Atmus Filtration Technologies Third Quarter 2026 Earnings Call - ATMUS FILTRATION TECHNOLOGIES INC

Financial Performance:

• Q3 2026 sales reached $510 million, a 14% year-over-year increase from $448 million, driven by the Cook Filter acquisition and 3% organic growth in Power Solutions.
• Adjusted EBITDA was $104 million (20.4% margin), up from $92 million (20.0% margin) in the prior year period.
• Adjusted earnings per share (EPS) were $0.77, compared to $0.69 in the prior year.
• Adjusted free cash flow generated in Q3 was $88 million, with year-to-date adjusted free cash flow totaling $189 million, an increase of $61 million compared to the prior year.
• Gross margin expanded to 30.3% from 28.9%, attributed to Cook Filter's incremental margin, higher volumes, and favorable manufacturing costs.
• Selling, general, and administrative expenses rose to $64 million from $56 million due to acquisition costs and increased incentive compensation.
• Net debt to adjusted EBITDA ratio stands at 1.7x as of September 30, 2026.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to a range of $2.01 billion to $2.035 billion, representing approximately 15% growth at the midpoint over 2025.
• Power Solutions segment guidance raised to $1.85 billion–$1.87 billion, with volume growth expected to be 2% to 3%.
• Industrial Pollution segment guidance raised to $160 million–$165 million.
• Maintained full-year adjusted EBITDA margin guidance at 19.75% to 20.25%.
• Increased adjusted EPS guidance to a range of $2.90 to $3.05.
• Expects Q4 to reflect seasonal margin pressure due to lower manufacturing absorption, with an implied Q4 margin of approximately 19.1%.
• Forecasts strong First Fit momentum continuing into the first half of 2027, offsetting potential pressure on diesel pickup truck demand.

Business Segments and Product Lines:

• Power Solutions segment delivered $468 million in sales (5% increase), driven by volume growth of 5%, pricing of 1%, and favorable foreign exchange.
• Industrial Solutions segment generated $42 million in sales following the Cook Filter acquisition.
• Fleetguard brand ranked #1 preferred brand in the US and Canada for fuel, air, and lube filters in a recent independent survey.
• Completed integration of Cook Filter; opened a new HEPA filter clean room and test facility at the Louisville manufacturing site.
• Announced plans to open a new Cook Filter facility in Florida next year to serve the HVAC market.
• Strategy focuses on four pillars: growing share in First Fit, accelerating profitable aftermarket growth, transforming the supply chain, and expanding into industrial filtration.

Market and Competitive Landscape:

• US First Fit heavy and medium-duty markets are experiencing a strong cyclical recovery; aftermarket remains relatively flat in North America.
• Global markets face mixed conditions, with challenges in Europe and India due to the Middle East conflict and rising input costs, while Latin America shows stronger growth.
• Fleetguard maintains a market-leading position, with customers recognizing its advanced filtration capabilities.
• Company is leveraging strong distribution and on-shelf availability to gain market share against competitors.

Risks and Challenges:

• Tariff refunds totaling $9 million were recognized in revenue but will be passed through to customers, impacting top-line growth; no additional material refunds expected.
• Rising input costs and inflationary pressures are being closely monitored, though the company maintains a price-cost neutral stance on tariffs and expects to be price-cost positive overall.
• Uncertainty surrounding 2027 EPA regulations remains, with final outcomes expected in late 2026, impacting pre-buy strategies for engine manufacturers.
• Potential supply constraints in the top tier of First Fit demand are being managed; the company reports no internal supply constraints.
• Geopolitical risks in the Middle East are impacting profitability in India and influencing markets in Europe.

Management Commentary and Tone:

• Management expressed high confidence in the business's momentum, citing disciplined execution of the four-pillar growth strategy.
• Strong emphasis on capital allocation flexibility, prioritizing organic/inorganic growth investments while maintaining investment-grade debt levels.
• Tone was optimistic regarding the cyclical recovery in US First Fit markets and the successful integration of Cook Filter.
• CEO Steph Disher highlighted the "price-cost positive" stance and strong cash generation as key enablers for future growth.

Analyst Questions and Answers:

• First Fit Demand: Confirmed strong demand continuing through Q4 2026 and into H1 2027; managing uncertainty around 2027 EPA regulations.
• Capital Allocation: Free cash flow will primarily fund share repurchases ($300M new authorization approved) after maintaining leverage targets; M&A remains a priority but repurchases will increase if deal pipeline slows.
• Pricing vs. Costs: Net pricing expected at ~1% for the year; company is price-cost positive despite inflationary input cost increases, utilizing both price actions and supply chain efficiencies.
• Q4 Margins: Lower Q4 margins expected due to seasonal volume absorption trends and rising input costs, not structural issues.
• New Investments: Florida facility is in approval stages; HEPA clean room investment is expected to yield higher-margin products targeting the fast-growing healthcare sector.

Other Key Points:

• Returned $25 million to shareholders in Q3 via $20 million in share repurchases and $5 million in dividends.
• Repaid $100 million of debt since the last earnings call, including $50 million in Q3 and $50 million in early October.
• Approved a new $300 million share repurchase program to replace the previous authorization.
• One-time integration costs for Cook Filter are estimated at ~$3 million for the full year; intangible asset amortization expected at ~$12 million.
• The company remains opportunistic on M&A, focusing on industrial air filtration but also evaluating industrial water and liquid filtration assets.