Q3 2023 PHINIA Inc Earnings Call
Thank you for standing by and welcome to the Affinia Q3 earnings call 2023.
Speaker 1: Thank you for standing by and welcome to the Finneac Q3 Ernie's call 2020.
Speaker 1: I would now like to welcome Michael Heifler, the Vice President of Investor Relations to begin the call. Michael Overd-
I would now like to welcome Michael Hype water, Vice President of Investor Relations to begin the call Michael over to you.
Speaker 2: Thank you, Mandeep, and good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on Phineas Investor Relations website, including a slide deck that we will be referencing in our remarks.
Thank you Mandy and good morning, everyone. We appreciate you joining us our conference call materials were issued this morning and are available on <unk> Investor Relations website.
Including a slide deck that we will be referencing in our remarks.
Speaker 2: We are also broadcasting this call via webcast. Joining us today are Brady Erickson, CEO , and Chris Brop, CFO .
We are also broadcasting this call via webcast joining us today are Brady Ericsson CEO and Chris <unk> CFO.
Speaker 2: Today, we will discuss our Q3 results and updated forecasts for full year 2023. Please keep in mind when we make year over year or second half 2023 to first half 2023 comparisons, we are comparing our standalone results, including actual or expected corporate costs to perform a results with corporate allocations when we were part of board Warner.
Today, we will discuss our Q3 results and updated forecast for full year 2023.
Please keep in mind, when we make year over year or second half of 2023 to first half 2023 comparisons we are comparing our standalone results, including actual or expected corporate costs to pro forma results with corporate allocations. When we were part of Borgwarner.
Speaker 2: During this call, we will make forward-looking statements, which are based on management's current expectations, and are subject to risks and uncertainties.
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.
Speaker 2: Actual results may differ materially from these statements due to a variety of factors, including those described in RSEC violence.
Speaker 2: And with that, it's my pleasure to turn the call over to Brady.
And with that it's my pleasure to turn the call over to Brady.
Speaker 3: Thanks Mike, and thank you for joining us this morning. I'm pleased to share our first earnings report as an independent company and proud to represent our nearly 13,000 employees to remain focused on delivering quality products to our customers and delivering stellar financial results in the quarter.
Thanks, Mike and thank you for joining us this morning.
I am pleased to share our first earnings report as an independent company and proud to represent our nearly 13000 employees to remain focused on delivering quality products to our customers and.
And delivering solid financial results in the quarter.
Speaker 3: I'll get into some of the numbers shortly and then hand it over to Chris for more details. But let me first provide some color on our journey so far.
I'll get into some of the numbers shortly and then hand it over to Chris for more details, but let me first provide some color on our journey so far.
Speaker 3: Throughout the past several months, I spent considerable time with customers, employees, and investors. The feedback externally and internally has been universally supportive and positive about Phineas focused on its core business and strategy for the future. Customers appreciate our commitment to-
Throughout the past several months I've spent considerable time with customers employees and investors the feedback externally and internally has been universally supportive and positive about Phineas focus on its core business and strategy for the future.
Customers appreciate our commitment to the combustion products.
Speaker 3: and that we're going to be a reliable partner to them for decades to come.
And that we're going to be a reliable partner to them for decades to come.
Speaker 3: They are aligned with our efforts to develop robust practical solutions for today, and the carbon neutral and carbon free solutions of tomorrow.
They are aligned with our efforts to develop robust practical solutions for today and.
In the carpet neutral and carbon free solutions of tomorrow.
Speaker 3: Our employees are excited that our profits and resources are being reinvested in our product lines and our operations to further strengthen and grow our business.
Our employees are excited that our profits and resources are being reinvested in our product lines and our operations to further strengthen and grow our business.
Speaker 3: Finally, investors are supportive of our strategy, commitment to being financially disciplined, and are focused on total shareholder returns.
Finally investors are supportive of our strategy.
Commitments to being financially disciplined and our focus on total shareholder returns.
Speaker 3: Continuing to deliver scholar financial performance and executing on our strategies will be key to building shareholder confidence.
Continuing to deliver solid financial performance and executing on our strategies will be key to building shareholder confidence.
Speaker 3: With regard to the transition from a former parent, the team has been hard at work exiting transitional services agreements or TSAs, and IT, cloud services, HR, facilities operations, procurement, sales, and IP, and have been making strong progress.
With regard to the transition from our former parent the team has been hard at work exiting transitional services agreements or <unk> and cloud services HR facilities operations.
German sales in IP and.
We have been making strong progress.
Speaker 3: IT-related services make up the majority of the costs and will take the longest to exit.
It related services make up the majority of the costs and we will take the longest to exit.
Speaker 3: We expect to close out all these TSAs by the middle of next year.
We expect to close out all these TSA is by the middle of next year.
Speaker 3: As we are negotiating independent services and hiring key talent, we are prioritizing establishing strong, efficient, long-term solutions against the backdrop of inflationary pricing.
As we are negotiating independent services and hiring key talent, we are prioritizing establishing strong efficient long term solutions against the backdrop of inflationary pricing.
Speaker 3: As such, we're working to keep as close as we can to the 80 million of annual corporate costs discussed at the time of the spin.
As such we are working to keep as close as we can to the $80 million of annual corporate cost discussed at the time of the spin.
Speaker 3: Given what we know now, we see the potential for higher costs, but we believe our longer term overall margin goals are still quite attainable. Chris will speak to our corporate cost.
Given what we know now we see the potential for higher costs, but we believe our longer term overall margin goals are still quite attainable.
Chris will speak to our corporate costs and other metrics shortly.
Speaker 3: We are also still on pace to exit all contract manufacturing agreements or CMAs by the end of 2024 in a steps and manage fashion.
We are also still on pace to exit all contract manufacturing agreements are cma's.
By the end of 2024, and the steps and managed fashion.
Speaker 3: Providing great products and service for our customers has allowed us to continue to win new business across all product lines and in all regions in support of our strategies.
Providing great products and service for our customers has allowed us to continue to win new business across all product lines and in all regions in support of our strategies.
A few examples.
Speaker 3: Finniades expanding into new markets by being selected to supply fuel injectors to a major aircraft equipment manufacturer.
Bidding is expanding into new markets by being selected to supply fuel injectors to a major aircraft equipment manufacturer.
Speaker 3: Finne is broadening its zero-carbon product solutions with its first major award to supply hydrogen fuel system components for a large OEM's medium-duty truck hydrogen fuel cell electric vehicle.
Dania is broadening its zero carbon product solutions with its first major award to supply hydrogen fuel system components for a large Oems medium duty truck hydrogen fuel cell electric vehicle.
Speaker 3: Vini is helping customers reduce carbon emissions today while increasing our market share with a significant GDI program award from a prominent domestic Chinese OEM for its new light vehicle plug-in hybrid program.
Vinny is helping customers reduce carbon emissions today, while increasing our market share with a significant Judy I program award from a prominent domestic Chinese OEM for its new light vehicle plug in hybrid programs.
Speaker 3: These business wins are proof points on how we are diversifying and growing by leveraging our product leadership, global footprint, and proven capabilities.
These business wins are proof points on how we are diversifying and growing by leveraging our product leadership global footprint and proven capabilities.
Speaker 3: Our quote activity and new business wins remain robust, and we believe we have the right strategy to achieve stable long term growth.
Our quote activity and new business wins remained robust and we believe we have the right strategy to achieve stable long term growth.
Speaker 3: We think our exposure to commercial vehicle industrial and aftermarket businesses is going to allow us to continue to grow through this decade and beyond.
We think our exposure to commercial vehicle industrial and aftermarket businesses is going to allow us to continue to grow through this decade and beyond.
Speaker 3: I knew business winds are supported by our product leadership strategy of bringing new technology to market that provides value for our customers.
Our new business wins are supported by our product leadership strategy of bringing new technology to market that provides value for our customers.
Speaker 3: such as market leading 500 bar GDI technology, helping customers improve efficiency, reduce emissions and lower costs.
Such as market, leading 500 bar <unk> technology, helping customers improve efficiency reduce emissions and lower costs.
Speaker 3: leveraging our GDI technology in capital to provide a value-focused solution for our off-highway diesel applications and hydrogen ice at different seasons from our competition.
Leveraging our <unk> technology and capital to provide a value focused solution for our off highway diesel applications and hydrogen nice a differentiator.
From our competition.
Speaker 3: Additionally, we're providing customers with complete system solutions from the injector to the ECU and collaboration services.
Additionally, we are providing customers with complete system solutions from the injector to the Acu and collaborate and calibration services.
Speaker 3: We can provide a complete turnkey solution for our customers that will help drive additional efficiencies and increase the value we provide.
We can provide a complete turnkey solution for our customers that will help drive additional efficiencies and increase the value we provide.
Speaker 3: Finally, we're helping our customers move towards carbon neutral and carbon free fuels with solutions using ethanol, biofuels, and hydrogen. As it's our view that a liquefied or a gaseous fuel is going to be a key element of our journey to carbon neutrality.
Finally, we're helping our customers move towards carbon neutral and carbon free fuels with solutions using ethanol.
Biofuels and hydrogen.
Our view that a liquefied or a gaseous fuel is going to be a key element of our journey to carbon neutrality.
Speaker 3: There are just too many applications where a battery electric solution is suboptimal and we're hydrogen, where renewable fuel will provide an economical, practical, and carbon neutral solution.
There are just too many applications, where our battery electric solution is suboptimal and where hydrogen for a renewable fuel will provide an economical and practical and carbon neutral solution.
Speaker 3: As summarized in our earnings deck on slide four, there's a lot of activity around hydrogen. In fact, many governments and industry participants around the world are working on commercializing hydrogen solutions.
As summarized in our earnings deck on slide four there's a lot of activity around hydrogen in fact, many governments and industry participants around the world are working on commercializing hydrogen solutions.
Speaker 3: I participated last month in the hydrogen America Summit in Washington, DC, along with other leaders from private industry and government officials, including Energy Secretary Jennifer Cranholm, to discuss future hydrogen initiatives.
I participated last month and the hydrogen America summit in Washington D C.
Along with other leaders from private industry and government officials, including energy Secretary, Jennifer Granholm to discuss future hydrogen initiatives.
Speaker 3: A significant development occurred shortly after when the Biden administration allocated $7 billion in appropriations for seven hydrogen hub project.
A significant development occurred shortly after when the Biden administration allocated $7 billion in appropriations for seven hydrogen hub projects.
Speaker 3: Combined with over $40 billion in private funding, the DOE expects the projects to produce three million metric tons of clean hydrogen by 2030.
And bind with over $40 billion and private funding the Doe expects the project to produce 3 million metric tonnes of clean hydrogen by 2030.
Speaker 3: We are investing prudently in hydrogen, leveraging our core technologies and resources, as we see this opportunity not being a substantial part of our revenues until 2030 and beyond.
We are investing prudently in hydrogen leveraging our core technologies and resources as we see this opportunity not being a substantial part of our revenues until 2030 and beyond.
Speaker 3: In the near to medium term, our focus is on growing and optimizing our core OEM and aftermarket businesses.
In the near to medium term, our focus is on growing and optimizing our core OEM and aftermarket businesses.
We believe our business is resilient with about one third of our business go into the Oes and aftermarket providing a nice ballast under all macro conditions.
Speaker 3: We believe our business is resilient with about one-third of our business going to the OES and aftermarket, providing a nice ballast under all macro conditions.
Speaker 3: our commercial industrial business, making up nearly a quarter of our sales, provide the stable and growing opportunity.
Our commercial and industrial business, making up nearly a quarter of our sales provides a stable and growing opportunity.
Speaker 3: And in the light vehicle business, we see our increasing market share and the higher market penetration rates of GDI, especially in hybrids, supporting our positions that our light vehicle business has staying power.
And in the light vehicle business, we see our increasing market share and the higher market penetration rates of DDI, especially in hybrids supporting our position that our light vehicle business has staying power.
Speaker 3: We also tend to be weighted more on the larger SUV, van, and truck segments, which will be among the last segments convert to full-babb.
We also tend to be weighted more in the larger SUV ban and truck segments, which will be among the last segment to convert to full bev.
Speaker 3: We're going to grow in a financially disciplined way. Our objectives are to continue to maintain low leverage and making all decisions based on maximizing return on an invested capital, while always exceeding our internal hurdle rates.
We're going to grow in a financially disciplined way our objectives are to continue to maintain low leverage and making all decisions based on maximizing return on invested capital, while always exceeding our internal hurdle rates.
Now moving to Q3.
Speaker 3: Our core operations continued to perform well with total segment, total segment adjusted operating margins in line with our first half average results.
Our core operations continue to perform well with posted segment total segment adjusted operating margins in line with our first half average results.
Speaker 3: As we previously discussed, our fuel system segment faced a difficult year over your comparison with Q3 last year, as it benefited from retroactive inflationary customer recovery.
As we've previously discussed our fuel systems segment faced a difficult year over year comparison with Q3 last year.
As it benefited from retroactive inflationary customer recoveries.
Speaker 3: Consequently, our fuel systems adjusted operating margins were down 540 basis points years ago at 10.3%.
Sequentially, our fuel systems, adjusted operating margins were down 540 basis points versus a year ago at 10, 3%.
Speaker 3: However, when viewed versus our first half of 2023, adjusted operating margins were actually up 40 basis points.
However, when viewed versus our first half of 2023 adjusted <unk> adjusted operating margins were actually up 40 basis points.
Speaker 3: As Chris will discuss shortly, we've been working proactively with our customers to achieve recovery and fair pricing against overall inflationary cost pressures.
As Chris will discuss shortly we have been working proactively with our customers to achieve recovery and fair pricing against overall inflationary cost pressures.
Speaker 3: Our aftermarket segment margins were down 110 basis points in last year and down approximately 90 basis points. Our first half results due to primarily primarily to higher inflationary costs and negative mix.
Our aftermarket segment margins were down 110 basis points from last year and down approximately 90 basis points from our first half results due to primarily primarily to higher inflationary costs and negative mix.
Speaker 3: We expect this dynamic to continue in the Q4, but have actions to recover in 2024.
We expect this dynamic to continue into Q4, but of actions to recover in 2024.
Speaker 3: Q3 adjusted segment results demonstrate positive underlying momentum in our business. As we discussed in our Q2 call, we expect a headwind in our adjusted operating income line from increasing corporate and disenergy costs.
Q3, adjusted segment results demonstrate positive underlying momentum in our business as we discussed in our Q2 call. We expect a headwind in our adjusted operating income line from increasing corporate and dis synergy costs.
Speaker 3: Q3 corporate costs came in at 19 million in line with their expectations of approximately 20 million per quarter.
Q3, corporate costs came in at $19 million in line with our expectations of approximately $20 million per quarter.
Speaker 3: expect these costs to be somewhat higher in Q4 as we build out our independent services.
These costs to be somewhat higher in Q4, as we build out our independent services.
Speaker 3: Over time, as we grow our top line, we'll be able to leverage these costs and reduce their impact on our margins.
Over time as we grow our top line will be able to leverage these costs and reduce their impact on our margins.
Revenues have stop and below our expectations in Q3, primarily due to the continued weakness in CV demand in China.
Speaker 3: Revenues have stopped and below our expectations in Q3 primarily to the continued weakness in CV demand in China.
Speaker 3: Although this TV market in China is recovering, our customer demand is well below prior year in our previous expectations. We do not see this recovering.
Although the CV market in China is recovering our market our customer demand is well below prior year and our prior previous expectations.
We do not see this recovering until the middle of next year.
Speaker 3: We're also seeing some signs of slowing demand in our European CV business versus our prior expectation.
We're also seeing some signs of slowing demand in our European CV business versus our prior expectation.
Speaker 3: Well, Strikes in the US had a minimal impact on our business in Q3. A more substantial impact is expected in Q4 from the Strikes across the big three light vehicle OEMs and Mac Volvo.
While strikes in the U S had a minimal impact on our business in Q3, a more substantial impact is expected in Q4 from the strikes across the big three light vehicle Oems and macro level.
Speaker 3: Current expected impact in Q4 is around 25 to 30 million, or about a three to four percent reduction in senior revenues for Q4.
Current expected impact in Q4 is around $25 million to $30 million or about 3% to 4% reduction infineon revenues for Q4.
Speaker 3: Although some tentative settlements have been reached, timing to ramp up to full capacity is still unknown.
Although some tender settlements have been reached timing to ramp up to full capacity is still unknown.
Speaker 3: Finally, we're also seeing FSFX effects from a stronger US dollar from when we provided our guide.
Finally, we're also seeing FX.
FX effects from a stronger U S dollar from when we provided our guidance.
Speaker 3: Consequently, we're revising our full year 2023 adjusted sales, adjusted EBITDA and adjusted EBITDA margin guidance range to $3.4 billion to $3.45 billion.
Consequently, we're revising our full year 2023, adjusted sales adjusted EBITDA and adjusted EBITDA margin guidance range to $3 4 billion to 345 billion.
Speaker 3: 455 million to 475 million.
465 million to $475 million.
Speaker 3: and an EMMA.margin range of 13.6 to 13.9 respectively.
And an EBITDA margin range of $13 six to $13 nine respectively.
Speaker 3: We're also revising our 2023 tax guidance to 34% from 20 to 27%.
We're also revising our 2023 tax guidance to 34% from 2027%.
Speaker 3: As we exit our TSAs and CMAs and achieve better alignment of our business operating model with our post-pain legal entity structure, we see our effective tax rate coming back down towards our original 27% expectation.
As we exit our TSA and Cma's and achieve better alignment of our business operating model with our post spend legal entity structure, we see our effective tax rate coming back down towards our original 27% expectation.
Speaker 3: We're generating strong free cash flow and have a solid financial position. In the quarter, we generated free cash flow of $118 million. And we ended September with $367 million of cash on hand.
We're generating strong free cash flow and have a solid financial position.
In the quarter, we generated free cash flow of $118 million and we ended September with $367 million of cash on hand.
Speaker 3: We continue to work collaboratively with our former parents, but some of this cash will be payable to them, and we will also have some cash receivables from them. Our balance sheet remains under one time, net lover.
We continue to work collaboratively with our former parent as some of this cash will be payable to them and we will also have some cash receivable from them.
Our balance sheet remains under one times net levered.
Speaker 3: Our confidence in the business led the Board of Directors at the end of August to authorize a 25 cent per share quarterly dividend and 150 million dollar share repurchase program.
Our confidence in our business led the board of directors at the end of August to authorize a 25 per share quarterly dividend and $150 million share repurchase program.
Speaker 3: During the month of September , we bought back $9 million of our shares and an average price of just over $27.
During the month of September we bought back $9 million of our shares at an average price of just over $27.
Speaker 3: In total, $21 million was returned to shareholders in the quarter.
In total $21 million was returned to shareholders in the quarter.
Speaker 3: As we previously articulated, our focus will be to maintain our strong balance sheet and maximize total shareholder returns. This will include dividends optimizing
As we've previously articulated our focus will be to maintain our strong balance sheet and maximize total shareholder returns.
This will include dividends.
Optimizing our debt structure.
Speaker 3: At the right time, making rapidly accretive and high ROIC acquisitions to grow our commercial, industrial, and aftermarket businesses, and opportunistically, you've
At the right time, making rapidly accretive and high ROIC acquisitions to grow our commercial industrial and aftermarket businesses.
And Opportunistically repurchasing shares.
Speaker 3: With that, I'd like to hand it over to Chris. He'll take us through our Q-through results and our outlook for the rest of the year. Chris.
With that I'd like to hand, it over to Chris who will take us through our Q3 results and our outlook for the rest of the year.
Chris.
Thanks Brady.
Speaker 4: I'm also pleased to reach this milestone of reporting our first standalone quarter. Please keep in mind there continue to be TSAs and CMAs with our former parent, which we are phasing out in steps through 2024 and expect to fully exit by the end of 2020.
I'm also pleased to reach this milestone of reporting our first standalone quarter.
Please keep in mind, there continue to be TSA, and CMA with our former parent, which we are phasing out and step through 2024 and expect to fully exit by the end of 2024.
Speaker 4: Also, as Brady mentioned, we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for payables and receivables to and from. From them to close out in Q3 2023 generated 870 million in adjusted total sales up slightly versus a year ago. Our adjusted earnings for share.
Also as Brian mentioned, we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for payables and receivables to and from.
From them to close out.
In Q3, 2023, we generated $870 million and adjusted total sales up slightly versus a year ago.
Our adjusted earnings per share or <unk> 53.
Speaker 4: We earned 82 million in adjusted operating income and 117 million of adjusted EBITDA, resulting in an adjusted operating margin of 9.4%.
We earned $82 million and adjusted operating income and $117 million of adjusted EBITDA, resulting in adjusted operating margin of nine 4% and adjusted.
Speaker 4: and an adjusted EVA DOM margin of 13.4%.
<unk> EBITDA margin of 13, 4%.
Speaker 4: A year-over-year decrease of 400 basis points and 420 basis points, respectively.
Year over year decrease of 400 basis points, and 420 basis points respectively.
Speaker 4: As Brady mentioned, we face difficult comparisons with Q3 a year ago. When we received retroactive conflictionary cost recovery from our customers.
As Brady mentioned, we faced difficult comparisons with Q3, a year ago. When we received retroactive inflationary cost recovery from our customers in.
Speaker 4: In addition, as we anticipated, we are flowing through higher standalone corporate costs.
In addition, as we anticipated we are flowing through higher standalone corporate costs.
Speaker 4: As depicted in slide seven and eight, our sales performance in the quarter was affected by continued softness in our CV business in China.
As depicted in slide seven and eight.
Our sales performance in the quarter was affected by continued softness in our <unk> business in China.
Speaker 4: We saw favorable sales from positive customer pricing of 18 million, which was offset by 32 million of inflationary costs from suppliers.
We saw favorable sales from positive customer pricing of $18 million, which was offset by $32 million of inflationary costs from suppliers.
Speaker 4: Volume X was a headwind of 20 million, mostly due to lower-seeking cells in China.
Volume mix was a headwind of $20 million, mostly due to lower CD sales in China.
Speaker 4: Customer recovery represents approximately 70% of our realized inflationary costs for the first nine months. And we have reached agreement on recovery mechanisms with most of our top customers for inflationary cost recovery for the year.
Yes.
Customer recoveries represent approximately 70% of our realized inflationary costs for the first nine months and we have reached agreement on recovery mechanisms with most of our top customers for inflationary cost recovery for the year.
Speaker 4: Please keep in mind that we have recently asked for customers for recovery for broader inflationary costs beyond materials, including utilities and employee costs.
Please keep in mind that we have recently asked our customers or recovery or broader inflationary cost beyond materials, including utilities and employee costs.
Speaker 4: For my core business performance standpoint, our segments reported solid overall margin.
From a core business performance standpoint, our segments reported solid overall margin.
Speaker 4: Q3 segment adjusted operating margins were healthy at 11.6%.
Q3 segment adjusted operating margins were healthy at 11, 6%.
Speaker 4: This was roughly in line with the average segment adjusted operating margin in the first half, despite lower aftermarket margins due to higher inflationary costs, not recovered in the quarter, and mixed headwinds from lower North American sales.
This was roughly in line with the average segment adjusted operating margin in the first half despite lower aftermarket margins due to higher inflationary costs not recovered in the quarter and mixed headwinds from lower North American sales.
Speaker 4: As expected, higher standalone corporate cost in Q3 drove an overall lower adjusted operating margin of 9.4%.
As expected higher Standalone corporate costs in Q3 drove an overall lower adjusted operating margin of nine 4%.
Speaker 4: Looking at performance on a segment level, as we forecasted, fuel systems margins contracted on a year-over-year basis due to challenging comparisons with retroactive recoveries in Q3 of last year.
Looking at performance on a segment level as we forecasted fuel systems margins contracted on a year over year basis due to challenging comparisons with retroactive recoveries in Q3 of last year.
Speaker 4: However, as Brady mentioned, fuel systems adjusted operating margins improved 40 basis points from the first half of this year's average.
However, as Brady mentioned fuel systems, adjusted operating margins improved 40 basis points from the first half of this year's average.
Speaker 4: This was driven primarily from better customer recovery of inflationary costs. Fuel systems also continues to benefit from GDI growth in the Americas.
This was driven primarily from better customer recovery of inflationary costs fuel systems also continues to benefit from GDP growth in the Americas.
Speaker 4: partially offset by lower than prior year and expected CV revenues in China that is primarily due to underperforming customers.
Partially offset by lower than prior year and expected CV revenues in China that is primarily due to.
Under two underperforming customers.
Speaker 4: While we had been expecting them to recover in the second half, we now believe we will not see recovery until the next.
While we had been expecting them to recover in the second half. We now believe we will not see recovery until mid next year.
Speaker 4: We are looking to partially offset this revenue loss by utilizing this capacity for aftermarket business and continuing to pursue new business opportunities with other customers.
We are looking to partially offset this revenue loss by utilizing this cap capacity for aftermarket business and continuing to pursue new business opportunities with other customers.
Speaker 4: Our aftermarket business sales grew 3% year over year driven by positive currency and growth in the European market.
Our aftermarket business sales grew 3% year over year, driven by positive currency and growth in the European market.
Speaker 4: Adjusted operating margin came in at 13.7% down 110 basis points from the same period of year ago. As non-commodity inflationary costs, we're not covered by prior pricing actions. And we experienced weaker mix.
Adjusted operating margin came in at 13, 7% down 110 basis points from the same period, a year ago as non commodity inflationary costs were not covered by prior pricing actions and we experienced weaker mix.
Speaker 4: Overall, we continue to target longer term EBITDA on margins of 14 to 15%. And as I mentioned last quarter, we are also continuing to assess our cost of footprint with an eye to further efficiency.
Overall, we continue to target target longer term EBITDA margins of 14% to 15%.
And as I mentioned last quarter. We are also continuing to assess our cost plan with an eye to further efficiencies.
Speaker 4: In addition, we will continue to incur costs related to the spin as we adjust our footprints to reflect the separation.
In addition, we will continue to incur costs related to the spin as we adjust our footprint to reflect the separation.
Speaker 4: Or if it cost came in at 19 million in Q3 in line with our previous expectation.
Corporate costs came in at $19 million in Q3 in line with our previous expectation.
Speaker 4: And we continue to forecast corporate costs in the 60 to 70 million range for the full year.
And we continue to forecast corporate costs in the $60 million to $70 million range for the full year.
Speaker 4: We expect corporate costs to likely annualize next year at around 80 million, but there is still considerable noise from exiting the TSAs as we finalize new contracts, complete our staffing, and finalize allocations between segments and corporate.
We expect corporate cost to likely annualized next year at around $80 million, but there is still considerable noise from exiting the TSA as we finalized new contracts complete our staffing and finalized allocations between segments and corporate.
Speaker 4: We'll have more to share with you during our Q4 earnings call in February when we plan to give full your guidance for 2024.
We will have more to share with you during our Q4 earnings call in February when we plan to give full year guidance for 2024.
Speaker 4: Q3 cash from operations was $155 million. During the quarter, we generated strong free cash flow of $118 million as we partially un-lown the working capital bill related to the spin.
Q3 cash from operations was $155 million during the quarter, we generated strong free cash flow of $118 million as we partially unwound the working capital build related to the spin.
Speaker 4: We see an opportunity to further reduce our working capital going forward in the tens of millions of dollar magnitude.
We see an opportunity to further reduce our working capital going forward in the tens of millions of dollar magnitude.
Speaker 4: Next, turning to our liquidity. We are committed to a strong financial foundation and having ample liquidity to run our business and execute our strategy.
Next turning to our liquidity, we are committed to a strong financial foundation, and having ample liquidity to run our business and execute our strategy.
Speaker 4: We ended Q3 with 367 million in cash and 425 million of committed revolver availability.
We ended Q3 with $367 million in cash and $425 million of committed revolver availability.
Speaker 4: giving us total liquidity of more than 790 million and net leverage of less than one time evit-daw.
US total liquidity of more than $790 million and net leverage of less than one times EBITDA.
Speaker 4: In closing, I want to reiterate Brady's message regarding our focus on financial discipline and generating strong shareholder returns. With that, we will now move to the Q&A.
In closing I want to reiterate brady's message regarding our focus on financial discipline and generating strong shareholder returns.
With that we will now move to the Q&A portion of our call.
Yes.
Speaker 1: At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We ask that you...
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we ask that you.
Pause a moment before we do compile all the questions.
Speaker 1: Again, if you would like to ask a question, please press start one on your telephone keypad.
Again, if you would like to ask a question. Please press star one on your telephone keypad now.
Speaker 1: Our first question comes from a line of Jake Snow with BMP Parabasic Day. Please go ahead. Hi guys. And...
Our first question comes from the line of Jake Snow with BMP pair of <unk>. Please go ahead.
Hi, guys and congratulations on your first quarter.
Speaker 5: Can you just remind us approximately what percentage of sales the China commercial market represents and then Keyes confirmed that if that market run developed corporate average margins and what's your level of confidence in the headwinds of the remainder of the year?
Can you just remind us approximately.
What percentage of sales the China commercial market represents.
Auctions confirmed that market.
Our corporate average margins and what's your level of confidence in.
Headwinds.
For the remainder of the year. Thank you.
Speaker 3: I think our CV business as a percent of our total revenue, or it's about 50% of our chain of sales. Correct. So it's about 250 to 300 million.
I think our CV business as a percent of our total revenue or it's about 50% of our China sales correct.
So it's about $250 million to $300 million.
Speaker 3: in total. Our CV business, I think, with all regions are all kind of comparable. Some of the CV business that we have in China is just play a little bit better than average.
And in total.
Our CV business I think with with all regions are all kind of comparable.
Some of the CV business that we have in China is probably a little bit better than average.
Speaker 3: for us and as far as kind of the headwinds. We see it abating going into next year on the CV side.
For us and as far as kind of the headwinds.
We see it abating going into next year on the CV side.
Speaker 3: I think the big question for us is how quickly the big three ramp up in North America and where that demand kind of comes in. As I mentioned, we see a little bit of softness in CV but in Europe , but not significant at this point. It's just a concern for us right now. Our aftermarket continues to be pretty steady and strong, generating strong cash flow generation for us.
I think the big question for US is how quickly the big three ramp up in North America.
And where that demand kind of comes in.
As I mentioned, we see a little bit of softness in in CV, but in Europe.
But not significant at this point, it's just a concern for US right now and our aftermarket continues to be pretty steady.
And strong generating.
Strong cash flow generation for us.
Speaker 5: Thank you. And then, pre-cast flow was definitely a point of strength in the quarter. Can you just talk about how we should think about that in the fourth quarter and then in the 2024?
Thank you.
Free cash flow was definitely a point of strength in the quarter can.
Can you just talk about how we should think about that in the fourth quarter and then into 'twenty four.
Speaker 3: I mean, I think we think, you know, it's going to be positive. Again, we, it's typical. A Q4 is a positive cash flow quarter. Obviously a lot of focus.
I mean, I think we think.
It's going to be positive again, we at typical that Q4 is.
Positive.
Cash flow quarter.
Obviously, a lot of focus is going to be on closing it out and reducing our working capital.
Speaker 3: is going to be on closing it out and reducing our working capital. I think in general, we're going to keep with our overall guide that we see ourselves generating plus or minus about 200 million of free cash flow on an ongoing basis once we get through all the different.
I think in general we're going to keep with our overall guide that we see ourselves generating plus or minus about $200 million of free cash flow on an ongoing basis once we get through all the different.
Speaker 4: You know, CMAs and TSAs and kind of working through things. So it will float out slightly because in Keep War, we're still collecting money and paying out money for board water. That's going to slow. So it is going to have an effect. We're getting more cash in than paying it out for them. So as part of that, it will affect our total run rate cash flow in Keep War compared to Keep 3.
CMA and TSA and kind of working through things so that it will slow down slightly because in Q4, we're still collecting money and paying out money for borgwarner.
So it is going to have an effect for getting more cash.
It out for them so as part of that it will it will affect our total run rate cash flow in Q4 compared to Q3.
Speaker 3: As Chris mentioned, I think that'll kind of work its way through over the next few quarters for us to kind of finalize all the AR and AP Between the two companies as well as tax matters agreements and Few other things that we've been paying for them and they're paying for us.
As Chris mentioned, I think that will kind of work its way through over the next few quarters for us to kind of finalize all the AR and AP.
Between the two companies as well as tax matters agreements and few other things that we've been paying for them in there.
They are paying for us.
Very helpful. Thank you.
Speaker 1: Our next question comes from the line of Joseph Spock with UBS. Please go ahead.
Our next question comes from the line of Joseph Spak with UBS. Please go ahead.
Speaker 6: Thanks, good morning, everyone. I guess Chris, first question. You briefly mentioned some of the recoveries not expected until middle next year now. How broadly should we think about price cost next year? Is that expected to be neutral? Or should we still expect some benefit in 20?
Thanks, Good morning, everyone I guess.
Chris first question.
Briefly mentioned some some of the recoveries not expected until middle of next year now how broadly should we think about price cost next year is that expected to be neutral or you or should you still should we still expect some some benefit in 'twenty four.
Speaker 4: Well, we still, we really aren't seeing much on
Well, we still.
We really aren't seeing much on.
Speaker 4: Commodities, they're really flat year over year where we're seeing our inflationary in terms of Utilities and merit for employees and things like that that obviously we've already increased the rates for this year like everybody else And that'll feed into next year what we expect is we will keep at the same level with our customers for the most part this year Instead of getting lump sums like we did last year we're building it into peace prize
Yes.
Commodities Theyre really flat year over year, we're seeing our inflationary in terms of.
Utilities and merit for employees and things like that obviously, we've already increased the range for this year like everybody else and that will feed into next year. What we expect is we will keep at the same level with our customers for the most part this year instead of getting lump sum like we did last year, we're building it into.
<unk> price.
So we expect it to remain basically flat and then if we experience any higher headwinds obviously, we'll go after the customers again, but I think we'll just continue staying the same run rate going into next year as for this year, yes, so from a year over year from 23 to 24.
Speaker 3: We think it's, we know we're kind of hit the peak and so we don't see any headwinds from inflationary costs. As Chris mentioned, I think we're not going to be in the battle that we have in the last few years where there's a complete negotiation and starting on scratch on January 1st.
We think we're kind of hit the peak and so we don't see any headwinds from inflationary cost as.
As Chris mentioned, I think we're not going to be in the battle that we have in the last few years, where risk complete negotiation and started from scratch.
Starting on scratch on January one.
Speaker 3: where the large portion of our customers, we've actually just re-adjusted the base piece price.
Sure.
<unk> portion of our customers, we've actually just readjusted the base these price.
Speaker 3: knowing that's going to be the new base kind of going forward. So
Knowing that it's going to be the new base kind of going forward. So.
Speaker 3: Hopefully that will then reduce the volatility that we've seen in our earnings over the last couple of years.
Hopefully that will then reduce the volatility.
That we've seen in our earnings over the last couple of years as Chris mentioned I think in Q3 of last year and 'twenty two.
Speaker 3: As Chris mentioned, I think in Q3 of last year in 22, we had three quarters of...
Had three quarters of retro.
Speaker 3: which is why we had the spike and we we saw most of those in Q2 of this year, but still had a little bit of bump in Q2. So hopefully with rolling it all into peace price, we'll have a more stable, you know, quarter to quarter compares.
Which is why we had the spike and we saw most of those in Q2 of this year, but still have a little bit of a bump in Q2.
So hopefully with the with rolling it all into piece price.
We will have a more stable quarter over quarter comparisons.
Speaker 6: And that peace price negotiation that consists in the cross, the different, all your customers across the different end markets or is it, is it specific to either life vehicle or commercial vehicle?
And that piece price.
Negotiation, that's consistent across the different.
All your customers across different end markets or is it.
Is it specific to either light vehicle or commercial vehicle.
Speaker 4: No, it's across all customers. That was more of a direction that we had to get that resolved because the uncertainty or the volatility from all the negotiations was not adding any value for our customers or for us. And so we took the initiative to really push that through into peace price. To be fair, most of the CD customers were already bailing that way. They're much...
No it's across all customers that was more of a direction that we had to to get that resolved because the.
The the uncertainty or the volatility from although negotiations was not adding any value for our customers or for us.
And so we took the initiative to really push that through and that these price to be fair. Most of the CD customers were already lean that way theyre much.
Speaker 4: more upfront with making sure the pricing is kind of set. And then peace price than the LV customers are. And then by region, America's in Europe are very similar in how it's approached. In China, we've seen less inflationary issues. So it's been more of the ongoing negotiations with all pricing, which is how it typically works in China for any event. And that all goes into peace price.
More upfront with making sure the pricing is kind of set and then Pes price then.
Customers are and then by region Americas, and Europe are very similar and talents approach in China, we've seen less.
<unk> issues. So it's been more of the ongoing negotiations with.
All pricing, which is how it typically works in China during the event and that all goes into piece price.
Speaker 6: That's helpful. And I just the second question, you know, obviously a lot of...
Great that's helpful.
And then just the second question, obviously a lot of.
Speaker 6: news and noise and headlines, particularly in North America about this EV push out. And I know a lot of your customers have probably been distracted with some other things as quarter and now they need to ramp up. But I am curious on some early level discussions you're having with them about 24 or maybe even 25 plans are we seeing?
News and noise and headlines, particularly in North America about about this EV push out and I know, there's a lot of your customers would probably been distracted with some some other things this quarter and.
Now they need to sort of ramp up but I am curious on some early level of discussions you are having with them about.
24, or maybe even 25 plans are we seeing any indication of upsized orders for GTI or are there other products.
Speaker 6: Any indication of, you know, upsized orders for GDI or other products, if the mix of the vehicles they plan to produce is changing.
If the mix of the vehicles that they plan to produce is changing.
Yes, I mean again, it's I'm not going to overreact, and say hey, things are going to take off for us, but I think we continue to see strong demand.
Speaker 3: I'm not going to overreact and say, hey, things are going to take off for us, but I think we continue to see strong demand. You know, for our products, I think Judy, I has been growing in North America.
For our products. So I think <unk> has been growing in North America.
Speaker 3: over the years, and I think we're continuing to see customers ask for extensions of programs that were previously planning on.
Over the years and I think we're continuing to see customers ask for.
Extensions.
Programs that were previously planning on.
Speaker 3: I'm just curious to find out I'm kind of dying out. I think the one example that we gave, as far as a new business win, was the GDI program we won in China.
Previous you're planning on kind of dining out.
I think the one example that we gave.
As far as the new business win was the Judy I program, we won in China.
Speaker 3: for plug-in hybrids. Those continue to code activity and request from customers continue to mean relatively strong. And that's why we think our light vehicle business you know has has a lot of staying power.
FERC plug in hybrids and those continue to quote activity and requests from customers continuing to mean relatively strong.
And that's why we think our light vehicle business.
Has a lot of staying power.
Speaker 7: And as I mentioned too, a lot of our North American light vehicle business tends to be on SUVs and trucks and vans. And those also have kind of longer staying power as well. And so we continue to see solid demand for those products and we think that's going to continue through the decades. CB in China has definitely been a...
And as I mentioned to us are a lot of our north American.
Light vehicle business tends to be on Suvs and trucks and vans.
And those also have kind of a longer staying power.
As well.
And so we just we continue to see solid demand for.
For those products and we think thats going to continue through the decade CV in China has definitely been a.
Speaker 4: a tailwind for this year. CV's been down in China, but the GDI in China has definitely been positive and has been higher than we expected from budget and compared to prior year.
Tailwind for this year.
<unk> been down in China.
<unk> in China has definitely been a positive and has been higher than we expected from budget and compared to prior year.
Speaker 3: Thank you, as we shared in the past, through is our light vehicle, code activity remains really robust. You know, we haven't seen a decline in code activity or new business wins over the last few years. And so this is consistent with that. I just think the markets finally catching up to maybe some of the things that we've already been seeing.
Okay.
Shared in the past who is our our light vehicle quote activity remains really robust.
We haven't seen a decline in quote activity for new business wins over the last few years and so this is consistent with that.
I just think the market's finally catching up to maybe some of the things that we've already been seeing.
Perfect. Thanks, so much.
Speaker 1: There are no further questions at this time. I would now like to turn the call over to Brady Erickson for close
There are no further questions at this time I would now like to turn the call over to Brady Erickson for closing remarks.
Speaker 3: Great, thank you very much and thanks for joining the call everybody. I think, you know, we're excited about the long-term future of this business. The core activity remains strong. We've got some great technology that our customers continue to pull on. And again, we think a liquefied and a gaseous fuel is going to be key for all of us to achieve carbon neutrality in the timeframe that each of us have defined. And so we're really happy with the strength of our balance sheet. The flexibility is going to give us.
Great. Thank you, Mike and thanks for joining the call everybody I think.
We're excited about the long term future of this business.
The quote activity remains strong we've got some great technology that our customers continue to pull on and again, we think our liquefied and a gaseous fuel is going to be key for all of us to achieve carbon neutrality in the timeframe that each of us have defined and so.
We're really happy with the strength of our balance sheet, the flexibility is going to give us.
Speaker 3: and our ability to continue to return money to our shareholders to provide them great returns as well. So looking forward to the future of Finiya. Thank you.
And our ability to continue to return money to our shareholders.
To provide them great great returns as well so looking forward to the future Affinia.
Thank you.
Speaker 1: I'd like to thank today's speakers for today's presentation and thank you all for joining us. This now can...
I'd like to think today's speakers for today's presentation and thank you all for joining US just now concludes today's call you may now disconnect.
Speaker 8: Please wait, the conference will begin shortly.
Please wait the conference will begin shortly.
[music].
Yes.
[music].
Yes.
Yeah.
[music].
Yes.
Yes.
[music].