Hello, and thank you for standing by. At this time, I would like to welcome everyone to Atmus Filtration Technologies' First Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Todd Chirillo, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Atmus Filtration Technologies First Quarter 2024 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 atmos.com. Now I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. We delivered strong performance in the first quarter. On the call today, I will provide an update on our performance in the quarter. Our outlook for the year and provide some comments on delivery of our growth strategy. Jack will then provide additional details regarding our financial performance. Before I discuss the quarterly performance, I would like to acknowledge the significant milestone of Atmus becoming a fully independent company on March 18. On February 14, Cummins announced an exchange offer, whereby common shareholders could exchange all or a portion of Cummins common stock for shares of Atmus. Investors showed significant interest in the offer with the transaction approximately 12x oversubscribed. The divestiture of Atmus shares by Cummins was completed on March 18 and resulted in the full separation of Atmus. With the successful completion of the exchange offer, all former Cummins appointed directors have resigned from the Atmus Board of Directors and 2 new independent directors, Diego Donoso, and Stuart Taylor have been appointed to the Board. A majority of the Atmus Board of Directors is now independent, and I'm excited to be working with the Board as we continue to accelerate growth and deliver long-term value for our shareholders. Now let's turn to the first quarter financial results and our current outlook for 2024. We delivered strong financial performance in the first quarter. Sales were $427 million compared to $419 million during the same period last year, an increase of approximately 2%. Adjusted EBITDA in the first quarter was $80 million or 18.8% compared to $79 million or 18.8% in the prior period. Adjusted EBITDA for the quarter excludes $6 million of onetime stand-alone costs and $4 million for the same period last year. Adjusted earnings per share was $0.60 in the…

Thank you, Steph, and good morning, everyone. We continued to deliver strong financial performance in the first quarter. Sales were $427 million compared to $419 million during the same period last year, an increase of approximately 2%. The increase in sales was primarily driven by pricing of approximately 2% and the favorable impact of currency, partially offset by a modest decrease in volume, as market share gains continued to counterbalance challenging conditions across many of our markets. Gross margin for the first quarter was $112 million, an increase of $2 million compared to the first quarter of 2023. In addition to pricing, we also benefited from lower commodities, which more than offset the impact of higher freight and manufacturing costs, along with lower volumes. Selling, administrative and research expenses for the first quarter were $53 million, an increase of $5 million over the same period in the prior year. The increase was primarily driven by higher people-related and consulting costs as we continue to stand up our team and separate our functions from Cummins. Joint venture income was $10 million in the first quarter, an increase of $2 million from 2023, primarily due to strong performance at our joint venture in India. This resulted in adjusted EBITDA in the first quarter of $80 million or 18.8% compared to $79 million or 18.8% in the prior period. Adjusted EBITDA for the quarter excludes $6 million of onetime stand-alone costs and excludes $4 million for the same period last year. We believe these costs will be in a range of $10 million to $20 million in 2024 an increase from our prior guidance of $5 million to $15 million. These onetime costs primarily related to the establishment of functions previously co-mingled with Cummins, such as information technologies, distribution centers and human resources.…

[Operator Instructions] The first question comes from the line of Rob Mason. And the second question comes from the line of Tami Zakaria, JPMorgan.

So the share gain you mentioned in the quarter, can you provide some color? Is that on the OE side or aftermarket side, is it through coming from new customers or increase in share of wallet gains? Any color on the share gain comments you made?

Hi Tami, good morning, thanks for the question. I would say that the share gains are primarily coming in the aftermarket, our share gains there in the aftermarket more than offset any headwinds we saw in market conditions. So that's primarily where we've seen the share gain.

Got it. That's helpful. And then my second question is, can you comment on whether you see any opportunity for your current products, especially in the coolant side, to be used in the data center end market in light of the liquid cooling technology that these data centers require?

Yes. So I guess, Tami, to answer your question broadly, we certainly see opportunity for growth, I think, this week on their call, Cummins talked about the significant growth in the power gen markets strongly linked to data centers. Certainly, we have product opportunities, both filtration and coolant opportunities across that market. And we see it as a strong growth market. I think I would just say that many of those applications are standby applications. We saw it [ don't drive ] as much recurring revenue opportunities. But certainly, we see strong tailwinds in that market that we will avail ourselves of in both our filtration product range and coolant.

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

Just -- I'm just curious how the first quarter may have compared to your internal plan? I know you don't provide formal first or quarterly guidance, but I was just curious how it compared to internal plan. And if there's any thoughts you can maybe give us on how you think about seasonality as we start into the second quarter.

Absolutely. Thanks, Rob. So firstly, I would say slightly ahead of expectations on our first quarter mostly driven by our market share gains in the aftermarket that I spoke about. I'd say our price expectations were broadly in line market expectations overall broadly in line. But certainly, I think, slightly ahead because of the share growth in aftermarket would be how I'd encapsulate the first quarter. As we look ahead, I've given a bit of an outline to the markets and how I see 2024 playing out. I'll just start with first-fit markets for a moment. Really the only change since our last guidance is the increase in our guidance on the heavy-duty truck in the U.S. markets, aligned with where our customers are seeing it really, but moved up from down 10% -- 10% to 15%, up to down 7% to 12% with a midpoint of 9.5%. So that's really the only change in the first-fit market. I would say we see that impact of declining markets in first-fit really starting to impact in the second half. It's a little earlier than that in Europe, but we're less -- we've got less exposure on first-fit markets in Europe. And so that's the first-fit side. If I turn to aftermarket, I talked about -- this is predominantly -- I guess, the U.S. is a heavy market for us in this regard. I talked about the cash freight index through the first quarter, down 5% year-over-year. We certainly saw that moderate throughout the quarter and the March month was down more like 3%. So we are certainly seeing freight activity starting to improve year-over-year. and the comparables in the second half of the year, as you know, on aftermarket because of the significant destocking through 2023 are much lower for us. So we see aftermarket through the full year at around 0% to 2%. So a flattish market, I guess, is the best way to describe it with the trend starting to lift here through the second quarter and then moderate through the rest of the year gradually is how I would describe it.

That's helpful. Just as a follow-up, I noticed there was a revision to the separation cost outlook for the year. How are you thinking about -- as we go through this year, completing all those activities or what might extend beyond 2024, just maybe the reason the cost went up this year.

Yes. Thanks, Rob. I'll just give some context about the overall separation, where we are on that journey and what we see ahead of us. And then I'll let Jack talk to the sort of sequential story and expense on cost -- separation costs. So I just -- it's been a significant unstacking as we step out of Cummins. Obviously, the IPO in 2023 -- May of 2023, we completed the full separation from an ownership perspective just here in the quarter. And we have a number of transition service agreements in place with Cummins to continue to provide a level of services. The original approach to those services was that they would run no longer than 24 months from IPO. We are about 55% of the way through those transition services agreements or winding them off, if you like. A significant amount of that happened in this first quarter of 2024. And we expect to be majorly done through the -- by the end of 2024 effectively and I'll let Jack just talk to what drove the revision for the 2024 cost and the timing of this.

Yes. Thanks, Steph. In terms of the revision, it's really pulsed by timing of certain projects, Rob, in this case, largely associated with IT systems and ensuring we are balancing -- switching the go live on those systems with risk mitigation. And obviously, there's a cost settlement there, but I want to make sure we get the transition right in order to optimize the business moving forward. As a -- in terms of sequential move, as you noted, it was $6 million in the first quarter, which I would just say indicates that the majority of the anticipated 2024 expenses were incurred in that first quarter, and we should see a moderation or a tapering as we move sequentially through the year. And again, from a comparison standpoint, our the onetime costs that we incurred last year were about $29 million, and that compares to the range here of $10 million to $20 million, which kind of coincides, I would say, largely with the progress of 55% that Steph highlighted. We do anticipate to be substantially through that by the end of 2024 with really one more distribution center to go inside of 2025.

our next question comes from the line of Jerry Revich with Goldman Sachs.

I wonder if I can probably get an update on the M&A landscape. You folks are coming up on a year as a public company, and I'm wondering what's the range of M&A opportunities for you folks over the next, call it, 12 to 18 months in terms of how much capital you expect to put to work and what that might look like based on your pipeline as you sit here today?

Thanks, Jerry. As you know, an important part of our strategy is expanding into industrial filtration markets. We have an established team that are working that significantly. We've conducted all of our analysis of those markets as we're assessing a strong pipeline of targets. Our team are continuously assessing that as we speak. We've worked through assessment on a number of those and have decided not to proceed with the numbers so far. And really, as always, with M&A, difficult to predict exactly when that opportunity will present itself. The way I see this playing out is consistent with what I've discussed previously. It is really a programmatic approach to acquisitions around that sort of $100 million, $150 million acquisition price, I guess, in terms of the capital outlay for each transaction really important that we get the right first step underway. And that at a cadence going forward, you could see us doing 1 to 2 of those a year as we build out our footprint in industrial filtration. So that's the landscape, as I see it, nothing to report specifically yet. We're working through a strong pipeline of targets very focused on balancing, pivoting our company into attractive growth markets whilst balancing strong returns to shareholders.

Okay. Super. And then as we think about what 2027 U.S. regulations could mean for your business, you have good visibility on engine platforms at this point. Can you talk about the range of content increases that you expect to see on the new specifications. And then part of the warranty program that's essentially going to be included, will it be a 5-year type warranty on the entire engine platform. So to what extent could you see higher market share as a result of that essentially extended warranty on every truck.

Yes. Thanks, Jerry. I think we are a leader in fuel filtration and crankcase ventilation. We're certainly actively pursuing all opportunities ahead of us to move on to new platforms. And as we look to the change in 2027 emissions, that's been a big focus for our sales team, our OE sales team. We've secured those platforms with Cummins. And as you would expect, without going into all the specific details of this rising emissions regulations, gives rise to more significant content for filtration products because of the complexity that's required in those filtration needs. So we certainly see that with the 2027 platforms that we're on, and we've had really strong wins in the fuel filtration and crankcase ventilation space. In terms of your question about warranty and ownership, we really -- we see a very high aftermarket retention in that first win . So certainly, the way I would have you think about this is as we see extended periods of warranty, I would expect our aftermarket capture to extend would be the trend I would see associated with that.

Our next question comes from the line of Joseph O'Dea with Wells Fargo.

Just wanted to touch on the aftermarket share gains and sort of talk about your approach to that a little bit. I would think in terms of like-for-like replacement, the incumbent has the natural advantage. And so when you're gaining share in the aftermarket, what efforts have been going on there, whether that's introducing new products to more broadly sort of compete what you're doing on the pricing side? And any quantification of how much share you think you're picking up.

Yes. So I would say there's a number of things driving aftermarket share. And as you think about our strategy of accelerating profitable growth in the aftermarket, that pillar, it has a number of focus areas underneath that we've been very disciplined in working on. And we're starting to see those many initiatives, I would say, come to fruition. And so the first is just making sure we've got a highly capable distribution network that is very focused on aftermarket customers and having product availability where we need it. I think I've mentioned this several times before, previously, our distribution centers were intermingled with Cummins' supply chain management, Cummins is predominantly our first-fit market. And so that meant we weren't focusing on our customers in the right way in terms of their availability needs in product. And we've just been able to capture gains because that's actually our customers prefer to have our products. It was just we weren't putting it where they needed it to be. So that's been a big part of driving our share gain. It's been predominantly in the U.S., I would say, but also we've seen that across other markets across the world. So that's the first thing I would say is seeing that come to life. This strategy of winning with the winners and partner with those that are successful in growing their share. I would say that's playing out in our market share gains in aftermarket as well. So we see that we're partnered with those that are really capturing share as well, and we're seeing the flow-on benefits of that. In addition, I would say there's a number of other initiatives that we've been pushing on the aftermarket front. We have revamped our branding and marketing around our Fleetguard brand, starting to see that in the filtration science capability that we have that competitors are not able to match. And we're starting to see the benefits of that flowing through as awareness increases across our aftermarket. So I wouldn't point to one thing ever in aftermarket. This is about doing a lot of things well. But if I was to link it to where is most of it coming from, it's really tailoring that distribution and availability network to drive outcomes for our customers.

I appreciate all the details. And then also just wanted to ask on the aftermarket outlook for the year. It seems like the quarter trended in line, maybe even better than anticipated. But if you can comment on that and sort of what aftermarket revenues did for you in the quarter? And then in terms of what you're seeing rest of year that would lead you to think that maybe it's a point lower than what you previously had in terms of the outlook.

Yes. So I guess without laboring around, I think the quarter in aftermarket was stronger than we expected, largely due to the share gains that I talked about. As we look ahead to the market outlook, we really are, I guess, relying pretty heavily on the external market source of the cash freight index. We've seen that's a pretty reliable source for us as a predictor of the U.S. market and correlated pretty closely with our aftermarket revenues. So as we see freight activity increase, we tend to see our aftermarket revenues follow that. And so that they have -- the cash freight index have revised down their outlook for the year, a slightly softer Q2 and a slightly softer Q4 is kind of the way that played out from memory. I think Q2 will be interesting to watch here. And as we monitor our guidance and outlook for the future, as -- then we see Q2 hopefully move freight activity more into positive territory year-over-year. And so that will be an important sign for us as we look to the health of the aftermarket throughout the rest of 2024.

Our next question comes from the line of Bobby Brooks with Northland Securities.

So just trying to starting with switching it up and wanted to talk about the first-fit could you discuss how share gains within the first-fit market have progressed now that we are almost 1 year post the initial split off from Cummins. I know, Steph, you mentioned when in the -- in your prepared remarks. Maybe talk about that road map of winning that contract or maybe more just broadly, have you felt you've made inroads with those larger OEMs who previously weren't used to be got in the first-fit production because they looked at it as helping a competitor? Were some maybe still not willing to gauge pre-share exchange since that ownership? And I'm sorry to interrupt, but you could go ahead.

No. Thank you, Bobby, for the question. I appreciate it. Firstly, I would call out, as you noted in my prepared remarks, obviously, it's always tricky to work out how I give you a sense of this in advance, whilst managing commercially sensitive information. So I'll do my best to straddle that. I will emphasize where we're seeing wins here is where we have clear technology advantage, right? And so on the fuel filtration side, on the crankcase ventilation side, we are seeing more and more wins with our customers on that first-fit side beyond Cummins. And so I referenced one that we've won recently that has driven gains for us in the North American market and in Europe. So that's been a great win here. And then I would say we've made really good progress with the initial discussions with other target growth customers. And I'd say they're not only U.S. based, but also in other parts of the world, we are making very good progress. We have invested consciously and deliberately in our sales team to increase the resources there, focused on [ canvassing ] and winning this business. And so hopefully, as we move ahead here, I'll be able to see the profits of that effort and also be able to share those with you, probably not in advance of them, unfortunately.

Yes. No, I can definitely appreciate how that works. And maybe just sticking with that, obviously, with my discussions with investors, one of the things that I think people are most interested in and positive on with Atmus is just your high aftermarket exposures. But to flip that back to the first fit, am I right in thinking that you could make notable new first-fit wins while keeping that 80% aftermarket weighting, like winning new first-fit job doesn't necessarily mean your aftermarket exposure drops to, I don't know, say, 70%, 60%, you can still win to make notable wins while keeping that high aftermarket exposure?

Yes. We certainly see that flywheel impact. I'd just make a couple of comments on that. We're very focused in our first-fit activity that we're doing that where we have a technology advantage where that also drive further aftermarket growth. We already have a significant installed vehicle base which continues to grow our aftermarket naturally anyway from the installed base that is out there. So I think that 80-20 is about the right mix for our business. And certainly, whilst we're looking to grow both sides of that, I think the mix holds.

Terrific. That's awesome. And then -- maybe just last question for me is, so in my view, one of the most -- one of the most exciting part of that in this story being able to reinvest in the business after years of being a Cummins cash cow. I mean you've previously talked about some exciting reinvestment initiatives such as the fully automated manufacturing line in your France facility. So could you just maybe discuss and curious to hear Jack's thoughts on this as well. But you just discuss maybe early learning that specifically and maybe more broadly, how the overall reinvestment programs have progressed versus expectations? And just generally, any early learnings from them.

Jack, do you want to take this one?

Yes, sure. So I think -- thanks for the question, Bobby. I think absolutely one of the key initiatives for us as we move outside of the Cummins environment is to make targeted capital expenditures to increase both capacity and to accommodate growth initiatives as our sales teams engage with customers, and we work to meet their expectations. And so you highlighted one of those, which is in our Quimper, France facility, fully automated green cartridge line. It is the first fully automated line that we have put in. So of course, there are some learnings there, but it's been really good to see that now Cummins largely into full production, which has allowed us to continue to meet our customers' needs then -- and then potentially leverage those learnings into other markets as we continue to win new business. I do think the range of 2% to 3% is still largely what we're thinking from a capital expenditure standpoint to accommodate that top line growth. But as we identify new opportunities, we'll continue to assess where we need to invest from an organic standpoint. On top of all of the initiatives that we've discussed in the inorganic space.

our next question comes from the line of Andrew Obin with Bank of America.

This is David Ridley-Lane on for Andrew. You had very good growth in the independent distributor channel last year. I wanted to just see if you could share some of the most relevant stats for you. Is this about signing up new distributors, is this about initiatives to kind of grow share within the distributors? How are you getting this kind of market share gain as that has continued here in the first quarter?

Yes. Thanks, David, for the question. I would say, really, it is a bit different by different region is how I would best describe that. We see that we've got the best footprint in the U.S. to service, in particular, our on-highway customers with our established partners today. So I would say that a very mature, established, well operating distribution network, very capable distributors. I talked about being partnered with the winners that are also growing their share and how that has a flow-on consequence in the U.S. aftermarket. So I really think that's about doing it better largely with those customers, although there is some expansion opportunity, whereas in other markets like Latin America, for example, we really see an emphasis on expanding that network of distributors growing those consciously. And we've seen the significant benefits of that. coming through the aftermarket as well. So tailored region by region is how I would describe it to you. The way I would think about it is those where we've got mature, established, capable distributors we're really looking to be partnered with the winners and doing that really well is the focus. And then in other regions that are growth emerging regions, really looking to expand a capable distribution network quickly to support our profitable growth in the aftermarket.

And now that you are formally separated from Cummins and with an updated Board, do you have any update on sort of the priorities for free cash flow or possible cash return to shareholders?

I did make some mention of this in my prepared remarks. The way I think about our capital allocation is, first and foremost, our focus is on funding our growth strategy both organically through our core markets where we still see significant growth opportunity and inorganically as we expand into industrial filtration markets. After that, we certainly are assessing now what return to shareholders would look like, both in the form of a dividend and in share buybacks. Obviously, that's a decision for our new independent Board. So we're working through those discussions with them, and we'll be able to provide updates as and when is appropriate on returns to shareholders.

There are no further questions at this time. So I'll turn the call back over to Todd Chirillo.

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

Concludes today's conference call. You may now disconnect.