Atmus Filtration Technologies Inc. Q2 FY2025 Earnings Call

Thank you for joining us. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to Atmus Filtration Technologies' Second Quarter 2025 Earnings Call. I will now hand the call over to Todd Chirillo, Executive Director of Investor Relations.

Thank you, Kate. Good morning, everyone, and welcome to the Atmus Filtration Technologies' Second Quarter 2025 Earnings Call. On the call today, we have Steph Disher, Chief Executive Officer; and Jack Kienzler, Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that could materially affect expected results. Please refer to the slides on our website for the disclosure of the risks that could affect our results and for a reconciliation of any non-GAAP measures referred to on the call. For additional information, please see our SEC filings and the Investor Relations pages available on our website at atmus.com. Now I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. On the call today, Jack and I will update you on our second quarter results and progress executing our 4-pillar growth strategy. We will also provide an update on our global market and our outlook for the remainder of 2025. I continue to be impressed with the ability of the Atmus team to navigate uncertainty and continuously provide our customers with industry-leading filtration solutions. Our team delivered record sales and strong financial results in the second quarter. We mitigated the impact of tariffs in the quarter and we'll continue to take appropriate operational actions to be price cost neutral in relation to tariffs. We continue to make progress on our operational separation from our former parent Cummins. I am pleased to report we are on track for full completion of separation in the third quarter. Now let's turn to our capital allocation strategy. We continue to deploy capital to create long-term shareholder value. We accelerated our share repurchase program in the second quarter, repurchasing $20 million of stock, bringing our year-to-date total to $30 million. Since the announcement of our share repurchase program last July, we have repurchased a total of $50 million of stock. We remain committed to investing for organic growth and executing our inorganic industrial filtration strategy. However, the timing of these opportunities can vary, and we will continue to deploy capital in a manner that creates value for our shareholders. We expect share repurchases to remain an important component of our capital allocation strategy and anticipate our full year repurchases will be in a range of approximately 1% to 3% of our current market capitalization. Now let's turn to the four pillars of our growth strategy and our progress in the second quarter. Our first pillar is to grow share in first-fit. We continue to win with the winners by building on our long-term partnership with industry-leading OEMs. We are delivering increased content with global OEMs as we work collaboratively on a train of development opportunities. These partnerships allow us to grow our share and provide our customers with industry-leading filtration products to solve their filtration challenges. While we continue to increase our bid rate for new business opportunities, the speed of decision-making by our customers has been impacted by ongoing uncertainties in the trade and regulatory environment. We expect continued growth from new first-fit business. However, the timing of awards may be elongated as our customers adjust to current market conditions. Our second pillar is focused on accelerating profitable growth in the aftermarket. We are winning share in the aftermarket as our distribution partners continue to grow their businesses, and we expand our product coverage through a multichannel path to market. This growth is supported by our expanded use of advanced data analytic tools, which increases our ability to provide industry-leading Fleetguard products for our customers when and where they need them. Our third pillar is focused on transforming our supply chain. We are now fully on the Atmus distribution network as we recently completed the transition of our final distribution location from Cummins in South Africa. Additionally, our Belgium distribution location is now operating at a normalized level and providing our customers with the product and service levels we expect. This location was our most complex distribution transition, and I am proud of our team for their focus on our customers. With 100% of our distribution network now under our direct control, we are focused on continuing to improve on-shelf availability and ensure we have the right products for our customers when and where they need our filtration solutions. Our fourth pillar is to expand into industrial filtration markets. Our strategy is unchanged and remains focused on growth into industrial filtration, primarily through inorganic acquisitions. As a reminder, we are broadly looking at three verticals: industrial air, industrial liquids, excluding water, and industrial water. We are reviewing a robust pipeline of opportunities for inorganic expansion. We will continue to take a disciplined approach and focus on transactions that will build long-term shareholder value. Now let's discuss our second quarter results. Sales were a record $454 million compared to $433 million during the same period last year, an increase of 4.8%. Our performance drove higher sales along with benefits of increased pricing despite challenging conditions in most of our global markets. Unfavorable foreign exchange partially offset these increases. Adjusted EBITDA was $95 million or 21% compared to $93 million or 21.4% in the prior period. Adjusted earnings per share was $0.75 in the second quarter of 2025, and adjusted free cash flow was $36 million. Now let's turn to our market outlook for 2025. Our guidance reflects tariff impacts as of July 31. We expect tariffs to continue to fluctuate, and we will adjust future guidance as the tariff and regulatory environment evolve. Starting with market guidance for aftermarket, we expect freight activity to generally continue at current levels, and the midpoint of our guidance to be slightly positive year-over-year and be within a range of down 0.5% to up 1.5%. We continue to execute our growth strategy, which will enable us to outperform the underlying market. Our outlook remains unchanged, and we expect share gains to add 2% of revenue growth. Overall pricing is expected to provide approximately 2.2% revenue growth. Pricing is inclusive of both our base pricing actions to offset certain input costs, including steel and tariff pricing. The U.S. dollar continues to weaken from the strength we saw early in the year. We anticipate the full year impact of a strong U.S. dollar to now be an approximate 0.5% revenue headwind. Let's now turn to our first-fit market. In the U.S., a lack of clarity surrounding regulatory emissions requirements, the continued evolution of tariff policies along with an uncertain economic backdrop is leading to a weak market. This is driving our expectations that both the heavy and medium-duty markets in the U.S. will be down 15% to 25%. We continue to expect demand for trucks in India to be flat to down as we've yet to see the ramp-up in government infrastructure spending. In China, the market has reflected some growth in the second quarter. However, we view this as temporary and expect continued challenging conditions. Overall, we have raised our expectations for total company revenue in 2025 to be in a range of up 1% to up 4% compared to the prior year, with global sales in an expected range of $1.685 billion to $1.735 billion. Our demonstrated ability to quickly adapt to changing market conditions and the expected continuation of strong operational performance results in us raising our expectations for adjusted EBITDA margin to be in a range of 19.25% to 20%. Lastly, adjusted EPS is expected to be in a range of $2.40 to $2.60. I would like to take a moment to thank our Atmus team for delivering record performance in the second quarter and their sustained commitment to building a great company. I am looking forward to the completion of the operational separation from Cummins later this quarter. This is a significant multiyear accomplishment, one which was made possible by the entire Atmus team. Now I will turn the call over to Jack, who will discuss our financial results in more detail.

Thank you, Steph, and good morning, everyone. Our team delivered another quarter of strong financial performance despite uncertain market conditions. Sales were a record of $454 million compared to $433 million during the same period last year, an increase of 4.8%. The increase in sales was primarily driven by higher volumes of 4% and pricing of 2%, partially offset by unfavorable foreign exchange of 1%. Gross margin for the second quarter was $131 million compared to $132 million in the second quarter of 2024. The decrease was primarily due to increased logistics costs, partially offset by increased pricing and higher volumes. Selling, administrative, and research expenses for the second quarter were $57 million, making an improvement of $3 million over the same period in the prior year. Joint venture income was $8 million in the second quarter, in line with our 2024 performance. This resulted in adjusted EBITDA in the second quarter of $95 million or 21% compared to $93 million or 21.4% in the prior period. Adjusted EBITDA for the quarter excludes $3 million of one-time stand-alone costs. Adjusted earnings per share was $0.75 in the second quarter of 2025 compared to $0.71 last year. Adjusted free cash flow was $36 million this quarter compared to $34 million in the prior year. Free cash flow has been adjusted by $3 million for capital expenditures related to our separation from Cummins. As Steph mentioned earlier in the call, we expect to complete our separation activities from Cummins in the third quarter. We continue to expect one-time costs will be in the range of $10 million to $15 million and we now expect one-time capital expenditures to be in the range of $10 million to $15 million in 2025. The effective tax rate for the second quarter of 2025 was 21.9% compared to 21.8% last year. Now let's turn to our balance sheet and the operational flexibility it provides us to execute our growth and capital allocation strategy. We ended the quarter with $191 million of cash on hand. Combined with the full availability of our $400 million revolving credit facility, we now have $591 million of available liquidity. Our strong liquidity position provides us with operational flexibility in the current dynamic market to effectively manage our business and execute on growth opportunities. Our cash position and continued strong performance in 2025 has resulted in a net debt to adjusted EBITDA ratio of 1.2x for the trailing 12 months ended June 30. In closing, I want to thank the global Atmus team for their continued dedication and flexibility to deliver another strong performance in the quarter. Now we will take your questions.

Your first question comes from the line of Rob Mason with Baird.

As I listened to your updated outlook, it seems like your pricing expectations have softened a bit. Could you explain how that will affect the rest of the year? I'm assuming it's related to changes around tariffs, but could you clarify if that also impacts your base price expectations?

Right. Thanks for the question. I'll just start talking around tariffs, you're right. I think most of that movement on price has been related to tariffs. In our last guide, we had guided tariff and pricing of about 1.5%. And I think this guide incorporates 0.8%. So the movement there on our expectations around tariffs, primarily related to the change in tariffs on China, I would say is where that movement is. As I noted in my opening remarks, the way we have developed our guide in relation to pricing for tariffs is that it's as of July 31, so I think what you can know is this will move around a little bit. We've obviously seen some changes since then with the 1st of August announcements and some of the additional announcements related to India. But right now, our outlook and guidance incorporates a 0.8% pricing on tariffs. Our overall expectation on tariffs is to be price cost neutral for the year and through the quarters is how I would guide you on it. And so hopefully, that gives you a bit of a sense of the evolving landscape in tariffs. Jack, I might just ask you to talk through the sequential of pricing; is there anything else you would add?

Yes. Thanks for the question, Rob. So if you think about the cadence on pricing, it's been about from a tariff perspective, in particular, about $1 million in the first quarter, $5 million in the second quarter. And again, as Steph highlighted, based on the facts in hand as of July 31, we would expect an additional approximate 4% in the second half. But we'll, of course, keep you updated as that situation and the broader tariff environment continues to evolve.

Very good. As a follow-up, we appreciate your consistent message regarding capital allocation, especially on the inorganic side and managing the pipeline. It appears that there might be increased activity in the industrial M&A sector, leaning towards larger deals. I'm curious if you noticed anything in that environment during the quarter that gives you additional encouragement as we move into the latter half of the year.

Thanks, Rob. Exactly right to say a consistent message, we are very committed to the strategy of continuing to expand into industrial filtration markets and still see the primary path to do so through M&A. We are reviewing a robust pipeline of targets and continue to do so. I feel really good about the team we've got in place, and the targets that are coming to our desks that we're reviewing. I think that there is a spectrum of those. But we had said that we wanted to target a revenue of $50 million to $100 million. And broadly, we've been looking to target that, but we're not making that an early pipeline filter, is what I would say. So we are looking at all of the opportunities available to us. And really, it's a disciplined approach we're taking. We've got a very clear view of the strategic rationale and the financial criteria for the deals that we want to make, but we stay absolutely committed to the strategy and executing on that strategy.

Your next question comes from the line of Tami Zakaria with JPMorgan.

It was a strong quarter. My question pertains to the EBITDA margin guidance. If we consider the full-year guidance and take into account the first half performance, it seems that the expectation for the second half suggests an EBITDA margin of less than 19%, compared to over 20% in the first half. I would like to hear your thoughts on the sequential factors that might contribute to this anticipated decline.

Tami, thanks for the comments on the quarter. And it's good to talk to you. Jeff, do you want to take the EBITDA question?

Yes, absolutely. Let me walk you through the first half to the second half. Starting with our revenue, we usually see some seasonality, where the first half is about 5% higher than the second half based on selling days. This typical seasonality could result in around $50 million headwind to our top line. We anticipate that the first-fit markets will be weaker in the second half, which will contribute to a more significant headwind than usual. We also expect our market share, which in the first half was about 2.5%, to level out to around 2% for the full year due to the timing and pre-buy activities from our customers ahead of midyear pricing adjustments. Regarding pricing, I want to correct my earlier comment. In the second half, we expect an additional $4 million in pricing compared to the first half, alongside roughly $3 million to $4 million from tariffs, bringing our total pricing impact for the second half to $8 million. Foreign exchange has improved as we progressed through the year, which we expect to benefit us in the second half compared to the first half. In terms of decrementals, we foresee the run rate of SAR from the second quarter continuing into the third and fourth quarters, reflecting the increase in personnel costs typically seen during the second quarter. We also anticipate facing somewhat worse decrementals in the second half due to the pronounced decline in volume. We'll need to consider whether to reduce fixed costs in response to the new volume levels or to manage with more significant decrementals, positioning ourselves for future growth. Overall, I'm pleased with where our guidance places us for the full year of FY ’25.

Understood. That's very helpful. And one follow-up on the prior answer about repurchases. I think you said 1% to 3% of market cap you expect to buy back this year. Would that leave you with enough firepower should there be an acquisition opportunity later this year? I guess what I'm trying to understand is if you do the buyback, how big of a deal could you still do if an opportunity came up?

Thanks, Tami, for the question. We're looking at that. It's a very dynamic equation. We do see, I guess, the trade-off between share repurchases and M&A investment. Our first priority, to be clear, is to invest for growth, organic growth and inorganic growth. And then we will also look to return to shareholders. And so the range is pretty wide, as you highlight, we wanted to give some range to folks about we're actively thinking about share repurchases. And so the 1% to 3% reflects really the flexibility for us should we proceed with an M&A target. I do want to highlight the cash generation capability of our business. We've talked about the separation activity coming to a close here in the third quarter. We have had to sustain expenses associated, one-time expenses and also capital spend associated with separation costs. As that now comes to a close, coupled with the strong cash generation capability of the business through the cycle, we feel very confident in our ability to execute on our M&A strategy and continue to return to shareholders.

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Can you just expand a little bit on the volume experience in the second quarter, that plus 4%, which I imagine was a little bit bigger number on the aftermarket side of things. And just how you parse the underlying base demand versus some demand that would have been brought forward just to understand the magnitude of that pull forward? And was that mostly just what you think was a Q3 to Q2 kind of event?

Thank you, Joe. To summarize the volume performance in the second quarter, it was quite strong, and we were very satisfied with it. There are three key factors I want to emphasize. First, we did experience some underperformance in our share during the first quarter due to delays in new content gains with some customers. However, we were able to realize those share gains in the second quarter, which allowed us to catch up for the first half of the year. This performance aligns with our expectations, which is encouraging. Second, there was likely some prebuy activity in the second quarter as we had midyear price increases in July, coupled with uncertainty surrounding tariffs with upcoming announcements in August. We believe this contributed to the prebuy activity, and we expect it to balance out in the third quarter. In terms of our full-year guidance, we anticipate a 2% share gain performance for the entirety of the year, with solid performance expected to continue into the third and fourth quarters. Regarding the market perspective, we adjusted our first-fit guidance downward by 10% at the midpoint compared to our previous estimate, due to the activity and orders we observed in the U.S. market during the second quarter, anticipating a difficult third quarter primarily influenced by regulatory uncertainties and ongoing tariffs. We hope for greater clarity moving forward, which may allow us to reassess. As for the aftermarket, we foresee continuing challenges consistent with what we’ve observed throughout the year and are not factoring in any rebound in aftermarket performance for the second half.

That's a lot of great detail. I guess just your last point would really be as we think about the aftermarket, underlying market demand trends, just think about stable activity over the course of the year. It's something that is still challenged but kind of stable throughout the year.

That's right.

Okay. And then also just wanted to ask on the kind of the distribution and go-to-market and what you're doing there and one of the comments around expanding product coverage through the multichannel path. And if you can just expand a little bit on some of the recent successes, and then also just give us a sense of where you are in that initiative for kind of how much still lies ahead?

Yes. There are several factors that contribute to our strategy of accelerating profitable growth in the aftermarket. First, we focused on establishing a distribution network that is fully under our control. Over the last three years, we transitioned eight distribution locations and recently finalized the South Africa location in the second quarter. Now we have complete control of our distribution network, which positions us well to support new partnerships and distribution agreements through a multichannel approach. This strong foundation in warehousing and distribution capabilities is essential for meeting our goals in the global market. Additionally, we have regional leaders dedicated to developing strategies for partnering with new distribution networks. We have established new distribution capabilities and see growth opportunities in the U.S. and Latin America. We are investing to unlock potential in these regions while ensuring we understand the product needs across our distribution network. Improving the speed at which we develop products is another key focus for our team, allowing us to serve our customers more effectively.

On the 3Q print last year, you guys announced an organic entry into the industrial space with, I believe it was a new filter product. I just wanted to check back in there and hear how the reception has gone so far or any specific lessons learned on that launch that you'll apply on future industrial solutions?

Thanks for the question. You've got a good memory as it turns out. We certainly are determined to enter into the industrial filtration market. And we're doing that through a multifaceted approach. Our primary approach will continue to be through inorganic expansion and M&A, and I think we've highlighted that previously. We are also looking to take steps organically, and that has included new distribution agreements and the launch of new products, and we've continued to do that. I think our outlook for growth in that area is modest over the course of this year. I would say it's sort of in that $5 million range. So I think I indicated at the time, it's not yet something to get excited about, but it's really more about starting that engine of us understanding that market more, growing where we can organically, and that will continue to be enhanced, obviously, as and when we support that with an acquisition.

Got it. And then just any specifics like lessons that you've learned as you're kind of understanding the market, anything that's kind of stuck out to you as from what you've learned through that initial rollout?

I don't have anything groundbreaking to share. It's really about figuring out how to establish our organizational capabilities to support that market, which is an ongoing process. We excel in working with distributors and managing channels, and we’ve shown that we can leverage this strength across additional end markets. I'm particularly focused on improving our speed to market in the industrial filtration sector, similar to what we've accomplished in our core markets. While there’s nothing revolutionary in this approach, it’s about reinforcing strong business practices.

This is David Ridley-Lane on for Andrew. I just want to dive into the drivers of the outperformance in the quarter, right? So if you go back for a decade, the average sequential growth in the second quarter is about 2%. You grew 9% this quarter. What went right?

Thank you. There's a lot to discuss, and it's the result of our hard work. Let's review the period from the second quarter of last year to the second quarter of this year. We focus on market dynamics, our pricing strategies, the effects of foreign exchange, and our share gains. The largest factor contributing to our outperformance this quarter was a significant share gain of over 4%. The drivers of this include a recovery from the first quarter where we identified opportunities for share gain through content that was delayed but came through as expected in the second quarter. Additionally, there's some pre-buy activity, which is hard to quantify, and, importantly, the dedication of our team in expanding our content, increasing share, and collaborating with our partners to help grow their businesses. We're very pleased with our performance in share this quarter. Furthermore, we experienced pricing impacts as we effectively navigated the tariff environment. I'm impressed with our team's ability to quickly assess market conditions and respond accordingly. We have taken a neutral stance on price and cost related to tariffs, and our first step has been to work diligently to mitigate those costs. Our team excelled in securing exemptions under USMCA for nearly all our products from Mexico, which significantly benefited our customers. Where we couldn't mitigate the tariff costs, we worked with our customers to adjust prices appropriately. We also faced typical pricing factors, but these were offset by some challenges, including the tough market conditions and ongoing headwinds from foreign exchange. We anticipate a more positive turn in the second half. I hope this gives you a good insight into the factors that contributed to our success.

Got it. And then in the quarter, so I know your expectation is to be price cost positive for the full year. But in the quarter, were you price cost positive? Or was this a drag? And I guess more importantly, does that imply that you're going to get some catch-up and some really good favorability in the second half?

So our objective is to be price cost neutral. And we were about price cost neutral in the quarter. That's what we're working to. It's difficult to balance out exactly over the quarters here, but we've got a team, not me necessarily, but a team that's working on this quarter.

Thank you. That concludes our teleconference for the day. Thank you all for participating and for your continued interest. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.