PHIN - NYSE

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the PHINIA Inc. First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. And I would now like to turn the conference over to Kellen Ferris, 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 PHINIA Inc.'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, 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 of the deck, the first quarter developed largely as we expected with highlights including strong business retention, 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% from 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 2025 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 the strong Q1 2024 comparison. Total segment adjusted operating margins were 12.2%, a 140 basis point decrease when compared with the first quarter of 2024. Adjusted earnings per diluted share excluding non-operating items as detailed in the appendix was $0.94. Our team continues to work closely with suppliers and customers in order to efficiently and effectively work through dynamic business conditions. On the capital side, we continue to take steps intended to drive long-term value for our shareholders. Our balance sheet remains 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 Inc. GDi technology while adapting it for decreased carbon emission alternative fuels. Two high-volume fuel delivery module or FDM wins in the Americas market for a gas truck platform that continues to expand the use of our robust and versatile FDM technology. A conquest selected 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 group in Scandinavia and a major Canadian distributor. We will boost our business in Canada and provide opportunities to expand sales in 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 a major US distributor across all product categories growing with them as they expand their business. We are committed to driving expansion in complementary product categories and executing on accretive 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. PHINIA Inc. 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-spin-off to building on and further improving the foundation we have built. Regarding the evolving North American market, I want 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 thirty years and represents roughly $1 billion of our revenues, or less than 30% 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, 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'll hand it 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 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 nine. Our business and financial results demonstrated resilience 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% versus a year ago. We have experienced some headwinds in US 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 continue 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 $0.94, 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 US 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 systems 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 adjusted EBITDA for the first quarter, which you can find on pages ten and eleven in the presentation. Sales in the quarter were impacted by softness in volumes, 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 eleven, 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 totaled $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 the 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 31, 2025, compared to 38% for the quarter ended March 31, 2024. 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 noncash 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 twelve for a discussion of our 2025 outlook. We are reaffirming our 2025 guidance, which you can see on slide twelve. 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 US dollar to all other currencies. More than 60% of our sales are generated out. Related to those North America bills, we expect any new tariffs incurred to fully pass through to customers. On the macroeconomic front, material changes in the US tariff structure are expected to dampen sales in the US. Uncertainty over emissions regulations in both the US 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. Again, press star one. 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 Scholl 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 third 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 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, you know, more than half of our revenues are also staying within country. And supplying to 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 accurate. And, again, we're continuing to work with customers as all the good discussions going on. I think this is gonna be a little bit easier for us to justify in the document versus maybe what we went through a few years ago on trying to 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 it looks like the commercial vehicle OE market has softened pretty significantly over the last few months.

Correct. And again, that's kinda all contemplated in our updated I guess, reaffirming our guide as Chris kinda mentioned. There's a bunch of moving parts, but in general, we see the softening CV, the softening light vehicle market in North America or maybe it's a rather softening CV. We don't see the pre-buy coming in the second half. We think that's gonna 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 FX exchange rates. So there's still a little bit of noise there, but I think the team is working through it. And we still, you know, we still see in general a good order board from our customers. Haven't seen any major impacts. And as Chris kinda 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 wanna 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, you know, it's not increased in polls 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 know, and that's gonna be the majority of our book of business.

Thanks, Brady. Thanks, Chris.

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

Good morning, everyone. I guess just to maybe follow-up on that a little bit, 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 sort of off some of the softer end markets you pointed to?

Yeah. I think in our original guide, we had FX as a think, Chris, about $80 million of headwind. I think that's down to closer to around $20 million now, which really just the impact in Q1. And we don't see it's having an impact in the rest of the year. It's kinda in line with 2024. That's then obviously offset with the $50 million of pricing on the tariff that could be passed through. And then also some volume kinda 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 kinda remaining strong for us as well. So those are kinda the little bit of volume here and there in different parts of the world and the FX and the tariff pass-through impact.

Okay. That's helpful. I guess given that, would you and I know you sort of reiterated the guidance range though. What would you say like, how would you sort of classify, like, where within that range you think you're trending? And the reason I ask is because if we look at sort of the first quarter and sort of the margins you put up, looks like you need to average about 14.5% 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 some lower volumes. So what really drives the margins higher over the balance here that would get you to the midpoint? Or is the low end a little bit more likely than that?

No. I mean, remember, when we're talking about both...

Yeah, Chris? Oh, go ahead. 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 revenue that then will convert. And so that's kinda what we're seeing kinda going forward. And, again, you've got 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 with higher revenues on a run rate perspective in the next three quarters. We also were expecting that Q1 was gonna be soft just because of the start of the year was, you know, the was kinda mid-week. And a lot of the customers kinda eased into coming back online. In that first week, and so we were expecting that to kinda flow through. And so, again, I think we're still seeing us, you know, solidly in the mid-range of our guide.

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 season, more driving in the seasons. Aftermarket is consistently much higher in Q2, Q3. Usually in Q4, but that's gonna depend also on weather and driving. For the fuel system side, it's usually also one of the weaker quarters. It's gonna depend on what the OEs are doing. But right now, our units are seeing 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, Ravi. I know as you guys have highlighted, there is sort of maybe increasing uncertainty out there I know, tuck-in 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 wanna maybe try to preserve some cash or is some of this uncertainty creating some 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 gonna be smaller in nature as well. And so we're not gonna do a deal that's gonna lever us up to two times or more. That's not what we're looking for. And so we're looking for those kinda tuck-in acquisitions, and they're gonna be acquisitions that are gonna be cash flowing. They're not gonna be cash burning entities. So we're looking at things that are opportunistic, but we're also gonna always compare that to, you know, what our share price is. On whether that kinda makes more sense as we do kinda every quarter.

Appreciate it, Brady.

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. So you mentioned that, you know, the year-over-year decrease in EBITDA was in part due to the nonrecurrence of the supplier settlement and increased standalone costs as you exit from TSAs. So those are 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 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 there's always gonna be some noise in it. I try to look at more of our operating performance, and I think the units from an operating segment performance standpoint performed pretty well. You know, our fuel systems were sub double-digit, which is kind of 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 16%. And even with a few million of tariff impact. And so from a segment perspective, I think they continue to perform really, really well. And again, I'm also not gonna get overly concerned from one quarter. Because we're always gonna have some noise of whether aftermarket some volumes get pushed out or pulled in. Same thing with timing of shutdowns. And adjustments in the market based on the quarter end. And so as you've seen over the last few years, you know, we can have some decent swings. You know, plus or minus a couple hundred basis points of margin for the segments. But then over the full year, it still kinda balances out where we expect it to be. And so we're still confident 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 TSA, is that gonna be do you expect that to kinda continue to be a headwind to the next couple of quarters? Could you just maybe remind us of when you expect to get out of all those?

Well, we're out of just so we're clear, we're out of all TSAs as of kinda Q2 of last year. What was mentioned was when we compare to Q1 of last year, the CMA, and the TSAs were still partially in place in Q1 of last year. And so now they're 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 2024. 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. And that's why the revenue reduction is probably more you know, from a net perspective, it was, you know, over 7%. But when we take out CMA, it was, you know, more closer to 4%. And so those were kinda low margin, no margin. I think the most of that is, I guess, it continues to go down next quarter. I think it was, basically, completely out or only a million in Q3 of 2024. It's kinda phasing out. And so really 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.

Yeah. I just wanted clarification there. Let me clarify one thing on the corporate cost 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 cost, they are running higher. Some of the you have to remember that we do project those based on what our units are projecting in terms of their activity and performance. And they we're on EB, economic value added, and the units are really pushing hard to achieve their numbers, you know, 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 get keep the EV in line. So 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 with in 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 really helpful, Cole. Thank you, Chris. Then you called out kind of a number of business wins in the first quarter. I was just hoping to maybe dive double click on that specifically with the 350 bar GDI in Brazil. 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 US distributor. Could you maybe just give us a sense of how much that wallet expanded? Like, did it go from ten to fourteen percent? Maybe it's not that specific, but was just hoping to hear that type of color.

Yeah. I mean, typical know, the first will go with the with the Brazil. We've been doing you you probably heard a number of announcements where we're seeing E100 and alternative fuels in different markets. And again, I think we continue to invest in Brazil. We see a lot of upper. 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, you know, two to three years is a typical kind of time frame. And so it's nothing, you know, 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 technology. And so this is another key win for us as well. And see, you know, more opportunities moving forward. As far as share as 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 anything that we're gonna put on this list, we think is meaningful. And is gonna 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 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 gonna get passed through to 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 tariff impact will be easily be pushed through the customer just kinda wanted to hear the reasoning through that.

I mean, we already have we've already had been having discussions with them for four 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 our with adding it into both our invoices as well as into our IT systems in order 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, you know, things going forward. And so we're not at a position. We're just saying throwing our hands up and saying, hey. You've gotta pay for it, but it's yeah, you need to pay for it, but let's work on ways that how can we make 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 the to where we're working with customers to not get double double tariff. You know, having our parts go back to the US to have a tariff and then back to them 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 color, and I'll return to the queue.

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

Yeah. Hi. Good morning. I'll just preface my remarks by saying I've due to some technical difficulties, I joined a little late. So I apologize in advance. If I'm making you repeat yourself. I did wanna follow-up maybe from a different angle on your reiterated full-year guidance. You know, I think in general and I again, I apologize. This is a gross oversimplification, but it you know, I think the companies that I speak with understand that 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 the 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, you know, full speed ahead on the development activities? Thank you.

It's full speed ahead. We really haven't seen any changes. You know, the RFQs and the new business request and quotes is really kinda continuing as normal. Again, as we've seen you know, we've actually seen some increases just from people realizing that electrification is not gonna be a hundred percent. Or at least better electric vehicles are challenged, and we continue to see, you know, 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 wanna ask I believe last quarter you mentioned that you had regarding your efforts in ARRIS aerospace, you had you had mentioned that you had received a key license that know, would be a precursor or milestone to you know, moving forward with the customer order. I was just wondering about an update, but do you think that the movement towards, you know, qualifications or licenses as the case may be. Does that indicate you know, over, 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 your 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.

Alright. 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 the commercialization rates, kinda 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 SKUs a year, both for 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, on that couple thousand plus units of SKUs being added a year.

Okay. Great. I appreciate the color. Thank you.

Your next question comes from the line of Federico Miranda with Bank of America. Please go ahead.

Good morning, everyone. One quick question on the commercial vehicle environment. So from my understanding, the import from China 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 gonna have that pre-buy effect. Which is why we've kinda adjusted our numbers or expectations as well. Regarding China, we don't export anything from China from a CV perspective into the North American market, and so we are not we're not concerned with that. As Chris mentioned, our CV business in China is still, you know, stable. And so we'll continue to kinda keep a monitor on the CV side of things. You know, primarily, you know, in North America. But know, at least at this point, other than know, not seeing a pre-buy in the second half, we haven't you know, seen any significant changes in their expectations. You know, we had a CV was already kinda 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 gonna be to the level that we expected before. And so we're seeing year over year being relatively flat plus or minus.

And did you have any thoughts on the potential tariffs for heavy-duty trucks?

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 engine production either. For those commercial vehicle engines. In Mexico, we see them predominantly in the US as well. So we'll continue to monitor it. And 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, how should we think about return of capital to shareholders? 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 forecast and kinda 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 a tax manager agreement that should be wrapping up on July third. 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 kinda limiting factor here in Q2. But, again, as we say, we don't give a specific number. But hopefully, our history kinda shows that we're good stewards of capital and looking to maximize shareholder value.

Thank you, guys.

And that concludes our question and answer session. And I will now turn the conference back over to Brady Ericson for closing comments.

Great. Thank you, everybody. I really appreciate it. It's 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 we'll continue to execute as an organization. And think our long-term strategies are still in place. And are continuing to win new business and look for opportunities for further growth. So really appreciate your support. We'll talk to you soon. Thank you. Have a good day.