PHINIA Inc. (PHIN) Earnings Call Transcript & Summary

Welcome back, everyone, to the UBS Industrials Conference. Super pleased to have with us PHINIA. With us from PHINIA, we have Brady Ericson, CEO; and Chris Gropp, the CFO. So thanks for joining us again at this year's conference. Always a pleasure to have you.

There's a bunch of topics I want to sort of run through, mostly relating to sort of where PHINIA's strategy and where we sort of go from here. But I wouldn't be sort of doing justice if I didn't sort of take an opportunity to sort of ask you just with roughly 3 weeks left in the year to go in the quarter to go, like how have things sort of played out relative to sort of what you talked about at the end of the third quarter?

I mean really no changes. I think things are continuing to kind of chug along. As you kind of see on the slide here, the number of end markets and regions and customer diversity that we have keeps us pretty resilient in kind of every market. And so commercial vehicle North America is still pretty soft, but we're seeing signs more positive in Europe, light vehicle in China. Aftermarket continues to perform well for us. And so there's a lot of different diversity. So there's not any one thing that really drags the business down in any way. And so we're confident in our guide, and we're looking forward to another strong 2026.

And as we begin to sort of think about ' 26, I know we're not going to get guidance from you here right now. But clearly, you're at least have begun, if not sort of right in the thick of sort of the planning and budgeting process for '26. and look what you sort of budget for might ultimately end up being different than sort of how you communicate the guidance to the street. But how are you sort of thinking about the markets for 2026, especially since I fully appreciate that you're sort of diversified here by end market and by geography, but there has been a lot of volatility in the market. So it's -- how do you sort of go about planning for that when we've seen this level of volatility? And do you expect that level of volatility to slow down at all?

No. I think -- I mean, we always do a full bottoms-up every single year. So every plant is going to look at every SKU. They're going to talk to their customers, see what their production plans are as well as compare that to what the market expectations are. And as Chris kind of pointed out in a number of our meetings, if you take a look at our guide for this year, we're almost dead nuts.

If you strip out tariffs and our acquisition stuff, we are within 2%. So and it's not that every market hit. It's just that for us.

Diversification.

Yes. We -- if aftermarket goes down, OE goes up, OE goes down, aftermarket goes up.

So we have nice diversity. I think the positive, again, that we've seen is we tend to look at halves, tend to be more comparable than quarters. And we're getting back to, I think, our normal seasonality to where Q1 and Q4 are lighter. Q2 and Q3 are stronger. But if you compare first half to second half, those are probably more comparable. And so with our current guide right now, our second half is a bit stronger than the first half, which is probably a good indication of us going into 2026.

Do you think that is a solid run rate into?

Yes. I think it's a good starting point for us. For us, since we've spun, we've gone from a peak cycle of CV and industrial and even some of the light vehicle to now we're closer to the bottom of the trough. And so we're only halfway through a normal cycle. And so for us, if the OE just stops declining, that's good for us because then our aftermarket is then growing and we'll be back into growth. And when the market does come back more to equilibrium, we're having -- we're going to have even better growth. And now with the relaxation of some of the CAFE requirements and other things, we've already seen that trend where customers are going to be keeping combustion engine on the light passenger vehicle side, which is a nice opportunity. And again, it's around 27% of our business globally. And we think it's a good solid business for us.

So it's definitely been the ICE stronger for longer thematic, which is something you guys have, I think, maybe secretly sort of thought all along, but when you did sort of spin, you did have some different assumptions for sort of how ICE would trend within the light vehicle market. So what's sort of your current thinking on that? Because like the old math was sort of like you need to win a certain amount of business, right, on injectors to sort of offset the headwind.

Correct.

It seems to me like you might still be getting that same amount of incremental business and share gains, but you're not having the headwind you thought.

Correct. Again, when we spun out, we were still part of our former parent. And so our messaging had to be consistent with what our former parent was saying. They presented in the morning, we presented in the afternoon. And so, we were still employees of that company. So we -- to be fair, we still had an obligation to our former parent. So that's a little bit different. Now again, most of our leadership team, myself included, raised their hands and says, Hey, we want to go with this combustion asset because we believed in it. Our view is still that battery electrics are still going to continue to gain share. It's just our view they're going to plateau. We're already seeing it plateau in China with the incentives no longer there. We're seeing it slow-down in the Western markets. We're seeing adjustments in Europe as well. EVs make a lot of sense for some applications and for some families, but they don't make a lot of sense in a lot of regions of the world in a lot of regions of the U.S. and in Europe. So Eastern Europe, Africa, Southeast Asia, Central South America, even China is not going full BEV. We get a certain percentage. in some of these Western markets. But in Brazil, we're doing 100% ethanol. That's now their solution for carbon neutrality rather than going electric. And so they're using sugarcane, processing that into ethanol. And now with our heated tip injector, they no longer have to have a dual fuel, and they could just run 100% ethanol for those cold environments.

So it's been a decent amount of time since that spin and since that sort of initial Analyst Day, I mean, is sort of a refresh of where we stand now given that a lot has changed, not just from a macro and regulatory development, but also you have a track record now at PHINIA. So is that something we should expect in 2026?

Correct. We are planning an Investor Day, and we'll have a notice coming out here later on this week, early part of next week to be in February of '26. at the New York Stock Exchange.

Okay. Perfect. We'll look forward to that. You mentioned CAFE regulations. There's also obviously EPA and CARB. It's a very complicated regulatory environment here in the U.S. Today, we did get sort of the new CAFE fuel economy rules and they, I think, lowered down to like I think you got to go to like 35.5% or something by the end of the decade from 50-plus prior. So you mentioned the absence of like the need to move to EV. But is there -- and we were just discussing this a little bit before we got started, but is there also any change to products for even ICE vehicles that would historically make them more fuel efficient, like just less of a need to do that because the bar is not as onerous.

Yes. I mean we think customers, and we still support incremental improvements on fuel efficiency. Why not? We have to do it in a cost-effective way that makes it affordable for the consumers because I think a lot of the technology and things are being forced on them was driving the cost to where it became unaffordable for people to buy a new vehicle. And if you're trying to reduce overall emissions, having people stay in 15-year-old vehicles longer isn't necessarily the best for CO2. And so why not continue to improve the fuel efficiency. Now there are some technologies. We're actually launching the first 500 bar. We launched it just over 2 years ago in China that actually improved the combustion process and actually allowed them to reduce the cost of the vehicle because they didn't need as much after treatment because during the combustion process, it was actually that much more efficient with the 500 bar technology. So it's been really, really beneficial for them. And so I think we'll continue to see customers strive for additional fuel efficiency. And I think now the consumer is no longer afraid of hybrids and plug-in hybrids because in the beginning, it was -- they had to -- we actually had to sell the hybrid at a lower cost than the combustion because people were afraid of the maintenance costs and the wear and tear and is it going to work? And is it going to fail? And I think everyone is now -- it's seamless as far as they're concerned. And so as we're talking about my -- all my kids drive hybrids, they get 35, 40, 45 miles a gallon, and they just think that's normal. And it's completely transparent to them. And I think that's a good solution for us to significantly reduce CO2 very efficiently with our existing infrastructure.

Okay. Maybe we could talk a little bit about this chart you put up in sort of the diversified business model. And look, I think individually, any one of these markets can have volatility and might be difficult to forecast. For them all to sort of move in the same direction, it seems like something would need to go fairly wrong in the world, maybe you disagree. But -- let's just sort of talk about the strategy from either a growth or improving profitability perspective by the market. So if we start with light vehicle OE, how would you sort of describe the -- which I think, again, you said it is 27% of the business. How would you sort of describe the strategic view there?

I mean our view there is that we're going to continue to gain market share, and we've been winning market share and announcing that, that we'll continue to gain that 1% of market share per year over the decade. And that's offsetting the slight decline. To your point, our original expectation was we're going to see maybe a 4% to 5% decline in combustion engines in light passenger vehicle, and now it's maybe only 2%. So some of those share gains, it's going to allow us to maybe increase the total revenue number for light passenger vehicle OE. With that said, it's roughly around $900 million of our revenue right now. We'd like to keep it around there, maybe up to about $1 billion and just keep those lines running full speed, generating a lot of cash.

Is that because that's what you're capacitized for? Or could you do a little bit more?

We can do a little bit more. But again, what I don't want to do is in a market that's still flat to declining, adding a bunch of capacity in something that already has too much capacity. And so we already have a number of our competitors on that side that are exiting or not investing. And so capacity is coming out, which is a good thing. And so we don't want to start adding capacity until the industry needs it with our technology.

Do you have any stats you could share about maybe how much share you've gained even in the period since you've sort of spun until now.

Yes, we were in the low double digits earlier in the decade, and we're probably mid-teens right now on the GDi side. That's where most of the share gains are happening and where 3 of our small competitors that had low to mid-single-digit market shares has exited. And even some of the larger players that we compete against are questioning whether they want to continue to invest in the next-generation technology, whether that's 100% ethanol going to 500 bar technologies, other alternative fuels, we think there's some advantages there for us to continue to win.

And the regions for those -- for that LV GDI are China and the Americas. That's where that's grown the most for us. Europe, not so much on that.

So I know this is probably a little bit difficult, but I mean, if I'm doing some very rough sort of mental math in my head as I hear you speak, like -- and again, it's difficult to know because I'm sure you're not invited for -- to look at everything out there. But is it possible that like in your bookings or backlog or whatever you want to call it, your share is maybe closer to 30% at this point?

Closer to?

30%.

30%? No, I would not estimate that high.

Well, but you just said like you had 3 competitors that were in single digits all drop out, right?

Those smaller players. There were some smaller players that dropped out, but you still have the 2 big players that are at 50 and 20 some.

Right. So if everyone sort of gets their fair share of...

In the future, not today. I'm not going today.

I'm saying like looking at the -- like are you winning at closer to, let's say, a 25% or 30% market share?

Correct. Yes. And I think we're -- again, we're picking up, as I said, about 1 point of market share a year through the decade. So we expect to [indiscernible].

I didn't mean in a year, you'll be at 30% or anything. I meant like, when you're looking at the business that you're quoting, which again, some of which won't launch for years, it seems like your share of the wins is significantly higher than your share in marketplace today.

Correct. We -- I mean, we continue to be at 100% win rate for our existing carryover business, and we've been anywhere from 20% to 50% of conquest for the last several years. So we continue to see those market share gains. I think the other thing that makes it difficult for us to forecast is we had originally assumed some programs ramping down and customers are saying, hey, they're staying and they're actually ramping up. And so that may change the dynamics. And so there's been some silent extensions and silent increases from customers that we're adapting to as well.

Okay. Maybe on the commercial vehicle OE portion, again, is -- you talked even in some of your opening remarks about the different regions, Americas is a little bit tougher, maybe some of the other regions doing a little bit better. Is that regional mix roughly in line with the overall regional mix you have for the entire company within that segment?

Yes. I mean I think the light passenger vehicle is overweight Americas and China. Commercial vehicle, probably more overweight Europe and North America, a little bit lighter in the Asian region as far as percentages, aftermarkets and the OES, Original Equipment Service that goes through the dealerships and the independent aftermarket, it's actually about 50-50 commercial vehicle and light vehicle.

Okay. And so similar sort of line of thinking for the OE commercial vehicle business. I mean this business is like arguably even more cyclical than the light vehicle business. And obviously, at least in the U.S., we're at a little bit of a downside. But how are you sort of viewing that going forward?

Well, I think the nice thing about commercial vehicle is, it's -- our aftermarket is driven by the number of miles driven. And obviously, commercial vehicle drives a lot of miles for a lot of applications. And that's -- I think when you take a look at a typical commercial vehicle engine component, they're probably 60% OE, 40% service and aftermarket. And so even though you have that cyclicality, a greater cyclicality of the commercial vehicle, you have a larger portion of aftermarket that's really stable. And so that ratio is really good. If you take a look at our -- some of our key customers you take a look at their business, they're probably around that 60-40 between their parts business and their OE business. And that's because of the 100,000 miles a year, they're driving these things, and we'll get anywhere from 2 to 4 replacements over the lifetime of that truck. And so although the OE is more cyclical, the aftermarket is a larger portion of their base business. We're on light passenger vehicle that may be 90-10 on typical. Now the reason why our aftermarket light vehicle aftermarket is actually so big is because we also do all makes and we added additional product lines, steering, suspension, braking, those are going to be propulsion-agnostic components -- and they're not something that we're doing on the OE side. But because we have a strong brand, we have an OE pedigree and a good reputation, we've been growing that as a part of our aftermarket business quite substantially in the last few years.

Sorry. And then the LCV portion, maybe just for definitional purposes, what -- is that just mostly van -- like what are you including in that?

That's like the Class 1 through Class 4 type vehicles, delivery vans, a 10,000-pound trucks type of thing. That will be in China. They'll probably go a little bit smaller.

But not like a heavy-duty pickup truck that you -- or do you put that in that?

Some of the larger, not by the not the 1 ton type thing, but it's going to be more of the larger trucks than that. It's really focused on -- these are vehicles that we would consider commercial in nature for businesses.

Okay. And then the final area -- sorry about that. The final area would be the sort of industrial types of business. And I know this is an area that's near and dear to you and a big focus of where you want to sort of bring the business going forward. So again, maybe it's just the strategy and the outlook and what you want to accomplish in that business.

Yes. And we'll deep dive that a little bit more in the Investor Day. And so the kind of that other OE, which will include marine, construction, ag, gensets, some aerospace, marine application, it's now growing to where it's becoming significant enough that we start to call it out. And so we're going to call it out in our Investor Day, and that kind of threshold is probably in the -- close to the mid-single digits as far as our revenue. Once it kind of gets there, it probably makes sense to give additional color to investors. And that's an area that we think is probably going to be our fastest-growing segment.

I was just going to say maybe as a sneak peek, like is that a market or a business for you that's sort of growing in line with those end markets or faster? It sounds like you're saying faster.

It's growing much faster than a lot faster. A couple of things. One is the competitive landscape and the technology that we have is very good versus the competitors that are in that space. And typically, when they're coming with Tier 4, Tier 5 emissions, they're looking to improve the quality and delivery of those vehicles, but they need something that's cost effective. And so that's been some of our announcements with Polaris, with JCB and [indiscernible] and aerospace companies. We're winning a lot of these things because we're one of the few that kept investing in these technologies. And they say, wow, this -- one of the gen sets that we have is what we call a GDi for diesel. And so it's taking our light passenger vehicle direct injection systems and converting it over to diesel for an off-highway excavator and genset application. And so it gives them a cost-effective solution, gives them a common rail design, electronically controlled, but it gives it to them in a cost effective because that's going to be running at 350 bar to 500 bar. So that's -- as you go up in pressure, the price goes up almost exponentially. And so they can't afford the 2,000 bar medium-duty or 2,500 bar heavy-duty type systems. They need something that makes more sense for their application. Obviously, those are probably less sensitive to fuel economy as a heavy-duty truck because heavy-duty trucks are running a lot of miles. They're so focused on fuel efficiency. For an excavator, they're not as concerned.

Right. And is the competitive set much different? I mean you mentioned that people haven't invested in this, but is it the same set of players or?

It's similar. There's also some smaller players out there and some legacy players because some of these technologies are still mechanical systems that have been around for 30 years. But as you go to direct injection, the competitive landscape comes down dramatically. It's same thing like on port fuel injected engines for gasoline application. There are a lot of players out there. It's a relatively simple technology. You can use it in a lot of different places. There's plenty of capacity out there, a lot of individual players. But once you go to direct injection, the tolerances, the engineering technology that's required, it really reduces the landscape.

Maybe you could remind us and give us a sense like how accurate some of these injectors are, right? I think they used to sort of give -- there was

Yes. We kind of joke is like when people say that our commercial vehicle product is not aerospace technology, and we say you're absolutely correct. It's so much more difficult than some of the aerospace technology. And we're talking about tolerances in these injectors for diesel that are plus or minus 0.5 micron, which is the tolerance, which is plus or minus a little bit larger than a virus. These things have 5 to 6 injections per combustion cycle. And so it's going up and down within each combustion cycle 5 or 6 times. They have to last 1 billion, 1.5 billion cycles to match up with our customers' needs. They have to be working hot environments, cold environments, biodiesels, a variety of different fuels and additives around the world, and they have to last 0.5 million miles. And so there's -- they're just incredible, incredible devices. I've been in turbos for a long time, but this fuel injection is just a whole different level of capabilities. There's the -- not only the tolerances, but the pressures that we're dealing with. And when people say, oh, it's 2,500 bar and people kind of go, okay, what does that mean? It's like 40,000 psi. When you think about you pop a tire and it kind of explodes and it shocks everybody, well, that's like a 40 or 50 psi right? This is 40,000 range between our 2,500 to 3,000 bar type system. So this is super high pressures, super high durability, really tight pressures and the speed at which we have to move these things is incredible. So it's really, really complex.

Yes. On the aftermarket side, it's been a pretty stable business, which I think you sort of alluded to would be. This year, the organic growth does seem a little bit more challenged. Can you just sort of remind us like what sort of is happening this year? Is there anything sort of one-off? Is it more some of this timing we're seeing through the year? And what's sort of the view going forward?

Well, I think that this OES and independent aftermarket, this 34% that people see there, that does not tie directly to our aftermarket segment. Okay. In our aftermarket segment, Chris, is, what, 40%?

Yes.

And so you could say, well, your aftermarket segment is 40%, but you're only showing 34%, what's the difference? Well, our aftermarket segment has some OE business in it. The Delco Remy starter and alternator business was in that segment, and that's predominantly North American CV. North American CV is probably the most down market of any of our markets. So that's actually embedded a large portion of that OE business is embedded in the aftermarket segment.

So excluding that, you still think that what I think

Our OES and aftermarket is still in that 35%, 36% is what we expect to be in our sales. And there is a little bit of the OES that's in our Fuel Systems segment. So there's a little bit of puts and takes in there. But I think our aftermarket team is still doing very well. It's still very resilient for us.

Okay. Does this chart portend that there's a re-segmenting coming or?

Well, I think what we've said is that -- it was spun that way when we got spun out. We didn't want to change it in that time period. And we're waiting for more of a more significant event or a larger acquisition that would then make sense for us to then re-segment the businesses. We are going to provide a lot more clarity and specifics at the next Investor Day, just so people can set their modeling up correctly to address this. But we'll kind of see kind of going forward.

On the acquisition front, and I'll tie in, and I'll give Chris here an opportunity to sort of talk about and boast about the sort of cash flow profile of the company. But cash flow has been strong. You have many different options for what to do with that cash because as you sort of pointed out on the slide, like you already have the footprint, right? You don't really need the footprint. M&A has been a focus. You've done your sort of first acquisition. Maybe you can sort of update us just on how that's progressing, how the integration has gone, what you learned about the organization through this sort of first deal as a stand-alone company and what you look for in the M&A pipeline going forward?

Sure. I mean, first and foremost.

Let's let Chris talk about the cash flow.

I mean cash flow has been good. Obviously, it's been -- it's held steady. Last year, it was slightly better just because of the debt deal we did and some just timing changes. And so that slightly lighter than last year. But I think everybody is going to be really pleased where we come in by the end of the year. We have been. And so we just want to use that cash flow judiciously, if I can even say that word. But -- so we've been really careful with what we're looking for in acquisitions. For sure, we need to do some acquisitions going forward, but we don't have to. So we're looking for things that tie into our business as it currently runs. -- and things that make sense to tie into our business. SEM tied in really well with our product, with our capabilities, it has a really long runway and something that we can expand upon and improve upon over time. Very small, but Brady and I have both been parts of integrations, and it's very important to get them right. So we just need to get everybody into that mode of, okay, this is what we need to do. Let's fall on our face with a small one first and then and make sure we have the playbook right for going forward. So after that, we'll just take our cash and look at what's the best uses.

Yes. And I think Chris had all the exact points. It's -- we intentionally did one small in order to get that muscle memory going in a new organization. So built our relationships with third parties, going through due diligence, the integration getting people kind of going through that process and putting together the playbook for future ones going forward. But we're always going to take a look at an acquisition and compare it to buying back our own shares and saying, Hey, what's going to drive the most shareholder value? And so if we're trading at 6, us going out and paying 12x for an asset that looks similar to us, it doesn't make sense. Why wouldn't I just continue to buy back my own shares when that business plan, I have a lot more confidence in than any acquisition that I do. And so I think the decision process around SEM was it was in the right market. It was alternative fuels, commercial vehicle focused, has gensets. It's synergistic with the overall system and the calibration work that we do. And it was at a valuation that was lower than our multiple, and it's a product line that we think can have much higher growth rates than our base growth rates. And so it checked a lot of those boxes and the size and those are the types of assets that we're looking at. And so as Chris mentioned, we don't need to do an acquisition. So just continuing to buy back our shares as we bought back close to 20% of our outstanding shares since we spun. And that's just a testament to all the cash flow and Chris' focus on the team on working capital and the financial incentive that we put in place for all the executives.

Yes. Brady hit on an important one on the last is changing our bonus metrics to EV. For us, just made common sense. It's what we grew up with in our former parent. And using that metric, at least for me, as being just a controller from -- for years, the easiest way for me to get everybody thinking in the right direction and making sure they're taking as much care of their working capital and getting that to be efficient is if their bonus is based on it. So we just had an off-site management meeting. And one of the things we said is everybody has done great. Our returns are in the P&L are great. However, everybody needs to make sure they're not missing the focus and getting that working capital, make sure we have inventory, but make sure it's working efficiently. And they get that. Everybody gets that.

And that goes into effect for '26, you said?

No, we've had it. We did that.

From the beginning. I am sorry.

We did it from the beginning.

We did. I thought you said there was a recent change...

No, no, sorry...

It's changing we got spun out. So again

Sorry, I misunderstood.

Our incentives are well aligned. It's economic value, and it's an easy discussion. We have to increase economic value on a year-over-year basis. There's no negotiation. There's no relief if the market is softer. There's no anything -- we've got to increase economic value. If we do that well, we get paid. It's cash flow. People love our cash flow. We got to continue to deliver it, which ties in with our economic value and our longer-term incentive is TSR. So we think our incentives are well aligned with investors.

Can we just sort of talk about margins? I guess, overall, I mean, if you want to sort of get into some of the segment stuff, you can. But I think like a high-level sort of heuristic model for suppliers, right, is it's a volume game, right? And you sort of -- you have this fixed cost base, you get more volume, you have strong incrementals, your margins go higher. When I hear you talk, and I know there's some differences between some of the segments, right, CV can be cyclical, it's cyclically down. So there will eventually be a cyclical growth there. But then even on the light vehicle side, I mean, you're basically saying you want to sort of stay in that $900 million to $1 billion level. So look, I guess when you sort of put it all together, it seems like what you're still saying is you can get to sort of 2% to 4% growth. So you are sort of converting.

On the incremental revenue. Yes.

On that. But in the absence of the growth, right, in, let's say, that like light vehicle, like what are the cost levers to sort of drive margins? Or is that sort of just the level we should think margins remain at given that revenue level?

Yes. I think in the past, if you weren't growing at least 3% or 4%, your margins were declining. And so we've had to change the structure of saying, hey, that's not acceptable anymore. We've got to ensure that we're not giving away 3%, 4% pricing in order to keep the business and therefore, you had to grow in order to offset that. I think that's kind of gone away. And so we've shown in the last couple of years, we've been able to maintain margins on relatively flat sales, driving productivity, working with our supply base on strategic partnerships. working with our customers to pass through some of the excess inflationary costs, repricing product where we have some pricing power, aftermarket being a big portion of it with annual price increases has shown that even flat, we're able to continue to maintain margins and generate significant amounts of cash flow. Once we start getting back into that growth rate, we expect to convert incremental revenues at that 20% level, and that will allow our margins to keep going back up. Now that's even been in the face of probably a 30 basis point headwind this year because of tariffs. And so yes, we were able to pass through 90%, 95% of the tariff cost, but it was still dilutive to our margins, although we've held EBITDA dollars.

And we did announce in Q3 a restructuring program, not a massive restructuring, but it's all related. Well, the majority of it is related to our IT infrastructure, which when we spun out was not fit for size. So we're having to strip that back a little bit and spend a little bit of money and then shrink that down. So we'll get a less than 2-year payback in getting that done. It's just part of the necessary.

It's a great segue to my next question, which is, are there additional opportunities for restructuring. I think like one of the regions that could come to mind, and please correct me if I'm wrong, but I think it's an area that's been a topic of discussion among investors is just -- is Europe. And even here on this slide, right, right off the bat, 52% best cost country. So it seems like there's maybe some opportunity for footprint rotation in that region. But even beyond that, and I know this is maybe more -- I think you said the commercial vehicle business over-indexes to Europe, but there is light vehicle business there as well. And I think there's some concerns that irrespective of whether European vehicle demand ever really comes back or not, like even if it sort of stays at these levels, like who -- which customers are providing that level of demand might change going forward and that some of the legacy European customers might continue to sort of lose share over a period of 5-plus years. If that happens, do you need to restructure? And are you sort of taking some maybe proactive actions to get ahead of that?

I think the one thing is because of our decentralized type structure, we're always asking every plant manager to be assessing the -- how efficient their operations are and not wait for, hey, we're going to take out 10% headcount. That means you waited too long, which means you weren't adjusting it on a monthly and a weekly basis to adjust your cost structure. So that's kind of one side of it. Two is Europe, there was -- Chris, you were doing the tail end of the restructuring where there was hundreds of millions of dollars of restructuring done in Europe to clean up a lot of the ex-Delphi structure to rightsize it. And again, when Chris first came into the Fuel Systems Group in 2020, they were -- that Fuel Systems business was breakeven, 0. And now we're double digit because a lot of that restructuring. A lot of the remaining facilities in Europe are primarily commercial vehicle focused. All of our light passenger vehicle is really already in low-cost locations. And then some of the locations we need to be there to support some of the aerospace and defense business, we have to be in country. And so for us, we don't see any major restructuring needs. If anything, we're starting to see where Europe because of a lot of the diesel scandals earlier last -- in the mid last decade, that light commercial -- that light diesel OE business was a headwind for multiple years. And we're starting to see Europe from our OE side actually start to plateau and starting to come back up again. And so we're actually -- although it's at 52%, but we still see things naturally kind of shifting. We've moved a few things around without having to do a major restructuring. And so we just continue to optimize without having to have a big ticket to go with it.

What about labor and automation? So I guess like maybe you could just remind us like what percent of either COGS or revenue labor is? And is there an opportunity to sort of get more automated, which might not only yield labor savings, but also efficiency, yield, quality improvement?

I mean, absolutely, there's a lot of work on cobots and automation within our locations. The interesting thing is in the U.K., where we have a number of our plants, it's actually quite cost competitive from a labor standpoint. I think total labor costs

Salaries -- including benefit .

It is just at $20.

No, it's just right at $20, a little over $20

That's including in Europe?

Yes. No, in the U.K.

Sorry, in U.K.

It's higher than that, obviously, in France and some of the others. But in Romania, it's very reasonable and Poland.

Yes, it gets mixed up because sometimes there is like in our France facility in one of our U.K. facilities at an R&D center there, too, that artificially kind of increases. But in general, they've -- both countries have been very supportive of engineering credits and supporting engineering and subsidizing engineering headcount.

And overall, what percent of COGS would you say is labor right now?

Overall, it runs about 12%-ish...

And is that lower than -- has that come down versus 5 years ago? I mean, I guess it's difficult for you to know.

It 5 years ago, definitely because as Brady said, there was about a $200 million restructuring that was done about -- right before acquisition from Delphi and right after, went for about a year, 1.5 years after that. So yes, it's come down.

And so if you're on the sort of more automation, more software, more cobot sort of use, like what inning would we say we're in? Are we early innings? Or has it sort of work started to work its way through some of the plants?

I think we're past the middle innings on a lot of that work. Again, we've also done a very nice job of moving capacity around the world to where it's needed. So we're not sitting with excess space and excess equipment in regions that have been declining. So we've moved a lot of the GDi lines, excess lines that we had in Europe and moved them to Asia and the Americas. And so our equipment and our manufacturing processes are such that we can move around where the demand is. So it's not like it's -- we're stuck and we have to scrap it all out. We can move it where we have demand. I think the repurposing existing equipment has also been very, very beneficial because the aerospace business that we're launching in France is a converted light vehicle diesel line.

Is that reusable too or?

Yes. I mean machining, grinding, drilling, diamond light coating applications, those are all -- it's all the same processes. And so our overall kind of strategy is we're not trying to revolutionize the company. We're trying to evolve our human capital and our manufacturing capital into these new markets. And so the engineers that I have on GDi are the same engineers I can put on aerospace because the concepts are the same. It's precision fluid management. It's dealing with erosion, with wear, durability testing. And we're in a unique position that not only do we manufacture a lot of the components, but we also know how to assemble it, validate it and test it and give customers a certified system.

So leverage our core capabilities into new end markets and application.

Correct. And so again, yes, we're not trying to -- we're not going to fire all our mechanical engineers and hire a bunch of power electronics engineers. I don't have to shut down my machining plants and build all new electronic plants. And so I think that's a much more boring and simple transition than trying to convert to something completely new.

Great. Well, we are out of time. So Brady, Chris, thanks so much for joining us again. Always a pleasure to have you. So thanks again for joining us.

Yes. Thank you.

All right. Thank you so much.

Take care.

Thank you.