Thank you for standing by, and welcome to the PHINIA Q3 Earnings Call 2023. I would now like to welcome Michael Heifler, Vice President of Investor Relations to begin the call. Michael, over to you.

Thank you, Mandeep, 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; and Chris Gropp, CFO. Today, we will discuss our Q3 results and updated forecast for full year 2023. 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 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 for joining us this morning. I'm pleased to share our first earnings report as an independent company and proud to represent our nearly 13,000 employees who remain focused on delivering quality products to our customers and delivering solid financial results in the quarter. I'll get into some of the numbers shortly and then hand it over to Chris for more details but let me first provide some color on our journey so far. Throughout the past several months, I've spent considerable time with customers, employees and investors. The feedback externally and internally has been universally 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're going to be a reliable partner to 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 our profits and resources are being reinvested in our product lines and our operations to further strengthen and grow our business. Finally, 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. With regard to the transition from our former parent, the team has been hard at work exiting transitional services agreements, or TSAs in IT, cloud services, HR, facilities, operations, procurement, sales and IP and have been making strong progress. IT-related services make up the majority of the costs and will take the longest to exit. We expect to close out all these TSAs by the middle of next year. As we are negotiating independent services and hiring key talent,…

Thanks, Brady. I'm also pleased to reach this milestone of reporting our first standalone quarter. Please keep in mind there continue to be TSAs and CMAs with our former parent which we are phasing out in step through 2024 and expect to fully exit by the end of 2024. Also, as Brady mentioned, we continue to work with them on balance sheet items related to the spin and expect it will take the next few quarters for payables and receivables to and from, from them to close out. In Q3 2023, we generated $870 million in adjusted total sales, up slightly versus a year ago. Our adjusted earnings per share were $0.53. We earned $82 million in adjusted operating income and $117 million of adjusted EBITDA, resulting in an adjusted operating margin of 9.4% and an adjusted EBITDA margin of 13.4%, a year-over-year decrease of 400 basis points and 420 basis points, respectively. As Brady mentioned, we faced difficult comparisons of Q3 a year ago when we received retroactive inflationary cost recovery from our customers. In addition, as we anticipated, we are flowing through higher standalone corporate costs. As depicted in Slides 7 and 8, our sales performance in the quarter was affected by continued softness in our CV business in China. We saw favorable sales from positive customer pricing of $18 million, which was offset by $32 million of inflationary costs from suppliers. Volume mix was a headwind of $20 million, mostly due to lower CV sales in China. Customer recoveries represent approximately 70% of our realized inflationary costs for the first 9 months and we have reached agreements on recovery mechanisms with most of our top customers for inflationary cost recovery for the year. Please keep in mind that we have recently asked our customers for recovery from…

[Operator Instructions] Our first question comes from the line of Jake Scholl with BNP Paribas Exane.

Congratulations on your first quarter. Can you just remind us approximately what percentage of sales the China commercial market represents? And then can you just confirm that, that market runs above corporate average margins? And what's your level of confidence in the headwinds for the remainder of the year?

I think our CV business as a percent of our total revenue or it's about 50% of our China sales.

Correct.

So it's about $250 million to $300 million in total. Our CV business, I think, with all regions are all kind of comparable. Some of the CV business that we have in China is probably a little bit better than average for us. And as far as kind of the headwinds, we see it abating going into next year on the CV side. I think the big question for us is how quickly the big 3 ramp up in North America and where that demand kind of comes in. As I mentioned, we see a little bit of softness in CV, but in Europe, but not significant at this point. It's just a concern for us right now and our aftermarket continues to be pretty steady and strong generating -- strong cash flow generation for us.

And then free cash flow was definitely a point of strength in the quarter. Can you just talk about how we should think about that in the fourth quarter and then into 2024?

I mean, I think -- we think it's going to be positive again. We -- a typical Q4 is a positive cash flow quarter. Obviously, a lot of focus is going to be on closing it out and reducing our working capital. I think in general, we're going to keep with our overall guide that we see ourselves generating plus or minus about $200 million of free cash flow on an ongoing basis once we get through all the different CMAs and TSAs and kind of working through things. So...

But it will slow down slightly because in Q4, we are still collecting money and paying out money for BorgWarner, that's going to slow. So it is going to have an effect. We're getting more cash in than paying it out for them. So as a part of that, it will affect our total run rate cash flow in Q4 compared to Q3.

As Chris mentioned, I think that will kind of work its way through over the next few quarters for us to kind of finalize all the AR and AP between the 2 companies as well as tax matters agreements and a few other things that we've been paying for them and they're paying for us.

Our next question comes from the line of Joseph Spak with UBS.

I guess, Chris, first question. You briefly mentioned some of the recovery is not expected until middle of next year now. How broadly should we think about price/cost next year? Is that expected to be neutral? Or should you still -- should we still expect some benefit in '24?

Well, we still -- we really aren't seeing much on commodities. They're really flat year-over-year. Where we're seeing our inflationary in terms of utilities and merit for employees and things like that, that obviously, we've already increased the rate for this year like everybody else and that will feed into next year. What we expect is we will keep at the same level with our customers. For the most part, this year, instead of getting lump sums like we did last year, we're building it into piece price. So we expect it to remain basically flat. And then if we experience any higher headwinds, obviously, we'll go after the customers again. But I think we'll just continue seeing the same run rate going into next year as for this year.

Yes. So from a year-over-year, from '23 to '24, we think it's -- we've kind of hit the peak, and so we don't see any headwinds from inflationary costs. As Chris mentioned, I think we're not going to be in the battle that we have in the last few years where there was a complete negotiation and starting from scratch on January 1, where a large portion of our customers, we've actually just readjusted the base piece price, knowing that's going to be the new base kind of going forward. So hopefully, that will then reduce the volatility that we've seen in our earnings over the last couple of years, as Chris mentioned. I think in Q3 of last year in '22, we had 3 quarters of retro, which is why we had the spike. And we saw most of those in Q2 of this year but still had a little bit of a bump in Q2. And so hopefully, with rolling it all into piece price we'll have a more stable quarter-over-quarter comparisons.

And that piece price negotiation, that's consistent across the different -- all your customers across different end markets? Or is it specific to either light vehicle or commercial vehicle?

No. It's across all customers. That was more of a direction that we had to get that resolved because the uncertainty or the volatility from all those negotiations was not adding any value for our customers or for us. And so we took the initiative to really push that through into piece price.

To be fair, most of the CV customers were already -- they lean that way. They're much more upfront with making sure the pricing is kind of set in a piece price than the LV customers are. And then by region, Americas and Europe are very similar in how it's approached. In China, we've seen less inflationary issues. So it's been more of the ongoing negotiations with all pricing, which is how it typically works in China in any event. And that all goes into piece price.

Great. That's helpful. And then just the second question. Obviously, a lot of news and noise and headlines, particularly in North America about this EV push out. And I know there's a lot of your customers have probably been distracted with some other things this quarter and now they need to sort of ramp up. But I'm curious on some early level of discussions you're having with them about '24, maybe even '25 plans. Are we seeing any indication of upsized orders for GDi or other products if the mix of the vehicles they plan to produce is changing?

Yes. I mean again, it's -- I'm not going to overreact and say, hey, things are going to take off for us. But I think we continue to see strong demand for our products. I think GDi has been growing in North America over the years. And I think we're continuing to see customers ask for extensions of programs that were previously planning on kind of dying out. I think the one example that we gave as part of the new business win was the GDi program we won in China for plug-in hybrids. Those continue to quote activity and requests from customers continue to remain relatively strong. And that's why we think our light vehicle business has a lot of staying power. And as I mentioned, too, is our -- a lot of our North American light vehicle business tends to be on SUVs and trucks and vans, and those also have kind of longer staying power as well. And so we continue to see solid demand for those products, and we think that's going to continue through the decade.

CV in China has definitely been a tailwind for this year. CV has been down in China, but the GDi in China has definitely been a positive and it has been higher than we expected from budget and compared to prior year.

I think as we shared in the past, too, is our light vehicle quote activity remains really robust. We haven't seen a decline in quote activity or new business wins over the last few years. And so this is consistent with that. I just think the market is finally catching up to maybe some of the things that we've already been seeing.

There are no further questions at this time. I would now like to turn the call over to Brady Ericson for closing remarks.

Great. Thank you very much, and thanks for joining the call, everybody. I think we're excited about the long-term future of this business. The quote activity remains strong. We've got some great technology that our customers continue to pull on. And again, we think a liquefied and a gaseous fuel is going to be key for all of us to achieve carbon neutrality in the time frame that each of us have defined. And so we're really happy with the strength of our balance sheet, the flexibility it's going to give us and our ability to continue to return money to our shareholders to provide them great returns as well. So looking forward to the future of PHINIA. Thank you.

I'd like to thank today's speakers for today's presentation and thank you all for joining us. This now concludes today's call, and you may now disconnect.