PHINIA Inc. 2026 Q3 Earnings Call

We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's investor relations website, including a slide deck that we'll be referencing 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. With that, it's my pleasure to turn the call over to Brady.

Thank you, Gordon, and thank you everyone for joining us this morning. I will start with some overall highlights and some key developments in the quarter that support our strategy. Chris will then provide additional details on our third quarter results and discuss our 2026 financial outlook. We will then open the call for questions. Overall, we delivered another quarter of solid operational and financial performance despite an uncertain macroeconomic backdrop. Our third quarter results were in line with expectations and keep us firmly on track to achieve our full year objectives. We continue to make meaningful progress on our strategic priorities, as reflected in the strong momentum we are seeing in new business awards. As I will discuss in more detail, I am particularly encouraged by recent wins across our diversified end markets and emerging growth sectors.

These successes position us well for a solid fourth quarter and provide a strong foundation for sustained profitable growth in 2027. Not only did we deliver strong financials in the quarter, we also continue to execute on initiatives that will strengthen the foundation of our business and support long-term value creation. These efforts enhance our operational capabilities and further position PHINIA to capitalize on future growth opportunities. We made significant progress on simplifying and consolidating our IT systems with approximately 40% of our sales transitioning onto S/4HANA, the next generation of SAP ERP, without major disruption to the organization. The next wave is planned in 2027, and I fully expect the teams to perform as superbly as they did with this first launch.

We issued our third sustainability report highlighting the progress we've made over the last few years towards our target of reducing our absolute Scope 1 and Scope 2 greenhouse gas emissions by 50% by 2030 when compared to our 2020 baseline. We were also proud to publish the 2026/2027 Worldwide Heavy-Duty and Off-Road Emission Standards booklet with greenhouse gas coverage. Supported by our deep engineering and regulatory expertise in fuel systems, combustion, system integration, and calibration, we continue a practice that began over 30 years ago to aid OEMs, engineers, policymakers, and other industry professionals navigate the emissions regulatory landscape with supporting data and interpretations of different requirements. Next, we made leadership changes to our segments, naming two division presidents to increase operational agility and better support the growing business, while also changing the names of our segments to better reflect the products and services they provide.

Effective September 1st, the Fuel Systems segment was renamed Power Systems and will be led by Pedro Abreu, while Aftermarket was renamed Aftermarket Solutions and will be led by Dan Griffin. Finally, we announced the closing of the stoba Group acquisition as of October 1st, 2026, and want to give a warm welcome to the newest members of the PHINIA family. The purchase is entirely funded through available liquidity as a result of our strong cash flow position. As previously noted, we expect the integration of the stoba Group to expand our exposure in off-highway industrial end markets, add new customers, and drive synergistic profit expansion through supply chain ownership, integration of key capabilities, and cost efficiencies. This will also add additional AS9100 aerospace and defense qualified locations. Now let's get into some of the specifics by turning to slide six.

PHINIA continued to demonstrate resilience in a mixed macroeconomic environment. Customer demand across key end markets remained as expected, supported by durable replacement fundamentals and ongoing positive results in the commercial vehicle industry in Europe and North America. We continue to navigate ongoing geopolitical and trade-related uncertainty, mainly in the form of shipping challenges and costs, commodity inflation, and pricing pressures in some markets. Through strong operational execution and disciplined cost management, we managed those challenges effectively. Our net sales in the quarter were $912 million, up $4 million over prior year. But this was negatively impacted by $21 million due to the timing of tariff impacts. All in, our year-to-date net sales have increased 5.2%. Despite some of the headwinds from inflationary costs and pricing pressures, we reported a record adjusted EBITDA of $135 million for the quarter, up $2 million over prior year, representing a margin of 14.8%.

Although R&D costs as a percent of net sales were a headwind on a year-over-year basis, they were lower than Q1 and Q2. This lower percentage of net sales should continue into Q4. For context, our net R&D costs as a percentage of net sales ran in the mid threes in the first half of 2026, and see this in the mid twos in the second half of 2026. This will result in us coming in around our stated 3% of net sales annual target for net R&D. Both segments performed well with total segment adjusted operating income achieving a record level of $128 million or a 14% margin. The Power Systems segment delivered a strong 12.1% margin on slightly lower sales, and the Aftermarket Solutions segment delivered 17.1% margins with sales up over 4% compared to prior year.

Our finance and tax teams continue to make great progress on better aligning our structure with our operational footprint and bringing us closer to an industry standard tax rate. As a result, our adjusted effective tax rate came in at 23% for the quarter and has benefited from a lower estimated full year effective tax rate for 2026 that Chris Gropp will provide an update on. Adjusted earnings per diluted share excluding non-operating items were a record $1.83 for the quarter, compared with $1.59 in the same period for the prior year, a 15.1% increase year-over-year reflecting a solid operational result, lower tax rate, and the benefits of our share repurchase program. From a balance sheet perspective, PHINIA continues to demonstrate financial stability and consistency. Our net leverage ratio was 1.3 times, below our long-term target of 1.5 times.

We've returned $76 million to shareholders in the form of $65 million of share repurchases and $11 million of dividends. We remain committed to maintaining a strong and flexible balance sheet, supported by healthy credit market access and long-standing banking relationships. We continue to evaluate and enhance our capital structure, and despite a volatile rate environment, we still see opportunities to improve our debt maturity profile and lower our average borrowing costs in the coming year. Our third quarter performance underscores the durability and resilience of our business amid a rapidly changing global environment by serving a broad mix of regions, customers, end markets, and products. Moving to slide seven, I'm pleased with the success we are having with respect to gaining new business.

The third quarter was another good quarter for us, with strong interactions with new and potential customers at a number of industry events, including Farnborough Airshow, Automechanika Frankfurt, IAA Transportation, and Autopar 2026 in Brazil. For example, we increased the number of active pursuits in the aerospace market to eight customers across 13 potential programs, with sourcing decisions expected later this year and into 2027. Our team continues working closely with their counterparts to develop and test parts that will provide effective solutions to their needs. This quarter included notable wins across OE and Aftermarket channels, reinforcing customer trust, technology differentiation, and PHINIA's ability to deliver premium solutions to our customers. Key Power Systems wins in the quarter include our first methanol engine program. This will extend our technology into alternative fuels and industrial off-highway applications for the Chinese market, a CNG injector program for the Indian light vehicle market.

This business strengthens our position across diverse fuels, applications, and regions. Extension of a GDI pump award for a new range extender application in North America. This award demonstrates the continued relevance of our technologies across evolving powertrain architectures. Turning to slide eight, Aftermarket Solutions 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 wins during the quarter include new customer win for the North American fuel injector remanufacturing business, expanding the diesel customer base. Won a competitive conquest aftermarket braking business in Spain, and expanded Southeast Asian distribution, including increased penetration of steering and suspension products. Secured new business across diesel, vehicle electronics, and engine management systems in Saudi Arabia, Portugal, and Spain, expanding customer and product penetration. Now moving to slide 9. We've had several significant launches this quarter, including launch of a heated tip injector for our flex fuel SUV application in Brazil. These products expand our presence in a key flex fuel market and demonstrate our differentiated patented fuel injection technology. Expansion and launch of a fuel delivery module for a medium duty truck and bus application in North America. This product expands our presence across commercial vehicle platforms.

Launch of our second 500 bar program, supplying a GDI pump and fuel rail assembly for hybrid vehicle applications in China and extending deployment of advanced gasoline fuel system technology. A multi-product system launch for a major North American diesel pickup platform for a high volume light commercial vehicle application. Components include supply of a fuel pump, rails, starter motor, and SCR doser. Moving next to capital allocation on Slide 10, our approach remains unchanged. We are staying disciplined and balanced as we continue to invest in our business to support long-term growth, both organically and through strategic opportunities that strengthen our competitive position and increase 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 repurchases, which did not change despite preparing to execute the deal for the acquisition of stoba.