Atmus Filtration Technologies Inc. Q3 FY2025 Earnings Call

Thank you for your patience. My name is Eric, and I will be your conference operator today. I would like to welcome everyone to the Atmus Filtration Technologies' Third Quarter 2025 Earnings Call. I will now turn the call over to Todd Chirillo, Executive Director of Investor Relations. Please proceed.

Thank you, Eric. Good morning, everyone, and welcome to the Atmus Filtration Technologies' Third 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 our 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, I will provide an update on our third quarter results, our progress executing on our 4-pillar growth strategy, and the outlook for the remainder of 2025. Jack will then provide further details on our financial results. During the third quarter, we completed our full operational separation from our former parent, Cummins. The separation has been a multiyear journey and marks a significant milestone for our company. I want to recognize this outstanding accomplishment, which is the result of the collective effort of all Atmusonians. We are now focused on unlocking the growth potential of Atmus. Completing the separation enables us to redeploy resources, time, and energy to focus on growth. We have a clear vision and strategy, and a highly capable organization who are energized to realize our full potential. Now let's turn to our capital allocation strategy. We continue to deploy capital to create long-term shareholder value. We further accelerated our share repurchase program in the third quarter, repurchasing $30 million of stock, bringing our year-to-date total to $61 million. Since the announcement of our share repurchase program last year, we have repurchased a total of $81 million of stock. We also increased our quarterly dividend by 10% last quarter, reinforcing our commitment to consistent long-term capital return to shareholders. We remain committed to investing for organic growth and executing our inorganic industrial filtration strategy. We will continue to keep you updated on our M&A activity. The framing of M&A investment choices continues to be guided by our strategy, long-term value creation, and the balance of growth and shareholder returns. 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 1.5% to 3% of our current market capitalization. I would like to now take a moment to share some insights on the strong culture we are building at Atmus. We have established what we call the Atmus Way. The Atmus Way incorporates our purpose, our values, and our strategy. It also includes what we call mindset shifts, which reflect specific areas where we want to intentionally shift the culture of our company. One example I would like to share today is our commitment to safety. We set a vision to be the safest company. In October, we achieved 2 years without a serious injury in our business. This is a result of disciplined focus on risk reduction and the engagement of employees at all levels of our organization. This is just one example of the Atmus culture in action. It reflects what we stand for, and it demonstrates what we can do when we set a bold vision and work together to bring change. Let's now turn to our 4-pillar growth strategy and the progress we have made during the third quarter. Our first pillar is to grow share in first-fit. As a fully independent company, we are expanding our first-fit customer reach to leading regional OEMs across a broad range of applications with dedicated sales and technical resources. We are winning with these customers by providing our industry-leading filtration products that deliver superior protection for our customers' equipment. Additionally, we continue to win with the winners by growing our long-term partnerships with global OEMs. Our second pillar is focused on accelerating profitable growth in the aftermarket. We are expanding our market presence in independent and retail channels with new distributors. This allows us to provide broader channel coverage of our industry-leading Fleetguard products and deliver to our customers when and where they need the product. We are also partnered with leading global OEMs who are expanding their own aftermarket businesses and growing market share. We work collaboratively with these industry leaders, allowing us to expand our business while simultaneously fueling growth for our partners. Furthermore, we are growing our brand awareness with our We Protect campaign launched earlier this year. This campaign highlights who Atmus is and the dedicated employees committed to creating a better future for our customers, communities, and planet. Our third pillar is focused on transforming our supply chain. As a fully operationally independent company, we have completely transitioned to the global Atmus distribution network. This allows us to directly control our customer experience. Additionally, our network is designed to optimize and grow our aftermarket business. We continue to increase the on-shelf availability of products to ensure we have the right products for our customers when and where they need them. 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. We are broadly looking at 3 verticals: industrial air, industrial liquids, excluding water, and industrial water. We have seen increased activity in the M&A markets and we continue to review a robust pipeline of opportunities for inorganic expansion. We remain focused on executing a disciplined approach to develop opportunities that deliver long-term shareholder value. Now let's discuss our third quarter financial results. Our team delivered another strong quarter. Sales were $448 million compared to $404 million during the same period last year, an increase of 10.9%. Significant outperformance drove higher sales despite continued challenging conditions in most of our global markets. We also benefited from increased pricing and favorable foreign exchange. Adjusted EBITDA was $92 million or 20.4% compared to $79 million or 19.6% in the prior period. Adjusted earnings per share was $0.69 in the third quarter of 2025, and adjusted free cash flow was $72 million. Now let's turn to our market outlook for 2025. Starting with market guidance for aftermarket. We expect freight activity to generally continue at current levels and be flattish year-over-year. Our team has done a great job executing our growth strategy, especially in the face of elongated challenges in global markets. We are increasing our expected outperformance and now project share gains to add 3% of revenue growth. Overall pricing is expected to provide approximately 3% revenue growth. Pricing is inclusive of both base pricing actions to offset certain input costs and tariff pricing. This reflects known tariffs as of November 1 and assumes the USMCA exemption for our products will continue. 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 be an approximate 0.5% revenue headwind. Let's now turn to our first-fit markets. In the U.S., the industry was recently provided with some guidance on Section 232 tariffs for medium and heavy-duty trucks. We will continue to monitor ongoing developments and adapt accordingly. We are still awaiting clarity on the upcoming 2027 emissions requirements. This continues to drive uncertainty in the market. Our expectations for both the heavy and medium-duty markets in the U.S. is to be down 20% to 25%. We expect demand for trucks in India to grow, which could be further bolstered by government infrastructure spending. In China, the markets we serve have continued to grow through the third quarter. Our exposure in China is weighted towards first-fit on-highway applications, and we remain cautious in our outlook. Overall, we have raised our expectations for total company revenue to be in a range of $1.72 billion to $1.745 billion, an increase of 3% to 4.5% compared to the prior year. Our team continues to quickly adapt to challenging market conditions to deliver strong operational performance. We expect this performance to continue, and we are raising our expectations for adjusted EBITDA margin to be in a range of 19.5% to 20%. Lastly, adjusted EPS is expected to be in a range of $2.50 to $2.65.

Thank you, Steph, and good morning, everyone. Our team delivered another quarter of strong financial performance despite continuing uncertain market conditions. Sales were $448 million compared to $404 million during the same period last year, an increase of 10.9%. The increase in sales was primarily driven by higher volumes of 6%, pricing of 4%, and favorable foreign exchange of 1%. Gross margin for the third quarter was $129 million compared to $111 million in the third quarter of 2024. The increase was primarily due to the benefits of higher pricing and volumes, partially offset by higher logistics costs. Selling, administrative, and research expenses for the third quarter were $56 million, flat to the same period in the prior year. Joint venture income was $8 million in the third quarter, in line with our 2024 performance. This resulted in adjusted EBITDA in the third quarter of $92 million or 20.4% compared to $79 million or 19.6% in the prior period. Adjusted EBITDA for the quarter excludes $4 million of one-time stand-alone costs. Adjusted earnings per share was $0.69 in the third quarter of 2025 compared to $0.61 last year. Adjusted free cash flow was $72 million this quarter compared to $65 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 have completed our separation activities from Cummins in the third quarter. We do not anticipate incurring any additional one-time costs associated with separation activities in the fourth quarter. The effective tax rate for the third quarter of 2025 was 23.6% compared to 18.4% last year. The higher effective tax rate was driven by both the change in the mix of earnings amongst tax jurisdictions along with changes in recently enacted U.S. tax legislation. Now let's turn to our balance sheet and the operational flexibility it provides us to execute on our growth and capital allocation strategy. We ended the quarter with $218 million of cash on hand. Combined with the full availability of our $400 million revolving credit facility, we have $618 million of available liquidity. Our strong liquidity provides us with operational flexibility in the current dynamic market to effectively manage our business and execute on our growth opportunities. Our cash position and continued strong performance in 2025 has resulted in a net debt to adjusted EBITDA ratio of 1.0x for the trailing 12 months ended September 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.

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

Nice work on the third quarter for sure. I wanted to see if you could dig in just a little bit deeper. It was stronger than your typical seasonality might suggest. And there was the thought maybe there was some pull forward coming out of the second quarter, whether you think that was actually the case. And then you took the share gain perspective or number up for the full year. I'm just curious how those are layering in. Is there any lumpiness around the share gains that may have come through in the third quarter?

Rob, thank you for your comments. We had a strong quarter and I’m really happy with our overall performance. To break it down, our revenue performance is the key focus. As Jack mentioned, we experienced a volume increase of 6%, a pricing increase of 4%, and a foreign exchange impact of 1%. Pricing was generally in line with our expectations, maybe even a bit better, but I want to emphasize the volume. If I delve into that 6% increase, it can be divided into 8% share gains and roughly 2% market headwinds. We saw a significant decline in first-fit, especially in North America, along with a sequential drop of about 27% in the heavy-duty and medium-duty truck markets, while the aftermarket conditions remained flat, contributing to that 2% headwind. Now, focusing on the share gains, we've revised our full year guidance from a 2% to a 3% share gain, driven by the team's impressive performance exceeding our growth strategy expectations. This improvement is due to factors like more content in first-fit applications and increased share in the North American aftermarket, totaling about 3% in share gains. A pivotal aspect of the third quarter is related to timing, particularly the launch of the Stellantis Model Year '25 Ram product this year. We are involved with that product, supporting both the engine and aftermarket. During the quarter, we saw significant stocking for this new product, affecting our first-fit sales to Cummins and aftermarket deliveries with Stellantis. However, we don't anticipate this level of stocking to continue in future quarters; while we will keep supporting the product, the spike in stocking we observed during the third quarter is not expected to repeat.

I understand. That's helpful, Steph. I’d like to focus on the topic of share gains. You mentioned winning some programs, particularly with regional OEMs on the first-fit side. Can you give us more details on how those are contributing so far? Are those purchases for on-highway or off-highway?

Yes, it's a great question. And I always try to think about how can I give you some color around this while obviously maintaining the commercial sensitivity. We have been very deliberate in our growth focus to build our business development capability. We've been doing that for several years now is the way I would describe it. We've built the sales force, the business development team. We've increased our bid rate. And we had identified these regional players as really a target for us that we had not pursued previously. And it's broad-based. I would say it's both across on-highway and off-highway. And I'd think about that equally right now. And we're starting to see the benefits of that. We're winning the business. We're getting the confirmation of those wins, and we're starting to see those benefits come through in our results. And I expect that to continue as part of our growth strategy within our core business.

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

Just a clarification on the details you gave around the volume growth. Just any sizing of the impact that Stellantis had within the quarter that you don't expect to repeat? And then just bigger picture as you think about aftermarket and sort of end market pacing kind of flattish in aftermarket, for how much longer do you think something like that can persist just as we think about wear on parts and some of the replacement that presumably is being pushed out here?

Thank you for your questions. Let me address the impact of Stellantis. It's challenging to quantify precisely, but the 3% share gains I mentioned for the quarter are linked to identifiable successes that we anticipate, resulting in slight outperformance. This gives us the confidence to adjust our share gain forecast from 2% to 3% for our full year guidance. Regarding new product development, there's a positive aspect there, including increased content and timing. In public reports, we’ve noted a 44% year-over-year increase in Ram volumes for the third quarter, which is a significant boost for this product. We believe our full year guidance accurately reflects our expected market share increase. On the aftermarket side, we've been discussing a freight recession for three years now and are questioning whether the current freight indicators are still valid for our business due to its duration. Current industry insights suggest that we do not see an improvement in the situation within the first half of 2026, with no indicators hinting at a turnaround yet. Therefore, we expect the current conditions to continue through the fourth quarter and likely remain at those levels into the first half of 2026.

And then I just wanted to touch on the full operational control and having sort of reached that transition now and how you're thinking about the nearest-term opportunities that presents for you?

We discussed this in our opening remarks, and I am very enthusiastic about being able to concentrate all our organizational resources, energy, and efforts on growth. The separation we are undertaking is large, involving over 300 projects, with 3 years of work, including 7 distribution centers and more than 280 IT projects. This requires significant organizational bandwidth. Completing this allows us to stand on our own, controlling our own destiny and utilizing processes and systems to support our growth strategy, which is thrilling. My focus is on accelerating progress related to our growth strategy, particularly the four-pillar growth strategy, which excites me the most. Jack will provide updates on the separation and our current status regarding that matter.

Yes. Thanks, Steph, and thanks, Joe, for the question. First off, I would just say I am really proud of the entire Atmus team for their unwavering commitment to bring the separation to a close. As Steph highlighted, multiple projects, a multiyear journey from beginning to end. And the team really delivered, which I think further underpins the reliability we've been able to establish across many fronts as a business. As we noted, the TSAs have concluded effective end of the third quarter. And therefore, we no longer intend to add back separation costs in Q4 and beyond. The one thing I would highlight is that we are still incurring some elevated costs driven by hyper care, if you will, primarily in the IT space until we reach full stabilization. We expect those to be incurred here in the fourth quarter. And that, in part, is leading to some of our margin outlook as we think about the implied Q4 guide here. Again, highlighting some of those inefficiencies to help you understand why that may be showing up as a little bit of a pullback in the fourth quarter, still feel really strongly about the full year outlook here, both across the top line and the bottom line in really challenging market conditions. And again, I can't thank the team enough for what they've been able to deliver.

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

Excellent quarter. My first question is with Section 232, the tariff-related regulations now out for trucks, did you take any intra-quarter pricing? And if so, how should we think about the rollover effect of that over the next few quarters? And then in that case, are you also still planning to do a typical beginning of the year price increase that you usually do?

Thank you, Tami. We have some clarity regarding Section 232, but there are still many uncertainties we are waiting to resolve. It will take time to fully grasp the implications and calculate them. Currently, we expect that our USMCA exemption will still apply concerning Section 232. Additionally, there are several other mechanisms in play that we will continue to explore in partnership with our customers as more clarity emerges. We’ve stated from the beginning that our goal concerning tariffs is to remain price and cost neutral, and we will achieve this through various strategies. We will certainly look for every possible reduction, including exemptions or sourcing products from abroad. For instance, we established a foreign trade zone at our distribution center in the U.S. this quarter. We are utilizing all available options. In our guidance for this year, we set full-year pricing at 3%, which we believe encompasses the necessary pricing adjustments for the year. We are not providing guidance for 2026 at this time, but we anticipate continuing our typical pricing actions in January and beyond, as we have historically done. The tariff situation remains fluid, and our team has done an excellent job working closely with our customers to navigate this changing environment.

Understood. That's very helpful. And my second question is, there's been a lot of encouraging comments and data points in the industry around the acceleration in capacity expansion for large engines to provide backup power to data centers. How are you positioning yourself to capitalize on that besides, of course, your exposure through your large customer, Cummins? Are you actively working to win share with some of those other players that have announced capacity expansions for large engines in the U.S. and also Europe? So any comments on that?

Yes, we definitely see a positive trend in data centers that we anticipate will continue for several years. We have a strong partnership with Cummins, and our filters are included in their generator sets, which allows us to grow alongside them. We are also focusing on new business development in both aftermarket and first-fit applications with customers we haven't worked with much before. We're making investments to grow with these new clients. Regarding the aftermarket, I want to point out that we don't expect significant aftermarket benefits from those generator sets since they are primarily used for backup power and don't have the same aftermarket potential as some of our other applications. Nonetheless, we aim to partner with new customers while continuing to support our existing customers who will benefit from this growth.

Your next question comes from the line of Andrew Obin with Bank of America.

Yes. This is David Ridley-Lane on for Andrew. I'll ask a bit of an interesting one for you here. First Brands declared bankruptcy in late September. They own the FRAM and the Luber-finer brands filtration subsidiaries there. If this is a disorderly process, could Atmus be a beneficiary? And are you already sort of reaching out to maybe the retailers about taking over some space on the shelves?

Thanks for the question, David. Certainly, we are aware of that. And look, broadly speaking, I would say we're absolutely looking to expand our aftermarket coverage. That's how I'd have you think about that. We're doing it through a number of channels, and we're being really successful. We are winning and gaining share. So the first path that we see an opportunity to do that is with our existing partners. And we are growing with our existing partners as they grow their share in OEMs, for example. And then we are intentionally increasing our coverage through new aftermarket channels, both through independent and through retail channels. And so that will give us greater access and coverage across the aftermarket. We see the opportunity really in expanding our coverage to be able to avail ourselves of getting our product to more customers. And that would be the way that we would potentially be the beneficiary of gaining greater share from some of the examples and the changes in the marketplace that you just described.

Got it. And then maybe one for Jack. Look, a lot of the tariffs were announced kind of suddenly. You had, I'm sure, 6 months of fun. As you look over the next 6 months, is all of these levers that you're pulling, supply chain optimization, etc., could you be saving a couple of million dollars or more from those efforts next 6 months relative to the last 6 months?

Yes. First of all, thank you for the question, David. It's been a significant challenge for us and likely for many of our peers in various industries to manage the constantly changing environment. Everyone is seeking some clarity to help them plan for the future. I want to reiterate what Steph mentioned earlier, which is our main principle in addressing this broader situation: to remain price and cost neutral. We are working to achieve this in ways that minimize impacts for our customers wherever possible. This includes taking advantage of exemptions and reviewing our supply chain to find ways to reduce costs, thereby limiting the need for price increases. We fully anticipate continuing these efforts for as long as necessary until we find more clarity.

So I was just hoping to dive a little bit deeper. The 11% year-over-year revenue growth, fantastic. That's the best rate that you've seen since going public by like 600 bps. I know you listed the pricing and volume dynamics, but just kind of curious to hear from the perspective of how much do you think was driven by the better availability of your products via now your whole distribution footprint being wholly owned? Or maybe any other internally controlled pieces that you'd point out that helped drive the growth aside from pricing?

Yes, Bobby, thanks for the question. We certainly experienced some benefits from increased availability during the quarter. We are continuously enhancing our availability across the global network, and we still see potential for further improvements in at least the fourth quarter and beyond. If I had to put a number on it, I would estimate that around 1% of the growth may be attributable to the availability improvement. However, I believe the broader benefits from enhancing our availability are even more significant. This initiative is crucial for building reliability as a company, which we aim to achieve with investors, shareholders, and our customers. Availability is not only about gaining market share and ensuring our products reach customers, but it is also about fostering reliability with both our current and new customers, ultimately creating a growth flywheel for our business. Our strategy remains the same as we expand into industrial filtration markets. We are focusing on three primary market areas and believe our best path forward is through acquisitions. Our team has been performing exceptionally well, consistently reviewing a strong pipeline of targets. When there are updates to share, I will certainly provide them. I am pleased with the growth initiatives we are pursuing as a team and the disciplined approach we are taking to enhance long-term shareholder value. On the organic side, we have launched products that can be used in industrial filtration applications. We are gaining insights from these launches and exploring new channels. This currently represents a very small portion of our revenue, but it has the potential to grow significantly as we pursue acquisitions, which is how I would like you to view it.

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, and you may now disconnect.