Phinia Inc. (PHIN) Q1 2025 Earnings Call Transcript

ladies and gentlemen thank you for standing by my name is krista and i will be your conference operator today at this time i would like to welcome everyone to the finia first quarter 2025 earnings conference call all lions have been placed on mute to prevent any background noise after the speaker's remarks will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star 1. And I would now like to turn the conference over to Kellen Farris, Vice President of Investor Relations. Kellen, you may begin.

Thank you, and good morning, everyone. We appreciate you joining us. Our conference call materials were released this morning and are available on FINIA's Investor Relations website, including a slide deck that we'll be referencing in our remarks. We are also broadcasting this call via webcast. Joining us today are Brady Erickson, CEO, and Chris Groff, CFO. During this call, we will make forward-looking statements 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 any undue reliance upon any such forward-looking statements and with that it's my pleasure to turn the call over to brady thank you kellen and thank you everyone for joining us this morning i'll start with some overall comments on the first quarter and then provide some thoughts on 2025 and beyond chris will then provide additional detail on our financials and discuss our 2025 guidance we will then open the call for questions starting on slide four the deck the first quarter developed largely as we expected with highlights including strong business retention and new conquest wins delivering on our capital return strategy and maintaining a healthy balance sheet during the first quarter the macroeconomic environment and the automotive industry continued to show signs of slowing similar to what we experienced in the second half of 2024. our financial results reflect the soft top line but with good segment adjusted operating margin performance while the environment continues to evolve rapidly our teams are managing our priorities and our business well both aftermarket segment sales and fuel system segment sales were lower year-over-year primarily due to lower oem volumes as a result net sales in the quarter were 796 million down 7.8 percent in the same period of the prior year which included contract manufacturing revenues. Excluding the FX impact and CMA agreements that were in place last year, revenue decreased 4.1%. This was in line with our expectations as we see a softer first half of 25 on a global basis. We reported adjusted EBITDA of 103 million with a margin of 12.9%, a 260 basis point year-over-year decline. The decrease was primarily due to lower sales, added infrastructure costs to support the business as a standalone entity, and a strong Q1 2024 comparison. Total segment adjusted operating margins were 12.2%, 140 basis point decreased when compared with the first quarter of 2024. Adjusted earnings per diluted share, excluding non-operating items as detailed in the appendix, was 94 cents. Our team continued to work closely with suppliers and customers in order to efficiently and effectively work through dynamic business conditions. On the capital side, we continued to take steps intended to drive long-term value for our shareholders. Our balance sheet remained strong with cash and cash equivalents of $373 million, and combined with our undrawn revolver, our total liquidity is approximately $900 million. Importantly, our net leverage ratio was 1.4 times, closing in on our approximate target of 1.5 times. And lastly, our solid financial position enabled us to return $111 million to shareholders via share buybacks and dividends during the first quarter of 2025. In fact, we bought back more than 7.5 million shares, or roughly 16.5% of outstanding shares, since we were spun out in July of 2023. Let us now move to slides five and six for a discussion of new business wins. We saw sustained momentum in new customer growth and continue to generate growth opportunities in our core business. Additionally, I'm pleased with our efforts around new product development and new customer wins. Our continued focus on deepening our relationship with customers, the expansion of our product offering, and our ability to capture new business wins give us many levers to drive the business. Let me call out a few. A 350-bar gasoline direct injection system, or GDI, for an alternative fuel application, which is using E100. It's with a leading international automobile manufacturer for the Brazilian market, which leverages existing high-performance Phinia GDI technology while adapting it for decreased carbon emission alternative fuels. Two high-volume fuel delivery module, or FDM, wins in the America's market for a gas truck platform that continues to expand the use of Phineas' robust and versatile FDM technology. A ConQuest Selective Catalyst Reduction, or SCR, pump win for the Chinese market securing additional LPV and LCV revenue in China focused on lowering tailpipe emissions. Aftermarket business wins in the Steering and Suspension category with a member of a major customer group in Scandinavia and a major Canadian distributor, which will boost our business in Canada and provides opportunities to expand sales and other product categories over time. Business expansion with a major US distributor, which is a consolidator in the warehouse distribution space, further strengthening our relationship. Increased share of wallet with major U.S. distributor across all product categories, growing with them as they expand their business. We are committed to driving expansion and complementary product categories and executing on a creative M&A to drive additional scale in our business. Additionally, we continue to believe that the breadth and scale of our customer base provides a strong foundation for continued growth. Now moving on to slide seven, capital allocation. Our capital priority is, first and foremost, to invest in our business for long-term profitable growth. We return excess capital to shareholders through both dividends and share repurchases. We have a proven track record of being financially disciplined and focused on maximizing long-term shareholder value. We have $264 million remaining under our current repurchase authorization, and we expect to continue to opportunistically repurchase shares as part of our capital allocation strategy finia continues to demonstrate financial stability and consistency and i'm confident in our ability to respond to this challenging macroeconomic environment looking ahead and summing up we have much to be excited about in 2025 despite the dynamic north american market the global nature of our business the diversity of the markets we serve and our substantial aftermarket business will benefit us greatly we continue to launch new innovative products around the world and look forward to moving from stabilizing the business post-spinoff to building on and further improving the foundation we have built regarding the evolving north american market i wanted to help frame the impact of tariffs on our business a majority of our north american manufacturing capacity has been in mexico for more than 30 years and represents roughly 1 billion dollars of our revenues for less than 30 percent of our global revenues. The majority of our products are USMCA compliant, and roughly half is sold to customers in Mexico. We are also working closely with our customers and suppliers on a number of options to adjust sourcing, sales, and logistics flow to mitigate at least some of the impacts of tariffs on products not qualified under USMCA. While we continue to digest the new trade policies and qualified mitigation plans, we feel we have several options and pathways to respond to this dynamic environment. We also believe the diversity of our global business and of our customers has us well positioned to manage the impact of tariffs on our business. I'd like to conclude with a few important messages. First, we are navigating near-term uncertainty well and appreciate the commitment of our strong global team. Second, we are very confident in the strength, the resilience, and the overall health of our company, which will allow us to continue to invest in our business, make acquisitions, and return capital to shareholders. And third, our long-term strategy to grow our CV, industrial, and aerospace OE business and aftermarket and service offerings remains intact, and we believe it will allow us to deliver long-term shareholder value. With that, I will hand over to Chris who will walk us through our Q1 results and discuss our outlook for the year. Chris?

Thanks, Brady, and thank you all 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. Moving to slide 9, our business and financial results demonstrated resiliency and balance sheet strength. As expected, revenue in the first quarter reflects similar market trends to what we experienced in the last half of 2024. We generated 796 million in net sales, down 7.8 percent versus a year ago. We have experienced some headwinds in U.S. dollar reported sales, which were largely impacted by a continuation of foreign currency devaluation. Excluding the impact from foreign currency and contract manufacturing sales that ended last year, the year-over-year sales for Q1 were down 4.1%. Our aftermarket segment sales decreased 3.9% year-over-year, primarily due to lower OEM sales. Fuel system segment sales were down 10.2%, including prior year contract manufacturing sales, or 7.3% excluding the effect of contract manufacturing. The decline in fuel systems is attributable to lower OE sales across all regions. Adjusted operating income was $73 million with a 9.2% adjusted operating margin, which represents a year-over-year decrease of $24 million and 230 basis points. corporate costs were higher as we continued to build out the necessary corporate functions to operate as a standalone entity we are taking steps to ensure that costs remain aligned with current needs and are closely reviewing all discretionary operating expenses our adjusted net earnings per diluted share in the first quarter was 94 cents which excludes non-operating items which are described in the appendix of our presentation. From a core business performance standpoint, our segments reported solid overall margins. Q1 segment adjusted operating margin was healthy at 12.2%. However, this did represent a decrease of 140 basis points year over year, primarily related to negative sales mix in the aftermarket segment, a one-off retro payment received from a supplier issue in Q1 of 2024 for fuel systems, and approximately $4 million in tariff costs from the newly introduced tariff regime in the U.S. that are expected to be passed through 100% in the second quarter. The aftermarket segment margin decreased 180 basis points, ending the quarter at 16.1%, due to negative sales mix, as noted, and about $2 million in tariff costs that are expected to be passed through to customers via increased sales prices in Q2. Q1 fuel system segment margins were 9.5%, down 130 basis points year-over-year due to reduced volumes. A prior year retro settlement from a supplier issue received in Q1 2024 and approximately $2 million in tariff costs that are expected to be charged to customers in Q2 of this year. Let me now bridge our adjusted revenue and adjusted EBITDA for the first quarter, which you can find on pages 10 and 11 in the presentation. Sales in the quarter were impacted by softness and volume, which was a headwind of $34 million on lower OEM sales across all regions. Compared to Q1 2024, FX was also a headwind of $16 million as the dollar strengthened against the Brazilian real and the euro. Moving next to the bridge on slide 11, adjusted EBITDA was $103 million for a margin of 12.9%, representing a year-over-year decrease of $28 million and 260 basis points. lower sales as i just mentioned was a headwind of 13 million in the quarter other cost of sales were affected by the one-off supplier recovery impact from tariffs and other manufacturing costs total 12 million this was partially offset by supplier savings and recoveries of 5 million corporate costs were higher by 6 million reflecting our standalone status as of last year combined with other cost increases of $2 million. Also of note, excluding the impact of items not related to the company's ongoing operations, the company's effective tax rate associated with ongoing operations was 36% for the quarter, ended March 31st, 2025, compared to 38% for the quarter ended March 31st, 2024. 4. Progress on improving our tax rate is slow and methodical, but clouded by pre-spin-related tax activity. Now for a quick recap of our balance sheet and cash flow. Our team's unrelenting focus has enabled us to maintain a solid balance sheet that provides us with financial flexibility to support our capital allocation priorities. We ended the quarter with substantial current liquidity. Cash and cash equivalents were $373 million, and available capacity under our credit facilities was approximately $500 million. Net cash generated from operations in Q1 was $40 million, up from $31 million in the same period of the prior year. During the quarter, adjusted free cash flow was flat to slightly negative compared to $13 million in the prior year. The decrease was primarily due to lower net earnings adjusted for non-cash items, partially offset by lower interest payments. While some uncertainty and risks remain globally, we are confident in our operations and our ability to generate sufficient cash for our needs while also continuing to invest in the future. On the capital allocation front, we paid dividends of $11 million in the quarter and completed share repurchases totaling $100 million. We now have $264 million remaining on the $600 million authorized under our share repurchase program. Capital spend of $35 million was 4.4% of sales in the quarter. Funds were primarily used for investments in new machinery and equipment for new program launches. Now moving to slide 12 for a discussion of our 2025 outlook. We are reaffirming our 2025 guidance. which you can see on slide 12. Despite headwinds related to tariffs and uncertainty in the markets, we now anticipate reduced headwinds related to exchange rates against the backdrop of changes in the U.S. dollar to all other currencies. More than 60 percent of our sales are generated outside of North America. Related to those North American bills, we expect any new tariffs incurred to fully pass through to customers. On the macroeconomic front, material changes in the U.S. tariff structure are expected to dampen sales in the U.S. Uncertainty over emissions regulations in both the U.S. and abroad, plus continuation of elevated interest rates point toward continued softness in the commercial vehicle market. However, we expect the industry to experience trends in 2025 that are similar to those in 2024, with the same level of sales in the first half of the year as the last half of 2024. The company continues to expect its 2025 full-year effective tax rate to be between 38% and 42% as we make slow, steady progress. I want to reiterate that the foundation of our business is strong, and with our diversified portfolio, scalable operating platform, and strong balance sheet. We believe we can continue to be successful even in the most challenging external environment. In 2025, we will continue our efforts to position our company for long-term success. In closing, we remain firmly committed to building sustainable value for all our stakeholders. Thank you all for your attention today and we will now move to the Q&A portion of our call. Operator, please open the lines for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. We also ask that you limit yourself to one question and one follow-up. And for any additional questions, please re-queue. Your first question comes from the line of Jake Schall with BNP Paribas. Please go ahead.

Hey, guys. Thanks for taking my question. It looks like in the first quarter, the tariff headwind was about $4 million for the one-month tariffs were in effect, so about $50 million on an annualized basis before we even see the May 3rd parts tariffs. So, I know you said you expect to be able to pass along these costs to customers, but could you just help quantify what your exposure is both on a USMCA compliant and a non-USMCA compliant basis? Thank you.

Yeah, I mean, as we mentioned in the call, you know, the bulk of our North American business is USMCA compliant, you know, so it's over well over half. And so, we're in a pretty good position there and as i also mentioned on the call um you know more than half of our revenues are also staying within country uh and and supplying to our country our customers in country so i think we're in a pretty good position i think your analysis on you know the current impact level is is accurate um and again we're continuing to work with customers there's all the good good discussions going on um i think this is going to be easier a little bit easier for us to to justify and to document versus maybe what we went through a few years ago on trying to, you know, go through electricity and freight costs. And so ongoing discussions are good and we're confident in our ability to work with our customers.

Thanks, Brady.

And then can you just talk about any shifts you've seen in the underlying production market, especially that looks like the commercial vehicle OE market has softened pretty significantly over the last few months correct and again that's kind of all contemplated in our in our updated i guess reaffirming our guide as chris kind of mentioned we there's a bunch of moving parts but in general we see um you know the the softening cv the softening light vehicle market in in north america or maybe i take rather than softening cv we don't see the the the pre-buy coming in the second half we think that's going to be muted we've taken that into consideration we've taken into account the impact of passing through the tariffs as well as the impact of the latest uh fx exchange rates um so there's still a little bit of noise there but i think the team is is working through it um and we still you know we still see in general a good order board from our customers uh haven't seen any any major impacts and as chris kind of mentioned you know i think people need to be careful not to overweight the impact of just North America when there's a lot of our business that's outside of North America or stays in country in Mexico. So I still think we're in a pretty good position.

Yeah, and Jake, I also want to point out, we have seen since end of last year, but it continued into this year, our LV market in China has gotten stronger and has really held up. CV has been about the same. It's not increased in pools in China, but still going at about the same rate. But LV has gotten noticeably stronger, and Europe has held up for us quite well. So, you know, and that's going to be the majority of our book of business.

Thanks, Brady. Thanks, Chris.

Your next question comes from the line of Joseph Spack with UBS. Please go ahead.

Good morning, everyone. I guess just to maybe follow up on that a little bit, it does sound like there's some moving parts. Is there any way to sort of help quantify, like, how much FX is sort of better versus prior? That's sort of offsetting maybe some of the softer end markets you pointed to.

Yeah, I think in our original guide, we had FX as, I think, Chris, about 80 million of headwind. uh i think that's down to closer to around 20 now it's really just the impact in q1 uh and we don't see it having an impact in the second in the kind of rest of the year it's kind of in line with uh 2024 um that then obviously offset with the you know 50 million of pricing uh on the tariff that's expected to be passed through and then also some some volume kind of being a little bit softer in CV than originally expected due to no pre-buy. So those are kind of the big three. But then we have some upside, as Chris mentioned, in Asia and Europe still kind of remaining strong for us as well. So those are kind of a little bit of volume here and there in different parts of the world and the FX and the Terra Pass-Through impact. Okay.

That's helpful. I guess, given that, and I know you reiterated the guidance range, though. How would you classify where within that range you think you're trending? And the reason I ask is because, you know, if you look at sort of the first quarter and sort of the margins you put up, looks like you need to average about 14 and a half percent EBITDA margins over the remainder of the year, which is obviously higher than the first quarter level, higher year over year as well. And you are sort of talking about, you know, some some lower volumes. So what really drives the margins higher over the bounce year that would get you to the midpoint? Or is the low end a little bit more likely than not?

No, I mean, remember when we're talking about... Yeah, Chris?

Go ahead.

Again, when we're talking about lower volumes, it's lower versus our prior guide. And again, Q1 came in about in line from a revenue standpoint, as we kind of expected. And so from a run rate perspective, we're seeing higher revenues that then will convert. And so that's kind of what we're seeing kind of going forward. And again, you've got, you know, 50 basis points on the EBITDA that was low because of tariffs that will then come back. So that, you know, so we'll get a little bit of that back, you know, so we'll have a little bit of upside there as well. and we should have some upside uh with uh with higher revenues on a run rate perspective in the second half of the next three quarters um we also were expecting that q1 was going to be soft just because of the you know the start of the year was you know the was kind of midweek and a lot of the customers kind of eased into coming back online uh in that first week and so we were expecting that to kind of flow through. And so, again, I think we're still seeing us, you know, solidly in the mid-range of our guide. Chris? Okay.

Yeah. For a lot of reasons, Q1 is our weakest quarter. On the aftermarket side, if you go backwards, Q1 has always been the weakest quarter for aftermarket. And after Q1, it consistently rises as you get into summer season, warmer seasons, more driving in the seasons. Aftermarket is consistently much higher in Q2, Q3, usually in Q4, but that's going to depend also on weather and driving. For the fuel system side, it's usually also one of the weaker quarters. It's going to depend on what the OEs are doing, but right now our units are seeing some good numbers, but this market, We're trying to be as conservative as we can be, but it's really hard to tell right now what the markets are going to do because we're seeing still good pulls and still good demand from the OEs. We realize that that can change on a dime, so we're watching really close.

Okay, thanks. Fair enough. Maybe last one, Brady. I know, as you guys have highlighted, there is sort of maybe increasing uncertainty out there. I know, you know, tucking M&A is part of your mid, you know, longer term strategy. How do you sort of view this uncertainty in the context of that M&A? I mean, is it sort of a time where you want to maybe try to preserve some cash or, you know, is some of this uncertainty creating some, you know, opportunities for you?

I think it's, I mean, again, we're in a really strong position. We still have a strong cash on hand and a lot of liquidity, and we continue to generate free cash flow even in this environment. So, again, we have a lot of confidence there. Again, the targets that we're looking at are going to be smaller in nature as well. And so we're not going to do a deal that's going to lever us up to two times or more. That's not what we're looking for. And so we're looking for those kind of tuck-in acquisitions, and they're going to be acquisitions that are, you know, going to be cash-flowing. They're not going to be cash-burning, you know, entities. So we're looking at things that are opportunistic, but we're also going to always compare that to, you know, what our share price is and whether that kind of makes more sense, as we do kind of every quarter.

Appreciate it, Bree. your next question comes from the line of bobby brooks with northland capital markets please go ahead hey good morning guys thank you for taking the question um so you mentioned that you know the year-over-year decrease in ebitda was impacted by non-recurrence of the supply of supplier settlement and increased standalone costs as you exit from tsa so so those some more so those seem more one-off in nature i was just curious when would you expect those headwinds to subside and also is the supplier settlement something that you could maybe come back to and

become a tailwind or is that really more one-off no that was a it was actually it was a headwind for us in 2023 and we settled that agreement with that supplier and got some retro recovery which is which then hit our q1 of 2024 again as i try to you know as i remind a lot of folks is the year over year is is there's always going to be some noise in it i try to look at more of our operating performance and i think the the units from an operating segment performance standpoint performed pretty well um you know our our fuel systems was sub sub double digit which is kind of our threshold but again that was a little bit due to tariffs without that they're right close to double digits and our aftermarket had really strong performance at over over 16 and even with a few million of tariff uh impact and so from a segment perspective i think they continue to perform really really well um and and again i'm also not going to get overly concerned from one quarter uh because we're always going to have some noise of whether aftermarket some volumes get get pushed out or pulled in uh same thing with with timing of shutdowns uh and and adjustments in the market based on the the quarter end and so as you've seen over the last few years you know we can have some decent swings you know um you know plus or minus a couple hundred basis points of margin for the for the segments uh but then over the full year it still kind of balances out where we expect it to be um and and so we're still you know confident in in the ability of our business to continue to deliver strong results on a full year basis fair enough that's a really good call and then just maybe just to follow up on it the tfas is that going to be do you expect that to kind of continue to be a headwind the next couple quarters could you just maybe remind us of one when you get the timeline of when you expect to get out of all those well we're out just so we're clear we're out of all TSAs as of kind of Q2 of last year what was mentioned was when we compared to Q1 of last year the CMA and the TSAs were still partially in place in Q1 of last year and so now there we're fully out of all the CMAs we're out of all the TSAs and so it's just more from a comparison standpoint when we look back to 24 and so i think there was 16 17 million of contract manufacturing that we had in our revenues in q1 of 2024 that's not in this number uh and that's why the the revenue reduction is probably more you know from a net perspective it was you know over seven percent but when we take out cma was you know closer to four um and and so those were kind of low margin no margin I think the most of that is it continues to go down next quarter and I think it was basically completely out or only a million in Q3 of 2024. So it's kind of phasing out and so really from a from a year over year perspective I think once we're to Q3 there's really pretty much all the noise from 2024 TSAs and CMAs are out.

Thank you for that clarification there. Let me clarify one thing on the corporate costs and the TSAs. These are all gone. In fact, we were doing some reverse TSAs for BorgWarner. That is all out as of now. So in terms of the corporate costs, they are running higher. You have to remember that we do project those based on what our units are projecting in terms of their activity and performance. and we're on EV economic value added and the units are really pushing hard to achieve their numbers. Right now their volumes are good but they're also looking at their working capital and everything else and they're fighting hard to make sure they keep the EV in line and they're doing a good job but we project based on that so it may look elevated.

Now if volumes come down obviously depending on how we do with EV there's ways to achieve your numbers even within a falling volume but it's a lot harder but taking out expenses and making sure your working capital and your balance sheet is in line is what the units are doing that's that's really helpful calling thank you chris um then you called out kind of a number of businesses in the first quarter i was just hoping to maybe dive double click on that you know specifically with the 350 bar gdi in brazil could you maybe discuss the timeline of the initial discussions to eventually winning that deal and then secondly you mentioned the increased wallet size with a major u.s distributor uh could you maybe just

give us a sense of how much that wallet expanded like did it go from 10 to 14 maybe maybe it's not that specific but was just hoping to hear that type of caller yeah i mean typical um you know the first we'll go with the with the brazil um we've been doing you probably heard a number of different announcements where we're seeing E-100 and alternative fuels in different markets. And again, I think we're continuing to invest in Brazil. We see a lot of opportunities. And in general, those are programs that we've been working on for over a year doing development and prototypes, and now we're being awarded. They'll be then going into production in the next two to three years is a typical kind of timeframe. And so it's nothing unique, but we are seeing more and more interest in alternative fuels around the world for things that are capable of running to an E100 type technology. And so this is another key win for us as well and see more opportunities moving forward. As far as shares wallet, we won't share the exact amount, but I think it's a key area for our growth and how we're continuing to gain market share in that segment. And so, you know, anything that we're going to put on this list we think is meaningful and is going to help, you know, drive our revenues and allow us to continue to grow organically. And so it's another just a good example of another key win, you know, for our aftermarket team as they continue to perform well.

Awesome. And then just last one for me is I know you had mentioned like in the reaffirmed guidance that any tariff impacts are going to get passed through to the customers. And I'm sorry if I missed this, but could you maybe just dive a little bit deeper? So like what gives you the confidence that you'll, that these, any, any tariff impact will be easily be pushed through the customers? Just kind of wanted to hear the reasoning through that.

I mean, we already have, we've already had been having discussions with them for, for months and we already have, you know, a number of agreements already in place. And so the team has done a really nice job of leveraging our systems to make the audit process a lot more seamless with adding it into both our invoices as well as into our IT systems for us to track it more accurately. And again, the teams are doing a good job working collaboratively with our customers to try to mitigate things going forward. And so we're not at a position, we're just saying, throwing our hands up and saying, hey, you've got to pay for it, but it's, yeah, you need to pay for it, but let's work on ways that how can we mitigate it for them and save them the money as best as possible, which is one way is, you know, is going through the, what they call a virtual impedimento to where we're working with customers to not get double tariffed, you know, having our parts go back to the U.S. to have a tariff and then back to them. And that's why the fact that we're sending, you know, a lot of our revenues go directly to our customers in Mexico is one way that we're really helping them mitigate the impact. Fair enough.

Thank you for the caller, and I'll return to the queue. Thank you.

Your next question comes from the line of David Silver with CL King. Please go ahead.

Yeah, hi. I'll just preface my remarks by saying I do some technical difficulties. I joined a little late, so I apologize in advance if I'm making you repeat yourself. I did want to follow up maybe from a different angle on your reiterated full year guidance. guidance. But, you know, I think in general, and again, I apologize, this is a gross oversimplification, but, you know, I think the companies that I speak with understand the direct tariff impacts on their business pretty well, but maybe the uncertainty is, you know, in terms of customer behavior and things like that. And so along those lines, my first question would be, you know, about your, the pace or any changes in your collaborative work, either on R&D or product development or moving a program, you know, from the drawing board into production. So has customer caution or rethinking or just, you know, delaying or pausing while tariff and trade policy issues might shake out. Are you seeing that in your business in any significant degree or is it pretty much full speed ahead on the development activities?

It's full speed ahead. We really haven't seen any changes. The RFQs and the new business requests and quotes is really kind of continuing as normal. Again, as we've seen, you know, we've actually seen some increases just from people realizing that electrification is not going to be 100%, or at least battery electric vehicles are challenged. And we continue to see, you know, increased interest in extending combustion programs, as well as, you know, a few customers talking about, you know, updating engines and new engine programs for hybrid and plug-in hybrid applications. So, we really haven't seen any reductions or delays and continue to see, you know, a strong book of business coming our way.

Okay. Thank you for that. And then I did want to ask, I believe last quarter you mentioned that you had, regarding your efforts in aerospace, you had mentioned that you had received a key license that, you know, would be a precursor or a milestone to, you know, moving forward. with a customer order. I was just wondering about an update, but do you think that the movement towards qualifications or licenses, as the case may be, does that indicate, let's say over the medium term, that there will be incremental aerospace business or key business in other newer areas for the company?

Yeah, absolutely. And again, that was actually our quality certification that's ongoing this month. And so we're still making great progress there. And so for us, it's starting to pick up even more. And so we're actually been engaging and had, you know, a number of additional customers coming and visiting us and evaluating our capabilities. and the reception has been really, really good. And so we're expecting to continue to invest in that area and see continued opportunities there.

All right, and then last one from me, but I believe last year in terms of new products coming to market, I think the number was 3,600 SKUs or in that range. I just wanted to circle back on that, But in your plans for, you know, this year, how does, you know, the new product commercialization rate kind of look? And has anything changed in that regards, let's say, from the first of the year till today? Thank you.

No, I think we continue to expect to add, you know, a couple thousand plus, you know, SKUs a year, both replacing as some come off as we then add new programs. And so that's a key area, again, for us to continue to drive market share growth is to ensure that we continue to quickly add those new product lines as they become available. So that's a continued focus for us. We've got a dedicated team. That's really all they work on, you know, every single year. So we expect to continue, you know, in that couple thousand plus units of SKUs being added a year.

Okay, great.

I appreciate the color. your next question comes from the line of federico mirandy with bank of america please go ahead good morning everyone um one quick question on uh the commercial vehicle uh environment so from from my understanding the uh the export from i mean the import from china is is coming down significantly and I guess that because of the impact of the tariffs other volume for some of your some of the commercial truck customers is expected to come down and on the top of that earlier this week the administration has vented the possibility of an investigation for heavy duty trucks which may result in tariffs. I know that it's still very uncertain, but did you have any conversation with some of your customers? What's the sentiment there?

Yeah, I mean, again, I think the bulk of their sentiment is CV volumes for primarily in North America are not going to have that pre-buy effect, which is why we've kind of adjusted our numbers our expectations as well uh regarding china we don't export anything from china from a cv perspective into the north american market and and so we're not we're not concerned with that as chris mentioned uh our cv business in china is still you know stable um and so we'll we'll continue to kind of keep a monitor on on the cv side of things um you know primarily you know in north america but you know at least at this point other than you know not seeing a pre-buy in the second half we haven't you know seen any significant changes in their expectations um you know we we had a cb was already kind of especially in north america and europe was soft second half of last year we're continuing to see that softness in the first half of this year we think it'll pick up a little bit in the second half but it's not going to be to the level that we expected before and so we're seeing year over year being relatively flat um plus or minus and do you have any thoughts on the potential tariffs for heavy duty trucks it's it's anyone's guess at this point i mean i think with truck manufacturing we still see a lot of that is in the us there's not a tremendous amount of um engine production either for those commercial vehicle engines in Mexico. We see them predominantly in the U.S. as well. So, we'll continue to monitor it. But, you know, it's anyone's guess on what will or will not happen.

Thank you. And one last is on your free cash flow, which, yes, it's expected to be positive.

But given the high level of uncertainty uh how should we think about uh return of of capital to shareholders uh more specifically what should we expect for share buybacks yeah i mean again as we tell a lot of folks you know we'll look at it every single quarter and look at the m a pipeline look at our share price and look at you know our cash flow forecasts and kind of where we are And so we'll do that each quarter and then make an assessment. As a reminder for everybody, we do have one limitation is the tax matters agreement that should be wrapping up on July 3rd that limits us to, you know, maximum repurchasing upwards of 20% of our shares. And so we're getting pretty close to that limit. So that would be the only kind of limiting factor here in Q2. um but again as as we say we don't give a specific number but hopefully our history kind of shows that we're good stewards of capital and looking to maximize shareholder value thank you guys thank you and that concludes our question and answer session and i will now turn the conference back over to brady erickson for closing comments great thank thank you everybody uh really appreciate it obviously a challenging time but I think in general you know our teams are working very closely with our customers and our suppliers and are doing the right things and and will continue to execute as an organization and think our long-term strategies are still in place and are continuing to to win new business and and look for opportunities for further growth so really appreciate your support we'll talk to you soon thank you have a good day Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation, and you may now disconnect.