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

Hello everyone, thank you for joining us and welcome to Atmus Filtration Technologies Second Quarter 2026 Earnings Call. Today's prepared remarks, we will host ag question-and-answer session. [Operator Instructions]. I will now hand the conference over to Todd Chirillo, Executive Director of Investor Relations. Please go ahead, Todd.

Thank you, Percy. Good morning, everyone, and welcome to the Atmos Filtration Technologies Second 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 pages available on our website at atmus.com. Now I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. Today, I will review our second 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 am pleased to share that we achieved record sales in the second quarter and delivered strong results among our key metrics, including adjusted EBITDA, free cash flow and EPS. I want to thank our global team for their dedication to our customers and their efforts in delivering these impressive results. Now let me provide you an update on the integration of [indiscernible] our first Industrial Filtration acquisition, which we closed earlier this year. Our team has made tremendous progress, and we have exited more than 95% of the transition services agreement. We expect all remaining integration activities to be completed during the third quarter. With the integration nearly complete, we are turning our attention to growth initiatives in our Industrial Solutions segment. We continue to see value creation opportunities from Cook filter's deep industry experience, combined with our filtration capabilities and global footprint, which will provide ongoing benefits for all stakeholders. Let's now turn to an update on our capital allocation strategy. Our strong cash generation provides us with balance sheet flexibility for both growing the business and returning capital to shareholders. With this balanced approach, we expect share repurchases to be $20 million to $14 million in 2026, aligned with our previous guide. Looking forward, we intend to allocate surplus cash towards paying down gross debt. This will position us for investing in future growth opportunities. 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. We are leaders in filtration science with our latest generation NeuroNet and 3 filtration media and advanced testing capabilities strategically located around the world. This allows us to expand our first-fit customer reach across a broad range of applications and provide advanced filtration solutions for OEM. Our second pillar is focused on accelerating profitable growth in the aftermarket. Our global aftermarket consists of thousands of customers across many applications. We have dedicated teams located where our customers need us. We have developed a robust pipeline of opportunities and are working every day to bring our industry-leading fleet guard and cook filter products to current and new customers. Our third pillar is focused on transforming our supply chain. We have launched lean the Atmus Way, our lean-based production system. The program includes implementation of standardized management systems and lean operating practices, which improves productivity and support sustainable margin expansion. I want to recognize our team in Mexico for becoming the first Atmus site to achieve certification in Lean, the Atmos way. In addition, our focus on relentless improvement has allowed us to continue raising our delivery and on-shelf availability metrics to all-time highs through the Atmus controlled distribution network. We have the right products for our customers when and where they need us. Our fourth pillar is to expand into industrial filtration markets. Following the acquisition of Cook filter, we continue to review a robust pipeline of opportunities with a focus on industrial air to build a platform of scale by leveraging Cork filter and creating value through targeted bolt-on acquisitions. While our primary focus is Industrial Air, we 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. We are focused on delivering long-term shareholder value. through the disciplined development and execution of industrial filtration opportunities. Now let's discuss our second quarter financial results. Sales were a record $528 million compared to $454 million during the same period last year, an increase of 16.4% and driven by the acquisition of Cook filter and strong performance in Power Solutions. Adjusted EBITDA was $109 million or 20.7% and compared to $95 million or 21% last year. Adjusted earnings per share was $0.82 in the second quarter of 2026, and adjusted free cash flow was $67 million. Also during the second quarter, we returned $18 million of cash to shareholders through share buybacks and dividends. Now let's turn to our outlook for the Power Solutions segment. In the aftermarket, we are starting to see signs of health in the overall freight market, including higher spot rates and increasing optimism for improved freight activity. However, we have yet to see a significant inflection and therefore, continue to expect the market to be relatively flat year-over-year. In our first bit market, the U.S. EPA has provided the industry with some regulatory clarity surrounding the implementation of 2027 emission standards. The agency has proposed allowing current engines to be sold into 2027 with a nonconformance penalty. While this is expected to ease some pre-buy pressure, Customers have indicated a stronger second half driven by improved market conditions and a cyclical recovery. We are already seeing the benefits of this cyclical recovery in our 2Q results and have good visibility through the end of the year. We also expect continued market share gains in both aftermarket and first bit through our multichannel distribution strategy, improved on-shelf availability and winning with new and existing customers. For Power Solutions, overall, we expect volume growth in a range of approximately flat to 2%. And inclusive of global markets and share gains. Additionally, pricing is expected to add approximately 1.5% and foreign exchange is expected to be a tailwind of approximately 2%. In total, we expect Power Solutions revenue to be in a range of $1.82 billion to $1.865 billion, which represents growth of approximately 4.5% at the midpoint. In our Industrial Solutions segment, we expect favorable market conditions and strong performance to continue with total revenue to be in a range of $155 million to $165 million. Taken together, we expect total company revenue to be in a range of $1.975 billion to $2.03 billion, an increase of approximately 13.5% at the midpoint, we are narrowing our full year adjusted EBITDA guidance and now expect to be in a range of 19.75% to 2.25%. Lastly, adjusted EPS is expected to be in a range of $2.85 to $3. In summary, our team continues to successfully execute our 4-pillar growth strategy and provide the protection our customers need and value most. I want to thank all Atmusonian for their strong performance in the first half. I remain confident in the ability of our team to continue to deliver for all our stakeholders. Now I will turn the call over to Jack.

Thank you, Steph, and good morning, everyone. I also want to recognize our global team for delivering another quarter of strong financial performance, all while successfully navigating challenging market conditions. Sales in the second quarter were a record $528 million compared to $454 million during the same period last year, an increase of 16.4%. Power Solutions delivered sales of $486 million compared to $454 million in the prior year. an increase of 7%. The increase was primarily due to higher pricing of 3% higher volumes of 2% and favorable foreign exchange of 2%. We Industrial Solutions sales were $42 million, resulting from the acquisition of Cook filter. Gross margin for the second quarter was $154 million or 29.2% and compared to $131 million or 28.9% in the second quarter of 2025. The increase was primarily due to favorable pricing, incremental margin from the acquisition of Cook filter favorable foreign exchange, higher volumes and the cessation of onetime separation costs. This was partially offset by higher materials and manufacturing costs. Selling, administrative and research expenses for the second quarter were $62 million compared to $57 million in the prior year. The increase was primarily due to people-related expenses and information technology consulting. Joint venture income was $8 million in the second quarter, flat compared to prior year. Strong performance in China offset weaker markets in India, which has been impacted by the Middle East conflict. Other income expense was unfavorable by $1 million compared to favorable by $4 million in the second quarter of 2025. The increase in expense was primarily due to foreign exchange losses and a nonoperating gain that did not repeat. Excluded from the adjusted results are onetime costs related to the integration of Cook filter, which for the full year is expected to be in the range of $3 million to $6 million. We also exclude intangible asset amortization resulting from the Cook filter acquisition, which is expected to be in the range of $11 million to $13 million for 2016. The Total enterprise adjusted EBITDA in the second quarter was $109 million or 20.7% compared to $95 million or 21% in the prior period. Segment adjusted EBITDA for the Power Solutions was $101 million or 20.8% compared to $95 million or 21% last year. Industrial Solutions segment adjusted EBITDA was $8 million or 18.9%. Adjusted earnings per share was $0.82 compared to $0.75 last year. Adjusted free cash flow was $67 million this quarter compared to $36 million in the prior year. Now let's turn to our capital deployment strategy. The combination of strong cash flow and continued robust adjusted EBITDA performance has resulted in an estimated net debt to adjusted EBITDA ratio of 1.9x for the trailing 12 months ended June 30. We also invested $13 million in capital expenditures for continued growth, and we returned $18 million to shareholders consisting of $13 million in share repurchases and $5 million of dividends. As Steph highlighted, we will continue to strategically deploy capital through investment in growth and paying down debt to provide balance sheet flexibility. Our cash flow allows us to take this balanced approach for both growth opportunities and returning capital to shareholders. In closing, I want to thank and applaud all of our teams around the world for all of your hard work and dedication in delivering a strong first half of 2026. Now we will take your questions.

[Operator Instructions]. The first question comes from the line of Quinn Fredrickson with Baird.

Could you guys discuss maybe how aftermarket and first-fit revenues performed in the quarter and also give us an estimate for how much share gains contributed in Power Solutions and whether any change to the year for your assumption there?

Thanks, Quinn. Great question. And let me start with, I guess, as I was saying in my prepared remarks, remarks. Our team delivered a really strong quarter. In the Power Solutions segment, overall, record revenues of 16.4% on the same period last year. And in the Power Solutions segment, delivered revenue growth of 7.1%. And as Jack highlighted, that really was broken down between 3% price, 2% volume and 2% FX. So if I take that volume growth year-on-year and break that down as requested to aftermarket and first performance. What we saw in aftermarket, I would say, is still flattish conditions. So if I give you a view of aftermarket around the world, a reminder that aftermarket is 85% of our revenues within the Power Solutions segment. And within that, about 50% of those revenues in the U.S. And so we are seeing stronger sentiment in the U.S. and in Mexico. But as I look around the rest of the world from an aftermarket perspective, I'd say, Europe and the Middle East and Asia Pacific outside China, we're still seeing subdued conditions. And so that balance really gives us a flat aftermarket outlook and also slight aftermarket through the quarter. We continue to deliver strong gains with our customers, and I continue to see us within the range of 1% to 2% within -- for our share gains outlook. If I turn to this bit market, we did start to see the cyclical recovery in first debt markets that we have been anticipating and was previously incorporated in our guidance. We started to see that uptick in our business in the second quarter. And we do -- just as education to you, we do see that uptick in our business ahead of the vehicle OEMs. The APT data that we often refer to with vehicle build is about 4 to 6 weeks. We're about 4 to 6 weeks ahead of that in terms of the cycle -- of the supply chain cycle. And so we started to see the cyclical upturn in first bit markets here at the end of the second quarter. I would say it was a balanced performance in first fit between market improvement and share gains through our ongoing strategy of winning wines.

Thanks, Steph. Jack, could we get an updated view on price cost expectations for the year? And I think you said maybe 2% price. Is that the right way to think about for the full year? So it sounds like you would have taken some pricing actions in July. Could you just clarify on that?

Yes, absolutely. So -- from a pricing perspective, obviously, we continuously assess our pricing and make strategic adjustments where necessary, both in terms of gross pricing as well as rebates and rebates can drive some of the timing nuances. We saw good price realization through the first half, just over 2%. Our full guide is 1.5% for the full year, and that reflects the mix of carryover from prior year as well as some new pricing and obviously anticipate a moderating price realization environment as I think about the year-over-year comparisons in the third quarter and the fourth quarter. As I think about that comparison as well, obviously, there's some rollback of certain tariff pricing that occurred last year that we've continued to implement or remove as policies change. As always, we'll take a balanced approach to pricing and share gains and are certainly doing that over the balance of the year. As I think about some of the cost dynamics in the second half, we continue to see some elevation in our cost base associated with some commodities and a lot of that is driven by the ongoing conflict in the Middle East. That's probably the biggest kind of headwind that's embedded in our second half. And as you look at the first half, year-to-date margin compared to the second half is one of the contributors leading to the implied softening second half compared to first half. The other dynamic I would just call out as you think about that margin walk is not only are we experiencing some commodity price increases associated with the conflict in the Middle East. That's also contributing to weaker overall conditions in India, and therefore, leading to a lower joint venture income outlook than we originally anticipated at the full year. So I think the combination of those hopefully helps you bridge kind of the first half, second half dynamic can get a better sense of price cost dynamics as we move through the year.

The next question comes from the line of David Ridley-Lane with Bank of America.

Thank you very much. On for Andrew Obin. Just really quickly, on the Middle East since you mentioned that, did you catch up on any of the lost sales from first quarter? And what's embedded in the guide that you catch up or don't catch up in the second half?

Thanks, David. Good morning. So we didn't fully catch up the Middle East in the second quarter. The conflict is ongoing, as I think we talked about in our first quarter earnings we were uncertain as to how the conflict would play out. So we're still seeing underperformance in our expectations of our Middle East business, driven really by market conditions is how I would describe it. We are anticipating it recovering into the second half. And it is a smaller proportion of our business, as we have shared before, about 2% of overall revenues. We are seeing, as I talked about, subdued conditions through Europe that may also be related to the complete and as Jack referred to, we have seen challenges in our India business through the joint venture line in our P&L that is also related to the Middle East conflict.

Got it. And then just on that point on pricing, First, can you confirm there's no tariff refunds in second quarter results? And then how much of your -- I know it's hard to parse this, but when you lower your prices just mechanically because of the tariffs coming off? How much of a drag is that in the second half ballpark? Because I realize there's still a lot of moving parts around tariffs.

Jeff, do you want to take that one?

Yes, absolutely. So let me first start with the tariff refund question, David, and then I can talk a little bit about what the implied pricing in the second half is -- as you know, it's a little bit hard to parse out, but I'll do my best. From a tariff refund perspective, as of the end of the second quarter of 2026, we've received an immaterial amount of tariff refund. Of course, we've applied for all the refunds that we feel entitled to and we'll continue to evaluate the potential treatment of those refunds as and when we receive them, including whether or not a portion of those should be allocated to expenses that we've already incurred and then what is left over in terms of customer refunds. Overall, I would say we continue to expect the net impact on EBITDA from a tariff perspective to be substantially neutral. As you note, the tariff environment will continue to evolve with ongoing changes in policy. And I would just say that our strategy to address that remains unchanged. Of course, we'll continue to avail ourselves of any exemptions as to protect our customers from the impact of tariffs, continue to evaluate our supply chain and optimize wherever possible. And then finally, obviously, looking to pass that on the impact of tariffs through pricing. Overall, continue to be guided by cost-neutral principle as it relates to tariffs. From a pricing perspective, I think I'll just kind of talk about it in totality because it's really hard to parse out, given all the moving pieces last year and particularly. But if you look at the full year guide and then year-to-date price realization, you can kind of see price realization, as I said, moderating in the third and the fourth quarter compared to those same periods in the prior year, kind of between -- just over 0.5%, I would say.

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

So industrial solution, run rate that orderly sale level versus the Cokes 2020 flows when you acquired it to a nice [indiscernible] question there is any seasonality that would make this an over way of looking at it or qualitatively, anything that drove improve sequentially?

Good morning, Bobby. I will try my best to make out your question. I must say on my end, it's breaking up a little. So I'll try to summarize. I think what your question is, is related to Industrial Solutions revenues, how is that performing? And is there any seasonality in the for that revenue. So I'll try to answer that, and I'm not sure what's driving the breaking up at your end. So Industrial Solutions is performing right where we would expect it to. I think broadly speaking, we've talked about price for Industrial Solutions, 1% to 2% market share. And really, overall, the market impact for Industrial Solutions being closely linked to GDP or around that sort of 3% level. So overall, the guides we're still giving is 1% to 8% for industrial revenues. We think it's pretty steady over the quarters. So I don't -- I wouldn't call out any specific cyclicality in the quarters and we're confident and really pleased with the ongoing performance relative to our original business case assumptions.