Thanks so much. We have the next presentation is Atmus Filtration, and we have the company's CFO, Jack Kienzler. We also have the IR team here. We have Todd Chirillo. Thanks so much for being there. Look, I think the way we describe Atmus to people, it's sort of the little engine that did and will. I think the performance since the IPO has been a massive upside surprise in a very good way. Thank you. With that, we're going to go to our fireside chat. Thanks so much.
Good.
All right. Yeah, maybe we can talk about durability, visibility. The last few months have really demonstrated, I think, the durability of Atmus's earnings versus OEMs and other component providers. You've seen a 5%-10% cut to U.S. machinery stock EBITDA estimates, but Atmus maintained guidance. What areas have been most resilient?
Yeah. Thank you, Andrew, for having us, first of all, and for the kind words. Thank you, everyone, for your interest. Look, I think what you're seeing here is really the resiliency of the aftermarket nature of our business. Over 80% of our revenues are derived from the aftermarket. That allows us to weather the inherent cyclical markets that we serve quite well. It has enabled us to provide a bit of security in times of turbulent markets. What we're most pleased about, I would say, is the ability to execute through times when the market is down. We've been in a broader freight recession here for many quarters in a row. Being able to execute throughout that, I think, positions the business well to really deliver even more as our markets start to pick up.
Really excited about the progress we've been able to make across all of our four core growth and strategic platforms and looking forward to continuing to deliver against those as we move forward.
Excellent. Maybe we can talk about first fit. It was 14% of revenue in 2024, down from 19% in 2023. Maybe could you help us to put some context around that revenue mix? Was it get down to in 09%, like 14% seems low, but how low is low?
Yeah. As a reminder for everyone, as I mentioned, over 80% of our revenue is derived from the aftermarket. Then on an annual basis, somewhere around, I would say, kind of 15%-20% derived from the first fit. As you're noting, Andrew, it can ebb and flow a bit each year. I would say that this is about the low that we see. It's really pronounced. It's driven by the fact that, as I mentioned, inherently, the aftermarket peak to trough is much more muted than the first fit. Right now, we're in a period where first fit is down in double digits. We've got, in our guidance, the market from a first fit perspective down about 12% at the midpoint. When that's down, you see the inherent pull-through to that mix at the top line.
That can be a little more further pronounced if certain geographies are also contributing to that lower market level. Specifically, somewhere like China, for example, which has kind of been bouncing along the bottom, that tends to be more of a first fit-centric market for us. If that's down, that can drag that portion down.
Maybe another couple of percentage points?
Yeah, I think would be the trough, if you will, from a first fit perspective. We believe quite firmly in the importance of the first fit markets as a flywheel to pull our installed base in the aftermarket. It is a really important piece of the business. It just inherently is more cyclical than the aftermarket and the freight dynamics.
Gotcha. At the low end of 2025 guidance, it calls for flat revenue. You were explicit not calling for a recession. How much visibility do you have into first fit production volumes in the second half? Yeah. How do you know what your customers do? Do they share their internal volume forecasting with you?
Yeah. Generally speaking, we have ongoing dialogue with our OEM customers. Inherently, with all of their supply base, including Atmus, they provide us their outlook on the market so as to ensure that their supply base is ready to serve their needs as and where they need volume. There is an ongoing dialogue between our commercial team and the likes of Cummins, PACCAR, Traton as we work through outlook for the market. It is important to note that that volume is not guaranteed. It is a continuous dialogue. As we get closer to that month or quarter when we are supposed to deliver the product, you get a bit more clarity.
Based on what we're seeing right now and the continued discussion with our OEMs, we have lowered our outlook from the initial outlook provided in February, again, to about 12% down year- on -year at the midpoint. Really what that reflects is sort of an elimination, if you will, of any pre-buy activity that could have come in in the on-highway markets towards the end of 2025. That was our initial expectation. With some of the reevaluation of the upcoming emissions regulations, I think the broader sentiment in the industry is that that is not likely to happen.
Right. Maybe I can push a little bit further. We had a truck distributor here before and somebody I respect a lot. I guess he was indicating that one of the OEMs only will give you production slots through July. There is another OEM which actually has made production slots available, but you have to commit to non-cancelable contracts, which in his view is the same as not having production slots. How do you deal? Is it ACT? Is it your internal modeling? Is it because you've been in business for so long? Right. It really does seem on trucks, right? Probably, I think, and I'm clearly putting words in your mouth, it seems that I think people think third quarter is the bottom, right? As I said, it's hard to forecast. I don't recall.
I think I've been looking at the industry for two decades. I don't recall a time where you could not get production slots like three months out.
Yeah. Yeah. I think it's really a reflection of the broader uncertainty that's impacting not only aftermarket, which we can talk about more as you think about global trade activity, but also our first fit markets where.
It's a first fit question.
Yeah, exactly. Where I think there's an inherent level of uncertainty and a hesitation on the part of end customers, fleets, what have you, to commit to any type of pre-buy activity given the uncertainty in the regulation. I think what could further exacerbate that and make the uncertainty even more pronounced is if you do have significant price increases that the OEMs are trying to pass through as a result of tariffs, that becomes fairly difficult to do as you think about the residual impact perhaps on demand. Keeping a very close eye on all that, I think the uncertainty that you're referring to there reflects a bit of that hesitation or lack of clarity on the end customer side.
Therefore, I think you see kind of the downstream effect of that as you think about the OEMs and their hesitation to give too much clarity into specificity as it relates to the end of 2025 or even into 2026 at this point in time.
Gotcha. So maybe we can talk a little bit about geography. Can we go around the regions? Maybe Europe, Latin America, China, and Asia ex-China?
Yeah, sure. I think we've talked a little bit about North America, but maybe I'll add that in and start there. Again, keeping with the first fit, if you will, we are expecting medium duty and heavy duty to be down this year and are continuing to see that in the market. As I think about working my way around the world, Latin America, from a first fit perspective, still relatively challenged. We have seen a few green shoots in aftermarket, but those have largely been offset by softness related to the uncertainty from a trade perspective.
What aftermarket in LatAm? Is it ag or trucks?
That would largely be on-highway trucks. I'll make sure I circle back on the end markets too. Obviously, FX headwinds in Latin America as well. Europe also fairly depressed. We were hoping to see some green shoots in construction perhaps, but haven't quite seen that pull through yet. In Asia-Pacific, excluding China, again, continued softness. I hate to paint a depressing picture there, but if I think about a bell curve of kind of where are our various markets at with respect to being on the upswing or in the trough, most I would say are in the trough. Still hopeful that India is probably the first to lead out of that trough, but haven't quite seen that yet.
Obviously hopeful that the aftermarket can continue to gain momentum if we get certainty on broader trade policies as we move throughout the year.
Maybe we can talk about LatAm growth because I think since 2021, you've grown at a 14% CAGR in Latin America. What is the secret to success in this region? What can you sort of replicate from your Latin American playbook in other regions?
Yeah, I think it's a good highlight of how we've been able to put our strategic growth pillars into action. I would say that the Latin America region historically was a bit underpenetrated as it relates to our steady-state view of where our share should be. We embarked on several growth initiatives there, in particular looking to build out our distribution reach through additional channel points and distributor relationships. Historically, we largely went through our former parent's distribution channel in isolation and now have looked to not compete from a channel perspective with that outlet, but just to broaden our exposure and get our products on the shelf in as many locations that trucks are being serviced, both on-highway and off-highway commercial vehicles. I think the other piece that you're seeing is the ability of the business to price.
That is a reflection of the quality and durability of our brand and the end customer's desire to have that strong product, which can really act as a low-cost insurance policy for them as they put that into their vehicles and ensure that they have as much uptime as possible. That combination of volume with price, even amongst some FX headwinds, has really contributed to a nice growth story in Latin America. To your point, where can we leverage that elsewhere? I think there are certainly other markets that we are underpenetrated in. Europe comes to mind, although the macro environment there is not quite as fast-growing. There are some price challenges, I would say, in that market.
This blueprint of how do we add to our aftermarket distribution outlet and just broadly win share is really the core foundation of our first two growth pillars around first fit and aftermarket and really spreading our wings, if you will, as we came out of the separation.
In theory, Europe could be another market where you could sort of see.
Yeah, Europe if our share would be a little underpenetrated, kind of like Lat Am would be. And then there's, I would say, different markets as I look to like the Asia-Pacific region where we have lower share relative to what perhaps an entitlement would be.
Within Europe, if growth picks up, which markets should we think are more natural for you to sort of go after market share?
Yeah. I think as I think about if I cut it by end market versus country per se, where can we lift our share? I think many of the off-highway markets come to mind where construction, for example, or maybe perhaps ag are those some areas where we just historically have not had a massive presence that we could look to exploit with our product range in hand. Certainly on-highway is always a place where we sort of lead with technical strengths, particularly on the fuel filtration side. We will see.
Gotcha. Thank you. Maybe we can talk about pricing. Historically, Atmus has realized pricing on a lagged basis, which tariffs seem to be acting a lot more quickly. What's different this time? Just maybe, are you doing surcharges or are you doing price increases?
Yes.
What's your competition doing?
Yeah, absolutely. Generally speaking, as you note, historically, our pricing in the aftermarket in particular has gone in at the beginning and in the middle of the year, so January and July, if I kind of speak generally. We are continuing to do that in response to broader inflationary dynamics, whether it be steel or other input costs. That is embedded into our guidance as 1.7% for our annual pricing in 2025. On top of that, we in extenuating circumstances look to take appropriate measures to make sure we're whole from a cost and a gross margin perspective. We are, of course, looking to do everything we can to mitigate the impacts of tariffs, starting first and foremost with exemptions that we can avail ourselves of.
USMCA is probably the most notable example of that, where historically, the vast majority of our product qualifies for USMCA. We are in the process, the final processes of that qualification for this year. That allows us to offset the tariffs at imports. We will look to recoup anything that we have leaked, if you will, over the course of the end of the first quarter and into the second. The second piece we look at to mitigate tariff impacts is any resourcing or shipping lane reconfigurations that we can utilize to minimize the impact that we ultimately have to pass to the end customer. At the end of the day, the biggest mitigating lever that we have in this very fluid environment is pricing.
To be specific, what we've done is for the most part, that pricing is being passed through in the form of base pricing. Obviously, as we engage with our customers, we try to give them a sense of why that is happening. I would say that's from what I've seen from an industry practice perspective, reflective of what others are doing with us and what our channel partners, the likes of the OEM dealer networks, for example, are also doing. I think it remains to be seen. That's obviously a pretty fluid dynamic. We had already taken the pricing actions. Obviously this week have received different news on China specifically. We'll continue to monitor the situation and react accordingly.
The principle that I would leave everyone with is that we intend to be margin neutral and we'll take the right measures to protect the business.
Maybe just sort of on the first fit side, right? In this environment, maybe an opportunity. Is there the possibility on the first fit to use this tariff and supply chain events to get better contractual terms and conditions? We recognize that these true partnerships with OEMs go back decades, but I guess legacy of locking in price downs with no flexibility has been tough. Does this open more avenues for dialogue with the OEMs? Are they receptive to maybe changing things?
Yeah, I would say broadly speaking, as you note, there are long-term agreements that we have in place with our customers, the OEs on the first fit side. Generally, those are kind of program by program, if you will. As you can imagine, those have evolved over the years as you see more things that you might not have contemplated a few years ago, most notably as of late tariffs and look to build in that into the next round of LTAs. I think that's not unique to Atmus. I think it's unique to everyone in the industry is doing it. At the end of the day, it's a negotiation on the OE side. We've continued to have constructive dialogue with our OE partners, as are they with their customers. I think ultimately we'll reach a constructive outcome there.
If you step back and you've looked, unprecedented, we haven't seen inflation like this since the 1970s. I remember from my sort of previous days, I remember when CAT had to face price increases like 20 years ago, they literally brought back guys from the 1970s who knew how to go to the customer and ask for the price increases, but then they did get the price increases, right? Has there been evolution if you just go back, not specifically six, twelve months ago, but the industry has just gone through a massive supply chain inflationary shock? Ultimately, do we come out with more flexibility versus OEMs or it's just, hey, you have more pricing power to your customers and that's what you get and take it, which is also good?
Yeah, I think at the end of the day, you've seen LTAs evolve. Historically speaking, you wouldn't see commodity clauses, FX clauses, now the onset of a tariff clause or something to mitigate broader trade uncertainty. Certainly I've seen the evolution in LTAs for that, as well as I would say constructive dialogue amongst both parties in those discussions. Obviously, there's always timing impacts and ensuring that those price increases can be passed along. I think what's adding to the uncertainty is just where the market cyclicality is. If you think about a pretty soft demand environment on first fit, some of these price increases when applied to the price of an on-highway truck are not insignificant. If you don't have customers lining up to buy trucks, it becomes all that much more difficult to pass it through.
Right. That's exactly it. Totally get it. The next couple of questions, it's sort of we're asking them every company. These come from the management. Do you expect to shift incrementally more of your own production or supply chain to the U.S.? Do you expect your customers to source more from the U.S.? Yeah, any anecdotes from your actually off-highway and trucking guys would be super useful.
Yeah, I think broadly speaking, it's difficult to make a long-term significant choice, like establishing a new manufacturing site amongst such an uncertain time frame. We are, as I mentioned, at this point, solely focused on, first of all, what exemptions can we avail ourselves of? And then what other resourcing, not wholesale reshoring of manufacturing, but resourcing activities can we undertake to mitigate the impacts? And then obviously, price is the biggest lever. We do have a strong manufacturing base in the U.S. already, a significant facility in Cookeville, Tennessee, as well as one in Neillsville, Wisconsin, which allow us to think about resourcing and increasing volumes in those plants relative to our global supply chain. But at this point, no actions in place to close or open any new manufacturing sites.
My view is that that's broadly the same sentiment that everyone in the industry has at the moment. As you're no doubt aware, it's very difficult to make that long-term and multi-year decision when you're amongst a pretty uncertain backdrop. That is kind of where it stands right now. We will continue to monitor the macro environment.
Thank you. I think the tax bill is getting attention. Things like bonus depreciation, domestic manufacturing incentives. Will any of these be important for you? If so, why?
Yeah, so I would say no real dialogue just yet on how those might influence end users' decision-making. Does an end user accelerate or change the timing of their purchase of a vehicle to take advantage of bonus depreciation? For example, I think it's way too early to say, given how hot off the press, if you will, the tax bill is and what, if any, changes that will undertake as it moves its way through Congress and the executive branch. I would say no real constructive dialogue as of yet, and we'll keep a close eye on it.
Thank you. Maybe on tariffs. As I said, the problem is it's very much a moving target. Products imported from China, less than 2% of U.S. revenue, so less than 1% of total revenue. How quickly can you change the sourcing there?
Yeah, so as part of that resource.
As a company, why would you continue to import from China?
Yeah, no, it's a good question. Some of it's based on where we have certain products and are they coming out of, we have a joint venture in China. We also have a wholly owned business in China. We de-risked, I would say, our sourcing landscape a fair bit when this administration was previously in office. As you mentioned, a rather small amount of our cost of sales now, China dependent. We are, of course, in constant evaluation as to where our supply base is and where we manufacture our own product. The challenge at the moment is, do you look to resource that to another low-cost country or alternative source when you do not exactly know what tariff may come onto that country? It makes it a very difficult dynamic. You may trade based on a short-term dynamic and then overnight regret that decision.
We are in the process, I would say, of looking at our supply base to de-risk it and looking at, again, our manufacturing environment, including our joint ventures, specifically in India as to what makes sense and where would we set up our long-term production. You kind of need global clarity, I would say, to make that a long-term.
The question, what's the internal plan if the Section 232 investigation into auto and truck component imports results in tariffs in Mexico facility? And what portion of U.S. revenue comes from imports from Mexico?
Yeah, so broadly speaking, as I mentioned, USMCA is probably the biggest mitigation lever that we've been able to utilize and avail ourselves of. That's not unique to Atmus. Again, it's quite pervasive across the commercial vehicle sector and the auto sector to have quite a commingled supply chain by design on the heels of NAFTA and USMCA. There is an investigation, for those who aren't aware, of Section 232 into the importation of trucks and related parts by foreign suppliers and whether or not that represents a national security interest. Perhaps does that become a lever which leads to the exemption from USMCA no longer being available to us and others in the region. If that happened, I would say that the primary mitigation then becomes price.
I would expect that to flow through in a pretty significant way, not only from our fellow filtration suppliers, but also from the OEMs and any other parts that come through. That is essentially how we would mitigate that. We do not disclose exactly how much comes from Mexico, but as we have noted, our largest facility from a manufacturing standpoint is in Mexico and is a big aftermarket supplier for us globally, including into the United States.
Maybe we can talk about aftermarket volumes and maybe there is a narrative that volumes from China are about to collapse. Regardless, you sort of highlighted, we had this trucking recession that was supposed to end last year and just goes on and on and on. I think last year we were talking about the end of the trucking recession. Just what are you watching internally, right? As you look at the on-highway truck market or vocational truck market, what metrics are you focused internally to try to sort of make heads or tails of what the heck is going on in that market?
Yeah, so the aftermarket is tricky. There's a lot of different indices that you can look at, some of which have flaws in terms of what's included versus excluded. We talk about the CAS fright index, for example, but that doesn't pick up this dynamic of the rise of private fleets.
Yeah, I had somebody call me on CAS, like, yesterday, and I was like, I don't look at it.
Yeah, exactly.
I think the person was very disappointed.
That's been a bit challenging. We look at ACT puts out some aftermarket activity. We look at ATA tonnage. We look at the age of fleets and the potential dynamics that exist there from a backlog perspective and the rise of maintenance costs for an older truck. I would say probably most importantly, we triangulate that quantitative data with qualitative sentiment from our OE partners as well as our other independent distribution partners. I know you mentioned some of those fellow partners here today. I think you probably get a sense of the broad uncertainty that inherently exists in the aftermarket. We haven't seen those green shoots just yet of positive inflection, which is one of the reasons why we brought the aftermarket market piece of our guidance down.
I would just say, I'm sure everyone's tired of hearing it, but the word of the day is still uncertainty and that kind of remains pervasive. I do think if we can get clarity from a broader trade policy perspective, hopefully that can lead to a bit of a resurgence in economic activity and give the market the clarity it needs to pick up. Until we see that, that's what's implied in our guidance. We'll certainly look to keep you all updated with what we hear.
Yeah, I think the best I got from that meeting is that maybe third quarter is the bottom, maybe.
Yeah, I think.
I think maybe with the capital M, all caps probably.
You could say that maybe that's the bottom. I think there is a seasonal pattern to that where the third quarter is a little bit softer in any given year. I think we largely thought that the summer of last year would be the bottom. Now we're lapping that as we sit here today. Yes, hopefully it is the bottom.
Yep. Meanwhile, you're making your numbers. It's not a bad place to be. Maybe on off-highway, 40% of revenue is off-highway and markets like construction, mining, and ag. Maybe just walk us through the trends you're seeing in each one of those verticals.
Yeah, so just to give people perspective, the business is 40% off-highway. Of that 40%, construction is about 35%. Mining is about 20%. And then ag is about 12%. And then you kind of dwindle into some ancillary markets, including power gen. If I had to characterize them, I would say all are down, unfortunately. I was describing that bell curve earlier. And that is certainly the case here. I think you can see that in our customer sentiment as they embark on their own guidance. Construction, of those, maybe the strongest, but again, it is down. It is relatively speaking. And ag is probably the weakest.
Okay. Maybe in the remaining time, we could probably spend an hour talking about, but EPA Model Year 2027 NOx rule.
Yeah.
What's your best guess as to what's going to happen over the next three months to get visibility into where we're going to come out?
Yeah, it's a great question.
I asked what's your best guess. I didn't ask what's going to happen.
Obviously, I would describe us as maybe one level removed in terms of clarity as you compare to the level of visibility maybe that our OE partners have in the space. I would say the broad sentiment if you talk to them is that there is currently a reevaluation going on across a broad number of pieces of that regulation. Some of that regulation likely gets pushed out or discontinued, maybe the pieces that have to do with zero emissions vehicles and some of that. Whereas the regulation itself as to more stringent emissions here in the U.S. could perhaps go forward. Does the warranty requirement no longer hold? And therefore, that offers a break for end users as they think about the cost that gets passed to them as they embark on that? Perhaps. Again, I think it is a little too early to tell.
If you think about the impact to Atmus, largely speaking, most of our products do not have a direct emissions tie. It will likely influence volume from a first-fit perspective and this notion of what could be a big pre-buy in 2026 and then a pretty soft market in 2027. Does that get smoothed out if the regulation gets pushed out? Perhaps, but I think it is too early to tell.
The primary, I should be thinking the primary impact of sort of NOx regulations moving around is volume. It's not content per your content per vehicle will not be that impacted.
Correct. Yeah. Now, generally speaking, I would say what we've seen in past emissions regulations, if there are more stringent emissions regulations, the large players in the industry who have made those investments and have the scale over which to make those investments, like a Cummins or a PACCAR, just to name a few, tend to take share in the market. Given our relationships with them, that is inherently a win-win if you will for us. Again, I think it's too early to tell.
Excellent. We are right on time. We're out of time. This has been great. Thanks so much.
Very good. Andrew, thanks for your time. Thank you, everyone, for your interest.