Atmus Filtration Technologies Inc. ($ATMU)

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome you to the Atmus Filtration Technologies First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Todd Chirillo, Executive Director of Investor Relations. Todd, please go ahead.

Thank you, Christa. Good morning, everyone, and welcome to the Atmus Filtration Technologies First Quarter 2026 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 this call. For additional information, please see our SEC filings and the Investor Relations page is available on our website at atmas.com. Now I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. Today, I will provide an update on our first quarter results and share details of our progress executing our 4-pillar growth strategy. I will also provide updates to our outlook for 2026. Jack will then speak to our financial results and segment performance. I want to begin by recognizing [indiscernible] for their ability to navigate continued challenging market conditions, all while delivering strong financial results to start the year. Our global team remains focused on solving our customers' filtration challenges and delivering on our 4-pillar growth strategy. During the first quarter, we completed the acquisition of Koch Filter which represents our first step toward advancing our strategy to expand into industrial filtration. This establishes our industrial air filtration platform and expands our portfolio into commercial, industrial HVAC and high-growth end markets, including data centers and health care. We have made significant progress integrating Koch Filter into the Atmus organization. We have exited over 50% of the transition services agreement and expect all remaining integration activities to be completed early in the third quarter. The combination of Koch Filter's deep industry experience with our filtration expertise and footprint along with a strong cultural alignment will provide benefits for all stakeholders. With the acquisition, we will report on 2 business segments in 2026. Power Solutions, which serves global on-highway and off-highway equipment markets and industrial solutions where the Koch Filter acquisition will be reported. Now let me provide an update on our capital allocation strategy. During the first quarter, we returned $12 million of cash to shareholders, consisting of $7 million of share buybacks and $5 million of dividends. We have $62 million remaining on our share repurchase authorization and expect share repurchases to be $20 million to $40 million in 2026. Behind our strong performance is our people, and I want to take a moment to provide some insight into how the culture at Atmus is driving momentum in the overall business. As I have shared previously, we have developed and embedded the Atmus way as a way of working, which incorporates our purpose, our values, our behaviors and our strategy. As part of the Atmus way, we are committed to being mining oriented. Embracing a learning mindset will enable our growth strategy and support the scaling of our operations. During the first quarter of 2026, we continue to invest in building future generations of leadership for Atmus. At an executive level, we launched our second Cosmo of our executive development program. This program is focused on building executive leadership capability over 2 years. Additionally, we launched our Leadership Foundation program focused on developing frontline leaders with foundational leadership skills grounded in our Atmus value. We have 200 managers and supervisors currently in the program and anticipate all frontline leaders to complete this by the end of 2027. I am inspired as our leaders around the world participate in these programs and develop both personal and professional skills to lead our organization. Now let's turn to our 4-pillar growth strategy. Our first pillar is to grow share in first fit. We continue to win with the winners by growing our long-term partnerships with leading global and regional OEMs across a broad range of applications. Recently, we announced the opening of a new state-of-the-art laboratory facility at our compare France location, reinforcing our commitment to advancing filtration technology and reducing testing lead times for our customers. This modernized testing facility strengthens our global laboratory network, which allows us to work collaboratively with our customers. Our second pillar is focused on accelerating profitable growth in the aftermarket. We have partnered with leading global and regional OEMs who continue to grow their aftermarket business and expand market share. These OEMs trust our industry-leading products to solve their filtration challenges and protect what is important. Additionally, we are expanding our product coverage in independent channels with new distributors. This allows us to provide our industry-leading sweetguard and Koch Filter branded products to our customers in their desired service channels. Our third pillar is focused on transforming our supply chain. We have established a strong distribution network, which has enabled us to enhance the customer experience. We have raised our delivery and on-shelf availability metrics to all-time highs ensuring our customers have the right product when and where they need them. Our fourth pillar is to expand into industrial filtration markets. The execution of our first acquisition with Koch Filter enables us to unlock operational, commercial and growth synergies through the alignment of Koch Filter's leading industrial and filtration brands and our advanced technology capabilities in filtration video. As we continue to review a robust pipeline of opportunity, we will focus on the industrial area to build a platform of scale by leveraging Koch Filter and creating value through targeted bolt-on acquisitions. While our primary focus is industrial air, we will remain opportunistic in evaluating industrial water and liquid filtration assets with the goal of identifying an anchor investment that can serve as the foundation as we build out our broader industrial platform over time. As demonstrated by the Koch Filter acquisition, we remain focused on executing a disciplined approach to develop opportunities, which deliver long-term shareholder value. Now let's discuss our first quarter financial results. Sales were $478 million compared to $417 million during the same period last year, an increase of 14.6%, largely driven by the acquisition of Koch filter. Adjusted EBITDA was $95 million or 19.8% compared to $82 million or 19.6% last year. Adjusted earnings per share was $0.69 in the first quarter of 2026, and adjusted free cash flow was $33 million. Now I will discuss our market outlook for 2026. The conflict in the Middle East introduces uncertainties to the [indiscernible] for the year. This includes uncertainties regarding impact on input costs, our ability to sell products in the Middle East and broader macroeconomic impact. At this stage, we have not incorporated as it impacts into our guidance associated with the Middle East conflict. But it is an ongoing risk factor that we will continue to monitor. Now let's turn to our outlook for the Power Solutions segment. In the aftermarket, overall freight activity remains muted, and we expect the market to continue at current levels and be relatively flat year-over-year. In our first-fit market, customers have indicated strengthening activity as the year progresses, related to cyclical market recovery and pre-buy activity ahead of 2027 U.S. regulatory changes. Our outlook for heavy and medium-duty markets in the U.S. is now expected to be in a range of up 5% to up 15% compared to 2025. In our Industrial Solutions segment, we continue to expect favorable market conditions and we anticipate the market to contribute 1% to 4% of growth. We expect share gains to deliver an additional 1% to 2% of share growth and overall pricing is expected to provide approximately 1% of revenue growth. As we noted last quarter, some tariff pricing implemented in 2025 will not carry into 2026 due to changes in status of global trade agreements, implementation of offset and the actions we have taken to mitigate tariff impacts. Based on tariffs in effect as of April 30, we expect the impact of tariff pricing to be flat relative to 2025 on a full year basis. We will continue to be nimble and adjust pricing as necessary should the tariff environment change. and we expect to remain price cost neutral. The U.S. dollar is expected to weaken year-over-year and provide an approximate 1% revenue tailwind. In summary, our expectations for Power Solutions total revenue will be in a range of $1.79 billion to $1.85 billion. an increase of approximately 3% at the midpoint from the prior year. In Industrial Solutions, we expect revenue to be in the range of $155 million to $165 million, which includes revenue from the Koch filter closing date of January 7. Taken together, we expect total company revenue to be in a range of $1.945 billion to $2.015 billion, an increase of 10% to 14% compared to 2025. We are maintaining our full year adjusted EBITDA guidance of 19.5% to 20.5%. As noted, the conflict in the Middle East is expected to put pressure on commodity prices throughout our supply chain, most notably in petroleum-based components, such as plastics. Should this occur, we would expect to recover these inflationary costs. However, there may be a timing lag for recovery. Lastly, adjusted EPS is expected to be in a range of $2.75 to $3. Before I turn the call over to Jack, I want to thank our team members around the world for delivering a strong quarter and for your continued focus on our customers. Now I will turn the call over to Jack.

Thank you, Steph, and good morning, everyone. Our team delivered strong financial performance in the first quarter of 2026, even though we continue to experience uncertain global market conditions. Sales in the first quarter were $478 million, compared to $417 million during the same period last year, an increase of 14.6%. Power Solutions delivered sales of $439 million compared to $417 million in the prior year. an increase of 5.4%. The increase was primarily due to favorable foreign exchange of 4% and higher pricing up 2%. Volume was down slightly year-over-year. Industrial Solutions sales were $38 million, resulting from the acquisition of Koch Filter. Gross margin for the first quarter was $137 million compared to $111 million in the first quarter of 2025. The increase was primarily due to incremental margin from the acquisition of Koch Filter, increases in pricing, the cessation of onetime separation costs and the favorable impact of currency. partially offset by higher logistics and duties costs, higher manufacturing costs, along with lower volumes. Selling, administrative and research expenses for the first quarter were $59 million compared to $55 million in the prior year. The increase was primarily due to people-related expenses and information technology [indiscernible]. Joint venture income was $8 million in the first quarter compared to $9 million in the prior year quarter. The decrease was primarily due to a $3 million expense in our India joint venture related to a benefit obligation remeasurement driven by recent labor law changes. Other income was an expense of $7 million compared to income of $1 million in the first quarter of 2025. The increased expense was primarily due to the Koch Filter acquisition consisting of $6 million in transaction costs. Excluded from adjusted results are onetime costs related to the integration of Koch Filter, which for the full year 2026 is expected to be in the range of $3 million to $8 million, along with approximately $6 million of transaction costs. Additionally, we will exclude intangible asset amortization resulting from the Koch Filter acquisition, which is expected to be in a range of $10 million to $15 million. Adjusted EBITDA in the first quarter was $95 million or 19.8% compared to $82 million or 19.6% in the prior period. Adjusted EBITDA for Power Solutions was $86 million or 19.6% compared to $82 million or 19.6% last year. Industrial Solutions adjusted EBITDA was $8 million or 21.9%. Adjusted earnings per share was $0.69 compared to $0.63 last year. Adjusted free cash flow was $33 million this quarter compared to $20 million in the prior year. Now let's turn to our balance sheet and the operational flexibility it provides to execute on our growth and capital allocation strategy. We ended the quarter with $210 million of cash on hand. Combined with the full availability of our $500 million revolving credit facility, we have $710 million in available liquidity. Our strong liquidity provides us with operational flexibility to effectively manage our business and to execute growth opportunities. Our cash position and continued strong performance, along with inorganic growth from the acquisition of Koch Filter has resulted in an estimated net debt to adjusted EBITDA ratio of 2x for the last 12 months ended March 31. I want to echo Steph and thank [indiscernible] around the world for all of their hard work and dedication to deliver a strong start to 2026. Our disciplined execution of our 4-pillar growth strategy, underpinned with a strong balance sheet will allow us to continue to drive growth and create long-term value for all of our stakeholders. Now we will take your questions.

[Operator Instructions] And your first question comes from Quinn Fredrickson with Baird.

I just wanted to start off with a question about pricing. It seemed to come in a bit stronger than you were expecting in 1Q. But it sounds like you haven't changed your expectation for the full year at 1%. First, just can you confirm that's accurate? And if so, can you impact why that would be the case given it sounds like input costs are moving up.

Thanks, Quinn for the question. So Overall, I would say our pricing expectations for the full year remain 1%. As we highlighted -- as we initiated our guide on our last call, part of what you're seeing there is the evolution of tariff dynamics and so as we talk about that pricing figure of 1%, it is holistic, including both base pricing actions that we took in January, for example, as well as tariff pricing. And so as we move through the year, that tariff pricing will reflect the evolution of the tariff dynamics. And as you compare year-on-year, you have different puts and takes as tariffs went up and down relative to specific countries. And so as we had highlighted, we do expect the first quarter from a year-over-year comparison to be our strongest pricing quarter. And then as tariffs change and as Steph alluded in her comments, we expect the full year impact from tariffs to be essentially flat year-over-year. In terms of the input costs and whether or not we will be taking price actions for that, as we stand here right now, we're keeping a vigilant eye on those costs. As we noted, we will certainly look to recover those costs, either through different things we can do in our supply chain or through pricing. As you know, base pricing is generally done at the beginning and the middle of the year. We would not expect necessarily similar dynamics to what we employed for tariffs to counter those input cost headwinds. And so that's that inherent timing line that may exist should input costs become a dynamic this year.

That was helpful. And then second question would just be on share gains. Any estimate on what that contributed in the quarter? And then any update to the 150 basis points that you're guiding to for the year?

Great. Thanks, Quinn. Let me get started on that one. Let me just step back and look at the quarter and the performance overall. Overall, we're really pleased with the performance in the quarter. It was strong growth. We saw 14.6% growth in the quarter. And if I just talk specifically, I'll dive a bit more deeply into Power Solutions. We were very happy with Industrial Solutions, about 6% growth in the quarter. So a very good start to the acquisition of Koch Filter and shell out to that teams have performed very well. If I look at Power Solutions, 5.4% growth year-on-year, quarter-on-quarter. That was made up of, as Jack discussed, 4% in FX and 2% in price with volume overall slightly down, and there's a mix in there of market conditions and share and some other onetime impacts that we experienced in the quarter also. So we saw the market was down year-on-year. Overall, we said that was about 1% down. First bit was 8% down in our numbers and aftermarket slightly down. And then if you start to unpack some of the specific onetime impacts we saw, the Middle East, we had impact on our ability to deliver to our customers in the Middle East in the month of March. That impacted us by about $4 million in sales, about 1%. We have -- that was because we couldn't deliver to our customers for a period of time because of restrictions in the supply chain. We have mitigated, so its impact and are now able to overcome that. Obviously, the Middle East conflict is an ongoing challenge, and we continue to monitor it and seek to mitigate those impacts. But in the quarter, it was a 1% impact that we are not expecting to continue. We also saw the stocking dynamics across the world, some within Latin America and Southeast Asia that we expect our sort of timing. So overall, share was about in the middle of that 1.3% level. right on top of the guys and where we're seeing it gives us confidence to continue to maintain our guide through the year. In addition, we're seeing positive inflection in the first-fit market. We've already seen that coming through in our build rates and orders from customers. That gives us confidence in the second half guide underpinned by a recovery in first-fit market.

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

Can you unpack Middle East uncertainty a little bit more just from both kind of a revenue and cost consideration perspective and based on what you see on current market prices, how you think about the potential cost headwinds there? And then also, you talked about a little bit of like supply chain disruption in the quarter, but stepping back, what you see as a potential demand response to ongoing conflict and a revenue impact that you consider?

Yes, Thanks for the question. The Middle East is an ongoing uncertainty for all of us. I guess we've been just over 60 days in the conflict now. And I'm certainly in no position to predict how long that continues. The way I'm thinking about the impact of the Middle East on our business really is in 3 key areas. The first of those is cost pressures and input cost pressures. It would be increases in costs related to inflationary pressures or supply shortages. We see the biggest impact for us there in plastics or petroleum-based products. Right now, we are not seeing a lot that is already impacting or is baked into our forecast. We're really monitoring this as a risk at this point. but an expected -- we'll expect to see some pressure on cost as the year plays out. Jack's go to that will obviously go to mitigate those but there may be some lag here in the second half on pricing depending on how the conflicts continue. The second dimension that may have an impact on our business is our sales in Middle East. For context, our sales in the Middle East were $38 million in 2025, so about 2% of our overall revenue. We did see a $4 million impact in the first quarter. We are not expecting that to continue through the remainder of the year. But obviously, we're watching to see how the complex continues to evolve. And then the third piece, which you rightly pointed out, is the broader business confidence impact on global demand. And it's very difficult to predict that. Obviously, our aftermarket is heavily weighted towards economic activity, freight activity around the world and particularly in North America. At this stage, we do not see the conflict having an impact on that, but we continue to monitoring business confidence and the projection for that we're getting from our customers as to the outlook. But at this stage, we think the view of a flat outlook on aftermarket year-over-year still help.

That's helpful detail. And then my other question is on the Koch Filter. And with respect to your pillar of accelerating profitable growth in the aftermarket, and just any color on how different the distribution network is there and some of the work that's underway or opportunities that you've identified in the near term to go after some of that aftermarket opportunity?

Great question. As I alluded to, I'm really pleased with the start of the acquisition of the Koch Filter business. They had a strong quarter, 6% revenue growth in the quarter. And really, we're progressing very well with the integration. So the integration, we expect to sort of wrap up here in early in the third quarter. And so very pleased with how that's beginning. And the team are very focused on share gains in their market and orienting the focus of their growth towards higher growth end markets. There are some similarities between the distribution channel and obviously, the overall broad coverage of our products across a very broad distribution network, that strategy holds across both our Power Solutions business and our Industrial Solutions business and some of our industrial broad-based distributors that we've signed up in recent times do have coverage both our segments. So we'll look to leverage the synergies across those distribution channels. Right now, I would say we see plenty of opportunity with the filtration with the Koch Filter business, continuing to target its growth strategy and orienting towards higher-end growth markets. and doing the integration well.

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

I wanted to revisit the volume comments you made. So for Power Solutions, volume was slightly down against the down number last year. Do you expect volumes to turn positive later in the year in any quarter, maybe driven by aftermarket or for [indiscernible] due to prebuy. So how are you thinking about volume in part solutions through the rest of the year?

Thanks for the question. So yes, we do expect volume to continue to grow quarter-over-quarter through this year. Obviously, second quarter is a stronger quarter for us. And then we see the first bit dynamics in the third and fourth quarter study to come in. So -- we talked about the heavy-duty and medium-duty market adjustment to be 5% to 15% up year-over-year. We expect that to be all second half loaded. We're starting to see that progress through the second quarter. We've also -- already seen increases in build rates. And so we'll start to see that trend up to through the second quarter and through the second half. And then from a share perspective, we see the 1% to 2% share as being about the right balance for us throughout this year. We still see a path to see how we'll deliver that. and with the aftermarket. Aftermarket was challenged here in the first quarter. We continue to see it operating at pretty flat year-over-year is the assumption underpinning our guide, but overall, that leads you to sort of a volume growth environment through 2Q and second half.

Understood. That's very helpful color. And a question on Koch Filter. I think I just heard you say 6% revenue growth. Is that all organic? And if it grew 6%, you're seeing the market would grow 1% to 4%. So was share gain over 300 basis points in the quarter? And do you expect sort of 6% type growth year-over-year for the rest of the quarters in the year?

Yes. So we've given you a pretty wide range on industrial, and I appreciate that. It is a smaller number. So as we find our way here, you'll give us some great. So our full year guide is a growth of 1% to 8% with a midpoint of 4%. If I look at the first quarter performance, it's right where I would expect it to be at about 1% price, 2% share and about 3% market growth is what we're seeing. We expect that market growth to be around that level. So I still position it for now around the midpoint of that 4%, but that's the range we're suggesting is 1% to 8% for industrial.

Your next question comes from the line of Bobby Brooks with Northland Capital Markets.

Now that you've had a couple under the hood for a little longer than 3 months, I'd be curious to hear what are the most compelling growth opportunities you see that are directly arriving from your ownership and then taking the opportunities on the cost of manufacturing side?

Great. Thanks, Bobby. So let me just give some -- an outline of how I'm seeing the opportunity of Koch Filter and then I'll ask Jack to talk through the integration activity and the supply chain costs. So look, firstly, as I said, we're really happy with the first quarter performance and -- when you do due diligence of an acquisition, obviously, we were very thorough in our due diligence, but you then get to work out exactly what is under -- as you described it. And here's what I would say is the opportunity. This was really a decent market step for us. and about expanding into new markets. And we really want to support fully the Koch Filter business to do what they do well. They have a very clear plan to continue to expand this year in this 2% rate customers. They have a strong favorable market condition, and we expect continued growth at a higher rate than our Power Solutions business into the future. In terms of where strategically I want to direct the opportunities of the team, it really is around products, customer and channels to higher growth end markets. and that includes data centers and health care, but it's also a very strong and robust set of opportunities we have across the broader industrial and commercial HVAC. So that's how I would describe the growth strategy, very pleased with how we started. And I'll ask Jack to comment on how we see the opportunities from a cost and synergy perspective.

Thanks, Steph and thanks, Bobby for the question. So first of all, I would just echo Steph's comments, we continue to be very excited about the acquisition of Koch Filter. I'm really pleased to see a strong cultural fit between the 2 organizations, which really makes the collaboration all that more possible. First quarter performance also demonstrates the margin accretion that the business can deliver to our overall portfolio and overall potential for the business. I'll start first on integration. We've made significant progress on the integration activities. Fortunately, we gained a lot of experience through our separation [indiscernible], and that has really served us well, I would say, as we know integrate this business and they go through their own separation from the prior parent. We've completed about half of the TSAs and are on track to complete the integration by early in the third quarter. As I shift then to synergies, it's been really great to see the teams come together, share learnings between the 2 organizations about not only the cost synergies that we outlined when we highlighted the $4 million of potential, things like supply chain and procurement savings, et cetera. but also other potential growth areas that Steph has alluded to, where we can use our media expertise or some of our product know-how or by Versa use their product know-how and products to complement failed upside into each other's end market. So excited about the future. As you know, early days just yet. We're -- [indiscernible] closed in January. So excited about the potential, and we'll certainly update you all that those opportunities come into portion.

Absolutely. Really appreciate the color. And then maybe for Jack. Just curious to talk about you guys any outlook on tariff recoveries or just how to be thinking of that playing out this year, if so?

Yes. Thanks, Bobby for the question. I would say, first, just to reiterate, our overall approach to tariffs remain unchanged. We will continue to pursue all of our available avenues to mitigate tariff exposure. importantly, minimize the impact on our customers and our overall objective remains unchanged to be price cost neutral. There has been, of course, some evolution from a tariff perspective. So let me just give some color to that. As you all know, effective in early April, the Section 232 steel and aluminum tariffs went into effect. I would just say that there's an immaterial number of our products that qualified under that category really because the -- most of our products are already qualified under the Section 232 tariffs around heavy-duty, medium-duty products. So not really an incremental change there for us. And because they qualify under the prior heavy-duty, medium-duty Section 232, the U.S. MCA exemption that we've been availing ourselves up, it's still valid and something we can take advantage. Overall, from a refund standpoint, as you all know, a refund mechanism has been established using the Cape system out of mid to late April of this year. Like other companies, we expect refund requests will be fulfilled once the mechanism is fully operational. These refunds, to our understanding, will be provided in phases, and we're following the normal steps with respect to filing our claims based upon their classification and the status of the entries. I would just say that the timing of those refunds and the corresponding treatment in the market in terms of how those ultimately flow through is still highly uncertain. But we'll certainly keep you updated as we gain more clarity there.

Your next question comes from the line of Andrew Obin with Bank of America. Andrew, I'm sorry, we are having a hard time hearing you.

Sorry about that. This is David Ridley-Lane on for Andrew Obin. Question on the potential impact for you from higher diesel prices as you're thinking about your commodity freight if you snap the line today and assume that diesel prices remained constant, what kind of drag or year-over-year headwind would you be facing?

Yes. So overall, I would say, David, again, from an input cost perspective, we're monitoring it -- that's one of many, I would say, dynamics that flow through not only directly to, I guess, us, but in terms of freight costs, et cetera, but also to end users in our space, right, who are navigating higher input costs and a challenging freight dynamic overall. Right now, in terms of the impact of those costs, again, as Steph said, we're more in the monitor phase. and would expect to react to those in terms of pricing or other supply chain maneuvering to offset. So our guide, as stated, really is in more of a watch-and-see mode on those just now, and we'll continue to update that as we move through the year.

Got it. And the other question I had just real quickly was on the aftermarket performance this quarter. I know you quantified the Middle East headwind. So that was a point overall. You also mentioned some destocking in LatAm and Southeast Asia. I just want to better understand, was this a surprisingly light quarter for aftermarket and any thoughts you have on reasons why or what you've seen maybe in April? Was there a little bit of recovery.

Yes. Thanks, David. Look, I think the first quarter is always a little challenging for us. There are some dynamics between fourth quarter and first quarter, and we see this in North America a little bit. If you look at our published results of our customers, you see this reflected as well. But where there is some stocking up at the end of fourth quarter, and then you see some timing impacts of that into the first quarter. So I think there is some impact there in the first quarter. We do see improved volume performance throughout the year. Second quarter is -- in aftermarket, second quarter is the strongest quarter for us. And then obviously, we see the tailwinds on the first fit side in the second half. So I believe that gives you some additional insight.

And we have no further questions in our queue at this time. I'd now like to turn the conference back over to Todd Chirillo for closing comments.

Thank you, Christa. That concludes our final conference for today. Thank you for participating and for your continued interest. Have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.