Thank you for standing by and welcome to the Atmus Filtration Technologies' Fourth Quarter and Full Year 2023 Earnings Call. I would now like to welcome Todd Chirillo, Executive Director, Investor Relations, to begin the call. Todd, over to you.

Thank you, Operator. Good morning, everyone, and welcome to the Atmus Filtration Technologies' fourth quarter and full year 2023 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 our 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 our 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. I'm excited to join you today to share an update on Atmus. I will discuss our fourth quarter and full year financial results and our outlook for 2024. I will also share some of the significant progress we have made implementing our growth strategy. First, let's discuss our performance in the fourth quarter. We drove strong financial performance in the fourth quarter, delivering an impressive finish to our first year as a public company. Sales were $400 million compared to $385 million during the same period last year, an increase of approximately 4%. Adjusted EBITDA in the fourth quarter was $71 million, or 17.9% compared to $53 million, or 13.9% in the prior period. Adjusted EBITDA for the quarter excludes $8 million of one-time standalone costs and $7 million for the same period last year. Adjusted earnings per share was $0.49 in the fourth quarter of 2023 and adjusted free cash flow was $30 million. Adjusted free cash flow excludes $4 million of one-time capital expenditures related to separation from Cummins. As expected, we saw some continued destocking and softer freight activity, which dampened revenues from our aftermarket. This was offset by continued strong demand in U.S. first-fit markets. In India, markets remained strong and in China, we saw demand slowly recovering. Now let's review our full year results. Sales for 2023 were $1.63 billion, an increase of approximately 4% from 2022. Adjusted EBITDA margin rose 300 basis points from the prior year to 18.6%. EBITDA has been adjusted for one-time separation costs which were $29 million in 2023 compared to $9 million in 2022. Adjusted earnings per share was $2.31 for the full year and adjusted free cash flow was $152 million. Free cash flow has been adjusted for $9 million of…

Thank you, Steph, and good morning, everybody. We delivered another strong quarter of financial performance in the fourth quarter. Sales were $400 million compared to $385 million during the same period last year, an increase of approximately 4%. The increase in sales was primarily driven by pricing and the favorable impact of currency, partially offset by a decrease in volume. Gross margin for the fourth quarter was $106 million, an increase of $23 million compared to the fourth quarter of 2022. In addition to pricing, we also benefited from lower freight and commodities, which more than offset the impact of lower volumes. As a reminder, during the fourth quarter of 2022, we took action to significantly right size our inventory and experienced short-term operational inefficiencies as we slowed production. These actions did not repeat in 2023. Selling, administrative and research expenses for the fourth quarter were $58 million, an increase of $6 million over the same period in the prior year. The increase was primarily driven by higher administrative costs related to our separation from Cummins, in addition to the impact of higher variable compensation driven by overall company performance. Joint venture income was $9 million in the fourth quarter, an increase of $2 million from 2022, due to increased performance at our joint ventures in India and China. This resulted in adjusted EBITDA in the fourth quarter of $71 million, or 17.9% compared to $53 million or 13.9% in the prior period. Adjusted EBITDA for the quarter excludes $8 million of one-time standalone costs and excludes $7 million for the same period last year. These one-time costs primarily relate to the establishment of functions previously commingled with Cummins such as information technologies, distribution centers, and human resources. Adjusted earnings per share was $0.49 in the fourth quarter of 2023,…

The floor is now open for your questions. [Operator Instructions]. Our first question comes from the line of Joe O'Dea with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Joe.

I wanted to start on the revenue outlook. And so aftermarket flat to plus three total down one to up three. What are you thinking about for first-fit range and just any commentary on within that range? Are you anticipating share gain, any kind of sizing of share gain opportunity?

Yes. Good morning, Joe. Thank you for your question. So let's talk about the first-fit side, as you talked about, and as a reminder, this drives about 20% of our revenue overall. The range I would point you to is at the low end down 14%, and at the higher end down 5% with a mid-range of 9.5% down. That's -- so that's the range we're seeing on market outlook. Obviously, heavily driven by the U.S. exposure to first-fit in our heavy-duty markets, medium duty as I talked about, we expect not to be down quite as much given the inventory levels there. In terms of share gains, we do see some share gain. And I point you to our overall growth algorithm over the long run. Generally speaking, we see our market run at 2% and we talk to a price of 1% and share gains of 1% to 2%. And in this case, we've got it in at around 1%.

And then just any kind of first half versus second half perspective on how you're thinking about it. I'm not sure to what degree first-fit demand is holding up better in the first half. And then as that would kind of slide that you'd see aftermarket come in, in a stronger way in the back half.

The way we're seeing it is that we expect first-fit to remain pretty resilient through the first quarter and into the second quarter, and then drop off more in the second half. Then on the aftermarket side, we actually expect that to be countercyclical. We'll have to see how this plays out. Of course, we saw the aftermarket, particularly the on-highway markets in the U.S., significantly down in the third and fourth quarters. I think I referenced it already, but that cash index is a good indicator of that for us. It was down 9% in the second half of 2023. So as a comparative, as we head into the second half of 2024, we do expect an inflection point in freight activity in the aftermarket. We also expect we're all the way through destocking now, and so we see some positive tailwinds for us in the aftermarket in the second half.

I appreciate those details. And then, Steph, wanted to ask on M&A and just any commentary on kind of progress with the pipeline over the last six months to nine months, and then what goals you're setting for the M&A team globally into 2024.

So as we've talked about our strategy, the fourth pillar of our strategy is to expand into industrial filtration markets, certainly very determined to pursue that strategy. We've been working both on clarifying our strategy, the target markets we want to enter into, and then what is our opportunity to win in those markets? A lot of the work in the last year with my strategy team and my leadership team has been in that space of what markets we want to target and then how we're going to win in those particular markets by leveraging our technology capabilities, but also our global footprint and distribution ability. And so that we have a good view of that, I would say, we announce -- we've been building a pipeline of M&A. We've been regularly reviewing M&A targets throughout the course of the last year. That's allowing us to fine tune our aim, I suppose I would describe it. We are going to take a very disciplined approach to M&A. And we are working through the goals I'm giving the team is obviously I want to expand into industrial filtration markets and see an acquisition and grow through that. But very much this needs to be the right acquisition that balances growth aspirations that we have with generating and creating value and returns.

That's helpful. Thank you.

Thanks, Joe.

Our next question comes from the line of Rob Mason with Baird. Please go ahead.

Yes. Good morning, Steph and Jack and congratulations on the quarter. I wanted to probe just your thoughts around what the puts and takes could be in gross margin for the year in your outlook. And specifically, I was curious your view on where cost is and also any efficiency gains that you can speak to. And maybe lastly, just how you think the $5 million to $15 million of one-time cost would flow through just the reported gross margin.

Okay. Good morning, Rob. Thanks for the question. I might ask Jack to take the lead on this one.

Great. Good morning, Rob. Thanks for your question. So I'll start first with kind of the impacts of price and volume from a gross margin perspective. For the full year, as Steph alluded, we're envisioning price of about 1%, some puts and takes from a volume perspective, again with aftermarket hopefully improving year-on-year, offset a bit by first-fit reductions. And then we have some share gain initiatives. All three of those put together equate to roughly an offset, if you will, at the gross margin level. And so as you think about that benefit of price, what we're expecting is a pretty healthy incremental gross margin backdrop partially offset by some continued investment in our separation activities as we've talked about, we still have few of our distribution centers to decouple from Cummins over the course of 2024 and into the beginning of 2025, which will obviously drive some of those one-time costs, but also drive some inefficiencies which are inherent as you decouple this.

So is it fair to think about gross margin flattish year-over-year with the full year that you just reported then?

Yes. I think generally speaking, we would see probably some gross margin expansion driven by that pricing activity, the other input, Rob, which we're keeping a close eye on is the input costs, right? And so our baseline assumption and what we're seeing right now is that commodities and freight remain relatively flat year-on-year. Obviously, if those dynamics change, then we'll revisit price in order to preserve our margin.

Understand. Just as a follow-up, you mentioned distribution centers that would expand into Asia, Europe. How should we think about those activities in the context of share gain opportunities, principally in the aftermarket? But should we look for outsized share gain opportunity internationally as a result of some of those actions?

So Rob, I would say firstly that we've progressed through most of our distribution center transition from Cummins already. So we obviously focused on the larger distribution centers first, these remaining distribution centers in Asia-Pacific and Europe is part of that transition. So really servicing our existing business and transitioning those distribution centers across. As part of our overall supply chain transformation, we do see opportunity in terms of product availability through our distribution network overall. And we do expect that to accelerate growth in our aftermarket. I would say that's integrated in the overall sort of shared summary that I gave you earlier. In that algorithm of the 1% to 2% at the top-line growth level is how we're still thinking about it right now. Obviously, we'll continue to push for accelerating that growth further.

That's great. Thanks, Steph.

Our next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi, good morning, everyone.

Good morning, Jerry.

Hi, Jerry.

Steph, I'm wondering if we just go back to the M&A topic, and when you look at the range of outcomes based on your M&A pipeline. Can you just give us a sense of how much capital you think you can put to work over the next 12 months to 18 months? And I appreciate that there's a wide range of outcomes, but can you just give us a flavor for your level of optimism on your ability to move the needle on that part of the strategy within 12-month timeframe?

Thanks for the question, Jerry. Look, I would say I don't have an M&A specific deal to talk to you at this point sitting here. My expectation is our capital allocation priorities will be very much focusing on creating the flexibility for us to make the right M&A investment when we identify that, that would be the first thing I would say. Obviously, we're balancing other things in our capital allocation priorities as well, but you should expect our capital allocation priorities to demonstrate that. In terms of the size of targets and what we're looking at, said before that we're really looking at targets in that $50 million to $60 million revenue range, generally speaking. Now, I don't intend to be bound to that, but I'm expecting that we're taking a programmatic approach to acquisitions. We want to build out our capabilities and the creation of value as we progress from expanding into industrial filtration markets. And so it will be that size level of revenue and then subject to market multiples, which I won't speculate on here as to how that may translate into capital allocation. But hopefully, that gives you at least some thinking around the prioritization and how it fits around our growth plan.

Okay. Thank you. And separately, the 27 engine regulations coming into play, you spoke about potential to gain new platforms earlier in the call. Any opportunities with 27 changeover either for share or content for you folks?

We continue to be focused on being a leader in fuel filtration and crankcase ventilation in particular. We are targeting all of those opportunities to grow our share in those platforms and we're having success. And so we are obviously very strong partnership with Cummins, which will continue, and we've been able to secure those platforms with Cummins. And we will continue to look to win other business in those platforms. And we've had some success in that as well. But this is very much focused on growing our share in fuel and crankcase ventilation as we see that opportunity coming up for 2027.

Okay. Super. And lastly on the Cummins front, with the transition of dialer medium duty engines, nearly 100,000 units over the next, call it five or so years, is that a global opportunity for you folks? Would you benefit across the Board on that or are there any regions where you wouldn't participate in? And how do you expect the cadence of that transition to play out as you plan your capacity?

We would absolutely expect that to be a global opportunity for us and to play out over the period of time. Our investment, we pre-plan, obviously, our investment in capacity, and we are investing in capacity to ensure that we can meet and service that demand and support our customers.

Okay. Thank you.

Thanks.

Sure.

Our next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Hi. Yes, good morning.

Good morning.

Congratulations on a great quarter. Just a question in terms of when you talk about your aftermarket, you sort of mentioned that destock is almost over. So as I look at your forecast, what is the headwind embedded in your number from the destock for the year and what sort of I guess I'm trying to sort of figure out sell through versus sell in.

It's interesting, Andrew. As you look at the aftermarket projection, and I've given a range in our aftermarket of 0% to 3% as part of our overall guidance, with a mid-point of 1.5% and so it's difficult to, I would say disentangle some of the freight indices and the freight activity from the destocking activity. While you would think that the destocking activity is just a supply side issue, I do think it is intermingled in the freight downturn that we saw in the cap index, for example, of 9% in -- at quarter three and four. So look, the best projection I can give you in aftermarket at this point as we turn that corner, and as I said, it's going to be more weighted to the second half is my expectation, particularly as we saw those headwinds in the second half of 2023, that it'll be in that range of the 0% to 3%. We haven't seen the inflection point yet, particularly in the on-highway markets of that turning. We're still seeing depressed freight activity. As I said, the destocking we've seen mostly conclude, but we're still seeing the depressed freight activity. We'll need to see that turn before we can give any more optimism around the aftermarket outlook.

Well, rush to rush called the bottom on freight for the summer earlier today. So there we go. Sorry, couldn't resist. But you know him, he's a character. So just a different question actually, a full separation from Cummins. Is the Board planning to revisit potential cash return to shareholders? I know folks are asking questions on M&A. Is that the first priority? What's the thinking on sort of return of capital to shareholders? Thank you.

No. Thank you for the question. We certainly will revisit that with our Board as we move through the sherry strange and the transition that obviously is subject to the Board's decision, but we would certainly look to revisit that. I think, Jack, it may be worth you just talking about how we're thinking about the capital allocation priorities.

Yes, absolutely. And thanks for the question, Andrew. So just a reminder, we are coming out of 2023 in a position of strength from a balance sheet perspective. As I mentioned, $586 million of liquidity and 1.4x net debt to adjusted EBITDA. Our number one priority is to continue to reinvest in the business to enable top-line growth across our growth platforms, in addition to a successful operational separation from Cummins. Obviously continuing to fund strategic growth initiatives with a focus on expansion into industrial filtration markets, as Steph mentioned, we will take a disciplined approach to that M&A balancing profitable growth with return on invested capital. And then, as you mentioned, continuing to evaluate cash returns to shareholders with a goal of delivering strong total shareholder return. We did pay down the revolver inside of Q3 and so I wouldn't expect any significant debt reductions outside of the contractual ones that we highlight.

Perfect. Thanks so much.

Thank you.

Our next question comes from the line of Bobby Brooks with Northland Capital Markets. Please go ahead.

Hey, good morning, team. Thank you for taking my question. So, pretty strong year-over-year revenue --

Good morning, Bobby, and welcome.

Hey, thanks, Steph. I really appreciate it. So pretty strong, so really strong year-over-year revenue growth in the fourth quarter. Obviously, you already mentioned that it was driven by price pricing and favorable impacts of currency, but slightly offset by decreased volumes. So I was just wondering if you could maybe help frame how much of an impact each of those factors were in the fourth quarter and then also maybe discuss how those I mean you kind of already touched on it, but if anything incremental that you want to add on how those factors influence your 2024 guide.

Thanks. Jack, do you want to touch on this?

Yes, absolutely. And welcome, Bobby, good to hear from you. So some of the quarter-over-quarter dynamics pricing versus last year in the same quarter was about $17 million or just about 4% year-over-year, volume was about an $8 million headwind or about a 2% reduction, and then some FX benefits of about $5 million or slightly over 1%. So that's kind of the top-line backdrop. As Steph mentioned, as we look at 2024, we would expect price to be about 1% of a benefit, share gains of about 1% offset by just about 1% of a net volume headwind, again with the impacts of first-fit offsetting the expected recovery in aftermarket. As we think about 2024 versus 2023 have not embedded any significant FX movements based on what we see right now.

Got it. Appreciate that. And then kind of shifts into the next question, of the 11 distribution centers you guys had exiting 2023, could you just remind me how many of those are in APAC, Europe and that you plan to split off from Cummins or just plan to stand up as your own sole distribution centers? And then could you discuss the financial impacts you've seen from -- and what you've learned from standing up the Brazil, Mexico and Dallas facilities and maybe how you will apply those learnings to the rest of your footprint.

Thanks for that question. We have currently four of the 11 are shared facilities still with Cummins, and so we'll look to transition those over a progressive plan, over the course of 2024. And I think South Africa extends into 2025 as the only remaining one beyond this calendar year. They are certainly we're at the tail end, if I describe it that way, of our distribution center transition still obviously very important to us in terms of our global footprint. But as I talked about earlier, we have prioritized the Pareto or 80% of distribution centers and have moved through those effectively. In terms of what we've learned and the opportunities generally we've been able to phase the work within the quarter. I would say obviously there is some build of inventory inside a quarter as we make the transition of the different facilities and set all of that up. Generally speaking, we've been able to do that in the quarter. There's systems transitions and facilities transitions as part of this and, all I would say, I guess is with each one of these, you get slicker in how you manage it. And so I'm not -- I'm not expecting any issues with the ones that are ahead of us. We have a clear plan, and I'd expect us to manage to support our customers through that transition very effectively, given how much practice we've had.

Got it. That's really good color. And then, maybe just touching on the fully automated line manufacturing line in France, could you maybe just remind us what the timeline of when that was completed and maybe talk about because I know you guys want to take the learnings from that, and obviously, you specifically chose to do that in a high cost region, right, to see those benefits most. And just so along with the timeline, just talk about maybe when you think you could get to a point where you're comfortable with the learnings, to maybe apply that to your manufacturing footprint elsewhere.

Yes. So, automation overall is a key part of our supply chain transformation strategy. For reference, our largest manufacturing facility is in at Mexico, in San Luis Potosi. And so our strategy for automation varies by location, I would describe, and also by the different lines and opportunity sets. And so we very much focus on the green cartridge line as one of our bigger automation undertakings. And it's a fully automated line, as distinct from, in some cases, such as in Mexico, we're using assisted robotics, which really removes some sets of the activity in the manufacturing line, but not all of it. So there's been a lot of learnings for us in France, as we've installed the green cartridge line. That decision was taken last year, I think commissioned early this year. We've been trying to scale that up. So certainly, I expect efficiency benefits as we get into 2024 associated with that line in particular, because just how that all works together has taken us some time to land. Also, part of that green cartridge line was not just the automation of it, but just the production ability that we had. And this will give us much more speed than our existing green cartridge line that's more manual, to be able to support the really growing demand for this particular product in Europe and beyond. So we will continue to strategically invest in that kind of capacity. And I guess the matching there is, what's the regional requirements? What are the global requirements? And then do we best service those through a fully automated line or this other end of the spectrum of just robotics to support parts of line.

That's great. Thank you. Thank you, Steph. I appreciate that and I'll turn the call back over to the operator. Thank you.

Thank you.

Thank you.

I would now like to turn the call over to Todd Chirillo for closing remarks.

Thank you. That concludes our teleconference for the day. Thank you all for participating and your continued interest. As always, the Investor Relations team will be available for questions after the call.

This concludes today's call. You may now disconnect.