Earnings Call Transcript
Phinia Inc. (PHIN)
Earnings Call Transcript - PHIN Q4 2023
Operator, Operator
Good morning. My name is Brianna and I will be your conference operator today. At this time, I'd like to welcome everyone to the PHINIA Q4 2023 Earnings Conference Call. Please note that today's call 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. I will now turn the call over to Michael Heifler, PHINIA Investor Relations. You may begin your conference.
Michael Heifler, Investor Relations
Thank you, Brianna, and good morning, everyone. 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 will be referencing in our remarks. We are also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO; Chris Gropp, CFO. Today, we will discuss our Q4 and full-year 2023 results and forecasts for 2024. Please keep in mind when we make year-over-year or second-half 2023 to first-half 2023 comparisons, we are comparing our standalone results, including actual or expected corporate costs to pro forma results with corporate allocations when we were part of BorgWarner. During this call, we will be making 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. And with that, it's my pleasure to turn the call over to Brady.
Brady Ericson, CEO
Thanks, Mike. Thank you all for joining this morning. I'd like to thank our more than 13,000 employees who remain focused on delivering quality products to our customers and making our first six months as an independent public company successful. I'd also like to thank our customers who've been highly supportive and have been awarding us new business at a record pace. I'll get into some of those numbers shortly and then hand it over to Chris for more details. But first, let me provide an update on our journey so far. As I mentioned in our last call, I continue to spend considerable time with our customers, employees, and investors. The feedback has been overwhelmingly supportive and positive about PHINIA's focus on its core business and strategy for the future. Customers appreciate our commitment to combustion products and that we will be a reliable partner for them for decades to come. They are aligned with our efforts to develop robust practical solutions for today and the carbon-neutral and carbon-free solutions of tomorrow. Our employees are excited that the profits and resources are being reinvested in our product lines and operations to further strengthen and grow our business. Finally, our investors are supportive of our strategy, commitment to being financially disciplined and our focus on total shareholder returns. Continuing to deliver solid financial performance and executing on our strategies will be key to building shareholder confidence. Along these lines, we are separately announcing today that our compensation committee has approved the company's 2024 incentive compensation program that we believe will best align our leadership team with shareholders' interests. As I've been sharing since our Investor Day last year, we are managing the business with a laser focus on generating economic value, or EV, and free cash flow. The 2024 annual cash incentive will be based on the company's achievement of two equally weighted performance metrics; EV and free cash flow. This program sends a clear message throughout our organization that investment decisions are made through the lens of earning an adequate return on capital. Our 2024 long-term equity incentive will be solely based on the company's relative total shareholder returns compared to that of a peer group company. We have filed a separate 8-K this morning with more details. Now let's go ahead and jump to the fourth-quarter highlights on Slide 4. I'm pleased to share that we ended 2023 on a strong note. Chris and I challenged a team to find incremental efficiencies and with their efforts, along with lower than expected impact from the strikes in North America and less of a currency headwind than expected, we came in at the top end of our revenue range and above our revised guidance range for adjusted EBITDA and adjusted EBITDA margin perspective. Chris will provide more specifics later. Providing great products and service for our customers has allowed us to continue to win new business across all product lines and in all regions in support of our strategies. A few examples from Q4 on Slide 5. PHINIA secured new conquest business to supply a GDI fuel system to a leading OEM specializing in hybrid and low-emission powertrain technology in the light vehicle segment. PHINIA won a contract extension to supply heavy-duty diesel fuel systems to a leading global OEM, securing revenue in our core commercial vehicle segment. And PHINIA achieved an important business win to supply medium-duty diesel systems to a leading global OEM, retaining and expanding our incumbent revenue. Now let's move to Slide 6. We accomplished a lot in 2023 from the successful spin to the strong operational performance. One area I want to highlight is our performance in securing our long-term future. In 2023, we had robust quote activity and strong win rates. When we were the incumbent, we won over 90% of the time. When trying to win conquest business, we won over 60% of the time. In total, approximately 40% of our business wins in 2023 were conquest. Our objective to increase market share to offset market headwinds is working well and I'm very pleased with our results. With these gains in our significant exposure to commercial vehicle, industrial and aftermarket businesses, we see continued organic growth through this decade and beyond. Finally, since becoming independent, we returned $47 million to our shareholders via dividends and share repurchases. Now, looking to 2024, we see the momentum continuing. Regarding the transition from our former parent, we now believe we are several months ahead of our original timeline and we expect that we will be exiting all material transitional service agreements, or TSAs, by the end of summer. We're also planning to exit all contract manufacturing agreements or CMAs with our former parent by the end of Q2 in a stepped and managed fashion. We will also be launching several key new technologies that will help our customers improve efficiency and reduce the CO2 output of their engines. We've also made progress on our corporate costs and are now confident that we will achieve our original target of $80 million per year or $20 million per quarter, as we are nearly fully staffed and most of the service and support contracts have been finalized. Our constant drive for efficiency and improvement across all areas of our business, operations, supply chain, engineering, corporate and even opportunistically refinancing our debt on more favorable terms is what will allow us to continue to return capital to our shareholders and drive long-term shareholder value. As you can see on Slide 7 and 8, our focus remains on growing our CV, industrial and aftermarket business while optimizing our light vehicle OE business. We remain aligned and confident in achieving our 2030 revenue target of $5 billion, with greater than 70% of our revenues coming from CV, Industrial and OES independent aftermarket channels. On Slide 9, we will execute on our strategies in a very disciplined manner in order to maximize shareholder returns by utilizing our ROIC-based investment analysis. In other words, efficient and profitable growth, not just growth. Capital return to our shareholders will continue to be a key part of our plan to maximize shareholder value. And finally, maintaining our strong balance sheet and liquidity ensures we will be a consistent and reliable company for all of our stakeholders. This leads us to my last Slide on Page 10. Given our strategies and execution thus far, we remain confident we will be able to deliver an average organic growth rate through the decade in the 2% to 4% range. We plan to do this in a disciplined way by maintaining strong margins and cash flow, all while maintaining appropriate leverage. We believe our business is resilient, with about a third of our revenue coming from the OES and independent aftermarket channel, which generally performs well even in poor economic conditions. Our commercial and industrial business, making up nearly a quarter of our sales, provides a stable growing opportunity. And in the light vehicle segment, we see our increasing market share and higher market penetration rates of GDI, especially in hybrids, supporting our position that our light vehicle business has staying power. With that, I'd like to pass it over to Chris to dive deeper into Q4 and full-year 2023 results and our 2024 guide.
Chris Gropp, CFO
Thanks, Brady, and good morning, everyone. I also want to thank our team for their extraordinary efforts this year and their hard work in closing out 2023 on a positive note. As we discuss our results and outlook, please keep in mind, there continue to be TSAs and CMAs with our former parent which we are rapidly phasing out. Also, we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for operational payables and receivables to and from them to close out. In Q4 2023, we generated $858 million in adjusted total sales, up slightly versus a year ago. Our adjusted earnings per share were $0.71. We earned $89 million in adjusted operating income and $127 million of adjusted EBITDA, resulting in an adjusted operating margin of 10.4% and an adjusted EBITDA margin of 14.8%, a year-over-year decrease of 80 basis points and 20 basis points, respectively. These results were meaningfully better than what we expected going into the quarter for the following reasons. The impact from the North American strikes only reduced our revenue by $5 million in the quarter, which was less than we had anticipated. We had strong commercial recoveries and cost controls and a somewhat lower headwind from currencies as the dollar softened in the quarter. Let me now bridge our revenue which you can find on Page 12 of the deck we made available on our website. Our sales performance in the quarter was affected by continued softness in our CV business in China. Volume mix was a headwind of $20 million, mostly due to lower CV sales in China as I just mentioned. We saw favorable sales from positive customer pricing, an inflation pass-through of $12 million and FX was a $15 million tailwind in the quarter. As we move to Slide 13, the teams managed their business well as volume mix impact was only $3 million, or approximately a 15% downside conversion. We also had additional supplier savings to help improve our results, offset by $19 million of inflationary costs from suppliers. As a reminder from the prior page on the sales bridge, we recovered $12 million of inflation from our customers for recovery of just under 70% in the quarter, all in a good Q4 result. Slides 14 and 15 summarize the full year. Volume and mix upside conversion was light due to mix. We recovered over 70% of supplier inflationary costs from our customers and drove additional efficiencies from our supply base. From a core business performance standpoint, our segments reported overall solid margins. Q4 segment adjusted operating margins were healthy at 12.6%, exceeding our first nine months performance by 90 basis points as our aftermarket segment rebounded from depressed margins in Q3 on the back of strong cost controls, strengthen sales in Europe and price. Looking at our performance on a segment level, Q4 fuel systems margins, while strong at 10.3% contracted somewhat on a year-over-year basis due to lower CV sales in China and partially due to supplier inflationary cost recoveries from our customers. On the supplier front, as we have mentioned, we are making strong progress and will see some benefit in 2024 from resourcing and/or settlements. Our aftermarket business adjusted operating margin recovered from a weak Q3, coming in at 16.3%, still down 40 basis points from the same period a year ago as non-commodity inflationary costs were not recovered by prior pricing actions and we experienced weaker mix. Corporate costs were well controlled, coming in at $19 million. We continue to expect approximately $20 million in quarterly corporate costs going forward. Q4 cash from operations was $62 million. During the quarter, we generated adjusted free cash flow of $55 million. I'm particularly proud of the team for focusing on inventory efficiency. We reduced overall inventory by $42 million from the end of Q3. We continue to see an opportunity to further improve our working capital going forward as we institutionalize inventory optimization programs, exit the CMAs, and complete production realignments. Next, turning to liquidity. We are committed to a strong financial foundation and have ample liquidity to run our business and execute our strategy. We ended the year with $365 million in cash and $425 million of committed revolver availability, giving us total liquidity of more than $790 million and net leverage of less than 1 times EBITDA. Now, let's look at 2024. I'll share our guidance, assumptions, and insights into our expected performance starting on Slide 16. From a market perspective on the OE side, industrywide CV volumes in 2024 are expected to decline by mid to high single digits in North America and Europe, while other global CV markets are expected to be flat to up slightly. Global LV volumes are expected to be down low single digits with engine production declining mid-single digits. Our good performance in 2023 has set the stage for the coming year and beyond. We expect strong earnings and cash generation in 2024 as we continue to drive operational efficiencies, exit agreements with our former parent and grow our aftermarket sales. Now let's move to Slide 17. For 2024, we expect adjusted sales of $3.4 billion to $3.55 billion, down 1% to up 3% in a difficult market environment. Market headwinds are being offset by our resilient and growing aftermarket and market share gains on the OE side. We expect adjusted EBITDA of $470 million to $510 million and adjusted EBITDA margins of 13.8% to 14.4%. For year-over-year comparisons, we would assume corporate costs of $80 million for 2023 rather than the $64 million related to carve-out accounting. This gives us a 2023 starting point of $3.45 billion in revenue, $474 million in EBITDA, and a 13.7% EBITDA margin. In 2024, we expect aftermarket growth, inflationary cost pressure reduction and resolution of troubled supplier issues to offset lower CV volumes in North America and Europe. PHINIA expects to generate $160 million to $200 million in adjusted free cash flow. Our adjusted tax rate is expected to be between 28% to 32% as we continue to work on reducing this to at or below 20% over the next couple of years. In closing, I want to reiterate Brady's message regarding our focus on financial discipline and generating strong shareholder returns. And with that, we'll now move to the Q&A portion of our call.
Brady Ericson, CEO
Brianna, can you queue up our questions, please?
Operator, Operator
Your first question comes from Jake Scholl with BNP Paribas. Your line is open.
Jake Scholl, Analyst
Hey, guys. Congratulations on the great quarter.
Brady Ericson, CEO
Thanks, Jake.
Jake Scholl, Analyst
First, I want to discuss cash flow, which is a strong number. Can you share your capital allocation priorities for the year? You're already below the 1 times net leverage target, so how can we understand your expectations for buybacks? Additionally, could you clarify the separation-related charges included in your guidance?
Brady Ericson, CEO
I guess on the first on the capital allocation side of things, obviously, we're in a net debt position that we like and we want to continue to maintain that. And that's going to give us a lot of opportunities to apply our free capital in other locations. As we did in Q4, we continued to accelerate our repurchase program and we continue to see stock repurchases as a key element to driving shareholder value. We're going to continue to opportunistically purchase shares, as we also look at additional organic and inorganic opportunities. And so, we'll look at where we can optimize ROIC for any of those capital allocations. The second?
Chris Gropp, CFO
Was cash.
Brady Ericson, CEO
The second, Jake was around?
Jake Scholl, Analyst
Sorry, the second part of that was just around separation-related charges in the free cash flow guidance.
Chris Gropp, CFO
On separation charges, they are essentially exit costs. The only expenses that BorgWarner is handling for us are mainly related to IT. Most of the transition service agreements have been completed. The remaining task involves their assistance in addressing our IT needs, which will extend into the second quarter. Ultimately, any services they are providing will be replaced by our own IT expenditures. So, it's simply a matter of replacement.
Brady Ericson, CEO
Yes, it's basically in our numbers. We had quite a few transitions happen in the last week or so, where we're creating clones. That's included in our $20 million of corporate costs and in our current guide. As we transition from their clouds and servers to our servers, we know where those costs will be, which is why we're confident in our overall costs and guidance.
Chris Gropp, CFO
Said another way, it's just replacement costs. Whatever we're paying them for IT and other services, we replace generally at the same rate of cost.
Jake Scholl, Analyst
Perfect. Thank you. And then previously when you guys talked about your 2030 targets, you said that for GDI revenue to stay flat from 2026 to 2030, you need about three points of market share gain. And we've seen pretty strong conquest wins this year. So can you just provide an update on how you guys are thinking about share gain over both the next few years and the second half of the decade? Thank you.
Brady Ericson, CEO
Yes. I think, in general, we are continuing to win. There's still a lot more quoting that's going to be happening in the next years as I think hybrids and plug-in hybrid volumes continue to remain strong. Getting into specific market share gains. We're still very confident in being able to hit our 2030 numbers. And as we kind of get closer to launching those programs, we'll kind of convey whether that growth rate can increase. But at this point, we're still very confident in our 2030 targets. As I just mentioned, as you know, most of the programs that are awarded now will launch in, say, roughly two years, some a little bit faster, some a little bit later and they're long-length programs. And so, we're feeling very confident in our positioning on the GDI side.
Jake Scholl, Analyst
Perfect. Thank you.
Brady Ericson, CEO
Thank you.
John Murphy, Analyst
Hi. Good morning, everybody. I just wanted to follow up on that line of questioning on the GDI side and your exposure to hybrids, Brady, as you look at this. There’s a shift back or maybe a shift back towards hybrids and plug-in hybrids. And the share gains there might be pretty material as far as a segment or a powertrain over the next few years as EVs are sputtering and there's a push obviously towards lower emissions and higher fuel economy. So as you look at your forecasts, what have you generally encompassed in your hybrid penetration, sort of in your outlook in your 2030 targets? And are you seeing some early signs of potential upside here?
Brady Ericson, CEO
Yeah. I mean, obviously, if hybrids stick around longer, that's obviously a good thing for us. GDI penetration rates on hybrids are generally higher than on non-hybrids. And obviously, the content per vehicle on GDI is significantly higher than a PFI application. I think a lot of the wins that we have now, I think, are positive and are going to put us in a very good position if hybrids kind of stay where they are and we see continued penetration in hybrids. We're going to continue to view, keep an eye on where penetration rates are. I think people were really surprised this year on the strength of hybrids. So it's always going to be difficult to predict on what we think hybrid penetration rates are going to be in 2028, 2029. But I think in general, I think people are realizing that a hybrid solution is a really good solution for many consumers and many markets in the world right now, which is why I think consumers are buying them because they get a lot of benefit, and I think a significant amount of CO2 reduction for the environment. And so, I do think as people update those forecasts and hybrids have a higher penetration rate, I think we'll benefit from that.
John Murphy, Analyst
Okay. And then just a second question. Yes, we're talking about $80 million of costs and rationalization savings targets. Seems like you're making good progress on that. How much of that is included in the 2024 outlook? Is that what's included in the 2024 outlook? And is there any potential upside? Because it does seem like you're executing a little bit ahead of plan.
Brady Ericson, CEO
Yes, I mean, we're right online again at the overall corporate cost. And the corporate cost also includes all of our stock compensation for all employees as well. And so, right now, we've been running 19, I think, the last couple of quarters, and I think we're right in line with that. And so, I think obviously we'll continue to drive other operational improvements in other areas, as well as some of our supply chain that caused some headwinds this year. And so, we think we're in a good position right now and the team is really coming together.
Chris Gropp, CFO
And just to be clear, it is in our 2024 plans. It's all baked in.
John Murphy, Analyst
Got you. That's helpful. And just the last one on that target of getting the 20% or so on the tax rate from 28% to 32% in your 2024 outlook. What's the time frame on grinding down to that? And would that mean that your cash taxes are down by a similar amount just to understand the potential for cash flow impact going forward?
Brady Ericson, CEO
Yes. I have a quick question. I think Chris may have made a mistake. I believe you mentioned 20% and 27%. They seem to have understood it as 20%. So, we are moving towards 27% or even lower. I would like to ask about that.
Chris Gropp, CFO
I said 20%.
Michael Heifler, Investor Relations
May I probably, it's my handwriting, probably.
Brady Ericson, CEO
No, Mike and I also heard 20%. So we're...
Chris Gropp, CFO
Sorry, I misread.
Brady Ericson, CEO
So this year we've already put in place a plan to work it, but it's going to, obviously with these things, take a bit of time. So as I said, we're going to get to between 28% and 32% this year and we just have to continue chunking away at it going down. But anything because we have so much business that's overseas, it takes a good period of time to get all of this stuff in place. So it's going to take a couple of years.
John Murphy, Analyst
But that will be mostly cash, that delta, is that correct?
Chris Gropp, CFO
Yes.
John Murphy, Analyst
Okay. Thank you very much. I appreciate it.
Colin Langan, Analyst
Thanks for taking my question. Just to follow up on the hybrid, can you remind me of the content per vehicle opportunity? Is it just that there's higher take rates on GDI and hybrids, or do you actually have more product opportunity on hybrid as well?
Brady Ericson, CEO
Yes, I believe there are two main points. First, the penetration rates for gasoline direct injection (GDI) in hybrids are slightly higher than in traditional combustion engines, mainly because there is no ongoing development for a next-generation traditional combustion engine. Therefore, the newer engines are predominantly hybrids, and GDI is a critical technology being utilized. In terms of content, whether it's a GDI standard or a GDI hybrid, they are quite similar. That said, we are currently seeing success with our engine control units (ECUs). They are sourcing more systems, which is a new product line for us. We used to purchase these from our former parent company and then resell them, but now we will be designing and supplying some of the next-generation products directly to our customers. This reflects an increase in content that we observe with the overall GDI system.
Colin Langan, Analyst
Got it. And there's been a lot of sort of pushouts on electric vehicles. Are your conversations on sort of the next-generation engines and hybrids changing at all? Are you seeing customers looking to develop new programs, or are they just extending the life of programs that are already in place for the most part?
Brady Ericson, CEO
I mean, for us, we didn't see a slowdown in quote activity in the last few years, and so the quote activity is still high. And so, I think a lot of it is going to be around, hey, they want more volume or much higher volume than they were originally expecting, or they're being extended.
Chris Gropp, CFO
But we did see some customers come in that we had not really spoken to on GDI before come in and ask for GDI applications, and then CV is a little different. I mean, they're really looking to extend and make sure that we're going to be there.
Brady Ericson, CEO
Right. But I think on the hybrid side, we've had a number of customers and hybrid applications that we're on that are now asking for 2 times as many as we originally contracted. And so, I think it's not necessarily new programs. I think it's volume increases and/or extensions.
Colin Langan, Analyst
Interesting. Okay. And just lastly, what are your assumptions? A lot of suppliers have been calling out high labor inflation, other cost inflation, and expectation that they could get recoveries this year. Are you seeing continued headwinds into this year, and do you expect to get full recovery from your customers?
Chris Gropp, CFO
Our blended labor rate increase for the upcoming year will be between 4% and 5% due to variations across different regions. Generally, it is stabilizing, but there are certain areas, like Mexico, where it is significantly higher. In these cases, we anticipate seeking reimbursement as we did last year. We aim to obtain reimbursement in any scenario that deviates from the original norms.
Brady Ericson, CEO
But we do see overall inflationary costs, I guess, muting a little bit. So I think it's not as high as it was in the last couple of years, but there are still going to be some pockets or specific labor inflation items that we'll be looking into.
Colin Langan, Analyst
Okay. All right. Thanks for the question.
Winnie Dong, Analyst
Hi, can you guys hear me?
Brady Ericson, CEO
Yes, we can.
Winnie Dong, Analyst
Hello, thank you. I was wondering if you could comment on the dynamics of your various end markets. It seems like they're mostly flat or declining, and your revenue outlook for 2024 appears to be flat as well. Could you provide more details on how you plan to maintain revenue performance and elaborate on the penetration and share gains you mentioned earlier?
Brady Ericson, CEO
I believe that overall, the commercial vehicle markets will be relatively weak globally, particularly in North America and Europe. Last year was quite strong, but this year is expected to decline. However, companies are preparing for a rebound in 2025 and 2026, driven by new emissions regulations and possible pre-buys. We are working with our customers to ensure we are installing additional capacity now to be ready for that pre-buy. This is part of the typical ups and downs we see in the commercial vehicle sector, but we are still experiencing strong demand for our products and gaining market share, which explains why our original equipment business remains relatively stable. On the light vehicle front, engine production is down about 5% due to the rising penetration of electric vehicles. Despite the negative press, electric vehicle adoption continues to grow. Although the light vehicle market is flat to down, we are managing to offset some of these challenges in our original equipment business through market share gains in our gasoline direct injection segment. We are hopeful for a slight recovery in the global light vehicle market, which would further enhance our market share and position. Additionally, since nearly a third of our revenues come from the aftermarket, it continues to be a strong growth area. Even when the overall market faces challenges, consumers still purchase service parts and maintain their vehicles, which is beneficial for our business as we steadily gain momentum with our aftermarket clients, achieving low to mid-single-digit growth.
Winnie Dong, Analyst
Thank you. That's very helpful. And then maybe a longer-term question. Just like the earlier questions on EV sort of adoption slowing down and also the administration potentially relaxing limits on some tailpipe emissions and potentially adoption of the EV getting slower in out years and requirements getting lower in the out years. I'm just curious as it relates to your $5 billion target for end-of-decade revenue, like at what point do you think there's potentially upside to that target and opportunities you might have there from a regulatory perspective?
Brady Ericson, CEO
We are committed to driving growth as long as we can implement programs that will deliver significant value. Our primary focus remains on a $5 billion target, which is based on an estimated 2% to 4% average organic growth, alongside some strategic acquisitions that will enhance our customer value and aftermarket offerings. These calculations are grounded in conservative assumptions and manageable acquisitions funded by our existing free cash flow. I believe there will be opportunities to exceed this growth target. Our expectations hinge on robust electric vehicle penetration rates, and it will be interesting to see where these rates stabilize. Opinions vary on this, with some suggesting EV growth may plateau globally at around 30%. The question is whether that will be 35% or 40%. A lower plateau would be more favorable for us. Additionally, we are experiencing a declining competitive landscape, which presents us with opportunities to gain market share. Furthermore, as we provide more comprehensive systems, including ECUs and calibration services, we see potential for added content opportunities.
Winnie Dong, Analyst
Very helpful. Thank you so much.
Dan Levy, Analyst
Hi, Trevor Young is here for Dan Levy today. Thank you for taking the questions. I wanted to ask about the ECUs that you mentioned during the Q&A. You highlighted the launch of your first internally designed and developed ECU this year and pointed out that electronic systems are a growth area. Can you provide more details on what you're doing in that area? Did you bring in new hires to develop this in-house, or are you acquiring it from your former parent company? Additionally, could you share some metrics to indicate your progress?
Brady Ericson, CEO
Yeah, I mean, we actually started bringing over engineers from our former parent probably about close to two years ago. And so, we started doing that as a lot of their engineers were focused on their next-generation inverters and high voltage. And so, we already had all the software engineers and all the calibration engineers were already within our four walls and so that's how they were split. The hardware side was on our former parent side and we had all the software and calibration engineers. And so, we started bringing over the hardware folks as they didn't have time to support our ECU needs. And so, it started about two years ago. And as I mentioned, we're actually going to be launching our first PHINIA-designed ECU as part of our system later on this year. It's actually in a hydrogen application and we won our first PHINIA-designed and PHINIA-sourced application that we'll be launching in the next few years as well. And so, we're starting that progress already. In some cases, we will use our former parent as a supplier, but it'll be based on our designs and our programs and our calibration and software. And so, we'll continue to grow that business. What we also see with some of these recent awards is as customers have moved more and more of their resources into electrification, they have less resources on their combustion and hybrid applications. So that means they want to then source the entire fuel system, including the ECU and calibration services to one supplier and we're ready to provide that service for them.
Trevor Young, Analyst
That's very helpful information. Thank you. Regarding GDI, the share aspect has been discussed extensively. I am curious, with increased interest in hybrids recently, have you noticed a rise in competition? I remember during your Investor Day presentation, you mentioned some suppliers exiting that market and how that benefited you. Have you observed any signs of suppliers wanting to remain in the market longer or possibly entering it?
Brady Ericson, CEO
I have not, no. Again, these are not easy parts. Some of the pressures and the calibration, and we're continuing to develop next-generation technology. And one great example is the 500 bar. It's taken a number of years to develop that technology and bring it to production. And a number of our competitors stop developing that next-generation product. It would be very difficult for them to then refire up their R&D resources to develop that product. And then if I'm an OEM, I would be very skeptical of how long are they going to stay committed to that market? Because these are suppliers that have already told their OEMs to please resource it to somebody else. And if I'm a customer and that supplier comes back to me, how long are they going to stay in the business before they exit again? And so, that's why I think, I say in a lot of my statements, customers want a reliable supplier for decades to come in this space. And that's one of the things that we provide them, which is why we've been successful. I think our some of our competitors that have announced their exit and have stopped quoting, it's going to be very difficult for them to come back in with a competitive product and to be able to gain confidence from the OEMs again.
Trevor Young, Analyst
That's great. Thank you.
Joseph Spak, Analyst
Thank you very much. I wanted to touch on the competition, as you mentioned that OEMs are hesitant to allocate resources and that other suppliers have essentially withdrawn, which is contributing to your market share growth. From your viewpoint, I’m curious about your capacity to support GDI for an extended period, considering it appears that industry capacity may be decreasing. Could you clarify your utilization or the need for further investment in that product?
Brady Ericson, CEO
I believe I can share a positive aspect that emerged from a previous challenge during the DELPHI days. We had initially overbuilt our capacity in Gasoline Direct Injection (GDI), resulting in some excess that we are now addressing. We’ve shifted some of that excess capacity from certain plants to regions with higher demand, mainly in North America and Asia, where we’ve experienced a notable increase in our wins and new business. This excess GDI capacity is being utilized not just for hybrid vehicles, but we've also adapted some of it for commercial applications and hydrogen technologies, including a low-pressure diesel direct injection system that helps meet stricter emissions standards. Overall, even with this rise in demand, we have adequate capacity to meet it and still have enough to allocate to hydrogen and off-highway applications.
Chris Gropp, CFO
We do have to add some small incremental bits onto this capacity that some of the customers are asking for, which is normal. But again, we've gone to a view that if they want a program and whatever they're giving us, if it's a four-year program, we'll buy the assets, but it has to return and depreciate over that period of time. So we're still being very careful because obviously a short-term trend does not make a long-term trend. So we're stating carefully, but.
Brady Ericson, CEO
Yes, in light of our new business wins and market share gains, we do not see a significant capital expenditure required to support these programs. I believe most of our capital is still directed towards CV and off-highway applications.
Chris Gropp, CFO
Correct.
Joseph Spak, Analyst
Yes, I know this is more difficult to sort of calculate, I guess. But based on your comments on competition, would you say industry capacity has come down industry-wide?
Brady Ericson, CEO
I think it's starting to come down. I mean, again, I think what we peaked at, what, $95 million, $96 million light vehicles at one point that were predominantly combustion. And so there's still some capacity. But I think capacity has been coming out of the market as some have exited and or stopped quoting next-generation programs. And so, yeah, I think capacity has come down in the marketplace, and I think that's good as well.
Joseph Spak, Analyst
Okay. And then just back on Slide 17 with the outlook, pretty flat sales year-over-year, pretty flat EBITDA at the midpoint, although I think you said maybe 490 is not the right base you would sort of suggest for comparison. But I guess just sort of wondering within that sort of EBITDA 2023 to 2024 bridge, are there any sort of larger puts and takes we should be considering?
Brady Ericson, CEO
No, I think the base comparison is the 474 once we have a full run rate, because our corporate costs in the first half of the year were relatively light due to more allocation. If we normalize that to the $80 number, we're seeing about a $16 million improvement in EBITDA with only a midpoint of $25 million more in revenue. This demonstrates strong conversion, driven by the additional revenue, improved operational performance, and addressing some supplier challenges. That accounts for approximately $10 million of the improvement, and another $5 million to $6 million comes from the conversion on incremental revenue.
Joseph Spak, Analyst
Okay, thank you very much.
Operator, Operator
There are no further questions at this time.
Brady Ericson, CEO
Great. Thanks, everybody, for joining our call. We're really proud of what the team has delivered this year in 2023 and really looking forward to another good year in 2024 and beyond. So thank you very much for your interest and investment. Have a good day.
Operator, Operator
This concludes today's conference. You may now disconnect.