PHINIA Inc. (PHIN) Earnings Call Transcript & Summary

It looks like the webcast has begun. So we'll get going with our next presentation. I'm very happy to have -- I'm Ryan Brinkman, autos analyst at JPMorgan. Very happy to have PHINIA, of course, spun out of BorgWarner the other year. Brady Ericson to my left, President and Chief Executive Officer; as well as Chris Gropp, Chief Financial Officer. Brady and Chris, thanks so much for coming to the conference. I'm sure you had some difficulty getting here with the weather. You might be a little tired, in the hotel at 02:00 a.m. But thanks for persevering and making it. I don't know if you have any introductory remarks or you just want to launch into questions. What do you think?

No, I think we'll just kind of comment what a difference a year makes.

The stock price.

I guess we just celebrated our 1-year anniversary back here in July. And I think when we were here last year, the sentiment on EVs and PHINIA in general were very different. And we're just super excited about what we've accomplished over the last year and how the industry has continued to realize that GDi and electrification are going to be both needed in the industry. And so I think we've continued to try to be good stewards of the company and put the foundation in place to where we're a strong company. And I think we're starting to see some of the appreciation in the stock price, too.

Yes. And that's really one of my first questions, is just what did happen with the EV expectations? I mean at the start of the year, S&P Global Mobility thought that 2024 BEV production would be up 32%. Their latest forecast out last week is only up 10%. What accounts do you think for this significant reset in expectations? Has the slower near-term growth caused you to think any differently about the medium- or longer-term trajectory for BEVs and the tail to ICE? And what are the implications for PHINIA?

Yes. I mean from our perspective, we always kind of question the somewhat parabolic curve that people were forecasting for electric vehicles, which is why we are excited to take the opportunity to join PHINIA and be spun out. EVs are going to continue to increase, okay? So rather than growing 30%, they're only growing 10%. And they're going to be a key part in the transition in the industry to cover neutrality. But I think people are realizing that efficient hybrid and plug-in hybrid solutions are also going to be key and they're going to be around for a lot, lot longer. And so our view has always been that EVs are going to continue to increase, but it's going to plateau at some point. And whether that's plateauing at 30% or 40% by the end of the decade, we'll see where that ends up. And we think that combustion engines are going to be around for decades to come on the light vehicle and through the rest of the century on commercial and industrial applications. We're just going to continue to work with customers to transition them from fossil fuels to carbon-neutral and carbon-free fuels.

And the second question relates to the big growth we've seen in the Chinese domestic automakers. They improved their quality, their design. Of course, they've been quick to embrace electrification, not exclusively. BYD does hybrids as well as total combustion. It has gone from the 13th largest automaker in China to the biggest in just the last 4 or 5 years. Overall, I think the domestic has gone from about 35% pre-pandemic to 55% or more this year, with ambitions to grow outside of China, too. How do you see that trend evolving? Many of the suppliers we cover are underexposed to these quickly growing automakers. What is your exposure to the Chinese? And can you describe any actions you might be taking to try to win more business with these automakers?

Well, I think you've seen a number of our announcements have been with the local Chinese OEMs. We're a little bit fortunate in the fact that on light vehicle side, probably over 80% of our revenues is with the local Chinese OEMs. And on the commercial vehicle side, it's around 100% because there's really no global OEMs on the CV side in the market. And so we're well positioned. We're actually seeing some advantages in supporting customers on some of their export business. They have some very competitive products. We have a strong team working with all those major players that you just kind of mentioned. And we've announced a number of plug-in hybrids and range-extending EVs that we're doing for a lot of these customers for both the local market as well as for export. And we're starting to see some of those also look to move production outside of China as well to support their global ambitions. And so we're excited about it. We're right in the middle of it. I think we're in a great position to be overweight with those customers.

Next question pertains to the implication for suppliers from the interplay of the price and the volume of new vehicles. And we saw during the pandemic that automakers can do just fine, even great in a low-volume, high-price environment, because while automakers are hurt by the lower volume, they're helped by the higher price supplier. So got the short end of that stick being levered to only the volume and not really the price. Vehicle sales in the U.S. remain 8% lower than where they were pre-pandemic. I think hurt by the fact that new vehicle prices have risen 9 points faster than other consumer prices. And automakers say that they will remain disciplined, intend to hold on to these relative pricing gains. Others expect volume to benefit from return to historical discounting, inventory build, et cetera. Maybe we're at a crossroads with inventory now, recovering to pre-chip shortage levels. Just curious what do you think happens next with price and volume? And if price is structurally higher, is demand maybe structurally lower, production structurally lower?

Well, I think that's what's happened a lot with the electric vehicles. I think the prices of those were just so high that people -- there's only a certain amount of population that can afford those. I think we've seen some of that on the combustion and hybrid side as well, but I think they're still at a lower price point from an overall cost and profitability standpoint. For the last couple of years, it has been a headwind for most suppliers because there were a lot of inflationary -- or non-commodity inflationary costs that we had to kind of fight and push through some price increases. We ended up still absorbing a good chunk of that. The good news is that those headwinds are now kind of abating. The labor costs, transportation costs, energy costs are now kind of stabilizing. And I think our teams did a really good job to try to push through. I think in '22, we got a lot of lump sums. In '23, we said, "Hey, we've got to roll this just in the base piece price." So now that's kind of ratcheted up our piece price as well. But we've got to continue to be focused on driving productivity and supplier productivity and improvements to remain competitive. And I think we've done that from a margin standpoint with increasing margins over that time with a lot of our cost reductions and synergies that we drove through in the last few years. So I think it's going to continue to be a challenging market for the suppliers with those lower volumes. We're seeing it with some of our suppliers as well, especially ones that overinvested in EV. And we're expecting EV volumes to be a lot higher. I think they're definitely seeing some challenging headwinds with those investments not cash flowing. And so we're dealing a lot with supply chain at this point. But I think the industry, especially on the combustion side has changed quite a bit to where these 3% and 4% year-over-year AIFs are now kind of the thing of the past, and it's going to be more maintaining flat pricing and ensuring you have productivity to offset inflation.

You also have to break that apart by segment too, because you have to remember Aftermarket, it is totally within our -- whatever we're going to do. Obviously, market price plays into that. But on Aftermarket, we're continuing to increase price, 1% to 2%, which keeps us still within market rate and still gaining share on that side. But as Brady said, it is a very different game right now on the OE side for sure.

And what are you seeing in terms of the latest with your various different end markets, the OE demand or production, of course, light vehicle OE? But you have a lot more commercial truck and the commercial vehicle exposure than many of the suppliers at this conference. What are you seeing in those various different commercial vehicle end markets globally?

Yes. I mean we're very fortunate with the diversity of our portfolio. Light vehicle, as you said, is not -- it's less than 40% -- right around 44% of our revenues, and so it's less than half. Commercial vehicle about 1/4. Obviously, commercial vehicle and industrial applications especially in the North America and the European markets are challenged. We originally came into the year thinking that was going to be mid to high single-digit declines. We're now seeing that closer to probably double digit for the year. But as part of the overall cycle that we see in the market, the CV industrial tends to be cyclical. I think the last 2 years, '22 and '23, were really good from a production standpoint as I think a lot of the pent-up demand was finally kind of met. I think folks are kind of pausing a little bit right now on some of their big purchases with the higher interest rates. But I think as those interest rates come down and as we start approaching the EPA '27 emissions regulations, we'll start to see the pre-buy start to kick in latter half of '25 and into '26. And then when Euro 7 comes into play, that will probably have some of the pre-buy in maybe '26, '27. And so, again, it's a cyclical market, and we'll continue to manage kind of up and down in those markets. But we see it coming back into norm in the next year or so.

And then I think the aftermarket you serve have been performing a lot better. Is that how you expect it to play out ordinarily that when OE demand is softer that the aftermarket tends to kind of counterbalance that with a bit stronger demand? How do the OE and aftermarkets typically relate to each other? And you were among the minority of parts suppliers to have maintained your full year outlook this earnings season. Can you talk about the role that aftermarket might have played there?

Yes. I mean we showed at the -- our Investor Day back in June of last year of how resilient the aftermarket is, and the fact that it's close to 1/3 of our revenues. And so when the OE business is down, that means people are keeping their vehicles longer. Average age is increasing, which means they need more service parts, which is a great thing for us. You take a look at our Aftermarket performance during the financial crisis and even during COVID, it may have had a short initial dip, but then it came back even stronger as people couldn't get OE vehicles there for a while, they had aging population and they bought more service parts. And so we continue to see steady, consistent growth in our Aftermarket. And so I think it's, what, up 4% -- 3%, 4%.

For the first 6 months of the year, we're down less than 1%. Aftermarket's up 3.6%. Fuel Systems is down 3.5% based on the CV trough. So it's a balance effect.

Correct. And again, I think that it's a good cash flowing business for us and it's resilient. And so if you have a 30-year business that consistently has a market growth of maybe 1% to 2%, has 1% to 2% of pricing. And we continue to expand our portfolio and gain some share. So it's a nice consistent business that kind of dampens and is a nice ballast, I think, for the rest of the business as we go through the cycles.

What does the regulatory backdrop for internal combustion emissions look like in terms of requiring these vehicles to be cleaner and more efficient? How are you thinking about the tailwind to your business from these regulations perhaps in the form of content per vehicle uplift?

Yes. I mean, obviously, GDi is a good content increase from port fuel injection. We also see opportunities with us providing complete systems is advantageous. On the commercial vehicle side, as they go to more stringent regulations, that's going to be another content increase for us because the specifications that our customers need are really, really tight. We're producing systems that have pressures of close to 3,000 bar, about 45,000 psi. We have tolerances in these injectors that are plus or minus 0.5 micron. It's just a little bit larger than the coronavirus, just to kind of give you an order of magnitude. And we have to make that in thousands and thousands of parts a day. And dealing with a lot of alternative fuels and the such. And so I think we're continuing to help customers today on improving efficiency through GDi, higher 500 bar for plug-in hybrids and range-extending EVs, is a good step. And then we're also working with a lot of customers on alternative fuels, whether it's 100% ethanol, hydrogen, ammonia, natural gas and the such. And so, our injection systems are such that we can adapt to whatever fuel or fluid they want us to be able to use and help them towards carbon neutrality. I think a lot of the emissions regulations, they're still 10 years out when people want these ICE bans. And I think they're starting to realize that, that may not be realistic. I don't think they're going to change officially until we get probably closer. And we've seen that in the past. And we're starting to see more interest in hydrogen combustion and more e-fuels as a viable path. And I think we always remind folks, too, even on the light vehicle side, everything is not California, London and Paris. South America, Central America, Southeast Asia, India, Eastern Europe, they're not going electric. They're developing other types of renewable carbon-neutral fuels. It's going to be their pathway to carbon neutrality.

And while we're used to regulations helping your business in terms of requiring internal combustion engine vehicles to be more efficient, which in turn necessitates more sophisticated ICE solutions, there are these other set of regulations I sort of alluded to -- or proposed regulations, which seek to mandate EVs or to ban ICE engines entirely by a certain year, et cetera. What have you seen in that respect? And what has been the trend in the discussion around these regulations amidst the recently slower consumer uptake of EVs?

Well, I think from a regulatory standpoint, I think they're listening a lot more. I think they got on a kick of, "We want 100% electric." And I think they're starting to realize that, that's not a viable practical solution for the consumers. And I think it's -- there's going to be some more education. We've got a hydrogen van that we've got running around both Europe and here in North America now as a demonstrator vehicle to show the benefits of alternative fuels. And combustion is not the problem. It's the carbon and the combustion process that's a problem. And so, we're showing and demonstrating to them how valuable it can be and what a practical solution it is. We're also doing a lot of fuel cell components as well. So we've been awarded some fuel cells. And so, we have options there with hydrogen. And so, I think there's a lot of interest right now, especially on the heavy-duty side and commercial side for hydrogen combustion. And I think folks are adapting to it. And there's also a lot of work on e-fuels. And so, I think the EPA and the environmental agencies are going to start to come around, and we're doing a lot of advocacy for that.

I like what you said there about combustion is not the problem, it's the carbon. I didn't know combustible hydrogen like on purpose was an actual thing until several years ago. But it does seem to be gaining traction, doesn't have some of the drawbacks around refueling time or operating in cold weather that some of the EVs do. Can you talk about the role of liquid hydrogen -- these liquid carbon-free or maybe like carbon neutral when you consider the whole supply chain, ethanol, the biofuels, you mentioned e-fuels? What if anything is in production today? I think you actually have an award in this respect, a development award. What research is being done? And when do you think this is going to become more commercial and take off?

Yes. I mean we've got 100% ethanol in Brazil, heated tip injectors, and that's already kind of going into production. The first hydrogen combustion engine for an industrial application is launching this quarter. And so, I think we're not expecting it to take-off and be a huge revenue portion for us this decade. But I think it's laying the foundation for it to be a viable technology for 2030 and beyond and actually start generating good revenues and cash flow for us. So we're -- with that understanding, we're not overinvesting in trying to spend too much money on it, but we're making sure we have the right technologies. I mean the thing about hydrogen and liquefied fuel is we know how to pipe it, we know how to truck it, we know how to ship it to the locations that we need it. Electricity, clean electricity or green electricity is a lot more difficult. You need to generate that green electricity within 300, 400 miles of where you're using it. And so, we're not -- we don't always have enough green energy where we're actually consuming it. And so, being able to pipe it, being able to truck it in makes a lot of sense. And so, just imagine, if you have a lot of green, cheap energy in Northern Africa, that's interesting, but how do you get it to Mainland Germany? Convert it into a hydrogen, convert it into a liquefied fuel of some sort and then you can truck it, ship it, pipe it a lot more cost effectively. And so, that's where I think people are starting to make some of those realizations that a liquefied fuel, whether it's gaseous or liquid, is going to make a lot of sense from a storage standpoint. I mean I see some of these massive battery parks going in to try to store energy, and that's not necessarily green either with the amount of CO2 that's required to produce all those battery packs and store the energy. And so, again, I think that a liquefied and gaseous fuel is going to be used in transportation for the rest of the century.

And what has the trend in conversation or research or development efforts been between the liquid, the combustible hydrogen versus hydrogen fuel cell?

Yes. I mean we've actually worked with the fuel quality folks as well, to get a different type of hydrogen certified or at least offered, because the nice thing about a hydrogen combustion is that we can deal with less pure fuel, a less pure hydrogen. A fuel cell needs liquefied and it needs to be really, really pure, because if there's any impurities both in the air that's going in or from the hydrogen, it causes a lot of challenges for the fuel cell. And so, we're working with a lot of the hydrogen manufacturers. We're working with them to convert some of those vehicles to run on hydrogen and working with some of the large energy producers in the world on some conversion fleets as well, as well as on the quality and distribution of those products. So we're working with a lot of different companies right now on that.

You've announced a number of conquest wins in the Fuel Systems area. If you can comment on the trend there and what maybe has driven those wins? We've been hearing about some competitors maybe not allocating additional R&D to this area. Can you give an update on what the competitive environment looks like in Fuel Systems? Maybe how your share has trended or could evolve and as a result of that changing backdrop?

Yes. I think from a light vehicle side, competitors have been exiting the marketplace, especially the smaller players, whether they're low single mid-digit players. They stopped investing a number of years ago and started exiting. And so, things are kind of trending down to maybe 2 or 3 major players in the marketplace. Bosch is still the big player in there, 40%, 50% market share. DENSO is in there and then there are us. Marelli is in there a little bit as well, primarily with Stellantis. And so, the market is consolidating. Even some of our competitors that I just named are still focused a lot on electrification. And our customers really appreciate the fact that we're continuing to invest in combustion technology, launching our 500 bar on GDi, continuing to develop next-generation diesel technology for commercial vehicles. And we've been selected in a lot of these cases because they want a partner that's going to be there for them for 2040 and beyond. And again, 2040 and beyond is what they're looking. They still see combustion engines and demand for their applications. And so, they see us as a strong viable partner that's going to continue to help them transition and support their carbon neutrality goals. I think, in many cases, we've been gaining market share on the GDi side, about 1 point, 1.5 points a year the last few years. And we see that continuing throughout the decade. And we think that market share gain on the light vehicle side is going to help offset any declines in combustion engine production because of EV penetration. And so, we're seeing that light vehicle kind of stay in that $1.5 billion to $1.7 billion of revenue, keep our plants full, keep them generating a lot of cash as we continue to grow and expand in industrial, off-highway, aerospace and commercial bringing additional ECUs and services to it and seeing a consistent steady growth in our Aftermarket. And so, we see that trending to where our commercial vehicle and Aftermarket business is going to be trending towards 70% of our revenue. Our light vehicle OE, we think will be around 30% by the end of the decade, but still right around that $1.5 billion, $1.7 billion of revenue with really good margins and cash flow.

Great. I also saw in the second quarter that you won your first award entailing an entire system, including hardware, software and calibration capabilities. Can you walk us through what are the various components of fuel system that you supply and how they get integrated into a complete system? And I think in the past, you saw an incremental opportunity to supply the ECU. But does a full system go even beyond that? And what are the software and calibration capabilities that have been alluded to? How should investors think about the benefits of providing a full system? Is it like a CPV tailwind? Does it help margin? Does it help market share? What do you think?

Yes. I mean kind of yes, yes and yes. And I think it also really intertwines us into their business and makes us really a core partner to our customers. From the low-pressure pump in the fuel tank to the high-pressure pump to the high-pressure rail and the injectors, that's historically, customers would buy 1 or 2 components at a time. Now they're looking and saying, "Hey, we want the entire wet side system" that we'll design and develop for them. As we mentioned, we then kind of picked up the ECU as well. From the hardware standpoint, we started that development 2, 3 years ago. We took some of the engineers from another business unit at Borg. They came into ours. We started developing our next-generation ECU. We've always had all the software and calibration engineers in our business unit. We've got about 400, 500 of those, that provide a lot of services for our customers. And so in this case here, we got all of the fuel side, all the mechanical parts. We've got the ECU. They're using our software. And they said, "Hey, we want to pay you money upfront to do the calibration services for us." And if you take a look at our numbers, we get about $90 million a year from our customers for services. So they're paying us for developing the engine, getting it certified. And that really integrates us and it uses for us, it just reduces our cost. It's not in the piece price. But it reduces our engineering costs, and that keeps our net engineering cost around 3%, even though our total engineering cost is north of 5%, which shows you how much technology that we're investing. But because we have a lot of these skills, we're charging our customers for that. And by doing that complete system, there's only a couple of us in the world that can do that. And that really also fully integrates us into their organization because a lot of our OEMs have been moving a lot of their calibration technology people into electrification and autonomy and infotainment, and that opens the door for us to then get a much larger piece of the pie of the customer.

Maybe switching gears a bit. Recently, you stepped up the pace of repurchases, bought back $90 million of your own stock in the second quarter. Can you talk about what was behind the faster pace? And how do you go about generally deciding whether to allocate capital towards share repurchases versus other potential uses of capital such as M&A opportunities?

Yes. I mean the big trigger was the refinancing of our -- and paying off of the TLB. The term loan B had a lot of restrictive covenants, had a one-time leverage kind of trigger that if once we went over that one-time, that would then trigger a lot of cash sweeps and additional debt reduction. And interest rates were kind of super high. I think they were north of about 9% at the time. And getting that refinanced into fixed rate at 6.75% really opened up and removing a lot of those covenants, kind of gave us a lot more flexibility in our capital allocation policy. And so that kind of opened up the logjam that we had up until that point. And looking at our share price, we're going to look at it every single quarter and make a decision on the cash flow that we're generating and our cash position, what's the best allocation of capital. And so when we look at M&A, we're going to compare that to our own share price. And so, if the assets out there that we're looking at are trading at 8 to 9x EBITDA, and we think they're subscale to what we are, it makes it very difficult to justify when we're trading at 5. And so, we're going to continue to look at that on a quarterly basis and evaluate where we are on cash, where do we see some M&A opportunities and where their prices are and compare that to our own stock price. And again, we're going to continue to be financially disciplined, maintaining a strong balance sheet, but then just being good stewards of our investors' capital.

And Chris, did you say on the last call that if you were to go to the 1.5x that you're now comfortable with from the 1, that you'd be paying essentially the same amount of interest expense as you did at the...

Yes. Yes. Yes. Exactly.

So how did you get such a good deal? Or did you inherit a bad debt structure from Borg? Or how...

I mean the structure that was taken out last year, the term loan B was not great. Term loan A was fair. But when we went to term loan B, it was known that we were going to be spinning out very shortly. So there was a little bit of opportunistic piling on, so to speak. So the rates weren't great. So yes.

And is the comfort going to 1.5 from 1, is that purely around the fact that the interest expense is less, the covenants are less? Or is there any maybe more confidence in the outlook for the business or the tail to ICE that could be motivating that also?

Kind of yes and yes again. I think one, it's the fixed rate, so we know what it is, and we've always been confident in the overall cash flow of the business. And I think that's just emphasized with this last quarter and the consistency and performance from our Aftermarket business. I think they all kind of play into that. And so, we knew the 1x was generally people questioned it was kind of low, but we kind of said that makes sense when we're paying 9% interest. 2x makes sense if you're paying 3%, right? And it's fixed for a long period of time. And so, I think it's a combination of the interest rates, the fixed nature and the confidence that we have in the long-term cash flow ability of the business.

Yes. The cash was running well. Brady was actually giving my treasury people a hard time as we were doing repurchases last quarter that my cash balances weren't going down, and I said that's no logical, because he was giving them a hard time, but cash isn't going down and we're still doing these repurchases and I went, that's a good thing, Brady.

Yes.

Don't give them a hard time.

Well, it was -- I mean, obviously, the -- we changed our bonus structure to everybody back to economic value and cash flow. And so, I think that's also having a very positive effect on our operations and driving the right actions, I think, of the team, too.

And I wanted to ask about what trigger are you going from [ 1 to 1.5, 2 ] because all the executives, all the management teams, they say that they always weigh M&A against the repurchases. They say they want to stay within their targeted range. And -- but sometimes they will say, "Well, we're willing to go above the range for something strategic, some M&A as long as we can get back within it." But I wonder if after Aptiv's levering to buy back stock last week, that maybe will start to increase the questions from investors whether you would consider levering purely for the sake of repurchasing shares?

I think the answer would be yes. If we take a look at the value and we say, "Hey, we don't see a pipeline for a good M&A, and we think our share price is still a great value." And so yes, we would. And that's one of the things we've been asked. Going up to 1.5x could be for M&A or it could be more accelerated repurchases.

And obviously, your share price is a totally different place than it was when you presented at the conference last year. I wonder if that changes how you think about allocating capital between M&A and repurchases. I know you think your shares are still undervalued. But also, does it change the way that you think about what kind of M&A you might engage in? Because on the one hand, you can go out and you can buy things that can increase your leverage to the structural change in the industry to the hydrogen to the EV. On the other hand, you can buy back and own more of the current business. And I don't know if with the shares higher that makes you incrementally interested in some of the more strategic M&A, as opposed to the more accretive to improve the base business? How are you thinking about where you would, first of all, M&A versus buyback in light of the share price, but then also how you might allocate the M&A? Is it to address strategic reasons or to maximize the shareholder returns over the near term? Some of the hydrogen stuff might benefit you 2030 and beyond, where the stocks cheap right here and now. Did you think different?

Yes. I mean my definition of strategic is it's going to cash flow and it's going to generate good returns for our investors, and it's going to be accretive. I don't want strategic that's going to be cash flow burning and a headwind on the business. And so, I'm always hesitant internally when people said, "Oh, it's strategic." Well, that means we're going to lose money. We're not going to get a return, so I'll pass on that. Thank you very much. We want to look at assets and acquisitions that are going to be cash flow accretive and then it's going to exceed our internal hurdle rate of 15%. And on an M&A, it obviously brings a lot of unknown risk. And so, you need to also factor that in saying, "Hey, you want to expect an even higher return than we have on organic business because of those inherent risks." And so, I think we're going to continue to be fiscally responsible and conservative. And even the organic investments that we're doing in hydrogen right now, we're doing substantial amounts, but we're getting customer funding, we're getting government funding, and we have a realization that it's not going to cash flow for us until at least next decade. So I'm not going to spend $50 million a year on something that may generate cash flow in a decade from now.

Sounds good. Let's see if there are any questions maybe in the audience. Perhaps as they think of their next question, I'll ask on these customer recoveries. You had strong supplier savings, customer recoveries, $13 million in the most recent quarter. It looks like you helped your margin by like 150 basis points. Most of the suppliers we cover have commented that these types of commercial settlements are increasingly more difficult to come by. What has been your experience in recovering non-commodity supply chain costs from your customers? Is there still any more that can be extracted? I know you're not -- you're just getting back what was yours, right? And how do you see that trending going forward?

I mean it's obviously been a lot more muted this year than it was the last couple of years. I think in '22, I think people claimed it was all transitory. So we did a lot of lump sums. In '23, we realized that, "Hey, it's going to be here for good." And so, we rolled a lot of that into piece price. I think on the average, we ended up I think each year about 70%...

[ Hovering ] about 70%.

70% of those costs. So not bad, but obviously not a 100%, and it was dilutive to our margins. And that then drove us, obviously, to really focus on improving our own operational efficiencies, driving to our supply base as well to drive additional efficiencies as well, try to mitigate some of those headwinds. I think that's pretty much -- there's a few pockets here and there on some labor costs and some energy costs and a couple kind of specific regions, but not nearly to the extent that it was the last couple of years. So I think that's mitigating and I think it's also being mitigated on customers' expectations on annual reductions. We don't see increasing volumes and therefore, giving annual reductions and price reductions doesn't make a whole lot of sense too. So I think you see that in our pricing as well that, it's pretty much more flat pricing with customers rather than the 2%, 3% a year that was historically in the marketplace. So I think folks are getting a lot more balanced on saying, "Hey, they want a strong supply base. We want a strong customer, and let's partner on how we can best do that together."

But also going back to that 70% in 2023 included the troubled supplier that we had last year. We resolved that at the end of the year, 1st of this year. So this year, part of that recovery in Q2, about 44% was related to that one supplier issue, where we got that pricing back to a correct pricing. And then we also had a lump sum retro to last year that we hit in Q1. So that's also a tailwind for us going into this year just to be on board. So but outside of that, GSM does continue to work with our suppliers. There were -- there was a lot more turmoil in the market in the supplier landscape the last couple of years. It's calmed down a little bit. So we are starting to get a little bit more in terms of price-downs and some efficiencies out of that.

Very helpful. And with that, it does look like we're out of time. So please join me in thanking Brady and Chris for all the great color and insight they shared.

Thank you.