versus some of your competitors that enable you to get that higher share?

Yes. I mean we're actually seeing -- as you guys know, we're probably seeing a little bit of tailwind. One is because the BEV penetration rates are shrinking, that's giving us a little bit of tailwind. As you guys know, we have a lot of confidence on the business that we win today, doesn't launch for another few years and is going to continue to 2030 and 2032. So we have really good visibility on the market share gains that we're having and what -- how that's going to have an impact on our business through 2030. And so we generally have a pretty good idea over the next 3, 4 years of that trend. And again, when we actually go through this and Pedro leads it on an annual basis, we'll do a bottoms-up analysis on all the different programs that are available, what's coming, our success rate on keeping our incumbent business as well as potential success rate on some conquests. And so we feel very confident in us being able to continue to deliver that market share gain based on the new business wins we've already had and continue to see.

And some of it depends on the region and the customers because just remember, our landscape in Asia Pacific is that we were always on the local domestic China suppliers who are no longer staying domestic. They're expanding. I think most people saw that BYD is increasing tremendously. And they're one of our customers, one of our -- in our top 4 is one of the domestic China OEs. So as that expands and whether it's expanding in Asia Pacific or it's moving into another region, we're on those products. So yes, that's part of it.

Yes. And if I can add, it's an internal KPI weekly, we have what we call a business case review. And weekly, we review 3, 4 to 5 responses to requests from quotations from our end customers. So there's a lot of activity sourcing, resourcing on light passenger and light commercial vehicle. And we keep on responding to those customer requests worldwide, and our success rates are encouraging. So we're really confident that increasing market share and maintaining absolute revenue until the end of the decade, beginning of the next one is -- we're comfortable with it. It's okay.

I have one that came in. Can you talk about the latest changes relating to tariffs and how it affects your '26 outlook?

Well, which day tariffs. I mean the latest changes with the tariffs that are coming off and then the other tariffs coming on, it's immaterial in the change in terms of how that's going to look. It's a tiny bit, we think, of a windfall, but it depends because if you look at our 2025, we really got payback or pass-through for all of it. So if we get pass-through back on any tariffs, which we're not sure about, and my legal guy is steering at me, he's probably going, don't go there because that outlook on getting back the tariffs is interesting. But if we did get them back, I'm absolutely sure we would have to pass them on. So then you're just talking about the difference in the old tariff scheme to the new tariff scheme, it's immaterial. It's very small.

Then another one that got e-mailed to me. On the slide showing '24 to '26 growth, can you address the slower EBITDA CAGR compared to the sales CAGR?

Yes. That one, again, goes back to the tariffs and FX. If you go from '24 to '25, if you remember at the end of the first quarter of '25, which seems like a long time ago, which was just a year, we did have a big -- that was when the tariffs were introduced. That was when FX dollar weakened. So we did have a big change there like every other company. And those had dilutive effects on our results for the rest of the year because they've remained fairly steady throughout there. Then you get into this year, even we're going to convert, including the dilutive effect of tariffs and FX at 20%. If you take those out, our conversion is almost double that. So it's better. It's last year, you have a good bit of dilutive effect because you have 3 quarters of the FX changes and the tariffs. So that's what creates a bit of a difference because you've got sales on sales with better tariff that are basically hollow sales passing through.

Bob?

Bobby Brooks from Northland. One question I wanted to ask on the expansion into the power generation space. I wanted to get a little bit more granular in terms of kind of what the products you guys are using or selling to supply that and kind of what type of gen sets is the focus centered on? And is that all coming from the SEM acquisition? Just want to get a better picture of kind of the opportunity as a whole.

Yes. It's kind of both. I know a lot of people want to talk about it, but it's pretty much anybody who's on combustion is probably also on power gen. It still has a fuel injection system. It's just sometimes if we sell to a Volvo Penta or a large customer, sometimes we don't know if it's going into a truck, a mining truck or into power generation because it's the same technology. So we've been supplying that market for a lot of years. I think there was a story I'll explain to folks a few years ago, we have this huge demand on one of our mechanical pumps. And we didn't know why. I mean it's a 30-year-old technology and the volume shot up. And it was because they were doing all these backup power generators with Cat Perkins for 5G cell towers. And we had a spike for a few years, and it was great business, and then it kind of tapered back down to what it was again. And so we're on a lot of these backup in power gen. I think it's going to be both with pumps, injectors and now probably on some of the larger things, that's what the SEM is on some of those ignitions for natural gas. Todd, do you want to expand on some of those applications?

Yes. I would add that in the combustion engine part of a stationary power gen, whether as Brady mentioned, it's injectors, pumps or rails. Now with SEM, we have the ignition portion of it. Many of those customers are looking not just on traditional fuels, but also on alternative fuels as well. And that's where some of our technology flexibility can come in, whether it's natural gas or some alternative fuels that are being used in the stationary power generation also. But those would apply, as mentioned, whether it's for telecom, for data centers, even for water management, and we've been supplying those through various OEs for a number of years and continue to grow in that space.

Got it. And then -- so you've had a lot of success breaking into the aerospace and defense end market, and you mentioned how that's given you confidence that that's the right approach. Are there any markets where you might have initially thought were ripe for entry, but now after a couple of years of trying to penetrate them, it's not as compelling. And the reverse of that, are there any industries where you initially didn't think might be compelling that now fast forward 2 years are more compelling to try to break into? I guess...

Yes. I may mention one that I would say is not now, but maybe in the future is medical. So medical has very precision fluid management requirements, and we do very precise fluid management. So it does make a logical fit. But to your question, we haven't made a significant inroad there, part of that because we have these other adjacent markets, which are taking focus and attention to grow in. I think that's probably the only one that I can think of specifically that we've looked at and have not pursued aggressively at this time, but may at some point in the future, make a good connection.

I think a lot of it is going to be, can we leverage our existing manufacturing processes and skills. As Todd mentioned, around fluid management, is that's going to be one of the core competencies of our skills, whether that's electrical motors, electrical controls, ECUs, calibration software. Those are kind of our core competencies of the company. And so we're going to be selective on where we see opportunities to grow. I'm not aware of one that we've started and then didn't go back. I think it may have been a little bit on hydrogen. I think we were investing a little bit in hydrogen, but most of that was being subsidized either by our customers or through grants. And we've dialed that back a little bit, but we actually used a lot of that lessons learned for natural gas and other applications. And so we've dialed that back and then we put more on aerospace and defense. And so we can easily kind of move it around -- but the one commitment that we have is that we're not going to sacrifice our financials to go after a medical or go after an aerospace and defense.

We're holding to our 3% net R&D or 4% of CapEx and being that consistent, reliable performer. So we're not going to saying, "Hey, trust us, we're going to invest all this money. We're going to sacrifice our margins in hopes of something coming in 2 or 3 years. That's not who we are, and that's not what we're going to do. We're going to maintain our financial discipline. And I think the aerospace is a good example. We had one location in France that kind of said, "Hey, we think we have some capabilities and they were starting to plant some seeds with aerospace probably, what, 7, 8 years ago for some of the first interaction. And they planted those seeds and they waited and waited and just did a small amount. And then it started to pick up. And we kind of said, wow, this is really interesting. We're getting some traction. Now let's really kind of put some additional resources on it and really start driving it, and that's where you've seen some of the success. And so you'll see that both on the OE side. You'll see that on the aftermarket side that we put -- we plant some seeds, and we see which one starts to grow. And one starts to grow, we really start planting a bunch of those seeds around the organization.

Brady, I may just piggyback just briefly on the importance of what Brady mentioned in controller capability, software systems capability. We've done engine control units for a number of years and have what's an increasingly rare skill set in combustion to be able to provide that to customers. But that extends not only to engine control units, but controllers for other elements on vehicle or on engine. So powertrain domain controllers, we've been able to move forward with a key customer in that area as well as other control units that are used. And that leverages this extensive software systems integration calibration capability that we have, which really adds value regardless of what market we're moving into.

And if I could just squeeze in one more question. I really like Brady, your -- the framing that you used of like planting the seeds and seeing which ones to Sprout. Kind of piggybacking on that, could you just maybe give us a sense of what -- how many seeds are kind of planted today within aerospace that might be starting to sprout comparatively to what that was in entering 2025 or entering 2024?

I mean it's -- there's quite a few. There's not what, 4 or 5 major engine manufacturers to deal with. And so there's not a bunch that we need to go chasing. But we're talking to all of them. I think with the -- with us getting our quality -- aerospace quality certification and them understanding that we're launching with one of the top 5 engine manufacturers in the world gives us a lot of credibility, and that's opened up a lot of doors. And I think that's what I think both Pedro and Todd kind of highlighted is there's a lot of discussion, and I would be disappointed if we don't have additional announcements with additional players this year.

I have one that got e-mailed to me from somebody online. How much of the shift toward 80% revenue from service, commercial vehicle and off-highway is organic versus M&A driven? What's the time line and sequencing of that shift? And is that driven more by growth in these segments or intentional decline in LPV?

I think there's a pathway to do it organically. It just may take longer than 2030. As I mentioned earlier, we're not turning down good business on the light passenger vehicle or light commercial vehicle. It's just we see that market is a little more challenged. If they give us a good return and a good -- it's a good program, we're going to support and invest in light passenger vehicle as well. It's just what we see in the market of those dynamics of it being a bit challenged. But the opportunities that we see in CV and aftermarket and off-highway industrial are real, and we see significant growth in those areas. And so we just see those areas growing much faster than the light passenger vehicle.

Another one that came in online. How do you see the Indian market as it's only the as it's the only large high-growth market kind of out there, this question says. And what are your strategies in India?

Yes. I mean we're clearly present in India. We've got a wholly owned location as well as a joint venture in India that's unconsolidated. And we continue to see good solid growth. As Pedro mentioned, we've just been awarded 3 from 3 different OEMs on natural gas. And so we'll be launching those over the next few years. And as you mentioned, India is one of the few locations that still sees combustion engine growth through this decade and beyond. And so we've got multiple locations, manufacturing locations. We have an engineering tech center there, both for IT support as well as software and calibration and application support for customers. And so I go there on a regular basis, and so is the rest of our team. And so we see as a nice growth opportunity on alternative fuels. They're probably the most advanced on natural gas, both on light vehicle, medium and heavy-duty vehicles. They have a lot of interest in hydrogen as well and ethanol applications. And so we're very present there, and we continue to grow there well.

You brought up hydrogen. This one came in online. So Todd, this question is for you. 89% of R&D is focused on efficiency improvements. How does that evolve as alternative fuels scale?

So part of the efficiency improvement is with alternative fuels. and part of it is with traditional fuels. As we improve efficiency with our traditional fuels of gasoline or diesel, whether it's improved performance or fuel economy, that's an innovative part of our development activity. And then part of it is with alternative fuels. I think that percentage roughly will stay about the same as we move forward. There just may be a shift within it from traditional fuels to alternative depending on the market transition and our customers' road maps.

And Todd, what's the 11% made of?

The 11% is for existing component supply, product supply supporting our plants. So some of this foundational engineering activity that supports our manufacturing and operations to continue to deliver the results that we saw earlier.

And I guess, is that flex -- Federico?

Federico Morandi, Wolfe Research. So you have a strong presence in the aftermarket segment, right? And most of it -- most of your sales from what I recall are North America and Europe. But is there an opportunity in APAC given that the -- basically the vehicles in operations are growing? And I guess that maybe they're still on the younger side, but they will also age over time. And on the top of that, do you think that's an area where you can actually see M&A going through to help you to boost your presence in the region? And lastly, could you remind us what percentage of the aftermarket is exposed to light vehicle, passenger light vehicle, commercial and medium and heavy duty?

Yes. I think there's -- and Neil, if you want to hit the Asia Pacific opportunity and what we're doing there, and then I'll hit the last one.

Yes. Asia Pacific is an area that we're really focusing on in our business development. I would really say that we need to think about it as 2 separate markets. One is China, which is half of the regional opportunity and the other half is the rest of the markets in Asia Pacific. We see lots of opportunity across those markets outside China, and we have the team focused on those. As I talked about in my presentation, the key success factors are making sure you have the right range, making sure you are first to market and you give the right logistics support. So we're really setting ourselves up to do that. Then China is a slightly different market, but our strong OE position with the domestic Chinese manufacturers, I think, gives us opportunity in the longer term as we see our GDi systems and other products coming into the market there and starting to fail. So it's one of the areas we really want to work on and has, I would say, been an area that hasn't developed as quickly as we would have liked in the past. So -- that's the focus we have.

Yes. Well, I think there's a couple of unique things with Asia market. One is our starter and alternator business is primarily a North America CV business, and so we don't have a lot of presence there. So that's always going to make it a little bit smaller. I think the other side of it on the GDI side, we were a little bit later getting into that market, and we're just ramping up now. And so once those vehicles get a little bit older as well, I think we'll have more opportunity to grow with that business. M&A in Asia, it's challenging. We've looked at a few. But again, it's getting the right technology and the right fit and not having unknown things. When you're purchasing in China with a local Chinese company, there comes a lot of different risks that have kept us kind of away from that market in general. I think the split was the last question. I think you're roughly about 50-50 between, say, light vehicle and commercial vehicle in our aftermarket segment.

Got another one here. This one is for Pedro. So medium-duty and heavy-duty is targeted to grow to over 20% at $5 billion. What is that -- is that share gain, market growth or mix shift? And what pricing pressure exists in the segment?

Yes. Good question. It's a mix of all. We're being successful in gaining new customers and extending our product portfolio in existing ones. So we're gaining market share. CV has been performing relatively weak in the past years. We expect it to somehow take off and recover. And on our aspirational target, we also have a portion allocated to the CV section. So it is actually a blend of all the 3 points.

So you had indicated increasing net leverage to 2x could be appropriate. Under what conditions would you execute that?

Well it adds shareholder value. I guess -- and one, as you saw on there, I think as we continue to get credibility and stability and get a little bit larger in size, similar to how we went from 1 to 1.5, we're going to do it on a conservative basis as we start to get consistent results. I think also, if you'll see, too, even though we may increase from 1.5 to 2, our debt costs may not go up that much. As the last time when we did the refinancing, we actually went from 1 to 1.5, but our debt service costs actually stayed flat because our interest rates dropped. If you see where our debt is trading right now, it's another 100, 150 basis points below what we went out with. And so we'll look at that, probably not this year because it's a -- the first one is a 5 non-call 2, and it's a little expensive to do right now. But if we go and get additional debt, it's probably at least 150 basis points lower. So it's becoming a lot more attractive for us to look at that. But we're only going to do it if we think there's a good use of that cash.

Same thing with the 2.0. I think as we get closer to $4 billion on a consistent basis and our margins continue to convert and increase, we could probably afford to go to 2x and still be in a very reasonable net leverage and debt service cost position. But again, going to 2x only makes sense if we think we can create additional shareholder value is that through an acquisition at a great price that makes sense to our current valuation or if our multiple drops again and we're opportunistically buy back a bunch of shares because the share price is well below where we think is fair value, we could do that, too. And I think you saw that over the last few years when we refinanced the last time, we took out a little extra cash. I think cash on hand went close to $500 million as we increased kind of our net leverage target to 1.5. And most of that money was used in the share repurchase program, which I think was a really good return for investors. At an average share price of $44 seemed like a pretty wise thing to do. And so we're going to continue to be opportunistic. When we see good opportunities to buy back our shares, we'll buy back our shares. If the price goes to $120, we may back off a little bit and look at other opportunities may open up. And so again, there's not -- I can't say I'm just going to do one or the other. It all kind of depends, and it's going to change every quarter.

How should we think about incremental margin on revenue growth in '26?

20% Well, 20%, and that's including FX. And that's what we always strive for. I tell Neil, his incremental should be a little higher than Fuel Systems, but we do a blended average of about 20%. And as we said, we are doing -- we are expecting that this year on the additional revenue. But if you strip out FX and tariff changes year-over-year, it's actually higher than that.

And that's -- I mean, I think both on the up and downside, that's a good number to kind of use that 20% expectation on EBITDA. I think to Chris' point, we're actually showing a little bit higher, and that's primarily because of some of the IT and restructuring that we've done. We're starting to get some benefits there. Our supply chain team has done a really good job on some of the productivity in the plants. And so we're actually seeing some, I guess, what people like to call the self-help things that are coming through as well that's helping us. And so we're going to continue to drive those things. But I think a consistent number is in that 20% on the upside and downside for a conversion number on incremental sales in a more standard environment.

I have a couple more that just came in. We might have touched on this one a little bit, but you're targeting $100 million of aerospace revenue by 2030. Can you explain what the revenue ramp profile looks like that? And then in aerospace and defense, how do you compete against Tier 1 incumbent suppliers?

Yes. I mean, as Pedro said, it's a little bit aspirational. We don't have that one as clear as we have on the light vehicle side for market share gains. But what we're seeing in that space is we're generally being able to win the business and launch it within 12 to 18 months after winning the business. The last one that we just announced, I think, launches in 2027. So our view is that we'll be able to continue to kind of continue with that ramp. The other thing to remind folks is in a lot of these applications, we're just getting 50% of the volume at this point because they're kind of letting us enter the market. They're going to see how we perform. If we execute well, our expectation is that we'll be able to then take over 100% of the volume, and that may then allow us to ramp up a little bit faster. So that's on the organic side. I think there's a lot of interesting opportunities for us to continue to grow on that on the organic side. And the second part was...

How do you compete against Tier 1?

Competing against the -- the Tier 1s. I think what -- the feedback that we get from our -- these aerospace customers is really around -- they have a lot of small mom-and-pop shops or small medium enterprises that are doing machine components. And they're having struggles. They're not being reinvested. Their second, third generation may not be all that interested in. So we're picking up some of that business because we have a lot of component manufacturing skill sets, whether it's with DLC, laser, laser drilling, machining, ablation. But what they also like from us, not only can we do the components, but we can also do the assembly and the complete system. And so they tend to have 2 groups of suppliers, ones that do components and ones that do complete systems, and we actually have the capability to do both. And what that enables us to do is to do things a lot faster for them and adapt to their needs very quickly. And that's one of the things I think the aerospace side struggles with is the speed. I think I shared this with people before on this first program launch that we had, we were actually ahead of schedule on PPAP and ready to go into production. They didn't know what to do with us because they never had a supplier that was on time, let alone early with a launch. And so it's that type of reputation that we're building with them, and that's why we're continuing to pick up additional business and why we have confidence that we'll continue to win moving forward.

Neil, during your part of the presentation, there was a nice graph of what I think was called out as like $41 billion in core market opportunities. Just wanted to understand that a bit better. Is that $41 billion in sales opportunity a year? Just want to understand kind of what that encompass.

That was the total addressable market for all the products that you saw in our portfolio everywhere in the world. And as I mentioned in the presentation, we don't necessarily sell all of the products in every market in the world. So one of the opportunities we have is to do that geographic expansion and to penetrate those markets. If we did sell $41 billion, that would be 100% market share, which would be great, but probably not realistic. So it certainly is an opportunity that helps us towards that target of $2 billion aftermarket revenue from organic growth is simply making sure that we take all the opportunities we have with the products that we have in the portfolio today.

I don't want to keep everyone here longer than they need to be. So we'll wrap with the Q&A there. If anyone has any questions that didn't get asked, feel free to give me -- shoot me an e-mail at [email protected] or you can contact through our -- contact us through our Investor Relations website. And again, thank you all for coming, battling the weather. It's great to see you here in person, and we look forward to seeing you out at some conferences in the future and being at your conferences in the future. So thank you very much.

Great. Thank you very much.

Good morning, and welcome, everyone, to the PHINIA Fourth Quarter 2025 Earnings Call. [Operator Instructions] Today's conference is being recorded. At this time, I'd like to turn the conference over to Kellen Ferris, Vice President of Investor Relations. Please go ahead.

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

During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements. And with that, it is my pleasure to turn the call over to Brady.

Thank you, Kelly, and thank you to everyone for joining us this morning. I'll start with some overall comments on the fourth quarter and full year, discuss financials at a high level and then provide some thoughts on our outlook for 2026. Chris will then provide additional details on our fourth quarter 2025 full year financials and discuss our 2026 financial outlook. We will then open the call for questions.

We delivered a solid finish to 2025, with full year results in line with our expectations despite a dynamic and often uncertain macro and industry environment. What stands out to me as I look back on the year is the resilience of our business. Our diversification across regions, customers, end markets and products continues to serve us well with no single end market and region that defines PHINIA. Our balance allows us to perform consistently even as conditions shift around us.

Before we get started on the numbers, you'll notice some changes as we recast some numbers between the Fuel Systems and Aftermarket segments. As we've been driving operational efficiencies, a significant portion of the original equipment service or OES sales will now be distributed from the Fuel Systems segment and not the Aftermarket segment.

We have also further enhanced our end market breakdown and have separated out our off-highway, industrial and other sales, which includes construction and agricultural machinery, vocational vehicles, marine, industrial applications, power generation, aerospace and defense and all other. Finally, we've also updated our calculation method for adjusted free cash flow conversion to be more in line with industry standards. No change in expectations from the strong cash generation of the business.

Now let's jump into the fourth quarter results on Slide 4. For the third consecutive quarter, we delivered year-over-year growth in both the aftermarket and Fuel Systems segments. Total net sales in the quarter were $889 million, up 6.7% from the same period in the prior year. Excluding FX impacts on the contribution of SEM, revenue was up 2.3%. We reported adjusted EBITDA of $116 million for the quarter, up $6 million and a margin of 13%.

Total segment adjusted operating income was $112 million and a 12.6% margin. The Fuel Systems segment delivered a strong quarter with sales of $560 million, up 7.9% and adjusted operating margin of 10.7%. The Aftermarket segment had sales of $329 million, up 4.8% with adjusted operating margin of 15.8%. Adjusted earnings per diluted share, excluding nonoperating items, was $1.18 for the quarter compared with $0.71 for the same period of the prior year.

Our balance sheet remains solid with cash and cash equivalents of $359 million and $859 million of total liquidity. We reduced our debt by $24 million, and our net leverage ratio came down from 1.4x to 1.3x, all while returning $40 million to shareholders via dividends and share repurchases. The fourth quarter performance underscores the durability and resilience of our business amid a complex and uncertain operating landscape. It reflects the advantages of being a diversified industrial company by serving a broad mix of regions, customers, end markets and products.

Moving to Slide 5. We continue to win new business across our core and adjacent markets. Throughout the year, this included multiple wins in light vehicle, commercial vehicle, off-highway industrial, aerospace and alternative fuel applications. A few key Fuel Systems segment wins in the fourth quarter included securing our third aerospace and defense contract for a post-combustion fuel valve, highlighting our proven capabilities and strengthening our position in the sector.

Key truck contract extensions with global commercial vehicle OEMs, reaffirming the strength and longevity of our strategic partnerships and a new business win in India with a leading OEM for port fuel injectors used with compressed natural gas, underscoring our dedication to lower carbon mobility and commitment to alternative fuels.

Now to Slide 6. The aftermarket segment remained a steady and resilient contributor throughout the year. Demand continued to be supported by an aging global vehicle fleet and expanding portfolio. Our strong brands and service continue to resonate with customers and distributors. We are winning both new business and expanding relationships with existing customers. Importantly, these wins were across diverse geographies, further strengthening our position in the independent aftermarket.

We also continue to accelerate the pace of expanding our offerings and coverage by adding approximately 5,800 new SKUs across our portfolio. Slide 7 highlights the diversification of our business across regions, customers and end markets. This is supported by manufacturing facilities close to our customers in all key regions. We also benefit from the flexibility to redeploy manufacturing and human capital across these opportunities.

As noted earlier, we provided additional end market granularity by splitting out CV and other into medium and heavy-duty on-highway CV and off-highway, industrial and other. This shows the progress we've made in expanding our presence in this end market as it now represents 6% of our sales.

Moving next to capital allocation on Slide 8. We remain disciplined and balanced in our approach to capital allocation while remaining opportunistic about M&A. Since the spin, we repurchased 9.8 million shares, which is roughly 21% of our original share count. In total, since spin, we returned over 0.5 billion to shareholders via share repurchases and dividends.

We accomplished all this while maintaining net leverage below our target level, sustaining robust liquidity, closing on an opportunistic acquisition and supporting the organic growth needs of the business. We also announced a few weeks ago an 11% increase in our dividend and a $150 million increase in our share repurchase program. Needless to say, our capital allocation decisions will always be based on how we can maximize long-term shareholder value.

Moving to Slide 9. We had some significant milestones in 2025, completing our first acquisition, receiving our aerospace quality certification, along with our first program launch and delivering strong financial performance in a volatile market. Also of note, 2025 is the first full year without the impact of TSAs and contract manufacturing with our former parent. Investors have been rewarded with a total shareholder return, which includes share price appreciation and dividends over the 2-year period of '24, '25 of 140%.

Looking forward to 2026, we expect our journey to continue on the path we set from the beginning, differentiating via product leadership, focusing on markets that will support our goal of sustainable growth, maintaining our financial discipline and remaining focused on delivering long-term value for our shareholders. Finally, I want to thank our team for their outstanding execution through fiscal '25. Their hard work and dedication enabled us to successfully navigate dynamic market conditions while driving meaningful growth and operational improvements.

I'll now turn the call over to Chris to discuss our financial results in more detail and introduce our 2026 financial outlook. Chris?

Thanks, Brady, and thanks to all of you 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.

Our fourth quarter and full year results met our expectations even as we navigated a range of challenges from tariffs and macroeconomic instability to geopolitical tensions and a shifting policy landscape. Despite these headwinds, we grew our top line and delivered a solid bottom line. In addition, as Brady mentioned, we made meaningful progress on the priorities we set at the start of the year, strengthening our core businesses, entering new markets and positioning PHINIA for long-term profitable growth.

Fourth quarter financial results were solid and include a full quarter contribution from SEM. The external environment has not changed dramatically from the prior quarters. However, we saw some strength in Asia and the Americas, partially offset by lower sales in Europe within Fuel Systems. Aftermarket sales were also higher, primarily driven by aftermarket pricing and tariff recoveries, offset slightly by lower commercial vehicle sales in the Americas.

Let me now bridge our revenue and adjusted EBITDA for the fourth quarter, which you can find on Pages 11 and 12 in the presentation. Specifically, during the quarter, we generated $889 million in net sales, an increase of 6.7% versus a year ago. Compared to Q4 2024, our top line benefited from favorable foreign exchange tailwinds of $25 million as the dollar weakened mainly against the British pound and euro. Revenue in the quarter also rose on tariff recovery of $15 million. Overall, volume and mix contributed $8 million as we saw strength in sales in Asia and the U.S. with higher LPD sales, partially offset by lower sales in Europe. SEM contributed $12 million in the quarter. Excluding the FX impact and the SEM contribution, sales were up 2.3% in the quarter.

Moving next to the bridge on Slide 12. Adjusted EBITDA was $116 million in the quarter with a margin of 13%, representing a year-over-year increase of $6 million and a 20 basis point decline in margin. Corporate and other costs, primarily R&D savings were a $6 million tailwind. Net tariff recovery, supplier savings and other overhead cost savings measures combined were another $5 million. These benefits were partially offset by unfavorable product mix in Asia and the Americas. Overall, results were healthy, though margin percentages were diluted as a result of FX, inclusion of FEM and negative mix.

Let me now bridge our adjusted revenue and adjusted EBITDA for the full year, which you can find on Pages 13 and 14 in the presentation. Once again, starting with adjusted sales, where the drivers were similar to the fourth quarter. Total revenue was approximately $3.5 billion, an increase of 3%, excluding the final contract manufacturing sales from our former parent in 2024. FX was a tailwind of $45 million as the dollar weakened mainly against the British pound and euro. Adjusted sales also benefited from tariff recovery of $38 million. Volumes of base business were flat for the year, but boosted with the inclusion of $20 million in sales from SEM. Excluding the FX benefit and contribution from SEM, revenue was up 1.1% for the year.

Moving next to the bridge on Slide 14. Adjusted EBITDA was $478 million, flat year-over-year with a margin of 13.7%, representing a 40 basis point decline in margin. Supplier savings and other cost-saving measures of $26 million were offset by unfavorable product mix, a slight increase in employee costs and net tariff pass-through. Margin was negatively impacted by the dilutive impact of both tariffs and FX, each of which resulted in an approximately 20 basis point decline in margin.

Moving next to a discussion of the individual segment's full year performance. Note that in Q4 of 2025, we made a strategic decision to shift a significant portion of our OE service business previously reported in the aftermarket segment to the Fuel Systems segment. This change is a result of creating a streamlined process for the sales structure and distribution of these sales, thereby reducing the related administrative burden. Our reporting segment disclosures have been updated accordingly, including recast of prior periods in all our reported financials.

Moving next to Fuel Systems on Page 15, where you can see that revenue for the full year increased 3.3% with a 40 basis point increase in adjusted operating margin. Segment revenue was impacted materially by changes in FX of $33 million, the addition of SEM of $20 million and tariff recoveries of $13 million. Full year segment AOI of $244 million is an increase of $16 million with solid supplier savings, partially offset by negative volume and mix. Compared to 2024, our aftermarket segment sales were up 2.7% for the full year, primarily due to customer tariff recovery and favorable FX. Aftermarket segment margins of 16.2% were down 30 basis points, primarily due to the dilutive impact of tariff recoveries.

Moving on to a discussion of our balance sheet and cash flow. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with strategic M&A and other investments. Cash and cash equivalents were $359 million, while available capacity under our credit facilities remained at approximately $0.5 billion for a resulting liquidity of $859 million.

Cash flow from operations was $312 million for the year, and adjusted free cash flow came in above guide at $212 million, enabling us to continue returns of capital to our shareholders through regular dividends and buybacks. Share repurchases represented a primary use of capital, totaling $30 million in Q4 and $200 million for the full year. We paid $10 million in dividends in Q4, bringing our full year dividend payments to shareholders to $42 million.

We remain confident in our ability to generate strong free cash flow to support our future capital allocation priorities. This is evidenced by the strong performance of the business in 2025, enabling dividends back to shareholders, share repurchases, a small bolt-on M&A transaction completed solely with cash and the settlement of $24 million in debt.

We made meaningful progress on lowering our tax rate in 2025, moving from a full year adjusted effective tax rate of 41.5% in 2024 to 32.5% in 2025. Cash taxes paid also reduced to $61 million in 2025 from $94 million in 2024, although it should be noted that there were one-off reductions in 2025 cash taxes paid. Without these one-off items, we would have expected a cash tax outlay in the approximately $75 million to $85 million range. While we expect improved trends to continue in the coming years, rate of improvement and rate of change is not linear for either ETR or cash taxes paid and therefore, expect rates and cash outlays to change at differing levels each year as various structuring projects are enacted.

Before moving to Slide 17 and 18 for a discussion of our 2026 outlook, I also want to take a moment and thank and congratulate all our employees for delivering great 2025 results. despite any market turmoil or chaos that ensues, our teams understand how to calmly assess situations and react appropriately.

Let me briefly discuss the drivers behind our outlook for 2026. Industry volumes are expected to be flat to slightly down globally, inclusive of battery electric vehicle sales. We expect to offset these market changes through continued share gains in aftermarket and increased gasoline direct injection products, off-highway, industrial and other end markets.

Taking these factors into account and at the midpoint of our net sales outlook of $3.5 billion to $3.7 billion, we would expect an increase in sales in the mid-single-digit range, inclusive of FX. Excluding expected FX, our growth is projected to be in the low single-digit range. We are, therefore, guiding adjusted EBITDA to be $485 million to $525 million with an EBITDA margin of 13.7% to 14.3%.

We believe the business is well positioned to continue generating meaningful cash flow, and our 2026 outlook for adjusted free cash flow is therefore $200 million to $240 million. The adjusted effective tax rate should be in the 30% to 34% range. Overall, we expect to deliver strong results in 2026 as we continue to drive operational efficiencies and search for new areas of growth for both segments.

Note that our outlook does not include any possible impacts related to future policy changes by any government, which could affect our operations or technical centers. This includes additional tariffs, tax or any other policy that could inflate or deflate revenue or affect our cost base. Fiscal year 2025 was marked by complexity and resilience, a tale of navigating global headwinds while making strategic progress.

We are entering the next chapter of growth and look forward to continued success in fiscal '26 and beyond as we continue our focus on revenue growth, product innovation and new markets, business wins, disciplined capital allocation and delivering shareholder value. We want to thank all of you for joining us on the call today. Operator, please open the lines for questions.

[Operator Instructions] We'll take our first question from Bobby Brooks at Northland.

The first one I had just on Chris, you gave a great breakdown of the guidance. And I was just curious on that Slide 17, when you're talking about mid- to upper single digits for commercial vehicle for Europe, right? Is that the industry overall? Or is that what you're expecting to see?

That's the industry overall. I think down below, you'll see kind of what our expectation is. I mean we've seen -- I think in the October S&P kind of update. And again, we saw that the commercial vehicle kind of ended last year in Europe relatively stable, and we're also seeing some positive signs from our customers in that region as well.

And just sticking with the guidance, turning to adjusted EBITDA margins. I would have thought if revenues would grow 6% that you would see a bit more margin expansion. So I just wanted to maybe double-click and hear what might be sort of the hurdles preventing more robust margin expansion with better growth?

Well, we're showing margin expansion of 20% incremental, which for us is a good rate to go through. And if you it's actually higher than that if you take out some of the FX and the tariff. We're assuming that we're also going to grow on tariffs and FX, which are basically hauling down. There's not going to be a big increase in the tariffs if they stay stable from last year, but there is a reasonable amount of FX in there. But 20% is really a good number, we feel.

Got it. I guess I wasn't looking at it like that. And it was really exciting to hear you guys won your third aerospace and defense supply contract. And I was just curious to hear, is this with the same customer for the first 2? Or is this a new customer?

Same customer, but there's momentum in other areas as well.

Got it. And maybe just the last one is -- so I know you started production on that first A&D supply contract in the fourth quarter, right? And isn't that second project slated to start beginning now in the first quarter? And any insights on when that third and any insights on when that third supply contract might start to kick off?

I think it's '27.

'27. Congrats on the great quarter.

We'll move next to Joe Spak at UBS.

Chris, I just want to make sure I have it right because I was sort of doing some of the same math on incrementals, and I think there might be some factors that are sort of weighing that a little bit down. So it sounds like in your revenue guidance, you're assuming about 2 points from FX. Anything there? Can you sort of further break down like what the contribution from tariffs or if there's any recoveries or other pass-throughs in that revenue guidance?

We're assuming on tariffs that will come out even. So that's why it's a bit dilutive on the tariffs. There's not a lot more in tariffs. Remember, we had 3 quarters of tariffs. We're just assuming the carryforwards that you would have additional tariffs in the first quarter that weren't there last year. So that's additional. But yes, overall, we just assume that our tariffs are going to be breakeven, which then be a lot of room for growth on margins.

Yes. I mean, so the tariffs are in the $10 million to $15 million range. I think it's one extra quarter at no margin. FX is helping.

So it adds revenue. And most of that is coming in the first quarter because, again, remember that dollar started weakening at the end of the first quarter last year. So a lot of that is coming in the first quarter.

So FX is not great conversion. So it's basically at margin. So again, if you take a look at the total number, if you go the '25 to the midpoint of '26, you're looking at, what, $130-some million of revenue and $27 million of EBITDA, which is a 20% conversion with those additional headwinds of no conversion on 1/4 to 1/3 of it.

Okay. Yes. That's -- all right. So we can sort of back into what margins would have been otherwise. I guess just another point, I'm just curious if anything is sort of baked in here as well. Like we've obviously seen metal and other input prices move higher and although they've been a little bit volatile late. Can you just remind us again of the most important inputs and just contractually how that flows through your financials?

Yes. I mean it's -- we -- mostly it's copper. Copper and aluminum are probably going to be the 2 as well as some stainless steels. But again, the material content of our overall revenue is not a significant percentage.

Because we're buying mainly already finished components that have it built in. And where we do have any kind of commodity we get pass-through. It's not a perfect because it's usually an adjustment at the end of the quarter to get either positive or negative overall.

But there's nothing meaningful in our guide from commodity pass-throughs or commodity impacts.

We'll go next to Jake Scholl at BNP Paribas.

Congrats on quarter. Within that, I appreciate you guys breaking out the 6% industrial mix. Within that, are there any particularly rapidly growing business, anything you guys really want to call out in there that should be a growth driver over the next few years?

Yes. I mean it's -- I think we've seen it in some of the press releases in our earnings calls as far as the new business. I think you'll see a lot of marine applications, some off-highway, some gensets in there, ag and construction. So I think it's obviously aerospace and defense. And so they're -- it's all been growing really good for us, and we've had a nice uptake in customers there in order of magnitude. I think we'll give some more color on the details in those markets in the Investor Day later on in a couple of weeks or 2.

And then you guys finished the year comfortably within your leverage range. You're generating strong free cash this year. How should we think about your capital allocation priorities? Are there any areas where you're looking to build out your portfolio through M&A? Or do you expect to keep deploying most of that towards buybacks? And then just quickly, can you quantify what -- where you expect the transaction costs within the free cash to adjusted free cash bridge to fall out?

I think -- I guess I'll hit the first -- what was the cash question?

No, the first is capital allocation.

Capital allocation. I mean, as we kind of told you, the -- we're always going to sit down every quarter and kind of take a look at where we are on cash and where some M&A is and where our share price is and try to make decisions that we think are in the best interest to maximize shareholder value. And so obviously, with share price appreciation and our multiple going up, it may make an M&A look better. But again, we're not going to force ourselves to do M&A.

We still think that we -- our business is made up of and the diversity of our business makes us look very much like a diversified industrial, and we kind of know where some of those comps are. So we still think that share repurchases is still going to be part of our capital allocation policies, which is why the Board also came out and increased our share repurchase program to give us some additional flexibility there and continue to being opportunistic.

We like our business. We like the portfolio of our products right now, and we like the trajectory that we have. So we upped our dividend as well, 11% because our share count keeps coming down. And so we'll continue to make those decisions to maximize shareholder value. On the cash conversion, I think it was your question there.

Can you reframe that one again, Jake? Because I didn't -- I think both of us got a little confused.

Just a quick question on the transaction costs to bridge from traditional free cash to adjusted free cash.

I mean it's -- we're just going from doing it from net income, which we felt was a little bit on squirrely and moving it to -- adjusted EBITDA.

Why did you go from net to adjusted cash flow? We say adjusted cash flow.

Yes, Chris --

Is that your question?

Yes. Thanks, Brady. So like on Slide 25, in the adjusted free cash bridge, there's the separation-related transaction costs, and that's the only difference between what you guys report as adjusted free cash and what other companies but what is like kind of a traditional free cash flow number. So I'm just trying to bridge that.

Separation.

Are you asking what the separation costs are? I mean that still relates back to the original spin transaction and as those go down. There's still a little bit of noise coming out of that from the settlement with BorgWarner and the finalization of some of the old transactions as we clear out some of the old statutory things. So those are the numbers that are there, and you can see it on Page 25 in the bridge.

Those will continue to come down as we get through that.

We'll take our next question from Bobby Brooks at Northland.

I guess kind of broad question, but a lot of good things happening in the business. You guys are doing a great job expanding outside of just being an auto supplier. You got your Investor Day coming up in 2 weeks. Just kind of wanted to give you the floor to what might be the focuses of the Investor Day and maybe just any hints of what's to come?

Sure. I think one of the things we're obviously going to do is we're going to go through a lot of our technology and the products that we think and services that we think differentiates us and gives us a lot of, I guess, strong relationships with our customers. That makes us a good partner for them from our products to our services and support and software and calibration.

We'll take you through that. We'll go through and deep dive each of these end markets that we've now highlighted and kind of share with you some of the applications and technologies and the market opportunities that we see in each of those markets. And finally, we'll kind of give an outlook on where we think we're going to be in 2030 and beyond as we continue to shift our business more and more towards commercial vehicle and off-highway and service applications and how that's going to further support our growth beyond 2030.

And so we'll have some nice displays there as well as for as our products, some of the unique manufacturing and proprietary processes that we have in our manufacturing facility that also helps put some walls up around our business and protects us from kind of individual players out there. So we think it will be a nice deep dive. And in some ways, it's going to be more of the same. We're going to continue to be financially disciplined. We're going to continue to lead with product leadership, and we're going to continue to allocate capital in the most efficient way possible. And so it's just a continuation of the journey for us.

We'll move next to Drew Estes at Banyan Capital Management.

So my question is about 2026 volume assumptions. We're seeing a -- what seems to be a refocus on ICE and hybrid vehicles among OEMs, especially in the U.S. And you're still assuming light vehicle volumes to decline low single digits in the Americas. And I'm just curious, what would it take for light vehicle volumes to turn positive in the Americas for you all?

Well, again, this is the market numbers. It's kind of the latest and greatest is that North America -- the Americas is going to be relatively flat to down a little bit. Not a whole lot, I mean, from the number standpoint. And that includes EV or battery electric vehicles in that number. And so we do still see some battery electric vehicle penetration kind of flat to maybe a little bit up.

But for us, we've got a good market. We continue to see market share gains in GDI penetration rates increasing. And again, the GDI goes across both hybrid and plug-in hybrid applications that have combustion engine in them. So that's a good thing for us. So for us, in general, the market may be flat to down, but we continue to see good penetration rates for our business.

As we kind of highlighted there on Slide 17, the overall global internal combustion, which includes hybrids and just standard combustion vehicles is going to be flat to down next year for us, but we're still showing growth, and that's because of our continued market share gains. And so we're outgrowing the market, maybe 400 basis points, 500 basis points on a year-over-year basis based on our market.

And that, I think, is a testament to our technology and a lot of new business wins that we've been announcing over the last few years. So from our perspective, the down 1% or 2% is kind of noise, and we'll continue with our market share gains, we'll continue to see growth.

Okay. And just a quick follow-up on that. A lot of your competitors had deemphasized their GDI platforms and anything ICE related. Are you seeing any change in their behavior, maybe a refocusing on some of those programs? Or is it -- have they not really changed anything?

No, not really. I mean there's still -- there's just 2 other major players out there other than us. We continue to gain share. I think the smaller players have already kind of started to wind down things. So there's not a huge change there. I think you'll continue to see our first to market with a 500 bar type system. We're doing a lot with alternative fuels, both natural gas, E100s I think puts us in a strong position, and we continue to launch more hybrid applications with GDI as well.

So again, what we benefit from is that we're truly focused. It's our key market for our company, where some of our competitors, it's just a small percentage of a very big company, and they're allocating their capital and they're focusing on a lot of different things. So we think there's benefits for us being a little bit smaller and more focused and dedicated to this space.

And that concludes our Q&A session. I would like to turn the conference back over to Brady Ericson for closing remarks.

Great. Thank you. We really feel we delivered a solid finish to the year. 2025 results were in line with our expectations, reflecting the resilience of our diversified portfolio. The progress we made during the year underscores the strength of our strategy and successful execution and has us well positioned in the coming year.

With our strong foundation in place, we're excited about the opportunities ahead and remain confident in our long-term growth outlook and our ability to create long-term value for our shareholders. And as mentioned earlier, we are going to be hosting our Investor Day on February 25 at the NYSE. Please go to our Investor page to sign up to join us, either in person or via live stream. So again, thank you, everyone, for joining us this morning. Have a great day.

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

Welcome back, everyone, to the UBS Industrials Conference. Super pleased to have with us PHINIA. With us from PHINIA, we have Brady Ericson, CEO; and Chris Gropp, the CFO. So thanks for joining us again at this year's conference. Always a pleasure to have you.

There's a bunch of topics I want to sort of run through, mostly relating to sort of where PHINIA's strategy and where we sort of go from here. But I wouldn't be sort of doing justice if I didn't sort of take an opportunity to sort of ask you just with roughly 3 weeks left in the year to go in the quarter to go, like how have things sort of played out relative to sort of what you talked about at the end of the third quarter?

I mean really no changes. I think things are continuing to kind of chug along. As you kind of see on the slide here, the number of end markets and regions and customer diversity that we have keeps us pretty resilient in kind of every market.

And so commercial vehicle North America is still pretty soft, but we're seeing signs more positive in Europe, light vehicle in China. Aftermarket continues to perform well for us. And so there's a lot of different diversity. So there's not any one thing that really drags the business down in any way. And so we're confident in our guide, and we're looking forward to another strong 2026.

And as we begin to sort of think about ' 26, I know we're not going to get guidance from you here right now. But clearly, you're at least have begun, if not sort of right in the thick of sort of the planning and budgeting process for '26. and look what you sort of budget for might ultimately end up being different than sort of how you communicate the guidance to the street.

But how are you sort of thinking about the markets for 2026, especially since I fully appreciate that you're sort of diversified here by end market and by geography, but there has been a lot of volatility in the market. So it's -- how do you sort of go about planning for that when we've seen this level of volatility? And do you expect that level of volatility to slow down at all?

No. I think -- I mean, we always do a full bottoms-up every single year. So every plant is going to look at every SKU. They're going to talk to their customers, see what their production plans are as well as compare that to what the market expectations are. And as Chris kind of pointed out in a number of our meetings, if you take a look at our guide for this year, we're almost dead nuts.

If you strip out tariffs and our acquisition stuff, we are within 2%. So and it's not that every market hit. It's just that for us.

Diversification.

Yes. We -- if aftermarket goes down, OE goes up, OE goes down, aftermarket goes up.

So we have nice diversity. I think the positive, again, that we've seen is we tend to look at halves, tend to be more comparable than quarters. And we're getting back to, I think, our normal seasonality to where Q1 and Q4 are lighter. Q2 and Q3 are stronger. But if you compare first half to second half, those are probably more comparable. And so with our current guide right now, our second half is a bit stronger than the first half, which is probably a good indication of us going into 2026.

Do you think that is a solid run rate into?

Yes. I think it's a good starting point for us. For us, since we've spun, we've gone from a peak cycle of CV and industrial and even some of the light vehicle to now we're closer to the bottom of the trough. And so we're only halfway through a normal cycle. And so for us, if the OE just stops declining, that's good for us because then our aftermarket is then growing and we'll be back into growth. And when the market does come back more to equilibrium, we're having -- we're going to have even better growth.

And now with the relaxation of some of the CAFE requirements and other things, we've already seen that trend where customers are going to be keeping combustion engine on the light passenger vehicle side, which is a nice opportunity. And again, it's around 27% of our business globally. And we think it's a good solid business for us.

So it's definitely been the ICE stronger for longer thematic, which is something you guys have, I think, maybe secretly sort of thought all along, but when you did sort of spin, you did have some different assumptions for sort of how ICE would trend within the light vehicle market. So what's sort of your current thinking on that?

Because like the old math was sort of like you need to win a certain amount of business, right, on injectors to sort of offset the headwind.

Correct.

It seems to me like you might still be getting that same amount of incremental business and share gains, but you're not having the headwind you thought.

Correct. Again, when we spun out, we were still part of our former parent. And so our messaging had to be consistent with what our former parent was saying. They presented in the morning, we presented in the afternoon. And so, we were still employees of that company. So we -- to be fair, we still had an obligation to our former parent. So that's a little bit different.

Now again, most of our leadership team, myself included, raised their hands and says, Hey, we want to go with this combustion asset because we believed in it. Our view is still that battery electrics are still going to continue to gain share. It's just our view they're going to plateau. We're already seeing it plateau in China with the incentives no longer there. We're seeing it slow-down in the Western markets. We're seeing adjustments in Europe as well.

EVs make a lot of sense for some applications and for some families, but they don't make a lot of sense in a lot of regions of the world in a lot of regions of the U.S. and in Europe. So Eastern Europe, Africa, Southeast Asia, Central South America, even China is not going full BEV.

We get a certain percentage. in some of these Western markets. But in Brazil, we're doing 100% ethanol. That's now their solution for carbon neutrality rather than going electric. And so they're using sugarcane, processing that into ethanol. And now with our heated tip injector, they no longer have to have a dual fuel, and they could just run 100% ethanol for those cold environments.

So it's been a decent amount of time since that spin and since that sort of initial Analyst Day, I mean, is sort of a refresh of where we stand now given that a lot has changed, not just from a macro and regulatory development, but also you have a track record now at PHINIA. So is that something we should expect in 2026?

Correct. We are planning an Investor Day, and we'll have a notice coming out here later on this week, early part of next week to be in February of '26. at the New York Stock Exchange.

Okay. Perfect. We'll look forward to that. You mentioned CAFE regulations. There's also obviously EPA and CARB. It's a very complicated regulatory environment here in the U.S. Today, we did get sort of the new CAFE fuel economy rules and they, I think, lowered down to like I think you got to go to like 35.5% or something by the end of the decade from 50-plus prior. So you mentioned the absence of like the need to move to EV.

But is there -- and we were just discussing this a little bit before we got started, but is there also any change to products for even ICE vehicles that would historically make them more fuel efficient, like just less of a need to do that because the bar is not as onerous.

Yes. I mean we think customers, and we still support incremental improvements on fuel efficiency. Why not? We have to do it in a cost-effective way that makes it affordable for the consumers because I think a lot of the technology and things are being forced on them was driving the cost to where it became unaffordable for people to buy a new vehicle.

And if you're trying to reduce overall emissions, having people stay in 15-year-old vehicles longer isn't necessarily the best for CO2. And so why not continue to improve the fuel efficiency. Now there are some technologies. We're actually launching the first 500 bar.

We launched it just over 2 years ago in China that actually improved the combustion process and actually allowed them to reduce the cost of the vehicle because they didn't need as much after treatment because during the combustion process, it was actually that much more efficient with the 500 bar technology. So it's been really, really beneficial for them.

And so I think we'll continue to see customers strive for additional fuel efficiency. And I think now the consumer is no longer afraid of hybrids and plug-in hybrids because in the beginning, it was -- they had to -- we actually had to sell the hybrid at a lower cost than the combustion because people were afraid of the maintenance costs and the wear and tear and is it going to work? And is it going to fail?

And I think everyone is now -- it's seamless as far as they're concerned. And so as we're talking about my -- all my kids drive hybrids, they get 35, 40, 45 miles a gallon, and they just think that's normal. And it's completely transparent to them. And I think that's a good solution for us to significantly reduce CO2 very efficiently with our existing infrastructure.

Okay. Maybe we could talk a little bit about this chart you put up in sort of the diversified business model. And look, I think individually, any one of these markets can have volatility and might be difficult to forecast. For them all to sort of move in the same direction, it seems like something would need to go fairly wrong in the world, maybe you disagree.

But -- let's just sort of talk about the strategy from either a growth or improving profitability perspective by the market. So if we start with light vehicle OE, how would you sort of describe the -- which I think, again, you said it is 27% of the business. How would you sort of describe the strategic view there?

I mean our view there is that we're going to continue to gain market share, and we've been winning market share and announcing that, that we'll continue to gain that 1% of market share per year over the decade. And that's offsetting the slight decline. To your point, our original expectation was we're going to see maybe a 4% to 5% decline in combustion engines in light passenger vehicle, and now it's maybe only 2%.

So some of those share gains, it's going to allow us to maybe increase the total revenue number for light passenger vehicle OE. With that said, it's roughly around $900 million of our revenue right now. We'd like to keep it around there, maybe up to about $1 billion and just keep those lines running full speed, generating a lot of cash.

Is that because that's what you're capacitized for? Or could you do a little bit more?

We can do a little bit more. But again, what I don't want to do is in a market that's still flat to declining, adding a bunch of capacity in something that already has too much capacity. And so we already have a number of our competitors on that side that are exiting or not investing. And so capacity is coming out, which is a good thing. And so we don't want to start adding capacity until the industry needs it with our technology.

Do you have any stats you could share about maybe how much share you've gained even in the period since you've sort of spun until now.

Yes, we were in the low double digits earlier in the decade, and we're probably mid-teens right now on the GDi side. That's where most of the share gains are happening and where 3 of our small competitors that had low to mid-single-digit market shares has exited.

And even some of the larger players that we compete against are questioning whether they want to continue to invest in the next-generation technology, whether that's 100% ethanol going to 500 bar technologies, other alternative fuels, we think there's some advantages there for us to continue to win.

And the regions for those -- for that LV GDI are China and the Americas. That's where that's grown the most for us. Europe, not so much on that.

So I know this is probably a little bit difficult, but I mean, if I'm doing some very rough sort of mental math in my head as I hear you speak, like -- and again, it's difficult to know because I'm sure you're not invited for -- to look at everything out there. But is it possible that like in your bookings or backlog or whatever you want to call it, your share is maybe closer to 30% at this point?

Closer to?

30%.

30%? No, I would not estimate that high.

Well, but you just said like you had 3 competitors that were in single digits all drop out, right?

Those smaller players. There were some smaller players that dropped out, but you still have the 2 big players that are at 50 and 20 some.

Right. So if everyone sort of gets their fair share of...

In the future, not today. I'm not going today.

I'm saying like looking at the -- like are you winning at closer to, let's say, a 25% or 30% market share?

Correct. Yes. And I think we're -- again, we're picking up, as I said, about 1 point of market share a year through the decade. So we expect to [indiscernible].

I didn't mean in a year, you'll be at 30% or anything. I meant like, when you're looking at the business that you're quoting, which again, some of which won't launch for years, it seems like your share of the wins is significantly higher than your share in marketplace today.

Correct. We -- I mean, we continue to be at 100% win rate for our existing carryover business, and we've been anywhere from 20% to 50% of conquest for the last several years. So we continue to see those market share gains. I think the other thing that makes it difficult for us to forecast is we had originally assumed some programs ramping down and customers are saying, hey, they're staying and they're actually ramping up. And so that may change the dynamics. And so there's been some silent extensions and silent increases from customers that we're adapting to as well.

Okay. Maybe on the commercial vehicle OE portion, again, is -- you talked even in some of your opening remarks about the different regions, Americas is a little bit tougher, maybe some of the other regions doing a little bit better. Is that regional mix roughly in line with the overall regional mix you have for the entire company within that segment?

Yes. I mean I think the light passenger vehicle is overweight Americas and China. Commercial vehicle, probably more overweight Europe and North America, a little bit lighter in the Asian region as far as percentages, aftermarkets and the OES, Original Equipment Service that goes through the dealerships and the independent aftermarket, it's actually about 50-50 commercial vehicle and light vehicle.

Okay. And so similar sort of line of thinking for the OE commercial vehicle business. I mean this business is like arguably even more cyclical than the light vehicle business. And obviously, at least in the U.S., we're at a little bit of a downside. But how are you sort of viewing that going forward?

Well, I think the nice thing about commercial vehicle is, it's -- our aftermarket is driven by the number of miles driven. And obviously, commercial vehicle drives a lot of miles for a lot of applications. And that's -- I think when you take a look at a typical commercial vehicle engine component, they're probably 60% OE, 40% service and aftermarket. And so even though you have that cyclicality, a greater cyclicality of the commercial vehicle, you have a larger portion of aftermarket that's really stable. And so that ratio is really good.

If you take a look at our -- some of our key customers you take a look at their business, they're probably around that 60-40 between their parts business and their OE business. And that's because of the 100,000 miles a year, they're driving these things, and we'll get anywhere from 2 to 4 replacements over the lifetime of that truck. And so although the OE is more cyclical, the aftermarket is a larger portion of their base business. We're on light passenger vehicle that may be 90-10 on typical.

Now the reason why our aftermarket light vehicle aftermarket is actually so big is because we also do all makes and we added additional product lines, steering, suspension, braking, those are going to be propulsion-agnostic components -- and they're not something that we're doing on the OE side. But because we have a strong brand, we have an OE pedigree and a good reputation, we've been growing that as a part of our aftermarket business quite substantially in the last few years.

Sorry. And then the LCV portion, maybe just for definitional purposes, what -- is that just mostly van -- like what are you including in that?

That's like the Class 1 through Class 4 type vehicles, delivery vans, a 10,000-pound trucks type of thing. That will be in China. They'll probably go a little bit smaller.

But not like a heavy-duty pickup truck that you -- or do you put that in that?

Some of the larger, not by the not the 1 ton type thing, but it's going to be more of the larger trucks than that. It's really focused on -- these are vehicles that we would consider commercial in nature for businesses.

Okay. And then the final area -- sorry about that. The final area would be the sort of industrial types of business. And I know this is an area that's near and dear to you and a big focus of where you want to sort of bring the business going forward. So again, maybe it's just the strategy and the outlook and what you want to accomplish in that business.

Yes. And we'll deep dive that a little bit more in the Investor Day. And so the kind of that other OE, which will include marine, construction, ag, gensets, some aerospace, marine application, it's now growing to where it's becoming significant enough that we start to call it out.

And so we're going to call it out in our Investor Day, and that kind of threshold is probably in the -- close to the mid-single digits as far as our revenue. Once it kind of gets there, it probably makes sense to give additional color to investors. And that's an area that we think is probably going to be our fastest-growing segment.

I was just going to say maybe as a sneak peek, like is that a market or a business for you that's sort of growing in line with those end markets or faster? It sounds like you're saying faster.

It's growing much faster than a lot faster. A couple of things. One is the competitive landscape and the technology that we have is very good versus the competitors that are in that space. And typically, when they're coming with Tier 4, Tier 5 emissions, they're looking to improve the quality and delivery of those vehicles, but they need something that's cost effective.

And so that's been some of our announcements with Polaris, with JCB and [indiscernible] and aerospace companies. We're winning a lot of these things because we're one of the few that kept investing in these technologies. And they say, wow, this -- one of the gen sets that we have is what we call a GDi for diesel.

And so it's taking our light passenger vehicle direct injection systems and converting it over to diesel for an off-highway excavator and genset application. And so it gives them a cost-effective solution, gives them a common rail design, electronically controlled, but it gives it to them in a cost effective because that's going to be running at 350 bar to 500 bar. So that's -- as you go up in pressure, the price goes up almost exponentially.

And so they can't afford the 2,000 bar medium-duty or 2,500 bar heavy-duty type systems. They need something that makes more sense for their application. Obviously, those are probably less sensitive to fuel economy as a heavy-duty truck because heavy-duty trucks are running a lot of miles. They're so focused on fuel efficiency. For an excavator, they're not as concerned.

Right. And is the competitive set much different? I mean you mentioned that people haven't invested in this, but is it the same set of players or?

It's similar. There's also some smaller players out there and some legacy players because some of these technologies are still mechanical systems that have been around for 30 years. But as you go to direct injection, the competitive landscape comes down dramatically.

It's same thing like on port fuel injected engines for gasoline application. There are a lot of players out there. It's a relatively simple technology. You can use it in a lot of different places. There's plenty of capacity out there, a lot of individual players. But once you go to direct injection, the tolerances, the engineering technology that's required, it really reduces the landscape.

Maybe you could remind us and give us a sense like how accurate some of these injectors are, right? I think they used to sort of give -- there was

Yes. We kind of joke is like when people say that our commercial vehicle product is not aerospace technology, and we say you're absolutely correct. It's so much more difficult than some of the aerospace technology. And we're talking about tolerances in these injectors for diesel that are plus or minus 0.5 micron, which is the tolerance, which is plus or minus a little bit larger than a virus.

These things have 5 to 6 injections per combustion cycle. And so it's going up and down within each combustion cycle 5 or 6 times. They have to last 1 billion, 1.5 billion cycles to match up with our customers' needs. They have to be working hot environments, cold environments, biodiesels, a variety of different fuels and additives around the world, and they have to last 0.5 million miles.

And so there's -- they're just incredible, incredible devices. I've been in turbos for a long time, but this fuel injection is just a whole different level of capabilities. There's the -- not only the tolerances, but the pressures that we're dealing with. And when people say, oh, it's 2,500 bar and people kind of go, okay, what does that mean?

It's like 40,000 psi. When you think about you pop a tire and it kind of explodes and it shocks everybody, well, that's like a 40 or 50 psi right? This is 40,000 range between our 2,500 to 3,000 bar type system. So this is super high pressures, super high durability, really tight pressures and the speed at which we have to move these things is incredible. So it's really, really complex.

Yes. On the aftermarket side, it's been a pretty stable business, which I think you sort of alluded to would be. This year, the organic growth does seem a little bit more challenged. Can you just sort of remind us like what sort of is happening this year? Is there anything sort of one-off? Is it more some of this timing we're seeing through the year? And what's sort of the view going forward?

Well, I think that this OES and independent aftermarket, this 34% that people see there, that does not tie directly to our aftermarket segment. Okay. In our aftermarket segment, Chris, is, what, 40%?

Yes.

And so you could say, well, your aftermarket segment is 40%, but you're only showing 34%, what's the difference? Well, our aftermarket segment has some OE business in it. The Delco Remy starter and alternator business was in that segment, and that's predominantly North American CV. North American CV is probably the most down market of any of our markets. So that's actually embedded a large portion of that OE business is embedded in the aftermarket segment.

So excluding that, you still think that what I think

Our OES and aftermarket is still in that 35%, 36% is what we expect to be in our sales. And there is a little bit of the OES that's in our Fuel Systems segment. So there's a little bit of puts and takes in there. But I think our aftermarket team is still doing very well. It's still very resilient for us.

Okay. Does this chart portend that there's a re-segmenting coming or?

Well, I think what we've said is that -- it was spun that way when we got spun out. We didn't want to change it in that time period. And we're waiting for more of a more significant event or a larger acquisition that would then make sense for us to then re-segment the businesses. We are going to provide a lot more clarity and specifics at the next Investor Day, just so people can set their modeling up correctly to address this. But we'll kind of see kind of going forward.

On the acquisition front, and I'll tie in, and I'll give Chris here an opportunity to sort of talk about and boast about the sort of cash flow profile of the company. But cash flow has been strong. You have many different options for what to do with that cash because as you sort of pointed out on the slide, like you already have the footprint, right? You don't really need the footprint.

M&A has been a focus. You've done your sort of first acquisition. Maybe you can sort of update us just on how that's progressing, how the integration has gone, what you learned about the organization through this sort of first deal as a stand-alone company and what you look for in the M&A pipeline going forward?

Sure. I mean, first and foremost.

Let's let Chris talk about the cash flow.

I mean cash flow has been good. Obviously, it's been -- it's held steady. Last year, it was slightly better just because of the debt deal we did and some just timing changes. And so that slightly lighter than last year. But I think everybody is going to be really pleased where we come in by the end of the year. We have been.

And so we just want to use that cash flow judiciously, if I can even say that word. But -- so we've been really careful with what we're looking for in acquisitions. For sure, we need to do some acquisitions going forward, but we don't have to. So we're looking for things that tie into our business as it currently runs. -- and things that make sense to tie into our business. SEM tied in really well with our product, with our capabilities, it has a really long runway and something that we can expand upon and improve upon over time.

Very small, but Brady and I have both been parts of integrations, and it's very important to get them right. So we just need to get everybody into that mode of, okay, this is what we need to do. Let's fall on our face with a small one first and then and make sure we have the playbook right for going forward. So after that, we'll just take our cash and look at what's the best uses.

Yes. And I think Chris had all the exact points. It's -- we intentionally did one small in order to get that muscle memory going in a new organization. So built our relationships with third parties, going through due diligence, the integration getting people kind of going through that process and putting together the playbook for future ones going forward.

But we're always going to take a look at an acquisition and compare it to buying back our own shares and saying, Hey, what's going to drive the most shareholder value? And so if we're trading at 6, us going out and paying 12x for an asset that looks similar to us, it doesn't make sense. Why wouldn't I just continue to buy back my own shares when that business plan, I have a lot more confidence in than any acquisition that I do.

And so I think the decision process around SEM was it was in the right market. It was alternative fuels, commercial vehicle focused, has gensets. It's synergistic with the overall system and the calibration work that we do. And it was at a valuation that was lower than our multiple, and it's a product line that we think can have much higher growth rates than our base growth rates. And so it checked a lot of those boxes and the size and those are the types of assets that we're looking at.

And so as Chris mentioned, we don't need to do an acquisition. So just continuing to buy back our shares as we bought back close to 20% of our outstanding shares since we spun. And that's just a testament to all the cash flow and Chris' focus on the team on working capital and the financial incentive that we put in place for all the executives.

Yes. Brady hit on an important one on the last is changing our bonus metrics to EV. For us, just made common sense. It's what we grew up with in our former parent. And using that metric, at least for me, as being just a controller from -- for years, the easiest way for me to get everybody thinking in the right direction and making sure they're taking as much care of their working capital and getting that to be efficient is if their bonus is based on it.

So we just had an off-site management meeting. And one of the things we said is everybody has done great. Our returns are in the P&L are great. However, everybody needs to make sure they're not missing the focus and getting that working capital, make sure we have inventory, but make sure it's working efficiently. And they get that. Everybody gets that.

And that goes into effect for '26, you said?

No, we've had it. We did that.

From the beginning. I am sorry.

We did it from the beginning.

We did. I thought you said there was a recent change...

No, no, sorry...

It's changing we got spun out. So again

Sorry, I misunderstood.

Our incentives are well aligned. It's economic value, and it's an easy discussion. We have to increase economic value on a year-over-year basis. There's no negotiation. There's no relief if the market is softer. There's no anything -- we've got to increase economic value. If we do that well, we get paid. It's cash flow. People love our cash flow. We got to continue to deliver it, which ties in with our economic value and our longer-term incentive is TSR. So we think our incentives are well aligned with investors.

Can we just sort of talk about margins? I guess, overall, I mean, if you want to sort of get into some of the segment stuff, you can. But I think like a high-level sort of heuristic model for suppliers, right, is it's a volume game, right? And you sort of -- you have this fixed cost base, you get more volume, you have strong incrementals, your margins go higher.

When I hear you talk, and I know there's some differences between some of the segments, right, CV can be cyclical, it's cyclically down. So there will eventually be a cyclical growth there. But then even on the light vehicle side, I mean, you're basically saying you want to sort of stay in that $900 million to $1 billion level. So look, I guess when you sort of put it all together, it seems like what you're still saying is you can get to sort of 2% to 4% growth. So you are sort of converting.

On the incremental revenue. Yes.

On that. But in the absence of the growth, right, in, let's say, that like light vehicle, like what are the cost levers to sort of drive margins? Or is that sort of just the level we should think margins remain at given that revenue level?

Yes. I think in the past, if you weren't growing at least 3% or 4%, your margins were declining. And so we've had to change the structure of saying, hey, that's not acceptable anymore. We've got to ensure that we're not giving away 3%, 4% pricing in order to keep the business and therefore, you had to grow in order to offset that. I think that's kind of gone away.

And so we've shown in the last couple of years, we've been able to maintain margins on relatively flat sales, driving productivity, working with our supply base on strategic partnerships. working with our customers to pass through some of the excess inflationary costs, repricing product where we have some pricing power, aftermarket being a big portion of it with annual price increases has shown that even flat, we're able to continue to maintain margins and generate significant amounts of cash flow.

Once we start getting back into that growth rate, we expect to convert incremental revenues at that 20% level, and that will allow our margins to keep going back up. Now that's even been in the face of probably a 30 basis point headwind this year because of tariffs. And so yes, we were able to pass through 90%, 95% of the tariff cost, but it was still dilutive to our margins, although we've held EBITDA dollars.

And we did announce in Q3 a restructuring program, not a massive restructuring, but it's all related. Well, the majority of it is related to our IT infrastructure, which when we spun out was not fit for size. So we're having to strip that back a little bit and spend a little bit of money and then shrink that down. So we'll get a less than 2-year payback in getting that done. It's just part of the necessary.

It's a great segue to my next question, which is, are there additional opportunities for restructuring. I think like one of the regions that could come to mind, and please correct me if I'm wrong, but I think it's an area that's been a topic of discussion among investors is just -- is Europe. And even here on this slide, right, right off the bat, 52% best cost country.

So it seems like there's maybe some opportunity for footprint rotation in that region. But even beyond that, and I know this is maybe more -- I think you said the commercial vehicle business over-indexes to Europe, but there is light vehicle business there as well.

And I think there's some concerns that irrespective of whether European vehicle demand ever really comes back or not, like even if it sort of stays at these levels, like who -- which customers are providing that level of demand might change going forward and that some of the legacy European customers might continue to sort of lose share over a period of 5-plus years. If that happens, do you need to restructure? And are you sort of taking some maybe proactive actions to get ahead of that?

I think the one thing is because of our decentralized type structure, we're always asking every plant manager to be assessing the -- how efficient their operations are and not wait for, hey, we're going to take out 10% headcount. That means you waited too long, which means you weren't adjusting it on a monthly and a weekly basis to adjust your cost structure. So that's kind of one side of it.

Two is Europe, there was -- Chris, you were doing the tail end of the restructuring where there was hundreds of millions of dollars of restructuring done in Europe to clean up a lot of the ex-Delphi structure to rightsize it. And again, when Chris first came into the Fuel Systems Group in 2020, they were -- that Fuel Systems business was breakeven, 0. And now we're double digit because a lot of that restructuring.

A lot of the remaining facilities in Europe are primarily commercial vehicle focused. All of our light passenger vehicle is really already in low-cost locations. And then some of the locations we need to be there to support some of the aerospace and defense business, we have to be in country. And so for us, we don't see any major restructuring needs. If anything, we're starting to see where Europe because of a lot of the diesel scandals earlier last -- in the mid last decade, that light commercial -- that light diesel OE business was a headwind for multiple years.

And we're starting to see Europe from our OE side actually start to plateau and starting to come back up again. And so we're actually -- although it's at 52%, but we still see things naturally kind of shifting. We've moved a few things around without having to do a major restructuring. And so we just continue to optimize without having to have a big ticket to go with it.

What about labor and automation? So I guess like maybe you could just remind us like what percent of either COGS or revenue labor is? And is there an opportunity to sort of get more automated, which might not only yield labor savings, but also efficiency, yield, quality improvement?

I mean, absolutely, there's a lot of work on cobots and automation within our locations. The interesting thing is in the U.K., where we have a number of our plants, it's actually quite cost competitive from a labor standpoint. I think total labor costs

Salaries -- including benefit .

It is just at $20.

No, it's just right at $20, a little over $20

That's including in Europe?

Yes. No, in the U.K.

Sorry, in U.K.

It's higher than that, obviously, in France and some of the others. But in Romania, it's very reasonable and Poland.

Yes, it gets mixed up because sometimes there is like in our France facility in one of our U.K. facilities at an R&D center there, too, that artificially kind of increases. But in general, they've -- both countries have been very supportive of engineering credits and supporting engineering and subsidizing engineering headcount.

And overall, what percent of COGS would you say is labor right now?

Overall, it runs about 12%-ish...

And is that lower than -- has that come down versus 5 years ago? I mean, I guess it's difficult for you to know.

It 5 years ago, definitely because as Brady said, there was about a $200 million restructuring that was done about -- right before acquisition from Delphi and right after, went for about a year, 1.5 years after that. So yes, it's come down.

And so if you're on the sort of more automation, more software, more cobot sort of use, like what inning would we say we're in? Are we early innings? Or has it sort of work started to work its way through some of the plants?

I think we're past the middle innings on a lot of that work. Again, we've also done a very nice job of moving capacity around the world to where it's needed. So we're not sitting with excess space and excess equipment in regions that have been declining.

So we've moved a lot of the GDi lines, excess lines that we had in Europe and moved them to Asia and the Americas. And so our equipment and our manufacturing processes are such that we can move around where the demand is. So it's not like it's -- we're stuck and we have to scrap it all out. We can move it where we have demand. I think the repurposing existing equipment has also been very, very beneficial because the aerospace business that we're launching in France is a converted light vehicle diesel line.

Is that reusable too or?

Yes. I mean machining, grinding, drilling, diamond light coating applications, those are all -- it's all the same processes. And so our overall kind of strategy is we're not trying to revolutionize the company. We're trying to evolve our human capital and our manufacturing capital into these new markets.

And so the engineers that I have on GDi are the same engineers I can put on aerospace because the concepts are the same. It's precision fluid management. It's dealing with erosion, with wear, durability testing. And we're in a unique position that not only do we manufacture a lot of the components, but we also know how to assemble it, validate it and test it and give customers a certified system.

So leverage our core capabilities into new end markets and application.

Correct. And so again, yes, we're not trying to -- we're not going to fire all our mechanical engineers and hire a bunch of power electronics engineers. I don't have to shut down my machining plants and build all new electronic plants. And so I think that's a much more boring and simple transition than trying to convert to something completely new.

Great. Well, we are out of time. So Brady, Chris, thanks so much for joining us again. Always a pleasure to have you. So thanks again for joining us.

Yes. Thank you.

All right. Thank you so much.

Take care.

Thank you.

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the PHINIA Third Quarter 2025 Earnings Call. Today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Kellen Ferris, Vice President of Investor Relations.

Thank you. Good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's Investor Relations website, including a slide deck that we will be referencing in our remarks. We're also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO; and Chris Gropp, CFO. During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements. And with that, it is my pleasure to turn the call over to Brady.

Thank you, Kellen, and thank you, everyone, for joining us this morning. I'll start with some overall comments on the third quarter and then provide some thoughts on the remainder of the year and beyond. Chris will then provide additional details on our third quarter financials and discuss our updated 2025 guidance. We will then open the call for questions. The highlights of the third quarter include the closing of our acquisition of Swedish Electromagnet Invest or SEM, our first acquisition as a public company, delivering our second quarter in a row of year-over-year net sales growth with Q3 being over 8% higher than prior year. This led to a record quarter for adjusted sales and adjusted EBITDA dollars as a public company. For the first time, our results are mostly being compared like-for-like against the prior year quarter as we had substantially exited all TSAs and contract manufacturing from our former parent in the third quarter of 2024 and nearly all of our corporate structure and costs were fully in place. And finally, with our strong adjusted free cash flow, we were able to acquire SEM and returned $41 million to shareholders via dividends and share repurchases while maintaining ample liquidity and our net leverage of 1.4x EBITDA.

Let's start with SEM. In June, we announced plans to acquire the company, and we were able to quickly close the transaction in August. SEM is a 100-year-old leading provider of an advanced natural gas, hydrogen and other alternative fuel ignition systems, injector stators and linear position sensors to the commercial vehicle and off-highway sectors. With SEM, we have expanded our ignition and electronic control capabilities, broadening our system offerings. By combining PHINIA's expertise in engine management systems with SEM's deep knowledge of advanced ignition technologies, we are creating a powerful platform for innovation and efficiency. We're excited to welcome SE to the PHINIA family and look forward to growing with them. Moving to our results.

Our third quarter performance reflects steady progress in executing our strategic priorities and our ongoing commitment to returning value to shareholders in the form of dividends and share buybacks. We are executing several structural initiatives to enhance efficiency and data visibility. We are consolidating 4 ERP systems into a single global SAP S/4HANA platform, which we will phase in across the globe over the next several years. Additionally, the integration of SEM and our ongoing cost savings initiatives are laying the groundwork for a more agile, efficient organization. Although the macroeconomic and industry outlook remain uncertain, we are focused on what we can control through operational and cost efficiency initiatives, providing value to our customers and driving sustainable performance across all our markets. Net sales in the quarter were a record $908 million, up 8.2% from the same period of the prior year as we benefited from the SEM contribution, favorable FX, customer pricing related to tariff recoveries and increased volume in Asia and the Americas. Excluding SEM and FX, revenue increased 5%.

This is the second consecutive quarter where both segments reported higher year-over-year sales. We reported adjusted EBITDA of $133 million with a margin of 14.6%, a 30 basis point year-over-year expansion. The margin expansion was primarily due to lower R&D expenses and strong performance from our Fuel Systems segment. This was partially offset by unfavorable product mix and increased employee costs. The $133 million of EBITDA was also a quarterly record as a stand-alone company. Fuel Systems delivered a strong quarter with adjusted operating income up 33% and the margin expanding 190 basis points, which is partially diluted from the SEM acquisition. AOI was driven by research and development savings, overhead cost control measures and efficiencies. Those are partially offset by unfavorable product mix. Aftermarket margin was down 80 basis points. The decrease was primarily due to unfavorable product mix. Our combined Fuel Systems and Aftermarket segment adjusted operating margin was 14%, an 80 basis point increase when compared with the third quarter of 2024 and a new record for a quarter as a stand-alone company. Adjusted earnings per share, excluding nonoperating items as detailed in the appendix of our presentation, was $1.59, up from $1.17 in the same period of the prior year.

Finally, as we disclosed in an 8-K last week, we reached an agreement with our former parent company to equitably resolve our litigation and move forward in a positive manner. We expect that a substantial portion of the settlement payments will be offset by collection of pre-spin VAT refunds, tax credits and various other tax recoveries. As a result, we do not believe that the settlement will have a material impact to our capital allocation strategies, liquidity or our net leverage ratio. This quarter marks an important milestone for PHINIA. It's our first quarter of fully comparable year-over-year results since the spin with all transitional service agreements and contract manufacturing now complete and nearly all corporate costs were in place.

The third quarter reflects the true underlying performance of our business. As a general overview and consistent with recent quarters, our results in the third quarter highlight the strength and resiliency of our business in the face of a challenging and unpredictable environment. This is consistent with the benefits of having a truly diversified industrial business with diversity in customers, markets, industries and regions in which we support. Our innovation strategy remains at the center of our growth story. We continue to invest heavily in R&D, roughly $200 million annually or about 6% of sales, and our customers reimburse us for about half of that through software and calibration services, demonstrating our position as a true development partner. In turn, we are making important investments in our business that are advancing our competitive position in the key markets and allowing us to capture incremental growth opportunities and support our customers.

Our brand is strong in the market and customer preferences for our products remain high. Our excellent service is supporting our growth with both new and existing customers. Let me highlight a few of the new business wins on Pages 6 and 7. The new next-generation canister technology with leak detection devices for a leading North American OEM on two hybrid light commercial vehicle programs. a brushless alternator for industrial applications to a leading off-highway OEM in Asia for mining haul trucks; a conquest gasoline direct injection, or GDi, fuel rail assembly and controller for a light passenger vehicle applications, securing our first win and new business with a major Chinese OEM.

Moving next to our aftermarket business, as shown on Slide 7, we're winning both new business and expanding relationships with existing customers. Importantly, these wins are across diverse geographies. Expanding our market-leading product coverage and grew share of wallet with a major Middle Eastern customer, signed an agreement with a new large customer in the United Kingdom for braking and suspension components new starter and alternator business with additional distributors in North America. Our value proposition is differentiated and continues to attract new customers as well as deepen relationships with existing customers. As shown on Slide 8, our business is diverse by end markets and geographies. Most recently, we've expanded into the aerospace and defense industries. As I've mentioned on prior calls, this is an emerging and exciting adjacency for us. We're launching multiple programs with a key aerospace customer that leverages our existing engineers and manufacturing infrastructure. We have started initial shipments on our first aerospace business award and expect our second program to launch in early 2026. These wins validate our strategy to extend core combustion and control technologies into adjacent markets.

Now moving on to Slide 9 for a discussion of capital allocation. We have taken a disciplined approach to capital allocation while remaining opportunistic about M&A. We will continue to evaluate selective M&A opportunities that enhance our product offerings in precision machine components and assemblies, electronics and controls as well as increasing our presence in key markets and industries such as aerospace, commercial vehicles, off-highway, industrial and the aftermarket. Our approach remains opportunistic and disciplined. Consistent with our capital allocation priorities to invest in our business for long-term profitable growth, we invested $26 million in capital expenditures during the third quarter with funds expended primarily on new tooling and equipment. Also on the capital allocation front, during the quarter, we returned $41 million to our shareholders, including $11 million in quarterly dividends and $30 million in share repurchases. We have $194 million remaining under our current repurchase authorization, and we expect to continue to evaluate the best use of capital on a quarterly basis. Since the spin-off in July of '23, we repurchased approximately 20% of our outstanding shares.

Even with the acquisition of SEM, capital investment in our operations and capital return to shareholders, our balance sheet remains solid with cash and cash equivalents of $349 million, total liquidity of approximately $900 million and our net leverage ratio remaining at 1.4x, which is under our target of approximately 1.5x. This was possible due to our strong adjusted free cash flow of $104 million in the third quarter. As we look to the remainder of the year, we see some market and tariff risk as CV tariffs are coming into effect on November 1. Importantly, we will continue to work with our customers on recovery and similar to the auto tariffs, we expect to substantially recoup the costs from our customers because CV OEMs are also qualifying for the same 3.5% rebate as are the auto OEMs. We have adjusted our 2025 outlook to account for the SEM acquisition and some external factors. On the revenue front, the midpoint of our outlook is up $40 million from our prior guide, driven by approximately $15 million from SEM and the remainder from favorable FX, volumes and pricing.

The midpoint of our adjusted EBITDA guidance is up slightly as it continues to be constrained by tariff-related revenue that carries 0 margin. Adjusted free cash flow has been a good story for us, and we're raising the midpoint of our 2025 outlook by $10 million. To wrap up, we've continued to build momentum across our diversified end markets while maintaining disciplined cost and cash management. Our teams are executing our long-term strategy that is focused on product leadership, stable growth, financial discipline and total shareholder returns. With that, I'll hand it over to Chris, who will walk us through our Q3 results and discuss our outlook for this year. Chris?

Thanks, Brady, and thank you all for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. Beginning on Slide 11. Our financial results in the quarter were solid and include the contribution from SEM, which closed in August, as Brady mentioned. The external environment has not changed dramatically from the prior quarters. However, we continue to see strength in our OE sales across the globe, enhanced by strength in aftermarket sales in select markets. We are pleased that the teams have responded appropriately and delivered strong revenue and EBITDA in the quarter. Specifically, we generated $908 million in net sales, an increase of 8.2% versus a year ago. Our top line benefited from favorable foreign exchange tailwinds of $19 million and an $8 million contribution from SEM. Excluding these impacts, net sales increased 5%, a result of better pricing, tariff recovery and increased volumes in Asia and the Americas. Let me now bridge our adjusted revenue and adjusted EBITDA for the third quarter, which you can find on Pages 11 through 13 in the presentation. Fuel Systems segment sales were up 13.4%, including prior year contract manufacturing sales or 13.7%, excluding the effect of contract manufacturing, which ended in Q3 of 2024. The increase in Fuel Systems revenue was also attributable to foreign exchange, customer tariff recoveries and the contribution from SEM of $8 million. Segment margin was 13.3%, up 190 basis points year-over-year, primarily due to supply chain savings, productivity improvements and reduced engineering costs. Our aftermarket segment sales were up slightly year-over-year on positive European results, combined with a small amount of tariff recovery. This revenue was partially offset by lower volumes in North America and Asia.

With respect to profitability, the aftermarket segment margin of 15% was down 80 basis points from the prior year and impacted by unfavorable product mix. On a consolidated basis, our Q3 segment adjusted operating margin and adjusted operating income were healthy at 14% or up 80 basis points and 11.1% or up 70 basis points year-over-year, respectively. Our teams worked hard to cut costs and improve productivity despite some volatile market conditions. Our adjusted net earnings per diluted share in the third quarter were $1.59, an increase of $0.42 per share for the quarter. These amounts exclude nonoperating items, which are described in the appendix of our presentation and influenced by lower share count as we continued share repurchases. On August 1, our team was excited to welcome new colleagues to the PHINIA family with the close of the SEM acquisition. Total paid was $47 million, comprised of $15 million in cash proceeds to seller and $32 million used to extinguish debt assumed through the acquisition. While we expect SEM to contribute sales annually of approximately $50 million and adjusted operating income of $10 million, we anticipate the first year sales and resulting returns may face some initial headwinds given SEM's reliance on a challenged CV market and potential distractions from ongoing integration efforts. In addition to SEM, we settled a claim regarding the tax matters agreement with our former parent following the close of the quarter.

Our full year 2025 guidance, which we will discuss, has incorporated the impacts of this settlement appropriately. We expect that a substantial portion of the settlement payments will be funded through refund payments we receive from various tax authorities related to certain indirect tax payments made prior to the spin-off with the remaining portion funded with available liquidity. As described in last week's 8-K, the settlement with our former parent also provides clarification on the company's ability to obtain and use the benefit of certain tax attributes. This has the potential of providing us with additional flexibility as we continue to optimize our tax structure. Intense focus by our teams delivered a strong balance sheet, providing substantial current liquidity despite all the extra activities in the quarter. Cash and cash equivalents were $349 million, while available capacity under our credit facility remained at approximately $0.5 billion for a resulting liquidity of approximately $900 million. Cash flow from operations was $119 million in the quarter, and adjusted free cash flow was $104 million, a significant increase from $60 million in the same period of the prior year.

We continue to remain confident in our ability to generate free cash flow to support our capital allocation priorities. As such, we paid $11 million in dividends and repurchased $30 million in our stock in Q3, bringing our year-to-date returns to shareholders to $202 million. This balance consists of $32 million in dividends and $170 million in share repurchases.

Now moving to Slide 14 for a discussion of our refined full year 2025 outlook. As Brady indicated, we have adjusted our outlook slightly to account for the acquisition of SEM, minor tariff changes and other macroeconomic factors. We are adjusting our 2025 sales guide, increasing the high end of the guide to $3.45 billion and bringing up the low end of guide to $3.39 billion for an increased midpoint of $3.42 billion. We are narrowing our adjusted EBITDA range with a high end of $480 million and low end of $465 million for a slightly higher midpoint of $473 million. In addition, we are taking the midpoint of our adjusted free cash flow up by $10 million to $190 million and improving our tax rate for the second quarter in a row. Our expected adjusted tax rate is now projected to be in an improved 33% to 37% range from the prior projection of 36% to 40% as ongoing tax structuring projects gain traction and progress.

We do not expect this change to have a material impact on cash taxes in 2025. Overall, we continue to be confident in delivery of solid returns as we deal with 0 or low-margin tariff recoveries, choppy markets and foreign exchange movements. As Brady mentioned, as we look forward, we are also disclosing implementation of a strategic effort to align our legacy structure to more effectively match the business as it develops globally. As such, we anticipate a step-up in restructuring charges, approximating $35 million in infrastructure rightsizing, professional fees and other costs to yield an estimated $25 million in annual savings, a less than 2-year payback once all projects are fully implemented. This is complementary to our normal ongoing work to ensure our operations and corporate functions are agile and meet the future needs of our invested constituencies. We are operating from a strong financial foundation and executing on clear strategic priorities. In closing, we remain firmly committed to building sustainable value for all our stakeholders. Thank you all for your attention today, and we will now move to the Q&A portion of our call. Operator, please open the lines for questions.

[Operator Instructions]

We'll take our first question from Bobby Brooks at Northland Capital Markets.

So excluding the acquisition and currency impact, sales were up 5.1% year-over-year, a really, really healthy number. I was just curious if we could dive a little bit deeper into that 5.1%. Like how much of that was pricing and tariff recoveries versus increased volumes or even just new products being shipped out?

Yes. I mean it's a balance between kind of all three of them. I mean pricing and tariffs is going to be about the same as volume is the same. There's a little bit of FX kind of headwind. So not a lot of difference between the three. It's kind of equally balanced.

Got it. Got it. And then just with the pricing, is that pricing -- like you said pricing and then tariff recovery, so it seems like those are two separate silos. On the pricing, is it reasonable to think that, that's going to be sticky moving forward? Or how should we think about that?

Yes. I mean obviously, they're linked directly because as we have tariffs, we're passing on price, and so that's the bulk of it. And that's going to be sticky because unless the tariffs are going away, it's going to stay there. And again, that's one of the reasons why our EBITDA is not going up as much is because those are basically at breakeven EBITDA or margin and a little bit of headwind in that. But we don't see it going away. We think it's going to be there. We just got to continue to drive productivity and other efficiency improvements to get our margin back to where we expected.

Bobby, on the tariffs, one of -- some of the things that we have been doing is in lieu of tariff pass-through, we've actually gotten concessions on some other areas. So I mean, we've gotten pricing. Obviously, on the aftermarket, it is more of a price increase game. But it's not huge. It's not material. It's just a couple of million dollars when you look at the pricing and strip out just the tariff going through, just trying to make sure we get recovery on all of those.

Got it. That's very helpful color. And then last one for me. It's great to hear you begin shipping components for your first aerospace program. That's really exciting news. Do you think achieving this milestone will sort of serve as a cowbell to alert other aerospace companies, your legit and certified potential supplier? And maybe asked a different way, do you feel there are potential customers waiting in the wings to see you successfully deliver those components for the first couple of projects before stepping in and placing an order?

Yes. And absolutely true. I think ever since we've announced them and then at the Paris Air Show in June, the level of interest, the RFIs and RFQs coming to us has gone up substantially. And as I mentioned, I think in the last call, we fully expect to get additional awards here in the coming quarters that will continue to support that expansion. And so we're having conversations with pretty much every of the major engine manufacturers out there and see some good opportunities for us to continue to grow in that space.

We'll move next to Joseph Spak at UBS.

I wanted to -- I had a couple of questions. I guess, one, maybe just on the implied guidance in the fourth quarter, maybe a little bit softer than expectations. Just wondering if you could give us a little bit more detailed commentary on the organic end market. And then related to the guidance, but also just want to understand the business going forward, it implies the guidance about $7 million in the fourth quarter from SEM, which is, I guess, $1 million below the third quarter despite it being a full quarter in the fourth quarter. So is that -- is there some seasonality to that? Or is that some of that sort of softer demand you talked about and for that first year of owning the business? And if so, is $7 million, $8 million a good sort of run rate to start to think about for '26?

Sure. On Q4, I think we're -- we always talk about seasonality in general, and we haven't had a normal season for a while. But I think this is looking to be more a normal seasonality where Q1 and Q4 are lighter. I think our Q1 this year was probably lighter than normal. I think Q4 typically is anywhere from 5% or so lighter than Q2 and Q3. And so I think we're kind of getting back to that normal seasonality. Obviously, still a little bit of noise here in Q4 on volumes on what people are going to do around shutdowns. So we're kind of taking that into account as well and making sure that we're in a good position on Q4 in general. SEM, we're still kind of learning their seasonality. We are finding that their second half of the year is a lot lighter than their first half of the year, along with a little CV softness. They tend to -- they shut down in the summer and don't come back until later in August and the expectation they're probably going to shut down earlier in December. So their windows in the second half tend to be a little bit lighter.

We're still confident that they're going to -- as we mentioned earlier, around that $50 million. we're confident they're going to kind of get back there when the market recovers a bit and see them delivering on our expectations. We just have the initial kind of hit right now. We've got a number of folks kind of going in there, getting their systems and processes up to speed and probably adding more cost to their cost structure and then beginning to kind of ramp them up to what our expectations are. So not a lot of material difference to the overall company, but we do see them coming back stronger next year as the market recovers, and we'll provide more insight in our Investor Day meeting next year as we give guide for 2026, and we'll give that additional clarity on SEM as well.

And Joe, I'll add a little bit to it because I think that with so much going on in the market, our units are just being very, very cautious on what they're putting out there because you named the issue. I mean we are not being hit materially by any -- like the JLR issues. That's not a big issue for us. But -- CV tariffs coming in, there's a lot of things out there. None of them hit us materially, but our units get a little cautious. And so we're just trying to be a little conservative in Q4...

The other one is the aluminum supply issue for Ford.

Very fair. Fair enough. I guess just in the quarter, Chris, you sort of talked about some of the factors driving the results. Specifically in Fuel Systems, I just want to understand, you had plus $37 million volume mix only $1 million flowed through to EBIT. And I know you sort of talked about negative mix, but it feels like there has to be something more than that in there. Is there anything else we should be thinking about that sort of really weighed on the flow-through there?

No. A lot of it, Joe, has to do with -- if you see, we actually specifically call out ECU because as a part of the separation from BorgWarner, we sell ECU from them, and that literally has no margin on it. Now those contracts are coming up in the next couple of years or those restrictions come out, and we're relooking at that. But at the end of the day, ECUs, those components are very expensive, and they just -- if we're going to pass them through or we're looking for other ways of do they sell directly. So that's part of it. But if you also look, yes, the contribution margin is low, but the units -- the contribution is based on standard. If you look at the other two lines where you see really good productivity and other costs, those are coming in much better, which means my standard is going to get better next year. So it will shift. As long as my units are covering it, whether if my contribution margin is low and they're covering it with productivity and other cost reductions, I'm okay with that because it just means that I'm getting better, my products are getting cheaper because the units are doing what they should be doing.

That's helpful color on these. If I could sneak one more in. Just on Slide 8, I noticed you put in power generation and maybe that's been in there all along, but there's definitely been a little bit more focus on turbochargers into power generators and almost all modern turbos have direct injection. Is there -- has there been any increased inquiries into that business? Or is that a growing opportunity and pipeline for you?

Yes. I mean we're -- that's kind of we throw that in the industrial side as well, whether that's the power generation, the linear generator that we are working on for hydrogen to gen sets, both small to medium and large plug-in or range extending EV power generation units. That's an area we're starting to pick up more business. And again, I think we'll -- as we may have highlighted, we'll probably going to split out our CV and other OE next year as well because that's starting to become a meaningful portion of our revenue. So we'll probably add some more disclosure on that as we head into next year.

[Operator Instructions]

We'll go next to Jake Scholl at BNP.

Congrats on a strong quarter. I just wanted to circle back to the Ford fuel pump recall from a few months ago. Now that you guys have had a chance to work through that, can you talk about kind of what impact you're seeing on the business, especially on the cash side?

No cash impacts, no update, still no concerns on our side. We haven't adjusted our warranty accruals and no cash impact at this point.

All right. And then can you just provide some color on the timing of the restructuring program you announced? When do you expect that to come out? And then when do you expect to fully realize the $25 million in savings?

Yes. I mean we see that it's starting to roll out now. We're starting to get -- I think the initial go-live, I think it's starting in 2026. It's going to take us a few years. There's a number of different sites that are at different stages of I guess, their system capabilities that we'll be kind of rolling out. But I think it's fully, I think, Chris, and fully completed by 2028 over that time period. So we see it's going to be a multiyear. It was just -- it was a bigger number than normal. And so we thought it was prudent to go ahead and kind of call it out given the multiyear nature of it and the benefits that we expect to see. And this is also just, I would say, the next stage of us just continuing to drive efficiency and rightsizing the number of data centers, the number of complexity we have in software and systems and really just consolidating that, consolidating them into one instance, one reducing the number of redundant software systems that we have and licenses and really driving a lot of efficiency in our operations and in the systems that we're using. So when we got spun out, obviously, it was old DELCO REMY, old DELPHI Automotive, parts of BorgWarner and now SEM. They're all kind of different. And so we're going to establish a kind of a core standard that then is going to be the standard template that we will roll out for future acquisitions and future locations as well and make it a lot simpler for us.

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

Great. Thanks, everybody, for joining. And just again, a shout out to all of our PHINIA employees, a really great quarter. As we mentioned, with record sales, some great cash flow, first acquisition, continuing to give cash back to our shareholders through dividends and repurchases and still maintaining a very robust balance sheet. And actually, I think our cash balances are up from the prior quarter after the acquisition and the share repurchases and the dividend. So really proud of the team. Looking forward to closing out the year in a very positive manner and continuing the momentum that we have. So thank you very much for joining.

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

All right. So let's get on with. Brady Ericson, President and CEO of PHINIA and Chris Gropp, Vice President and Chief Financial Officer. We have Kellen in the audience as well here, Kellen Ferris, Vice President of IR. Thanks for joining us. We are delighted to have you talk about PHINIA's outlook for growth and market development, capital allocation strategy, simple stuff.

I can tell you, being a kind of a retired an auto analyst, there's a lot of suppliers that would like to trade places with you in terms of your portfolio and your balance sheet. Not that it's an easy job, of course, but that the opportunities that you have to continue to improve the business and work on that multiple as well, which it quite good progress so far. I know you're not satisfied yet. We'd love to trade places with you.

And one of the really interesting things that we've been talking about with Brady and Chris that may not seem so obvious, is why is it covered by auto analysts. Auto as an end market is 27% of your total revenues and I suspect, falling over time, not rising over time. You're not burdened with the R&D and operational and execution burdens of the electric vehicle portfolio. Aftermarket is thriving, and we'll get into that as well as to how much duration there is behind that. But really happy to get into some of these topics with you.

But Brady and/or Chris, any opening comments or messages beyond what I stated that you wanted to get to the audience?

I think you hit a lot of the key comments. I think we've been trying to educate folks on the diversity of our business, not just from the different markets, but also regional diversity and customer diversity. And so I know we've been talking a lot of folks so far and there's some doom and gloom out there around commercial vehicle trucks and build rates and whatnot, and they ask us. And we're like, yes, we're kind of okay. Yes, EV, heavy-duty North America is still less than 10% of our revenues and so it has an impact. But South America is doing okay. Europe is kind of plugging along. We're seeing some positive signs out of Asia and as you pointed out, aftermarket continues to chunk away.

So for us, we really see ourselves as a very diversified industrial. That's just going to -- we're not going to get swung one way or the other based on one particular market. And so we're feeling kind of very comfortable where we are right now from a balance sheet standpoint, from a cash flow generation and just continuing to use that free cash flow as efficiently as possible to benefit our shareholders.

Great. William, why don't you delve some of the more finer topics?

I think there's a number of new markets that you guys have entered or announced that you would enter over the past year. Obviously, you had hydrogen before, which seems like it's -- maybe a focus may not be Aerospace is most recent one. Talk about the decision to enter the aerospace market, maybe a little bit on the off-highway too, but the new markets broadly, what the focus is and where do you see that going?

Yes. I think what we're trying to do is we're trying to leverage our existing human capital and manufacturing capital and taking it into new markets. And so this is not a situation that we have to invest another $100 million in R&D or put in new plants or anything else. The lines that we're producing light vehicle diesel in Europe are the lines that we converted to make aerospace. The engineers that worked on light vehicle diesel and commercial vehicles are the ones that can shift to aerospace or off-highway.

The ones that we had on hydrogen for a while -- we still think hydrogen is going to come along, but it's going to take a lot longer, we can reallocate those to ethanol and methanol applications and alternative fuels. And so that's -- I think the one nice thing about our strategy is depending on where it goes, we can easily shift our human capital and manufacturing capital.

Going into aerospace. There's 4 major customers out there, so I don't need a big sales force. We know who they are. They're learning who we are. And so it's really just engineer to engineer, and so we're starting to pick up a lot of RFIs and RFQs and we'll launch our first 2 programs with Safran, first one here in Q4, next one in Q1, and we think there's going to be more to follow. Going into the off-highway applications with their Tier 4 and Tier 5 emissions. We're bringing our existing technology. We converted the GDi line to run on diesel for some of those off-highway applications.

And so again, we're leveraging existing capital for new applications and similar engineers. So I'm not having to hire and fire a bunch of people not having to take my CapEx to 7%, keep my engineering at 3, my CapEx at 4, and we can easily transition depending on where the markets are.

And any way of, I guess, sizing those opportunities? Because I know you're aiming for the 2% to 4% growth rate at the end of the decade. How reliant is that growth on these new markets? And I guess like when you think about how much of the business could shift these sort of like adjacent tangible markets, like what percent of the business does that become over time?

Yes, I still think it's going to be in the mid- to high single digits of our total revenue. towards the end of this decade. Do we have -- it's not large enough right now for us to call out, but we're probably going to call that out probably sometime next year after we finish the 2025 number to give more color to our investors as we did to separate light passenger vehicle from light commercial vehicle to give them a little more color. And so I think it's going to start to become substantial enough that it makes sense for us to call out.

And again, I think the total addressable market for those off-highway and aerospace is as big as our commercial vehicle business globally. So it's a multibillion-dollar total addressable market, of which we really have little penetration. And we think there's a strong demand from customers given the new emissions regulations and requirements that's going to have us pulling getting pulled into those sectors.

And to your point, I mean you already have the plants, same engineers, you're not spending a ton of CapEx on this. And so it's basically a free call option. It's like why not?

Or R&D. We also manage our R&D spend by project. And so we've actually flexed that up and down depending on what we're seeing out there, we were spending a little bit more a year or so ago. We pulled that back and we saw that sort of coming down on hydrogen and things, but then we can flex it back up because it's the same engineers. It's the same knowledge base that you apply to it.

And again, probably 2 -- probably over 2/3 of our engineering spend is application engineering. Well, application engineering is taking an existing core product and just adapting it installation to their specific requirements. So it's the same basic technology, so I don't need to develop something from scratch. It's just tweaking it to the specific customer application. So that's the same thing that we're doing on the aerospace side and off-highway side.

We talked a lot about the organic diversification. You guys just acquired a company called SEM, Swedish Electromagnet. Any other inorganic expansion opportunities, ways you can augment your business? I'm sure there's a lot of attractive targets in this environment.

Yes. And again, we're always going to look at it and compare it to our own valuation and our own multiple. When we were trading at 4x and 5x. There's not a whole lot of companies out there that we think are good, that's going to be at or below our multiple. And that's always how we're going to compare it, which is why we bought back close to 20% of our shares since we've spun because we just thought we were way undervalued and buying somebody else at 6 or 7x when we're trading at 5 and they're going to be similar, it doesn't make a good sense to us.

So now as we're getting up to maybe we're now just over 6, that may open up a few more opportunities that we can maybe find some interesting assets that may be trading in the 5 to 6 range. If it's a pure aftermarket asset, maybe we go a little bit higher. But we're always going to compare it to the safe and conservative plan just buying back our shares and continue to other appreciate. So that's our base plan. I think of just continuing to grow organically. We've got good opportunities to grow organically. And if we think our share price is a good value, we'll continue to buy.

Anything specifically on the aftermarket business? Because when you're in environments like this and everything is going down, you benefit by having a very stable business line like aftermarket that's not tied to auto production. So I guess any sort of trends that you would call out? Because I feel like it's one of the businesses that people tend to overlook with PHINIA.

Yes. Again, it's 34% of our global revenues. And so it is -- if you look at a ship that ballast and so when the rate -- all the waves are crashing, we've got that nice ballot that keeps us from moving around. And that's a constant cash flow constant support. When OE are down, our aftermarket tend to come up a bit. And so it's been a great business for us, and we're going to continue to expand in that area. We produce about 60% of the revenues in our aftermarket segment from a product that we produce internally, 40% we're buying and reselling.

The Delphi brand has a great reputation with the mechanics and customers in the field. And so we'll work with suppliers, have them meet our specifications and then we'll add additional product lines to our portfolio. And that's what's been kind of helping our aftermarket grow a little bit faster than the market. And so as we continue to bring additional product lines in that will continue to support us and the Delphi brand is a great brand for us to use.

Back on the core fuel injector business, maybe on the more automotive side. I remember what we initiated last year, one of the big trends is that all the other legacy auto suppliers are divesting away from fuel injectors. I won't say specific to AMS, but some of the larger ones. Is that still a trend that's going on? Are you getting that free market share? And sort of where has the share shifted over the past couple of years?

Yes, I think it's probably is more prevalent in '23 and '24, where we were probably 50% of our -- we were winning 50% of conquest opportunities. I think that's down now closer in the 20% to 30% range.

Would that be historically normal? Would '25 to '30 be more of a normal...

It's more normalized. I think obviously, there's one that said they're kind of exiting in their plan in 2030s. There's another that their JV partner in China is kind of tired of losing share, and so they're probably getting a little bit more aggressive on that and they see more opportunities in GDi and plug-in hybrids in China. And so they're probably being a little more defensive.

I think what's also happening in the marketplace, we're not getting as many I guess, RFIs or RFQs because customers are just rather than sending out a bid, they're just extending the program and keeping volumes higher. And they know in space setting out an RFQ is not going to do much when there's only 2 people out there and they know they're not going to switch to somebody that already has over 50% market share. And so we're seeing a lot of just natural extensions beyond what we originally were expecting.

Just to your point earlier, I think we still like light passenger vehicle. We're still going to support those customers. I'm just not trying to grow it from a dollar perspective. It's about $900 million of our revenue right now. I'd like to keep it around there, maybe go up to $1 billion, keep the plants running, generating cash as we continue to grow in the commercial vehicle and other markets.

Any update on GDis, which is a little bit more light vehicle staying at the same point? But it is a growth opportunity within light vehicle?

Yes. I mean we're seeing a lot of positive growth in China. And what people didn't know when we were spinning in 2023 and thinking EVs are going to take over the world, we had the Li Autos, the Changans and the BYDs saying, "Hey, can you give us a GDi injector for 350, 500 bar because we know hybrids are going to be needed in their portfolio. EVs are great. I just don't think it's going to be 100%. EVs may plateau. I think they're plateauing in China even around 30%, maybe going a little bit higher. But it's not going to 100. Maybe it goes to 40%, maybe it goes to 50%, but that means there's still 50 million, 60 million engines, combustion engines out there.

But our GDi also in the U.S. or in North America has also been very high. So we ended '24 just below 20% in terms of market share. So it has been our biggest area of growth over the last several years.

Maybe shifting a little more short term, anything you'd highlight on industry volatility across the business, maybe a little bit on the light vehicle/CV side? There's not a lot of CV peers that we look at personally, and so it's always helpful to hear what you guys have to say.

Yes. I mean, North America is obviously probably the most challenge right now and probably I think I've been hearing from a number of folks that have talked to some of the CV. There's not a lot of hope. There's a lot of despair out there. we're kind of okay with it. We've been bumping along this bottom at this run rate for a play going on in the fourth quarter. So from a sequential standpoint, we don't see it getting worse. We see it bumping along the bottom.

When do you think the inflection happens?

And freight rates start coming back up and freight demand comes back up. Interest rates, I think, is one that people have been pointing to but I'm not sure interest rates alone are going to get people to buy more trucks. They just don't have the demand. We're hearing people are putting trucks on the lot. They're cannibalizing some of the parts. They're going to keep those used trucks lasting longer. I think the build rates right now are below replacement rates. And so there's probably vehicles being decommissioned faster than bringing on new ones. And that's because the demand for freight is not there and the freight rates are too low.

I think if housing starts to come back at some point, that will then start helping trucking and freight rates to come back up again. But I think it's going to be a while. I don't think there's going to be a prebuy. I don't see it happening this year. Maybe there's a little bit next year, but I don't see any big prebuy before the model year or the 2070 emissions regulations come out.

I have to ask, any update on tariff mitigation plans, anything weighted to policy?

No. I mean, I think as we communicated, we think overall, tariffs are going to be neutral to our P&L. When we gave our new guide, we basically said that revenues are going to be up $50 million, $60 million because of tariffs, but there's going to be zero EBITDA impact. And that's then affected our EBITDA margin midpoint going from 14.1% to 13.9% because of that, because it was revenue without profit, but the midpoint of our EBITDA number stayed at $470 million. There were some puts and takes, some ups and downs, currency benefit, volume in North America down, Europe. But all in all, we kind of held our overall guide in Q2, and we're still on pace to be at the high end of the revenue side.

That's great. Capital allocation back half, part of the story was that we're going to continue to buy back stock continue to beat on free cash flow, and that was sort of like differentiate you from the other suppliers. How do you think about capital allocation at the back half of this year? And then, I guess, heading into next year?

I mean, again, no change to what we've been doing. We're going to be -- continuing to be a good steward of the capital for our shareholders. First half of this year, we've been a little bit light on our free cash flow generation. I think it was only around $20 million. But we kept to guide where it is. We still expect to deliver our midpoint at 180, which means we're going to generate about $160 million of free cash flow in the second half. $20 million of that is going to go to dividends. That's generally what we're giving out in dividends.

We spent $50 million on the SEM acquisition. So that leaves us about $90 million left, due to do share repurchases or other acquisitions. Nothing urgent on the acquisition side, so I still see a good use for share repurchases. And our debt levels are at 1.4, so it's a little bit below target. So our cash balances are in a good position. So again, I think we're in a very enviable position. We've kind of continued to maintain our conservative nature and being very financially disciplined.

Any audience questions? We have about 15 minutes left. If I could just weigh in on the onshoring strategy. What is the onshoring thesis for PHINIA? And how does that -- how would that differentiate from other suppliers that you might be looking at and benchmarking?

And also I'd like to follow up just on automation. We're hearing as LLMs and GenAI gets into the physical world, there's opportunities for manufacturers to create digital twins and eke out efficiencies and over time, mitigate some labor cost inflation in key markets that might be necessary in an onshoring world. So how do you kind of see that?

Yes. I mean, again, in general, our strategy has always been designed, develop source, produce and sell within region. So again, we've always generally, on average, over 80% is sourced and sold within regions. So we don't like to ship a bunch of stuff. And so when this all kind of occurred, we were in a starting point, pretty good. Are we looking at additional opportunities to get that 80% to 90% or 95%, absolutely. That may require some things kind of going back and forth, not just in one direction to the U.S. or North America.

So we are looking at some of those opportunities primarily to desource some of the Asian suppliers tend to be where the biggest impact and where we were sourced before. And so we're working with those suppliers to put plants here in North America to support us and/or we'll look at make versus buy changes as well, but still within our 4% CapEx.

From an AI perspective, we probably got a dozen different projects going on around the company. We actually have a digital steering committee that monitors all the different AI and IT projects that we have going on, but they're going to be probably a lot more targeted. We don't have customer service type entities that we can quickly automate. But as far as helping us analyze production efficiencies and key data that we're tracking, warranty analysis, inventory, software, calibration work that we're giving to customers.

So there's a bunch of different programs that we have, but I think they're going to be more targeted, and they're really going to be focused on let's ensure that whatever we're doing actually delivers the value that we expect. Doing AI just to say we're doing AI and not driving value to the bottom line is not what we're going to do.

Has it changed the kind of people though that you've brought into the organization? I don't know if you can point to any recent external hires or other areas that you've brought into the business to beef up the IT part of it?

Well, we have software engineers already, and we have little pockets of where we -- I mean we have a group that's in the U.K. that had done the original software engineering. But then we've concentrated that and moved a lot of that into India and into Turkey, where we have software engineers and doing work around that. So engineering has a big push on that.

And within my group, in finance, I mean I have a robotics department within our shared services that literally comes up with ways to automate some of our internal administration stuff and push it out to the world. So there's a group there that's a very small group. But when you take that, you can push it out easier, the software side, the engineer side, it's a lot bigger.

There's probably 2 different sides of it. As Chris mentioned, we've got over 400 software and calibration engineers. People wouldn't -- were mechanical people think is mechanical. We probably have a lot more software engineers than maybe our predecessors do. And that's why we get close to $100 million a year from our customers for software calibration, cybersecurity, specialty projects that we actually quote them for packages that we'll do $3 million $4 million, $5 million packages to do cyber secure for them. So we have a lot of capability inside that also allows us to do the complete system integration. So that's kind of one side of it.

On the IT and the finance side of it, that is an area that we're probably going to be investing in the next few years because as we got spun out were legacy Delco Remy, legacy BorgWarner, legacy Aptiv, legacy Delphi Tech acquisition. And so we've got a number of different instances. And so we're going to -- our goal is to then rightsize the structure and infrastructure of we don't need 6 data centers spread around the world for our size of the business, but that's what we've got spun off with.

So we're consolidating all that. We're looking to go down to 1. As we go to S/4HANA and SAP, we'll consolidate down to 1 instance globally, make it more consistent across the organization, which then makes it easier for acquisitions. It makes it easier on the finance team because now we're not trying to go all these different systems that have to talk to different systems and the chart of accounts becomes consistent.

And so we're really going to be driving for consistency across the organization, which then is going to help as we do AI or any kind of software upgrades we can blow it through everywhere without having to do. Right now, the person who runs in the financial side in Turkey can't really talk to the one in Juarez because their chart of accounts are different, their queries are different because they don't have the same system. And so we think that's going to be an opportunity for us to drive a lot of significant savings.

And I think, I mean, the technology of fuel injectors, it's complicated. It's not simple. So I'm sure all these AI tools design, CADD, like all that is benefits you guys to design new products to see the OEMs?

Yes. I think it was in our -- it used to be a lot higher. I think they cut down the amount of data. But for every single diesel injector that we produce, there's about 5 megabytes of data that we store for every single injector as far as the data that we're storing and having to have traceability, too. And so as we start getting AI and the big data, that's an opportunity for us to really start analyzing how can we make our part more efficient, more robust? Where do we see variations? How can we control better?

And again, we're talking about tolerances that we're controlling to plus or minus 0.5 micron. And if people realize, 0.5 micron is like a little bit larger than a virus. That's how small that we're controlling. And by the way, in our diesel injectors, it's 3,000 bar and people kind of go, what's 3,000 bar. That's close to 45,000 psi. Your tire, when your tire explorers big bang, that's like 40, 50-psi. We're managing 45,000 psi of pressure inside of our injectors, with 0.5 micron tolerate that to last 0.5 million miles with a bunch of junk in biofuels and sulfur and crap they throw in these things. This is not easy stuff.

I've been in the industry for 30 years in turbos and engine design and development. This fuel injection stuff is next level. And when we start taking that technology and capabilities to aerospace, it's like aerospace stuff is easy from -- they just have a lot more paperwork to do to kind of track everything. But as far as the manufacturing processes and capabilities, it's really not a big issue.

It's a high-pressure drop. High pressure. Yes, that's a 50-year-old dad joke, sorry.

Well, you're getting me excited too about fuel injectors and I never thought...

Brady gets very excited about that.

What's the next big tech wave in fuel injectors? Like what's the next big unlock?

Well, I think on the light vehicle side, we're already leading with the 500-bar technology out there. I think we're looking to push that maybe a little bit higher. I think a lot of the fuel injection is being adaptable to multiple fuels, whether it's different fuels and multi-fuel applications because customers are not sure what the fuel of the future is going to be, but they need a fuel system that can adapt to whatever people are going to want to adapt to.

So we're doing a lot of multi-fuel where it runs -- it can run on 100% ethanol or 100% gasoline in Brazil. We're seeing dual injectors that will do both diesel and natural gas or diesel and hydrogen. And so I think there's a lot of unique technologies coming there as well.

But if I can just chime in here, are we we still at -- I know that there's an extended stay of execution or more excited useful life for internal combustion technologies and particularly because the hybrids and then regulatory changes as well. But would you still categorize that we may be in the final generation of the technology? Like are we -- like OEMs aren't really trying to make giant leap and injector technology for light vehicle or commercial vehicle applications or kind of where would you push back on that?

Yes, I mean, on the...

It's been good for you.

Commercial vehicle guys, we're still developing next generation. They're still trying to squeeze out that 1%, 2% efficiency. So we're launching '27. We've got some other upgrades that people are working on for '30, and they're already asking us for upgrades for '32. And our view and what we've stated is our view is that combustion engines are going to be around for the rest of the century in transportation, full stop.

Now it may go from gasoline and diesel to carbon-neutral fuels like ethanol, methanol to carbon-neutral fuels like hydrogen. It's going to take decades to transition. It's going to take decades to transition to those carbon-free and carbon-neutral fuels. But a liquefied or a gaseous fuel is just a very, very efficient energy dense way. for transportation, off-highway, construction, marine, aerospace, it's going to be something like that. Battery technology is going to get there. I don't think it's going to get there for at least clean renewable energy is not going to be available in quantity in Wyoming or South America or Southeast Asia.

If I were to ask you on hydrogen combustion to gauge your level of excitement today versus a year ago, is it same, less or more? Doesn't feel like it's...

It's probably a little bit less because I think people are now becoming more realistic on the time frame. In commercial applications, they like to run things for 3 or 4 years before they make a wholesale change. And so I think we need to get more demo fleets out there.

They need more of that in order to commit?

We still need the infrastructure. Same thing as battery electrics went through. They still have infrastructure. Do we have enough hydrogen stations? Is the cost of hydrogen there. We're working on hydrogen, bring down the hydrogen cost quite a bit because of we actually got approved a new grade of hydrogen. That's for combustion.

But geographically, where is the main event for hydrogen combustion? Asia, U.S., Europe?

I think more India and China. And so I think India is interesting because they've already got a large infrastructure for natural gas, and so they're used to those. So the tanks are already in the vehicles. They understand how it works and so for them to convert those stations and infrastructure from natural gas to hydrogen.

It's not liquefied, it's not like under high pressure?

Correct.

Cryogenic, yes.

Do you think it's a 10-year story with hydrogen? Do you think it's a 20-year story, a 30-year story?

I think it's at least a decade before. I don't think it's going to be any meaningful part of our revenues until sometime in the 2030s. There's still -- there's a lot of interesting work. I mean take a look at -- we just did a hydrogen van like 24 hours of Le Mans driving it around France for 24 hours straight in cold weather, hauling things with really no issues with a 10-minute refill time. We're working with Alpine and a number of the F1 folks on hydrogen for racing as well as they see that as a way forward because they love combustion sounds of an engine, and now they're trying to get cleaner as well. So we've got a lot of opportunities there as well.

What about marine or defense?

For hydrogen or for just in general?

In general. You still need fuel injectors in tanks?

Oh yes. Yes, it's going to be different. I mean, they're going away from the heavy diesel on the marine. So now they're looking at ammonia, they're looking at methanol they're looking at different fuel types as well. And again, we're kind of agnostic to all the different fuel type. We can adapt to whatever they want. And so from our perspective, depending on where the trend is, we'll adjust accordingly.

And a year, a year or 2 ago, we had a lot of customers in 50 development programs that they were paying for us to develop on hydrogen. They're now asking us for ethanol, methanol and ammonia, and we can adjust accordingly. I think the fuel injection system at the end of the day, is going to be at the heart of it because that's the main thing that has to change and probably one that's most impacted.

Some of these first aerospace are for defense models, and we're having to produce them in country -- for the country that they're for. I've done it before, BorgWarner. BorgWarner has some, too. It's very niche. It's very small. It's very lucrative, but it's just a different market, yes.

And again, we -- it also ties in, the aerospace ties in well with having a good aftermarket because they have their, hey, every 1,000 hours, they're going to replace your injectors regardless of whether there's an issue or not. And so you get -- we're starting with the OE side of it. And then after a number of years, we'll start to get to MRO that comes with it as well that's going to give us that perpetual dividend.

I'm just going to guess the aerospace, the defense injectors are probably multiples more expensive than what you have in a CV?

Oh absolutely. Their volumes are lower. They're, again, a lot more paperwork. And again, their focus is on quality and delivery. That's their biggest challenge, full stop. We don't have to talk to them and negotiate on a $3.22 or $3.17. They want 100% guarantee on the quality, and they don't want their lines to be affected. And that's why the biggest impact they've seen over the last decade is supply chain issues that have prevented them from meeting their numbers.

And we see ourselves as a good supplier because our program management and on the commercial vehicle and light vehicle side, you don't miss an if you miss an SOP, you're out of business. And we're supporting our first customers, not only were we on time, we were early and they didn't know what to do with us. because they're used to everyone being late. And so us actually being ahead of time was very unique for them.

Finance questions, 2 minutes.

Was the decision to enter aerospace, is that more of you being approached by manufacturers that needed to diversify? Or was that a you decision because you had the technology and you could make it work?

I think it was a little bit of both. I think we were originally approached because they had some supply issues probably 5, 7 years ago. And so the relationship started building at that point. We continue to show our commitment to the space. We continue to allow our teams to be entrepreneurial to find new opportunities for growth. And it's -- they planted the seed and that seed is turning out to turn into a nice little -- nice tree. So we're going to continue to cultivate it and plant some more trees.

It really came through some of our engineers who had contacts within the industry and they start talking and speaking and then it just kind of grew from there. they had a need and they knew what we did, and they approached us and they talked to our engineers and get a solution.

So what are some of the good public comps for your business, industrial, commercial aftermarket that people should think about?

Yes. It's on our deck, probably about half of them that we use is our, I guess, compensation and peer for TSR is there. So the Allisons, the Timkens, the Dormans, the Donaldsons, who else I'm missing, Oshkosh is another good one. So those are the types of folks, Atmos, I think we've added in there, too. Garrett, they're still probably 70%, 80% pass car. So they're still pretty heavy in that space.

We took Gates off.

Gates is one that we probably need to add. Gates is another good example. And these are ones that they're serving a lot of different markets. They don't have a heavy exposure into one different industry. They generally have a good portion of aftermarket business. They're global in nature. And so I think those are -- I've got my own list, I can add more to it. I've got like 9 or 10 that I think are what I would consider our core comps in that space. I think there were 5 of them I just brought it off the top of my head.

Great. Brady and Chris, we really appreciate your time, and good luck.

Thank you.

Thanks, guys.

Great. Thank you so much. Good luck to you, too.