Good morning, everybody. Thank you so much for joining us. Once again, I'm Jerry Ravitch, Wells Fargo Securities, and thrilled to have with me here from Atmos Filtration, Jack Kinsler, Chief Financial Officer. Jack, thanks so much for joining our conference.
Thanks, Jerry, for having me, and thank you, everyone, for your interest. It's great to be here.
Jack, to kick off the conversation, just want to go back to the four-pillar growth strategy that you folks outlined. So you spoke about grow share and first fit, accelerate aftermarket, transform the supply chain, and expand into industrial filtration. You've made progress on all four points. Let's start with first fit share. what has been the key progress since the spin and do you have room to drive
market share higher yeah it's a great place to start so let me just remind everybody you know what the what is all encompassed inside of that gross share and first fit so there's really three I would say broad areas that were we're focused on the first is what we describe as win with the winners and really what that means is I want to continue to capitalize on the strong partnerships that we have with the leaders in you know the commercial vehicle industry folks like PACCAR folks like Cummins etc that you know we have strong relationships with and as they continue to grow market share in their own right obviously that can pull through to our business in addition to you know their own market share gains we want to continue to expand our own you know penetration share of wallet with each of those and so you know that's been a nice catalyst for us last year for example as Cummins you know launched their their new model year engine inside of the Stellantis product we did have a bit of a step change in in content and that you know not only pulsed first fit gains through sales to Cummins but also you know grew our installed base in our you know aftermarket through this Atlantis channel the second piece of the first fit market expansion is is really trying to grow after customers that we you know historically haven't done business with you know really driven by you know just the inherent ownership structure that we have had historically and the fact that particularly in the large engine space you don't generally see always sourced from their competitors captive suppliers and so you know really looking to cultivate those relationships now that we you know have an independent ownership structure you know introduce Atmos and our capabilities to a number of different players and look to grow you know our penetration with them it's been pleasing to see you know the the ongoing conversations and we feel like our technology leadership in these displacement ranges from a filtration standpoint can really open up opportunities for us and then the third piece within the first fit markets really is you know a number of other areas that didn't necessarily have a competitive dynamic with with Cummins but more just we didn't have the resources you know to really go after them and so there's a number of different first fit opportunities that we've been going after across a number of different OEs again introducing them to Atmos and our technology opportunities and capabilities and opening up those those avenues so I'm pleased with the progress thus far but I think you know as I look at our broader share I think there's still plenty of room to run and you know it's really about again having people understand what we can bring and and the quality of our product is Is Caterpillar at all a possibility as a customer? I would say Caterpillar is certainly in that first category or the second category of potential customers that we would target among others and want to continue to try to open up a number of different avenues. As you can imagine, it's not like you all of a sudden take every filtration opportunity. And so we want to really focus on, are there smaller pieces of the portfolio that we can we can go after and you know sort of open up the relationship what
kind of first fit and market outgrowth do you think you folks can deliver if
these share gains play out yeah so if you think about from a product family standpoint where our strength has has really been historically its own on engine filtration obviously that's driven by the historical relationship with Cummins and the deep embedded application knowledge that we have on things like fuel filtration lubricant filtration so on and so forth and so that's probably our you know technology leader in terms of our product family obviously we do all sorts of different filtration as well as you know things like coolants and chemicals but from a technology standpoint we'd really try to lead with uh with that on-engine filtration with these customers got it um and then another uh
first fit related question so cummins genset business has grown dramatically can you just talk about atmos content for both prime power and um for for backup uh what's that look like from an opportunity standpoint for you folks yeah absolutely so if you think
about you know what where our product is today certainly just like in the on highway space we have essentially a hundred percent share of all it was Cummins in the power power systems space as well most of that product today is going into various backup power applications and so while we're on you know all of those gent sets just like we're on you know again a 15 liter in on highway space the aftermarket generation which really pulses our business is relatively immaterial just given the fact that it's backup right and so you do still change the filters every once in a while but it doesn't have the same duty cycle as say a mining truck for example so obviously we'll continue to support them as well as you know other potential customers in the space and you know I it's great to see their ambitions and their intentions to expand you know their prime power exposure through the launch of different capabilities and we're excited to continue to support them that's not a big piece today at least for our business and so i think it remains to be seen you know what that that maintenance activity will be how long those you know gen sets are running and what the inherent aftermarket you know content
will be for us but certainly an opportunity and what's your first fit content is it similar to truck $300 per unit or does it scale up considering these are pretty massive
engines yeah so it would be if you think about like the the ratio it would be the same it's just a much larger engine and therefore you know instead of you know one two fuel filters etc you've got a much larger amount but from a portfolio
like percentage perspective it's the same so about $3,000 per unit give or take yeah and then you know if if these units do truly run 24 7 how quickly do I generate $3,000 of aftermarket demand one year two years what's what's that look like assuming a mining type 24 7 operation yeah so yeah again it's really
about hours run in these spaces and so in the on-highway space you're talking about you know a change of filters you know every what 35 to 40,000 miles um and then you know as you move into the off-highway space uh again it would be kind of hours driven so it just depends on how how long they're uh but you know the percentage or the ratio if you will of uh aftermarket content relative to the first fit um is quite substantial as you can imagine and
over a very long period of time. And I don't have the legacy notes, unfortunately, for obvious reasons, given my transition. Can you just remind us what time frame do you folks generate after market sales equivalent to the first fit sales generally across the book? If I recall, I believe that's a three or four year type number. But can you just refresh me, Jack? Yeah. So again, it
depends on the the duty cycle but if you think about you know in the on-highway space if you're talking about on average a fuel content of what $200 over the life of that vehicle you could have $8,000 roughly in aftermarket content over the life of the vehicle so depends on how long it's driven but you could get to to that replacement of your first fit content and inside of three
years depending on the application. Super, thank you. And then the aftermarket part of the growth strategy, can you update us on your view of progress so far? And is there more opportunity to continue to drive that part of the business? Absolutely. So if I think about the second
pillar, accelerating profitable growth in the aftermarket, really we've been looking at a few different things one of the big pieces there is to increase our penetration into independent distributors historically we've been quite strong in the OE dealer networks and we were going to continue to build on that strength certainly but we also want to ensure that you know Fleet Guard products are available anytime and anywhere service event is occurring and obviously those service events don't always occur within the OE dealer network and so that's That's been one of our strategic priorities, and we want to continue to build that out. We've seen good traction, I would say, on that in areas where we had relatively low penetration. I think Latin America is a good example of that, where historically we've really only gone to market through the Cummins distribution channels. And now we've been able to continue to cultivate additional independent distributors, some of whom you know carried the fleet guard product historically but you know we just didn't focus on them in terms of commercial activity as much and so as we've you know built and strengthened those relationships we've been able to experience growth inside their portfolio among other filtration brands so that's been a nice growth story and really pleased to see that that progress I think underneath all of these different things in the aftermarket which as you can imagine is many different opportunities that you know are flowing through to our sales team to go after is the ability to deliver and so you know kind of synonymous with our third pillar which we'll get to in a moment is the supply chain transformation has been a big focus on delivery capability and the ability to ensure that you know our product is available as and when our aftermarket you know channel partners need it and our end users need it and so we've had a lot of you know actions and initiatives going on in the supply chain historically our distribution centers were all co-located for the most part with Cummins and so one of the big undertakings of our separation was the the separation of those distribution centers into you know Atmos owned and operated locations and that's allowed us to really address our inventory levels and lift our inventory levels to hit the delivery metrics that we want to. We're really pleased with where that journey has been. It's been a lot of hard work from the supply chain team, so a big kudos to them for all the undertakings that they've had. That comes with not only the physical movement of goods, but also an underlying IT initiative to separate systems. And so each one presents its own challenge, but we're pleased with where we're at now and i would describe our delivery capabilities now as top quartile and really what that does is again unlock many opportunities not only with existing channel partners but also with new channel partners and then to shift gears on
the industrial filtration part of the strategy can you talk about the cook acquisition for those that have spent less time with the company just remind people the size of the business the multiple paid and then just if you don't mind update us on how the integration is
going absolutely so yeah so we were really pleased to to close on the cook acquisition here in January of this year signed it last year so you know overall when you include you know they expected synergies not only from a tax perspective but also from the ongoing operational synergies expecting the multiple to be you know about 10 to 11 times so an attractive entry point in these industrial sectors the business it's a great business I'll talk a little bit about you know what we found you know post diligence but for perspective in 2025 on their fiscal year they generate about 156 million of revenue they were on a September year-end so now obviously the transition to our same fiscal year and which is calendar based really looking forward to what the the team can accomplish moving forward you know if I think about what's been you know a pleasing factor if you will post-acquisition has really been the cultural similarities that exists between the two organizations if you think about it they've been owned by a number of larger companies Johnson controls and embedded within 80 TI which is the parent company that the private equity firm who we bought it for bought it from had acquired and so you know they had a similar mindset to what we had which is you know embedded within a larger organization and perhaps not you know quite able to spread your wings in terms of all your different growth initiatives and now that they're with filtration focused company I think they're really excited about you know what they can unleash with some focus and investment so that cultural similarity has been fantastic to see and I think has really unlocked not only a fairly seamless integration but also a lot of collaboration as we think about not only the synergies that we expected to get but also you know other potential synergies moving forward so the synergies as a reminder was about four million of annualized synergies you know by the end of year three and really the bulk of those were you know supply chain initiatives so leveraging our scale and capacity to to get some better rates and you know different direct material areas etc the you know what we found though is that there's potentially some other areas of collaboration you know now as we move forward that could involve you know cross-selling through each other's distribution networks you know not only their products through our existing power solutions as we call it or commercial vehicle distributors but also in reverse potentially selling through some power solutions product fleet guard product through some of the independent distributors that they already had relationships with in addition obviously we're looking at you know particularly in the high efficiency space in the HVAC areas you know what what can we bring in terms of media capability into their products where there's you know a need for elevated filtration science capabilities so excited about where we can take that there's been a lot of different growth forms as we call it with them where we bring the teams together exchange ideas and then really go out and trial a number of different
things and you know given the explosive growth and data centers we were finding that companies had 1% sales exposure data center where all of a sudden becomes seven percent exposure any opportunity for atmos within data centers yeah it's a great uh a great
question and i think um if i think about you know where our exposure is today uh or you know historically if you will it's really you know in that um backup power that we were just describing uh alongside you know gensets um and so that's you know exposure but again not a heavy duty cycle from an aftermarket so somewhat immaterial at the top uh at the top line in inside of the cook business they do provide um hvac filtration into into data centers that's about eight percent of their business today and so one of the things that we're focused on is you know how do we continue to lift the exposure to that end market given you know the significant and robust growth rates that it's experiencing um you know that could come with not only you know the addition of new products but really probably the cultivation of new distributor relationships you know to make sure that we're available you know through a number of different service avenues into data centers that tends to be you know relatively focused particularly here in North America across a few different geographies today the cook business is really just North American centric and so another opportunity that we're thinking about more globally is just how do we you know explore geographic expansion from an industrial HVAC perspective and so
10 to 15 million revenue data center today where could that go I think it
depends on obviously the the longevity of this robust tailwind that we're experiencing today and then how quickly we can kind of shift the portfolio right so you know I think about if you think about the revenue algorithm that we talk about in our core it's really been about four to five percent over a long period of time two percent market one percent price one to two percent share gains there's not a lot we can do in the commercial vehicle market to address that two percent underlying market growth rate if I then look at the the industrial business you know that revenue algorithm inherently lifts a bit where you've got you know, the traditional commercial vehicle, or sorry, commercial and industrial HVAC sectors kind of growing at GDP levels. But if you can expose more of the portfolio to higher growth markets like healthcare or data centers, you could really start to meaningfully shift that revenue algorithm up. So that's a big area of focus. And I think we'll see what the art of
possible is in terms of top line growth and then in terms of uh m a from here since this is a the first large deal as a public company are you folks hitting pause to make sure you integrate or is the team out there actively looking for the next one yeah so absolutely uh integration was a
big priority um but that hasn't slowed us down in terms of uh exploring other you know opportunities and continuing to cultivate the pipeline. I would say, as a reminder, the three broad areas that we've been looking at in terms of industrial expansion has been industrial air, which obviously the Cook business fits inside of, industrial water and industrial liquid. One of the great things about the Cook business, I think, is frankly the size of it. It was kind of a perfect entry point, which allowed us to get an asset of scale that we can now build on and potentially add on to in terms of bolt-on acquisitions that you know by themselves might have been somewhat orphaned in the portfolio and so it opens up that that ability to focus on add-ons in the airspace while still exploring you know anchor platform potential in the industrial water and the industrial liquid space the team is out there you know continuing to cultivate a number of different opportunities and I would say that you know we're excited about where we can take it in the future from a you know a debt perspective and a leverage perspective obviously a little bit of a step up following this acquisition but you know finished the first quarter right at kind of that two times net debt to EBITDA level I think that's about right for this business in an ongoing acquisitive standpoint and so we'll continue to naturally de-lever from that, you know, which really opens up the door for more M&A
moving forward. And in terms of the market backdrop, really interesting to see strong aftermarket demand for you folks, in contrast to what we saw from PACCAR, you know, 6% volume declined in their business replacement tire demand was down six percent in the quarter why is infiltration facing those headwinds it sounds like trucks were taken out of operation
based on the packard telematics data yeah so it's been a it's been a uh an interesting backdrop i would say in the aftermarket you know really since we ipo'd back in 2023 um pretty tepid market conditions uh you know we you know haven't seen that that overall growth per se and it's kind of been uh either declining or now bouncing along the bottom um certainly we've seen as of late you know an increase in uh you know some of the spot rates and whatnot i think that's more driven by supply dynamics you know driver shortages shortages um and you know a bit of consolidation in the carrier space uh and it hasn't yet translated i would say to robust volume growth, just kind of steady along the bottom. And so what we've seen is some people taking trucks out of service, that does have attendance or pushing off larger maintenance events. And so that'll kind of limit some of the broader parts churn and activity of, say, an engine rebuild or overhaul. At the same time, you know, you're still seeing, you know, trucks needing normal course maintenance. And, you know, as and when they do that, generally filtration content is getting a changeover. So that's kind of what we're experiencing. Again, I wouldn't say growth, but not that, you know, decline necessarily in underlying market. And obviously we try to counterbalance these tepid market conditions with continued share gain activity.
And in terms of what's fascinating about the way the cadence played out this quarter, based on our checks with PACCAR dealers, April, first part of May, really weak because of the magnitude of diesel headwinds and for truckers that aren't well set up with surcharges. And then with the step change higher in spot rates in the back half of May, there was just the acceleration in orders for one of the dealers. Orders doubled between first half of May and back half of May as that played out. Is that consistent with the intensity of demand pickup in the market? It's been really interesting to see spot rates and the load to band ratio just get way out of whack in a really short period of time.
Yeah, it's been interesting. As we think about our sales activity, so obviously our sales activity is generally pulsed by our channel partners, whether it's PACCAR or many other folks in the aftermarket. We do sometimes see some timing nuances in terms of stocking or de-stocking activity, not to the levels that we had experienced back in kind of 22, 23 timeframe. But certainly I think we saw some of that in inside of the fourth quarter with, you know, some pretty robust activity and probably indicative of some stocking up and then relatively slow out of the gates in the first quarter of this year in terms of some de-stocking as they sold through inventory levels. as we sit here right now inside of Q2 I think you know really in line with our guidance levels which is you know an expectation of flat to slightly up from the overall aftermarket market perspective and we continue to expect you know one to two percent market share gains so we'll continue to keep an eye on it obviously continuing to take a pulse on the sentiment every time it feels like we start to get some some green shoots or positive sentiment you know, a broader geopolitical slash macroeconomic dynamic emerges. And so hoping to get some stability on that front. And I think overall, that'll help lift overall, you know, miles driven,
which really pulses our business. And so the shipper to truck ratio just really accelerated exiting May, which I think historically bodes really well for aftermarket demand anytime time. We need to drive up time. Has that played out the story of two halves in May? Is that the way it played out? So I understand overall more or less in line, but did we see that acceleration
that we're hearing about? It's a little, it's, we can't see it like with that level of precision necessarily. Because again, there's this difference in terms of when they're stocking up inventory levels and then when it's actually getting sold to the end user. So I would say that, you know, the second quarter has tracked again in line with our expectations super um can we talk about china
so um they're transitioning to more evs what does that mean from an atmos opportunity standpoint what can you folks do to drive performance with that backdrop and where do you see ev share in
china going longer term yeah absolutely i think it's you know certainly the one area in the world where you're seeing pretty robust EV activity which is contrary to every other region in the world which is going the opposite way you know inside of inside of China obviously we're continuing to focus on supporting our customers you know in whatever fashion that we can if I think about the broader EV transition you know first and foremost it's important I think to note just the significant aftermarket nature of our business and the longevity of that tail so even if you know you're seeing robust increases in penetration of EV vehicles in China for example you still have a lot of activity in the aftermarket based on you know units on road we are working to support you know our customers really who are all global in nature on their you know alternative fuel ambitions and you know and support them in any way we can we saw some catalysts of that a few years ago and now really that's kind of dried up so but we'll be you know ready to support them and continue to collaborate with them however we can if I think about you know the nature of of different types of alternative fuels and impact to the business you know I would describe kind of alternative fuel-powered internal combustion engines as having a largely a similar look um to uh what you know diesel does in terms of filtration content on a vehicle uh i think you know in terms of ev it would be the the most significant reduction relative to uh today so we're keeping a close eye on it um and we'll see what what happens i think you're just going to continue if the current trend uh plays out continue to see a pretty big disparity in in terms of penetration of EV vehicles in China versus everywhere else in the world.
And can you spend a minute on that? So what are the specifications of the EV trucks in China? How big are the battery packs? And could the build out in China drive other regions to take a look and see what they're doing?
Yeah, so I mean, I think the various powertrain providers are probably better equipped to speak to the nuances in terms of size of battery packs and payload and charging infrastructure, et cetera. I think it'll be interesting to see if the, certainly I think the Chinese battery pack suppliers have a lead in terms of capabilities from a technology standpoint. I think it remains to be seen how successful they'll be enabled in terms of dropping that capability into other markets. And I think, obviously, the various OEs and powertrain providers will certainly look to, you know, retain their existing shares in those spaces. So I think it remains to be seen at this point.
Okay. And if we shift gears, talk about tariffs, the tariff rate declined from 25% to 15% for ag and construction equipment. Any nuances within that that might benefit Atmos? Obviously, trade policy is super complex. What do you think?
Yeah, so I wouldn't say anything that necessarily benefits us relative to others. It's kind of been, as you note, a moving target, if you will. So maybe it's best to kind of describe what our approach to tariffs has been, which has remained consistent regardless of the underlying shifting policies and rates. So first and foremost, we look to avail ourselves of any exemptions available, the largest of which has been the USMCA exemption, which is you know allowed us to continue to mitigate our customers from tariff you know pricing increases by leveraging and certifying as much of our products you know that are coming out of Mexico under that exemption the second has been exploring different you know supply chain changes and things that we can we can do we have not done a lot of reshoring of production just given the the changing landscape and you might make a long-term fix and then all of a sudden the rates change amongst countries which is not necessarily fast or easy to unwind so that hasn't been a big thing we have done you know a few different creative initiatives such as you know establishing a free trade zone in our US distribution center outside of Cincinnati that allows us to import export product without incurring the tariffs the the last you know lever that we look to pull is is you know via pricing and so obviously there's a competitive dynamic with that that we try to ensure that we're you know mitigating and insulating our customers from that impact wherever we can but at the same time we have to protect you know our our own profitability levels so we've moved I would say quite swiftly and the team has done an excellent job to to navigate in an ever-changing environment, put pricing through as and when we're incurring those tariff costs and then adjusting that pricing as and when the tariff landscape changes. We'll continue to do so moving forward. And then I think obviously the second piece of tariffs is just what happens in terms of refunds and whatnot. And so certainly we are working through the various reconciliation processes that you inherently do in the customs landscape and then looking to, you know, file for refunds through the CAPE system. You know, obviously the rulings of that continue to evolve and will continue to evolve with that. I think it remains to be seen how and when, you know, tariff refunds effectively flow through the market. Obviously, there's a lot of different partners there. So So you've got our channel partners who we sell to in the aftermarket who ultimately sell that on to the end users. So that will be a little bit interesting to see how we navigate through that, whereas the OE is a little more straightforward.
And then USMCA up for renewal. Let's say we lose the USMCA exemption, costs become 15, 20% higher. Does that change in that scenario, your manufacturing footprint at all?
Yes, I think obviously we'd have to look at longer term changes, if you will, if we had confidence that that's going to be the new environment that we're working under. I think you saw many people, including us, with the onset of NAFTA and then USMCA set up their supply chains in one way. And if that's going to change, then, you know, perhaps over the long term, our supply chains would change. I think it's, you know, it's really important that we continue to have strong trade agreements with important partners like Mexico. And I think what you see is the benefit of that accruing to end users ultimately, right? Because we've been able to take advantage of that exemption and, again, mitigate the impact to end users, owner-operators of trucks. and we want to continue to do that to partner with our end users so that's that's what we're looking at obviously we're closely looking at that and we'll continue to navigate our supply chain environment as needed at the risk of
leading the witness so you know 15 to 25 percent that increase on a cost of good sold basis given the supply chains already set up in Mexico feels like the most likely outcome would be the price moves a little bit higher to pay for that as opposed to
resetting up the supply chain would be my guess. Yeah, I think that's certainly what you should expect in the short term. And again, you know, it's not a quick endeavor to shift and reestablish your entire supply base. So we would continue to evaluate that over time. But in the near term,
you would expect to see it flow through in price. Last question. What's the most significant supply chain opportunity for you folks that was one of the pillars that we didn't
double click on until this moment yeah absolutely so first of all I would just again thank the the broader supply chain organization for all the hard work that they they did during you know our initial supply chain transformation that was really focused on some of the lower hanging fruit in the procurement space you know trying to get more of our supply base under contract establish multiple different sources of supply as we move into our next horizon of supply chain transformation certainly want to continue our strong delivery capabilities as well as then look at efficiency opportunities so you know really looking at our conversion costs and how we kind of streamline our operations but excited about that and certainly we'll provide more
details on that as as time elapses super please join me in thanking jack for coming out for a Yes, thank you. Thank you, Jerry. Thanks, everybody.