PHINIA Inc. (PHIN) Earnings Call Transcript & Summary

All right Next up, we're very pleased to have with us PHINIA, Tier 1 supplier for automotive, commercial vehicle, aftermarket parts, market cap a little bit under $2 billion, but I know Brady wants to get that higher. So...

Should be higher.

So thanks for joining us. We do have with us Brady Ericson, CEO; Chris Gropp, CFO.

So I mean, I guess just to kick things off, 3 weeks left in the quarter, probably have schedules out here for the balance of the year, probably heading into third quarter already. Can you just talk a little bit about what you've seen, how you've seen the quarter play out in terms of the customer production schedules, how have those developed? Anything meaningful? Obviously, there's always some adjustments here and there on the light vehicle side, in particular. But anything material to sort of note that sort of played out different than what you thought earlier in the quarter?

No. I mean, our view is in our full year guide, I think, we're still comfortable with it. And again, just as a reminder folks, we're seeing probably most of the volatility in the North American market, but that's still a small percentage of our business. Europe is still kind of hanging in there, doing well. Asia doing well. South America doing good. India doing good. And our Aftermarket continued to be strong. So from our perspective, it's kind of well within our original expectations. We know Q1 was a little bit soft. That's primarily because of the Chinese New Year always in Q1. And I think people came out after the winter shutdown and Christmas shutdown a little bit slower. But as far as current run rates and EDI, we think things are pretty consistent right now to our expectations.

When you're talking about some of that volatility in North America, is that on the -- are you specifically talking about the light vehicle side or are you including some of the commercial vehicles...

The commercial vehicle as well. I think we're seeing some of that. But in many ways, it's just more noise in investors or the market or press. Our order boards have remained pretty consistent. Again, we supply into the engine manufacturers, and they tend to have less capacity. And so they continue to kind of run at a pretty consistent clip on the engine side and maybe the vehicle side may see a little more volatility.

We've had slightly more strength on the Aftermarket in North America than we expected. We're not talking massive numbers, but it has picked up and it's been stronger coming back stronger. Last year, it was our European Aftermarket was extremely strong, and that's held, but we're seeing North America Aftermarket actually coming up.

What's driving that?

Good question.

I think, one, we did some organizational changes there as well, and we continue to bring more products to market. We announced it with each of our earnings calls, some of the new wins. And in Aftermarket, you win and generally within 3 to 9 months, you've got the business coming in. So it's a much faster cadence. Again, Europe, I think last couple of years was really strong because we rolled out steering suspension and braking as a new product line. And now we're starting to bring more of that product line in North America. And so they're seeing a little bit more pick up there, too.

We've also had strength in China light vehicle. So GDi has been really selling well in China.

In North America, and let's stick on the light vehicle side. I just want to sort of -- it seems like there's some like near, mid- and long-term dynamics that I'd sort of like to sort of walk through. So in the near term, for instance, like we know GM is one of your big customers. And again, not saying IHS or sort of S&P is sort of the bible. But if you look at some of their forecast there, I think they do have some of their programs down somewhat materially in the back half of the year. Wondering if that is sort of something that's embedded into your outlook as well or whether you think there's maybe some adjustments that need to happen there?

We think there's probably more adjustments. Again, we see a consistent order board across pretty much all of our customers. What we saw kind of last year, Q3 and Q4 were soft, and that's kind of continued into this year. And so from a run rate in a production, we haven't seen a lot of changes. We were originally hoping to see things kind of pick up in the second half, both on commercial and light. Maybe the pickup isn't there as much as we expected, but it's not going down from kind of current run rate that we see right now.

And I guess mid and longer term, right? And I think this has sort of been your view since the spinout is that the ICE engine has a much longer tail than people expect. That's proven, I think, to be correct. And I think if you look at the way regulatory policy on emissions and EVs and California sort of is evolving, maybe there's even more extension than sort of people thought. Now I know none of that is officially settled or set in stone yet from a policy perspective. But I am curious if you're starting to have some conversations with your customers about supporting programs for longer or maybe even some new programs that might be hybrid, might have be plug-in hybrid, but still have sort of that combustion engine that would need a PHINIA product.

Yes. I mean from our perspective, the conversations with customers have been consistent. It was happening before we spun. People didn't believe us. But these things were happening with some of our Chinese OEM customers that are known for battery electric vehicles. They were asking us for 350 and 500bar GDi technology for their plug-in hybrids and full hybrids and range extending EVs back in '21 and '22 because they recognize that the battery electrics are good for some applications and some percentage of the population, but it's not for 100%. And so I think we even saw it with GM with their latest announcement with their engine plant. Well, now they make a press release about it...

New York, yes.

3 years ago, they were doing $1 billion to their Flint and truck, but they didn't make a press release about it. They just didn't highlight it. And so I think people are just whatever it gets on the front page, they think that's the first time it's ever happened, but it's actually been happening for years now. And then even we're talking with folks, and I still don't think they understand when they talk about electrification, for some reason, they always bundle together plug-in hybrids. And a plug-in hybrid still has a wonderful combustion engine in it with a GDi system in it. It has to have the same performance as a standard combustion engine because that plug-in hybrid is only going to be good for some transit response improvement and maybe 30 or 50 miles. And so you still have to have the full performance and drivability in that combustion engine in that plug-in hybrid. And that still requires a full GDI type system. And I think it's confusing folks.

Yes. That's a good point. I guess like you sort of brought up China earlier, where obviously, this has been more pervasive, like we've also seen the advent of the EREVs or the range extender EVs in China, which also have a combustion engine, but maybe just for a different purpose. But are those also using GDi technology or...

There's GDi or PFI. I think we've got a PFI application launching with the range extender. But there's still some technology that they're going to need depending on how they want to use it and how efficient. I think the initial ones will probably be a PFI. They're trying to make it run steady state as efficiently as possible. But I think there may be a potential down the road where there's a cost-effective GDi system that works for them, too.

Okay. And then just with the customer specifically in North America, I mean I think, at least, to me, my understanding was that there were conversations with customers about extension of current program and engine programs. I guess, the question is though now, like, are we actually even seeing conversation about new potential programs?

Yes, I think they are. I don't think we'll see a ground-up engine development as far as new blocks, new heads. But I think they're already working on, "Hey, how do we convert some of our pure combustion to hybrid." And they're looking saying, "Hey, we need to go from 350 to 500bar." Hey, can you increase the compatibility with E15 or E20 or E80 or E100, alternate fuels," and that's going to require some adjustments to our fuel injection systems. And so I think we're seeing more and more of that now. I think we've announced our first E100 in Brazil. We're in ethanol. We're in natural gas. We're in diesel, gasoline, hydrogen, ammonia. We can do all those types of fluids. And we're going to continue to develop the next-generation technology for them. And because I think it's -- they're going to continue to have these engines for decades to come in parts of the world. Some parts of the world may go more electrification, but I still think we're going to be seeing combustion engines in 50 million, 60 million units a year.

We see the extensions on the light vehicle side, but where we really see more of a request for an extension and commitment to longer term is on the CV side for sure. And Brady has, for sure, been in conversations with the owners, the people that are running those companies and asking us to stay in longer to give them commitment. And we've actually had quotes come back to us because some of our competitors didn't want to commit beyond 2030 and beyond. And so we've actually had them come back and had the buyers actually come back and ask us to requote because they need commitment beyond that period of time.

It's actually a great segue to the next question, which was on the competitive environment. And maybe you just sort of gave an inkling to the answer here. But I think part of the interesting aspect of the PHINIA story was you had this market which, a, maybe wasn't going to decline as much as some people thought, but b, you definitely had competitors who chose to exit the market because they thought there wasn't a future in it, which led to share gains for you. I guess now that you've proven to be maybe more right than wrong, have you seen any retracement on some of those strategies from the competitors and say, maybe we don't want to get out as fast, maybe we should invest some capital here?

I think it's going to be very -- this is a very capital-intensive and very R&D-intensive product line for direct injection. Once you go direct injection, there's a lot of competitors that fell off because port fuel injection was relatively low tech, a lot of people were in it, and therefore, it was a much more competitive market. Once you go to direct injection, your number of competitors get down, gets shrunken significantly. Now a lot of the small players that were in the low to mid-single digits market share, they're the ones that are exiting. And for them to not invest in R&D and then try to reinvest to kind of get back in, I don't think it makes any financial sense for them whatsoever because we don't need more capacity necessarily because the market is still going to be kind of flat to down. So if they're going to get back in and there's going to be 4 or 5 competitors and they're 1/10 the size of the largest competitor, I think it's going to be very difficult for them to compete. So I think the smaller players are going to continue to kind of exit. And some of them have sold off some of their plants and manufacturing already. And then I think it's basically the 3 big ones with Bosch, DENSO and ourselves. And I think we're the ones that are the clear -- clearly committed to this midterm and long term. And we're focused on the next-generation technology and being great partners for them. And I think one of our competitors is not necessarily saying they're committed to long term. And another one is in it significantly. So I guess they've got the bulk of the share. But again, it's a small piece of their overall business. And...

Well, that's what I was going to say, like I think whether -- and I don't want to sort of name competitors, but I think like when you look at the larger competitors, right, like one, I think your question -- you could have questioned over the past couple of years, just commitment to the product, but the other consideration, right, internally at the organization is capital to that product versus other potential alternatives, right? And that's sort of -- again, you're sort of solely focused, you're committed, right, like this is what you're investing in. I guess that was sort of the real impetus of the question. Like have you seen any evidence that there's been a retracement on their strategy to maybe start to reinvest a little bit more or commit some more capital to it?

I think I wouldn't say add more capital. I think they may be getting some a little bit more aggressive on pricing to keep their existing programs. I think on new programs and on our own business, we haven't lost any of our own business. So we're not losing what we consider kind of maintaining our current business. The conquest business for us to gain market share may be a little bit tighter with one of them, but there's still other markets that we continue to grow in. And again, our goal for our light passenger vehicle business is just to gain enough market share to keep our revenues flat. And so there's -- okay, they're getting a little more aggressive, but guess what, the combustion engine decline is not as steep anymore. So I don't need to gain as much in order to keep that just shy of about $1 billion of our revenue.

But is there still not like if they're sort of trying to start to play the price game to sort of maintain share, but they didn't make the necessary investments in the years prior. Isn't there a technology gap that like, yes, your product might be a little bit more expensive, but like look what you're getting for this product? And does that help you win in the...

Absolutely. That's why we've been winning a lot in China with our 500bar technology. And so we're the first one to market with that, and we continue to gain more customers and launching in more applications. And that is an area to where we're differentiating. If they want to go down that path, it's a great solution for them. Do they have to have 500bar technology? No. They can spend more money on variable cam timing or turbocharging or more valves. There's other technologies they can use, but it may not be as cost effective as switching to our 500bar technology.

Understand that most of the technology, if they shed it, what they're shedding on the R&D side are the people, the engineers that really understand this because I've been -- and Brady has been in a lot of different automotive businesses, but I've never been in one that had such precision, and it was -- there was such knowledge held by the engineers themselves and they're driving it. So if they've gone through -- if our competitors have gone through and if they have shed those heads or pushed them out to try to spend on other areas, it's hard to get that back. It creates a huge gap. And we have not done that. We really still have all of that asset remaining because it's important for the technology for sure.

Maybe just going back a little bit to your -- like the here and now and your recent results and your outlook, I think you talked about $4 million of tariff impact in the first quarter that you expected to get some recovery. I'm not sure if that's happened yet or if that's sort of taken -- so that's been settled. We've gotten...

Not all of it, but the authority is stilll...

I think we've resolved with most of our customers already the pass-through mechanism at 100%. We're confident we'll get there with the rest of them in the quarter. Maybe a little bit of hangover, but I don't expect much. I think this is a much easier one to share exact information of what we're paying and the implications. I think we've got those systems and processes in place from the inflationary cost pass-through and the challenges that we had from '22 and '23. So we fired it back up again, and Chris and her team have done a great job to actually add it as a line item to track it and make it very clear and transparent for our customers kind of going forward.

And just to be clear, like that $4 million or sort of what you embedded to keep going forward from a tariff perspective, that relates to the non-USMCA compliance portion that are incurring that you have to pass on...

And/or if the reciprocal tariffs got put in place, some of our suppliers have some impact depending on the material they're bringing in. So that was just in total of all both from our suppliers as well as us shipping to our customers in the U.S. We've worked a lot with them in order to mitigate it, whether it's shipping directly to their plant in Mexico, whether it's increasing our USMCA compliant and have plans to offset. So we're working very quickly and closely with customers to try to mitigate it first. We're not just putting up our hands and saying, "Hey, you've got to pay for it all." We're really working with them as a partner to try to resolve it as quickly as possible because we ultimately want them to be successful, and we're trying to offset as much as possible for making to the consumer.

Right. Now I think is part of the reason why some of those reimbursement mechanisms have been swimming along in terms of customer conversations is because -- and I think this is -- my timing might be off here, but I think like when you issued your guidance, we didn't yet have this 3.75% sort of mechanism for the automakers recover. So once they got that ability, did that make those conversations a little bit easier to sort of try to start to get reimbursements?

I think it may have. But again, we were well down the path even before that came out. I think the expectation was there, the communication was there with customers of what was expected. And it's not something that we can just kind of absorb on our own. The numbers are just too big.

Plus, it's in 2 different pieces. So the Aftermarket, it's actually in piece price, and we've already pushed through one price increase for that, and I have already put notification out of possibly another one. We're not going to do it if we don't need to, but there's possibly going to be another one. And then the other is basically a surcharge based on the HTS Code of the component that it ends up being. So it's coming out in 2 different pieces. But yes, I agree with you that when we went out, that last MSRP, basically duty drawback was not in place. That gives the argument for us to push it through even more because at the end of the day, they have a pool of money that they can then pull back and supply.

Is it -- Chris, is there any like earnings or sort of cash flow timing impact we should expect for this? Like are they -- are the automakers actually paying you for this yet or because it's part of it is...

Yes. So some of it is going to be in that surcharge, which is going to come in on their normal terms. So it will be based on our normal either 45 days or whatever their payment days are. We've had one that is wanting to do it on a quarterly basis, and they're a very good partner. So we're contemplating that. It's not a big -- cash-wise, it's not going to be a big issue.

Okay. I think just sort of heading back to the guidance and this has sort of been one of the bigger, I think, investor conversations we've had since you reported was the reiterated EBITDA guide about 4 -- I think it implies like 14.5% over the next 3 quarters. Now I understand like that's just average there, right? Like it's nothing sort of smooth like that. But it does imply, I think, based on sort of everything else you're saying, like there's some additional cost savings needed in order to sort of get that run rate EBITDA up. And I know you sort of talked about some -- there's maybe some uniqueness to some of the first quarter margin that sort of should repeat. But I guess this is a long-winded way of asking the question, which is like how can investors get comfortable with the step-up from 1Q levels to sort of what's implied and needs to happen over the balance of the year?

I guess the first thing I'd do is take a look at all of our quarters. There's always going to be -- there's not a direct tie between revenue and EBITDA, and there is a quarter where we had north of 15% EBITDA for the quarter on lower revenues. And so there's always going to be some kind of puts and takes in each quarter. We get -- we're fortunate enough that we actually get to take a look at our forecast in a detailed manner. You guys have to kind of guess a little bit. And so from our perspective, we're very comfortable with our revenue guide and our EBITDA dollar guide. I think the challenge is really going to be on that, say, that $40 million, $50 million of tariff pass-through at no margin on the OE side. Does that put a little bit of pressure on the EBITDA percentage? It's not going to put pressure on the EBITDA dollars. And again, I think, in general, we saw the volume impact that we're seeing and now is in our latest forecast is offset by the tariff pass-through as well as some FX being less of a headwind. And so they're kind of balancing each other out. And so again, we take a look at our numbers and what we see in the EDI, and we're very comfortable with where we are in the guide.

Are there some additional costs...

We do have cost savings. I mean our teams are working on that all of the time. They are -- I mean, you've seen our GSM numbers. They are looking for savings all the time. That is coming through. And then productivity with our units, that's just something that they constantly do is looking at better productivity. So...

Yes. And with things -- with uncertainty, we've already gone to folks saying, hey, as far as travel, discretionary spending, what can we do to try to mitigate that over time. So people are doing that, kind of delaying some hiring. But again, we still see the number of new program launches and our new business wins and our growth still there in the long term, and that's what we're really focused on, a little bit less just specifically on 1 quarter. With the OE being down and Aftermarket up, that's also going to be from a mix perspective, good from a margin perspective as well. So I think there's going to be some puts and takes. And again, we're still very confident with our guide.

Well, glad you found the budget to join us here in New York. So metals. So just remind us sort of the steel, aluminum sort of metal buys, some of the exposures there. And then we obviously saw over this past weekend sort of another round of tariffs, maybe not, but I guess, maybe yes. So what's sort of the sensitivity there in terms of sort of the pass-through agreements you have for any changes that occur there?

Yes. From a commodity standpoint, aluminum, copper, steel, those are all the standards that kind of go up and down. Commodity cost as an overall percentage of our sale price is relatively low, low single digits. Most of the components we have going into our parts are going to be highly complex machine type components. Probably the biggest part of it is going to be aluminum castings for our starters and alternators.

But can't the cost of those go up?

Yes. But they're on the index, and they get automatic pass-through.

To your customer?

Yes.

Okay. So there might be a little bit of timing there as well as...

Yes, they're relatively well timed...

Exactly.

Okay. And then the other sort of topic that's come into a bunch of focus of late is rare earths. I'm not sure if you have any sort of direct exposure there on rare earths, but would be curious to see even if there's an indirect exposure, meaning you've seen any sort of fluctuations or sort of changes in production schedules because maybe there's been a holdup in some other part of the vehicle. And so your customers are saying hold up shipments.

Yes. I mean, again, our strategy is we're generally designing, developing, sourcing, producing in region, okay? So if probably most of the rare earth that we have in some of the ECUs is in China for China, there's no restrictions for that. It's more coming out of China. And there's very little that we actually have coming out of China...

That's 97% of our direct exposure is in China...

China for China...

And then again, the rest of it, same thing. There's not a lot of rare earths. We have -- with our starters and alternators, we're in pretty good shape. And we haven't seen any customers drop out production. I think most of the disruptions, again, are generally going to be at vehicle plants, and we're supplying the engine plants. And so I think we've seen the engine manufacturing stay relatively consistent because the vehicle plants, I think, can generally -- even if they're down, they can make it up once they get the slug of material in for the engine guys, engine plants, they can't flex 30%, 40% like some of the vehicle plants that are running 1 shift.

Got it. That's super helpful. We talked a little bit about earlier some of the way policy around emissions and EVs is seemingly headed in the U.S. I don't think -- I think you've always sort of talked about your capacity and your sort of footprint as sort of being sufficient. Is that something you may need to reevaluate if California is removed. ICE is much longer than expected. Is your footprint rather calibrated for how things seem to be trending now? And like to your point, it's like you guys always believe this and the rest of us are just sort of waking up to it.

Yes. Yes. I mean from our -- we like our existing footprint right now. It has -- we have some surge capacity capability there. But again, I don't see combustion engines ramping up. I just think it's not going down or ramping down as much as before. And so I think we've got plenty of capacity to meet their demand, and we're continuing to reinvest...

Because the plants were capacitized for back when there were no electric vehicles, so -- or the footprint anyway. So conceptually, you could go up to that.

On the diesel side, but on the GDi side, really that started coming in after. So we have capacity, but it's not excessive. And where we've had even diesel capacity, we've been able to take that capacity and convert it for other uses and for other products.

And again, our -- from a manufacturing standpoint, our equipment is relatively fungible. And so we had a lot of excess capacity in Europe at one point for GDi. We sent line to China, and that's a lot of the ramp with GM came from the lines we had in Europe to ramp up here in North America. And so those -- that actually was ramped up quite a bit from a revenue. It went from basically 0 to full speed over the last couple of years. And we've sent one of those lines down to Brazil as well for GDi down there and as well as E100.

Now on commercial vehicle, you mentioned that's where maybe there's sort of been the bigger change, right, like especially post 2030, I think, where people realize that the combustion engine is there for longer. I know you had talked about when there was sort of this greater hope or idea for sort of a prebuy this year or last year that the customers are sort of funding some of that capital. Did that actually end up occurring? Or has some of that been pushed back, pulled back or...

I think, I mean, we had to be ready to produce yet this year. So with the lead times of 12, 18 months to get some of the stuff in place, they're kind of in flight already and kind of continue to ramp up capacity for those just in case. Do we expect to see that big prebuy for the North American business? No. But I do see -- I do expect it to kind of come up latter half of '25 and into '26. We'll see how much we need. At the same token, our customers also buy third-party engines. So they could also change some of the mix between -- they've sometimes been limited in capacity on their own engine, and this may free up some opportunity for them as well.

Yes. I guess the question is like does that capacity that they're sort of helping pay for a "surge" actually end up paying dividends well into sort of 2030 and beyond now that sort of the combustion engine sort of less...

Yes. I mean you get to reuse it, right? We [indiscernible] our plants. We can continue to use it. It could help us with our footprint or if they have another new business program, we can put on that for them and support them. But it is allocated for them. And if they have a demand for it, we'll produce on it for them. If they don't have a demand and we can use it in other areas, we can do that, too.

One of the things that's come up with in talking to some of the automakers is that they are having discussions with supply base, and I'll use that as sort of a broad term, right, about right, upping U.S. content or I guess, at first, USMCA content eventually sort of U.S. content, right? And it seems like that's sort of being targeted for higher-value parts, right, that maybe that involve less labor, et cetera. I'm curious whether you've started to have any conversations with your customers about what would it or what could it look like if you were to sort of move -- shift capacity?

No, our focus is being prepared for the renegotiation of the USMCA. And our view is making sure we get all of our parts USMCA compliant as well as probably getting prepared for a higher percentage in order to be -- to maintain USMCA compliant with the renegotiation. Our plants have been in place for 20, 30, 40 years. And to think that we're going to uproot those plants and move something, I think, doesn't make a lot of sense. Are we -- is there some potential for us to do or source with some suppliers in the U.S. for highly precision machine components, potentially. But those are things that generally take a couple of years to get requalified and approved. And so it's going to be a slower process. And I think the industry is going to have to see some stability first to then to make the right decisions. But we have not had any conversations with customers saying, "Hey, we want you to move plants back to North America."

Is your view just -- because it's not the first time this has sort of come up about this upcoming USMCA renegotiation, is your view that USMCA compliance might remain exempt as for sort of vehicles made in the U.S., but that the requirements to be USMCA compliant might move higher?

Maybe make more stringent, whether there's a U.S. content requirement or rather than 70% or 75% from North America, it gets bumped up to 75%, 80%, 85%.

And do you think you have enough flexibility in your facilities to sort of -- like obviously, we don't know what it's going to, but like do you think barring it being some extreme like you could sort of adjust to be compliant with those...

Yes, I think we can. And again, as I mentioned, a lot of our manufacturing equipment, if there's something that we need to do to add more capacity to one region, we can move things, I wouldn't say easily, but it's possible. And we've done that and proven that we can do that before. So it may change where we produce some components, some of the key components that may justify us to move it over, but we don't see any wholesale changes in our footprint at this point.

Okay. Maybe just to bring the conversation home, I want to start and talk about the balance sheet and capital allocation. So I think you bought back around $100 million worth of stock last quarter. Just remind us sort of how you think about cash, how you -- what level you're sort of comfortable -- minimum cash, minimum liquidity, you're comfortable going to? And then Brady, in the past, you've also sort of talked about some potential sort of tuck-in M&A, how you sort of evaluate that versus share repurchases?

Sure. I think on the minimum cash, I think, conservatively, I think, it was about [ $225 ]. Now we're working -- I'd like to see if we can find other ways to get that a little bit lower, but [ $225 ] the way that we're currently structured makes sense. And we currently think at end of the quarter, we had [ $378 ]. So we have plenty of excess cash. Our debt is at -- net debt is at 1.4. Our target is kind of at 1.5. We said we'd potentially go up as high as 2 for the right kind of M&A at this point. But adding debt just to add debt doesn't make sense. The -- from an M&A perspective and a share repurchase perspective, they're going to be competing. Do I buy myself at 5x EBITDA with a known long-range plan and something that we have a lot of confidence in? Or do I buy a similar type asset at 7x that has risk to it. It's going to make a lot more sense for me to continue buying my shares. Now we are limited based on our -- from the spin to the tax matters agreement, says we can only buy back up to 20% of our shares through July 3 of this year...

That should be coming up pretty soon.

So It's 1 month away. We -- after our $100 million that we purchased in Q1 of this year, we bought back 16.5% of our shares since we've spun. And so we're getting kind of close to that. The Board -- we're getting close to that limit and the Board authorized another $200 million of share repurchases in Q1 of this year. So we still have over $300 million available on that share repurchase program. But each quarter, we're going to sit down, take a look at our debt, take a look at our cash flow projections, take a look at where we're trading, take a look at the M&A pipeline and kind of decide, hey, what's this next quarter look like? Based on what that is, we may then put together a grid and/or a target of share repurchase for that quarter and then review it at the end of the next quarter. And so doing anything longer than that, you don't know what's going to happen 6 months from now. So that allows you some flexibility.

But just to be clear, once we get past July 3 of this year...

No more restriction...

Right. So it's more -- the restriction is sort of versus the other opportunity set. It's not really a restriction. It's more a constraint.

Yes. It's going to be, hey, if we see a really good deal that's trading at or below our multiple or that we think is going to add more value to our shareholders than buying back our shares, then we'll consider it. If we're trading at 10x, that's going to make some of the M&A that we can acquire at 6 or 7 a lot more attractive than buying our shares at 10x.

And I guess just on the M&A environment, I mean, how would you sort of describe it out there? I'm sure you always sort of have a pipeline or sort of funnel. And it's always interesting to me what happens to those sort of, I guess, buyers and sellers when there's periods of high uncertainty or sort of disruption. So are you seeing that funnel widen? Is there a little bit of loosening? Or how would you sort of describe it?

I mean we've always seen a consistent flow of M&A, just not many that we liked and/or was at a valuation that we thought was fair. And so the volume of deals we're seeing is still the same. But I do think that sellers are becoming a little more realistic on their pricing expectations. And we're getting close on a couple of smaller ones and -- but we'll see. Even from the day we spun, we were in negotiations and talking with folks because M&A takes a long time. You never want to rush it. You never want to just jump on whatever is available. You want something that fits your criteria and fits your business. And so we don't need to do an M&A to continue to execute our strategy and deliver great shareholder value over this decade. And so we're being very selective, and we're looking for assets that make a lot of sense for our own capability. So we're precision machining, fluid management, electronics and controls, calibration capability. We want parts that are going to get service 2 to 4x over the lifetime to support our Aftermarket and really focusing a lot on commercial vehicle and industrial and areas that are going to have less headwind to electrification.

I mean maybe you sort of just touched on this, but like what about -- like I guess, are there opportunities where you think you can use sort of your core competencies to expand or sort of diversify by end market, so into -- away from sort of transportation markets of light vehicle, commercial vehicle?

Yes. I mean we're doing that right now. I mean, again, our strategy, we think, is a lower risk, but a highly cash-generative strategy to where we're leveraging our human capital and our manufacturing capital to go into these end markets. The engineers that we had working on light vehicle diesel are the ones that we moved to GDi or the ones that we moved to commercial vehicle, are the ones that are now working on the aerospace injectors. The manufacturing equipment. Well, guess what, the manufacturing equipment that we're using for aerospace is a refurbished light vehicle diesel line. Take out some of the automation, but it's still precision machining, coatings, assembly, final test, quality systems. It's the same manufacturing processes and core competencies.

Why is there less automation?

It's lower volume.

Just lower volume, okay...

But pricing, you don't need to sell so many of them in order to get the margins and the revenues because these are some of these applications. I think we're starting out. I saw some of the numbers where we're going to have upwards of $5,000, $10,000 per engine. There's not a lot of volume, but there's opportunities for us to increase that by a factor of 10 per engine. So there's a lot of opportunities. We've converted one of our GDi lines to diesel, to actually run a 350bar diesel applications for an off-highway application because as Tier 4 emissions and Tier 5 emissions are coming out, they need more advanced fuel injection systems. And so we can convert that over to off-highway applications using those same engineers and same equipment. So we've got a lot of flexibility in our manufacturing capital and our human capital.

Great. I think it's a great place to close, and we're out of time. So thank you for joining us. I appreciate the time.

Thank you.

Thank you very much.