Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmus Filtration Technologies fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Press the star one. I would now like to turn the conference over to Todd Chirillo, Executive Director, Investor Relations. You may begin.

Thank you, operator. Good morning, everyone, and welcome to the Atmus Filtration Technologies fourth quarter and full year 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 at the investor relations pages available on our website at atmous.com. Now, I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. Our team achieved another quarter and full year of strong results by delivering industry-leading filtration solutions for our customers. I want to thank our global team for their tremendous efforts throughout the year that made these results possible. On the call today, I will provide a summary of our fourth quarter and full year financial results and our outlook for 2025. I will also share some of the significant progress we have made implementing our four-pillar growth strategy. Jack will then provide a detailed review of our financial results. As I reflect on 2024, I would like to highlight some of the unforgettable accomplishments our team delivered during the year. In March, the common share exchange was completed, and for the first time in our more than 65-year history, we became a fully independent company. This has allowed us to accelerate our growth strategy and deliver significant market outperformance. We initiated our capital allocation program balancing share repurchases with a consistent dividend return. Since our announcement in July, we have repurchased a total of $20 million of stock, $10 million in both the third and fourth quarter. We have $130 million remaining under our board authorization and expect a continuation of capital return to shareholders in 2025. Separation from our former parent Cummins and intend to be complete in 2025. As we begin 2025, we have launched our We Protect campaign to increase awareness of our Atmus brand. The campaign is focused on three key elements: science that safeguards, championing a cleaner world, and securing a better future. Now let's turn to the four pillars of our growth strategy and highlight from 2024. Our first pillar is to grow share in first fit. We have realigned our organization and added resources to our…

Thank you, Steph, and good morning, everyone. We delivered another quarter of impressive financial performance. Sales were $407 million compared to $400 million during the same period last year, an increase of 1.8%. The increase in sales was primarily driven by higher volumes of 2% and pricing of 1%, partially offset by foreign exchange of 1%. We continue to outperform in many of our global markets. As Steph mentioned earlier in the call, we incurred $4 million of one-time restructuring costs during the fourth quarter related to employee severance costs. These costs are excluded from our adjusted results and from my following comments. Gross margin for the fourth quarter was $107 million compared to $106 million in the fourth quarter of 2023. In addition to volumes and pricing, we also benefited from lower manufacturing costs, partially offset by higher logistics and material costs. Selling, administrative, and research expenses for the fourth quarter were $59 million, an increase of $1 million over the same period in the prior year. Joint venture income was $8 million in the fourth quarter, down $1 million from our 2023 performance. Other income was $5 million, an increase from $1 million in the fourth quarter of 2023. The increase was primarily due to higher interest on cash balances and foreign exchange gains as a result of balance sheet hedging programs. This resulted in adjusted EBITDA in the fourth quarter of $78 million or 19.1% compared to $71 million or 17.9% in the prior period. Adjusted EBITDA for the quarter excludes $7 million of one-time standalone costs. Adjusted earnings per share was $0.58 in the fourth quarter of 2024, compared to $0.49 last year. Adjusted free cash flow was $28 million this quarter compared to $30 million in the prior year. Free cash flow has been adjusted…

Thank you. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. We also do request for today's session that you please limit to one question and one follow-up and requeue to ask additional questions. Thank you. And our first question comes from the line of Joseph O'Dea with Wells Fargo. Your line is open.

Good morning. Thanks for taking my questions. Can we just start on EBITDA margin, the 19.7% in 2024, was clearly very good. It was above the high end of the initial guidance range. Just to sort of put in perspective, any kind of non-repeats that you saw in 2024 to rebaseline that number and help us think about 2025? And then just from a quarterly cadence perspective, Q2 of last year was obviously strong. Should every other quarter in 2025 be up year over year, you know, just any color there on the quarters.

Good morning, Joey. Thanks for your question. I'll ask Jack to walk through the question on margin and then the sequential quarters as you asked.

Great. Thanks, Joe. Good morning. Yeah. So as I think about, you know, I'll start first maybe with the full year view. And so as you think about, you know, what's driving, you know, kind of the step down, year over year to the midpoint of our guidance range, there's really, I would say, two factors. First of all, we are expecting a much more significant headwinds from FX this year relative to last year. Obviously, that affects our top line as implied with our 2% guide there on the top line, but also will bleed through to the bottom line, particularly where we have a mismatch, if you will, between our revenue and cost base. That's one headwind, which will exist this year. If rates stay where they are relative to the environment we operated in in 2024. The other piece I would just point out is, you know, we do operate on a lag from a pricing perspective, and so we are into, you know, various input costs to be a headwind, particularly at the beginning of the year. You know, steel is one of our big commodities and, you know, depending on what happens with tariffs, we do anticipate an increase in overall steel prices and we also, you know, envision an inflationary environment as it relates to people costs and labor costs. And so we do anticipate those to be a headwind. We will of course look to take potential pricing for that, but won't have the flexibility to do that, really until the midyear. So all in, as I think about the sequential build, you know, we've talked in the past about the first half generally being about 5% stronger than the second half. I would expect this year to look a little different than that based on the overall market cycle dynamics. As we've talked, you know, we are anticipating an aftermarket recovery, albeit most likely, you know, second half or at least later in the year weighted. And furthermore, on the first fit side, any recovery that we may see would also come in in the back half of the year. And so as I think about, you know, comparisons to prior year quarter, I think, you know, both the first quarter and the second quarter will be, you know, challenging comps and then easier comps as the market recovers in the second half of the year. From a margin perspective, you know, I think the first quarter likely looks fairly similar to last year's both, you know, top line and margin levels, with then sequential improvement as volume picks up and price realization, you know, kicks in throughout the year.

That's great color. And then Steph, just wanted to touch on the outlook for outgrowth and a little maybe additional color on the aftermarket side and the first fit side. As you sit here today and those expectations for outgrowth, the visibility that you have into that, how much of that is carryover from things that happened in 2024? How much of that is sort of new wins in 2025?

Okay. Yeah. Thanks for that, Joe. Look, I'd say we feel very positive about the outgrowth we've given in the guide of around 2%. Feel like that strongly underpins by committed business and wins that we have made with new partners. And so, certainly, in the aftermarket, they have been a very strong outcome for us throughout 2024 and will flow here into 2025. So I'd say I feel comfortable with it being underpinned. There are certainly some things towards the second half that we need to see that they land, but I feel good about the market share gains being underpinned by pretty solid wins that will carry over into 2025.

And that's both aftermarket and first fit? In terms of sharing?

Yep. That's right.

Great. Thank you.

Thank you, Joe. Our next question comes from the line of Rob Mason with Baird. Your line is open.

Good morning, Steph and Jack. Maybe I'll revisit a prior question, asking it a little bit different way just around the cadence and seasonality. You may have different numbers, but my math is, you know, based on historical seasonality, if I run kind of run that out at historical seasonal, I'd kind of land at the midpoint of your revenue guidance, but I guess, Jack, you're saying you know, we should wait, we should shift though that weighting more towards the second half, and I'm just curious, you know, if you have any more granularity on how maybe the first half should how much it should be underweighted versus history.

Yeah. So, Rob, I think you're absolutely right. I think we tend to say around 5% overweight in the first half. And then working days a lot of this with our heavy exposure to aftermarket I think what you're seeing in terms of outlook that's embedded in our thinking about, you know, as well as through 2025 is obviously depressed first fit markets in the first half, we are expecting a rebound in the second half of first fit. And then we're not seeing the turnaround in aftermarket yet in this first quarter is the way I would describe it. So we certainly see that more weighted towards the second half as well. Is how I would describe it. And then certainly, in the near term on a revenue perspective, we have got these FX headwinds that we that are in the in the first half that we will not be able to, you know, price for fully until until the midyear is how I would describe it. I think Jack referenced to you, and I'll let Jack add any remarks he has here. But that's the first quarter in particular that first quarter 2024 is a good guide as to where we see as where we see the level. What would you add, Jack?

Yeah. I think that's, you know, particularly true on the margin side, really driven again by volume, FX, and then, you know, input costs, you know, that we're experiencing in the market. So I think you said it well.

Understood. And then just, you know, again, a question as you think about maybe the latter part of your four strategies, your four strategy that diversify the business. Maybe on the just internally, the new media technology, new Nanonet that's introducing, you know, can you speak to any opportunities there to leverage that to move into new markets and, you know, maybe, you know, how quickly that could be on the horizon if that's an opportunity.

Yeah. Thanks, Rob. We really see this launch of new media and Nanonet in our Nanonet portfolio range gives us optionality across both our power solutions segment and also into new markets, into industrial filtration. So the way we're thinking about our technology strategy and the leadership there and the opportunities available to us and what this unlocks is really things like smaller filters being able to make more compact options, which allows, you know, for a better value offering for our customers, our existing customers, existing core markets, and new partners in those markets. So it certainly unlocked and enabled that opportunity. We'll give us greater flexibility on filtering a range of different types of fuels as we, you know, continue to see the energy transition and different fuels that we will need to filter. So it'll give us a lot of flexibility in our core business. And then we've always seen big expansion and development of our media technology for finer particles to really underpin our optionality as we step out into industrial filtration. I wouldn't link that to an immediate opportunity, industrial filtration. This is about us building our technology platform to be able to enable our broader strategy and it will leverage both across our existing markets in our power solutions segment and across the industrial filtration markets.

Very good. I'll hand it back. Thank you.

Next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Yes. Hi. This is David Ridley-Lane on for Andrew. Just on sort of the restructuring cost that you took, are these more structural in nature or could some of these costs come back as volumes come back? And then what's the payback period for you on a program similar to this?

Yeah. Thanks for your question. I would describe it. We took structural actions associated with the downturn in the market. And so those actions were deliberately targeted in the US and in China. I think we expect continued weak activity in China for an extended period of time. We cannot see a recovery for that inside 2025. So I certainly expect those restructure assets to hold in China. In the US, I think those actions we would look to assess the market as the market rebounds and we also want to make sure we're making deliberate and intentional investments in areas where we want to grow. And so we will make some intentional investments back in associated with growth. Largely in the US. But I, you know, the China actions were very much structural in a market that is challenged for the foreseeable future.

Got it. And just in terms of paybacks, should we think of this as all of us being equal providing that $4 million benefit to you in 2025, or is it a little bit longer-term payback?

I think it'll be so David, it'll be a, you know, a little bit longer than that really driven by Steph's comments there around, you know, reinvestment, you know, in our four pillars for growth. Right. And so wanted to take those actions given the current market environment and then as and when we see the markets begin to recover, you know, we really want to take that opportunity to fund various initiatives to continue to bolt our top line growth initiative.

Got it. And just a quick one on clarify the guidance a little bit on the aftermarket. So aftermarket up 1% to 4%, your aftermarket revenue for full year 2025 of 1% to 4%, and what would that imply on the first fit side? Thank you.

Yeah. So aftermarket would be up for the full year 0% to 3%. And on the first fit side on a global basis, both of these numbers are global blends. But on the first fit side, we expect it to be down 0% to 10%. The market.

Got it. Thank you very much.

Thank you. Next question comes from the line of Tami Zakaria with JPMorgan. Your line is open.

Hi. Good morning. Thank you so much. First question is on pricing. I think I heard you say about 1% for the year, and also pricing is lagged. So are we expecting pricing 1% throughout the year, or is it expectation that pricing would actually accelerate in the back half? Especially if steel prices go up because of all this tariff noise.

Yeah. Tami. Good morning. It's a great question. What's implicit in our guide is 1% on price. That does not incorporate at this point a second half price increase is the way I would describe it. We will continue to monitor conditions. This will involve a number of different conditions as you highlight, input costs, on steel and others. It will also include monitoring of FX and how that plays out. And, obviously, the tariff situation is ongoing and uncertain and so it will involve monitoring of that as well. But right now, the guide incorporates the pricing which we've already taken at 1% and does not include an additional pricing action in the second half at this point.

Understood. That's very helpful. And my second question is, it's almost a year since your separation, how are you evaluating your efforts in winning the first fit new first fit deals? The reason I asked do you expect any OEM wins in the near term that could help you outperform the weak OEM build forecast for this year?

So as you know, I think with the different parts of our business, so the first fit wins tend to be a longer-range activity in terms of incubating those new customers, working through trialing and testing products, and usually, because of our strength in fuel filtration, for example, connected with emissions cycle changes. And so I say a lot of the cycle changes have been determined for the next emission cycle for 2027. We have certainly announced the win that we had inside 2024 in first fit, which will flow over and bring benefit into the aftermarket as we also secure the aftermarket as associated with that business. And we have certainly seen share growth on first fit and in fuel and crankcase ventilation, which we monitor throughout 2024. So we have seen that share growth and we are also continuing to monitor through our win rates, is how we measure it with our team, through our win rate with quotations, and consistently tailoring and adjusting the resource we need, actually, to support our growth aspirations in both First Fit and aftermarket. We spoke about the reinvestment in growth related to the restructure costs just now. A lot of that reinvestment for growth we're making is in and around in a targeted way this account management focus.

Understood. Very helpful. Thank you.

You're welcome. Thanks, Tami. And our next question is from Bobby Brooks with Northland Capital Markets. Your line is open.

Hey. Good morning, guys. Thank you for taking my question. First, just want to start, could you maybe help us understand what actions you could take to limit exposure to tariffs that would impact your manufacturing footprints in both China and Mexico? And maybe just remind us what markets those products that are made there ultimately are then sold into?

Yeah. Thanks, Bobby. Good morning. So our team have been working extensively on tariffs over the last several months. And have modeled various different scenarios. As you are aware, it's a fairly uncertain environment that we are operating in. We have sort of assessed all of the scenarios. The only action that has really been currently implemented that has impacted us in an immaterial way. I would describe it as the China tariffs that were implemented here recently. We have actually taken action to price for those China tariffs. It is impacting only a small part of our business, and the reason for that is mostly around the world. Our manufacturing strategy is region for region. And in China, particularly, it's China for China. Where we do have some exposure is the largest manufacturing facility is in Mexico. And that Mexico manufacturing facility supports the US market. And, obviously, we've modeled a range of scenarios on if there was a tariff implemented on Mexico, if there were retaliatory tariffs, in place, what would be the various actions that we would take in the short and the long term. There are a series of actions that would require. Our team are very well equipped to respond to this. Subject to how it plays out. It is difficult to fully predict exactly how that's gonna play out and you start talking about hypotheticals upon hypotheticals. So probably not that useful to do that. But I feel very confident through a number of actions, whether that be pricing, whether that be us to shift our sourcing around because we have a lot of flexibility in our sourcing strategy, and the resilience of our supply chain. You know, we've got a good handle on the range of scenarios, and we'll be able to act. And in the most recent situation with the China tariffs, that's what we've done. We've acted with pricing already.

Yeah. That's terrific color. I do kinda want to double click on that a little bit. Little because it seems like you guys do have plans in place, and I think it would be helpful for us just to maybe just hear about, you know, maybe some of those potential plans. So could you just specifically with Mexico, given that obviously largest manufacturing facility and that supply in the US market, so could you maybe just walk us through maybe one example of maybe some levers that you guys have modeled out that you could pull to help insulate your business a bit?

Yeah. Bobby, look, I would say it does really depend on how the scenarios play out. And, you know, I think the immediate lever would be pricing. Obviously, this is the most immediate action we would need to take, and that's the way we have approached the China tariffs, and we're set up and ready to be able to do that. And then, you know, I think the range of others that we would implement would really depend on how the various decision-making of the different administrations around the world plays out. And so that's the additional color I would give you at this point. We are very well set up for dynamic decision-making on this. It's the best way for me to describe it. And, you know, I feel confident that we understand the impacts, we do need to be able to adapt as the different decisions are made.

I can appreciate that answer, and thank you. And thanks for the color. And I think investors should give you guys the confidence you and Jack have really executed actually since the separation. So Kevin, the next question here for me is how's the initial reception been from your first industrial filter? Kind of first step into the industrial market that you guys did there organically that you mentioned on the last call. You know, how have sales gone versus expectations? And could you maybe remind us what type of industrial environment that product was in is being used in?

Yeah. Thanks for that, Bobby. You know, one of this I've always said that our intention in industrial filtration expansion, our primary path is through inorganic expansion and through acquisition. And we're still actively pursuing that. At the same time, the team have identified the opportunity to launch a range of products to support industrial applications and have partnered with a handful single digit of distributors to support the distribution of that product. It's in its infancy phase is what is how I would describe it, not a material amount of revenue at this stage. And I don't expect a material amount of revenue through 2025 from that channel. The primary path for industrial filtration expansion is still intended through acquisition.

Completely understood. And maybe just last one is on the inorganic expansion in the industrial. Could you maybe just give us a sense of, you know, what have what's kind of been the biggest delta between what you guys are willing to pay and stuff that you've been looking at? Because it seems like that's probably the reason you guys haven't made any actions and any color on what you see happening now in the market that could maybe change that.

I appreciate that. Look, I would just say our process for M&A we've been very disciplined and diligent around this. We've got a team working on it. We've got a very robust set of pipeline that we've identified, and then we're really working that pipeline for targets to progress. And we have progressed a number of targets to the due diligence phase. As part of that, the reason not proceeding with those targets has not been valuation, actually. We're pretty comfortable with, you know, the targets that we're pursuing in the valuation range. What we're really trying to marry is this is strategic fit and aspirations that we have at Atmus. How are we gonna be able to scale a smaller entry business? Either through our global footprint or otherwise? We want to be able to see a path to being able to scale that. And that has been one of our restrictions. And then, of course, we're very focused on this balance of ensuring we can create value for shareholders. And the returns. And so the mix of strategic fit, and scaling and ensuring we create those returns in value. But it hasn't been particularly evaluation.

Very well said. Appreciate all the color, guys. And thank you for the answers, and I'll return it to you.

Thank you, Bobby. And our last question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

Hi. So you folks have hit your, I think, aspirational margin targets a couple of years ahead of plan. Can we just talk about do you see incremental margin improvement opportunities from here or are we at the point that we were targeting that pre-IPO? Is this essentially the cruising altitude?

Yes. Thanks, Jerry, for the question. You're right. As we set out on this journey in 2022 talking about it, and we've embarked on the first use a big part of our margin expansion opportunity was the supply chain transformation, the third of our strategy. And we had a three-year program. We're now in that third year of the program. And we have delivered ahead of our expectations the margin expansion opportunities. We will continue to deliver cost savings in the supply chain this year aligned with our plan, but that will put us in this guidance range that we've talked about of the 19% to 20%. So I do think we have hit what is a strong margin performance for our business, and we intend to continue to sustain that is how I would articulate it. Where I see us transitioning now in our supply chain transformation is really underpinning, empowering our growth strategy on top line growth. So very much focused on how do we value engineer our product, how do we have a better value package for what our customers' needs are, and then how do we grow share faster than we have been? Faster than the market, on a sustainable basis? And that really is the shift in the supply chain as well as obviously the rest of our organization. So the short answer to your question, I think that 19% to 20% of the guide is strong margin performance and where we, you know, where we see ourselves operating, very focused on unlocking growth requires potential throughout supply chain transformation and across the organization going forward.

Okay. And separately, wondering if you folks can talk about the first fit end market assumptions and particularly what you're assuming in China and if demand in China does surprise to the upside, I'm assuming you folks would be in a strong position to respond. But maybe you could just fact check me on that and talk about how quickly folks can scale if demand does surprise to the upside.

So our outlook for China at the moment is continued weaker conditions. And the midpoint of our guide is kind of flat. It was a poor year last year, and we kind of see that continuing into this year. It's a wide range for us. I think we're saying down, you know, down 5% to possibly up 5%, and we've talked about not having great visibility through the China market. So we can scale up if we need to. Our current outlook is that it's weak conditions near through 2025.

Thank you.

Thanks, Jerry.

That concludes the question and answer session. I would like to turn the call back 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. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.