Atmus Filtration Technologies Inc. (ATMU) Earnings Call Transcript & Summary

We have -- next presentation is Atmus Filtration, and we have the company's CFO, Jack Kienzler. And we also have the IR team here. We have Todd Chirillo. Thanks so much for being there. Look, I think that described, we -- Atmus to people, it's sort of the little engine that did and will. And I think the performance since the IPO has been massive upside surprise in a very good way. And yes, thank you. And with that, we're going to go to our fireside chat. Thanks so much.

Thank you.

All right. So yes, so maybe we can talk about durability, visibility. So the last few months have really demonstrated, I think, the durability of Atmus' earnings versus OEMs and other component providers. You've seen a 5%, 10% cut to U.S. machinery stocks, EBITDA estimates, but Atmus maintained guidance. What areas have been most resilient?

Yes. Well, thank you, Andrew, for having us, first of all, and for the kind words, and thank you, everyone, for your interest. Look, I think what you're seeing here is really the resiliency of the aftermarket nature of our business. Over 80% of our revenues are derived from the aftermarket, and that allows us to weather the inherent cyclical markets that we serve quite well. And so it has enabled us to be -- to provide a bit of security in times of turbulent markets. And what we're most pleased about, I would say, is the ability to execute through times when the market is down. We've been in a broader freight recession here for many quarters in a row. And so being able to execute throughout that, I think, positions the business well to really deliver even more as our markets start to pick up. So really excited about the progress we've been able to make across all of our 4 core growth and strategic platforms, and looking forward to continuing to deliver against those as we move forward.

Excellent. So maybe we can talk about first-fit. It was 14% of revenue in '24, down from 19% in '23. Maybe could you help us to put some context around that revenue mix? Where did it get down to in '09, like 14% seems low, but how low is low?

Yes. So as a reminder for everyone, as I mentioned, we're -- over 80% of our revenue is derived from the aftermarket. And then on an annual basis, somewhere around, I would say, kind of 15% to 20% derived from the first-fit. And as you're noting, Andrew, it can ebb and flow a bit each year. I would say that this is about the low that we see, and it's really pronounced. It's driven by the fact that as I mentioned, inherently, the aftermarket peak to trough is much more muted than the first-fit. And so right now, we're in a period where first-fit is down in double digits. We've got, in our guidance, the market from a first-fit perspective, down about 12% at the midpoint. And so when that's down, you see the inherent pull-through to that mix at the top line. And then that can be a little more further pronounced if certain geographies are also contributing to that lower market level. And so specifically, somewhere like China, for example, which has kind of been bouncing along the bottom, that tends to be more of a first-fit-centric market for us. And so if that's down, that can drag that portion down.

So maybe another couple of percentage points?

Yes. I think would be the trough, if you will, from a first-fit perspective. We believe quite firmly in the importance of the first-fit markets as a flywheel to both our installed base in the aftermarket. And so a really important piece of the business. It just inherently is more cyclical than the aftermarket and the freight dynamics.

Got you. And so at the low end of '25 guidance, it calls for flat revenue. And you were explicit not calling for a recession. So how much visibility do you have into first-fit production volumes in the second half? Yes. And how do you know what your customers do? Do they share their internal volume forecasting with you?

Yes. So generally speaking, we have ongoing dialogue with our OEM customers. And inherently, with all of their supply base, including Atmus, they provide us their outlook on the market so as to ensure that their supply base is ready to serve their needs as and where they need volume. And so there's an ongoing dialogue between our commercial team and the likes of Cummins, PACCAR, TRATON as we work through outlook for the market. It's important to note that, that volume is not guaranteed. And so it's a continuous dialogue. And as we get closer to that month or quarter when we're supposed to deliver the product, you get a bit more clarity. Based on what we're seeing right now and the continued discussion with our OEMs, we have lowered our outlook from the initial outlook provided in February, again, to about 12% down year-on-year at the midpoint. And really, what that reflects is sort of an elimination, if you will, of any prebuy activity that could have came in, in the on-highway markets towards the end of '25. That was our initial expectation. But with some of the reevaluation of the upcoming emissions regulations, I think the broader sentiment in the industry is that, that is not likely to happen.

Right. Well, maybe I can push a little bit further. We had a truck distributor here before and somebody I respect a lot. And I guess he was indicating that one of the OEMs only will give you production slots through July. And there's another OEM, which actually has made production slots available, but you have to commit to noncancelable contracts, which in his view is the same as not having production slots. So how do you deal? Is it ACT? Is it your internal modeling? Is it because you've been in business for so long, right? Because it really does seem on trucks, right, they're really -- probably, I think, and I'm clearly putting words in your mouth, it seems that I think people think third quarter is the bottom, right? But as I said, it's hard to forecast. I don't recall, and I think I've been looking at the industry for 2 decades. I don't recall a time where you could not get a production slot like 3 months out.

Yes. Yes, I think it is really a reflection of the broader uncertainty that's impacting not only aftermarket, which we can talk about more as you think about global trade activity, but also our first-fit markets where...

It's a first-fit question.

Yes, exactly, where I think there's an inherent level of uncertainty and a hesitation on the part of end customers, fleets what have you, to commit to any type of prebuy activity given the uncertainty in the regulation. And then I think what could further exacerbate that and make the uncertainty even more pronounced is if you do have significant price increases that the OEMs are trying to pass through as a result of tariffs that becomes fairly difficult to do as you think about the residual impact perhaps on demand. And so keeping a very close eye on all that. I think the uncertainty that you're referring to there reflects a bit of that hesitation or lack of clarity on the end customer side. And therefore, I think you see kind of the downstream effect of that as you think about the OEMs and their hesitation to give too much clarity into specificity as it relates to the end of '25 or even into '26 at this point in time.

Got you. So maybe we can talk a little bit about geography. Can we go around the regions maybe Europe, Lat Am, China and Asia ex China?

Yes, sure. So I think we've talked a little bit about North America, but maybe I'll add that in and start there. Again, keeping with the first-fit , if you will, we are expecting medium-duty and heavy-duty to be down this year and are continuing to see that in the market. And then as I think about working my way around the world, Latin America from a first-fit perspective, still relatively challenged. We have seen a few green shoots in aftermarket, but then those have largely been offset by softness related to the uncertainty from a trade perspective.

And what aftermarket in Lat Am? Is it ag or trucks?

That would largely be on-highway trucks, but -- and I'll make sure I circle back on the end markets to the -- and then obviously, FX headwinds in Latin America as well. Europe, also fairly depressed. We were hoping to see some green shoots in construction perhaps, but haven't quite seen that pull through yet. And then in Asia Pacific, excluding China, again, continued softness. So I hate to paint a depressive picture there. But if I think about a bell curve of kind of where our various markets at with respect to being on the upswing or in the trough, most, I would say, are in the trough. Still hopeful that India is probably the first to lead out of that trough, but haven't quite seen that yet. And then obviously hopeful that the aftermarket can continue to gain momentum if we get certainty on broader trade policies as we move throughout the year.

And maybe we can talk about Lat Am growth because I think since '21, you've grown at a 14% CAGR in Latin America. What is the secret to success in this region? And what can you sort of replicate from your Latin America playbook in other regions?

Yes. I think it's a good highlight of how we've been able to put our strategic growth pillars into action. So I would say that the Latin America region historically was a bit under-penetrated as it relates to our steady-state view of where our share should be. And so we embarked on several growth initiatives there, in particular, looking to build out our distribution reach through additional channel points and distributor relationships. Historically, we largely went through our former parents distribution channel in isolation and now have looked to not compete from a channel perspective with that outlet, but just to broaden our exposure and get our products on the shelf in as many locations that trucks are being serviced, both on-highway and off-highway commercial vehicles. I think the other piece that you're seeing is the ability of the business to price. And really, that's a reflection of the quality and durability of our brand and the end customers' desire to have that strong product, which can really act as a low-cost insurance policy for them as they put that into their vehicles and ensure that they have as much uptime as possible. And so that combination of volume with price even amongst some FX headwinds has really contributed to a nice growth story in Latin America. To your point, where can we leverage that elsewhere? I think there are certainly other markets that were under-penetrated and Europe comes to mind, although the macro environment there is not quite as fast growing and there are some price challenges, I would say, in that market. But this blueprint of how do we add to our aftermarket distribution outlet and just broadly win share is really the core foundation of our first 2 growth pillars around first-fit and aftermarket and really spreading our wings, if you will, as we came out of the separation.

But in theory, Europe could be another market where you could sort of see if...

Yes, Europe, I think our share would be a little under-penetrated kind of like Lat Am would be. And then there's, I would say, different markets as I look to like the Asia Pacific region, where we have lower share relative to what perhaps an entitlement would be.

And within Europe, if growth picks up, which markets should we think more natural for you to sort of go after market share?

Yes. So I think as I think about -- if I cut it by end market versus country per se, where can we lift our share, I think many of the off-highway markets come to mind where like construction, for example, or maybe perhaps ag, are those -- some areas where we just historically haven't had a massive presence that we could look to exploit with our product range in hand. And then certainly, on-highway is always a place where we sort of lead with technical strength, particularly on the fuel filtration side. So we'll see.

Got you. So maybe we can talk about pricing. So historically, Atmus has realized pricing on a lag basis. With tariffs, you seem to be acting a lot more quickly. What's different this time? And just maybe are you doing surcharges? Or are you doing price increases? Yes. So what's your competition doing?

Yes, absolutely. So generally speaking, as you know, historically, our pricing in the aftermarket, in particular, has gone in at the beginning and in the middle of the year. So January and July, if I kind of speak generally. And we are continuing to do that in response to broader inflationary dynamics, whether it be steel or other input costs. And that is embedded into our guidance as 1.7% for our annual pricing in '25. And then on top of that, we -- in extenuating circumstances, look to take appropriate measures to make sure we're whole from a cost and a gross margin perspective. We are, of course, looking to do everything we can to mitigate the impacts of tariffs starting, first and foremost, with exemptions that we can avail ourselves of. So USMCA is probably the most notable example of that where, historically, the vast majority of our product qualifies for USMCA. And we're in the process, the final processes of that qualification for this year. And that allows us to offset the tariffs at imports, and then we will look to recoup anything that we've leaked, if you will, over the course of the end of the first quarter and into the second. The second piece we look at is to mitigate tariff impacts is any resourcing or shipping lane reconfigurations that we can utilize to minimize the impact that we ultimately have to pass to the end customer. But at the end of the day, the biggest mitigating lever that we have in this very fluid environment is pricing. And so to be specific, what we've done is, for the most part, that pricing is being passed through in the form of base pricing. But obviously, as we engage with our customers, we try to give them a sense of why that is happening. And I would say that's, from what I've seen from an industry practice perspective, reflective of what others are doing with us and what our channel partners, the likes of the OEM dealer networks, for example, are also doing. So I think it remains to be seen. That's obviously a pretty fluid dynamic, and we had already taken the pricing actions. And then obviously, this week have received different news on China specifically. So we'll continue to monitor the situation and react accordingly. But the principle that I would leave everyone with is that we intend to be margin neutral, and we'll take the right measures to protect the business.

But maybe just sort of on the first-fit side, right, and this environment, maybe an opportunity. So is there the possibility on the first-fit to use this tariff and supply chain events to get better contractual terms and conditions? And we recognize that these true partnerships with OEMs that go back decades. But I guess, legacy of locking in price downs with no flexibility has been tough. So does this open more avenues for dialogue with the OEMs? Are they receptive to maybe changing things?

Yes. I would say broadly speaking, as you note, there are long-term agreements that we have in place with our customers, the OEs on the first-fit side. And generally, those are kind of program by program, if you will. And so as you can imagine, those have evolved over the years as you see more things that you might not have contemplated a few years ago, most notably as of late, tariffs and look to build in that into the next round of LTAs. And I think that's not unique to Atmus, I think it's unique to -- everyone in the industry is doing it. But at the end of the day, it's a negotiation on the OE side, and we've continued to have constructive dialogue with our OE partners as are they with their customers. And I think ultimately, we'll reach a constructive outcome there.

But just maybe as I said, if you step back and you looked unprecedented, we haven't seen inflation like this since the '70s. And I remember from my sort of previous days, I remember when Cat had to face price increases like 20 years ago, they literally brought back guys from the '70s who knew how to go to the customer and ask for the price increases. But then they did get the price increases, right? So is there this -- has there been evolution if you just go back not specifically 6, 12 months ago, but the industry has just gone through a massive supply chain inflationary shock. Just ultimately, do we come out with more flexibility or versus OEMs? Or just, hey, you have more pricing power to your customers, and that's what you get and take it, which is also good.

Yes. I think at the end of the day, you've seen LTAs evolve. Historically speaking, you wouldn't see commodity clauses, FX clauses now the onset of a tariff clause or something to mitigate broader trade uncertainty. So we certainly have seen the evolution in LTAs for that as well as, I would say, constructive dialogue amongst both parties in those discussions. And obviously, there's always timing impacts and ensuring that those price increases can be passed along. I think what's adding to the uncertainty is just where the market cyclicality is.

Of course, yes.

And so if you think about a pretty soft demand environment on first-fit, some of these price increases when applied to the price of a on-highway truck are not insignificant. And so if you don't have customers lining up to buy trucks, it becomes all that [indiscernible].

Right. That's exactly it. Yes, totally get it. So the next couple of questions, it's sort of we're asking them every company, these come from the management. So do you expect to shift incrementally more of your own production or supply chain to the U.S.? Do you expect your customers to source more from the U.S.? Yes. Any anecdotes from your actually off-highway and trucking guys would be super useful.

Yes. I think broadly speaking, it's difficult to make a long-term significant choice like establishing a new manufacturing site amongst such an uncertain time frame. We are, as I mentioned, at this point solely focused on, first of all, what exemptions can we avail ourselves of? And then what other resourcing, not wholesale reshoring of manufacturing but resourcing activities can we undertake to mitigate the impacts? And then obviously, price is the biggest lever. We do have a strong manufacturing base in the U.S. already, a significant facility in Cookeville, Tennessee as well as one in Neillsville, Wisconsin, which allow us to think about resourcing and increasing volumes in those plants relative to our global supply chain. But at this point, no actions in place to close or open any new manufacturing sites. My view is that, that's broadly the same sentiment that everyone in the industry has at the moment. As you're no doubt aware, it's very difficult to make that long-term and multiyear decision when you're amongst a pretty uncertain backdrop. So that's kind of where it stands right now, and we'll continue to monitor the macro environment.

So I think the tax bill is getting attention, things like bonus appreciation, domestic manufacturing incentives. Will any of these be important for you? And if so, why?

Yes. So I would say no real dialogue just yet on how those might influence end users' decision-making. Does an end user accelerate or change the timing of their purchase of a vehicle to take advantage of bonus depreciation, for example? I think it's way too early to say given how hot off the press, if you will, the tax bill is and what, if any, changes that will undertake as it moves its way through Congress and the executive branch. So I would say no real constructive dialogue as of yet, and we'll keep a close eye on it.

So maybe on tariffs. So -- and as I said, it's -- the problem is it's very much a moving target. But products imported from China, less than 2% of U.S. revenue, so less than 1% of total revenue. How quickly can you change the sourcing there?

Yes. So as part of that resourcing...

And as a company, why would you continue to import from China?

Yes. No, that's a good question. And some of it is based on where we have certain products and are they coming out of -- we have a joint venture in China. We also have a wholly owned business in China. We derisked, I would say, our sourcing landscape a fair bit when this administration was previously in office. And so as you mentioned, a rather small amount of our cost of sales is now China dependent. We are, of course, in constant evaluation as to where our supply base is and where we manufacture our own product. The challenge at the moment is do you look to resource that to another low-cost country or an alternative source when you don't exactly know what tariff may come on to that? I'm sure it makes it a very difficult dynamic and it may trade based on a short-term dynamic and then overnight regret that decision. So we are in the process, I would say, of looking at our supply base to derisk it and looking at, again, our manufacturing environment, including our joint ventures, specifically in India as to what makes sense and where would we set up our long-term production. But you kind of need global clarity, I would say, to make that a long term.

So other question, what's the internal plan if the Section 232 investigation to auto and truck component imports results in tariffs in New Mexico facility? And what portion of U.S. revenue comes from imports from Mexico?

Yes. So broadly speaking, as I mentioned, USMCA is probably the biggest mitigation lever that we've been able to utilize and avail ourselves up. And that's not unique to Atmus. Again, it's quite pervasive across the commercial vehicle sector and the auto sector to have quite a commingled supply chain by design on the heels of NAFTA and USMCA. And so there is an investigation for those who aren't aware of Section 232 into the importation of trucks and related parts by foreign suppliers and whether or not that represents a national security interest, and perhaps does that become a lever which leads to the exemption from USMCA no longer being available to us and others in the region? If that happened, I would say that the primary mitigation then becomes price.

Yes. And then everybody would be...

And I would expect that to flow through in a pretty significant way, not only from our fellow filtration suppliers, but also from the OEMs and any other parts that come through. So that's essentially how we would mitigate that. We don't disclose exactly how much comes from Mexico. But as we've noted, our largest facility from a manufacturing standpoint is in Mexico and is a big aftermarket supplier for us globally, including in the United States.

So maybe we can talk about aftermarket volumes. And maybe there is a narrative that volumes from China are about to collapse. But regardless of that, you sort of highlighted we have this trucking recession that like was supposed to end last year and just goes on and on and on.

Yes indeed.

I think last year, we were talking about like the end of the trucking recession. So just what are you watching internally, right? As you look at on-highway truck market or vocational truck market, what are you guys -- what metrics are you focused internally to try to sort of make heads of tails of what the heck is going on in that market?

Yes. So there's -- the aftermarket is tricky. There's a lot of different indices that you can look at, some of which have flaws in terms of what's included versus excluded. We talked about the Cass Freight Index, for example, but that doesn't pick up this dynamic of the rise of private fleets.

Yes, I was [ happy you commented on Cass ], like that sounds like I don't look at it. I think the person was very disappointed.

So that's been a bit challenging. We look at ACT puts out some aftermarket activity. We look at ATA tonnage. We look at the age of fleets and the potential dynamics that exist there from a backlog perspective and the rise of maintenance costs for an older truck. But I would say probably most importantly, we triangulate that quantitative data with qualitative sentiment from our OE partners as well as our other independent distribution partners. I know you mentioned some of those fellow partners here today, and I think you probably get a sense of the broad uncertainty that inherently exists in the aftermarket. We haven't seen those green shoots just yet of positive inflection, which is one of the reasons why we brought the aftermarket market piece of our guidance down. And I would just say, I'm sure everyone is tired of hearing it, but the word of the day is still uncertainty, and that kind of remains pervasive. But I do think if we can get clarity from a broader trade policy perspective, hopefully, that can lead to a bit of a resurgence in economic activity and give the market the clarity it needs to pick up. But until we see that, that's what's implied in our guidance, and we'll certainly look to keep you all updated with what we hear.

Yes. I think the best I got from that meeting is that maybe third quarter is the bottom, maybe [ capital M ], all caps probably.

You could say that maybe that's the bottom. I think there is a seasonal pattern to that where the third quarter is a little bit softer in any given year. But I think we largely thought that the summer of last year would be the bottom, but now we're lapping that as we sit here today. So yes, hopefully, it's the bottom.

Yes. Well, meanwhile, you're making your numbers. So it's not a bad place to be. And maybe on off-highway, 40% of revenue is off-highway end markets like construction, mining and ag. Maybe just walk us through the trends you're seeing in each one of those verticals.

Yes. So just to give people perspective, the business is 40% off-highway. Of that 40%, construction is about 35%, mining is about 20% and then ag is about 12% and then you kind of dwindle into some ancillary markets, including power gen. If I had to characterize them, I would say all are down, unfortunately. I was describing that bell curve earlier, and that's certainly the case here. And I think you can see that in our customer sentiment as they embark on their own guidance. Construction, of those, may be the strongest, but again, it's down. And so it's relatively speaking, and ag is probably the weakest.

Okay. And maybe in the remaining time, we could probably spend an hour talk about, but EPA model 27 NOx rule. What's your best guess as to what's going to happen over the next 3 months to get visibility into like where we're going to come out?

Yes, it's a great question.

And I ask what's your best guess, I didn't ask what's going to happen.

And obviously, I would describe us as maybe one level removed in terms of clarity as you compare to the level of visibility maybe that a Cummins or our OE partners have in the space. I would say the broad sentiment, if you talk to them, is that there's currently a reevaluation going on across a broad number of pieces of that regulation. Some of that regulation likely gets pushed out or discontinued, maybe the pieces that have to do with zero emissions vehicles and some of that, whereas the regulation itself as to more stringent emissions here in the U.S. could perhaps go forward. Does the warranty requirement no longer hold, and therefore, that offers a break for end users as they think about the cost that gets passed to them as they embark on that? Perhaps. Again, I think it's a little too early to tell. If you think about the impact to Atmus, largely speaking, most of our products don't have a direct emissions tie. And so it will likely influence volume from a first-fit perspective, and this notion of what could be a big prebuy in '26 and then a pretty soft market in '27. Does that get smoothed out if the regulation gets pushed out? Perhaps, but I think it's too early to tell.

So the primary -- I should be thinking the primary impact of sort of NOx regulations moving around is volume. It's not content for -- your content per vehicle will not be that impacted.

Correct. Yes. Now generally speaking, I would say what we've seen in past emissions regulations, if there are more stringent emissions regulations, the large players in the industry who have made those investments and have the scale over which to make those investments like a Cummins or a PACCAR, just to name a few, tend to take share in the market. And given our relationships with them, that is inherently a win-win, if you will, for us. But again, I think it's too early to tell.

Excellent. We are right on time. We're out of time. That has been great. Thanks so much.

Very good. Andrew, thanks you for your time. Thank you, everyone, for your interest.

Yes, of course, yes.