PHINIA Inc. Q2 FY2025 earnings call

• Celebrated 2-year anniversary of spin-off, returned over $464 million to shareholders in past, and $50 million in Q2 via share repurchase and dividends.
• Balance sheet remains healthy. Moved into new markets and won new business including Conquest, and announced first acquisition.
• Both segments performed well while managing tariffs; strategy of sourcing and producing in same region as selling mitigates tariff exposure, with progress made on tariff recoveries and working towards higher USMCA compliancy.
• Highlighted new business wins: gas direct injection fuel rail assembly and pump for Chinese OEM, first GDi pump business with North American OEM, PFI compressed natural gas injector for Indian OEM, and aftermarket business wins across product lines and regions.
• Expanded portfolio into aerospace and defense industry, exhibited at Paris Air Show, with first product launch in Q4 and second in Q1 next year, certification process progressing well.
• Invested $34 million in capital expenditure during the quarter, announced acquisition of SEM (expected to generate ~$50M annual revenue and ~$10M annual adjusted EBITDA, closing in Q3), and returned $50 million to shareholders in Q2.

In the second quarter, net sales were $890 million, up 2.5% from the same period of the prior year, including contract manufacturing sales. Excluding foreign currency and CMAs that ended in '24, sales increased 1%. The Aftermarket segment sales were up slightly year-over-year, primarily due to favorable FX, tariff recoveries and volume increases in the European aftermarket, though partially offset by lower OE volumes in North America. The Fuel Systems segment sales were up 3.7%, including prior year contract manufacturing sales or 4.7% excluding the effect of contract manufacturing. Both segments had strong adjusted operating income performance; Aftermarket over 16% and Fuel Systems returning above 10% to 11.5%. Adjusted EBITDA was $126 million with a margin of 14.2%, a 60 basis point year-over-year expansion. The Aftermarket segment likely contributes a certain percentage to total revenue, and the Fuel Systems segment also contributes a respective percentage, though exact percentages weren't explicitly stated in absolute terms but were described in terms of their performance relative to each other and the overall business.

• Refined net sales outlook: increased the low end from $3.23 billion to $3.33 billion and kept the high end at $3.43 billion.
• Adjusted EBITDA and adjusted EBITDA margin projected to be $455 million to $485 million and 13.7% to 14.1% of sales, adjusted from previous guidance.
• Full year adjusted free cash flow guidance remains strong despite minor delays related to timing on tariff recoveries.
• Adjusted tax rate projected to be an improved 36% to 40% range from original 38% to 42% as tax structuring projects progress.

• Geopolitical and economic environment remains challenging and unpredictable, causing uncertainty.
• Tariffs continue to pose uncertainty, although progress is being made on tariff recoveries and managing tariff exposure.

Q: Could you dive deeper on the dynamics driving the strong bounce back in the business from the first quarter?

A: As explained, things came back slower from Christmas holiday shutdown with inventory adjustments, and there was benefit from FX and tariffs, with good momentum going into the second half which led to upping the lower end of revenue guide.

Q: What were the conversations like at the Paris Air Show and about aerospace certifications?

A: Had great meetings with customers like Safran, certification process is going well with an audit earlier this month going well, on pace to get fully certified and approved with first launch in Q4 and second in Q1 next year.

Q: What's the strategic rationale behind the SEM acquisition and cross-sell opportunities?

A: SEM is focused on alternative fuels, hydrogen, natural gas, etc., which aligns with PHINIA's fuel injection and engine control unit business, providing greater system solutions for customers, and leveraging PHINIA's manufacturing sites and engineering teams to support SEM's growth in commercial vehicle and industrial side where alternative fuels are a good trend.

Q: Any impact on financials from the Ford recall announced in the quarter?

A: There's no change to disclosures and expected accruals, it's a Ford issue with ongoing discussions as Ford hasn't announced a fix yet.

Q: Confirmation on tariff recoveries and net tariff headwind?

A: In the quarter, $9 million was recovered from tariffs and $11 million outgoing, resulting in a net of $2 million negative, with progress being made to get it back full year.