PHINIA Inc. (PHIN) Earnings Call Transcript & Summary

Good afternoon, everybody. Today here with us, we have PHINIA, and we have the CEO, Brady Ericson; and CFO, Chris Gropp. PHINIA is a global supplier of automotive parts, commercial vehicle parts -- fuel system, not parts, sorry, and Aftermarket parts. So the question that everybody is asking is what about tariffs? And I have to ask you the same question. Could you break it down for us and how you think about tariffs, both for your fuel system and Aftermarket?

Sure. I think when everybody heard the tariffs come out and you take a look at our Americas revenue of about $1.3 billion, the initial shock, you take the $1.3 billion, you multiply by 10% or 25% and I think people's hair kind of catch on fire, it is the end of the world, and then you start breaking it down into its pieces. A couple of hundred million of our Americas revenue is in Brazil. So you knock off that couple of hundred million, another $100 million of [ reman ] in the United States, you knock that off, and that gets us down to about $1 billion of revenue that we produce in Mexico. Well, then you got to start breaking it down from there and say, well, half of that revenue actually stays in Mexico. And so we're not going to be the one subject to the tariff that goes directly to our customers. And so we've done the virtual [Indiscernible], which allows us to do it virtually and not have to do the tariffs. And so that knocks it down by half. About 70% of our total in Mexico is USMCA compliant. So that knocks it down even more. And then we also have the commercial vehicle that is actually exempted. And so although the HTS codes are the same between commercial vehicle and light vehicle, but there's a I think Section 99, subsection B, whatever that says, hey, if it's for gross vehicle weight over 6,000 pounds or commercial vehicle, you can then go back to the normal 10% tariff rather than the 25% tariff. And so that knocks it down. And then, oh, by the way, it's not on revenue, it's on cost of goods sold, so that knocks it down even more. So now we're down into the tens of millions, which is a lot more manageable, [ hundreds of millions ]. And we're working with customers. I think we have a good process in place. They're already starting the audit process to go through the numbers to understand it. And again, I think we're in a very strong financial position that we don't have to be overly aggressive in order to get the money quickly, but we are going to make sure that we get our recoveries. And so we're working with them on options to further reduce it. But it's no worse than COVID and the inflationary costs that we went through a few years ago, and we'll continue to work with our customers to manage it.

The fact that you said it was a 10% normal -- you get to a 10% normal tariff tells you where we've come.

That's super normal right now. That would be a good walk through because I think people are overestimating the amount of impact.

Well, I think as we mentioned the 10% to 20%, we're joking about it. Now we're talking about 70% and 140%. And now if you tell people that we are going to settle at 10% to 20%, they're like, wow, what a great solution. It's only 10% to 20% is something we can manage. And so I think we're going through that. I think also to kind of remind folks as far as our light vehicle OE business in the North American market is only 15% of our revenues. And so if that market is down 20% because of tariffs and volume and everything else, it's only a 3% global hit. And we're seeing -- Europe remains strong for us. We're seeing some positive numbers out of there. China is looking good. Southeast Asia is looking good. South America, our Aftermarket continues to remain consistently strong. And from a translational standpoint, the weakening dollar from a translational standpoint is going to be a big tailwind for us because 2/3 of our sales are outside the U.S. market.

And we are having the discussions with our customers to pass through. I mean that's the expectation is 100% of the tariff goes through because it's not something that we can bear for sure.

Yes. So basically, the impact on tariff is small. But as you said, there might be market disruption on the volumes, but we have a very large Aftermarket component. And I would assume that people if they cannot buy in the immediate term a new vehicle they will fix it so they will buy more Aftermarket. So how should we think about that business of yours? I mean how do you sell so these Aftermarket products was the channel?

Yes. I mean we sell through all the different channels. And so whether in the U.S. market, are we working with the NAPA, the O'Reilly, the AUTOZONE, yes, we are. We also work through the large distributors. And we also have some direct-to-consumer as well depending on the product. And so that's kind of the U.S. market. In Europe, it's probably more the large master distributors or buying groups. The [ LKQs ] of the world. And so we're not restricted on any one. And so we actually -- probably 1/3 of our Aftermarket revenues are going through the OEs through the OES channel. So it's about 10% of our revenue. So we're going through them as well as a lot of different distribution channels, not only with our OE product, but also with [ all mix ] and services and support and test equipment and as such as well.

And so if I remember correctly, you expanded the amount of SKUs that you're selling and you are diversifying into propulsion-agnostic components and parts. So what is the plan, I mean how do you see Aftermarket evolving in the next 3 to 5 years?

Yes. I mean we see an Aftermarket is probably the largest portion of our business going forward. It's already 34%. We see that continuing to grow kind of in all markets, and we see any acquisitions that we're going to do, it needs to be a product line that has a good Aftermarket that's going to have 2 to 4 parts and is over its lifetime after the OE part. And so it's going to provide a good Aftermarket. And we're looking at 100% pure Aftermarket companies as well. As we've highlighted, we wanted to see our Aftermarket by 2030 at over 40%. I see a pathway of us getting closer to 50%. And I think that would be a nice balance for our organization because as we've seen last year, when fuel cells -- or fuel systems was down 3%, Aftermarket was up 3%. But because Aftermarket was a smaller percentage, we had a little bit of headwind there. And so getting at 50% or more, I think, would be a nice position to be at. The combustion engines vehicles in operation continue to increase and average age increases. So we don't see any headwinds from that. And with that being said, our propulsion-agnostic Aftermarket is now at 25%. It was close to 20% a year or 2 ago. So we're still seeing a lot of growth in adding a lot of those new SKUs, is adding a lot of propulsion-agnostic Aftermarket for us that we don't care where the market is going, whether it's going better, like the plug-in hybrid range extending or just pure combustion. And so that's adding a lot more resiliency to our Aftermarket as well.

And at the segment level, Aftermarket is more profitable. So even if it is a smaller piece, it is balancing out everything if fuel systems goes down.

Is it possible to see some opportunities within that from an organic standpoint, but also from inorganic as there are like assets you could take a look at and buy?

Oh, absolutely. We've got a long pipeline of things that we've been looking at, but we're being financially disciplined in what we're willing to pay and look for the [Indiscernible] making sure it's the right fit to our portfolio. Adding -- when people ask if you want to have [ CV ] and industrial and aerospace exposure, a large Aftermarket exposure, but also wants to be somewhat synergistic with our existing portfolio. So doing instrument clusters doesn't make a whole lot of sense because it doesn't have a good Aftermarket that goes with it, and there's not a lot of operational synergy. So products that have -- that are part of the overall combustion system that have precision machining, fluid management, systems calibration influences, low-voltage electronics, those are areas that I think we can leverage. And there's a lot of different assets out there. And I think it's -- there's going to be more interesting assets out there as the year goes on. And so we think there's some interesting opportunities out there.

And you said that light vehicle is still a fairly large component of your sales and revenue, but you are diversifying away from that and you are expanding your footprint in commercial and [Indiscernible] off-highway and even aerospace. So what allows you to do that? I mean, can you talk more about your expertise and your capabilities in fuel systems and what allows you to do this versus the competitive landscape?

I mean first is we're not exiting light vehicle fuel systems. We like the business. We think we can keep the revenue at $800 million, $1 billion and keep those plants full and running. And so we're continuing to develop next-generation technology, [ 500 bar ] alternative fuels for that light vehicle. But we just see it as a relatively flat revenue over the decade. As the market goes down a little bit, we'll pick up some share. And so we like that portion of the business because it gives us some good volume that we can then leverage and use those capabilities to enter these new markets. And the strategy that we have is really leveraging our existing human capital and our manufacturing capital to enter these new markets. And so it's clear, the engineers that we have that we're developing light vehicle diesel with GDI are the same engineers that we're applying to aerospace and applying to off-highway and industrial applications. And so it's -- in many ways, it's not light vehicle GDI capability, it's precision fluid management and system control capabilities.

Including alternative fuels.

Right. And so that -- whether it's using sustainable aviation fuel that we're managing or ethanol or methanol or ammonia or diesel or natural gas, we've got that core competencies. We understand how to do coatings, precision machining, and we're leveraging a lot of those core competencies that go into those new markets. And that's why we've communicated to folks that as we enter these new markets, we don't need to increase our R&D as a percent of sales. We don't need to increase our CapEx as a percent of sales because we're able to move our existing human capital and manufacturing capital. We've converted a lot of our manufacturing capital that was doing light vehicle. It's now doing off-highway in aerospace, along the same lines. We can just kind of convert them over and be very, very efficient in how we're using our capital.

And how would you say that your competitors are operating in this environment? Because one of the concerns, at least when you went public was like, vehicles are going to be under heavy pressure from BEV. But because you're a pure player in this space, you are laser-focused on executing. So can you talk more about how you are approaching these markets versus your competition?

I mean customers want both on the OE side and on the Aftermarket side, they want a supplier they can count on for decades to come because they have to be able to service these vehicles. Light vehicle, maybe another 10, 15 years after production. Commercial vehicle, they want someone's committed for 30 to 40 years after OE production. And if you look at some of our competitors' websites, you can't find fuel systems on their website. They're even communicating that they're trying to exit and reduce their exposure. So do you want to pick them as your long-term supplier or someone who's really focused on continuing to invest in next-generation technology for the combustion side of things. And so that's where I think we've seen a lot of shift towards us, people knocking on our doors, asking us to quote on new business that maybe others are walking away from because their capital allocation strategy is putting it into infotainment or semiconductors or other things, and therefore, they're starving maybe some of the combustion side. And so we see ourselves as a very reliable and trustworthy partner, both on the Aftermarket side as well as on the OE side.

The trend is actually your friend right now because EV is -- in the future, it will certainly be here, but it's absolutely a lot slower than people predicted each year, it just gets pushed out.

Yes. And again, that was after probably 8 years of people increasing their estimates of what EVs are going to be, and now they're consistently decreasing. When we were spun off, we were trying to convince folks that, hey, EV is not going to 100%. And we were laughed at and we couldn't get debt and we were wrong type of thing. EVs are going to continue to grow in share. They're just -- in my opinion, they're not going to 100%. I think we're already starting to see that plateau a little bit in China. They're pure -- we got to always remind people, don't say electric vehicle, say battery electric vehicle to make sure that people are clear because they mix those 2 terms up. And so their battery electric vehicle in China is kind of starting to plateau a little bit around that 25%, 30% level. Is that going to be the global average moving forward? Maybe. But I don't see it going over 50% anytime in the next couple of decades.

I think the U.S. is about 8% or 9%, I think.

Currently, yes.

But even when we were spending 2 years -- 2.5 years ago or 2 years ago -- 2 years ago, we were starting to see -- we were having some of the Chinese big OEs that are considered pure EV coming to us and asking us for injectors because they needed a hybrid, a plug-in hybrid to put into their portfolio. That was 2 years ago. We're finally starting to see that in the U.S. OEs where they're starting to add more hybrids back into theirs because they realize, okay, we hopped too quickly. We also had a quote that we wouldn't go down on price. We lost the quote about a year 18 months ago. They've come back because the supplier that went with them, they went with said, well, I'm not going to commit to you beyond 2030. And they said, we can't do that. Our plans are longer than that. So now that's coming back to us. So it's interesting.

If I could inject on the hybrid side, how does your portfolio play with not BEV but a hybrid vehicle?

That's a combustion engine, whether it's hybrid, plug-in hybrid or just a pure combustion, it's got to -- generally it's a GDi system, and we support it. And so in some cases, there's applications that the same part goes into their combustion that goes into a hybrid that goes into a plug-in hybrid. Our parts may not change because, again, in all those applications, they still need the engine to provide full power at times. And so the power requirements and the performance is still there. The biggest change for some of the hybrids and plug-in hybrids is some of the transient response. They can use the electric motor to help on the stop start that can help it for launching some of the transient response, but that's really not going to have an effect on our fuel injection system. It may have an effect on other components.

It's good. And so that's on the light vehicle side. I would assume that on the commercial side, it's even harder to go electric. So it sounds like that you have a much longer tailwind there also in terms of Aftermarket.

Yes, absolutely. Again, as I mentioned, the commercial vehicle, you have the Aftermarket for 30 years after production, but they want to keep that fleet up and running. Even before we spun, we were being selected for a fuel injection system for a large CV customer. And their point to us was that, hey, we're looking for a supplier for 2040 and beyond to supply them fuel injection systems. They fully believe that combustion engines and even diesel engines are going to be a large portion of the commercial vehicle fleet for decades to come.

So -- and we discussed earlier that some of the OEMs are also pushing the existing programs for longer. How does that work? I mean, do you get more pricing? Are you able to basically lever the depreciation of those products better?

Yes. I mean even if they're extending them, there's always going to be some amount of renewal or upgrade as far as a performance standpoint. I think now with tariffs and supply chain challenges and everything else, there's always going to be new supplier launches and revalidation to kind of drive productivity. I do think we've gone from a state of customers expecting 2%, 3%, 4% annual AIS to now, hey, we're kind of okay, just keep it flat over the life of the contract. And so we are seeing some changes there. And I think that's primarily due to because we don't see this increasing volume. So they could push the volume when we had 3%, 4% light vehicle combustion volume increases, they could drive more productivity and get more AIFs. But I think on some of these programs, now the AIFs are being pretty much eliminated and we're not giving AIFs because we're offsetting inflation, because there may be less productivity that we can drive an additional AIS from our supply base. So I think it's becoming, in many ways, closer to commercial vehicle partnerships, I think, with the light vehicle OEMs. They know that we both need to be successful and profitable. In our space, overall competition is declining. So it's not as if they've got 10 to choose from. There may be 1 or 2 to choose from. And so I think it's causing the relationships to be a lot closer and more collaborative.

And I would like to touch on the off-highway in the Aerospace. For Aerospace, you just won 2 new awards and it should be certified by the end of the year, if I remember correctly. So -- how are you taking that market for the off-highway? I mean why didn't you enter into that market years ago?

Well, I think, again, our prior parents, they were light vehicle focused. And maybe they worked on some commercial vehicle and some off-highway, but everything was really driven and focused on light vehicle. I think when we looked at our portfolio of products when we spun, it was a much different portfolio than our prior parents. And I think you see that with 1/3 of our revenue at Aftermarket. CV is significantly higher as a portion of our sales. And just to clarify is we do have a lot of off-highway and industrial companies now, whether it's Polaris, JCB, Caterpillar, John Deere, we've been with those players, but they just haven't been highlighted or talked about. And it hasn't been an area where people are saying, "Hey, let's try to grow that business. We got the business or took it because it was just available, but now I think it's really one of our focus is to grow it and ensure that we have the right product portfolio to support those customers. And that's one of the good examples where we converted one of our light vehicle GDi lines to kind of a direct injection low-pressure diesel application. So it's a GDi for diesel. So it's a 350-bar system that we're used in the same basic design, but we converted from gasoline to diesel, and it's for off-highway applications. As they start going to Tier 4 and Tier 5 emissions, they need to upgrade from their legacy injection systems that are 3, 4 years old, and now they're going direct injection common rail, and they're getting a significant amount of fuel efficiency, which is not as important to them, but a significant reduction in emissions and improved performance that is really advantageous for them.

And so for commercial and also light vehicle is important, the regulation on emissions. And given the latest developments, especially in the U.S., what should we think about in terms of replacement cycles for commercial vehicles? Do you think that there's some -- the pull forward of demand is going to be delayed because some of these regulatory requirements are changing?

Yes. I think going -- kind of going into the end of last year, there was still an assumption that we're going to have a prebuy of some sort in the U.S. latter half of this year. I think our expectations are probably tempering quite a bit. I think the hockey stick, we still think the revenues are going to -- or the volumes are going to go up from where we are in Q1 and Q4 of last year, but it's maybe not going to go up as much. And I think that's for a couple of reasons. Obviously, the fleets are a little bit concerned on demand. And are we going into a recession? Do they want to finance a bunch of new trucks? And I think people are moderating the impact of the next generation of emissions. I still think it's going to go into place. But I think the cost impact and the potential impact on fuel economy, they're coming to a realization that is not that different. And therefore, if you're not -- if the new vehicles may even be more fuel efficient, you don't need to prebuy because there's not a detriment for going to the next generation, which is very different than the consent decree that came out, what, 2001, 2002, where the next generation because they had to rush through EGR and a bunch of other emissions devices, they were seeing a 5%, 7% fuel economy hit. And so of course, they get a lot of prebuy because they didn't want those less efficient applications that have -- also have lower reliability.

Any kind of pause in the [ OE buy ] is obviously going to help our service and Aftermarket because they are going to have to replace it. It all depends on how much they're on the road. As long as they're driving and they're putting miles on those injectors at a certain point, you do have to do a replacement.

Whether it's a new vehicle driving miles or a used vehicle driving miles. It's a key for us.

[Indiscernible] replacement for a truck, like a commercial truck. [Indiscernible] 3x?

Yes, at least because again, they're doing, say, a heavy-duty truck they're doing upwards of 100,000 miles a year. And so if these things are going anywhere from 400,000 or 500,000 miles before they'll do a full engine rebuild which will include the injectors. And again, what's kind of interesting is we actually sell our injectors in 6 packs. And so rather get them the beer, they can get their 6 pack of injectors and they'll do.

[Indiscernible] beer too, just don't recommend doing.

And it's against the same thing with a lot of the Aftermarket is the bulk of the cost of that repair is not necessarily the injectors. It's the labor and the downtime of that vehicle. And so that's why they generally replace all 6 rather than trying to replace 1 or 2. They'll just replace them all to make sure that everything is right and continue to go forward. The same thing is true of in the Aftermarket on the light vehicle side. If you look at your repair bill for your vehicle, if you need to replace some injectors, the largest portion is going to be labor. And so if the injectors -- if the parts are $200 and it's $1,000 in labor and now the parts are $250, it's not going to change the consumer's question of whether they change the injectors or not. And so that's -- they're going to be shocked by the labor. They're not going to be shocked by the parts. And in our case, again, when you're carrying a part of the engine, you don't want to replace 1 or 2 injectors. If we got that much in fact, they're going to change the whole set. And our parts are nondiscretionary and the fact that if the injectors aren't working, your vehicle is not running. And so it's not as if they can say, well, I'm going to delay later. Well, that made you not drive them.

And one of the strength that PHINIA has is the brand in the Aftermarket part is the -- how do you leverage your brand, the Delphi brand specifically across the geographies?

Yes. I mean it's a global brand. I mean you put Delphi in about every -- any component and people are going to think it's OE quality because that probably at one point in their career or lifetime, Delphi made that part, right? And so whether we add it to steering and suspension, we don't make it, but we buy it, but we still qualify it to our OE specifications. We put a Delphi label on it, and we can get a premium for that product. And a lot of our customers are asking us to, hey, even raise the price because you have a premium brand. The way that we also draw it from the mechanics and the workshops is we have a lot of YouTube videos and training. We have a lot of -- if you look at some of our LinkedIn links as well, we've got training centers that we're certifying a lot of these technicians are flying people in from all over Europe to come in and get certified at our locations, not just in our products, but how to properly and safely disconnect the battery, how to disconnect a plug-in hybrid, how do you service it. So we do a lot of work that's continuing to build on that brand and that reputation. And I know that we've kept our first-time fill rates at north of 95%. So they're saying, hey, we know we can get it. We know it's good quality. It's OE. And I know when I fix it, it's going to get fixed right. And these guys are helping me ensure that when I do a repair for the mechanics, they know they have the right tools and support in order to do it correctly.

And from what I remember, most of your sales in Aftermarket are North America and Europe. Majors are still -- they have a small footprint. What's your plan? Are you planning also to have a similar growth in Asia and have -- and how would you do that? Do you want to increase the parts that you offered or you try to leverage the brand also in that region?

I think it's all of the above, whether it's continuing to add SKUs. I think it's a different market because the average age of the vehicle in China and Asia is much younger. I think the competition, the technology there is still a lot older. I mean there's still a lot of PFI where there's a lot of competitors. So the market isn't nearly as robust. I think once it starts going to more direct injection, then I think we start to have a lot more advantage to where they're going to really don't have a choice other than going with one of the big 3 that provide that product. And so I think it's going to take some time for that car park to kind of further age in the amount of miles. There is a lot more competition in China locally. Obviously, IP regulations are a little bit different, a little bit more relaxed. And so you can get competitors coming in maybe a little bit faster using your IP. But we still have a dedicated team there. Still see a lot of growth outside of China as well, but we think it's just a less mature market.

But to be clear, right now, there's no one that we found in China that can do injectors because it's a very complex part to do. And also, it's a fragmented market. They don't have in China surprisingly yet an AUTOZONE, an LKQ or any kind of buying group that that market has not matured to the point that they actually have that kind of.

Do it yourself. And again, I think we were -- Delphi was a little bit late on the fuel injection business getting into China. And so I think our main competitors were there a lot sooner. And so we're still probably in the last 10 years and still kind of ramping up. And so the age of our products is still probably much younger than most others. But as Chris mentioned, if you have the direct injection business, you're going to get the service business because it's difficult to do a job in replacement. With that said, the average cost of vehicles in China is a lot less. And so whether to repair or not repair and how much they're willing to spend to repair changes quite a bit, too.

And -- so in the Aftermarket, I would assume that at least for the fuel system part, you are the manufacturer. But for the propulsion of agnostic like suspension steering, you blend your sourcing maybe part in sourced and the other one is made by you. So going forward, if you want to push the expansion of the Aftermarket business, what would you focus your attention on? Would you rather buy or like build facilities to manufacture the parts or you would rely more on third parties?

I think the -- from an acquisition standpoint, if we do an acquisition in the Aftermarket, they need to have manufacturing. Buying a distributor, I don't think makes a lot of sense for us. We can do it on our own. If I say, I'm going to hire 10 more engineers and I want you to launch another rather than 3,000 SKUs, I want you to launch 5,000 SKUs, we can just do that. So buying someone who's just a distributor doesn't make a whole lot of sense for us. We can do that more organically. I think if we do an acquisition and/or vertically integrate, adding some manufacturing capability makes sense. Right now, about 50% of our Aftermarket revenues comes from our OE plants. We produce it, and that generates about half the revenue. The other half we'll buy from third parties during suspension braking, and we'll use third parties to ensure that we've got 95% coverage of a particular product line. So it's our injectors and some other injectors to make sure we can offer full coverage for them as well.

And -- so I remember that when -- the last time you reported earnings, you had fairly high tax rate and.

Still have a fairly high tax rate.

But I guess [ the decline ] is try to optimize that. And from what you said in the past that there is a problem of tax structure, I think it was basically in Europe. So what's the plan there? What should we think in terms of time line for a reduction of the tax rate? And where -- and how low can it go?

It's going to take a couple of years, and it's just doing very boring stuff structurally that we have to do. We got one hurdle completed in Q1. There's another hurdle that we have to get through in -- at the end of Q2, or late Q3. And it's just literally the team just chunking away and going after that. It's going to take a couple of years. We've had -- we have all the experts out there. They're all starting to come together and coalesce and we know the path, but it's going to take a couple of years to get all that and done. And it's not due to lack of trying. It's just as we try to exit some of these plans and get out of some of these holding companies in these jurisdictions, you have to wait for the government as you start to exit or shrink down something in a jurisdiction, they're obviously going to take -- stand back and take a look at it. You have to go through all the steps, get through that and then move to the next thing. So it's just a slow, very boring process to get through but we'll get there. It will be sub-30% in a couple of years, slowly over.

Slowly overtime. So it will be a tailwind from a cash perspective for the next few years. And maybe high now, but it's going to be coming down and it will be a tailwind for us going forward.

Yes.

And going to cash flow, you generate a significant amount of cash. How do you plan to allocate that cash like organic growth, M&A or like just returning it to shareholders? And as a follow-up on that, what's your cash balance that you need to operate the business properly?

On capital allocation, I think, first and foremost, we want to continue to support our base business capital investments to support our organic growth. That's kind of number one. Number two is we want to make sure we keep a strong balance sheet. So we have a target of 1.5. I think we're at 1.1 right now. So we've got a strong balance sheet. Net leverage is very good. Yes. We're then looking at liquidity as well. So we want to make sure that we have between our undrawn revolver and cash, $700 million plus is what we would like to see. Then we start going down further down, we want to maintain a good dividend for shareholders. I think we've targeted right around that $40 million to $50 million of our free cash flow for dividends, which is why we bumped up our dividend in order to kind of stay in that range as we continue to buy back shares, we need to bump up the dividend to kind of stay in that range. And then the final is going to be the M&A and share repurchases. And so we'll sit down with the Board every quarter, take a look at our cash balance, take a look at our cash needs going forward, see what the M&A opportunities are, see where our stock price is and then make a decision there on what we want to do for the next quarter. The good challenge we have is we have a very large amount of cash on the balance sheet. We have low leverage, and we have a cash-generating business on a quarterly basis. So every quarter, it's going to increase cash balances unless we do something from a capital allocation standpoint.

And we've built that into our overall bonus structure because we don't -- I've never cared for bonus structures that were based on EBIT or EBITDA returns because as -- if you get into a market condition where everything [ dies ], you can get to a point where the business doesn't care because they -- you're down, so everything is out. So we're out of the money, so nobody cares. But if you're on an EV, which is what we're on, the business has to drive the balance sheet too. So they have a vested interest. And if the market goes down, I've got to get my inventory down, I've got to get my receivables down. I've got to drive my working capital to a good level that keeps in line with whatever is happening in the market, and they're incentivized and they know that. So for me, EV has always been a really good way to drive the entire business and to get all the employees going in the same direction and making sure that their focus is making sure the balance sheet is good. and clean and that we're driving as much cash as possible in the business.

And what was your last portion of the question?

The minimum levels. I mean, if you went into a really, really bad downturn over 3 years, we want to keep $200 million and $250 million range, but that's still pretty healthy.

And that's true. That's just the way that we're currently operating right now. I mean there's a lot of our peers that take it down to $10 million, but they may have a larger revolver and they tap into the revolver kind of in and out and they try to maintain as little cash as possible and just go in and out of the revolver. That is something we could do. Obviously, we're global. But right now, we're kind of saying, hey, without having to tap into the revolver on a regular basis, if we're around $200 million of cash, that's pretty comfortable for us.

And one last is on the M&A -- so given the current environment, what would you do in terms of -- what would be a good target for you? Like would you go for a bolt-on small target just to increase your marginal capabilities in some specific area? Or would you also consider something a little bit larger that can help you to achieve your targets faster?

Yes. I mean I think where we've been focused for the last -- since then is really on smaller bolt-on acquisitions, smaller in nature that we can fund just some cash on our balance sheet. I think we have to first both prove internally that we have the processes of doing M&A that we have a good due diligence that we can integrate them well and then prove to investors that we can do a good job before doing something transformational or something larger. If we go out and 12 months after spinning with an unproven track record and do something transformational, we thought we were just going to get crushed at that point. And so we want to focus on proving the folks that we can do a smaller, whether it's a couple of hundred million in revenue or less, get that done and then that may kind of open up. Obviously, as the quarters go on, we continue to get, I guess, more of a track record of being good operators and good capital allocators that as time goes on, that also then kind of open things up. And so I think over time, we'll be able to do larger deals. I'd like to see the stock price up a lot more before doing a larger deal because we more likely do use some equity because we don't want to lever up that's kind of a key focus for us. Would we lever up a little bit above 1.5, maybe a little bit. But we're not going to be ones that are going to lever to 2, 2.5 because that can quickly become 3.5 to 4 and cause a lot of challenges.

And very last one. Could you remind us of your long-term targets?

As far as split of the business or revenue?

Like your financial target, the long term [ 2030 ].

Yes. I think we've updated that, I think, last summer, where we think comfortably we can get to about $5 billion by 2030 with our existing cash flows. That's going to be averaging around 2% to 4% organic with maybe about $700 million to $800 million of revenue being acquired. And we think we can support that with our -- with our strong cash flow because again, if we average $200 million plus a year of free cash flow in the next 5 years is $1 billion plus. That's going to generally buy at an EBITDA in a similar range of 5x to 6x. We can pick up $700 million and continue to give dividends and buy back shares in that time period.

Thank you very much.

Thank you. That is great.