Atmus Filtration Technologies (ATMU) Q2 2026 earnings call transcript

Thank you, Percy. Good morning, everyone, and welcome to the Atmos Filtration Technologies second quarter 2026 earnings call. On the call today, we have Steph Discher, Chief Executive Officer and Jack Hinsler, 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 the slides on our website for the disclosure of the risks that could affect our results and for a reconciliation of any non-gap measures referred to on this call.

For additional information, please see our SEC filings and the Investor Relations pages available on our website at atmos. com. Now I'll turn the call over to Steph.

Thank you, Todd, and good morning, everyone. Today, I will review our second quarter results and share details of our progress executing our four-pillar growth strategy. I will also provide updates to our outlook for 2026. Jack will then speak to our financial results and segment performance.

I am pleased to share that we achieved record sales in the second quarter and delivered strong results among our key metrics, including adjusted EBITDA, free cash flows, and EPS. I want to thank our global team for their dedication to our customers and their efforts in delivering these impressive results.

Now, let me provide you an update on the integration of Cook Filter, our first industrial filtration acquisition which we closed earlier this year. Our team has made tremendous progress and we have exited more than 95% of the transition services agreements. We expect all remaining integration activities to be completed during the third quarter. With the integration nearly complete, we are turning our attention to growth initiatives in our industrial solution segment. We continue to see value creation opportunities from Cook Filter's Deep Industry Experience combined with our filtration capabilities and global footprint, which will provide ongoing benefits for all stakeholders. Let's now turn to an update on our balance sheet flexibility for both growing the business and returning capital to shareholders.

With this balanced approach, we expect share repurchases to be $20 to $14 million in 2026, aligned with our previous guide. Looking forward, we intend to allocate surplus cash towards paying down growth debt. This will position us for investing in future growth opportunities.

Now, let's turn to our four pillar growth strategy. Our first pillar is to grow share in first bit. We continue to win with the winners by growing our long-term partnerships with leading global and regional OEMs across a broad range of applications. We are leaders in filtration science with our latest generation NANONAT and three filtration media and advanced testing capabilities strategically located around the world. This allows us to expand our first bit customer reach across a broad range of applications and provide advanced filtration solutions for OEM.

Our second pillar is focused on accelerating profitable growth in the aftermarket. Our global aftermarket consists of thousands of customers across many applications. We have dedicated teams located where our customers need us. We have developed a robust pipeline of opportunities and are working every day to bring our industry-leading fleet guard and cook filter products to current and new customers. Our third pillar is focused on transforming our supply chain.

We have launched Lean the Atmosway, our Lean based production system. The program includes implementation of standardized management systems and Lean operating practices which improves productivity and supports sustainable margin expansion. I want to recognise our team in Mexico for becoming the first atmos supply to achieve certification in Lean the Atmosway. In addition, our focus on relentless improvement has allowed us to continue raising our delivery and on-shelf availability metrics to all-time high through the Atmos control distribution network.

We have the right products for our customers when and where they need us. Our fourth pillar is to expand into industrial filtration markets. Following the acquisition of cook filter, we continue to review a robust pipeline of opportunities with a focus on industrial air to build a platform of scales by leveraging cook filter and creating value through targeted bolt-on acquisitions. While our primary focus is industrial air, we remain opportunistic in evaluating industrial water and liquid filtration assets with the goal of identifying an anchor investment that can serve as the foundation as we build out our broader industrial platform over time.

We are focused on delivering long-term shareholder values through the discipline, development and execution of industrial filtration opportunities. Now, let's discuss our second quarter financial results. Sales were a record 528 million compared to 454 million during the same period last year and increased for 16.4 percent, driven by the acquisition of cook filter and strong performance in power solutions. Adjusted EBITDA was 109 million or 20.7 percent compared to 95 million or 21 percent last year. Adjusted earnings to share was 82 cents in the second quarter of 2026 and a adjusted pre-cash flow with 67 million. Also, during the second quarter, we returned 18 million dollars of cash to shareholders through share buybacks and dividends.

Now, let's turn to our outlook for the power solution segment. In the aftermarket, we are starting to see signs of health in the overall freight market, including higher spot rates and increasing optimism for improved freight activity. However, we have yet to see a significant inflection and therefore continue to expect the market to be relatively flat year over year. In our first bit market, the US EPA has provided the industry with some regulatory clarity surrounding the implementation of 2027 emission standards. The agency has proposed allowing current engines to be sold into 2027 with a non-conformance penalty. While this is expected to ease some pre-buy pressure, customers have indicated a stronger second half driven by improved market conditions and a cyclical recovery.

We are already seeing the benefits of this cyclical recovery in our 2Q results and have good visibility through the end of the year. We also expect continued market share gains in both aftermarket and first-fit through our multi-channel distribution strategy improved on shelf availability and winning with new and existing customers.

For power solutions, overall, we expect volume growth in a range of approximately flat to 2%. Inclusive of global markets and share gains. Additionally, pricing is expected to add approximately 1.5% and foreign exchange is expected to be a tailwind of approximately 2%. In total, we expect power solutions revenue to be in a range of 1.82 to 1.865 billion, which represents growth of approximately 4.5% at the midpoint. In our industrial solutions segment, we expect favourable market conditions and strong performance to continue with total revenue to be in a range of 155 to 165 million. Taken together, we expect total company revenue to be in a range of 1.975 to 2.03 billion, an increase of approximately 13.5% at the midpoint.

We are narrowing our four-year adjusted EBITDA items and now expect to be in a range of 19.75% to 20.25%. Lastly, adjusted EPS is expected to be in a range of $2.85 to $3.

In summary, our team continues to successfully execute our four-pillar growth strategy and provide the protection our customers need and value most. I want to thank all Atmosonians for their strong performance in the first half. I remain confident in the ability of our team to continue to deliver for all our stakeholders. Now, I will turn the call over to Jack.

Thank you, Steph, and good morning, everyone. I also want to recognise our global team for delivering another quarter of strong financial performance, all while successfully navigating challenging market conditions. Sales in the second quarter were a record 528 million, compared to 454 million during the same period last year, an increase of 16.4%. Power solutions delivered sales of 486 million, compared to 454 million in the prior year, an increase of 7%. The increase was primarily due to higher pricing of 3%, higher volumes of 2%, and favorable foreign exchange of 2%. Industrial solutions sales were 42 million, resulting from the acquisition of cook filter. Growth margin for the second quarter was 154 million, or 29.2%, compared to 131 million, or 28.9% in the second quarter of 2025.

The increase was primarily due to favorable pricing, incremental margin from the acquisition of cook filter, favorable foreign exchange, higher volumes, and the cessation of one-time separation costs. This was partially offset by higher materials and manufacturing costs. Selling, administrative, and research expenses for the second quarter were 62 million, compared to 57 million in the prior year. The increase was primarily due to people-related expenses and information technology consultants.

Joint venture income was 8 million in the second quarter, flat compared to prior year. Strong performance in China offset weaker markets in India, which has been impacted by the Middle East conflict. Other income expense was unfavorable by 1 million, compared to favorable by 4 million in the second quarter of 2025. The increase in expense was primarily due to foreign exchange losses and a non-operating gain that did not repeat.

Excluded from the adjusted results are one-time costs related to the integration of cook filter, which for the full year is expected to be in the range of 3 to 6 million. We also exclude intangible asset amortization resulting from the cook filter acquisition, which is expected to be in a range of 11 to 13 million for 2026. Total enterprise adjusted EBITDA in the second quarter was 109 million or 20.7 percent, compared to 95 million or 21 percent in the prior period. Segment adjusted EBITDA offered a power solution was 101 million or 20.8 percent, compared to 95 million or 21 percent last year. Industrial solutions segment adjusted EBITDA with 8 million or 18.9 percent. Adjusted earnings for share with 82 cents compared to 75 cents last year.

Adjusted free cash flow with 67 million this quarter compared to 36 million in the prior year. Now let's turn to our capital deployment strategy. The combination of strong cash flow and continued robust adjusted EBITDA performance has resulted in an estimated net debt to adjusted EBITDA ratio of 1.9 times for the trailing 12 months ended June 30th. We also invested 13 million dollars in capital expenditures for continued growth, and we returned 18 million dollars to shareholders consisting of 13 million in share repurchases and 5 million of dividends.

As said highlighted, we will continue to strategically deploy capital through investment in growth and paying down debt to provide balance sheet flexibility. Our cash flow allows us to take this balanced approach for both growth opportunities and returning capital to shareholders.

In closing, I want to thank and applaud all of our teams around the world for all of your hard work and dedication in delivering a strong first half of 2026. Now we will take your question.

Thanks, Quinn. Great question. Let me start with, I guess as I was saying in my prepared remarks, our team delivered a really strong quarter in the power solution segment. Overall, record revenues of 16.4% on the same period last year. In the power solution segment, delivered revenue growth of 7.1%. As Jack highlighted, that really was broken down between 3% price, 2% volume and 2% effect. If I take that volume growth year on year and break that down as a question to aftermarket and first fit performance, what we saw in aftermarket, I would say is still whitish condition. If I give you a view of aftermarket around the world, a reminder that aftermarket is 85% of our revenues within the power solution segment.

Within that, about 50% of those revenues in the US. We are seeing stronger sentiments in the US and in Mexico, but as I look around the rest of the world from an aftermarket perspective, Europe and the Middle East and Asia Pacific outside China, we're still seeing subdued conditions. That balance really gives us a slight aftermarket outlook and also slight aftermarket through the quarter. We continue to deliver strong gains with our customers and I continue to see us within the range of 1 to 2% within for our share gains outlook. If I turn to first fit market, we did start to see the cyclical recovery in first fit markets that we have been anticipating and was previously incorporated in our guidance.

We started to see that uptick in our business, in the second quarter. We do see that uptick in our business at the vehicle OEM. The APT data that we often refer to with vehicle bills is about four to six weeks. We're about four to six weeks first fit markets here at the end of the second quarter. I would say it was a balanced performance in first fit between market improvement and share gain through our ongoing strategy of winning the winner.

Yeah, absolutely. So from a pricing perspective, obviously, we continuously assess our pricing and make strategic adjustments where necessary, both in terms of gross pricing, as well as rebates and rebates can drive some of the timing nuances. We saw good price realization through the first half, just over two percent. Our full guide is one and a half percent for the full year, and that reflects the mix of carryover from prior year, as well as some new pricing. Obviously, it anticipates a moderating price realization environment as I think about the year over year comparison in the third quarter and the fourth quarter. As I think about that comparison as well, obviously, there's some rollback of certain tariff pricing that occurred last year that we've continued to implement or remove as policies change.

As always, we'll take a balanced approach to pricing and share gains in our certainly doing that over the past of the year. As I think about some of the cost dynamics in the second half, we continue to see some elevation in our costs associated with some that's probably the biggest headwind that's embedded in our second half. As you look at the first half, year to date margin compared to the second half is one of the contributors leading to the implied softening second half compared to first half. The other dynamic I would just call out as you think about that margin walk is not only are we experiencing some commodity price, increases associated with the conflict in the Middle East.

That's also contributing to weaker overall conditions in India and therefore leading to a lower joint venture income outlook than we originally anticipated at the full year. So I think the combination of those hopefully helps you bridge kind of the first half second half dynamic and get a better sense of price cost dynamics as we move through the year.

Thanks David, good morning. So we didn't fully catch up the Middle East in the second quarter, the conflict is ongoing as I think we talked about in our first quarter earnings, we were uncertain as to how the conflict would play out. So we're still seeing underperformance in our expectations of our Middle East business driven really by market conditions is how I would describe it. We are anticipating it recovering into the second half and it is a smaller proportion of our business as we have shared before about 2% of overall revenues. We are seeing as I talked about subdued conditions through Europe that may also be related to the conflict and as Jack referred to, we've seen challenges in our India business through the joint venture line in our, in our P&L that is also related to the Middle East conflict.

Jeff, do you want to take that one? Yeah, absolutely. So let me first start with the tariff refund question, David, and then I can talk a little bit about what the implied pricing in the second half is, as you know, it's a little bit hard to parse out, but I'll do my best.

From a tariff refund perspective, you know, as of the end of the second quarter of 2026, we've received an immaterial amount of tariff refunds. Of course, we've applied for all the refunds that we feel entitled to, and we'll continue to evaluate the potential treatment of those refunds as and when we receive them, including whether or not, you know, a portion of those should be allocated to expenses that we've already incurred, and then, you know, what is left over in terms of customer refund. Overall, I would say we continue to expect in that impact on EBITDA from a tariff perspective to be substantially neutral. As you know, you know, the tariff environment will continue to evolve with ongoing changes in policy, and I would just, you know, say that our strategy to address that remains unchanged.

Of course, we'll continue to avail ourselves of any exemption for us to protect our customers from the impact of tariffs, continue to evaluate our supply chain and optimize wherever possible, and then finally, obviously, looking to pass that on the impact of tariffs through pricing. Overall, continue to be guided by, you know, cost neutral principle as it relates to tariffs.

From a pricing perspective, I think I'll just, you know, kind of talk about it in totality because it's really hard to parse out, given all the moving pieces last year, particularly, but if you look at, you know, the full year guide and then year to date, price realization, you can kind of see, you know, price realization, as I said, moderating in the second, in the third, in the fourth quarter, compared to the same period in the prior year, kind of between just over half a percent, I would say.

Good morning, Bobby. I'm doing my best to make out your question. I must say, on my end, it's breaking up a little. So I'll try to summarize. I think what your question is, is related to industrial solutions, revenues, how is that performing, and is there any seasonality in the guide for that revenue? So I'll try to answer that, and I'm not sure what's driving the breaking up at your end. So industrial solutions is performing right where we would expect it to. I think, broadly speaking, we've talked about one percent price for industrial solutions, one to two percent market share, and really overall the market impact for industrial solutions in closely linked to GDP or around that sort of three percent level.

Over all the industrial revenues, we think it's pretty steady over the quarters. So I wouldn't call out any specific technicality in the quarters, and we're confident and really pleased with the ongoing performance relative to our original business case assumptions.

I apologize for the break up.

Okay, Jack, do you need to take that?

Yeah, I'll take it. Thanks Bobby for the question. So I think, again, I think I'll interpret it as your question as just a quick update on the Cook integration overall, and then speaking to some of the gross initiatives that the team is thinking through. So, first of all, I would just say we continue to be very excited about the acquisition of Cook Filter, and very pleased to see such a strong cultural fit with our organization.

As you noted, and as we noted in our prepared remarks, we're, you know, through about 95 percent of the TSA's, and we'll be planned to fully exit those TSA's here in the third quarter.

You know, overall continue to be really excited about the growth prospects for that business, and a lot of different initiatives that we are working through in a collaborative way with the Cook business. Of course, you know, continuing to cultivate new market share opportunities through the build out of distributed relationships, launching new products to fill gaps in that coverage, as well as looking to expose the business to high growth end markets, things such as data centers, health care, so on and so forth. And so, the team's got a lot of energy around that. We continue to find ways that we can, you know, complement the artery strong attributes that they bring to the table and excited about the future.

Good morning, Tammy. I'll pass that one to Jack.

Yes. Thanks, Tammy. Good morning. So, first of all, I would just say, you know, we've seen really strong operational execution through the first half of the year. I think, you know, year to date margins at about 20.3% from an EBITDA perspective over the first six months, so really pleased with where that's at. I'll start first, Tammy, maybe just bring to life performance in the second quarter, and then I'll speak to the balance of the year and a couple of the moving pieces. As we noted, the second quarter, we saw the benefits of pricing, volume, effects, and then, you know, partially offset by the entire material costs and manufacturing costs.

In addition, we had, you know, a small amount of elevated intensive compensation costs in the quarter as we're outperforming the plan. And then finally, down in the other income, expense line items, a couple of non-operational items in Q2 and 25 that didn't repeat this year. Let me help you then kind of bridge to the full year guide. You know, as our guidance implies, we have more favorability in the first half, as you think about year over year comparisons in the form of pricing and effects than we will in the second half. So, those are a little bit of a Middle East conflict to persist for longer than we originally anticipated, really driving inflationary pressures associated with raw materials like chemicals, plastics.

And then, as I noted, I would just say that the other impact from a second half perspective is, you know, those Middle East conflict impacting JV income, most notably in China. And so, you'll see that we load our outcome of it on JV income. Sorry, in India, I apologize. In terms of mixed to your question, Tammy, I think, you know, obviously, there is a little bit of a mixed dynamic with strengthening first fit relative to aftermarket. But I think it's a combination.

Yeah, I'll take that one as well, Tammy. So, look, year to date margin performance is about 20%. If you, you know, average the first quarter, second quarter, and that continues to be our guide. And so, that's how I would have you think about the third and in the fourth quarter. As you know, you know, second quarter margin took a sequential step down, you know, 18.9% and below that full year guide.

Really, I would say that's driven by some, some one-off impacts that drove some inefficiencies that we expect to be, you know, one time and not repeating in nature. To bring a little color to that, it's, you know, a little bit of operational efficiencies as volumes moved around. And some inefficiencies associated with, you know, the transition off of the TSA, some are done to the next step. So, we remain confident in our full year guide for that business and think it's just a temporary new off.

Good morning, Kevin. Thanks for the question. Look, our guide remains the same, actually, as we came out from a market perspective aftermarket in the US. Certainly, we are reading what I'm sure you're reading, which is improving sentiment. And that gives us a lot of optimism is what I would say, but we are not yet seeing that translate in at least the visibility we have at this stage. And we don't have a lot of forward visibility in aftermarket orders. But in the visibility we have at this stage, we're not seeing that translate yet into an uptick in outcomes in market condition. So, the way we see it is really flat year on year aftermarket. Obviously, we'll continue to deliver where we started out the year.

Thank you. Yeah, so I would think about, again, I highlighted some of the commodity costs impacts. You can imagine it takes a little while for things like that to work through the system. And obviously, we're doing our best to mitigate the impact of those. So it's a bit more of a second half dynamic, I would say, than a Q2 dynamic. And it's one of the drivers, if you will, of the step down in the margin percentage outlook in the second half.

If you look at our joint venture income year over year, it's flat compared to the same period last year. And I think really what that is reflective of is a strong market in China, not only in the quarter, but in the first half. And then, you know, some corresponding weakness in our India market, which is driving a bit of that lower joint venture income. Again, originally, we had kind of built in an assumption, I think, like many people did, that we'd see some resolution of that conflict in the second quarter. And obviously, that's not been the case. So we'll continue to do our best to mitigate those ongoing impacts, not only at the cost line, but also trying to get product to our customers.

Thank you, Piercy. That concludes our teleconference for the day. Thank you for participating and for your continued interest. Have a great day.