Atmus Filtration Technologies Inc. (NYSE:ATMU) Q4 2024 Earnings Call Transcript

Atmus Filtration Technologies Inc. (NYSE:ATMU) Q4 2024 Earnings Call Transcript February 21, 2025

Atmus Filtration Technologies Inc. misses on earnings expectations. Reported EPS is $0.4802 EPS, expectations were $0.53.

Operator: 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.

Todd Chirillo: 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.

Steph Disher: 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 account management team to focus on growth in first fit. We are seeing results. We announced a new business win with a major European OEM for our industry-leading fuel filtration and crankcase ventilation content in 2024. We further expanded our technology leadership in fuel filtration with the launch of our next-generation media in our NanoNet product portfolio, NanoNet N3. This media has wide-ranging applications, enabling compact filter designs while delivering superior service life in the harshest environments across a wide variety of fuels.

The reorientation of our organization for growth coupled with industry-leading filtration technology provides us with a continued opportunity to expand with new and existing OEM customers around the world. Our second pillar is focused on accelerating profitable growth in the aftermarket. We estimate that we outperform the market by approximately two percentage points in 2024. This consistent outperformance in challenging market conditions demonstrates our ability to grow share. We are expanding our product coverage with our industry-leading Fleetguard brand available to customers through new channels to market. We are also investing with our customers in high-growth geographies. For example, we recently held a three-day Latin American customer event focused on strategic discussions, market insights, and business development opportunities.

Additionally, we are using advanced data analytic tools. This enhances our team’s ability to provide our industry-leading Fleetguard products for our customers when and where they need them. Our third pillar is focused on transforming our supply chain. In the fourth quarter, we completed the transition of our Belgian warehouse and have now transitioned 95% of the distribution network from Cummins. While we have not yet realized normal operating levels in Belgium, our team continues to focus on bringing the facility to its full operational capacity and delivering technology-leading Fleetguard products to our customers. Turning to supply chain efficiency, our adjusted EBITDA performance continues to demonstrate the results of our supply chain transformation and the cost reduction efforts we are driving through the organization.

Since 2022, we have expanded adjusted EBITDA margin by 410 basis points. This is a significant accomplishment by the Atmus team, achieving these results during a period of an extended freight recession and establishing our own operational independence. Our fourth pillar is to expand into the industrial filtration market. Our strategy remains focused on growth into industrial filtration primarily through inorganic acquisitions. As a reminder, we are broadly looking at three verticals: industrial air, industrial liquids excluding water, and industrial water. We will continue to take a disciplined approach as we review a robust pipeline of opportunities for inorganic expansion in these three verticals, ensuring any opportunity will be the right strategic fit for Atmus and deliver value to all our stakeholders.

Now let’s discuss our results starting with the fourth quarter. Our team delivered another strong financial performance in the fourth quarter. Sales were $407 million compared to $400 million during the same period last year, an increase of 1.8%. While our strong outperformance drove sales, we are still experiencing soft end market conditions in both our aftermarket and first fit markets. In response to these conditions, we determined it was prudent to reduce costs through restructuring actions in both the US and China. We incurred one-time costs of $4 million associated with employee severance, which are excluded from our adjusted results and my following comments. We believe these actions will allow us to navigate current market conditions while preserving the ability to scale as markets rebound.

Continuing with our results, adjusted EBITDA was $78 million or 19.1% compared to $71 million or 17.9%. Adjusted EBITDA excludes $7 million of one-time standalone costs. Adjusted earnings per share was $0.58 in the fourth quarter of 2024, and adjusted free cash flow was $28 million. Adjusted free cash flow excludes $14 million of one-time separation-related items in the quarter. Now let’s review our results for the full year. Sales were $1.67 billion, an increase of 2.5% from 2023. We saw a strong outperformance throughout the year in the face of soft market conditions. Adjusted EBITDA was $330 million, up from the prior year of $302 million. Adjusted EBITDA margin rose 110 basis points from the prior year to 19.7%. Adjusted EBITDA excludes $25 million of one-time standalone costs.

Expanding margins by 110 basis points is an impressive accomplishment by the Atmus team, especially considering the challenging market conditions faced during the year. Adjusted earnings per share was $2.50, and adjusted free cash flow was $115 million. Now let’s turn to our outlook starting with the aftermarket. We are expecting a recovery in freight activity as we progress through the year, but the timing of the inflection is still unclear. This recovery will be dependent on global economic conditions, which remain fluid. Overall, we anticipate global markets for the aftermarket to be flat to up 3% compared to last year. Our continued execution of our growth strategy is expected to contribute 2% to aftermarket revenue growth. Pricing is also expected to provide an additional 1% of year-over-year increase.

We do expect continued strength in the U.S. Dollar, which will result in approximately 2% revenue headwind. Let’s now turn to our first fit markets. In the U.S., we expect the heavy-duty market to be flat to down 10%. While we expect emissions regulations for 2027 to remain unchanged, the potential impact of a pre-buy in the second half of the year remains unclear. For U.S. medium duty, we expect production to be down 5% to 15%, driven by a reduction in backlogs. Demand for trucks in India is expected to be flat to down as we have yet to see the ramp-up in government infrastructure spending. And in China, where we have low visibility to the market, we anticipate weak market conditions to continue. Overall, we expect total company revenue for 2025 to be flat to up 4% compared to the prior year, with global sales in an expected range of $1.67 to $1.735 billion.

We expect our strong performance to deliver adjusted EBITDA margin in a range of 19% to 20%. Adjusted EPS is expected to be in a range of $2.35 to $2.60. Now I will turn the call over to Jack to discuss our financial results in more detail.

Jack Kienzler: 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 by $3 million for capital expenditures related to our separation from Cummins, and free cash flow has also been adjusted by $12 million for working capital and other items. Now let’s discuss our full year 2024 financial results. Sales were $1.67 billion compared to $1.63 billion in 2023, an increase of 2.5%. We benefited from pricing actions and higher volumes, which were partially offset by foreign exchange headwinds. Gross margin was $462 million, an increase of $29 million from 2023.

In addition to favorable pricing and volume, we saw lower variable costs, which were partially offset by higher manufacturing and logistics costs, along with an unfavorable foreign exchange impact. Selling, administrative, and research expenses for the full year were $228 million, an increase of $11 million compared to the prior year. The increase was primarily driven by increased people-related costs, partially offset by lower costs related to our separation from Cummins. Joint venture income was $34 million in 2024, flat to the prior year. Other income was $7 million in 2024, compared to $3 million in 2023. The increase was primarily due to higher interest on cash balances and foreign exchange gains resulting from balance sheet hedging programs.

Adjusted EBITDA was $330 million or 19.7%, compared to $302 million or 18.6% in 2023. One-time costs related to separation were $25 million. We have substantially completed our separation activities from Cummins and expect to be finished this year. We believe these costs will be in a range of $5 million to $10 million in 2025. The effective tax rate for 2024 was 21% compared to 24.3% in 2023. The decrease was driven by a change in the mix of earnings among tax jurisdictions and one-time use of foreign tax credits. For the full year 2024, adjusted EPS was $2.50, compared to $2.31 in 2023. For the full year 2024, adjusted free cash flow was $115 million compared to $152 million in 2023. Adjusted free cash flow was unfavorably impacted by higher inventories primarily to support our warehouse transition in Belgium, along with the timing of certain tax and accounts payable-related items.

Free cash flow has been adjusted for the full year by $15 million for capital expenditures related to our separation from Cummins. Free cash flow has also been adjusted by $39 million for working capital inefficiencies associated with the move from intercompany settlement terms with Cummins to standalone practice. In 2025, we expect to incur $5 million to $10 million of one-time capital expenditures related to the completion of our separation from Cummins. We do not expect any impact related to intercompany settlement terms in 2025, as this process is now complete. Let’s turn to our balance sheet and the operational flexibility it provides us to execute our growth and capital allocation strategy. We ended the quarter with $184 million of cash on hand combined with the full availability of our $400 million revolving credit facility, we have $584 million of available liquidity.

Our cash position and continued strong performance during the fourth quarter of 2024 has resulted in a net debt to adjusted EBITDA ratio of 1.2 times for the twelve months ended December 31st. In closing, I want to thank our global team for delivering another year of solid performance to all of our stakeholders. Now we will take your questions.

Q&A Session

Operator: 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.

Joseph O’Dea: 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.

Steph Disher: 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.

Jack Kienzler: 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.

Joseph O’Dea: 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?

Steph Disher: 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.

Joseph O’Dea: And that’s both aftermarket and first fit? In terms of sharing?

Steph Disher: Yep. That’s right.

Joseph O’Dea: Great. Thank you.

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

Rob Mason: 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.

Steph Disher: 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?

Jack Kienzler: 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.

Rob Mason: 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.

Steph Disher: 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.

Rob Mason: Very good. I’ll hand it back. Thank you.

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

David Ridley-Lane: 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?

Steph Disher: 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.

David Ridley-Lane: 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?

Jack Kienzler: 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.

David Ridley-Lane: 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.

Jack Kienzler: 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.

David Ridley-Lane: Got it. Thank you very much.

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

Tami Zakaria: 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.

Steph Disher: 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.

Tami Zakaria: 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?

Steph Disher: 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.

Tami Zakaria: Understood. Very helpful. Thank you.

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

Bobby Brooks: 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?

Steph Disher: 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.

Bobby Brooks: 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?

Steph Disher: 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.

Bobby Brooks: 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?

Steph Disher: 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.

Bobby Brooks: 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.

Steph Disher: 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.

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

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

Jerry Revich: Yes. Hi. Good morning, everyone.

Steph Disher: Good morning, Jerry.

Jerry Revich: 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?

Steph Disher: 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.

Jerry Revich: 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.

Steph Disher: 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.

Jerry Revich: Thank you.

Steph Disher: Thanks, Jerry.

Operator: That concludes the question and answer session. I would like to turn the call back over to Todd Chirillo for closing remarks.

Todd Chirillo: Thank you. That concludes our teleconference for the day. Thank you all for participating and your continued interest. Have a great day.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.