Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the PHINIA Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the conference over to Mike Heifler, Vice President of Investor Relations. You may begin.

Thank you, Abby, and good morning, everyone. We appreciate you joining us. PHINIA completed its separation from BorgWarner on July 3rd and started trading on the New York Stock Exchange on July 5th. Prior to the separation, PHINIA was a wholly owned subsidiary of BorgWarner comprised of the company's fuel systems and aftermarket segments. PHINIA's historical GAAP financial information is presented on a carve-out basis. In addition, we present certain adjusted non-GAAP financial measures on today's call and in supporting materials. Our conference call materials were issued this morning and are available on PHINIA's Investor Relations website. We are also broadcasting this call via webcast. Joining us today is 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. And with that, it's my pleasure to turn the call over to Brady.

Thanks, Mike, and thank you all for joining PHINIA's first earnings call. As Mike mentioned, on July 3rd, we completed the spin-off from BorgWarner and were honored to ring the opening bell on July 5 prior to our stock trading for the first time as an independent company. Our entire leadership team, family members and key supporters were present to celebrate this key milestone. It was a great event, but it would not have been possible without the dedication and commitment of nearly 13,000 employees and for that, our leadership team and Board of Directors want to say thank you. In the weeks after, our leadership team scattered around the world to share our excitement and to celebrate the milestone with as many of our employees as possible. The celebrations were great and the level of excitement and commitment shown was extremely high. While our journey is just beginning, we are confident in our future given how our team came together to meet extraordinarily tight deadlines related to separation and not missing a beat in servicing our customers and executing on our day-to-day business. We've assembled a strong team, bringing together the right talent and experience to deliver on our strategies. We have a balance of legacy BorgWarner and Delphi as well as top outside talent. As we built the team, one thing became very clear. We all chose to be here because we believe in the long-term potential of the business. We all support our focus on product leadership and our drive to achieve carbon neutrality by 2035. We have long-term relationships with many of the top OEMs in the world and their feedback around the spin-off has been highly supportive. The last few years have challenged the supply chain and have demonstrated the importance of strong, reliable suppliers…

Thanks, Brady. And I'd like to add my congratulations to the PHINIA team. I greatly appreciate the commitment and long hours that the team has put in over the last few months to get us over the finish line to a successful separation. I know the same commitment and momentum will carry forward and help us drive the success of PHINIA. Before diving into the financials for the quarter, I would like to note again that the following discussion regarding Q2 results reflects the fuel systems and aftermarket business units that were under BorgWarner ownership prior to completion of the spin-off on July 3. At quarter-end, PHINIA is not operating as a standalone business. Our 10-Q to be filed later today reflects GAAP carve-out basis. There are allocations between us and our former parent that will eliminate going forward plus countless other changes as a result of the spin, which impact any takeaways within our Q2 reported numbers as filed. To help the investment community better understand our historical underlying operating performance by segment, we included an adjusted quarterly table in today's earning presentation within the appendix section of the document. This table aligns with the presentation that we shared at our Investor Day. We expect our Q3 results will be a more accurate representation of the performance of PHINIA as a standalone business, but will still have some adjustments due to transition services agreements and contract manufacturing, which we expect to fully exit by the end of 2024. That said, our intent is to make these comments helpful to gauge our fuel systems and aftermarket performance during this quarter and help you think about the business going forward. In Q2 2023, we generated $887 million in total sales, up 11% year-over-year. We achieved $94 million in adjusted operating income…

Thank you. [Operator Instructions] And we will take our first question from Jake Scholl with BNP Paribas. Your line is open.

Hey, guys, and congratulations on successfully getting through the spin-off. The first thing I want to ask you guys is so on BorgWarner's call, they mentioned that they expect a $450 million payment in the third quarter. Could you talk about how that's going to impact your financials and if that's something that's already kind of accounted for on your pro forma balance sheet?

I mean on the spin on July 3 as we took on that additional debt of the term loan A and B and revolver, there was then a lot of cash payments kind of going back and forth to pay off all the intercompany due to BorgWarner and BorgWarner due to us. And I believe the net result is what they were mentioning after all the spin cost was the $450 million. But I don't have that full walk. Again we think there was an $800 million net payment that we had from all the debt that we gave to BorgWarner and that's net of other payments. So there's nothing going to impact us going forward. That all happened on July 3.

And – go ahead, sorry.

No, sorry. Go ahead.

And I think my other question is could you guys just give us the walk from your net leverage now, which stands at about 1 times to your year-end net leverage, which looks like is also at about 1 times. Is there any – are there any cash payments that are factored into the guide? Can you just talk through the bridge there? Thank you.

Yes. If I understand, you're talking about the net leverage. What you're not seeing on that chart is the cash generation that we're going to have in Q3 and Q4. So our net cash would – probably is going to be going up with the profits and improvement in our working capital. And so we'll then determine what do we do with that cash as part of our capital allocation. Do we pay down debt, dividends and other items? So I do see us maintaining that or improving on our net leverage, too.

All right. Thank you.

[Operator Instructions] And with no further questions at this time, I will now turn – I do apologize. We did get another question. Next question comes from Douglas Dethy with DC Partners. Your line is open.

Good morning. Brady Ericson​: Good morning.

Congrats on all your efforts on the spin-off. Could you comment a little bit about the management incentives, the stocks and sort of compensation philosophy relative to your key performance parameters? Thank you.

Sure. I think right now, obviously, we had incentives that were put in place with BorgWarner. Those are basically carrying over. We're going to be working with our Board and our account committee in this next meeting as we do those conversions. But as I mentioned on the call, we're going to be resetting kind of our key metrics that will be focused on economic value and ROIC as well as the overall cash generation of the business on a year-over-year basis. And so that will be rolled out for the 2024 and beyond is how we're going to do things.

Okay. That's helpful and look forward to seeing that. Just the other comment. Now you're a much smaller company, you're not part of I guess the very large company. And just comment on how that will affect you going forward? I mean we deal with a lot of smaller companies and they have fewer resources and it's different than running a big company. How do you see that I guess opportunity…?

I think in general the way that things were set up under the prior ownership is most of our business units were pretty standalone. From finance, supply chain, engineering; our plants were pretty standalone. So from that perspective, there's not a lot different. There's obviously going to be some differences and the fact that legal, investor relations, treasury, tax are going to be some of the additional corporate costs that we need to add to our organization because that was some of the primary support that we had from our prior parent. So from our perspective that's going to be the biggest dissynergy. With that said, I think we're going to be a lot more nimble in supporting our business and so I think we're going to be a lot more focused on our customers and our markets to help grow our business. And that's where I made the comment earlier around our customers are actually excited about the spin because they know they're going to have a trusted partner to supply them with combustion technology, whether it's carbon neutral, carbon-free, aftermarket parts for decades and decades. And so they were quite supportive and excited about the opportunity because they see us continuing to invest in that space and we're going to continue to help them transition to carbon-free fuels going forward.

Good. Thank you very much.

[Operator Instructions] And with no further questions, I will now turn the call back to Mr. Brady Ericson for closing remarks.

Great. Thanks, everyone. Really appreciate your questions and feedback. We truly believe in what this business can deliver. After visiting many of our sites over the past few weeks as a newly independent company, our organization is extremely excited and eager to demonstrate growth and value creation. We appreciate your time and interest in our story. Have a great day.