PHINIA Inc. Q3 FY2025 earnings call

Acquisition of SEM

• Closed in August, SEM is a 100-year-old leading provider of advanced natural gas, hydrogen, and other alternative fuel ignition systems, etc. for commercial vehicle and off-highway sectors. Expanded ignition and electronic control capabilities.

Financial Results

• Record net sales, adjusted EBITDA, and adjusted EPS. Second consecutive quarter of both segments reporting higher sales.

Strategic Initiatives

• Consolidating 4 ERP systems into a single global SAP S/4HANA platform. Ongoing cost savings initiatives. Focus on selective M&A in precision machine components, electronics, etc., and aerospace expansion.

New Business Wins

• Next-generation canister technology for a leading North American OEM, brushless alternator for an off-highway OEM in Asia, conquest GDi fuel rail assembly for a major Chinese OEM. Aftermarket wins across geographies. Aerospace expansion with multiple programs launched.

Capital Allocation

• $26 million in CAPEX during the quarter. Returned $41 million to shareholders via dividends and share repurchases. Solid balance sheet with $349 million cash, net leverage 1.4x EBITDA.

Net sales in the third quarter were a record $908 million, up 8.2% from the prior year. Excluding SEM and FX, revenue increased 5%. Fuel Systems segment sales were up 13.4% (including prior year contract manufacturing sales 13.7%, excluding contract manufacturing ended in Q3 2024), with segment margin 13.3%, up 190 basis points due to supply chain savings, productivity improvements, and reduced engineering costs. Aftermarket segment sales were slightly up year-over-year on positive European results, partially offset by lower volumes in North America and Asia, with margin 15%, down 80 basis points due to unfavorable product mix. Adjusted EBITDA was $133 million with a margin of 14.6%, a 30 basis point year-over-year expansion.

2025 Outlook

• Adjusted sales midpoint $3.42 billion (up from prior guide), adjusted EBITDA midpoint $473 million, adjusted free cash flow midpoint $190 million. Tax rate improved to 33%-37%.

Restructuring

• Approx $35 million in restructuring charges for infrastructure rightsizing, etc., expected $25 million annual savings, less than 2-year payback once fully implemented.

• Macroeconomic and industry uncertainty. - CV tariffs coming into effect on November 1, though expecting to recoup costs from customers. - SEM's reliance on challenged CV market and initial integration headwinds.

Q: Excluding the acquisition and currency impact, sales were up 5.1% year-over-year. How was this 5.1% broken down among pricing, tariff recoveries, and increased volumes?

A: It's a balance among pricing, tariff recovery, and increased volumes in Asia and the Americas, with no one factor dominating.

Q: Is pricing related to tariffs expected to be sticky moving forward?

A: Yes, as tariffs are likely to stay, pricing linked to tariffs is expected to be sticky, and productivity and other efficiency improvements are needed to regain margin.

Q: How has the aerospace program launch impacted interest from other potential customers?

A: Level of interest, RFIs, and RFQs from major engine manufacturers has gone up substantially, with expectations of additional awards in coming quarters.

Q: Regarding Q4 guidance and SEM's run rate, is there seasonality and what's the expectation for '26?

A: Q4 typically is lighter seasonally, SEM's second half is lighter due to CV softness, but confident SEM will reach $50 million annual sales as market recovers.

Q: In Fuel Systems, how did negative product mix impact EBITDA flow-through?

A: Partly due to low-margin ECU contracts, but productivity and other cost reductions offset, with standards expected to improve next year.

Q: What's the impact of the Ford fuel pump recall on the business?

A: No cash impacts, no adjustment to warranty accruals, and no concerns on the company's side.

Q: When will the restructuring program be fully realized and what are the timing details?

A: Starting to roll out now, multiyear with full completion expected by 2028, with approx $25 million annual savings expected, less than 2-year payback.