Yahoo Finance Atmus Filtration Technologies Inc. (NYSE:ATMU) Q1 2024 Earnings Call Transcript
Atmus Filtration Technologies Inc. (NYSE:ATMU) Q1 2024 Earnings Call Transcript May 3, 2024
Atmus Filtration Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for standing by. At this time, I would like to welcome everyone to Atmus Filtration Technologies' First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Todd Chirillo, Executive Director of Investor Relations. Please go ahead.
Todd Chirillo : Thank you, operator. Good morning, everyone and welcome to the Atmus Filtration Technologies First Quarter 2024 Earnings Call. On the call today, we have Steph Disher, Chief Executive Officer; and Jack Kienzler, Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that could materially affect expected results. Please refer to our slides on our website for the disclosure of the risks that could affect our results and for a reconciliation of any non-GAAP measures referred to on our call. For additional information, please see our SEC filings and the Investor Relations pages available on our website at Atmus.com. Now I'll turn the call over to Steph.
Steph Disher: Thank you, Todd, and good morning, everyone. We delivered strong performance in the first quarter. On the call today, I’ll provide an update on our performance in the quarter. Our outlook for the year and provide some comments on delivery of our growth strategy. Jack will then provide additional details regarding our financial performance. Before I discuss the quarterly performance, I’d like to acknowledge the significant milestone of Atmus becoming a fully independent company on March 18. On February 14, Cummins announced an exchange offer, whereby Cummins shareholders could exchange all or a portion of Cummins common stock for shares of Atmus. Investors showed significant interest in the offer with the transaction approximately 12 times oversubscribed.
The divestiture of Atmus shares by Cummins was completed on March 18 and resulted in the full separation of Atmus. With the successful completion of the exchange offer, all former Cummins appointed Directors have resigned from the Atmus Board of Directors and two new independent directors, Diego Donoso, and Stuart Taylor have been appointed to the Board. A majority of the Atmus Board of Directors is now independent, and I'm excited to be working with the Board, as we continue to accelerate growth and deliver long-term value for our shareholders. Now let's turn to the first quarter financial results and our current outlook for 2024. We delivered strong financial performance in the first quarter. Sales were $427 million compared to $419 million during the same period last year, an increase of approximately 2%.
Adjusted EBITDA in the first quarter was $80 million or 18.8% compared to $79 million or 18.8% in the prior period. Adjusted EBITDA for the quarter excludes $6 million of one-time stand-alone costs and $4 million for the same period last year. Adjusted earnings per share was $0.60 in the first quarter of 2024 and adjusted free cash flow was negative $13 million. Adjusted free cash flow excludes $6 million of one-time separation-related items. Now let me provide some insight into our global market. As expected, we saw softer freight activity during the first quarter. However, our continued market share gains are offsetting some of the market weakness. Demand in the first-fit markets has started to show signs of slowness in the US, in India markets remain robust, while in China, the market continues to fall short of expectations.
Looking ahead to our outlook for global markets, I will start with aftermarket for both on-highway and off-highway. In North America, we saw the cash freight index down 5% in the first quarter compared to the prior year. The rate of decline slowed through the quarter with the month of March down 3.6% year-over-year. While we are expecting year-over-year freight activity to gradually improve through the balance of the year, we are still experiencing year-over-year declines and have not yet seen positive freight activity compared to the prior period. In global off-highway markets, we continue to see strength in North American construction for both residential and non-residential construction, partially aided by government infrastructure spending.
Economic conditions in Europe continue to be depressed with weakness in construction activity. And in the Asia Pacific region, we are seeing low utilization rates across a number of our key end-markets. Overall, we expect aftermarket for on-highway and off-highway to be flat to up 2% during the year, down slightly from our previous guidance of flat to up 3%. Let us turn to our first-fit markets. In the US, we are anticipating declines to primarily impact the second half of 2024. We are modestly raising our outlook for U.S. heavy-duty truck to be down 7% to 12% for the full-year. From our previous guidance of down 10% to 15%. In medium-duty truck, our outlook remains unchanged at flat to down 5%. In China, we expect weakness to persist and demand for trucks in India is expected to remain robust, driven by strong on-highway performance.
While the outlook for our markets is mixed, we continue to execute on our growth plans and expand our market share in both aftermarket and first-fit. Our revenue guidance is unchanged at down 1% to up 3%, with global sales in the range of $1.61 billion to $1.675 billion. We expect continued strong operational performance and to deliver adjusted EBITDA margins of 18.25% to 19.25%, unchanged from prior guidance. Additionally, adjusted EPS is unchanged from our prior outlook and anticipated to be in a range of $2.10 to $2.35. As we have separated from Cummins, we have incurred separation costs and cash impacts associated with establishing a stand-alone company. These costs and cash flows are onetime in nature. We want to be transparent and highlight those items to enable a clear understanding of the ongoing performance and cash generation of our business.
In relation to cash flow outlook, I want to highlight a onetime cash outflow, which is estimated to be $30 million in 2024. This impact arises as a result of a change in working capital. Cummins previously processed our payroll on our behalf, and we received 60 day terms. As we transition to managing our own payroll directly, this cash will flow innately upon payment to employees. Now I would like to take a moment to share the progress we have made on implementing our growth strategy. As a reminder, there are four pillars of our growth strategy. Our first pillar is to grow share in first step. We are a leader in Fuel Filtration and Crankcase Ventilation products, and we are focused on growing this leadership position with global OEM customers.
We are winning with the winners and have continued to secure Cummins new vehicle platforms, we are also accelerating growth with other leading global OEMs. We have recently won the fuel filtration business of a global OEM for their European and North American business, and we are actively pursuing new customers who were out of reach to us as part of Cummins. Our second and third pillar are interrelated and focus on accelerating profitable growth in the aftermarket and transforming our supply chain. We are relentlessly focused on our customers and providing the right product when and where it is needed. Our agility allows us to continue gaining share in the aftermarket with our world-class Fleetguard products. As a key component of our agility is the continued transformation of our global distribution capabilities to provide our customers with industry-leading product availability.
Earlier this year, we inaugurated our southern distribution center near Dallas, Texas, and we recently opened our newest distribution facility in Singapore. We now have coverage for over 80% of our volume being distributed through dedicated Atmus warehouse facilities. We are on track to establish additional centers in Europe throughout 2024. We are also focused on driving efficiencies through our purchasing organization and investing in automation in our manufacturing operations. These focus areas will support continued reduction of our operating costs. We have demonstrated delivery of our transformation initiatives through expansion of our adjusted EBITDA margin 300 basis points during 2023. Our guidance for 2024 reflects continued momentum, as we execute on our strategy.
Our fourth pillar is to expand into industrial filtration markets. We intend to pursue this growth inorganically, and we see a strong pipeline of opportunities, which our team is continuously evaluating. We will take a disciplined programmatic approach with a focus on creating long-term shareholder value. Our capital allocation priorities will continue to reflect our focus on growing our business, both organically and inorganically. We are also assessing our approach to returning cash to shareholders now that we are an independent company. I am proud of our Atmus team, who delivered another strong quarter of performance. As a fully independent company, we will accelerate our growth strategy as we move through 2024. Now I will turn the call over to Jack, who will discuss our financial results in more detail.
Jack Kienzler: Thank you, Steph, and good morning everyone. We continued to deliver strong financial performance in the first quarter. Sales were $427 million compared to $419 million during the same period last year, an increase of approximately 2%. The increase in sales was primarily driven by pricing of approximately 2% and the favorable impact of currency, partially offset by a modest decrease in volume as market share gains continued to counterbalance challenging conditions across many of our markets. Gross margin for the first quarter was $112 million, an increase of $2 million compared to the first quarter of 2023. In addition to pricing, we also benefited from lower commodities which more than offset the impact of higher freight and manufacturing costs, along with lower volumes.
Selling, administrative and research expenses for the first quarter were $53 million, an increase of $5 million over the same period in the prior year. The increase was primarily driven by higher people-related and consulting costs, as we continue to stand up our team and separate our functions from Cummins. Joint venture income was $10 million in the first quarter, an increase of $2 million from 2023, primarily due to strong performance at our joint venture in India. This resulted in adjusted EBITDA in the first quarter of $80 million or 18.8% compared to $79 million or 18.8% in the prior period. Adjusted EBITDA for the quarter excludes $6 million of one-time stand-alone costs and excludes $4 million for the same period last year. We believe these costs will be in a range of $10 million to $20 million in 2024, an increase from our prior guidance of $5 million to $15 million.
These one-time costs primarily related to the establishment of functions previously co-mingled with Cummins, such as information technologies, distribution centers and human resources. Adjusted earnings per share was $0.60 in the first quarter of 2024 compared to $0.67 last year. The decrease was primarily due to higher interest expense incurred from debt issued at our IPO in May of 2023. Adjusted free cash flow was negative $13 million this quarter compared to $37 million in the prior year. The higher cash usage was primarily related to increased working capital requirements and the payment of incentive compensation for strong performance achieved in 2023. Free cash flow has been adjusted at $3 million for capital expenditures related to our separation from Cummins compared to $1 million in the previous year.
As Steph mentioned earlier in the call, we are also adjusting free cash flow for working capital inefficiencies associated with the move from intercompany settlement terms with Cummins to stand-alone practices. In the first quarter, this adjustment is $3 million and relates to Cummins processing payroll on our behalf prior to the full separation and we reimburse them on 60-day terms consistent with historical practices. As we take over the payroll process, these cash obligations are funded as incurred. We expect these inefficiencies to impact us through the end of the third quarter of this year. The effective tax rate for the first quarter of 2024 was 22% compared to 23.7% in 2023. The decrease was driven by a change in the mix of earnings between U.S. and foreign operations.
Now let us turn to the continued strength of our balance sheet. We ended the quarter with $149 million of cash on hand, combined with the full availability of our $400 million revolving credit facility, we have $549 million of available liquidity. Our cash position and continued strong performance during the first quarter of 2024 has resulted in a net debt to adjusted EBITDA ratio of 1.5 times for the trailing 12 months ended March 31. Our balance sheet provides us with operational flexibility as we focus on value creation, and delivering total shareholder value by deploying capital for continued organic growth and strategic inorganic initiatives. In closing, I want to thank our global team for their hard work and dedication as we begin our first year as a fully independent company.
I am looking forward to continuing our momentum and delivering on our strategy throughout the year. Now we will take your questions.
Operator: [Operator Instructions] The first question comes from the line of Rob Mason with Baird. Please go ahead. And the second question comes from the line of Tami Zakaria, JPMorgan. Please go ahead.
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