PHINIA Inc. (PHIN) Earnings Call Transcript & Summary

Okay. Well, good afternoon, and welcome, everyone, to PHINIA's first Investor Day. I'm Mike Heifler. I lead Investor Relations. It's great to see so many familiar faces in the audience, and a special thanks to those who are listening in on the webcast. For those who don't know me, I'm passionate about bringing the investor perspective to the leadership team and prioritizing transparency, and I look forward to engaging with you as we share more about the PHINIA story. Today's presenters are Brady Ericson, CEO; Todd Anderson, CTO; Neil Fryer, Head of Aftermarket; and Chris Gropp, our CFO. We will have a 15-minute break after Neil's presentation and we'll take questions from the audience after Chris discusses our financials. Now I'd like to briefly introduce the team. Brady has over 30 years of industry experience and has been with BorgWarner since 2000. At BorgWarner, he has held engineering, sales and operations and strategy roles. He has led 3 different business units, was the first Chief Strategy Officer of the company and has lived and worked in 5 different countries. Todd has over 25 years of industry experience and joined the company in 2019. He has a strong engineering and operational background, having spent the bulk of his career serving commercial vehicle and industrial markets. Neil joined the company in 2017 and has spent most of his 40-year career in OE service and independent aftermarket, working for multiple Tier 1 suppliers and 1 OEM in 4 different countries. And finally, Chris has over 30 years of industry experience and joined the company in 2001. She has held a variety of financial roles across 4 different business units. She has also lived and worked in 5 different countries. Before we get started, I need to inform you that during this presentation, we make forward-looking statements which involve risks and uncertainties as detailed in our Form 10. Our actual results may differ significantly from the matters discussed today. During the presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of underlying business performance. We provide additional disclosures regarding our forward-looking statements and non-GAAP reconciliations in the investor materials posted to the BorgWarner IR website this morning. And with that, I'd like to hand it over to Brady, but first, a quick video. [Presentation]

All right. Thanks, Mike. Really enjoy that video, especially after lunch kind of gets the blood pumping, everything kind of flowing and really want to welcome everybody here to our first Investor Day. I'm truly excited and humbled to be here, introduce you to our new company, PHINIA. We have some exciting things to share with you today and look forward to your questions and your feedback. Before I get started, I want to give you a brief background and insight into who I am, what I believe and my view on PHINIA. First, I'm an engineer. I'm rational, I'm pragmatic and I'm data-driven. I like finding solutions to difficult problems and driving efficiency in everything that we do. Maintaining my composure, integrity and values even in difficult times is who I am. I'm a positive and optimistic person with a can do and we will find a way mentality. I have a lot of confidence in our team and our Board. We have a good balance of backgrounds, perspectives and experience that we can leverage. I've worked with a few of our executives for over a decade. In fact, Chris and I first worked together in 2010 while we're in Spain, where we successfully integrated one of our acquisitions. We are facing many challenges and skeptics, but our leadership team wants to be here. We believe in the long-term potential of the business. We believe that we will both -- we will need both battery electric and carbon-neutral fuels to achieve carbon neutrality in an efficient, effective and practical manner. With our team working together, we will find a way to consistently grow our business in an efficient and financially disciplined way, focused on long-term shareholder value creation. Now I want to share with you what will drive us and our decisions. We're on a journey towards carbon neutrality and feel PHINIA will play a key role in achieving it. We provide systems and components to our customers to help them improve efficiency today while powering their transition from traditional fuels to carbon-neutral fuels to the carbon-free fuels of tomorrow. We will do this by driving our product leadership strategy, defined as innovation that provides value for our customers. We'll be focused on fuel systems -- focused on being a fuel system leader for alternative and carbon-free fuels. Todd is going to cover a little bit of this more in his section. We believe that our strategies and our drive for results mentality will deliver stable and consistent growth, leveraging the diversity of our customers, markets and regions that we serve. We will focus on applications that need the energy density, the convenience and the utility of a liquefied or a gaseous fuel. These include most commercial vehicles and other industrial applications. We will also focus on regions where they're driving towards carbon neutrality with carbon-neutral and carbon-free fuels such as ethanol and hydrogen. We will invest in our aftermarket segment, which includes our remanufacturing capacities and capabilities. Neil is going to cover more of our aftermarket strategy in his section as well. To be clear, growth without financial return is not acceptable. We will only execute on new opportunities that add value to our business. We will continue to enhance our strong financial foundation by remaining financially disciplined, pursuing opportunities that meet or exceed our ROIC hurdles. We're committed to maintaining our strong margins, cash flow generation and prudent leverage levels. We'll be focused on year-over-year improvements regardless of the market conditions. With our strong and consistent cash flows, we expect to return value to our shareholders via a competitive dividend and opportunistic share repurchases. Chris is going to add more color on this in her section as well. With this framework, we believe we will drive superior total shareholder returns. Now at the core of our culture is our set of values that's going to drive our business. We are dedicated to product leadership and strive to minimize our environmental impact, aiming to achieve net zero. We're committed to fostering an atmosphere of humility and inclusivity, aiming to create a diverse and collaborative environment. Our culture of integrity and accountability ensures that we're going to do the right thing and take responsibility for our actions. We are united in our mission to create a better future for our employees, our suppliers, our customers, our communities and the planet. Now this chart may surprise a few folks. 56% of our revenues come from commercial vehicle, original equipment service and the independent aftermarket channels. This is really different for PHINIA. With that said, we see opportunities in the light vehicle market with secular growth in gasoline direct injection, or GDi, where our GDi technology is key for full hybrid and plug-in hybrid applications. But our primary focus will be on growing our commercial vehicle and our independent aftermarket businesses. These will be less affected by electrification and benefit from the transition to carbon-neutral and carbon-free fuels. We believe a carbon-neutral fuel, liquefied or gaseous, will provide the best overall performance and utility for many applications. Those requiring high power, high loads, traveling long distances, operating off-highway and with high uptime requirements. Some applications are going to require the energy density, the portability and the practicality of these fuels. We also see some regions focusing on carbon-neutral fuels as their pathway to carbon neutrality rather than BEV. Reasons include availability of renewable power, infrastructure challenges, national security and independents. We have a strong and long-term relationship with many of our top OEMs in the world. They're relying on us more and more to provide complete systems as well as software and calibration services, increasing our share of wallet and further integrating us into their business. Finally, we are globally positioned to support our customers wherever they need us. Now looking forward a bit, we see continued growth in our business even with the phaseout of about $100 million of contract manufacturing revenues that were in our 2023 and prior numbers. We expect to maintain robust EBITDA margins and strong cash flow generation. We expect that this strong cash flow generation will enable us to invest in our business in a financially disciplined manner, provide a competitive dividend and opportunistically repurchase shares, all while maintaining prudent leverage levels and liquidity. Before diving into more specifics about our market, there are some common themes. First, customers are looking for reliable partners. The last few years have challenged the supply chain, and our customers are looking for strong, viable suppliers that have a global footprint, are committed to the market and have the financial foundation they require. We are that supplier partner. They also need technology that brings value for their customers. As they have limited resources, they also are looking for synergy. By having one supplier provide a broader range of products and complete turnkey solutions, they also need a product leader. We are that supplier partner. Finally, we're also driving towards carbon neutrality from the products themselves to our operations. They need a supply that supports their transition from traditional fuels to carbon-neutral to carbon-free fuels. They need a supplier partner that's going to remanufacture its products. They need a supplier partner committed to its own path of carbon neutrality. We are that supplier partner. In summary, we're well positioned to meet our customers' most pressing needs. We're in a strong position to be their partner on their journey to carbon neutrality. To support our view of continued growth, I want to share with you our total addressable market and how it evolves over time. With our strategy, we actually see a growing total addressable market through the decade. Now let me walk you through the different parts of this as well. First, our aftermarket. It just sticks out on the page. It's large and growing. It's being driven by a growing vehicle park and an increasing average age of vehicles. Next is the commercial vehicle market. You see some growth in the midterm and then starting to decline as we see electrification in that market more and more. Most of that electrification is coming on the lighter side, lower mileage and where they return to base kind of every single night. We're focused predominantly on the larger, higher-power, long-haul applications and off-highway applications. We also see greater opportunity in alternative fuels as shown on this chart. Light vehicles are next and the ones that are most affected by electrification trends. However, we see growth opportunities in the midterm from GDi penetration rates with a declining competition. I'll hit on this in more detail shortly. Finally, we have tangible opportunities that are driving the growth in our addressable market. First is with electronic control units, or ECUs, and powertrain domain control units, or PDCUs. We will have a royalty-free license for the BorgWarner IP needed for these low-voltage controllers. We started developing our own next-generation of controllers just over a year ago and see this not only as a great growth opportunity, but critical to our ability to provide complete system solutions for our customers. Our first PHINIA-designed PDCU actually launches next year. Second is the expansion into new end markets with our core technology. We were focused primarily on larger on-highway applications, but tighter regulations and a drive towards carbon neutrality for the off-highway applications such as ag, construction, marine, industrial and aviation are creating new opportunities for us. We're already building customer relationships and developing products for these applications. Now let's first talk about the CV market. It's a resilient market, rebounding quickly from the shocks from the financial crisis and from COVID. With this order backlog, we also have good insight into the longer-term production demands. On the right, you can see growth in combustion engine CV products in red from 2.8 million growing to 3.3 million units over the decade despite an assumed increase in battery electric penetration rates. However, we see continued opportunities to increase share in the latter part of the decade to offset some of these market share declines as well as increasing our share of wallet. Now to light vehicle. As we look at the light vehicle market, we see an interesting dynamic in the midterm. Despite the declines in the black and red bars, we actually see an increase in volumes from GDi from '22 to '26. This is driven by the need for fuel efficiency and lowering emissions. More engines are transitioning to GDi due to the performance and the fuel economy benefits, especially in hybrid and plug-in hybrid applications, which are going to be here for a long time. In addition, we see a competitive landscape where the smaller players are exiting and the larger players are prioritizing other areas. This has allowed us an opportunity to gain some share. Now that leads us to the longer term, where we fully expect that the increasing penetration rates of battery electrics are going to impact our GDi volumes as well. But as we mentioned, we feel that we're in a position to opportunistically increase share as we have leading products, a strong financial foundation and a commitment to the space and we see with this reduced competition. To illustrate, with only a 3% market share gain between '26 and 2030, we can maintain our GDi revenues flat over that time period. We're also preparing for the longer term. Our assets, both human capital and capital equipment, can be transitioned to alternative fuels in other markets. Our GDi technology is the foundation of our alternative fuel and our hydrogen product portfolio. In fact, we've already converted one of our light vehicle production lines to produce hydrogen injectors for an off-highway application that launches early next year. The industrial and off-highway markets are also driving to improve efficiency and lower emissions by moving away from their current indirect injection fuel systems. We are developing lower-pressure, high-value direct injectors specifically for that market and is based on our GDi technology so we can leverage our existing capital as well, and actually we see our first launch of that launching next year as well. Now to our aftermarket business. It's also going to provide a lot of stability for our overall business for the long term. It's really a stable business and has a long track record of consistent year-over-year growth even through the most challenging of times. We see the market continuing to grow as new car prices have risen dramatically, making new car affordability a concern. So we see more and more people looking to keep their cars running longer and longer. Now the aftermarket also has some nice growth, and I'd like to give you some color around what's driving some of that growth. Here, we've illustrated the typical life cycle of the vehicle as well as providing opportunities for providing new markets -- or new products to the aftermarket. From the original state of production, we see aftermarket sweet spot is between 5 years and 25 years, with an average part replacement about every 4 to 5 years, depending on the product category. With the average vehicle part growing and our growing population and average ages increasing and our growing propulsion-agnostic portfolio, we see a consistently growing aftermarket business. So what does that all translate to us in our targets. We will continue to grow our business of roughly 50%, 56% CV and OES and aftermarket business to one that's over 70% CV, OES and aftermarket. We will do this by focusing on these markets while also maintaining and optimizing our light vehicle business. As markets evolve, we will transition our human capital and capital equipment from light vehicle and traditional fuels to CV, aftermarket and carbon-neutral fuels. Now that we've discussed how we're going to grow and evolve our business, I'd like to discuss how we will operate. First and foremost, we will continually be very financially disciplined, utilizing our ROIC models to evaluate every new opportunity and ensuring that we reuse our resources wherever possible. We will focus on areas where you have -- where we have a right to win and can deliver the returns that we expect. We will also continue to drive for further improvements in our operations, continually reviewing our structure and our footprint. This will ensure we will continue to have a strong margins and strong cash flow generation. As an example, over the last 4 to 5 years, we've actually closed 5 manufacturing facilities and 4 technical centers while reducing our headcount by over 3,500 heads. This was a tremendous amount of restructuring, but it was also needed as a new step to rightsize the business and put us on a solid foundation. These actions resulted in over a 500 basis point margin improvement in the business. In the process, we also changed the culture from a very centralized and rigid to a decentralized and empowered culture. Chris and I have been through this several times, integrating several acquisitions, developing performance-driven cultures and improving operations. We will continue to review our operations as needed and make the necessary changes. Now with all that said, this put us in a relatively enviable position. All of these efforts have resulted in a footprint with nearly all of our Asia Pacific and our Americas operations head count in best cost countries. Europe also has over 50% of its operations and headcount in best cost countries. When I wrap it all together, in total, over 75% of our headcount and operations are in best cost countries. We have a competitive footprint. We're also globally positioned to support our customers in all regions of the world. Now to bring my section to a close over the next couple of slides. We feel we have a clear and viable path to deliver consistent growth. Our fuel systems segment will focus on the long-term growth in the CV and other industrial markets. We'll opportunistically gain share in a financially disciplined manner. We're not just going to gain share to gain share, have volume for volume. We're going to do it to drive shareholder value. We're going to drive to maintain our leadership position in alternative fuels. And we're going to expand our total addressable market by entering adjacent synergistic new end markets with our existing products. And as I mentioned, we're going to add some new products such as ECUs and PDCUs to our portfolio to make sure we can provide that complete system solution for our customers. The aftermarket also will consistently grow above market, but we're going to do that by increasing our market share and our share of wallet by leveraging our superior performance, our quality and our reliability, and Neil will hit on a couple of those points in this section as well. We're going to continue to add products that add value as well as bring all products to all regions of the aftermarket. So you see a lot of areas where the aftermarket has room to grow. And finally, in summary, for kind of our last slide and our vision, we feel that product leadership will continue to be a key to our success, providing value-based innovations, system solutions and leading in alternative fuels. As I've shared, we have some attractive market and product opportunities where we can leverage our core competencies, global scale and a diversity in our markets in order to deliver the stable growth. We're committed to maintaining our strong foundation by remaining financially disciplined. Bringing it all together, our disciplined approach to growth, a competitive dividend policy, opportunistic share repurchases and the maintenance of a strong balance sheet will help us deliver strong and consistent total shareholder returns. Thank you. Now I'd like to hand it off to Todd to walk you through some of our great technologies that we're providing to our customers.

Thanks, Brady. I'm really excited to be here and be able to talk a little bit about PHINIA. Having grown up working on carburetors in farm equipment, like my F-150 hay truck, I'm fascinated by the technical capabilities of today's modern fuel injection systems. And in the process, it's a pleasure to work with highly skilled professionals in our products and technologies. Together, we drive to have the right products with the right quality, delivering the right performance made by the thousands every day. In fact, having come from an operational perspective the past few years, I'm very focused on making sure our engineering and technology efforts bring value to both our customers and the business. This is me. So that's what I'll be sharing over the next minutes, starting with a short video that depicts some of our operational and technical capabilities. [Presentation]

So it's a brief view. But as seen in the video, we operate very capable, high-precision and technically advanced manufacturing centers. And we do this worldwide. So with this as background, you might expect our facilities to be certified by global standard organizations. They are, with certifications to the exacting standards of both IATF and ISO as well as other organizations. You may expect us to deliver high-quality parts and production. We do, with most of our plants achieving single-digit parts per million quality levels as expected by global OEMs. You may expect us to have talented, skilled expert professional teams across the globe. And we do, with around 1,500 skilled scientists, engineers and technicians focused on our business. What you may not expect is the precision with which we manufacture these fuel injection components. Many of our products are specified with tolerances within 1 micron or 1/1,000,000 of a meter. So to put that in perspective, if you think about 1 of your human hair, which is about 75 microns in diameter, so -- or a grain of dust, that's 4 microns. We are manufacturing parts with plus or minus 1/2 micron tolerance and clearance in our parts to deliver the performance that's expected from our products. And we do that by the tens of thousands every day. Having seen some of our manufacturing and technical capabilities, let's talk about PHINIA's products and technology. We have highly capable products to provide to our customers. Beyond that, we offer higher value to our customers by integrating and optimizing those products as systems with software and calibration capabilities supported by 600 engineers. We interact with customers on their level based on their needs and can provide optimized turnkey solutions for the whole fuel system. This partnership is evident in a recent business award received from a large CV customer for what's anticipated to be their last heavy-duty diesel engine development. They spoke about the importance of having a partner for life, expressing the need for a strong fuel system supplier through 2040 and beyond. We are that supplier. Our industry and customers are currently going through a dynamic transition period. Our technology, our skilled team and competencies deliver innovative solutions to not only keep pace with this rapid change that help lead the way for our customers on their respective future road maps. And importantly, our competencies and capabilities can expand to diverse end markets that have similar needs for precision engineering and production technologies. We offer leading integrated components and fuel systems that meet the exacting needs of our customers. In each of these 4 categories pictured, we're globally in the top 3 market position. On the left, our GDi system of injectors, fuel pumps and rails are highly engineered and robustly performing products used globally by many OEMs. This technology is also part of the foundation for our hydrogen products. Our diesel injection system used globally by many customers in all regions of the world is a foundation of our technical skill and capability. I shared some about the critical nature of our production processes. Let me spend just a couple of minutes sharing an example of the technology that goes into our latest generation commercial vehicle diesel fuel injector. It's possible that getting here today, you might have been on the road and maybe shared the road with a large Class 8 tractor, which was running one of our fuel systems. This fuel system will be operating around 2,500 bar of pressure or 36,000 psi, over 2x the pressure that's found in the deepest part of the ocean. Our injector has a valve pin, which is about 1 millimeter in diameter, maybe the size of a piece of spaghetti, made out of hardened steel alloy that cycles hundreds of times a second to deliver atomized fuel to the combustion chamber to deliver the performance, the power and the requirements while meeting strict emission controls. It results in higher fuel economy and lower emissions as we move with this technology. This is one example, but each of our products offer excellent features and benefits to our customers, delivering the value they expect, like fuel delivery modules and canisters, which provides strong performance for combustion engine vehicles and continue to be needed in hybrid and plug-in hybrid as those engines gain momentum. Underlying the mechanical products are critical skill sets and system capability. With ECUs, PDCUs, software and calibration, these capabilities cross product lines and benefit our customers by providing a fully featured solution set for their needs. We get great products to our customers and we help them optimize how they are used. Complementing the extensive fuel system product offering are starters and alternators. We offer a full range of models with various power levels and key technical features, long life, high-efficiency versions that our customers gravitate toward for the value they bring. These products are extensively used by many commercial vehicle customers and provide additional channel strength and share of wallet for this important market segment. We're well positioned to serve global customers with a strong technical team, and we do so in every region in the world. As part of the alignment and rebalancing that Brady described, we've worked to ensure we have regional capability in engineering and production, supported by a strong global team to ensure aligned global standards. Let me share a short example of the value that brings. We had an EU customer come to us with a product change late in the development cycle with extremely urgent timing. We began the day working on that issue in Europe, handed the analysis off to our team in the Americas, who then delivered the resulting engineering calculations to a team in China who put actions in place to deliver within 24 hours a strong result to our customer. That's the service that PHINIA technology and engineering skills and capability bring. It's an example of how we provide outstanding technical support to global customers. The columns that you see on this slide show a spectrum of offerings that we can provide to our customers. Starting on the left-hand column, it shows high-quality, capable components that we supply. And then as we move to the right, we illustrate how we're able to meet customers at their level, increasing our engagement through providing ECUs and software depending on the resources and capabilities these customers need from us. We've provided full turnkey fuel system solutions for many years. And increasingly, our customers are coming to us to provide the far right-hand level of system supply for their fuel systems, including our strong mechanical products, ECUs, software, calibration services. We see our skills and competencies becoming increasingly valuable to customers as OEMs reallocate their resources elsewhere. Pictured on the bottom of the slide, as we move to providing more of the system, our content per vehicle increases, while at the same time, the number of competitors able to offer those full packages is declining. We have the capability to provide solutions anywhere along this spectrum to our customers. To demonstrate an example of the close partnership we developed with our customers, let's review a case study with a large CV customer. Our initial interaction with this customer began around the year 2000, where we provided high-quality, technically solid components for their fuel system. And as this customer faced the challenges of increasingly stringent emissions regulations, they came to us to supply a complete fuel system including ECU, software and calibration, which contributed to a 2% to 3% fuel economy improvement as well as meeting those emissions regulations. We continue to the future with this customer providing a full system offering. From working level teams across all functions to senior executive discussions, we interact closely in all aspects of our business and technical relationship. We're exploring the future with this customer related to both next generation heavy-duty diesel engines and new technology with alternative fuels. With this partnership in mind, let me share a brief illustration. After the recent World Hydrogen Summit, where we attended and presented a paper on our technical work done with hydrogen fuel injection systems, we drove our hydrogen demonstrator van to this customer's headquarters. And for an entire morning, we emptied out their tech center as technicians, engineers and team members came out to interact with our engineers and see a real life example of hydrogen ICE technology in operation and on the road. One of their senior engineering leaders shared with me, and I'm going to read this specifically, "Todd, compliments on the shown van, a full hydrogen direct inject vehicle. Excellent to have a real driving prototype vehicle, and it really started lots of discussions between the technical specialists of our 2 companies. Besides the impressive technology and smooth drive, what maybe hit me the most was real enthusiastic engineers talking to each other on a deep hydrogen technical level." This technology share is just one example of many that we've had with our hydrogen ICE vans. We've had over 6,000 viewers of this as it has traveled around various cities, been shown to government officials and many customers and industry events over the past months. The feedback we receive is consistent with our message to the industry. Hydrogen ICE technology is real, it's viable, it's happening. And it demonstrates the strong promise of a carbon-neutral fuel. It leverages the existing knowledge, base and capacity of long-established combustion engine technology, and it will play a part in the world's pursuit towards carbon neutrality. I can't talk about technology without mentioning innovation. We have a robust process to drive innovation across our product families led by product line strategy teams. We're focused on driving innovation with the resources that we have, not just in future technologies, we look for innovation in everything we do. We believe innovation is commercialized creativity, and we can find that in products, in processes, in features, in business processes and development techniques everywhere. We continue to invest to advance today's technology across our product portfolio to drive efficiency. And as mentioned, we invest in the innovation of future technologies. Our industry is undergoing tremendous change in every aspect, in technology, not the least. So additionally, we're investing in powering the technology of the future as we support that process toward carbon neutrality. One key example of this is our work with hydrogen fuel system. We have significant investment in today's technology, and shown on the left of this slide is our GDi injector and ECU. We're leveraging that knowledge and equipment to springboard to the future with upcoming hydrogen ICE injector with our start of production, as Brady mentioned, next year. This synergy and leverage is taking place for hydrogen in both the injector and the ECU, demonstrating the strong position we have with our hydrogen development in an industry that's showing increasing interest in this technology. PHINIA is well positioned in hydrogen as a right to win growth category. The left-hand side of this slide shows recent press articles about the growing importance and awareness of this space. In fact, I'll mention that articles are coming out regularly often about the investment that's taking place in hydrogen in every region of the world. We see increased -- that increasing investment worldwide in what Goldman Sachs is calling the Clean Hydrogen Revolution. On the right-hand side of this slide, I'm showing the level of customer engagement and interest in our hydrogen activities. We've seen over 50 opportunities with customers who are seeking road map consultations and technology evaluations. We're looking at all aspects of using this carbon-free fuel to effectively demonstrate a realistic way to move towards carbon neutrality. Those opportunities resulted in 32 initiations for partners with OEMs and other industry partners, for example, engine durability testing and vehicle conversion activities. These, in turn, have realized 23 executions of advanced development and product development programs. These take the form of development engines, single and multi-cylinder demonstrator engines and even vehicles. The hydrogen sector is growing rapidly on a global scale. There are over 30 national hydrogen strategies, pledging an over 400-fold increase in clean hydrogen installed capacity this decade versus 2020. The Hydrogen Council reports more than 1,000 clean hydrogen projects worth $320 billion of investment by the end of 2030. In the recent Vienna International Motor symposium, there was an announcement about investments in hydrogen development and infrastructure, which are taking place with a significant increase in hydrogen fuel systems and fuel stations to support the growth of hydrogen vehicles. This technology is an important solution along the path to carbon neutrality. PHINIA is in the forefront of advancing this technology for engines and vehicles in a real and pragmatic way. My last slide will outline how our technologies lend themselves to expansion in diverse end markets. We currently supply fuel systems to marine and stationary powered markets and have ongoing activities in pursuit of further expansion. This would include linear power generation, flexible fuel technology to support power grid as well as specific commercial and industrial needs, aerospace fuel systems and low-cost indirect small engine common rail diesel solutions for smaller engines that need to meet new emission standards. Additionally, we're targeting growth geographically by further leveraging our existing portfolio and assets in Europe, continuing to regionalize to meet local customer needs, especially in Asia, and consistent with prior messages, to grow in the CV and GDi in the Americas. Well, I appreciate the opportunity to share insight on PHINIA's products and technologies. I'll just mention, if I had my preference, I would be showing you an injector right now. But they won't let me bring a piece of metal that's shape like the barrel of a gun into the room. So we'll have to see that in another setting. But I will turn the time over to Neil to share information about the aftermarket part of our business.

Thank you, Todd, and good afternoon, everybody. So I'm Neil, and I'm here to talk to you about PHINIA aftermarket, tell you what's special about PHINIA aftermarket. We're a global business. We leverage Tier 1 supplier-strengthened technology plus the agility of an aftermarket specialist supplier to deliver for over 4,500 customers around the world. We go to market with our powerful OE brands, Delphi and Delco Remy, and a portfolio that's built on the strengths of fuel systems plus added products that complement the offer. With a seasoned management team that has collective experience of over 75 years in the aftermarket, we built a stable financial foundation over the last 5 years that will allow us to grow the business profitably through this decade and beyond. We have a holistic approach to winning in the aftermarket. As Brady mentioned, we provide solutions right through the life cycle of our products. And our portfolio combines fuel systems original equipment know-how and resources to bring the diesel and gas fueling products that you see on the left-hand side of the chart to the market. On the right-hand side of the chart, you can see how we supplement the fuel systems offer with additional products that round out the portfolio, vehicle electronics, chassis products and starters and alternators, all of them made to our exacting quality standards. In the center, you see the heart of our program. These offerings keep us top of mind with technicians. When they diagnose vehicle problems with our diagnostic tool or attend our training courses, they understand better what we can offer them. And that way, they're much more likely to use our products for a repair or maintenance job. We take the portfolio to market through a broad distribution network that puts inventory close to customers. That way, we can deliver off-the-shelf availability to warehouse distributors, retailers and online players wherever they are in the world. And we're market leaders in logistics. Our target is to deliver over 92% first-time availability to our customers. And I'm proud to say that our overall fill rates have rarely fallen below 80% over the last few years despite the post-pandemic supply chain disruptions when many others were below 50% first fill rate. We offer remanufacturing programs for diesel fuel injection and starters and alternators, and they've been part of our business for many years as a way to deliver cost-effective solutions to vehicle owners right through the lifetime of the vehicle and also help us to deliver sustainable solutions that reduce waste and energy use. We have a synergistic sourcing model which leverages our OE products, as I said before. Our product sourcing is divided between fuel systems manufacturing, aftermarket manufacturing, which we do within our own business, and third-party suppliers to build the ranges that we need to offer market-leading coverage in the aftermarket. Market-leading coverage means covering more than 95% of the vehicles on the road, which we do in most of the ranges we offer, except diesel fuel injection where we're more selective about the vehicles that we cover. Fuel systems products, starters and alternators and aftermarket manufactured parts account for 55% of our revenue. The other 45% comes from third-party suppliers. We have strong customer relationships in the independent aftermarket across multiple channels, such as international buying groups, individual wholesalers, retailers and online players. And we leveraged the many years of experience of our team to make sure that we can service the aftermarket and deliver market share gains. We also serve the vehicle manufacturer channel, and we leverage our independent aftermarket competencies in supply chain and product management to deliver value for original equipment manufacturers and their service networks in their original equipment service programs. Finally, we work on supply chain sustainability, with supplier transport optimization and near-shoring initiatives as the first steps to reduce our Scope 3 emissions. We have strong aftermarket positioning cleaner, better, further, that encapsulates our mission as an aftermarket business. You've heard Todd talk about the precision manufacturing fuel systems products that help our OEM customers meet increasingly stringent emission requirements. What we aim to do, is to make sure that vehicles continue to be as clean as they can be throughout their lives, to perform like they did the day they left the production line, contributing to sustainability throughout their life. We take our products to market, as I mentioned before, with the trusted brands, Delphi and Delco Remy, which have many years of OE heritage. And the products that we sell are made to OE specification, whether we make them ourselves or whether we buy them from third parties, which gives our customers confidence. One of the key criteria for technicians is whether they can fit and forget the products they use every day. They don't want customers to come back because of faulty parts that have been installed, and they know they can trust our solutions. So our winning formula is built on those 3 pillars that I've just talked about, the portfolio, the synergistic sourcing model and brands our customers can trust. Let me take you through what that means. We have a global footprint, with the Americas representing about 2/3 of our sales, followed by Europe and Asia. The Aftermarket has different local characteristics, and we're organized in 4 regions to make sure that we meet our customer needs wherever they are. That's North America, South America, Europe and Asia Pacific. North America and Europe are the mature markets, while we see faster market growth in South America and Asia, and the number of vehicles in operation there continues to grow. North America is the most consolidated market, with big players like AutoZone and O'Reilly. And Europe is starting to become more consolidated, and there, we see GPC and LKQ as key players in driving that market consolidation. In Asia Pacific and South America, the markets are more fragmented, and we make sure we're set up to meet the needs of customers in those regions day-in, day-out. The portfolio consists of products that wear out during vehicle life, as Brady mentioned in his presentation, and they have to be replaced. You can see there in the middle how our sales split out between the different categories. The offer gives us a stable revenue base since we supply parts that are used throughout the life cycle of the vehicle. I mentioned earlier that we serve 4,500 customers across the globe. Our top 10 customers account for 36% of the revenue, which again contributes to the stability of our business. So now let's look at where PHINIA Aftermarket is heading. The total aftermarket, as you can see there, including products like tires, is huge. Within that, our salable market is worth about $50 billion with the product portfolio we have today. That salable market will grow to the end of this decade and beyond because of the tailwinds and the number of vehicles in operation, average vehicle age increases and also we see an increase in miles driven since the end of the pandemic. Propulsion agnostic products, that's to say products which fit electric vehicles as well as combustion vehicles, make up 40% of the salable market, but only represent 20% of our revenue today, giving us another growth opportunity. So the size of the salable market, the proportion of Fuel System agnostic sales in our mix and the relative weighting of our sales between regions are all growth opportunities, and we've defined plans to take advantage of them. Organic growth is our primary focus, delivered through expanding the markets we sell to and selectively extending the product offer to adjacent categories. So let's talk about market expansion. This includes selling products in more geographies, expanding our market coverage within the ranges we offer and increasingly capturing new opportunities by near shoring to help our customers who want a more resilient supply chain. Extending our product offering is done in 3 ways: by remanufacturing competitive products to serve independent aftermarket customers, by building on strong supplier relationships to cover new product categories and by working to identify opportunities to manufacture more products in-house using Phinia's existing capabilities and production capacity more efficiently. We also see opportunities to grow inorganically as the market consolidates and competitors pull back. And we'll look at these critically as the market continues to develop, but with opportunities to grow organically, we'll be very, very selective about acquisitions. I've talked about growth, and we've already proved that we can deliver organic growth with a low-risk model. We're launching one new region at a time, limiting financial exposure and the risk of management distraction, and we only move on to launch in other regions once execution is successful, and we can see we have traction. Here's an example. Steering and suspension is a significant product category for us in Europe, but historically, we did not offer it in North America. We first entered the market with a program taken from our European range to cover import vehicles in the U.S. and Canada. Once we have positive customer feedback, we decided to expand and offer a full range that covers domestic vehicles, Asian vehicles and European vehicles. And we did that by leveraging our existing supply base to create market coverage and by leveraging the strength of the Delphi brand to enter the market through existing distribution channels. Sales have doubled every year since 2019, and we're on course to achieve that again this year, which is a milestone towards our goal of reaching 20% of sales with steering and suspension in North America by 2027. I mentioned remanufacturing before, and I'd like to talk a little bit more about that. It's a key sustainability driver, reusing existing products and components, which reduces new material use and provides value for the money, repair solutions to our customers. Increasing the proportion of remanufacturing in our business is part of our plan, and it will help us to extend the product offer. We already have about 900 SKUs in our offer for sale, covering diesel products and starters and alternators. These generate around 10% of our revenue as an aftermarket segment today. Our largest dedicated remanufacturing facility has remanufactured over 10,000 metric tons of material since 2010. And we've also reduced the CO2 emissions from that facility by 65% compared to the 2018 baseline. We see growth opportunities in remanufactured diesel fuel injection products, and we've launched this year expanded reman capability in Poland to capitalize on all makes remanufacturing opportunities. With all this together, we expect to increase our revenue from remanufactured products by 30% in the next 3 years. Now I'd like to talk about the way we use marketing to drive demand for our products. We sell through intermediaries to reach final customers who fit our products and digital marketing now allows us to have regular communication with them in a way that we could never have done in the past. Our Masters of Motion campaign was developed after some extensive research among technicians to understand what they want and to help to solve their daily problems. What they told us is their first point of reference is YouTube. Any time they can't solve the problem, they look for a video that tells them what to do. So we decided that we would use YouTube as our means of communication, but we've also developed the Masters of Motion hub, which has more detailed content. And over and above that, we offer an online training platform and face-to-face training courses. This year, we've already produced more than 50 how-to videos, which you can see on our YouTube channel, and we'll add 50 more before the end of the year. We've signed up 6,400 users on the Masters of Motion hub, and content has been displayed to users 12.5 million times since December 2022. We are positioning ourselves as the aftermarket supplier who can help technicians around the world to do a better job every day, but also to prepare them for the future with our training courses for hybrids and electric vehicles. And now I'd like to show a video. [Presentation]

So while we sell complex technical products, Aftermarket is a people business and the video shows you how we interact with the people who work with our products every day. What I've shown you here is PHINIA Aftermarket, and we are special because we have this holistic approach to winning in the aftermarket, combining OE expertise with specialist aftermarket product management and supply chain capability to deliver what our customers want. Our fuel systems-based product ranges and starters and alternators have longevity because they have long product life cycles, as Brady showed, and our propulsion-agnostic products are well positioned to make us a relevant supplier for all types of vehicles in the future. We're a profitable growth engine with significant organic opportunities to grow, which can be supplemented by selective merger and acquisition if the conditions are right. And that's all I have to say. I think now we have a 15-minute break before Chris comes back to talk about the financials. Thank you. [Break]

Okay. Thanks, everyone. We're going to resume our program. And it's a pleasure to have Chris Gropp, our CFO, come up and share the financials with you.

Okay, everybody. It's nice to be the last thing between you and a beer, but we'll try to do this pretty quickly. All right. All right. You've heard Brady, Neil and Todd speak about Phinia's great products and markets. Now I'd like to walk you through the strong financial underpinnings of our business. We see continued revenue growth in the low single digits through this decade as we leverage our technologies in areas such as GDi, commercial and industrial markets and the aftermarket, as well as benefiting from significant interest in alternative fuels. We plan to continue our legacy of disciplined financial analysis of investments and operational excellence to achieve solid, sustainable mid-teen adjusted EBITDA margins. Combined with modest capital spend intensity, this translates into strong cash generation, providing flexibility in driving the business forward. And finally, we are focused on maintaining low net leverage of 1x adjusted EBITDA, while consistently returning cash to our shareholders. To provide some historical perspective, we've accomplished significant operational performance improvements since BorgWarner purchased the majority of the PHINIA business in Q4 of 2020 as part of the Delphi Technologies transaction. Over the past 2 years, we managed the business to increase output in revenue and improve profitability as we restructured operations during a difficult market backdrop of COVID shutdowns, supplier disruptions, chip shortages and inflation. We optimized footprint, simplified and reduced overheads while continuing to develop new applications and markets. As Brady told you, we eliminated 5 manufacturing sites and consolidated and closed 4 technical centers across Europe and the Americas. We beat expectation with steeper savings on an accelerated basis, with an improvement in margin of 500 basis points outside of changes in corporate allocations. In addition to profitability, we scrutinized the required investment in the business and have taken steps to minimize capital intensity. Historically, this business required capital spend of more than 5% of sales, while we see 4% as a sustainable level going forward. By moving responsibility for capital spending to manufacturing sites and managing capacity on a global basis with input from the engineering function, we found we could optimize and reduce spend, right capital, right sized, right region. Looking forward, our new technologies for hydrogen and alternative fuels, use existing blueprints and ensure maximum use and reuse of existing resources. On the R&D front, we initiated a robust tracking and oversight process to ensure appropriate returns on spending. Engineering is now accountable for its global footprint and works with regional partners to ensure we are developing the right product at the right cost. Turning to our 2023 outlook. We expect our revenue to increase approximately 4% year-over-year on organic growth and pass-through pricing on inflation. We'll walk you through the revenue details in the following slides, but we continue to see growth in CV sales in Europe, continued expansion of GDi in the Americas, offset slightly in softness of CV in the light vehicle in China. Adjusted EBITDA margins include solid year-over-year savings, partially offset by continued inflationary headwinds. Supplier disruptions have created softer results in the first half of the year, but we have taken corrective actions and are confident in achieving an improved outcome by early 2024. Approximately 60% of PHINIA business is Fuel Systems and 40% is Aftermarket. At Spin, we'll also perform -- have contract manufacturing for about 18 months for BorgWarner. This is limited in nature and included and called out in our 2022 proforma results. Expected revenue growth this year reflects increases in European CV and ramping volumes of GDi in the Americas. We are continuing to pass through inflationary cost to customers through pricing, which is 2.4 percentage points of the total sales increase and represents approximately 70% recovery. The 70% recovery is lower than the 80-plus percent recovery we received in 2022, reflecting an isolated issue with one supplier that we are taking actions to address and expect to fully resolve by early 2024. Walking our adjusted EBITDA from 2022, I'll note the inclusion of the contract manufacturing, which is slightly dilutive to margin. But as I said, only lasts about 18 months. Volume and mix on organic revenue was lower than normal as reduction in mature CV sales in China is offset by growth in CV in Europe and increases in immature GDi revenue in the Americas. GDi launched meaningfully in 2021 and is still not up to full capacity. Margin expansion will occur as this revenue hits peak shipments. Going forward, we expect to recover inflationary costs on a full run rate basis as we adjust our supply base and continue to drive cost improvements. As Brady said, we have a clear and achievable road map to deliver solid growth, and we are targeting revenue of $3.7 billion and adjusted EBITDA margins of 14% to 15% in 2025. Our quote activity has increased over the last couple of years, unprofitable product lines have been exited and we have expanded the portfolio to include new applications and areas of growth. Our business is diversified across regions and platforms, with further optionality for growth as we maintain our drive for operational excellence. We see ourselves as a solid commercial vehicle, industrial and aftermarket business. With growing opportunities to expand within these markets, while maintaining our base in light vehicles. Our high cash conversion provides us with advantages and flexibility to invest in the business organically and inorganically, while providing solid returns to our shareholders. As you can see from the slide, we have best-in-class margins with cash generation that stacks up positively to our high-profile industrial peers. At spin, we will be well positioned with low debt, ample liquidity and strong credit ratings. Net debt at spin will be 1x adjusted EBITDA, with sufficient cash flows over the period to cover the needs of the business, support a competitive potential dividend and more than comfortably service the debt. Mid and long term, we expect to maintain our modest leverage and strong credit ratings. And finally, at the start, I noted our legacy of disciplined financial management, running the business for strong returns and generating high cash flows, which are expected to be more than $200 million per year. We expect our Board to approve an attractive dividend with an initial target of approximately $50 million annually, while we continue to create shareholder value and maintain our strong balance sheet. We have a focused approach to all organic and inorganic investments to ensure they meet our targeted returns. And with that, I thank you for your patience, and I'm going to turn it back over to Brady to close out the presentation.

Okay. Just to kind of wrap things up, I'm just going to rattle off some words for you. Product leadership, value-driven innovation, efficiency, components, systems, calibration, turnkey solutions, carbon-neutral fuels, carbon-free fuels, net zero, stable growth, commercial vehicles, off-highway, independent aftermarket, remanufacturing, strong margins and cash generation, financially disciplined, ROIC, prudent, opportunistic, attractive potential dividend, share buybacks and total shareholder returns. Those are the words I want you to go away with that describe PHINIA and what our objectives are. So with that, we'll pass it off and we'll open up for questions and looking forward to your feedback. Everyone want to come on up?

And John has a question.

I've got 3 quick ones here. John Murphy, Bank of America. First, you kind of cited gaining market share in the Aftermarket, particularly in commercial vehicles. I'm just curious who you're going to be taking share from and how we should really kind of think about that? I mean, obviously, it's not a market that's vacant. Is there an open opportunity to consolidate and take share? I mean who we're going up against there?

Neil?

Thank you, Brady. The way that we take market share, generally speaking, is by offering a better service than our competitors, better logistics, better products and making sure, as we talked about before, that we train the customers so the products are pulled through the distribution chain. So it's much more about making sure that we can capture share of wallet within our customers than anything else. I think we will see opportunities as some competitors pull back a bit from the market, particularly tier 1 competitors who may be focused more on EVs. But we're not seeing that at the moment. So we have to win in the way that we win at the moment, which is by getting more share of wallet from our customers.

Second question, and this is more on the light vehicle side, a lot of automakers are focused on capturing greater lifetime revenue of vehicles through Aftermarket parts and service along with their dealer partners. What percent of your Aftermarket sales are actual OE branded parts that would fit that bill? And could that be an opportunity for you to grow over time?

If we exclude the starters and alternators OE business, which is part of our segment turnover, it's about 25% which goes through the vehicle manufacturer channel. That's been pretty constant over time, to be honest. It doesn't move that much. And that's, I think, is partly related to the long life cycle of vehicles. With the average age of vehicles getting older, we still see that it's really people who own vehicles that are less than 5 years old who go to the vehicle manufacturer channel. So the independent aftermarket has that growing opportunity with aging vehicles. But for us, we want to serve everybody. So the vehicle manufacturer channel and the independent aftermarket channel are great opportunities. They get our products into the market.

And then just lastly, only 20% to 25% of your free cash flow being paid out in a dividend. And I think a lot of investors in this company are going to want to see high payouts from the free cash flow. It's pretty low. Is there a potential for that to increase over time? And how do you come up with that 20% to 25% of free cash flow?

Well, again, we thought it was a prudent start where we want to see it. There's obviously going to be -- depending on where rates come in as well, that's not going to include any amortization or debt reduction in that number. There's also going to be opportunities for share repurchases, as well as some M&A. So we think it's a good spot for us to start with.

Colin Langan, Wells Fargo. Maybe just to quickly follow-up on that. Would you consider M&A? And what kind of things would you consider? Or is it really mostly focused on repurchases for that [indiscernible]?

First and foremost, it's got to be synergistic with the rest of our business, and it's got to meet our ROIC targets. We're going to be investing or acquiring entities that are going to be immediately or very shortly accretive and cash -- and add to our cash flow. We're not going to be looking at battery electrics. We're not going to be looking at prospective type products. We're going to focus on where we think our strength is and find areas that are synergistic to our existing portfolio. I'd love to have opportunities to grow in areas that have a significant CV exposure, off-highway exposure as well as have a significant aftermarket. So those are the types of product lines if we're going to add it, that's going to have that criteria.

Got it. Some investors are a bit concerned about -- in fuel injection, I think even in the starters and alternators, your competitors, there's one major competitor that seems to dominate everything. How do you -- is that a concern to you? Is that an opportunity? Is that market driven by that one main competitor? And is that maybe your wrong assessment because I haven't seen any current market shares?

No. I mean there is a very large competitor that may be similar colors to our color. But there are customers out there that don't want to be dependent on one supplier. Having multiple suppliers as part of their strategy. And so from our perspective, as the number of competitors shrink, and as I kind of mentioned, they're spending more of their resources on other things, we think it's creating an opportunity for us. And we continue to see customers come to us asking for extensions on existing programs without competition, as well as asking us to commit to new programs to support them as their existing supplier is not providing them the service and support they need.

Over to Rod on the corner there, please?

Rod Lache with Wolfe Research. I was just looking at Slide 63 in the appendix where you show the -- your customers. It looks like your top 4 customers, GM, Volkswagen, Stellantis, Volvo, are 40% of the business. Some of them, notably Volvo and GM, have given very specific dates for when they're going to be phasing out of internal combustion. Presumably, this is going to accelerate as you move beyond 2025. Can you maybe just give us a little bit of perspective on what you think the trajectory will be of that decline? And then how do you kind of mitigate that as a business? BorgWarner earlier was talking about the investment in restructuring and what the savings would be from that and how they can kind of mitigate the decremental margin. Maybe give us a little bit of perspective beyond 2025 and how that looks, and does that consume a lot of the -- debt restructuring and consume a lot of the free cash?

First, Volvo is Volvo Truck. So we're -- that's probably one of the examples of a CV manufacturer that we're really close with. It's Volvo Truck, and we've got a long tail with them. So that one is not going to be as effective.

Maybe just the 44% of the business that's light vehicle...

Correct. And then on the GM side, as I mentioned, I think a lot of our business is on the GDi side as well, and we actually see opportunities to continue to grow market share with those customers. We're a reliable partner for them. And despite press, they're investing more money to expand and maintain their larger engines. And we're fortunate enough to be on some of the larger applications. So if you're thinking about larger SUVs, light truck, medium-duty truck that need a V8 gasoline engine, those are probably the ones that are going to be a little bit longer before they transition to a full battery electric. And so we're working with all of our customers, not only on GDi solutions, but also on hydrogen fuel cells and other applications and are looking at hydrogen ICE as well. And so at least from our perspective, we expect to have a similar expectation where half of the light vehicle market is going to be battery electric by the end of the decade. It's just going to happen. But we're going to make sure that we're selective in the customers that we're pursuing. And we think with a little bit of market share gain, we'll be able to keep our facilities full with that product through the decade. And then as we see it transitioning faster, more than likely, we'll get some more opportunities on the off-highway and CV side as we transition our portfolio more to CV and off-highway.

So as you look out to 2030, maybe just give us some perspective on what is the size of that light vehicle ICE business in that kind of time frame or the overall fuel injection, ICE-related businesses in that time frame.

2030, I think we're still around $1.4 billion in total for light vehicle. And again, we see our light vehicle business roughly being flat from where it is today.

Dan. In front outdoors. Right there.

Great. Dan Levy, Barclays. Just to follow up on Rod's last question there. And I think you'd say that the plan or the hope is to keep the facilities relatively full. But to the extent that maybe the transition does happen faster or customers change their plans, just give us a sense on, from a capacity standpoint, what are the things that you can do to keep your facilities full? Or just what -- where should we be concerned that there could be idle facilities? How do we deal with the CapEx on the facility side?

I mean most of the programs that we have are fixed programs for the next 3, 4 years. And what's interesting, despite some of the announcements from some of the customers that were mentioned, they continue to come back to us and ask for extensions and commit to those extensions. And so a lot of the applications that we're on, I think, are in larger vehicles and for hybrids and plug-in hybrids, which are going to be around for a while. We've also proven that we've been able to move capacity between regions. And so the lines that we're now ramping up in Mexico came from one of our lines in Europe. So we're able to move equipment around in order to meet the customers' needs in that region. And again, I think we'll see -- we'll start to see some transition to where we're going towards alternative fuels and hydrogen over the decade as well. And so we see more demand in South America now for E100, and that's going to be part of their solution to carbon neutrality. And so at least from our perspective, given our predominantly best-cost footprint, we don't see substantial restructuring dollars being needed even if we have some capacity shifts.

Right. And then as a follow-up, just maybe a historical context. I think most of the people were familiar with what you used to be when you were actually the old Delphi. We were aware there were a number of operational issues that was dragging down the margins, just excess footprint, excess resources, et cetera. And that was one of the things that -- there were some initiatives underway or when you were folded into BorgWarner, there was some efforts to clean that up. So maybe you can give us a sense, I mean, I'm looking at your EBITDA margin bridge, a lot of it looks very market driven. Where are you operationally in terms of some of the legacy issues? Is everything mostly cleaned up? Or is there more opportunity, more low-hanging fruit in terms of facility rationalization or footprint or resource reduction, et cetera?

You want to have that one first?

Sure. I'll go with because -- so I landed in Luxembourg on day 1 in 2020 amidst COVID, that was a fun trip to get to Europe at that point. We did a lot of work. They had really started, they being Delphi, had done a lot of work previously. So Todd was there already. Neil was already in place. They've been doing quite a bit of work. We're running out of cash, so we basically picked up those programs and expanded them and continued. There was just a lot of basic things that had to be done and simplified and cleaned up in the way BorgWarner works is pushing it back to the plants and really pulling a lot of, what I would call, a top layer away that we just didn't feel that we really needed. There were some good talent in the facilities. We did add a little bit more talent and justify a little bit. We had to go back and re-implement some systems. So a lot of the stuff I was talking about with -- they had a good quote process, but it didn't have a great overall view. The plants weren't responsible for it. There was sort of a lack of that. There was also some -- a lot of issues with how they were buying capital and looking at the capacity plans. We did a lot of corrections to that. And then the last one was in engineering, there was zero tracking systems. They had dismantled them because they felt -- so we just basically put that back together. There's a lot of work done. Is there more that we can do? In my view, there's stuff you can do every day and Neil and Todd know that -- Todd was also operations not very long ago and there's always things you can do. And we build those in very conservatively all the time. Do I think there's major things that have to be done? No. I think we've picked off all of the big stuff, but there's always efficiency improvements you can make, I don't care what business you're speaking of.

Yes. And I think from my perspective, too, I think it's going to be more evolutionary. We can let attrition be our friend in certain areas, and we're already doing that. And so I think we'll continue to see improvements in our footprint without having to have a significant restructuring outlay.

Todd?

Yes. I was just going to comment specific to your question, I think much of the heavy lifting has been done, which was described with the closure of 5 manufacturing facilities, 4 tech centers, the restructuring of heads. And then to Brady's point, that was -- it's my view as well, both operationally and technically on the engineering side, that there may be optimization going forward, but nothing like what we saw as Delphi transition before day 1.

[indiscernible] from UBS. I think most investors would believe that the relative margin profitability of the 3 areas you're talking about, which goes to something like aftermarket, commercial vehicle, light vehicle. But can you help us out with a little bit of the relative profitability since I think everyone is going to have different assumptions about how those different things grow, including you're laying it out. And maybe even more importantly, how we should think about incremental and decremental margins for those 3 businesses.

Okay. I'll start out and somebody else can jump in. I mean, I'm not going to give you all -- you can see the segments, so you know the profitability of the Aftermarket compared to FS. Just remember that most of the sales that Aftermarket is making of our own products that are coming from FS. So there's obviously an intercompany aspect to that. So each side is quite comfortably profitable. And then what was the second part of that question?

Conversion.

Conversions. Conversions, yes. Well, I mean, the majority of our costs are variable, materials, labor. Anything else, we can flex those. We understand that. I had a conversation with somebody who knew -- remembered Robin Adams from the BorgWarner Days. I grew up under Robin Adams. I understand how to flex costs because that was a requirement under BorgWarner. So we have the ability to do that and understand quite well how to convert. But if I was going to give you a conversion, I would say somewhere in the 15% to 20%, if I'm going to convert.

Okay. And then if I look at the slide that had the 2 walks from '23 to '25 on revenue and EBITDA, especially if I look at the profit walk, you have lower market but offset by market share gains. So it seems like the incremental profitability is really coming from the new opportunities, which I think you described as market and products and regions. And I think a lot of times what people hear new market, regions, people expect some sort of ramp towards profitability. So is that embedded in that? Or do you think that if you're successful in getting into those new markets or regions, you can hit average profitability pretty quickly?

Yes. I think from our perspective, if you look at our footprint, it's really solid globally. And so as we bring a new product into a new market, we don't need additional infrastructure, especially like on the Aftermarket. They've got their sales distribution. They have their warehouses. They have their customer relationships. And the same thing on the OE side as well. And so when we're bringing a new technology into a new market, we -- the existing plants, we've got a couple of plants in China, we've got plants in India, in Europe, in North America, South America. And so we've got the locations there. And a lot of times, we're just going to be rolling in an additional product line and rolling in some additional equipment in an existing facility. And we think we're -- with our footprint right now, we don't see any need for expansion on that footprint. And we think we've got great skills and capabilities in each one of our locations to accept new product lines without a major ramp coming. By and large, the last big ramp was with the GDi in our North American operations that was just a massive ramp up, where they went from basically 0 to a few hundred million in a year or 2.

And hydrogen, that was when hydrogen came in -- before Todd, our former Head of Engineering, who is really leading it. I grilled him excessively on it. "You're absolutely sure I can use my GDi equipment and transfer it over to hydrogen?" And we are. We already have them. We're taking -- if we have any -- and we don't really have much. But if you have any equipment reuse, reuse. So we understand what that looks like. We understand the cost of it. So it's a much easier proposition than to go to something that is completely new.

If I just piggyback one small point on that, which is to emphasize the capital reuse capability, not just from current technology to new technology, but across regions as well, leveraging the footprint that Brady described. As light vehicle diesel in Europe has dropped over the past 6 years, much of that capacity has been taken and shifted regionally into China to build up that capacity. So we're reusing, reallocating across regions and across technology, which our capital is able to do.

James?

James Picariello, BNP Paribas. Just 2 housekeeping questions. First, the phaseout of the BorgWarner contract manufacturing revenue, that $100 million, does that go down to 0 for next year? Or is there some...

It's going to phase out over time, and it should be completely up by the end of '24. And so there's multiple product lines going to multiple business units within BorgWarner, but that will phase out by the end of '24.

Got it. And then on free cash flow, can you just confirm what the guidance is for this year? Is it that $200 million annually? Or...

It's going to be a little bit less than that for this year. There's going to be a little bit more going into it for this year.

It's a little squarely given all the carve-out and kind of everything else for the 6 months of the year.

Yes. Carve-out account...

And the intercompany and we're going to -- I think they're going to net out a lot of the cash pooling that's been going on and balance sheets that we had shared with BorgWarner. That's going to be a little bit squarely. But I think what's clear is that on the spend date, the intent is that we'll have about $300 million of cash and then 6 months more to go.

Got it. And then last one, just high level strategically. Over time, the ICE-focused supplier base seems ripe for consolidation. I don't think I'm surprising anyone with that comment. You've given PHINIA's net leverage at just a turn of EBITDA, do you envision the company participating as a consolidator of the space over time to maybe expand your regional footprint or accelerate into some of these untapped new product categories? Or...

I think we're going to remain disciplined and prudent in anything that we do. Again, to gain scale and be a consolidator and not generating additional cash flow and shareholder returns is not an interest to me. I like making a lot of money, and I want to do it as efficiently as possible. And just gaining scale is not my priority. I think, in many cases, we'll be able to win the business organically rather than having to scale up. Because obviously, especially on the light vehicle side, there's not a need for additional capacity. So why would I buy someone else's business? I could probably more -- I can probably just win it and utilize my existing capacity to support the program.

Emmanuel in the back, please. Then we'll come back to John.

Emmanuel Rosner from Deutsche Bank. First, a quick housekeeping item. So what is the size of the extra corporate costs that you're incurring as a result of being a public company? Just trying to compare the sum of your outlook for this year and BorgWarner's versus sort of like the previous combined and how much relates to this?

Well, the total corporate cost is $80 million for PHINIA, and that's built up from all of the functions. I mean we've got a bit in treasury and we're transferring some of the talent from BorgWarner that's coming in. They have to replace, obviously, but it's $80 million in total.

Okay. Then second question, I think you had a good slide on capital and R&D intensity sort of showing that, obviously, in relative terms, this is a pretty capital-efficient business. Is there room to make that even lower, I guess, would be the question? Where it feels like if half of the business is tied to light vehicle OE business and maybe some of these automakers are not necessarily redesigning completely new platforms, that's maybe there could be more efficiencies on the R&D side or the CapEx side.

I mean right now, we think it's an appropriate level. We still see growth in our business. And so if we no longer see growth, then yes, there's probably going to be some opportunities for us to become more efficient. But at this point, we think it's an appropriate level to support our business and making sure that we maintain our product leadership. Because as I mentioned earlier, there's a lot of customers that are eager to partner with us because they know we're committed to the market and they know their engines are going to be around for a lot longer than maybe people expect. And so they're looking for a strong partner, and we're committed to do that. And we think that even at those levels, we're still going to have greater than 90% cash flow conversions and maybe approaching 100%. So I think we'll be in a very good, strong position and we'll adapt as the market adapts.

And then in terms of capital allocation for the free cash flow, so 25% goes towards dividend. Can you help us out sort of like complete the pie, like what is allocated towards M&A, buybacks, debt paydown?

Yes. I mean we don't have the clear percentages, I guess, that others have. I think for us right now, we're committed to the dividend. We think we've got -- we're in a strong position to provide a very attractive and competitive dividend. We're fully focused on ensuring that we maintain our good leverage position. We don't want to extend that and make that unreasonable. We want to make sure that we're a robust supplier for our customers. And I think we'll then -- as we get our feet and get our -- get the cash flow flowing in, we'll have a balance between some inorganic, if it meets our ROIC requirements and share repurchases as well. And so I think it's -- we're going to, at least at this point, keep it a little bit open.

John, please?

Sorry, I just had one additional question. On Slide 45, you talked about proven strategy execution capability, and you mentioned steering and suspension launch in North America. So that's something that's a new product category, particularly for North America in the Aftermarket. I think everybody who looks at this business is trying to understand how you kind of grow and maintain the revenue base and potentially largely shrinking segments. But that's one area that's kind of new to you, particularly in North America. Are there product categories, particularly like braking, which is a very good aftermarket business that you could develop, like develop into region, braking that could then create sort of a tether to the distant future that people are worried about for you, that may actually really just extend the life of what this fear is that the revenue is going to just go to 0 at some point, and then there's this opportunity to transform the company over time? I mean I think that's one example. But what about like braking and other product categories could it go well beyond sort of this fear of 0?

Yes. Maybe I'll start the answer, Brady. We do sell braking in Europe. We are launching it in China at the moment. So as I was talking about before, we tend to do those kind of things region by region. We do see braking as an opportunity. Our customers in Europe certainly look to us and want to buy breaking from us. So it's something that we can do. And as you said, if you think about the future of the business, it's certainly something that we could think about developing further. But we want to do that in a disciplined way. We want to make sure that the investments that we do pay back and that we get real market share from anything that we do. So I think we're not just expanding the coverage for the sake of doing it, let's say that.

And that's what Neil mentioned, I think 20% of this aftermarket right now is propulsion agnostic, steering suspension, braking and the such, are going to be in those categories and he has a plan to continue to grow that. And so I think there are opportunities for them to continue to grow. That gives us additional protection with an accelerating bad penetration rate. The vehicles are generally heavier as well, so steering and suspension is going to take a little bit more of a beating in the such. Regenerative braking, obviously, may reduce the amount of brakes, but not necessarily. We think there are some opportunities there, and we think it's going to be a good aftermarket for us as well. As I mentioned as well, as far as adding OE products to it, I'm going to -- we're going to lean towards commercial vehicle and industrial, and we're going to lean towards ones that have large aftermarket spaces. Becoming a large light vehicle OE component of combustion? No. Even light vehicle for noncombustion would be questionable unless it has a large aftermarket. I want to keep our aftermarket as a large portion of our business. I think it provides a lot of stability and a lot of great cash flow. Did you have a -- good.

[indiscernible] Capital. Just on the hydrogen business, does that meet your current ROI targets? And if not, could you sort of dimension the costs around it?

It does meet our ROIC targets. That's any new program that we quote. In these cases, we're able to get a lot of, as we call NRE, nonrecurring engineering. So we get a lot of engineering support upfront to support those, as well as, in some cases, co-investment in the capital equipment. And so any program that we do, we expect to meet or exceed our ROIC. We always used to kind of joke as whenever somebody says it's a strategic program, that means you lose money. And that's not something that I think with our size and scale that we want to do. And I think with the technology that we have and the leadership position that we have, we don't need to lose money on anything that we do.

Chris had described some of the financial discipline that's happening not just in our normal operations, but in engineering efforts as well. So what Brady described is taking place. Even as we quote development programs, advanced development programs, we're still focused on what the return is for those efforts.

Okay. That seems to be the last question. Brady, would you like...

Were there any web questions?

No. Would you like to make any closing remarks?

Sure. Again, I really appreciate you guys spending some time with us. I know we're going to be around. I think for the next few weeks as well, going on some roadshows and getting some more time. Then feel free to reach out to Mike and us with any other further questions and follow-up. Looking forward to your feedback. Thank you.

Thanks, everyone, for your attendance.