Atmus Filtration Technologies Inc. ($ATMU)

Good morning. Let me just go up. So kicking off the third day of the BofA Industrials, Transportation, Airlines Key Leaders Conference. I'm Andrew Obin, BofA's U.S. multi-industrial analyst. With me here is Atmus Filtration CFO, Jack Kienzler. Jack, thank you for being here. Just a few stats on Atmus. Since its spin from Cummins in 2023, 42% annualized return, now $5 billion market cap and a relatively new member of the S&P 600 Index. Thanks so much for being here.

Thank you, Andrew. Good morning, and thank you for having us, and thank you, everybody, for your interest.

So maybe we can start with aftermarket. So aftermarket drives 84% of Atmus' revenue. In the past, you've cited the Cass Shipment Index. That improved to down 6% year-over-year in 1Q versus down 8% in 4Q '25. So improving, but still negative. So how have on-highway volumes trended in January, February, March and April?

Yes, it's a great question. And what index you look at is something that we've continued to try to triangulate on, I would say. The Cass rate index certainly is directional, but also misses some of the private fleet activity, which obviously has grown a fair bit in recent times. So if I think about how the first quarter went to start, I would call the market trends from a volume perspective is flattish. And that is reflective of our full year guide as well from a market standpoint in the aftermarket. Certainly are hopeful for a positive inflection, but haven't really seen the indicators of that just yet. We look at a large number of things, certainly the cash rate index, but also GDP trends, spot rates, et cetera, some of which can show signs of some recovery, but not necessarily volume recovery, which is really what pulses our business. So keeping a keen eye on that, but haven't yet seen the positive signs of inflection. And so that implies our full year 2026 guide for flat.

Of course. And any sequential lift in April, May, the way you look at it?

No, not just yet. So kind of the same trend as what we saw in the first quarter.

So maybe we can talk about aftermarket trends across on-highway, mining, construction and ag, maybe just sort of dig in each vertical a little bit more?

Yes, absolutely. So if I go around the world, perhaps maybe I'll start first with on-highway, focusing in on the aftermarket. The broad headline theme is that it's fairly similar to what I just described, relatively tepid markets. There are some puts and takes around the world, but most, I would say, even out for a relatively flattish market dynamic here in 2026. We have had some -- from an off-highway perspective, pockets of growth. Certainly, the Indian market continues to be a relatively high-growth market relative to many other regions of the world. And we've had a few spots of positive sentiment from an aftermarket standpoint, Latin America, for example, with some of the off-highway markets. But broadly speaking, when you wash it all out, flattish from a market perspective.

And ag is still dead?

Ag is -- yes, Ag, I would say, is still pretty down really whichever region you go to.

Got you. You've had a 10% CAGR for LatAm over the past 4 years. What have you been doing differently in the region?

Yes. So I think Latin America is a great example of our aftermarket strategy in action. And so if you think about our growth pillars, the second is to accelerate profitable growth in the aftermarket. If you think about the Latin American region, historically, we largely went to market through the Cummins distribution channel, specific to Brazil, but also many of the other regions in Latin America. And so what we've been trying to do is, of course, still cater to that market, it's still a very important customer for us. But in the aftermarket, what we want to do is be on the shelf whenever a service event is occurring or wherever the parts for that service event are being procured. And so what we've tried to focus on is the rest of the market, independent distributors, for example, and increasing our focus there that can come via investment in sales resources to get out in front of those customers. It can also come from lifting our delivery capabilities and making sure that as and when they do show an interest in placing an order, we're there to meet it and satisfy their needs. And so to give you an example, I was down there last year and went and met with a few independent distributors. They had a Fleetguard relationship. That's our product brand, obviously, in the commercial vehicle market, but they hadn't really focused on it mainly because we hadn't really focused on cultivating that relationship. We didn't have any real commercial schemes going on with them discounts, rebates, things of that nature and weren't calling on them extensively. And so just focusing on that relationship has allowed us to lift our presence in their portfolio. Typically, in these independent distributors, you see them stock multiple different brands. And so our goal is to increase our penetration or share of wallet with these different independent distributors. And we've seen that be highly successful, particularly in Latin America.

That's great. Thank you. Any one country that stands out?

Brazil is where our biggest presence is. That's our biggest market, certainly. But via Brazil, we're also able to get to some of the other large off-highway markets, things like Chile from a mining perspective, et cetera.

That makes perfect sense. And we're not going to be -- there was like 34 hours left. I think we're going to talk for 34 hours. But your on-shelf availability is now at all-time highs. What's the next lever to capture market share?

Yes. So that was definitely the first and one of our primary areas of focus, not only in our -- to bolster our growth in first-fit and aftermarket, but also as we were addressing our supply chain transformation 1.0 as we referred to it. Pleased with the progress there. It's not easy to lift your delivery statistics all while separating distribution centers at the same time and managing inventory to appropriate levels. And so I think the team did a fantastic job navigating through that dynamic. And now we feel really good about where our delivery levels are, certainly in the first-fit, but also in the aftermarket. And so now from there, how do we couple that capability with expanding our relationships. I just mentioned the examples in Latin America, where we're looking to cultivate new independent distributor relationships. And I think that same playbook can be applied elsewhere. Our presence is in the aftermarket, we have a very significant presence with the OE dealer network. That's a big strength of our business and one that we want to continue to focus on. But how do we supplement that to ensure that we're meeting the needs across the useful life of a vehicle and again, increase the Fleetguard presence in the aftermarket. So that's really where we're focused. And I think that the sales team, coupled with the supply chain team equipping the sales team is the unlock making that happen.

Excellent. So maybe sort of talking about first-fit. There is an upcoming change in EPA regulations that will make the '27 truck models more expensive. If that's going to happen, there's going to be a prebuy of the cheaper models here in '26. But how meaningful are new U.S. Class 8 truck sales for Atmus, right? Because I think the revenue mix is 14% first-fit, of which 50% are on-highway and 54% in the U.S. And if you just sort of multiply these percentages, you sort of get to mid-single digits. Like should we get excited about this? A, what's happening? B, should we get excited?

Yes. So let me maybe talk about the market dynamics first and then how it pulls through to our business. So as you noted, yes, the expectation is for 2027 emissions regulation to kick in. Everything that we understand through conversations with our important customers in that space is that the expectation is that, that will come in. I know there's been some discussion of specific engine programs that may get pushed out from Cummins specifically. But overall, that is our expectation. It is a bit odd to be at this point in 2026 and not have definitive insight into that, but that is our expectation is that the NOx regulations will come into play. That will lead to an increase in the truck price, albeit perhaps not as substantial as once thought, particularly around some of the warranty payer mix. So we are expecting -- and our guidance implies a strong second half recovery in our first-fit markets. And I would say that we have both positive sentiment reinforcing that from our OE customers, Cummins, PACCAR, et cetera. And we also see the order activity coming through to back that up. So we feel very good about that market trend. How much of that will be pre-buy versus buy? And then what is the ancillary impact in 2027? I think that can be a little bit hard to measure. I do think that perhaps certainly relative to expectations 12, 18 months ago, the prebuy will be less significant, which actually should be a good thing from a 2027 perspective and sort of smooth that out, if you will. So what does it mean for us? Your percentages are generally right. So the business is about, give or take, on every given year, 15% first-fit, 85% aftermarket and overall, 60% on-highway, 40% off-highway. I would say our first-fit is a bit more skewed towards the on-highway. So it would be a little bit more than that. So revenue-wise, certainly being an aftermarket-centric business when the aftermarket is pulsing up on a market trend that's quite a bit more favorable. But after -- the first fit, certainly, we'll see a pickup in revenue. We'll also see some benefits from a volume perspective in our manufacturing plants. While the product may seem on the outside the same, it's actually a fair bit different where in the first-fit, you've got housings, et cetera, the interface with the engine being manufactured. And so that tends to drive more standard hours in our manufacturing plants and can help improve our cost of sales per unit, if you will, as we move through the year. So we're excited about that trend. Certainly have been in a bit of a trough, I would say, in Q1 and starting to pull out of that. We'll have a top line benefit, but we'll also have a bit of a margin benefit as we think about just hours in the plant and getting the volume going.

And you have visibility because you know what production slots are with OEMs, right?

Yes. And then obviously, there's a lead time sort of between them procuring the filter for that first-fit product ahead of an engine manufacturing and then through to the trucks.

And how do you guys -- do you have an internal model for figuring out Class 8 demand? Do you rely on ACT? How does it work? Do you just talk -- do you rely on OEMs models?

I would say the best source for us is the OE discussions, their order activity via EDI through to us as well as just the ongoing discussions that we have with them. Certainly, we look at ACT data which is sort of a combination of all of that sentiment, but the direct conversations with these key customers is really...

What would you say the industry best guess for just directionally for Class 8 production next year?

'27?

Yes. Up, down, flat?

'27 versus '26, I think certainly, you should see some favorability. It's a little hard to tell exactly how much that would be. Q1 should be an easy comp, but then you've got the perhaps slowness out of the gate. So I think it somewhat depends on clarity on this emissions regulation, and we'll be watching that with a close eye.

And the economy, of course.

Yes, of course.

Maybe sort of other first-fit markets, maybe we can start with off-highway.

Yes. So I think somewhat similar dynamics to what you see in the aftermarket, which is relatively tepid outside of North American on-highway here. And so if you think about -- maybe I'll start just with a bit of the markets that we're exposed to. So from a first-fit perspective and an aftermarket in that off-highway slice of 40%, the majority of that would be construction and mining, driven by aftermarket activity in duty cycle, followed by markets like ag, power gen, et cetera. I would say that, again, similarly to the aftermarket, we see some pockets of growth and some back-weighted optimism for the end of '26. But all of that is somewhat dependent on what happens with the geopolitical dynamics and the relative macroeconomic impact that falls out of that. So outside of North America on-highway, I would say we don't have a robust first-fit outlook for 2026 embedded in our guide.

Right. And can you talk about maybe a little bit what do you see in power gen because it's sort of interesting dynamic, and it's just completely changing now.

Yes, absolutely. So we are a supplier into the power generation market. Obviously, Cummins is a very large player in that market, and we supply them filters for all of those different gen sets, et cetera. A lot of those, including what's going into the data centers are backup power in nature. And so inherently don't drive a lot of aftermarket activity, which is why the impact to our top line is relatively muted. Of course, we're excited to continue to partner with them and others in the space, but it just doesn't drive as much unless it moved into like a prime power type application, which we haven't seen just yet.

Right, right. Okay. And just if Cummins converts them into recip engine, it still has a filter, right?

Yes, yes. So some of...

Because you're seeing a lot of, I go to shows and you see these 17-liter engines converted in like 0.5 megawatt power. And actually, I think they are going to go become prime power units.

Yes, it's definitely a trend that we're watching. And I think it remains to be seen how much of a piece of the market that takes. Is it supplemental until we get more stability, more megawatt capacity, et cetera. And then ultimately, what is the fuel source that bolsters those? Is it diesel? Is it natural gas? Is it some other form of power. But yes, again, we look forward to partnering with all of our customers in the space.

But just too early to tell.

Yes, a little bit too early to tell.

Okay. Atmus has been clear from the spin, first-fit sales are lower margin. If you had lower aftermarket and higher first-fit, that's bad for margin, but that's not what you're guiding for '26. It's flat aftermarket sales and high first-fit. It's the exact same filter produced in the exact same factory and high volumes drive fixed cost absorption. Is the incremental margin on first-fit better than the average margin on aftermarket sales. Incremental on first-fit versus average...

Yes. So a lot to unpack there. I would say you're correct in that, generally speaking, aftermarket is higher margin than the first-fit. Really, what I would say is the benefit from a margin perspective as we move into the second half of the year is the activity in the plants and that fixed cost absorption that you're describing there. I wouldn't say necessarily that incremental margins are better on first-fit than aftermarket. I think if you look at -- if you zoom out and look at the overall guide, I think it's reflective of continuing to try to address the cost base, improve efficiencies and lever price through to the bottom line to lift the overall margin profile of the business. If you look over the past few years since we've been out post IPO, we've seen very significant margin expansion, all in a challenging market dynamic across our markets. And so I think that's reflective of the focus that we've brought to the table across all the different levers that we can exploit on margin. What we're trying to do now is think about how do we lift really that top line revenue algorithm. We want to, of course, continue to deliver strong incrementals. But does that kind of shift to a slower margin expansion and a higher top line growth. We need the markets to recover to help us pulse that revenue engine, but that's some of the debate that we're having.

Excellent. Maybe a little bit about first quarter. Just 2 quick questions on first quarter. Could you explain the $3 million EBITDA hit from the change in Indian labor laws in the quarter? Is it onetime? Does it mean higher costs going forward?

Yes. So certainly, a bit of a nuance there. So I would have you think about it as a change in essentially the social security retirement benefits that the Indian government implemented. And then all companies, not just unique to us, had to true up to reflect what that would have been, had it been in place over the past few years. So there's an element of it that is effectively onetime catch-up. And then reflected ongoing, there will be a higher accrual that the employer books, in this case, our joint venture to reflect that compensation scheme. So we, along with everybody else, booked that accrual. It hasn't been put in place just yet. So we're watching that. But that is what that is. And as you can imagine, the large majority of that $3 million then is that catch-up and then reflected in our ongoing outlook will be the run rate expense if you will.

Got you. So yes, higher costs going forward, but a relatively small number.

Correct. Yes.

And second, your commentary about pricing Atmus normally adjust prices in January and July. You're sticking to that timing, but haven't decided on the magnitude. Would you rather err on the side of raising price too much or too little?

Yes. So I guess just to -- so everybody is aware. So generally speaking, we have pushed price in the aftermarket, which is where the majority of our price occurs at the beginning and then at the middle of the year. And we'll continue to evaluate our input cost environment and continue to take action accordingly to protect our financials and continue to offset that input cost. I think the other balance that you're highlighting is just the balance between price and share. And I would say that we certainly err towards share as the #1 priority to continue to grow our installed base, partner with our customers and grow overall. And so I would not push price at the expense of share, but there's always a careful consideration between the 2, and we want to work with our customers to reflect the ongoing cost.

But the idea is just to capture price cost at least.

Yes. So certainly, our goal is to be price/cost neutral to positive, not price/cost negative. I do think the tariffs were a bit of a unique cost input that led to a more agile pricing environment via 30-day-ish price throughs. I think the ongoing input cost environment that we're facing here as a result of rising oil prices, et cetera, the pricing actions from that would likely look a bit more like a normal situation versus the tariff situation.

So maybe just shifting to manufacturing. Atmus reduced recordable injuries by 35% last year for a recordable incident rate of [ 0.6 ] per 100 employees. That's over 20% lower than Donaldson. So how are you instilling a safety-first culture on the factory floor?

Yes, it's a great question, and I appreciate you...

And the reason because it also obviously ties in into lean and everything, I think.

Yes, it's a great question. I appreciate you raising it. It's -- we look at safety as our #1 priority. It's not an initiative. It's really embedded in our values and our culture. And it's been the biggest area, I would say, of focus for us and will continue to be. We want to ensure that our workplace is as safe as possible and that we would all feel comfortable with our own family members, our children coming to work in at an Atmus location. How have we done it? I would say it's really about addressing the culture from the top down and using a wide array of tools and investing in tools to bring it to reality. So we, as the leadership team, put a big focus on this. Anytime we go to one of our sites, we do a safety summit, as we call it, where we engage with the workforce, get direct feedback on things that are on their mind, visit areas of past safety instances to make sure that we're learning from those and implementing change, installing machine guarding, so on and so forth. And then making sure that, again, it's instilled in everyone's work plan, not just those in a manufacturing environment, but everyone across the Atmus organization. So safety is never something that you can say is done. And so it will continue to be a big focus for us. And again, it's -- safety of our people is our #1 priority.

No, when I got my Lean certificate at University of Tennessee, it's like they're hammering you that you start with safety because you can't have flow like through the line without safety. And I think that's where we like to focus on. It's just a great indicator where the manufacturing culture is going. So thank you.

Absolutely.

So last year, revenue per employee was $490,000 at Atmus versus $246,000 for Donaldson. So can you help us explain like how do you drive 2x the productivity versus a close peer?

Yes. It's -- honestly, that's not a metric that we look at in a meaningful way. But I do think it's worth just revisiting our overall growth strategy, which has been a big focus for us, obviously, as we've been an independent company post split-off from Cummins. So it all starts with the first-fit, trying to grow our installed base. This is a multipronged strategy. So we want to focus, first and foremost, on our existing customers, winning with the winners as we call it. So how do we continue to delight and expand our share of wallet and our presence with our important customers, the likes of PACCAR, Cummins, Volvo, et cetera. And as they win in the market, we want to help enable them to win. So that's the first piece. Secondly is now how do we go after additional first-fit customers that perhaps we weren't able to focus on historically. That could have been driven by competitive dynamics with our former parent Cummins or it could be driven by just, frankly, an under focus on some of these smaller OE opportunities that we have the product line to address via our engine displacement range that we can service, but just hadn't focused on in terms of engineering focus, sales resource, et cetera, historically. First-fit, in our view, is really important to kind of pulse the flywheel, grow the installed base and grow the addressable market in the aftermarket. The second is as I mentioned earlier, accelerating profitable growth in the aftermarket. This is not only lifting delivery capabilities, expanding independent distributors, increasing the use of different tools, digital tools, et cetera, that the sales force can use to help identify opportunities when they go into one of our dealers, highlight cross-sell opportunities, highlight new products that can, again, help our customers succeed. The third is the supply chain transformation. So delivery is a component of that. Automation is a component of that. And just, I would say, really sound procurement practices to get more suppliers under contract, utilize those contractual mechanisms to continue to expand margins, et cetera. And then the fourth, of course, is the expansion into industrial markets. This has been a big accomplishment of the business with the closure of the Koch Filter acquisition here in January. We're really pleased with how that's going so far and the potential that, that has to, again, just accelerate our growth engine moving forward. So I think that's just a combination of the factors. We don't really look at it on a headcount basis, but more of a cohesive strategy that we want to continue to do.

So maybe another way of asking the question. So how much opportunity is there to just standardize best practices across your factories? Like what's the gross margin difference between, say, the best and the worst plants?

Yes. It's a little bit of a tough comparison because the makeup in the different plants has a different dynamic, right? So what's produced in our manufacturing location in China, both in terms of first-fit versus aftermarket, the products they're in, et cetera, isn't quite the same as if you went to Neillsville, Wisconsin; Cookeville, Tennessee; San Luis Potos , Mexico. So overall, I would say that our big focus as we now move to the next stage of supply chain transformation is to certainly continue some of the same. So some of those procurement dynamics we want to continue to address, but also looking at efficiency gains from a conversion cost perspective, how do we get more efficient in terms of labor optimization, how do we address overhead costs and try to make step changes in terms of fixed cost reductions. All of that's a big focus for the organization moving forward. You may have seen we just announced the hire of our new supply chain leader, Kevin Carpenter. And so really excited about what he can bring to the organization and supplement the great team that we already have in place. We've been on, as I mentioned, a remarkable margin expansion journey, frankly, and supply chain transformation has been a big part of that. And so now really focusing on what the next chapter of that will look like.

And maybe just finishing up, 2 years ago, you put your first fully automated line in your factory in France. How has the project return been? And have you expanded this to other factories?

Yes. So first of all, it's -- so we call it a green cartridge line. And what that means is effectively partnering with our European OEMs, given it's in France to meet their needs in terms of increasing the recyclability of the reusable part, the disposable part of a filtration spec, right? And so how do we reduce the amount that needs to be changed, if you will, in terms of the element within the filter housing and make sure that, that is recyclable, if you will. So that kind of depends on which market you're looking at in terms of customer demand. We have looked to expand that capability into some other markets, including Brazil, which tends to follow certainly in terms of OE market share, the European market. Obviously, looking at the labor cost dynamic, the notion of a fully automated line has different return metrics depending on where you are in the world. But we're really pleased with how that went. It was the first of its kind for us. And so really synonymous with our ambitions to be an ongoing learning organization. How do we learn from that deployment? Certainly, there were some things that didn't go as planned. But again, we were able to address those relatively quickly and get it on track. So we're pleased with where it is. We'll continue to evaluate the deployment of similar types of technologies going forward.

So maybe to talk about Koch Filter. Let's sort of talk about your first industrial filtration acquisition. For background, $450 million purchase price, 14x adjusted EBITDA margins that are modestly above corporate average. So your '26 revenue guidance for this business is 1% to 8% year-over-year, midpoint 4%. But data centers are 8% of revenue and power gen is 8% of revenue, and those are pretty fast-growing market. Can you just walk us through.

Yes, absolutely. So first of all, we're really excited about the acquisition. Again, I think it really met all of our strategic objectives and our financial objectives. And so -- and maybe most importantly, the culture of the 2 organizations is quite harmonious. And really, that just opens the door up for a seamless integration. We're more than halfway through that as well as hopefully, in the future, ongoing synergy realization and the identification of opportunities beyond what we quantified at the outset of the deal. In terms of the revenue end market makeup, so they serve a broad array of end markets. So commercial HVAC, industrial HVAC, data centers, power generation, health care, as you note. So the majority of the business, about 60% would be that industrial, commercial HVAC. That tends to grow at kind of GDP type levels. And then as you noted, some faster growth markets, data center, certainly, health care and power generation are roughly 7%, 8% each. And so what we're really trying to do is continue to grow in those core markets. A lot of times, as you're expanding in those markets and establishing new distributor relationships, you need to have that level of product to have an in, if you will. And then that allows you to leverage those relationships to sell through those higher efficiency filtration products that service those fast-growing markets. And so over time, how do we shift the revenue profile and grow the exposure into those end markets that will obviously allow us to lift the overall revenue algorithm of the Industrial Solutions segment and ultimately Atmus.

Got you. But just from a top-down perspective, 4% seems fairly achievable.

Yes, we feel good about the guide. I think at the midpoint, right, 4%, which is an overall revenue outlook. And so yes, excited about, again, what that business is...

So you gave $4 million in synergy target by year-end '28, but these guys buy media from someone else today. Atmus, of course, one of the largest filtration media manufacturers in the world. How meaningful is the cost savings from in-sourcing filtration media?

Yes. So it's one of the many areas that we're looking at from a synergy realization standpoint. Our filtration capabilities, I would say, are most applicable to some of their higher efficiency filtration needs, less so on the pleated panel filters at the lower end. And so overall, as you noted, $4 million of synergy targets. We remain committed to that from a run rate perspective and are, of course, looking to identify other opportunities to complement that. I think from a media perspective, the teams are meeting on a regular basis and beginning to identify those opportunities where we can bring our media know-how and our products specifically in, and that will contribute to that $4 million savings.

So maybe last question. You will be off all the transition service agreements by the end of the third quarter. Starting in the fourth quarter, could we see a step-up in Koch Filter's margins like 100 bps?

So the financial profile that we've highlighted for you all, including our first quarter results, include TSA charges, which are frankly, representative of what we think those stand-alone charges are. And so I don't think about the reduction of the TSA as necessarily upside moving forward. It's more indicative of the financial profile that we'll have as we go forward. So margin expansion, of course, will be a goal and a priority for us, but that will come through the synergy realization and other things like that.

Excellent. This is great, Jack. Thanks so much.

Thanks, Andrew. Appreciate it. And thank you, everybody, for your interest. Have a wonderful day.