Atmus Filtration Technologies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmos Filtration Technologies Third 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

I would now like to turn the call over to Todd Chirillo, Executive Director of Investor Relations. You may begin.

Speaker 1

Thank you, Kayla. Good morning, everyone, and welcome to the Atmos Filtration Technologies' 3rd quarter 2024 earnings call. On the call today, we have Steph Disher, Chief Executive Officer and Jack Hensler, 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.

Speaker 1

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.

Speaker 2

Thank you, Todd, and good morning, everyone. Our team delivered another quarter of solid performance despite continued softness in the aftermarket and weakening first fit markets. The dedication and hard work of our global employees consistently focused on delivering technology leading products for our customers allows us to deliver these results even in challenging market conditions. On the call today, I will provide an update about our performance during the quarter, share an updated outlook for the year and highlight progress executing our growth strategy. Jack will then provide additional details regarding our financial performance.

Speaker 2

Let me begin with some comments on our capital allocation priorities. We are focused on growth in both our core business and expansion into industrial filtration, and we'll continue to allocate our capital to fuel this growth. Additionally, share repurchases and quarterly dividends are components of our balanced approach to capital allocation. We continue to assess opportunities for share repurchases with a minimum annualized target of offsetting dilution from long term incentive compensation. In the Q3, we repurchased $10,000,000 of shares as part of the $150,000,000 program we announced last quarter.

Speaker 2

We also paid a cash dividend of $0.05 per share. Now let's turn to Q3 financial results and our updated outlook for 2024. Sales were $404,000,000 compared to $396,000,000 during the same period last year, an increase of approximately 2%. Adjusted EBITDA in the 3rd quarter was $79,000,000 or 19.6 percent compared to $73,000,000 or 18.3 percent in the prior period. Adjusted EBITDA for the quarter excludes $9,000,000 of onetime standalone costs and $7,000,000 for the same period last year.

Speaker 2

Adjusted earnings per share was $0.61 in the Q3 of 2024 and adjusted free cash flow was $65,000,000 Adjusted free cash flow excludes $10,000,000 of onetime separation related items. We have made substantial progress moving from transition service agreements with Cummins to operating as a fully stand alone company. We estimate to have completed 80% of the transition and expect to be 90% complete by the end of this year. This transition is a significant milestone for our company and will enable us to focus our energy on growth. Now let me provide some insight into our global markets.

Speaker 2

Beginning with the aftermarket. We continue to see soft freight activity, a trend we have seen throughout the year. Our continued outperformance in share gains, coupled with tailwinds from prior year destocking activity, allowed us to more than offset market weakness. Demand in the U. S.

Speaker 2

Heavy duty first fit market softened in line

Speaker 3

with our expectations, while U. S. Medium duty demand remains resilient. The India market softened and China did not show any signs of rebounding.

Speaker 2

Turning to our outlook, I will start with the aftermarket. As we have progressed through the year, we have become more confident in our opportunities to grow revenue despite challenging market conditions. We are expecting our overall global aftermarket revenue to be up approximately 2% to 4% compared to last year. As we have seen throughout the year, we are still experiencing year over year declines in freight activity and have not yet seen a positive inflection. We expect our global markets for the aftermarket to be down approximately 2% to 3%, reflecting soft freight activity along with continued weakness in the off highway, construction, mining and agricultural markets.

Speaker 2

Offsetting market conditions, our outperformance is expected to continue as we execute our growth strategy and expand our new business wins. We expect our market outperformance to contribute 2% to aftermarket revenue growth. Adding an additional 2% of revenue growth will be the benefit related to destocking year over year. You may recall our customers were destocking from 2Q through 4Q in 2023 as supply chains normalized. This activity is not expected to repeat.

Speaker 2

Pricing is also expected to provide an additional 1.5% year over year increase. Let's now turn to our 1st fit markets. In the U. S, our view of the heavy duty market remains unchanged with expectation of down 7% to 12% for the full year. We anticipate further softening in the 4th quarter in line with industry expectations.

Speaker 2

Our expectation of the medium duty market remains unchanged at flat to up 5%. Demand for trucks in India is expected to continue softening and we anticipate weak market conditions to continue in China.

Speaker 3

Overall,

Speaker 2

our continuing outperformance gives us the confidence to raise our revenue guidance to now be in a range of up 1% to 3% compared to the prior year with global sales in an expected range of 1,650,000,000 to 1,675,000,000 dollars We have delivered strong operational performance throughout the year, and we are raising our adjusted EBITDA margin to be in an expected range of 19.25 percent to 19.75%. We are also raising our adjusted EPS outlook and now expect to be in a range of $2.35 to $2.50 Now I would like to discuss our plans for growth. During the Q3, we brought our global enterprise leaders together to focus on our long term strategic vision for unlocking both the opportunities as a fully independent company. Our team has been executing on our growth strategy. As a reminder, there are 4 pillars to our growth strategy.

Speaker 2

Our first pillar is to grow share in First Fit. We are realigning our organization and adding resources to our account management teams to focus on First Fit growth. This has resulted in increased bid rates for new business opportunities and will allow us to further capture market share. We are leaders in fuel filtration and crankcase ventilation and continue to win with the winners as we partner with industry leading OEMs. The reorientation of our organization for growth coupled with technology leadership provides us with the continued opportunity to expand with new and existing OEMs around the world.

Speaker 2

Our second pillar is focused on accelerating profitable growth in the aftermarket. Our outperformance through challenging market conditions this year demonstrates our ability to grow share in the aftermarket. We are expanding and adding aftermarket partnerships for continued growth, allowing us to deliver FLAT GUARD products when and where our customers need them. We have also implemented advanced digital analytic tools for our sales team to identify cross sell and up sell opportunities and generate new customer leads. This provides a win win for both Atmos and our dealers to increase sales of Link Guard products.

Speaker 2

Our 3rd pillar is focused on transforming our supply chain. We are continuing to transition our supply chain to our own dedicated network. This quarter, we opened a new warehouse facility in the United Kingdom, increasing the volume being distributed through dedicated Atmos facilities to approximately 85%. During the Q4, we anticipate transitioning our remaining European facility to the Atmos network, at which point substantially all our volume will go through our own distribution network. Controlling our distribution network allows us to improve on shelf availability and provide our customers with fleet card products when and where our customers need them.

Speaker 2

Our distribution network transformation is delivering results as we achieved all time high delivery and availability metrics during the quarter. I'm proud of the Atmos team delivering a significant accomplishment while simultaneously transforming our distribution network. 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. At the midpoint of our guidance, we expect to expand adjusted EBITDA margin 390 basis points since the end of 2022, another significant achievement by the Atmos team.

Speaker 2

Our 4th pillar is to expand into industrial filtration markets. Our strategy remains focused on growth into industrial filtration primarily through inorganic acquisitions. As a reminder, we are broadly looking at 3 verticals: Industrial Air, Industrial Liquids, excluding water and Industrial Water. We continue to take a disciplined approach as we review a robust pipeline of opportunities for inorganic expansion in these three verticals. We've also been focusing on opportunities to expand in industrial filtration organically.

Speaker 2

We recently launched multiple products to grow organically. While we're in the early stages of organic industrial product growth, this demonstrates another opportunity for continued growth for Atmos. Now Jack will discuss our financial results in more detail.

Speaker 4

Thank you, Steph, and good morning, everyone. We delivered another quarter of solid financial performance. Sales were $404,000,000 compared to $396,000,000 during the same period last year, an increase of approximately 2%. The increase in sales was primarily driven by higher volumes of 2% and pricing of approximately 1%, partially offset by foreign exchange of 1%. We continue to outperform in many of our global markets.

Speaker 4

Gross margin for the Q3 was $111,000,000 an increase of $8,000,000 compared to the Q3 of 2023. In addition to volumes and pricing, we also benefited from lower commodity costs, partially offset by foreign exchange, one time separation costs and higher manufacturing costs. Selling, administrative and research expenses for the Q3 were $56,000,000 an increase of $4,000,000 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 own team and separate our functions from Cummins, partially offset by lower variable compensation costs. Joint venture income was $8,000,000 in the Q3, flat to our 2023 performance.

Speaker 4

This resulted in adjusted EBITDA in the Q3 of $79,000,000 or 19.6 percent compared to $73,000,000 or 18.3 percent in the prior period. Adjusted EBITDA for the quarter excludes $9,000,000 of one time standalone costs compared to $7,000,000 for the same period last year. One time costs are higher than originally anticipated. We incurred additional costs as we completed the separation of our Mexican production facilities and incurred additional information technology costs due to unanticipated delays as we stand up independent systems. We now believe these costs will be in a range of $20,000,000 to $25,000,000 in 2024 and be substantially complete by the end of this year.

Speaker 4

Adjusted earnings per share was $0.61 in the Q3 of 2024 compared to $0.52 last year. Adjusted free cash flow was $65,000,000 this quarter compared to $50,000,000 in the prior year. Free cash flow has been adjusted by $5,000,000 for capital expenditures related to our separation from Cummins compared to $2,000,000 in the previous year. We expect one time capital expenditures will be in a range of $13,000,000 to $18,000,000 in 2024 and be substantially complete by the end of this year. We are also adjusting free cash flow for the working capital inefficiencies associated with the move from intercompany settlement terms with Cummins to standalone practices.

Speaker 4

In the Q3, the adjustment was $5,000,000 We expect these inefficiencies to be complete this year and total approximately $35,000,000 unchanged from our previous outlook. The effective tax rate for the Q3 of 2024 was 18.4 percent compared to 23.1% in 2023. The decrease was driven by a change in the mix of earnings between U. S. And foreign operations and favorable discrete items, which occurred during the quarter.

Speaker 4

Now 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 $197,000,000 of cash on hand, Combined with the full availability of our $400,000,000 revolving credit facility, we have $597,000,000 of available liquidity. Our cash position and continued strong performance during the Q3 of 2024 has resulted in a net debt to adjusted EBITDA ratio of 1.2 times for the trailing 12 months ended September 30. In closing, I want to thank our global team for continuing to execute on our growth strategy and deliver value to our customers. Now, we will take your questions.

Operator

Our first question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Speaker 5

Yes. Hi. Good morning, everyone.

Speaker 2

Good morning, Jerry.

Speaker 5

Hi. Steph Jacques, I'm wondering if you could just talk about the puts and takes around expectations for the Q4. You had really excellent margin performance in the Q3. The revision looks like generally by the extent of the beat and looks like you folks continue to outperform your operating efficiency targets. So are there any discrete items impacting the outlook for the Q4?

Speaker 5

Or just given the choppy environment, we want to make sure we have room to execute?

Speaker 2

Thanks, Jerry, for the question. I might just start with talking about the market impact and the top line and what's driving our expectations around Q4. And then I'll ask Jack to just walk you through the sort of margin sequential margin bridge on that. I guess from a market perspective, relatively flat revenue sequentially, 3Q to 4Q. I would point out just two things in particular that we expect to be continued downward pressure sequentially, less working days.

Speaker 2

Working days drives a significant amount for us given the 80% of our business in aftermarket. And the second element I would point to is we do expect a continued decline in heavy duty truck impacting us through the Q4 and the 1st fit side of our business. So that will obviously drive some volume downside, which will flow into margin. I'll let J. A.

Speaker 2

Just talk to you here about some of the impacts we saw in Q3 and how that bridges through to 4th quarter

Speaker 4

margins? Great. Thanks, Steph, and thanks, Gerry, for the question. So the first piece, I would say, Gerry, as we think about the sequential walk from kind of Q3 levels into our Q4 outlook, it's the impact from the volumes that Steph just talked about with lower volumes top line but also lower production hours, we will see a bit of a drag from a profitability standpoint from that. The second piece is from about the variable compensation standpoint, based on our outperformance over the first half of the year, we have been accruing at a higher rate.

Speaker 4

And as the markets have softened here and we haven't seen that recovery in the aftermarket, our outlook has come down a little bit and therefore we had a $4,000,000 benefit in Q3 associated with variable compensation truing that up. And so obviously, we would not expect that to repeat into the Q4. And I think that helps bridge a little bit of the sequential margin story.

Speaker 5

It does. Yes, I appreciate the color and strong performance even when adjusting for that. And as we think about the puts and takes around 2025 margin profile, can you just step us through where you have visibility so far to touch on, if you can, the expectations for pricing opportunity for material cost reductions and any other moving pieces? Obviously, the end markets are going to do what they're going to do and will firm up those views in 3 months. But I'm wondering, based on developments and visibility that you have now, what are some of the puts and takes around margin profile 25 versus 24?

Speaker 2

Yes. So thanks for the question, Jerry. I want to try to give you some color of how we feel we're going to end 2024 and our confidence of being able to sustain that, I guess, without sort of straying into forward guidance on 2025, which I'm not in position to give at this stage. But a couple of things. Let me just talk broadly about the market about how we see that playing out as that may impact some pieces of our margin profile.

Speaker 2

And then I'll talk about how confident I feel in the sustainability of the expansion of margins that we've been able to achieve here in this year and also prior to that. And so starting with sort of the outlook of the markets, I think as we head into the Q4 and wrap up 2024, we'll be in the unusual situation of at the bottom of the cycle for both our first fit markets and our aftermarket. It's not that common that both of them are at the bottom of the cycle at the same time. And as you know, we've been in a longer term period of down in the cycle on the aftermarket side. So as we look to 2025, the industry view views from our customers, we do expect first fit to continue to be at the lower levels through the first half, with some discussion around possible pre buy at the back of 2025 driving some improvement in 1st fit in the second half.

Speaker 2

Aftermarket, we have been waiting for a point of inflection. I think we originally thought it might be July and that seems to be dragging out. And so certainly, we do expect some turn of positive market conditions in the aftermarket, Very difficult to call that at this stage. Obviously, great greater performance in the end markets of aftermarket really drives better margin upside for us. So that's something to be mindful of as we turn to 2025.

Speaker 2

So that's just some broad comments about the market. I think if I turn to just our margin story, we've done a really terrific job as a team of expanding margins throughout 2024 and also 2023. And I feel confident about that being sustainable as we head out into 2025. And we'll be able to give a further update on our specific guidance of 2025 in a future call.

Operator

And your next question comes from the line of Rob Mason with Baird. Your line is open.

Speaker 6

Yes. Hi, Steph and Jack. Maybe I'll follow-up there, Steph, just on 25. You somewhat framed it, but it sounds like typically the Q1 is one of your stronger seasonal quarters seasonal growth quarters moving from the 4th to the first. But we are looking at this 1st fit downturn in real time.

Speaker 6

I'm just curious if you have enough visibility at this point to have a feel for how that might look sequentially or how we should think about just in general seasonality in this Q1 'twenty five versus historical?

Speaker 2

Okay. Good morning, Rob. Good to talk to you. Look, I don't know that I can give him a lot more color than what I just said. I think we would expect to see the same seasonal impacts that you've seen throughout quarter this year.

Speaker 2

We did see some differences, obviously, where in this back half, we've been we've seen that the positive the tailwinds from the prior year destocking, no longer taking place. So but broadly, I'd expect you to still see the seasonal implications, but this downward pressure on 1st fit markets, it will be something that will impact our first half, no doubt. So I wouldn't give much more than that color, I would say. The only other thing probably to point out in terms of what drives that sort of seasonal activity heavily for us, I think I just referenced it as it relates to our 4Q expect 4Q 2024 expectations is just selling days. It really does drive a lot of the quarterly movement for us given our high exposure to aftermarket.

Speaker 6

Yes, yes. Very good. And just as a follow-up, the again, the one time cost that you spoke to, they did come in higher. Do you have a breakdown of where those split between cost of goods sold and SG and A?

Speaker 2

Absolutely. I'll ask Jack to respond to that one, Rob.

Speaker 4

Yes. Good morning, Rob. So as I think about the $9,000,000 for the Q3, dollars 5,000,000 is up in cost of sales and $4,000,000 is in SAR. And maybe I'll just expand a little bit. So as a reminder, the one time costs are primarily related to IT costs related to separation projects from Cummins as well as supply chain costs as

Speaker 5

we

Speaker 4

separate facilities from Cummins. The overage relative to our original expectations is primarily driven by 2 things. The first is delays in IT system cutovers. You can imagine it's quite complex to navigate these system cutovers. And so we are ensuring that we strike the right balance between the desire to move quickly coupled with risk mitigation.

Speaker 4

And so we've seen a few delays on that front. The second and really the primary driver behind this specific quarter increase is really the separation of our Mexican production facility from a legal perspective from Cummins. We originally thought that that would happen inside of Q1 and that slipped into Q3 here that was completed in August. And so about a 6 month slip there which related in higher costs from a transition service standpoint from Cummins. And that's just to clarify, that's now completed.

Speaker 4

And so again, you should see a step down here in Q4. And as I noted, we do expect to be substantially complete with those inside of 2024.

Operator

And your next question comes from the line of Bobby Brooks with Northland Capital Markets. Your line is open.

Speaker 7

Hey, good morning guys. Thank you for taking my question. I first was just curious to hear some more discussion just on your international business. I know you in the prepared remarks, you mentioned India, the market softened a little and there's no signs of rebound in China. But maybe just a little bit curious to maybe get break that down even more, maybe talk about Europe and APAC more broadly.

Speaker 7

And if you could compare and contrast where maybe you're seeing strength internationally versus what markets might be a little cooler. And any specific markets that's a big focus for you in 2025?

Speaker 2

Good morning, Bobby, and thanks for the question. So I'll build on some of my opening remarks. And I would say it we're pretty much seeing downside in all markets now. And so it's very hard to find a bright spot from a market perspective. Previously, I would have described in the last quarter, I think I would have described that bright spot as India.

Speaker 2

And I would still say that India would be the strongest performing of the global markets from a market perspective. But either has also softened here, and the outlook has softened over the last quarter since we spoke to you last. So it would certainly be the bright spot that I see. Jack and I are actually traveling there in the next week or so. And so we'll get a much better sense on that market.

Speaker 2

We have a joint venture operation there as a reminder and a very strong leading market position. So I do expect India to still provide us with strong benefits from an international perspective. I expect China to continue to be challenged. We've seen that challenge throughout this year. I'm expecting that to be challenged throughout 2025.

Speaker 2

And we're really looking at how we continue to outperform the market in China through our partnership and through our product innovation. And then if I just come to Europe, we deliberately don't cover Europe in our opening because it is less material for us relative to other markets. But we're seeing certainly the same down cycle of the market in Europe. And we did see some moderation in the first bit decline. I think it came back a bit from an expected 18% down to around 10 percent down for the full year, but still a decline year over year and not really seeing bright shoots there.

Speaker 2

So it's a challenging market for sure internationally and at home here in the U. S. And I think what we're working to do in challenging market conditions is to continue to outperform the market.

Speaker 7

Got it. Thank you. That's great color. And it's great to hear that how well you guys are winning despite kind of the tough backdrop. My next question is just on margin.

Speaker 7

So those continue to be a really strong point for Atmos. That's for sure benefited by some of their improvement initiatives you've taken across your manufacturing footprint. So what I'm most curious on specifically is that green cartridge line in France that was your first fully automated line, has that been a large enough success where the team is now contemplating executing a fully automated line elsewhere. Obviously, lower cost labor regions maybe don't make as much sense. But just trying to get a sense of where and what is the next round of margin expansion initiatives?

Speaker 2

Thanks for that question. Let me talk about broadly our supply chain transformation and just cover the areas where we've seen the most benefit delivered. And certainly, you highlighted one of them, which is terrific. It's the automation of our manufacturing operations. And that is firmly part of our ongoing strategy within our manufacturing operations.

Speaker 2

And a great example of that is the green cartridge line. Really pleased with how we're learning fast as an organization as we implement that automated line. We really build capability in this area to be able to continue to do that on a much larger scale across our operations. So I see automation, a continued part of us unlocking value into the future. We have had some wonderful benefits that we've been able to achieve through a focus on purchasing, working with our suppliers to improve our cost our input costs.

Speaker 2

And I've been really pleased with the work of our purchasing team and how they're thinking about that. And certainly, I see further opportunity to be able to do that, but that's been another big part of the delivery of the benefits in our supply chain expansion.

Operator

And your next question comes from the line of Tami Zakaria with JPMorgan. Your line is open.

Speaker 3

Hi, good morning. Thank you so much. I wanted to clarify. So do you expect volumes to remain positive in the Q4? What are you seeing quarter to date in terms of volume?

Speaker 2

Yes. So I think our volume forecast for the Q4, we let me just get my bearings here. I think we do expect to continue our share gains, Tammy, is how I would describe it. But we certainly see the market conditions putting downwards pressure on that. So it's a very similar story to what sort of played out here in the Q3.

Speaker 2

I think the only thing and I sort of pointed this out in my one of my previous remarks was the 2 additional things that we see from a market side that will impact us is the selling days in the 4th quarter And then we do expect further declines in heavy duty first fit.

Speaker 3

Got it. Okay. Okay. Thank you. That's helpful.

Speaker 3

And my second question is, as you start planning for next year, what magnitude of pricing are you thinking about when you implemented in January?

Speaker 2

Yes. So I'm just still working

Speaker 3

yes. Go ahead. No, no, no. I think you got my question.

Speaker 2

Yes. So look, we're still working through what 2025 looks like. In broader strokes, I think you can count on our growth algorithm that we've talked about. I'll leave the market part of that out for the moment because obviously this year has been downside to our market expectations. Generally, we expect through the middle of the cycle about 2% market growth for the core markets that we're exposed to, about 2% on share growth and about 1% to 2% on price.

Speaker 3

Got it. Okay. That's very helpful. Thank you.

Speaker 2

Thanks, Timmy.

Operator

And your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open.

Speaker 8

Hi, good morning. Good morning, Joe. Hi. Question is on manufacturing footprint and kind of the prospect of tariffs. And so, we'd just like to understand reliance on manufacturing outside of the U.

Speaker 8

S. For revenue in the U. S, what kind of redundancies might exist? And then also just from the competitive playing field, to what degree Mexico is an important center of manufacturing in the for U. S.

Speaker 8

Filtration demand in the U. S?

Speaker 2

Yes. Thanks, Joe. It's a good question. So let me tell you how we think about our overall global supply chain. We're obviously a global company, and we do support free trade across the world.

Speaker 2

And so tariffs any introduction of tariffs does create challenges to a global company. And that's the first comment, I guess, I would make. So but we have looked at this extensively. We continue to monitor it. Broadly speaking, I would say that our manufacturing facilities are set up as regional for regional is how I would describe it.

Speaker 2

So let's talk about China for as an example. The majority of the manufacturing production we have inside China is for the China market. There are some exceptions to that and I would point to one exception would be our Mexico facility. Certainly, it does produce would be our Mexico facility. Certainly, it does produce volumes for the U.

Speaker 2

S. And the other exception I would probably point out is our media production in Korea and in South Korea. And so we continue to monitor if there are any impacts there that at this stage, we feel good about our overall supply chain strategy, where we're producing to support the regional local markets in which we operate in the best

Speaker 7

way. Got it. And do

Speaker 8

you find that the filtration sort of competitive landscape is such that Mexico is a common area of supply source?

Speaker 2

Look, we've been Mexico is our largest manufacturing facility around the world, and it's been very successful for us. And I think it has driven a competitive advantage overall. And so we see that certainly as a significant benefit.

Operator

And your next question comes from the line of Andrew Obin with Bank of America. Your line is open.

Speaker 9

Hi, good morning. This is David Ridley Lane on for Andrew. Could you just expand a little bit more on the organic expansion into industrial filtration?

Speaker 2

Yes. Thanks for that question, David. The first thing I would say, I mentioned it in my opening remarks, not because it's immediate significant and material revenue. The reason I thought it was really important to mention is because I see this as the spark of our innovation flywheel in our team. And so we've now launched products to be able to distribute into the industrial filtration market.

Speaker 2

We will do that through our existing distribution channels right now that are already established through our core. And we're starting reasonably small, I would say. I still certainly see our growth in industrial filtration primarily through acquisitions. But I'm very pleased with the progress the team has made in innovating and developing products to be able to take into the industrial filtration markets. You won't see big revenues from this in the short term, but I do expect it to build our flywheel of innovation.

Speaker 9

Got it. And then

Speaker 5

just sort of

Speaker 9

I heard you that the algorithm remains the same, but just to state this plainly, in 2024, you have 2 points of benefit from lapping the destocking. If you saw no market improvement in 2025, all those being equal, the revenue would be 2 points lower. Is that correct?

Speaker 2

Yes. I think the big unknown in this is what the market is doing is what I would say, David. And obviously, we've been in very challenged market conditions this year. And but yes, so we have certainly had 2% of destocking benefits this year. I would also say we've had pretty strong headwinds on market downside.

Operator

Our next question comes from the line of Bobby Brooks with Northland Capital Markets. Your line is open.

Speaker 7

Hey, thanks guys. Just wanted to jump in real quick again and follow-up on just the M and A. So you guys mentioned how the pipeline remains robust, but no deals have crossed the line yet, right? So I was just curious, could you maybe discuss what are kind of the main factors that have been holding up deals from getting across that line? Is it more so sellers having an unreasonable valuation on their company?

Speaker 7

Or is it maybe some legal stuff? Just curious on that.

Speaker 2

Yes. Thanks, Bobby. I was wondering whether I'd get through this call without an M and A question. So the Yes. Sorry.

Speaker 2

No, no, you're absolutely fine. The way I would describe it is we've been we've developed a clear strategy. I talked about the 3 verticals that we are prioritizing in industrial filtration market. So industrial water, industrial liquids, excluding water and industrial air. And so there's a number of factors that we're looking at.

Speaker 2

Obviously, there's a lot of there's a number of strategic considerations that we feel the deals based on. And then there's a set of financial considerations. And as we've discussed regularly on this call, we really want to balance growth, profitable growth with returns on our investment. And so it's not always an easy dance to do. I feel really good about the pipeline and what's coming in the top of our pipeline.

Speaker 2

We do certainly have a disciplined and rigorous filtering process and we've moved a number of those through to due diligence phase. And so we want to make sure we expect that the first deal we make, it kind of we've talked about this programmatic approach, will allow us to be able to further build on that platform. And we know it's important as a new company that we build confidence in how we're going to do this for the long term. And so we feel confident about where we are. It does just take time as we work through this as to what the right target is.

Operator

And I would now like to turn the call back over to Todd Chirillo.

Speaker 1

Thank you. That concludes our teleconference for the day. Thank you all for participating and for your continued interest. As always, the Investor Relations team will be available for questions after the call. Thank you and have a great day.

Operator

And this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Atmus Filtration Technologies Q3 2024
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