Q4 2023 PHINIA Inc Earnings Call

Brianna: Good morning. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the FINIA Q4 2023 earnings conference call. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise.

Good morning, My name is Brianna and I will be your conference operator today.

This time I'd like to welcome everyone to the Affinia Q4, 'twenty twenty-three earnings conference call.

Please note that today's call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Brianna: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, simply press star 1 again.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question simply press Star one again.

Brianna: I will now turn the call over to Michael Heifler, FinEA Investor Relations. You may begin your conference. Thank you, Brianna. And good morning, everyone.

I will now turn the call over to Michael Hi, Flare Senior Investor Relations you May begin your conference.

Thank you Briana 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 include.

Michael Heifler: We appreciate you joining us. Our conference call materials were issued this morning and are available on FINIA's Investor Relations website, including a slide deck that we will be referencing in our remarks. We are also broadcasting this call via webcast. Joining us today are Brady Erickson, CEO; and Chris Graf, CFO.

Including a slide deck that we will be referencing in our remarks. We are also broadcasting this call via webcast joining us today are Randy Erickson CEO.

Chris Graves CFO.

Michael Heifler: Today, we will discuss our Q4 and full year 2023 results and forecast for 2024. Please keep in mind when we make year-over-year or second-half 2023 to first-half 2023 comparisons. We are comparing our stand-alone results, including actual or expected corporate costs, to pro forma results with corporate allocations when we were part of Board 1. During this call, we will be making forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainty. And with that, it's my pleasure to turn the call over to Brady. Thanks, Mike. Thank you all for joining us this morning.

Today, we will discuss our Q4 and full year 2023 results and forecast for 2024. Please.

Please keep in mind, when we make year over year or second half 2023 first half 2023 comparisons.

We are comparing our stand alone results, including actual or expected corporate cost to pro forma results with corporate allocations when we report our borgwarner.

During this call we will be making 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.

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

Thanks, Mike. Thank you all for joining this morning.

Brady Erickson: I'd like to thank our more than 13,000 employees who remain focused on delivering quality products to our customers and making our first six months as an independent public company successful. I'd also like to thank our customers who've been highly supportive and have been awarding us new business at a record pace. I'll get into some of those numbers shortly and then hand it over to Chris for more details.

I'd like to thank our more than 13000 employees, who remain focused on delivering quality products to our customers and making our first six months as an independent public company successful.

I'd also like to thank our customers, who have been highly supportive and have been awarding us new business at a record pace.

I'll get into some of those numbers shortly and then hand it over to Chris for more details, but first let me provide an update on our journey so far.

Brady Erickson: First, let me provide an update on our journey so far. As I mentioned in our last call, I continue to spend considerable time with our customers, employees, and investors. The feedback has been overwhelmingly supportive and positive about FINIA's focus on its core business and strategy for the future.

As I've mentioned in our last call I continue to spend considerable time with our customers employees and investors.

The feedback has been overwhelmingly supportive and positive about it he is focused on its core business and strategy for the future.

Brady Erickson: Customers appreciate our commitment to combustion products and that we will be a reliable partner for them for decades to come. They are aligned with our efforts to develop robust, practical solutions for today and the carbon neutral and carbon free solutions of tomorrow. Our employees are excited that profits and resources are being reinvested in our product lines and operations to further strengthen and grow our business. Finally, our investors are supportive of our strategy, commitment to being financially disciplined, and our focus on total shareholder returns. Continued delivery of solid financial performance and executing on our strategies will be key to building shareholder confidence. Along these lines, we are separately announcing today that our Compensation Committee has approved the company's 2024 Incentive Compensation Program, which we believe will best align our leadership team with shareholders' interests. As I've been sharing since our investor day last year, we are managing the business with a laser focus on generating economic value, or EV, and free cash flow. The 2024 Annual Cash Incentive will be based on the company's achievement of two equally weighted performance metrics.

Customers appreciate our commitment to combustion products and that we will be a reliable partner for them for decades to come.

They are aligned with our efforts to develop robust practical solutions for today and the carbon neutral carbon free solutions up tomorrow.

Our employees are excited that the profits and resources are being reinvested in our product lines and operations to further strengthen and grow our business.

Finally, our investors are supportive of our strategy commitment to being financially disciplined and our focus on total shareholder returns.

Continuing to deliver solid financial performance.

And executing on our strategies will be key to building shareholder confidence.

Along these lines, we are separately announcing today that our compensation Committee has approved the company's 2020 for incentive compensation program that we believe will best align our leadership team with shareholders' interest.

As I've been sharing since our Investor day last year, we are managing the business with a laser focus on generating economic value for EV and free cash flow.

The 2024 annual cash incentive will be based on the Companys achievement of two equally weighted performance metrics.

Brady Erickson: EV and free cash flow. This program sends a clear message throughout our organization that investment decisions are made through the lens of earning an adequate return on capital. Our 2024 Long-Term Equity Incentive will be solely based on the company's relative total shareholder returns compared to that of a peer group company. We have filed a separate 8K this morning with more details. Now, let's go ahead and jump to the fourth quarter highlights on slide four.

And free cash flow.

This program sends a clear message throughout our organization that investment decisions are made through the lens of earning an adequate adequate return on capital.

Our 2024 long term equity incentive will be solely based on the company's relative total shareholder returns compared to that of our peer group company.

We have filed a separate 8-K this morning with more details.

Now, let's go ahead and jump to the fourth quarter highlights on slide four.

Brady Erickson: I'm pleased to share that we ended 2023 on a strong note. Chris and I challenged the team to find incremental efficiencies, and with their efforts, along with a lower than expected impact from the strikes in North America and less of a currency headwind than expected, we came in at the top end of our revenue range and above our revised guidance range for an adjusted EBITDA and adjusted EBITDA margin. Chris will provide more specifics later, but providing great products and service for our customers that allows us to continue to win new business across all product lines and in all regions in support of our strategy. A few examples from Q4 on slide five. Finian secured new Conquest business to supply a GDI fuel system to a leading OEM specializing in hybrid and low emission powertrain technology in the light vehicle segment. Finia won a contract extension to supply heavy-duty diesel fuel systems to a leading global OEM, securing revenue in our core commercial vehicle sector, and Phinney achieved an important business win, supplying medium-duty diesel systems to a leading global OEM, retaining and expanding our income and revenue. Now, let's move to slide six.

I'm pleased to share that we ended 2023 on a strong note.

Chris and I challenge the team to find incremental efficiencies and with their efforts along with lower than expected impact from the strikes in North America and less of a currency headwind than expected. We came in at the top end of our revenue range and above our revised guidance range for adjusted EBITDA and adjusted EBITDA.

Margin perspective.

Chris will provide more specifics later.

Providing great products and service for our customers that allowed us allowed us to continue to win new business across all product lines and in all regions in support of our strategies.

Few examples from Q4 on slide five.

<unk> secure new conquest business to supply a GTI fuel system to a leading OEM specializing in hybrid and low emission powertrain technology and the light vehicle segment.

Vinnie I want a contract extension to supply of heavy duty diesel fuel systems to a leading global OEM.

Securing revenue in our core commercial vehicle segment.

Infineon achieved an important business when the supply medium duty diesel systems to a leading global OEM, retaining and expanding our incumbent revenue.

Now, let's move to slide six.

Brady Erickson: We accomplished a lot in 2023, from the successful spin to strong operational performance. One area I want to highlight is our performance in securing our long-term future. In 2023, we had robust quote activity and strong win rates. When we were the incumbent, we won over 90% of the time.

We accomplished a lot in 2023.

From the successful spin the strong operational performance.

One area I want to highlight is our performance on securing our long term future in.

In 2023, we had robust quote activity and strong win rates.

When we were the incumbent we won over 90% of the time.

Brady Erickson: When trying to win conquest business, we won over 60% of the time. In total, approximately 40% of our business wins in 2023 were conquests. Our objective to increase market share to offset market headwinds is working well, and I'm very pleased with our results. With these gains and our significant exposure to commercial vehicle, industrial, and aftermarket businesses, we see continued organic growth through this decade and beyond. Finally, since becoming independent, we have returned $47 million to our shareholders via dividends and share repurchase.

When trying to win conquest business, we won over 60% of the time.

In total approximately 40% of our business wins in 2023 were conquest.

Our objective to increase market share to offset market headwinds is working well and I'm very pleased with our results.

With these gains in our significant exposure to commercial vehicle industrial and aftermarket businesses. We see continued organic growth through this decade and beyond.

Finally, since becoming independent we returned $47 million to our shareholders via dividends and share repurchases.

Brady Erickson: Now looking to 2024, we see the momentum continuing. Regarding the transition from our former parent, we now believe we are several months ahead of our original timeline, and we expect that we will be exiting all Material Transitional Service Agreements, or TSAs, by the end of summer. We're also planning to exit all Contract Manufacturing Agreements, or CMAs, with our former parent by the end of Q2, in a stepped and managed fashion. We will also be launching several key new technologies that will help our customers improve efficiency and reduce the CO2 output of their engines. We've also made progress on our corporate costs and are now confident that we will achieve our original target of $80 million per year or $20 million per quarter, as we are nearly fully staffed and most of the service and support contracts have been finalized.

Now looking to 2024, we see the momentum continuing.

Regarding the transition from our former parent we now believe we are several months ahead of our original timeline and we expect that we will be exiting all material transitional service agreements or <unk> by the end of summer.

We're also planning to exit all contract manufacturing agreements or <unk> with our former parent by the end of Q2 and.

And our steps and managed fashion.

Okay.

We will also be launching several key new technologies that will help our customers improve efficiency and reduce <unk> output of their engines.

We've also made progress on our corporate costs and are now confident that we will achieve our original target of $80 million per year are $20 million per quarter. As we are nearly fully staffed and most of the service and support contracts have been finalized.

Brady Erickson: Our constant drive for efficiency and improvement across all areas of our business—operations, supply chain, engineering, and corporate—and even opportunistically refinancing our debt on more favorable terms is what will allow us to continue to return capital to our shareholders and drive long-term shareholder value. As you can see on slides 7 and 8, our focus remains on growing our CB industrial and aftermarket business while optimizing our light vehicle OE business. We remain aligned and confident in achieving our 2030 revenue target of $5 billion, with greater than 70% of our revenues coming from CB, industrial, and OES independent aftermarket channels. On slide nine, we will execute on our strategies in a very disciplined manner in order to maximize shareholder returns by utilizing our ROIC-based investment analysis. In other words, efficient and profitable growth, not just growth.

Our constant drive for efficiency and improvement across all areas of our business operations supply chain engineering, corporate and EBIT Opportunistically refinancing our debt on more favorable terms is what will allow us to continue to return capital to our shareholders and drive long term shareholder value.

Yeah.

As you can see on slide seven and eight our focus remains on growing our CB industrial and aftermarket business, while optimizing our light vehicle OE business.

We remain aligned and confident in achieving our 2030 revenue target of $5 billion with greater than 70% of our revenues coming from CB industrial and Oes independent aftermarket channels.

On slide nine we will execute on our strategies in a very disciplined manner in order to maximize shareholder returns by utilizing our ROIC based investment analysis in other words efficient and profitable growth not just growth.

Brady Erickson: Capital return to our shareholders will continue to be a key part of our plan to maximize shareholder value. And finally, maintaining our strong balance sheet and liquidity ensures we'll be a consistent and reliable company for all of our stakeholders. This leads us to my last slide on page 10.

Capital return to our shareholders, we will continue to be a key part of our plan to maximize shareholder value.

And finally, maintaining our strong balance sheet and liquidity insurers will be a consistent and reliable company for all of our stakeholders.

This leads us to my last slide on page 10 gig.

Chris Graf: Given our strategies and execution thus far, we remain confident we will be able to deliver an average organic growth rate through the decade in the 2-4% range. We plan to do this in a disciplined way by maintaining strong margins and cash flow, all while maintaining appropriate leverage. We believe our business is resilient, with about a third of our revenue coming from the OAS and independent aftermarket channel, which generally performs well even in poor economic conditions. Our commercial industrial business, making up nearly a quarter of our sales, provides a stable and growing opportunity. And in the light vehicle segment, we see our increasing market share and higher market penetration rates of GDI, especially in hybrids, supporting our position that our light vehicle business has staying power. With that, I'd like to pass it over to Chris to dive deeper into Q4 and full year 2023 results and our 2024 guide. Thanks, Brady. And good morning, everyone.

Given our strategies and execution, thus far we remain confident we will be able to deliver an average organic growth rate through the decade, and the 2% to 4% range.

We plan to do this in a disciplined way by maintaining strong margins and cash flow all while maintaining appropriate leverage.

We believe our business is resilient with about a third of our revenue coming from the Oes and independent aftermarket channel, which generally performed well even in poor economic conditions.

Our commercial industrial business, making up nearly a quarter of our sales provides a stable growing opportunity.

And in the light vehicle segment, we see our increasing market share and higher market.

Higher market penetration rates of <unk>, especially in hybrids supporting our position that our light vehicle business has staying power.

With that I'd like to pass it over to Chris to dive deeper into Q4, and full year 2023 results and our 2020 for Guy.

Thanks, Brad and good morning, everyone. I also want to thank our team for their extraordinary efforts this year and their hard work and closing out 2023 on a positive note.

Chris Graf: I also want to thank our team for their extraordinary efforts this year and their hard work in closing out 2023 on a positive note. As we discuss our results and outlook, please keep in mind there continue to be TSAs and CMAs with our former parents, which we are rapidly phasing out. Also, we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for operational payables and receivables to and from them to close out. In Q4 2023, we generated $858 million in adjusted total sales, up slightly versus a year ago. Our adjusted earnings per share were $0.71.

As we discuss our results and outlook. Please keep in mind, there continue to be TSA from CMA with our former parent, which we are rapidly phasing out.

Also we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for operational payables and receivables to and from them to close out.

In Q4, 2023, we generated $858 million and adjusted total sale up slightly versus a year ago.

Our adjusted earnings per share or <unk> 71.

Chris Graf: We earned $89 million in Adjusted Operating Income and $127 million in Adjusted EBITDA, resulting in an Adjusted Operating Margin of 10.4% and an Adjusted EBITDA Margin of 14.8%, a year-over-year decrease of 80 basis points and 20 basis points, respectively. These results were meaningfully better than what we expected going into the quarter for the following reasons. The impact of the North American strikes only reduced our revenue by $5 million and a quarter, which was less than we had anticipated.

We earned 89 million and adjusted operating income and 127 million of adjusted EBITDA, resulting in an adjusted operating margin of 10, 4% and an adjusted EBITDA margin of 14, 8% a.

The year over year decrease of 80 basis points and 20 basis points, respectively. These results were meaningfully better than what we expected going into the quarter for the following reasons.

Impact from the North American strikes only reduced our revenue by 5 million in the quarter, which was less than we had anticipated.

Chris Graf: We had strong commercial recoveries and cost controls and a somewhat lower headwind from currencies as the dollar softened in the quarter. Let me now discuss our revenue, which you can find on page 12 of the deck we made available on our website. Our sales performance in the quarter was affected by continued softness in our CV business in China. Volume mix was a headwind of $20 million, mostly due to lower CV sales in China, as I just mentioned.

We had strong commercial recoveries and cost control and a somewhat lower headwind from currency as the dollar softened in the quarter.

Let me now bridge, our revenue, which you can find on page 12 of the deck, we made available on our website.

Our sales performance in the quarter was affected by continued softness in our seating business in China.

Volume mix was a headwind of $20 million, mostly due to lower <unk> sales in China as I just mentioned we.

Chris Graf: We saw favorable sales from positive customer pricing and installation pass-through of $12 million, and SX was a $15 million tailwind in the quarter. As we move to slide 13, the team managed their business well with volume mix impact with only 3 million, or approximately a 15% downside conversion. We also had additional supplier savings to help improve our results, offset by $19 million of inflationary costs from suppliers. As a reminder from the prior page on the sales bridge, we recovered $12 million of inflation from customers for recovery of just under 70% in the quarter, all in a good Q4 result. Slides 14 and 15 summarize the full year. Volume and mix show upside conversion with light due to mix.

We saw favorable sales from positive customer pricing and installation pass through of $12 million and FX was a 15 million tailwind in the quarter.

As we move to slide 13, the teams manage their business, well and volume mix impact with only $3 million or approximately 15% downside conversion.

We also had additional supplier savings to help improve our results offset by $19 million of inflationary costs from suppliers.

As a reminder from the prior page on the sales bridge, we recover $12 million of inflation for the.

For customers.

Recovery of just under 70% in the quarter.

All in a good Q4 result.

Slides 14, and 15 summarize the full year volume and mix upside conversion was light due to mix, we recovered over 70% of supplier inflationary costs from our customers and drove additional efficiencies from our supply base from.

Chris Graf: We've recovered over 70% of supplier inflationary costs from our customers and driven additional efficiencies from our supply base. From a core business performance standpoint, our segments reported overall solid margins. Q4 segment adjusted operating margins were healthy at 12.6 percent, exceeding our first month's performance by 90 basis points, as our aftermarket segment rebounded from depressed margins in Q3 on the back of strong cost control, strength in sales in Europe, and price. Looking at our performance at a segment level, Q4 fuel systems margins, while strong at 10.3%, contracted somewhat on a year-over-year basis due to lower CV sales in China On the supplier front, as we have mentioned, we are making strong progress and will see some benefit in 2024 from resourcing and or settlement. Our aftermarket business adjusted operating margin, recovered from a weak Q3, coming in at 16.3%.

From a core business performance standpoint, our segments reported overall solid margin.

Q4 segment adjusted operating margins were healthy at 12, 6% exceeding our first two months' performance by 90 basis points as our aftermarket segment rebounded from depressed margins in Q3 on the back of strong cost control strength in sales in Europe and price.

Looking at our performance on a segment level Q4 fuel systems margins, while strong at 10, 3% contracted somewhat on a year over year basis due to lower CD sales in China and partially.

To supplier inflationary cost recovery.

From our customers.

On the supplier front as we have mentioned, we are making strong progress and we will see some benefit in 2024 from Resourcing <unk> settlement.

Our aftermarket business adjusted operating margin recovered from a weak Q3 coming in at 16, 3%.

Chris Graf: Still down 40 basis points from the same period a year ago as non-commodity inflationary costs. We're not recovered by prior pricing actions, and we experienced a weaker mix. Corporate costs were well-controlled, coming in at $19 million.

Still down 40 basis points from the same period, a year ago as non commodity inflationary costs were not recovered.

By prior pricing actions and we experienced weaker mix.

Corporate costs were well controlled coming in at $19 million, we continue to expect approximately $20 million in quarterly corporate costs going forward.

Chris Graf: We continue to expect approximately $20 million in quarterly corporate costs going forward. Q4 cash from operations was $62 million. During the quarter, we generated adjusted free cash flow of $55 million.

Q4 cash from operations was $62 million during the quarter, we generated adjusted free cash flow of $55 million.

Particularly particularly proud of the team for focusing on inventory efficiency, we reduced overall inventory by $42 million from the end of Q3.

Chris Graf: I'm particularly proud of the team for focusing on inventory efficiency. We reduced overall inventory by $42 million from the end of Q3. We continue to see an opportunity to further improve our working capital going forward as we institutionalize inventory optimization programs, exit the CMA, and complete production realignment. Next, turning to liquidity. We are committed to a strong financial foundation and have ample liquidity to run our business and execute our strategy. We ended the year with $365 million in cash and $425 million of committed revolver availability, giving us total liquidity of more than $790 million and net leverage of less than one times EBITDA.

We continue to see an opportunity to further improve our working capital going forward as we institutionalize inventory optimization programs exit the CMA and complete production realignment.

Next turning to liquidity, we are committed to a strong financial foundation and have ample liquidity to run our business and execute our strategy.

We ended the year with $365 million in cash and $425 million of committed revolver availability, giving us total liquidity of more than $790 million and net leverage of less than one times EBITDA.

Chris Graf: Now let's look at 2024. I'll share our guidance, assumptions, and insights into our expected performance starting on slide 16. From a market perspective, on the OE side, industry-wide CV volumes in 2024 are expected to decline by mid to high single digits in North America and Europe, while other global seeding markets are expected to be flat to up slightly. Global LV volumes are expected to be down low single digits, with engine production declining mid-single digits.

Now, let's look at 2024.

I will share our guidance assumptions and the insights into our expected performance starting on slide 16.

From a market perspective on the OE side Industrywide CV volumes in 2024 are expected to decline.

Mid to high single digits in North America and Europe.

While other global CV markets are expected to be flat to up slightly.

Global LPG volumes are expected to be down low single digits with engine production declining mid single digits.

Chris Graf: Our good performance in 2023 has set the stage for the coming year and beyond. We expect strong earnings and cash generation in 2024 as we continue to drive operational efficiencies, exit agreements with our former parent, and grow our aftermarket sales. Now, let's move to slide 17.

Our good performance in 2023 has set the stage for the coming year and beyond we expect strong earnings and cash generation in 2024, as we continued to drive operational efficiencies exit agreements with our former parent and grow our aftermarket sales.

Now, let's move to slide 17.

Chris Graf: For 2024, we expect adjusted sales of $3.4 billion to $3.55 billion, down 1% to up 3% in a difficult market environment. However, market headwinds are being offset by a resilient and growing aftermarket and market share gains on the OE side. We expect adjusted EBITDA of $470 million to $510 million and adjusted EBITDA margins of 13.8% to 14.4%. For year-over-year comparisons, we would assume corporate costs of $80 million for 2023, rather than the $64 million related to carve-out accounts. This gives us a 2023 starting point of $3.45 billion in revenue, $474 million in EBITDA, and a 13.7% EBITDA margin. In 2024, we expect aftermarket growth, inflationary cost pressure reduction, and resolution of troubled supplier issues to offset lower CV volumes in North America and Europe. CINIA expects to generate $160 million to $200 million in adjusted free cash flow.

For 2024, we expect adjusted sales of $3 4 billion to $3 55 billion down 1% to up 3% and a difficult market environment market headwinds are being offset by our resilient and growing aftermarket and market share gains on the OE side.

We expect adjusted EBITDA of $470 million to $510 million and adjusted EBITDA margins of 13, 8% to 14, 4%.

For year over year comparisons, we would assume corporate cost of $80 million for 2023, rather than the $64 million related to carve out accounting.

This gives us a 2023 starting point at $345 billion in revenue.

407, $474 million in EBITDA, and a 13, 7% EBITDA margin.

In 2024, we expect aftermarket growth inflationary cost pressure reduction and resolution of troubled supplier issues to offset lower CV volumes in North America and Europe.

<unk> expects to generate 160 million to $200 million and adjusted free cash flow.

Brianna: Our adjusted tax rate is expected to be between 28 to 32 percent as we continue to work on reducing this to at or below 20 percent over the next couple of years in clothing. I want to reiterate Brady's message regarding our focus on financial discipline and generating strong shareholder returns. And with that, we'll now move to the Q&A portion of our call. Rihanna, can you queue up our questions, please?

Our adjusted tax rate is expected to be between 28% to 32% as we continue to work on reducing this to at or below 20% over the next couple of years.

In closing.

I want to reiterate <unk> message regarding our focus on financial discipline and generating strong shareholder returns.

And with that we'll now move to the Q&A portion of our call.

Yeah.

Rihanna.

<unk>.

Our questions. Please.

Chris Graf: At this time, I would like to remind everyone, in order to ask a question, please press star 1. Your first question comes from Jake Scholl with BNP Paribas. Your line is open. Hey guys, congratulations on a great quarter. First, I want to dig in a little bit. First, I just want to dig in a little bit on cash flow, so... I think that, you know, I think everyone will agree that's a pretty healthy number. So, can you talk a little bit about your capital allocation priorities for the year? You're already at that sub one times that leverage target.

At this time I would like to remind everyone in order to ask a question. Please press star one.

Your first question comes from Jake <unk> with BNP Paribas. Your line is open.

Yeah.

Hey, guys congratulations on the great quarter.

Perfect. Thanks, Jay again.

Of course first I just wanted to dig in a little bit on the.

Cash flow so.

I think that I think everyone will agree that's a pretty healthy number. So can you talk a little bit about your capital allocation priorities for the year.

You're already at that sub one times net leverage target so.

Chris Graf: So, how should we quantify your buyback expectations, and then can you just help us bracket the separation-related charges that are embedded in that guide? Yes, on the capital allocation side of things, obviously, we're in a net debt position that we like, and we want to continue to maintain that. And that's going to give us, you know, a lot of opportunities to apply our free capital in other locations. As we did in Q4, we continue to accelerate our repurchase program, and we continue to see stock repurchases as a key element to driving shareholder value. We're going to continue to opportunistically purchase shares as we also look at, you know, additional organic and inorganic opportunities. And so we'll look at, you know, where we can optimize ROIC for any of those capital allocations was cash, the second Jake was around.

How should we quantify.

Your buyback expectations and then can you just help us bracket the separation related charges that are embedded in that guide.

Yes on the first on the capital allocation.

Side of things, obviously, we're in a net debt position that we like and we want to continue to maintain that and thats going to give us.

A lot of opportunities too.

Apply our free cash flow in other locations.

As we did in Q4, we continued to accelerate our repurchase program.

Program and we continue to see stock repurchases is a key element to driving shareholder value.

We're going to continue to opportunistic purchase shares as we also look at additional organic and inorganic opportunities.

And so we will look at where we can optimize.

ROIC.

For any of those capital allocations.

The second.

Whereas cash.

And the second Jake was around.

Chris Graf: The second part of that was just around separation related charges in the Free Cash Fund, being on separation charges. They're basically an exit. The only thing that Warner is caring for us more is anything related to it; the majority of the TSAs are done. The only thing remaining is they're helping us bridge over for it, which will go into q2. So really anything that they're caring for us, we're going to replace with our own IT charges, so there's no really other it's just going to be replacement. Yeah, it's basically it's in our numbers. I think a lot of the we actually had quite a few transitions happen in the last week or so where we're creating clones, and so again, that's included in our 20 million corporate costs and in our current guide, and generally, as with the new contracts that we've signed up as we transition away from, you know, maybe their clouds and servers to our servers, we kind of know where those costs are going to be, which is why we Perfect, thank you. And then...

Sorry, the second part of that was just around separation related charges and the free cash flow guidance.

The announced separation charges, they're basically exit the only thing that more Warner I was carrying for us is.

Is it mainly it related and the majority of the TSA are done the only thing remaining are theyre, helping us bridge over for <unk>, which will go into Q2.

So really anything that they're carrying for us.

We're going to replace with our owning it charges said theres no really other.

It's just going to be replacement yeah. It's basically it's in our numbers I think a lot of it we actually had quite a few transitions happening in the last week or so.

Where we're creating clones.

And so again that's included in our in our $20 million of corporate costs in our current guide.

And generally is with the new contracts that we've signed up as we transition away from.

Maybe their clouds and service to our servers, we kind of know where those costs are going to be.

Which is why we're confident in our in our overall cost guidance.

So said another way, it's just replacement costs whenever we're paying them for it and other services. We replaced generally at the same rate of cost.

Yeah.

Perfect. Thank you and then.

Brady Erickson: Previously, when you guys talked about your 2030 targets, you said that for GDI revenue to stay flat from 2026 to 2030, you need about three points of market share gain, and you know we've seen pretty strong conquest wins this year. So can you just provide an update on how you guys are thinking about share gain over the next few years and your second half? Thank you.

Previously when you guys talked about your 2030 targets you've said that.

For <unk> revenue to stay flat from 2026% to 2030, you'd need about three points of market share gain.

We've seen pretty strong conquest wins this year.

So can you just provide an update on how you guys are thinking about share gain over the next few years.

Half of the decade.

Brady Erickson: Yeah, I think in general, we are continuing to win. There's still a lot more quoting that's going to be happening in the next years as I think hybrids and plug-in hybrid volumes continue to remain strong. Getting into specific, you know, market share gains, we're still very confident in being able to hit our 20, 30 numbers. And as we kind of get closer to launching those programs, we'll kind of convey, you know, whether or not that growth rate can increase. But at this point, we're still very confident in our 2030 targets, and I just mentioned, as you know, most of the programs that are awarded now will launch in, say, roughly two years, some a little bit faster, some a little bit later, and they're long-term programs. And so we're feeling very confident in our positioning on the GDI side. Perfect, thank you. Your next question comes from John Murphy with Bank of America. Please go ahead. Good morning, everybody.

Yes, I think in general we are continuing to win.

There's still a lot more quoting that's going to be happening in the next years as I think hybrids and.

And plug in hybrid volumes continued to remain strong.

Getting into specific.

Market share gains, we're still very confident in being able to hit our 2030 numbers.

And as we as we kind of get closer to launching those programs will kind of convey.

Whether that growth rate can increase.

But at this point, we're still very confident in our 2030 targets.

And I just mentioned as you know most of the programs that are awarded now we'll launch and say roughly two years.

Some of them a little bit faster some a little bit later in their long linked programs and so.

We're feeling very confident in our positioning on the GTS side.

Perfect. Thank you.

Yeah.

Your next question comes from John Murphy with Bank of America. Please go ahead.

Hi, Good morning, everybody I just wanted to follow up on that line of questioning.

Brady Erickson: I just wanted to follow up on that line of questioning on the GDI side and your exposure to hybrids. Brady, as you look at this, obviously, there's a shift back or maybe a shift back towards hybrids and plug-in hybrids, and the share gains there might be pretty material, you know, as far as a segment or a powertrain over the next few years as EVs are sputtering and there's a push, obviously, towards lower emissions and higher fuel economy. So, as you look at your forecasts, what have you generally encompassed in your hybrid penetration, you know, sort of in your outlook for your 2030 targets, and are you seeing some early signs of potential upside here? Yeah, I mean, obviously, if hybrids stick around longer, that's obviously a good thing for us. GDI penetration rates on hybrids are generally higher than on non-hybrids.

On the <unk> side and your exposure to hybrids. We've really if you look at this obviously as it is.

Ship back or maybe a shift back towards.

Hybrid and plug in hybrids and <unk>.

Share gains there might be pretty material.

As far as the segment awards powertrain over there over the next few years as Evs or sputtering and there is a push obviously towards lower emissions and higher fuel economy. So if you look at your forecast what are you generally encompassed in your hybrid penetration.

Give us room in your outlook into 2030 targets.

And are you seeing some early signs of potential upside here.

Yes, I mean, obviously, if hybrid stick around longer and Thats, obviously, a good thing for us.

<unk> penetration rates on hybrid is generally higher than on non hybrids and obviously the content per vehicle on <unk> is significantly higher than our <unk> application.

Brady Erickson: And obviously, the content per vehicle on GDI is significantly higher than a PFI application. I think a lot of the wins that we have now are positive and are going to put us in a very good position if hybrids kind of stay where they are and we see continued penetration of hybrids. We're going to continue to keep an eye on where penetration rates are. I think people were really surprised this year by the strength of hybrids, so it's always going to be difficult to predict what we think hybrid penetration rates are going to be in 2028-2029. But I think, in general, I think people are realizing that a hybrid solution is a really good solution for many consumers and many markets in the world right now, which is why I think consumers are buying them because they get a lot of benefits and, I think, a lot of significant CO2 reduction for the environment. And so I do think as people update those forecasts and hybrids have a higher penetration rate, I think we'll benefit from that. Okay. And then there is just one second question.

I think a lot of the wins that we have now I think are positive and I'm going to put us in a very good position if hybrids kind of stay stay where they are and we see continued penetration in hybrids.

We're going to continue to view.

You know keep keep keep an eye on where penetration rates are I think people were really surprised this year on on the strength of hybrids. So it's always going to be difficult to predict on what we think hybrid penetration rates are going to be in 2000 22029.

But I think in general I think people are realizing that.

A hybrid solution is a really good solution for many consumers in many markets in the world right now.

Is why I think consumers are buying them because they get a lot of benefit and I think a significant amount of <unk> two reduction for the environment.

And so I do think as people update those forecast.

And hybrids have a higher penetration rate I think we'll benefit from that.

Okay.

And then just a second question.

Chris Graf: You guys were talking about $80 million in costs and rationalization, you know, savings targets. It seems like you're making good progress on that. How much of that is included in the 24 outlook? Is that what's included in the 24 outlook?

You guys were talking about $80 million of caution.

Rationalization savings targets it seems like Youre, making good progress on that how much of that is included in the 24 outlook is that what's included in 'twenty four outlook and is there any potential upside because it does seem like youre executing a little bit ahead of plan.

Chris Graf: And is there any potential upside? Because it does seem like you're executing a little bit ahead of schedule. Yeah, I mean, we're right online again, the overall corporate costs, and the corporate costs also include all of our stock compensation for all employees as well. And so right now, it's, you know, we've been running 19, I think, the last couple quarters. I think we're right in line with that. And so I think obviously, we'll continue to drive other operational improvements in other areas, as well as some of our supply chain that caused some headwinds this year. And so we think we're in a good position right now. And the team's really coming together. And just to be clear, this isn't our 2024 plan. It's all baked in.

Yes, I mean, we're right online again at the overall corporate costs and the corporate costs also includes all of our.

Stock compensation for all employees as well.

And so right now we've been running 19, I think the last couple of quarters and I think were right in line with that.

And so I think obviously, we will continue to drive other operational.

Improvements in other areas as well as some of our supply chain that caused some headwinds this year.

And so we think we're in a we're in a good position right now and the team is really coming together and just to be clear. It is in our 2024 plans, it's all baked in.

Got it that's helpful. And then just the last one on that target of getting to 20% or so on the tax rate from 20% to 32% year 'twenty for outlook.

Chris Graf: What's the time frame on grinding down to that, and would that mean that your cash taxes are down by a similar amount just to understand the potential cash flow impact going forward? Yeah, one quick question. I think Chris may have misspoken.

Whats the timeframe on grinding down to that.

Would that mean that your cash taxes are down by a similar similar amount just to understand the potential cash flow impact that going forward.

One quick question I think Chris May have misspoke, I think you said, 2027% I think they heard 20%.

Chris Graf: I think you said 20, 27%. I think they heard 20%. And so we're heading towards down towards 27 or below. So then I'll answer 20%. May I please use my handwriting properly? No, I know I Mike and I heard 20 as well.

And so we're heading towards down towards 27 or below so then I'll ask and 20%.

I, probably my handwriting probably.

No.

Mike and I heard 20 as well so weird.

Chris Graf: So we're sorry. Thanks for the questions. I was wishing No, it's so this year, we've already put in place a plan to work it, but it's going to obviously take a bit of time. So, as I said, we're going to get to between 28 and 32% this year. And we just have to continue chunking away at it going down.

Alright, I misread thanks for the questions I was wishing.

No. So this year, we've already put in place a plan to work it but it's going to obviously with these things take a bit of time. So as I said, we're going to get to between 28 and 32%. This year and we just have to continue chunking away at it going down but anything because we have so much business at all.

Chris Graf: But anything, because we have so much business that's overseas, it takes a good period of time to get all of this stuff in place. So it's going to take a couple of years. But that will be mostly cash, that delta. Is that correct? Yeah. Thank you very much. I appreciate it. Go!

Overseas. It takes a good period of time to get all of this stuff in place. So it's going to take a couple of years.

But that will be mostly cash that delta is that correct.

Yes, okay.

Okay. Thank you very much I appreciate it.

Okay.

Chris Graf: Your next question comes from Colin Lingus with Wells Fargo. Please go ahead. Oh, thanks for taking my question. Just to follow up on the hybrid, reminding you of the content for vehicle opportunity. Is it just that there's higher take rates on GDI and hybrids? Or do you actually have more product opportunities? Yeah, I think two things.

Your next question comes from Colin Langan with Wells Fargo. Please go ahead.

Oh, Thanks for taking my question.

Just a follow up on the hybrid can you remind me of the content per vehicle opportunity is it just that there's higher take rates on <unk> and hybrids or do you actually have more product opportunity on a hybrid as well.

Yes, I think two things one is GTI penetration rates on hybrids are a little bit higher than on on traditional combustion engines.

Brady Erickson: One is GDI penetration rates on hybrids are a little bit higher than on traditional combustion engines, primarily because no one's working on a next generation traditional combustion engine. And so all the newer engines tend to be hybrid, and GDI is a key technology they're using. From a content point of view, whether it's a GDI standardized or a GDI hybrid, it's going to be similar. With that said, you know, one of the things that we're winning now is our ECUs or engine control units. And so they're sourcing more systems, and typically, it's a new, I guess, kind of product line for us. We were purchasing those from our former parent and reselling them, but some of the next generation products there are designs.

Primarily because no one is working on a next generation traditional combustion combustion and so all the newer engines tend to be hybrid and <unk> as a key technology they are using.

From a content, whether it's the GTI standardized through <unk> is going to be similar.

With that said one of the things that we're winning now is our <unk> our engine control units.

And so there are sourcing more systems and that typically that's a new I guess kind of product line for US we were purchasing those from our former parent and reselling those but some of the next generation product there are designs.

Brady Erickson: And we'll be sourcing those and supplying those directly to our customers. So there is some content increase that we see on the overall GDI system. And there have been a lot of sort of... push-outs on electric vehicles.

And we will be sourcing those in supplying those directly to our customers. So there is some content increase that we see on overall TDI system.

Yeah.

Got it and there's been a lot of sort of.

Push outs on electric vehicles are your conversations on sort of the next generation engines and hybrids changing at all are you seeing customers look.

Brady Erickson: Are your conversations on sort of next generation engines and hybrids changing at all? Are you seeing custom... now looking to develop new programs, or are they just... programs? I mean, for us, we didn't see a slowdown in code activity in the last few years, and so the code activity is still high, and so I think a lot of it is going to be around, "hey, they want more volume or a much higher volume than they were originally expecting, or they're being extended." But we did see some customers come in that we had not really spoken to about GDI before come in and ask for GDI applications, and then CV is a little different.

To develop new programs or are they just extending the life of programs that are already in place for the most part.

I mean for US we didn't see a slowdown in quote activity in the last few years and so.

The quote activity is still high and so I think a lot of it is going to be around hey, they want more volume a much higher volume than they were originally expecting or they are being extended.

We did see some customers come in that we are not.

Not really spoken to on CDI before come in and ask for <unk> applications.

And then <unk> is a little different I mean, they're they're really looking to extend and make sure that we're going to be there right I think on the on the hybrid side, we've had a number of customers and hybrid applications that were on that are now asking for two times as many as we originally contracted.

Brady Erickson: I mean, they're really looking to extend and make sure that we're going to be there. Right, but I think on the hybrid side, we've had a number of customers and hybrid applications that we're on that are now asking for two times as many as we were originally contracting for. And so I think it's not necessarily new programs. I think it's the volume increase, and or extension.

And so I think it's not necessarily new programs I think it's the volume.

Increases <unk> extensions.

Okay.

Chris Graf: And just lastly, what are your assumptions? A lot of suppliers have been calling out, you know, high labor inflation here. Our blended labor rate increase for this next year, because it's different around the world, is between four and five percent. For the most part, it's leveling back out, but there are a few areas in the world where it is much higher.

Lastly, what are your assumptions a lot of suppliers and I'm, calling out high labor inflation and other cost inflation on the expectation that they could get recoveries. This year are you seeing continued headwinds into this year.

Do you expect to get full recovery from your customer.

Our blended labor rate increase for this next year, because it's different around the world is between four and 5% for the most part it's leveling back out but there are a few areas in the world whether it is much higher.

Chris Graf: For instance, in Mexico, and in those cases, we do expect to get reimbursement because that's the, we got it last year. We will go for reimbursement in any place that it's sort of out of the, what I would call the original norm. But we do see overall inflationary costs, I guess, expanding. We campaigned across state registries. The last couple of years were he yows. There will be specific information post publication. Your next question comes from Winnie Dong with Deutsche Bank. Please go ahead. Hi, can you guys hear me?

For instance, in Mexico and in those cases, we do expect to get reimbursement because that's the way we got to last year. We will go for reimbursement any place that it's sort of out of the what I would call the original norms.

But we do see overall inflationary costs I guess.

Meeting a little bit.

So I think it's not as high it was the last couple of years, but there are still going to be some pockets or specific labor inflation items that.

That will be looking into.

Okay, alright, thanks for thanks for the question.

Your next question comes from Winnie Dong with Deutsche Bank. Please go ahead.

Hi, good morning.

Again, Hello, Oh thank.

Brady Erickson: Hello. Oh, thank you. I was wondering if you could comment on maybe the dynamics of your various markets. It seems like it's, you know, either mostly flat or down, but your revenue is sort of flattish for 2024. I was wondering if you could just maybe go into a bit more detail on the maintenance of revenue performance, a bit more details on the penetration and share gains that you talked about. Yeah, I think I can generally be, You know, the CV markets are going to be relatively globally depressed, especially in North America and Europe. Last year was a pretty robust market, so I think people are expecting this year to kind of be down.

Thank you.

I was wondering if you can.

Comment on maybe the dynamics of your end markets it seems like it.

Even with the flat or down but hum.

Your revenue is sort of flattish between 'twenty one outlook I.

I was wondering if you can just maybe go into more detail John.

We are maintaining prevented the performance a bit more details on the penetration and share gains you talked about earlier.

Yes, I think I think in generally fee.

The CV markets are going to be relatively globally depressed, especially in North America and Europe last year was a pretty robust market I.

I think people are expecting this year to kind of be down.

Brady Erickson: But at the same token, they're preparing for 25 and 26 rebound with new emissions regulations and potential pre buys. And so we're still working with customers on making sure we're installing additional capacity now to be prepared for that pre buy. So it's just part of the cyclicality that we see in the CV sector. But we continue to see, you know, strong demand for our products and market share gains, which is why our business is still relatively flat. As we mentioned on the light vehicle side, the market is down about 5% for engine production because EVs are, despite a lot of the press out there, EV penetration is still increasing. And so with a flat to downlight vehicle market and increasing EV penetration, although slower than people were expecting, we still see engine production being down about 5%.

The same token there preparing for 25 and 26 rebound.

With new emissions regulations and potential pre buys.

And so we're still working with customers on making sure. We're installing additional capacity now to be prepared for that pre buy so it's just part of the cyclicality that we see on the CV sector.

But we continue to see strong demand for our products and market share gains, which is why our OE business is still relatively flat.

As we mentioned on the light vehicle side.

The market is down about 5% or engines production because evs are despite a lot of press out there.

The penetration is still increasing.

And so with a flat to down light vehicle market and increasing EV penetration, although slower than people were expecting we still see engine production being down about 5%.

Brady Erickson: But with our again with our market share gains in our GDI business, we're able to offset some of those headwinds in our OE business, hopefully that'll slow down a little bit and the global market for light vehicles will go back up, and we'll continue to gain market share and put us in a pretty good, pretty good position. I think our aftermarket is the one benefit that we have; with close to a third of our revenues in the aftermarket, it continues to be a strong growth area. You know, regardless of the overall market, as people delay purchases, they're still buying service parts and keeping their vehicles on the road.

But with our again with our market share gains in our <unk> business, we were able to offset some of those headwinds in our OE business.

Hopefully that will slow down a little bit in the global market for light vehicle will go back up in and we will continue to gain market share and put us in a pretty good pretty good position.

I think our aftermarket thats the one benefit that we have with close to a third of our of our revenues in the aftermarket. It continues to be a strong growth area, regardless of the overall market as people delay purchases, they're still buying service parts and keeping their vehicles on the road and that's a good balanced I think for overall businesses.

Brady Erickson: And that's a good balance, I think, for overall businesses. You know, a third of the business is going to continue just a chunk away. And we continue to gain momentum in our aftermarket customers as well, growing low to mid-single digits. Thank you, that's very helpful, and it may be a longer-term question, you know, just like the earlier questions on sort of, you know, adoptions slowing down and also the administration potentially relaxing limits on some tailpipe emissions and potentially adoption of the getting slower now years and requirements going out years.

As you know a third of the business is good at continuing to just a chunk away.

And we continue to gain momentum in our aftermarket customers as well.

Growing low low to mid single digits.

Thank you that's very helpful.

And then maybe a longer term question.

Like the earlier questions on sort.

Adoption is growing down and also really good.

<unk> potentially.

Relaxing remains on on some quite emissions and potentially adoption.

Swollen out requirements.

We're in the out years.

Brady Erickson: I'm just curious, you know, as it relates to your 5 billion target for end-of-decade revenue, like, at what point do you think there's potentially upside to that target and opportunities you might have? From a regulatory perspective, I mean, obviously, we're going to continue to try to drive that higher, provided we can have programs that we think are going to bring significant value. So that's always going to be our number one focus in that five billion.

Curious and you know.

As it relates to your 5 billion target for end of decade.

At what point do you think.

Upside to that target.

Opportunities you might have there from a regulatory perspective.

Yeah.

Yeah, I mean, obviously, we're we're going to continue to try to drive that higher and provided we can have programs that we think are going to bring significant value.

So that's always going to be our number one focus in that $5 billion.

Brady Erickson: It's roughly our assumption is a two to four percent average organic growth, as well as some bolt-on acquisitions that's going to help us continue to increase our CV as a percent of revenue and aftermarket in our portfolio. And those are with relatively modest assumptions and modest acquisitions using our existing free cash flow. Are there going to be opportunities for us that could drive that higher? I think there will be. Obviously, our assumptions are still, you know, with significant EV penetration rates, and the question is going to be, you know, where is it? Where does it start to plateau? There are obviously differing opinions out there. Some are saying, hey, they think that EVs are going to continue to grow, but will they plateau around 30 percent? Is it 35 or 40?

It's roughly our assumption in the 2% to 4% average organic growth.

As well as some bolt on acquisitions, that's going to help us.

To increase our CV as a percent of revenue in aftermarket.

Our portfolio.

And those are with relatively modest assumptions and modest acquisitions, using our existing free cash flow.

Are there going to be opportunities for us.

That could drive that higher I think there will be.

Obviously, our assumptions are still with significant EV penetration rates.

And the question is going to be what where is it where does it start to plateau.

There's obviously different opinions out there some are saying hey, they think EPS is going to continue to grow but globally theyre going to plateau around 30% is it 35 or 40, we'll kind of see and obviously the.

Brady Erickson: We'll kind of see, and obviously, the lower, the better it is for us. And again, we are in a market where competition is declining, not increasing. So there are definitely opportunities for us to continue to gain share. As I mentioned earlier, there are also content opportunities for us as we continue to provide more complete systems, including ECUs and calibration services for those customers. Very helpful Thank you so much. Your next question comes from Dan Levy with Barclays. Please go ahead. Hi, Trevor Young on for Dan Levy today.

The lower the better it is for us.

And again, we are in a market that competition.

Competition is declining.

Increasing so there is definitely opportunities for us to continue to gain share and as I mentioned earlier Theres also content opportunities for us as we continue to provide more complete systems, including <unk> and calibration services for those customers.

Yeah.

Yeah.

Very helpful. Thank you so much.

Your next question comes from Dan Levy with Barclays. Please go ahead.

Yes.

Hi sure.

Trevor young on for Dan Levy today, Thanks for taking the question.

Brady Erickson: Thanks for taking the question. So first, I just wanted to say, you touched a little bit on the ECUs in your remarks here in the Q&A, but I was just curious. You called out the first internally designed and developed ECU being launched this year, and you highlighted electronic systems as a growth area. And I was just curious if you could give a little bit more color on, you know, what all you're doing within that area, you know, the team, did you bring in new hires to do this yourself versus buying from your former parents, things like that, and then also just progress. Yeah, I mean, we actually started bringing over engineers from our former parents probably about close to two years ago. Uh, And so we started doing that as a lot of their engineers were focused on their next generation inverters and high voltage. And so we already had all the software engineers, and all the calibration engineers were already within our four walls. And so that's how they were split.

So first I just wanted to go you touched a little bit on the ease of use.

In your remarks here in the Q&A, but I was just curious you called out the first from timely design and develop new being launched this year and you highlighted electronic systems as a growth area and I was just curious if you could give a little bit more color on what all you're doing within within that area.

The team did you bring in new hires to do this yourself versus buying from your former parent.

Things like that.

And then also just great progress.

Yeah.

Okay.

Yes, I mean, we actually started.

Bringing over.

Engineers from our former parent probably about close to two years ago.

And so we started.

Doing that a lot of their engineers, who are focused on their next generation Inverters and high voltage.

And so we already had all the software engineers and I'll, let calibration engineers were already within our four walls and so that's how they were split the hardware side was on on our former parent side and we had all the software and calibration engineers.

Brady Erickson: The hardware side was on our former parent side, and we had all the software and calibration engineers. And so we started bringing over the hardware folks as they didn't have time to support our ECU needs. And so it started about two years ago. And as I mentioned, we're actually going to be launching our first FinEA Design ECU as part of our system later this year. It's actually in a hydrogen application.

And so we started bringing over the hardware folks as they didn't have time to support our acu needs and so it started about two years ago and as I mentioned, we're actually going to be launching our first <unk>.

<unk> designed TCU as part of our system later on this year, it's actually in a.

Hydrogen applications.

And we won our first.

Brady Erickson: And we won our first FinEA Design and FinEA Source application, which we'll be launching in the next few years as well. And so we're starting that process already. In some cases, we will use our former parent as a supplier.

Many of design and Phineas sourced application that will be launching in the next few years as well and so we're starting that progress already in some cases, we will use our former parent as a supplier, but it'll be based on our designs and our programs in our calibration and software.

Brady Erickson: But it'll be based on our designs and our programs and our calibration and software. And so we'll continue to grow that business. What we also see with some of these recent awards is that as customers have moved more and more of their resources into electrification, they have less resources for their combustion and hybrid applications. That means they want to then source the entire fuel system, including the ECU and calibration services, from one supplier. And we're ready to provide that service for them. Yeah, it's getting better. Yeah,

And so we will continue to grow that business.

What we also see with some of these recent awards is as customers have moved more and more of their resources into electrification they have less resources on their combustion and hybrid hybrid applications.

So that means they wanted then source the entire fuel system, including the Acu and calibration services to one supplier and we're ready to provide that service for them.

Okay.

The metrics include Mexico, Yes.

Brady Erickson: Sorry, on the metrics and progress, I think I gave a number of examples that we started from Affinia Design this year to being awarded Affinia Design and Developed and Sourced. And we'll continue to see that grow, you know, with our customers through the decade. I think if you go back to our old Investor Day deck from back in June, you'll see where we had a $5 billion market opportunity was opening up to us. And that's what we see us going after. And we think there's an opportunity for us to continue to grow our share of ECUs, hopefully closer to in line with our mid-teens, you know, GDI and CV diesel fuel injection penetration. That's very helpful.

Sorry on the <unk>.

<unk> and progress I think I gave a number of examples that we started from Affinia design this year to being awarded a finian designed and developed and sourced.

And we will continue to see that grow with our customers through the decade.

If you go back to our old Investor day deck back in June you will see on there, where we add like $5 billion.

Addressable market opportunity was opening up to us and Thats, what we see us going after and we think there is an opportunity for us to continue to grow our share of Ecu's hopefully closer to in line with our.

Mid teens.

<unk>.

And CB diesel fuel injection penetration rates.

Brady Erickson: And then I guess just on GDI, the share portion of it's been talked about quite a bit. I guess I was just curious, with more interest coming into hybrids of late, have you seen an uptick in competition? I know in the initial deck, you know, at your investor day, you kind of laid out people, suppliers exiting that space a bit and gaining from that. Have you seen any indications of more suppliers either wanting to stay in the space longer or even maybe entering it? I have not, no.

That's very helpful. Thank.

Thank you and then I guess just on the on.

GTI.

The share the share portion of it has been talked about quite a bit I guess I was just curious with more interest coming into hybrids of late have you seen an uptick in competition I know in the initial.

<unk>.

In your Investor Day, you kind of laid out people suppliers exiting.

It's a bit you're gaining from that have you seen any indications of more suppliers either wanting to stay in this space longer or even maybe entering it.

Okay.

I have not no.

Brady Erickson: Again, these are not easy parts. Some of the pressures and the calibration, and we're continuing to develop next generation technology, and one great example is the 500 bar. You know, it's taken a number of years to develop that technology and bring it to production, and a number of our competitors have stopped developing that next generation product. It would be very difficult for them to then re-fire up their R&D resources to develop that product. And then if I'm an OEM, I would be very skeptical of how long they are going to stay committed to that market, because these are suppliers that have already told the OEMs to please resell it to somebody else. And if I'm a customer and that supplier comes back to me, how long are they going to stay in the business before they exit again?

Again these are not easy parts some of the pressures in the calibration and we're continuing to develop next generation technology and one Great example is the 500 bar.

It's taken a number of years to develop that technology and bring it to production and a number of our competitors stop developing that next generation product.

It would be very difficult for them to then re fire up their R&D resources to develop that product.

And then if I'm, an OEM I would be very skeptical.

Of how long are they going to stay committed to that market. Because these are suppliers that are already told her Oems to please resource it to somebody else.

And if I'm, a customer and the supplier comes back to me.

How long are they going to stay in the business before the exit again.

Brady Erickson: And so that's why I think I say it a lot in my statements customers want a reliable supplier for decades to come in this space, and that's one of the things that we provide them, which is why we've been successful. I think some of our competitors that have announced their exits and have stopped quoting. It's going to be very difficult for them to come back in with a competitive product and to be able to gain confidence from the OEM. That's great. Thank you. Your next question comes from Joe Spack with UBS. Please go ahead.

And so that's why I think I say it a lot of my statements customers want a reliable supplier for decades to come in this space and Thats one of the things that we provide them, which is why we've been successful.

Our some of our competitors that have announced their exit and have stopped quoting it's going to be very difficult for them to come back in with a competitive product.

And to be able to gain confidence from the Oems again.

That's great. Thank you.

Your next question comes from Joe Spak with UBS. Please go ahead.

Brady Erickson: Thanks so much, Brady. I actually just wanted to pick up right there on the competition, because I think you've clearly stated that OEMs are not willing to commit resources. Other suppliers have basically backed away, which is leading to your market share gains, but from your perspective... You know, I guess I'm wondering about your capacity to sort of support GDI stronger for longer, because it does seem like maybe industry capacity has sort of come down, or is coming down, and I'm wondering if you could sort of help us understand your utilization or need to sort of invest further for that purpose. Yeah, I mean, kind of. I guess I'll give you the bad that turned into the good.

Thanks, So much actually just wanted to pick up right there on sort of.

The competition, because I think you've you've clearly stated right Oems are not willing to commit resources other other sort of suppliers.

I have not.

Basically backed away.

Which is leading to your to your market share gains, but from your perspective.

You know if I I guess I'm wondering about your capacity to sort of.

Support you know, maybe GTI stronger for longer because it does seem like maybe industry capacity has sort of come down or is coming down and I'm wondering if you could sort of help us understand your utilization or a need to sort of invest further for that product.

Yeah.

Yeah, I mean kind of I guess I'll give you the bad that turned into a good.

Brady Erickson: In the kind of prior Delphi days, I think they kind of overcapacitized, in GDI, and so we actually have some excess capacity on GDI, we had. And we've actually taken some of that out of some plants and moved it into regions where we see stronger demand primarily in North America and in in Asia, where we've seen a significant uptick in our in our winds and the new business. And so I think we're able to use that excess GDI capacity, both to support hybrids, but we've also been been using some of that same capacity and converting it over to commercial applications as well as, you know, for hydrogen, as well as one of the technologies that I mentioned of a kind of a low pressure diesel direct injection system, and so we're actually, you know, launching in that 300 to 500 bar range a direct diesel injection for off-highway applications That's helping them meet their more stringent emissions.

In the prior Delphi data I think they kind of overcapacity.

In <unk> and so we actually have some excess capacity on <unk>.

We had.

And we've actually taken some of that at some plants and moved it into regions, where we see stronger demand primarily in North America and in Asia, where we've seen a significant uptick in our in our wins in the new business.

And so I think we're able to use that excess <unk> capacity both to support hybrids, but we've also been using some of that same capacity and converting it over.

Two commercial applications as well as for hydrogen as well as one of the technologies that I mentioned.

Kind of.

Low pressure diesel direct injection system.

And so we're actually launching in that 300 to 500 by a range of direct diesel injection for off highway applications, that's helping them meet their more stringent emissions and so I think in general we've got even with some of the uptick.

Brady Erickson: And so I think in general we've got even with some of this uptick In demand, I think we've got necessary capacity to support it And we we have probably still enough capacity that we're also reallocating it to you know, hydrogen and off-highway applications We do have to add some small incremental Bits on to this capacity that some of the customers are asking for which is normal but again, we've got to a view that If they want a program and whatever they're giving us if it's a four-year program We'll buy the assets, but it has to return and depreciate over that period of time So, you know We're still being very careful because obviously a short-term trend does not make a long-term trend so yeah waiting carefully but yeah with our with our at least our new business wins and market share gains we don't see a significant uh, I guess capital outlay to support these programs. I think the bulk of our capital is still on the CV and off-highway applications. Yeah, I know this is more difficult to sort of calculate, I guess, but based on your comments on competition, would you say industry capacity has come down industry wide? I think it's starting to come down. I mean, again, I think what we peak at what 95 96 million light vehicles at one point that were predominantly combustion.

In demand I think we've got necessary capacity to support it.

And we have probably still enough capacity that we're also reallocating it to hydrogen and off highway applications. We do have to add some small incremental bits onto this capacity that some of their customers are asking for which is normal but again, we've come to a a deal that.

If they want a program and whenever theyre, giving us if it's a four year program will buy the asset, but it has had to return and depreciate over that period of time.

We're still being very careful because obviously.

Short term trend does not make a long term trends.

Well.

Waiting carefully.

With our at least our new business wins and market share gains, we don't see a significant.

I guess the capital outlay to support these programs I think the bulk of our capital is still on the CV and off highway applications.

Yeah I know this is more difficult.

Sort of.

Calculated I guess, but based on your.

Comments on competition would you say industry capacity has come down industry wide.

I think it's starting to come down I mean, again, I think what we peak at what $95 $96 million.

Light vehicles at one point there were predominantly combustion.

Brady Erickson: And so there's still some capacity, but incapacity has been coming out of the market as, as some of exited and or, you know, stop quoting next generation programs. And so, yeah, I think capacity has come down, in the marketplace, and I think that's good as well. And then just back on slide 17 with the outlook, pretty flat sales year-over-year, pretty flat EBITDA at the midpoint, although I think you said maybe $4.90 is not the right base you would sort of suggest for comparison but I guess just sort of you know wondering with within that sort of EBITDA 23 to 24 for bridge are there any sort of you know larger puts and takes we should be we should be considering, No, I think again, we think the base comparison is a 474, you know, once we have a full run rate, because you can see in our corporate costs in the first half of the year was more allocation, they were pretty light.

And so there is still some capacity, but I think capacity has been coming out of the market is somewhat exited <unk> stock.

Stop quoting next generation programs.

And so yes, I think capacity has come down.

In the marketplace and I think that's good as well.

Okay.

And then just.

Back on slide 17 with the outlook.

Yeah.

Pretty flat sales year over year pretty flat EBITDA.

At the midpoint and although I think you said, maybe $4 90 is not the right.

Base, you would sort of just just for comparison, but.

I guess, just sort of wondering with within that sort of EBITDA, 23% to 24 four bridge are there any sort of you know.

Larger puts and takes we should be we should be considering.

Yeah.

No I think again, we think the base comparison as the $4 74, once we have a full run rate because you can see in our corporate costs in the first half of the year was more allocation they were pretty light Brian.

Brady Erickson: And so if we normalize that to the 80 number, you know, we're seeing about 16 million improvement in EBITDA, and to a midpoint, you know, of only 25 million more in revenue. So obviously, that's really strong conversion. And that's driven by, you know, one conversion on that additional revenue, as well as improving operational performance in dealing with some supplier challenges, and that's probably driving $10 million of the improvement and then another $5 to $6 on the conversion of incremental revenue.

So if we normalize that to the 80 number we're seeing about $16 million improvement in EBITDA and to a midpoint of only $25 million more in revenue.

So obviously, that's really strong conversion and thats driven by one conversion on that additional revenue as well as improving operational performance and dealing with some supplier challenges.

And that's probably driving $10 million of improvement and then another five years to fix on the conversion on incremental revenue.

Okay. Thank.

Chris Graf: Thank you very much. There are no further questions at this time. Well, great. Thanks, everybody, for joining our call. We're really proud of what the team has delivered this year or in 2023 and really looking forward to another good year in 24 and beyond. So thank you very much for your interest and investment. Have a good day. This concludes today's conference. You may now disconnect.

Thank you very much.

Yes.

There are no further questions at this time.

Yeah.

Okay, great. Thanks, Thanks, everybody for joining our call. We're really proud of what the team has delivered this year.

Between 2023, and really looking forward to another another good year in 'twenty four and beyond so thank you very much for your interest and investment.

Hey.

This concludes today's conference you may now disconnect.

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