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

Hello, everyone. Thank you for joining us, and welcome to the Atmos Filtration Technologies Third Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Todd Shrillo, Executive Director of Investor Relations. Please go ahead. Thank you, Piercy. Good morning, everyone, and welcome to the Atmos Filtration Technologies Third Quarter 2026 Earnings Call. On the call today, we have Steph Disher, Chief Executive Officer, and Jack Kinsler, 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 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 web site at ATNIS.com. Now I'll turn the call over to Steph. Thank you, Todd. And good morning, everyone. Today, I will review our third quarter results and share details of our progress executing our four-pillar growth strategy. I will also provide updates to our outlook for 2026. Jack will then speak to our financial results and segment performance. We have consistently delivered strong performance this year amidst mixed market conditions. Our team has delivered year-to-date revenue growth of 15%. This is a reflection of our disciplined delivery of our growth strategy. Our expansion into industrial filtration markets has contributed 9% and our consistent focus on building a strong growth engine within our power solutions segment has resulted in organic growth of 3%. The balance is related to foreign exchange, as well with. I am pleased to see organic growth momentum building in Power Solutions through the year and into the third quarter, where we delivered our strongest volume growth year over year. We have continued to deliver strong profitability, and the cash generation capability of our business is now being realized. We have generated $189 million of adjusted free cash flow through September 30, an increase of $61 million from the same period last year. This strong free cashflow generation enables us to take a balanced and disciplined approach to capital allocation. Our first priority is to invest in growth, both organically and inorganically. Next, we focus on strong liquidity to protect against volatility and uncertainty, maintaining investment-grade debt levels through the cycle. Lastly, we provide returns to shareholders through our dividend program and further utilize share repurchases variably relative to M&A activity. We have been actively executing this strategy. During the third quarter, we returned $25 million of cash to shareholders through share buybacks and dividends. We have paid down $100 million of debt since our last earnings call and have achieved our stated objective of reducing leverage following a significant acquisition. Additionally, our Board of Directors recently approved a new $300 million share repurchase program which replaces our previous authorisation. Given the strength of our balance sheet and strong cash generation capability of the business, moving forward we expect to increase share repurposes. We continue to seek M&A opportunities and will balance share repurtases against these as appropriate. Now let me highlight our third quarter financial results. Sales were 510 million compared to 448 million during the same period last year. An increase of 14% driven by the acquisition of Cook filter and organic sales performance of 3% in power solutions excluding foreign exchange. Sales were reduced by $9 million related to IEPA tariff refunds that we expect to return to customers. Excluding these refunds and foreign exchange benefits, organic sales grew 5%. Adjusted EBITDA was $104 million, or 20.4%, compared to $92 million, or 20% last year. Adjusted earnings per share was $0.77 in the third quarter of 2026, and adjusted free cash flow was $88 million. Now, let's turn to our four-pillar growth strategy. Our first pillar is to grow share in first bid. With a strong upturn in the US first fit market and long-standing partnerships with market leaders, we are growing our installed customer base. This provides us with both near and long term growth opportunities. As the market expands, we continue to grow our long term partnerships along with pursuing new opportunities with leading global and regional OEMs across a broad range of applications. Our second pillar is focused on accelerating profitable growth in the aftermarket. We are prioritizing investments in faster growth regions and markets to broaden the availability of our industry-leading Fleetguard and Cook filter brands. Our customers recognize the value and advanced filtration capabilities the Fleetguard brand delivers. A recent independent survey ranked Fleet Guard as the number one preferred brand across all filter types, including fuel, air and lube in the United States and Canada. We are proud of this recognition and the faith our customers have in us to protect what is important. Our third pillar is focused on transforming our supply chain. have built a resilient and flexible supply chain that allows us to navigate challenges in an ever-changing operating environment. We control our distribution network and have consistently achieved top quartile performance in delivery. This capability enables global availability of our products when and where our customers need us. Furthermore, we continue to prioritize investment for capacity and automation to expand our capabilities and position the business for growth our fourth pillar is to expand into industrial filtration markets we have completed the integration of cook filter and are now focused on investing for growth we recently opened a new hepa filter clean room with test capabilities at the louisville manufacturing site this investment allows us to unlock growth in the high efficiency product category with applications in fast-growing markets such as healthcare. Additionally, we are investing to expand Cookfilter's capabilities and expect to open a new facility in Florida next year to accelerate growth. In addition to organic growth, we continue to review a robust pipeline of inorganic opportunities with a focus on industrial air to build a platform of scale by leveraging Cook 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 and anchoring investments that can serve as the foundation as we build out our industrial platform over time. Now let's turn to our outlook for 2026, starting with the power solution segment. In the aftermarket, we continue to see strength in freight rates, indicating improved economics for freight carriers. However, the overall level of freight activity has yet to reach an inflection point, and we expect the market to remain relatively flat year over year. In contrast, the U.S. first-fit heavy and medium-duty markets are experiencing a strong cyclical recovery. We saw the benefits of the recovery begin in the second quarter. This momentum has continued through the third quarter, and we expect these markets to remain strong. We now expect some pressure on diesel pickup truck demand, which will impact volumes for the remainder of the year. This is more than offset by the strength in the heavy and medium-duty markets. Our investment for growth is expected to deliver market share gains in both aftermarket and first fit as we expand distribution capabilities, maintain world-class on-shelf availability, and win with new and existing customers. For power solutions overall, we expect volume growth to change of 2% to 3%. Additionally, net pricing is expected to add approximately 1% growth, with 1.5% of base pricing actions to be partially offset by a half percent of lower tariff pricing and refunds. Foreign exchange is expected to be a tailwind of approximately two percent. In total we are raising our expectations for Power Solutions revenue to be in a range of 1.85 to 1.87 billion which represents growth of approximately five and a half percent at the midpoint in our industrial pollution segment we expect favorable market conditions and strong performance to continue and are raising total revenue to be in a range of 160 to 165 million taken together we are raising total company revenue expectations to be in a range of $2.01 to $2,035 billion, an increase of 15% from 2025 at the midpoint. We are maintaining our full year adjusted EBITDA margin guidance which is expected to be in the range of 19.75 to 20.25 percent lastly we are raising adjusted eps expectations to be in a range of two dollars ninety to three dollars and five i want to thank amazonians around the world for focusing on delivering for our customers and protecting what is important our disciplined execution and strong cash flow generation enables us to continue investing for growth through the execution of our four pillar growth strategies now i will turn the call over to jeff thank you steph and good morning everyone the admins team delivered strong financial performance by supporting our customers through the upturn in the U.S. first-fit markets while also navigating variable market conditions in the rest of the world. Sales in the third quarter were $510 million compared to $448 million during the same period last year, an increase of 14%. Our solution delivered sales of $468 million compared with $440 million in the prior year, an increase of 5%. The increase was primarily due to higher volumes of 5%, pricing of 1%, and favorable foreign exchange of 1%. This was partially offset by 2% of pricing due to IEFA tariff refunds that we received and expect to refund to customers in the fourth quarter. Returning refunded tariffs to customers is consistent with our stated objectives to be price-cost neutral on tariffs. We do not expect to receive any additional material refund. Industrial solution sales were $42 million, resulting from the acquisition of Cook Filter. Gross margin for the third quarter was $154 million, or 30.3%, compared to $129 million, or 28.9%, in the third-quarter of 2025. The increase was due to incremental margin from the acquisition of cook filter higher volume and favorable manufacturing costs partially offset by higher material costs selling administrative and research expenses for the third quarter were 64 million compared to 56 million in the prior year the increase was primarily due to incremental costs associated with the acquisition of cookfilter higher incentive compensation and other people related costs Joint venture income was $7 million in the third quarter compared to $8 million in the prior year. Strong performance in China offset weaker profitability in India, which has been impacted by rising input costs driven by the Middle East conflict. Other expense was $3 million compared to two million in third quarter of 2025. The increase in other expense was primarily due to a non-recurring $3 million settlement with a supplier, partially offset by higher interest income and lower foreign exchange losses. Excluded from adjusted results are one-time costs related to the integration of Koch Filters, which for the full year is expected to be approximately $3,000,000. We also exclude intangible asset amortization resulting from the Koch Filter acquisition, which is expected at approximately $12,000 for 2026. Total enterprise adjusted EBITDA in the third quarter was $104 million, or 20.4%, compared to $92 million, for 20.5% in the prior period. Segment adjusted EBIDDA for power solutions was $96 million, or 205%, compared to $90 million, or 204% last year. Industrial solutions segment adjusted EBDDA was $8 million, or 19.6%. Earnings per share was 77 cents compared to 69 cents last year. Adjusted free cash flow was 88 million this quarter compared to 72 million in the prior year. Now let's turn to capital deployment. The combination of continued strong cash flow and adjusted EBITDA performance has resulted in an estimated net debt to adjusted EBITA ratio of 1.7 times for the trailing 12 month and September 30th. During the quarter, we returned $25 million to shareholders, consisting of $20 million in share repurchases and $5 million of dividends. Furthermore, we have repaid $50 million of gross debt in the third quarter and another $50 million in early October. As Seth highlighted, we've achieved our stated objective of reducing leverage and enhancing flexibility for growth following a significant acquisition. This provides us with flexibility to invest in both organic and inorganic growth on the scenes. In closing, I want to thank our global team for their relentless focus on our customers, and I am confident the team will successfully deliver a strong finish to 2026. Now we will take your questions. We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If your muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tammy Zacharia with JPMorgan India. Your line is now open. Hi, good morning. Thank you so much. Very nice quarter. A question for you on FirstFit. The back half of this year is turning out to be quite strong. How are you thinking about first fit demand into next year, are you preparing for some sort of a slowdown after a very strong finish? Or how are you thinking about or planning for at least the first couple of quarters of next year? Good morning, Tammy, and thank you for your question. Look, really pleased with the performance this quarter. And as you highlight, we're starting to see momentum through the year. We saw First Fit start to improve through the second quarter and we've also seen that here in the third quarter and expecting that to continue in a strong way through the end of the year of 2026. There is a lot of uncertainty around the First Fit markets particularly with the upcoming 2027 regulation which is still open and finalisation of that expected inside this year. So many of our customers are working through that landscape. I would say we are well placed. While there has been some discussion about some supply constraints on the top end of first bit demand, we don't have any supply constraints. We're able to support our customers through this upturn. And right now, we expect it to continue through the first half of 2027. Obviously, watching this closely as we see the demand response to 2027 regulations the broader macro environment but as we look to it now we kind of see it through the end of the year very strong and in into the first half of 2027. understood that's very helpful color thank you and uh other question is on uh sherry purchases it seems like that's going to step up so as we looked to the you know next year or so should we expect all of the free cash flow minus the dividend all of it goes to our repo uh if there's no m a or are you gonna still try to pay down some some debt and then use the rest for repo yeah thanks temi i i would really highlight the um strong cash performance of the business if you look at it we've seen about 61 million improvement in free cash flow year to date over last year and we're really starting to see the capability of the business in terms of cash flow generation particularly given we don't have the extra costs associated with separation that we were incurring last year in 2025. We also have managed to move our debt levels to you know a good level and we've got a strong balance sheet Jack talked to it being 1.7 times at the end of the third quarter and we believe our debt level is at or around the right level doesn't mean we won't repay some debt going forward but it does free up for the majority of our cash flow to be directed towards share repurchases. That, of course, is contingent on us continuing to pursue our M&A opportunity. We are very clear that investing for growth is our first priority, and we continue to review a robust pipeline of M&As, and if and when we have something to communicate there, we will. Your next question comes from the line of Andrew Ovin with Bank of America. your line is now open. Hi, good morning. This is David Ridley-Lane on for Andrew Obin. Tremendous gross margin performance this quarter. Congratulations. I wanted to check in on how you're thinking about price cost. It is a more inflationary market and maybe any early thoughts on sort of your future price actions that you're looking at ahead. Thank you. Good morning, David. I'll ask Jack to take that one. Yeah. Good morning David. Thanks for the question. A few moving pieces in there, so I might just highlight a few in peace so that we can decouple those moving pieces. So the first one, let me maybe talk to tariffs and kind of isolate the impact of that so that you can understand what's going on beyond the tariffs. So as we noted in our prepared remarks, we did receive the tariff refunds that we had been expecting to receive here in the third quarter, and we've correspondently booked the impact into our financial statements of the receipts of those refunds. As you can see, we are expecting to pass those refund on to our customers. The impact to the top line of that was about $9 million, so that's a reduction in revenue And then we've looked at corresponding reduction in cost of sales. It's worth noting there's an immaterial amount of tariff refunds that are sitting in gross margin, about a million and a half. That largely offsets previously incurred administrative expenses. But overall, I think you should think about the tariff impacts. Obviously, we'll continue to navigate ongoing dynamics that emerge from a tariff perspective. But I expect the impact I just walked through to be isolated to the third quarter, and then obviously we'll issue those refunds on to our customers here in the fourth quarter. We believe the treatment of that is consistent with our strategy of being price-cost neutral, and that will continue to be our principle as it relates to tariffs moving forward. If you exclude the impact of tariffs, overall, we will be price-cost positive for the year. Certainly, we have seen a rising input cost environment as we move through the year, and that's beginning to step up here in the second half. And so we are monitoring that closely. We did take some modest pricing in the middle of the year, although some of that washed out when you think about the lapping of tariffs from the prior year. And so relatively muted impact there as you think about the quarter itself. Overall, pricing for the full year, as we highlighted in our comments, will be about 1%. And again, we will be price-cost positive. As we look into next year, you know, we'll see what happens in terms of the input cost environment, and if those continue to, you know, increase. And obviously, we will take corresponding pricing actions to make sure that we're price cost positive and, you know, preserve our margins as we navigate that environment. Thank you very much. Your next question comes from the line of Quinn Fredrickson with Baird. Your line is now open. Quinn Fredrichson, Bairds, Hey, good morning. Steph, I was wondering if you could expand on your comments on how you're seeing the market shaping up for the aftermarket, perhaps looking out beyond the fourth quarter into 27. Obviously a lot going on with higher diesel prices, perhaps some capacity coming out at the smaller end of the market. So we'd just like to hear your thoughts on the underlying market as well as your share gain performance. Thanks. Yeah. Good morning, Quinn. Thanks for the question. So aftermarket is the majority of our business, and we've been talking about it being pretty flat for the last few years, actually since we IPO'd, it's been those conditions, and Arguably we've been in a freight recession and we're looking forward to a brighter market is what I would say. We still haven't seen that inflection point arrive. If we think about the breakdown of our aftermarket, the big market is really first and foremost North America and then we come into Latin America and Europe and Asia Pacific after that. just kind of paint those in order and talk about what we're seeing. In North America, we've still seen robust aftermarket. We've seen us continuing to gain share and output on the market, but it's relatively flat year over year is how we're viewing it. We're not seeing green shoots or an inflection in North America at this point. I do think, as I said, we're seen some improvement in freight race but still not seeing that turn into great activity or a significant upturn i would say throughout the rest of the world is more challenging conditions the impact of the middle east conflict um you know flowing onto europe and even into india um i would say we have seen that um and and we're seeing some bright spots in latin america both our performance we are outperforming there and we're also seeing stronger market conditions in a market that's growing faster um so a mixed landscape is the best way to describe it north america being our biggest market relatively flat from a market perspective and we are outperform and then the rest of the world is um is somewhat challenged impacted in part by the ongoing conflict in the middle east got it that's helpful thanks steph jack just wanted to ask about the fourth quarter margin guidance just based on your full year ebitda margin guide it seems like there's a fairly wide spread for the fourth-quarter implied i'm just wondering if you could talk about any puts and takes for 4q margin and you know what factors could push you the high end versus the low end Yeah, absolutely. So, you know, first of all, I would just say our year-to-date margin performance has been quite strong. You know, year-today sitting at 20.3, so the high end of our guide on a cumulative basis. So really proud of the team for what they've been able to deliver there and navigate various puts and takes from a macroeconomic perspective. If you look at then the implied Q4, as you know, it's about what, 19.1 percent, I think it is. So a few different pieces there. I would say, first of all, I mentioned before from a price-cost perspective, we are keeping a close eye on the inflationary backdrop. As a reminder, we price at the beginning and the middle of the year, And so keeping a close eye on that as input costs continue to rise in response to the macroeconomic landscape. So that's one piece. I would say the other piece is you just look at kind of seasonal trends, you know, in our business. Generally, we do see lower hours in the fourth quarter. And so that leads to lower absorption benefits, obviously, in the manufacturing environment. and so that's been a pretty consistent trend you know if you look at 2025 2024 2023 usually be a bit of a step down in margin in the fourth quarter and really all that's driven by is that kind of seasonal dynamic as we work through remaining inventory and set our sights towards the next year so really nothing more than that um we're excited again about the the full year performance of the business feel like both top line and uh and margin performance in addition to robust cash flow has been a really great story. Your next question comes from the line of Bobby Brooks with Northland Capital Markets. Your line is now open. Hi, good morning. This is Keaton Chokian for Bobby. It seems like you've done a good job navigating the rise in raw material costs. I was just kind of curious if that's a fair assumption and maybe if you could discuss a little bit on how you've been able to achieve that. Good morning, Kate, and I'll ask Jack to take that one. Yeah. Thanks, Keaton. So, yeah, as I mentioned earlier, I think absolutely we'll be price-cost positive. It is always a difficult needle to thread, right? Obviously we can't price necessarily ahead of when input costs impact the business, but we do our best to make sure that we're consistently pushing price into the market to meet the the technology offerings that we can bring to the market overall. So we did increase prices at the beginning of the year in line with normal market practices and then took a modest mid-year price increase. In addition to that, you know, our third pillar is supply chain transformation, and we continue to do a really good job of finding efficiencies in the business, working with the supplier base to really get more suppliers under contract and find ways to take costs out of our product. So it's kind of a combination of all of the above, and we'll continue to stay vigilant on that as we move into 2027. Okay, thank you. And then on the new COSH facility that you're opening up in Florida next year, can you give us a sense of investment size and capacity add to that um and then also second question on cost the new clean room testing is will that be a higher margin product line and what is the opportunity there over the next few years yeah we're excited about the growth investment you know we've got through the integration at cook filter very pleased with the way the business is continuing to perform and now focused on growing and we've identified a number of growth investments we've highlighted two today one is the HEPA clean line investment that you talk about as they have a clean room investment that you talk it does allow us to move more into high efficiency products and we do expect them to be stronger margin products that's part of our strategy to move into you know higher technology products that support our customers and that will be able to support markets like healthcare in particular so in addition those markets are faster growing um than some of our exposure to other markets so we see that as a great growth opportunity for the cook filter business um it's early days we've just made the investment we've got our first order so we're really starting to turn that and we'll start to see the benefits of that you know coming through here in fourth quarter and beyond in terms of the investment in florida we haven't made it yet it will be into next year we've approved the investment and we'll be moving forward with that florida is the third largest hvac market in the united states we see great opportunities to further expand the cook filtration business where we already have great capabilities here in the united states beyond that we'll continue to look for growth opportunities in the industrial air filtration segment, you know, very much in line with our stated growth strategy of expanding into industrial filtration. Your next question comes from the line of Kevin Urich with Wells Fargo. Your line is now open. Good morning. Congrats on the quarter. Yeah, I just had a question on EPA 2027, just given all the uncertainty around that. You know, what are your expectations for it kind of going into the quarter pre-buy and what are you hearing hearing from customers morning kevin and thanks for the question a lot of uncertainty as you say around epa 2027 and the associated actions of engine manufacturers and and truck oems in response to that as we get into 2027 here i think as we've communicated before the transitionary approach um that has been outlined in epa 2027 should be good overall in terms of really allowing the industry to make a transition to regulatory standards new regulatory standards in in an effective manner um so i think that's playing out uh we're still awaiting guidance and outcomes i think many are saying that's expected in december in terms of the 2027 regulations and the final the final outcomes there so waiting to see that here inside 2026 we are working closely with all of our customers uh to support them through this transition and we feel well equipped to do that in some cases some of our customers are running you know multiple engine platforms uh providing customers with choice of you know previous platforms and the new and we are on both those platforms and are working with our customers to support them and in other cases customers are moving to the new um standards and providing only one option so we feel like we're in good shape to support our customers through all of those outcomes and we'll all know more here as we as we get into the final quarter Got it. And then just as a follow-up, when we think about 4Q and kind of the implied volume bridge, is there anything that you'd call out for 4Q, like in 3Q, you know, tougher comp from Stellantis? How should we think About that? Yeah, there's a couple of things I would call out. We're expecting continued strong performance through the fourth quarter and to finish the year strong. Year-over-year growth is is very strong um we are expecting the first bit markets heavy duty and medium duty markets uh to continue to show uh growth year on year um and after markets to be relatively flat i did note in my script that there is um a pressure on pickup demand we it is our first bit business is about 15 of our overall revenues in power solutions and a small part of that is a associated with pickup demand, and we are expecting some downward pressure in the fourth quarter, but that is more than offset, I would say, by the upturn we're seeing in heavy and medium-duty markets. There are no further questions at this time. I will now turn the call back to Steph Disher for closing remarks. Thank you, Patsy. So in closing, I want to leave you with three key takeaways. First, we are building momentum in our business as we execute our four pillar growth strategies. Secondly, we have demonstrated disciplined execution throughout the year, and we expect strong full-year performance. And thirdly, our business generates strong and consistent cash flow, enabling us to invest for growth and return value to shareholders. I want to thank you all for joining us today and for your continued interest. Have a great day. This concludes today's call. Thank you for attending. You may now disconnect.