PHINIA Inc. Q2 2026 Earnings Call

Good morning and welcome everyone to the PHINIA Second quarter 2020 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again at this time. I'd like to turn the conference over to Brady Ericson, Vice President and Treasurer. Please go ahead.

Thank you and good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on Finneas Investor Relations website, including a slide deck that will be referenced in our remarks. We're also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO and Chris Gropp, CFO. During this call, we will make forward looking statements, including comments related to our 2026 guidance, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We. Caution listeners not to place undue reliance upon any such forward looking statements. And with that, it's my pleasure to turn the call over to Brady. Thank you, Lord, and thank you, everyone for joining us this morning. I'll start with some highlights on the second quarter and some key developments in the quarter that support our strategy Chris will then provide additional details on our second quarter results and discuss our 2026 financial outlook. We will then open up the call for questions. The second quarter developed largely as we expected, with highlights including continued revenue growth from both fuel systems and aftermarket.

Leading us to a refinement of our full year guidance. We were also excited to announce that the company has entered into a definitive agreement to acquire the Stobart Group, a global technology partner specialized in high precision components systems. And integrated solutions globally. As slide six and seven detail. Stobart has operations in four countries expected run rate, third party revenue of approximately 80 million. And accretive EBITDA of approximately 25 million. We expect the integration of the Stobart Group to expand our exposure in off highway, industrial and other customers and markets, and drive synergistic profit expansion through supply chain ownership, integration of key capabilities and cost efficiencies. This will also add an additional aerospace and defense qualified location or portfolio, as well as greater exposure to these customers. Exciting. These assets support the global semiconductor industry with high performance equipment components. Opening another avenue of growth and diversification. Closing of. The deal is expected in the fourth quarter of 2026 and will be funded with available liquidity. Returning capital to shareholders is a key component of our capital allocation strategy, and with a healthy balance sheet, we continue paying dividends and repurchasing shares. We are confident of our operational and financial performance that allows us ongoing run rate, capital returns to our shareholders.

While the environment continues to evolve rapidly. Our teams are managing our business well and delivered results that strengthen our long term foundation. Our diversification across regions, customers and markets and products helped offset variability in any single region or segment. And finally, we continue to adapt to ongoing changes in government policy governing tariffs. And as such, with expected net refunds during the quarter with some cash settlements already received Chris. Will discuss further details in her commentary. Turning to slide eight. PHINIA continued to demonstrate resilience in a mixed macroeconomic environment Demand conditions across key end markets remain steady. Supported by durable replacement cycle fundamentals and ongoing positive results in the commercial vehicle industry. We continue. To navigate ongoing geopolitical and trade related uncertainty. Tariff changes as previously noted, shipping challenges and regional production variability through. Operational execution and disciplined cost management. We've managed these challenges effectively. We continued our streak of year over year growth in both aftermarket and fuel system segments. Total net sales in the quarter were 940 million, up 5.6% from the same period of the prior year. Including FX impacts, the impact of tariff recoveries in the contribution of SCM revenue was up 2%.

We reported. Adjusted EBITDA of 130 million for the quarter, up 4 million, representing a margin of 13.8%. Total segment adjusted operating income was 125 million, or 13.3% margin. The fuel system segment delivered a strong quarter, with sales of 584 million, up 5%, and adjusted operating margin of 11%. The aftermath. Segment had sales of 356 million, up 6.6%, with adjusted operating margin of 17.1%. Adjusted earnings per diluted share, excluding non-operating items, was $1.53 for the quarter. Compared with $1.27 in the same period of the prior year. A 20.5% increase year over year. From a balance sheet perspective. PHINIA continues to demonstrate financial stability and consistency. We exited the quarter with a cash position of 370 million and a total liquidity of 820 million. Our net leverage ratio was 1.3 times, which is under our target of 1.5. We returned 53 million to shareholders in the form of share repurchases and dividends Our balance sheet continued to provide the financial flexibility to support growth initiatives while returning capital to shareholders in. Summary while the external environment continues to evolve, we remain focused on the current and future of the business The second quarter performance underscore the durability and resilience of our business amid a rapidly changing global environment.

By serving a broad mix of regions, customers, and markets and products. Going to slide nine. I am pleased with the success we are having with respect to gaining new business. The second quarter was another good quarter for reflecting, continued progress across multiple fronts Importantly, we're continuing to grow with our existing customers, adding new ones and gaining real traction in new areas of our portfolio. This quarter included notable wins across OE and aftermarket channels, reinforcing customer trust technology differentiation, and PHINIA ability to deliver premium solutions to our customers. Launch progress on important programs in our portfolio include aerospace, off highway, heavy duty. Truck continued at an advanced pace, which will support our progress through the end of the decade and beyond. Key. Fuel system wins in the quarter include a new business for a heated tip, Mpfi system supporting light passenger vehicle engine application. Further expanding PHINIA alternative fuel portfolio a. 34 volt starter program supporting a class eight commercial vehicle platform reinforcing PHINIA long standing position in the heavy duty on highway market, a complete. Common rail system program for agricultural applications highlighting the strength of PHINIA integrated fuel system portfolio and reinforcing our position in the growing off highway sector.

Turning to slide ten. Our aftermarket business continues to be a steady and reliable contributor to our results Demand remains consistent, driven by an aging fleet and a growing vehicle park. As vehicles stay on the road longer, customers around the world rely on our quality parts and service more than ever. Our strong and recognizable brands broad and consistently expanding product offerings and focus on customer service, are helping us build deeper relationships and win new opportunities. Recent wins were across diverse geographies, further strengthening our position in the independent aftermarket. A few notable changes during the quarter include open vehicle electronic distribution with a leading pan European distributor significantly expanding market access across the EMEA region. Expanded the global aftermarket footprint through new customer acquisitions. Branch expansion, and increased distribution penetration across North Africa, Eastern Europe, North and South America. China, Southeast Asia, and Oceania. We introduced more than 2650 new SKU globally during the first half of 2026. While adding more than 150,000. Cross references to regional catalogs, expanding vehicle coverage and enhancing customer access to PHINIA products. These wins show consistent progress towards seamlessly diversifying into higher growth end markets by leveraging our existing human and manufacturing capital Additionally, we had several significant product launches this quarter, including a 500 bar GDI system showcasing our full system capabilities and continued leadership in advanced gasoline technologies.

A fuel delivery module in India, broadening our CV portfolio and supporting growth in a key strategic market. In the next. Generation GDI pump, reinforcing our position in passenger and light commercial vehicle applications. Moving next to Kappa allocation on slide 12, our approach remains unchanged. We are staying disciplined and balanced and are continuing to invest in our business to support long term growth, both organically and through strategic opportunities. That strengthen our competitive position and expand our long term opportunities. At the same time, we are committed to maintaining a healthy balance sheet and returning cash to shareholders through dividends and share buybacks, which do not slow down. Despite striking the deal for the acquisition. This approach reflects our strong financial position, our confidence in the path ahead and our focus on long term value creation During the quarter, we returned 53 million to shareholders in the form of dividends and repurchases. 216 million remains under our current share repurchase authorization. Since the. Spinoff in July 2023 through the second quarter of this year, we repurchased 534 million worth of shares, representing approximately 24% of our original share count and paid 131 million in dividends in total, we have returned 665 million to shareholders through share buybacks and dividends since July 2023.

We. Moved all of this while keeping net leverage below our target, reserving strong liquidity and continuing to fund the growth of our business. Finally. I want to thank and congratulate all of our employees. As we just surpassed our third anniversary as an independent, publicly traded company. It's been a great journey so far and look forward to many more years to come. I'll now turn the call over to Chris to discuss our financial results in more detail, and discuss our 2026 outlook.

Thanks, Brady, and thanks to all of you for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. In the second quarter, we delivered results in line with our expectations, and that reflect both the strength of our diversified portfolio and the benefits of our operational discipline. Diving into. The details, which you can find on slides 13 and 14 of the presentation, I will bridge our revenue and adjusted EBITDA for the second quarter. Specifically, during the quarter, we generated $940 million in net sales, an increase of 5.6% versus a year ago compared to Q2 2025. Our top line rose 2.4%, unfavorable foreign exchange of 21 million as the Chinese renminbi euro and Brazilian Real strengthened against the US dollar. We saw a positive contribution from volume and mix of 18 million or 2%, on positive customer pricing and higher sales in the Americas. Aftermarket revenue. In the quarter was reduced from net tariff pass through of 7 million affected, mainly by anticipated tariff refunds from the government expected to be passed through to customers who had previously reimbursed us for portions of the impact.

Finally, SM contributed sales of 18 million in the quarter, excluding. The FX impact. SM contribution and tariff pass through sales were up 2% in the quarter. Moving next to the bridge on slide 14. Adjusted EBITDA was 130 million in the quarter, with a margin of 13.8%, representing a year over year increase of 4 million and a 40 basis point decrease in margin. Net tariff expense and anticipated refunds were an 11 million contribution to earnings in the quarter Contribution from SM was 3 million, or a 16.6% margin in the quarter. Product mix partially offset by supplier savings and cost control measures, was a 1 million headwind. Other costs, including corporate costs, were up approximately 9 million, primarily due to adjustments for short and long term incentive compensation. All changes are related to previously published incentive compensation schemes for PHINIA associates, which reward improvements in economic value and the cash generation of the business. We. To effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with the potential for strategic accretive M&A, cash and cash equivalents at quarter end were 370 million, while available capacity under our credit facilities was approximately $450 million. For a resulting liquidity of 820 million. Cash flow from operations was 91 million, an increase of 34 million over second quarter 2025.

Adjusted free cash flow was 74 million, with capital expenditures of 2.3% coming in below our target of 4%. And efficient uses of working capital in the quarter, including approximately 1 million in cash tariff refunds received share. Purchases and dividends represented our primary use of capital with value back to our shareholders of 42,000,011 million, respectively, in the quarter. For year to date totals of 98,000,022 million, respectively. As Brady noted, we announced the purchase of Stover Group in late June with an expected close date of Q4 2026, dependent upon normal regulatory approvals and customary closing conditions. With the purchase price of approximately six times EBITDA, we expect the inclusion of the business to be accretive on a run rate EBITDA basis, adding approximately 40 basis points on an annual basis. While full Stovewood group sales were approximately 200 million. This balance includes sales to PHINIA operations, which, upon consolidation, are eliminated as intercompany sales. On a third party basis, this asset will add full year sales of approximately 80,000,025 million, or 31%, in adjusted EBITDA. We are excited to welcome the group into the PHINIA family. Strengthening capabilities, expertise and future growth opportunities in multiple markets and product lines. We. To generate strong free cash flow, supporting our near and long term capital allocation priorities, our broadening portfolio of products, solutions and services, coupled with our healthy balance sheet, will enable us to continue to deploy capital with discipline.

Focus on delivering long term, sustainable, profitable growth, creating value for our shareholders. Moving next to slide 15 to comment on our 2026 outlook. As. We move through the year, we're refining the full year guidance we issued earlier this year. Specifically, we're tightening the range of revenue while keeping the midpoint of our revenue outlook range at 3.57 to 3.67 billion. We would expect an increase in net sales in the mid-single digit range, inclusive of FX, excluding expected FX. Our growth is projected to be in the low single digit area. We are now guiding adjusted EBITDA to be 485 to 515 million, with an EBITDA margin of 13.5% to 14.1% as sales impacts from FX and net tariff recoveries, as well as product mix, have had a slightly dilutive impact on margins, we. Believe the business is well positioned to continue generating meaningful free cash flow, and we've updated our 2026 outlook for adjusted free cash flow to 210 to 250 million. We expect the. Adjusted tax rate to be in the 30% to 33% range, as meaningful progress has been made in addressing legacy tax structure headwinds. Overall, we expect to continue to deliver strong results in 2026 as we drive operational efficiencies and search for new areas of growth for both segments.

As a reminder, our outlook does not account for potential impacts from changes related to the announced acquisition. In addition to recent or future government policy changes or other risks described in our filings with the SEC, that could influence our operations or technical centers. This includes measures such as additional tariffs, tax reforms or any other policies that might either increase or decrease our revenue assumptions and or alter our cost structure With that said, we believe PHINIA is well positioned to navigate global markets, conditions and changes, and we are confident in our operations and our ability to generate sufficient cash for our needs, while also continuing to invest in the future. As we look forward to the rest of the year, we look forward to managing the business as demand risks and opportunities develop, while providing solid returns to our shareholders. We want to thank you all for joining us on this call today, and we are ready to open up the call to questions. Operator, please open the lines.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We'll go to our first question from Christian Zeiler at KeyBanc Capital Markets.

Good morning everyone. Thank you for taking the questions First question for me is just on the guide lower amid what seems like a positive backdrop. So LTV might be better than expected on on higher volumes and or mix commercial vehicle orders in the last three months have been positive. The industrial backdrop on IP and PMI is positive. So just can you kind of frame out like how much of the guide down ?, you know, kind of as we think about 2026 and then even into 27, like how much is that positive backdrop weighing like the guide down? I'm just trying to kind of square those two.

Yeah. I mean, from a revenue standpoint,, we kept, we kept it flat ., and so really no change. We were always expecting the back half of the year to be a little bit stronger than the first half., CV as you mentioned, is looking a little more positive. And then globally a little bit weaker ,, seeing some. Weakness in China light vehicle market. I think you see that local market down in the in the mid teens., so seeing some challenges there, but all in all, we kept our overall revenue flat ., our guide. Flat.

Let me add. One, one area Christian the tariff refunds that we're getting. There's a big chunk of those in fact, about half of what we booked will go back to customers. That's a that's a reduction in sales. So that's about a 7 million hit on the revenue. It's not extremely material, but that is also in effect, that we did not have at the beginning of the year.

Got it. Thank you. And then for my follow up, if I could just ask about. So is the right way to think about the incorporation of the business like 80 million in sales? And I don't know, 10 million in EBITDA? Or is there something, you know, special to think about in terms of the EBITDA dollars that you get from the deal?

Yeah, we you have the right to 80 million of the revenue, the 25 million is EBITDA in. It's just the because again, we've got 120 million of revenue that was from,, to PHINIA. And when it gets eliminated as intercompany. But we still have the profit from it .. And so the right way to look at it is 80 million of additional revenue, 25 million of EBITDA. And that's why Chris kind of highlighted that, given that it's actually going to be EBITDA margin accretive by, you know, close to 40 basis points.

Got it. That makes sense. Thank you. Nice little acquisition there. Thanks.

Okay.

We'll move next to Jake Scholl at BNP Paribas.

Hey, guys., can you provide a little bit more detail on,, what drove. Your decision to acquire soba and then how should we think about ,, potential synergy driven upside to that $25 million in EBITDA? Thank you.

Yeah. Still has some really unique,, operational capabilities and manufacturing. There are obviously a key supplier to us., we've known them for a long time. And this is also part of our kind of just making sure we have a stronger supply base. And we're protecting our customers., they were obviously a small organization, only 200 million of sales, roughly ., and we thought this kind of made sense to solidify our own manufacturing capabilities as well as opening up, you know, additional customers,, for us. And so ,, one of their sites is aerospace and defense certified. So that's going to open up, you know, some additional customers there. They have customers that we currently don't support. So that's going to be an interesting opportunity there., and then. Finally, I think, you know, as far as synergy, the, the 80 million and the 25 is what we expect them to be., you know, relatively quickly., as, as with the Cem. That also includes some synergy,, to bring them kind of up to speed to our, you know, capabilities and systems and processes and controls., and so that kind of considers some of the synergy as well as the synergy. I think longer term, we see opportunities for, for higher growth., and again, from our standpoint, it solidifies our supply base and our manufacturing supports our customers ,, expands.

Our off highway and industrial and other kind of exposure ., and. It's,, at a, at a fair valuation ., and we think there are, you know, longer term, there may be some synergies ,, that we'll be able to get from them as well. So ,, we thought it was, you know, a nice acquisition, a nice tuck in for us.

Thanks. Brady. And then,, could you guys just,, help. Us understand the bridge to $10 million in higher free cash flow year. And then,, you. As we look at customized machinery business, it looks like they provide. Or they could provide a lot of the,, precision and laser machining .. You know,. Equipment that you guys use., so does make up a material portion of your CapEx and is there potentially an outsized free cash impact from the deal? Thank you.

I think they, they can help us on the equipment side., they do some of their own machine building. And that's what some of their capabilities are. And that's some of the equipment that we need as well. So there's some additional synergies there ., I think you see from the, from the cash side, I think that it continues to be a real positive story. I think you see our, our working capital as a percent of our revenues kind of continue to be ,, you know, improved., the team is doing a good job managing that working capital., cash tax. Rate continues to come down a little bit ., and again, that's, you know, CapEx coming in, you know, a little bit lighter that's helping our cash flow as well. So there's a lot of little different things that are going into it. But I think in general, from our, as Chris mentioned, from the,, the employee costs and the short,