Q2 2024 Atmus Filtration Technologies Inc Earnings Call

Operator: Thank you for standing by. And at this time, I would like to welcome everyone to today's Atmus Filtration Technologies second quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise.

Thank you for standing by and at this time I would like to welcome everyone to today's Atmos filtration technologies second 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. If you'd like to ask a question. During this time simply press star.

Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star 1 on your telephone keypad. Once again, star 1. Thank you. I would now like to turn the call over to Todd Chirillo.

One on your telephone keypad once again star one.

Todd Carrillo: I would now like to turn the call over to Todd Carrillo Executive Director of Investor Relations. Todd. Please go ahead.

Speaker Change: Thank you operator, good morning, everyone and welcome to the Atmos filtration technologies second quarter 2024 earnings call on the call today, we have Steph Fischer, Chief Executive Officer, and Jack Cansler, Chief Financial Officer.

Todd Chirillo: Thank you, Operator. Good morning, everyone, and welcome to the Atmus Filtration Technologies second 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 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.

Speaker Change: 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 <unk> dot.

Todd Carrillo: Now I'll turn the call over to Steph. Thank.

Steph Disher: Thank you, Todd, and good morning, everyone. Our team delivered another strong quarter of performance, even as we see softness in many of our global end markets. On the call today, I will provide an update on our performance in the quarter, an update on our outlook for the year, and provide some insights on our growth strategy. Jack will then provide additional details regarding our financial performance.

Steph: Thank you Todd and good morning, everyone.

Steph: <unk> delivered another strong quarter of performance, even as we see softness in many of our global end market.

Steph: On the call today, I will provide an update on our performance in the quarter and.

Steph: An update to our outlook for the year and provide some insight on our growth strategy.

Steph: Jack will then provide additional details regarding our financial performance.

Jack: During the second quarter, we reached a significant milestone of one year as a publicly listed company. Whilst this is an important milestone more important is our sustained strong performance over the last 12 months.

Steph Disher: During the second quarter, we reached a significant milestone of one year as a publicly listed company. Whilst this is an important milestone, more important is our sustained strong performance over the last 12 months. I want to take this opportunity to thank all our global employees for their hard work and dedication to consistently deliver.

Jack: I want to take an opportunity to thank all of our global employees for their hard work and dedication to deliver consistently.

Steph Disher: This has positioned us to recently announce our first quarterly dividend and a share repurchase program. Capital return to shareholders is an important part of our ongoing commitment to strengthen total shareholder value. Now let's turn to the second quarter financial results and our updated outlook for 2024. We delivered strong financial performance in the second quarter. Sales were $433 million compared to $414 million during the same period last year, an increase of approximately 5%. Adjusted EBITDA in the second quarter was 93 million, or 21.4 percent, compared to 80 million or 19.3 percent in the prior period.

This has positioned us to recently announced our first quarterly dividend and a share repurchase program.

Capital return to shareholders is an important part of our ongoing commitment to strengthen total shareholder value.

Now, let's turn to the second quarter financial results and our updated outlook for 2024.

Steph Disher: Adjusted EBITDA for the quarter excludes $4 million of one-time standalone costs and $9 million for the same period last year. Adjusted earnings per share was $0.71 in the second quarter of 2024, and adjusted free cash flow was $0.34. Adjusted pre-cash flow includes $23 million of one-time separation related items.

Jack: We delivered strong financial performance in the second quarter.

Sales were $433 million compared to 414 million during the same period last year, an increase of approximately 5%.

Adjusted EBITDA in the second quarter was $93 million or 21, 4% compared to $18 million or 19, 3% in the prior period.

Jack: Adjusted EBITDA for the quarter excludes four 4 million of onetime standalone costs and $9 million for the same period last year.

Jack: Adjusted earnings per share was <unk> 71 cents.

Steph: In the second quarter of 2024, and adjusted free cash flow with 34 minutes.

Steph: Adjusted free cash flow excludes 23 million of one time separation related items.

Steph Disher: Now, let me provide some insight into our global market. Beginning first with the aftermarket, softer freight activity continued during the second quarter, and we have yet to see a positive inflection. However, our strong performance is offsetting some of the market weakness and contributing to volume growth. Demand in the U.S. first fit markets is beginning to slow, as expected. In India, markets remain strong, while China remains sluggish.

Steph: Now, let me provide some insight into our global market.

Steph: Beginning first with the after market.

Steph: Softer freight activity continued during the second quarter, and if we and we have yet to see a positive inflection.

Steph: However, our strong performance is offsetting some of the market weakness and contributing to volume growth.

Jack: Demand in the U S. First fit market is beginning to slow as expected in India markets remain strong while China remains sluggish.

Steph Disher: Looking ahead to our outlook, I will start with aftermarket for both on-highway and off-highway, which represents approximately 80% of our global revenue. However, it is challenging to predict the timing of an aftermarket recovery. We establish our outlook for the aftermarket by considering a number of factors, including third-party metrics and input from our global customers across the value chain. Compared to the prior year, we are expecting our overall global aftermarket revenue to be in a range of flat to up 5%.

Jack: Looking ahead to our outlook I will start with after market for both on highway and off highway which represents approximately 80% of our global revenues.

Steph: It is challenging to predict the timing of an after market recovery.

Jack: We establish our outlook for the aftermarket by considering a number of factors, including third party metrics and input from our global customers across the value chain.

Jack: Compared to the prior year, we were expecting our overall global aftermarket revenue to be in a range of flat to up 5%.

Steph: At a high level. This guidance reflects a declining market with strong market share performance and positive tailwind from Destocking, which occurred in 2023 and is not repeated in 2024.

Steph Disher: At a high level, this guidance reflects a declining market with strong market share performance and positive tailwinds from de-stocking which occurred in 2023 and is not repeated in 2024. Let me provide some further detail regarding the assumptions underpinning this guidance. We expect our global markets for aftermarket to be down in a range of 2 to 4 percent. We are still experiencing year-over-year declines in freight activity and have not yet seen a positive turning point. Overall freight activity is expected to be weaker through the balance of the year than previously expected.

Jack: Let me provide some further details regarding the assumptions underpinning this guidance.

Jack: We expect our global market for after market to be down in a range of 2% to 4%.

Jack: We are still experiencing year over year declines in fright activity and have not yet seen a positive turning point.

Jack: Overall freight activity is expected to be weaker through the balance of the year than previously expected.

Jack: In global off highway we are seeing softness across the world in construction mining and agriculture markets.

Steph Disher: In global off-highway, we are seeing softness across the world in construction, mining, and agriculture markets. However, offsetting market softness, we expect our outperformance to continue as we accelerate our growth strategy and continue to win new business. We expect our market outperformance to contribute 2% to aftermarket revenue growth. Additionally, an additional 2% of revenue growth will be the benefits related to de-stocking year over year. You may recall our customers were de-stocking from 2Q through 4Q in 2023 as supply chains normalized. Pricing is also expected to provide an additional 1.5% year-over-year increase.

Jack: Offsetting market softness we expect our outperformance to continue as we accelerate our growth strategy and continue to win new business.

Jack: We expect our market outperformance to contribute 2% to after market revenue growth.

Jack: Adding an additional 2% of revenue growth will be the benefits related to destocking year over year.

Jack: You may recall, our customers with de stocking from <unk> through <unk> in 2023 as supply chains normalized.

Jack: Pricing is also expected to provide an additional one 5% year over year increase.

Steph Disher: Let's now turn to our first target market. In the U.S., our view of the heavy-duty market is unchanged, while we are seeing modest improvement in the medium duty market. However, we anticipate declines in the second half of 2024 in line with industry expectations.

Jack: Let's now turn to our first fit market.

Jack: In the U S. Our view of the heavy duty market is unchanged.

Jack: While we are seeing modest improvement in the medium Judy markets.

Jack: We anticipate declines in the second half of 2024 in line with industry expectations.

Steph Disher: We are maintaining our outlook for U.S. heavy-duty truck sales to be down 7% to 12% for the full year. In medium duty truck sales, we are raising our guidance to flat to up 5%. Demand for trucks in India is expected to remain strong in both the on-highway and off-highway markets, while, in contrast, market conditions in China continue to remain at weak levels.

Jack: We are maintaining our outlook for U S heavy duty truck to be down 7% to 12% for the full year.

Jack: In medium duty truck, we are raising our guidance to flat to up 5%.

Jack: Demand for trucks in India is expected to remain strong in both the on highway and off highway markets. While in contrast market conditions in China continued to remain at weak levels.

Jack: We expect new business wins, including the field fuel filtration business of a global OEM, we announced last quarter to partially offset some of the market weakness expected in our first fit business.

Steph Disher: We expect new business wins, including the fuel filtration business of a global OEM we announced last quarter to partially offset some of the market weakness expected in our first bid business. Taken all together, we are raising our revenue guidance to now be in a range of flat to up 3% compared to the prior year, with global sales in an expected range of $1.625 to $1.675 billion. We expect continued strong operational performance and the benefits of our first half performance to carry through the year.

Jack: Taken altogether, we are raising our revenue guidance to now be in a range of flat to up 3% compared to the prior year with global sales in an expected range of 1625 to $1 67 5 billion.

Jack: We expect continued strong operational performance and the benefits of our first half performance to carry through the year.

Jack: We are raising our adjusted EBITDA margin 25 basis points and expect to deliver adjusted EBITDA margins of 18, 5% to 19, 5%.

Steph Disher: We are raising our adjusted EBITDA margin by 25 basis points and expect to deliver adjusted EBITDA margins of 18.5% to 19.5%. We are also raising our adjusted EPS outlook and now expect it to be in a range of $2.15 to $2.40.

Jack: We are also raising our adjusted EPS outlook and now expect to be in the range of $2 15.

Jack: To $2 40.

Jack: Now I would like to turn to the capital return to shareholders, we announced in July.

Steph Disher: Now I would like to turn to the capital return to shareholders we announced in July. We are pleased to announce this comprehensive capital return program as part of our ongoing commitment to strengthen total shareholder value. The strong cash generation ability of our business allows us to deliver high-quality solutions to our customers, invest in strategic growth initiatives, and now return capital to shareholders. We declared our first quarterly dividend of $0.05 a share and announced the authorization of a $150 million share repurchase program.

Jack: We are pleased to announce this comprehensive capital return program as part of our ongoing commitment to strengthen total shareholder value.

Jack: The strong cash generation ability of our business allows us to deliver high quality solutions to our customers.

Jack: Invest in strategic growth initiatives, and now return capital to shareholders.

Jack: We declared our first quarterly dividend of <unk>, a share and announced the authorization of a $150 million share repurchase program.

Steph Disher: Our priority for capital deployment remains focused on the execution of the four pillars of our growth strategy, for which I will now provide you with an update. Our first pillar is to grow share in first fit. We continue to win with the winner, and we have secured new vehicle platforms associated with the 2027 U.S. EPA emissions standard. We are leaders in fuel filtration and crankcase ventilation.

Jack: Our priority for capital deployment remains focused on the execution of the four pillars of our growth strategy.

Jack: For which I will now provide you with an update.

Jack: Our first pillar is to grow share in first fit we continue to win with the winners and have secured new vehicle platforms associated with the 2027 U S API emission standards.

Jack: We are leaders in fuel filtration and crankcase ventilation.

Steph Disher: These continued wins further demonstrate our ability to support customers and provide our industry-leading flea-guard products to solve our customers' filtration challenges. Our second pillar is focused on accelerating profitable growth in the aftermarket. We are growing our share of the aftermarket by providing our customers with our technology-leading flea cart products where and when they need them. Our teams continue to aggressively pursue new business around the globe, allowing us to expand our share of the aftermarket business. We have recently launched our filtration science campaign to raise our brand awareness and demonstrate how FleetGuard products provide industry-leading protection and uptime.

Jack: This continued wins further demonstrate our ability to support customers and provide our industry, leading free play card products to solve our customers' filtration challenges.

Jack: Our second pillar is focused on accelerating profitable growth in the aftermarket.

Jack: We are growing our share of the after market by providing our customers without technology, leading flake out products, where and when they need them.

Jack: Our teams continue to aggressively pursue new business around the globe, allowing us to expand our share of the aftermarket business.

Jack: We have recently launched our filtration science campaign to raise our brand awareness and demonstrate how <unk> products to provide industry, leading protection and uptime.

Jack: Our third pillar is focused on transforming our supply chain.

Steph Disher: Our third pillar is focused on transforming our supply chain. We continue to improve on-shelf availability as we build our own fully dedicated distribution facility. Over 80% of our volume is being distributed through dedicated Atmus Warehouse facilities, and we are on track to have substantially all of our volumes on the Atmus network by the end of the year. We continue to drive costs through investments in automation and efficiencies in our purchasing organizations.

Jack: We continue to improve on shelf availability as we stand up our own fully dedicated distribution facilities.

Jack: Over 80% of our volume is being distributed through dedicated Atmos warehouse facilities and we are on track to have substantially all of our volumes on the Atmos network by the end of the year.

Jack: We continue to drive out costs through investments in automation and efficiencies in our purchasing organization.

Steph Disher: Our adjusted EBITDA performance demonstrates the results of our continuous focus on cost reduction. At the midpoint of our guidance, we expect to expand our adjusted EBITDA margin by 340 basis points since the end of 2022, and our supply chain transformation has been a key component of this expansion. Our fourth pillar is to expand into industrial filtration markets. We are primarily focused on growing inorganically, and we continue to build our M&A pipeline and review opportunities.

Jack: Our adjusted EBITDA performance demonstrates the results of our continuous focus on cost reduction at.

Jack: At the midpoint of our guidance, we expect to expand adjusted EBITDA margin 340 basis points since the end of 2022 and our supply chain transformation has been a key component of this expansion.

Speaker Change: Our fourth pillar is to expand into industrial filtration market we.

Jack: We are primarily focused on growing inorganically and we continue to build our M&A pipeline and review opportunities.

Jack: While we are excited about the possibilities industrial filtration will bring to US we are taking a disciplined approach in evaluating potential targets.

Steph Disher: While we are excited about the possibilities industrial filtration will bring, we are taking a disciplined approach to evaluating potential targets. Our focus remains on creating long-term shareholder value, and we will move forward with acquisitions when we are confident we can deliver on this value. We will continue to keep you informed of our progress. Now, Jack will discuss our financial results in more detail. Thank you.

Jack: Our focus remains on creating long term shareholder value.

Jack: And we will move forward with acquisitions. When we are confident we can deliver on this value. We will continue to keep you informed of our progress.

Jack: Now Jack will discuss our financial results in more detail.

Jack Kienzler: Thank you, Seth, and good morning, everybody. We delivered another quarter of strong financial performance. Sales were $433 million compared to $414 million during the same period last year, an increase of approximately 5%. The increase in sales was primarily driven by higher volumes of 3% and pricing of approximately 2%. We outperformed in many of our global markets through gains in market share. Gross margin for the second quarter was $132 million, an increase of $18 million compared to the second quarter of 2023. In addition to volumes and pricing, we also benefited from lower commodity costs.

Jack: Thank you Scott and good morning, everyone. We delivered another quarter of strong financial performance.

Jack: Sales were $433 million compared to $414 million during the same period last year, an increase of approximately 5%.

Jack: The increase in sales was primarily driven by higher volumes of 3% and pricing of approximately 2%.

Jack: Outperformed in many of our global markets through gains in market share.

Jack: Gross margin for the second quarter was $132 million, an increase of $18 million compared to the second quarter of 2023.

Jack: In addition to volumes and pricing, we also benefited from lower commodity costs.

Jack: Selling administrative and research expenses for the second quarter were $60 million, an increase of $1 million over the same period in the prior year.

Jack Kienzler: Selling, administrative, and research expenses for the second quarter were $60 million, an increase of $1 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 own team and separate our functions from common. Joint venture income was $8 million in the second quarter, flat to our 2023 performance. This resulted in adjusted EBITDA in the second quarter of 93 million, or 21.4 percent, compared to 80 million, or 19.3 percent, in the prior period.

Jack: 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.

Jack: Joint venture income was $8 million in the second quarter, but to our 2023 performance.

Jack: This resulted in adjusted EBITDA in the second quarter of $93 million or 21, 4% compared to $80 million or 19, 3% in the prior periods.

Jack: Adjusted EBITDA for the quarter excludes $4 million of one time standalone costs compared to $9 million for the same period last year.

Jack Kienzler: Adjusted EBITDA for the quarter excludes $4 million of one-time stand-alone costs compared to $9 million for the same period last year. We continue to believe these costs will be in a range of $10 to $20 million in 2024 and be substantially complete by the end of this year. These one-time costs primarily relate to the establishment of functions previously commingled with Cummins, such as information technologies, distribution centers, and human resources

Jack: We continue to believe these costs will be in a range of $10 million to $20 million in 2024 and be substantially complete by the end of this year.

Jack: These onetime costs, primarily related to the establishment of functions previously co mingled with Cummins, such as information technologies distribution centers and human resources.

Jack Kienzler: Adjusted earnings per share was $0.71 in the second quarter of 2024, compared to $0.63 last year. The results reflect higher interest expense from a full quarter of debt issued at our IPO in May of 2023. Adjusted pre-cash flow was $34 million this quarter compared to $35 million in the prior year. The higher cash usage was primarily related to increased working capital requirements. Free cash flow has been adjusted $5 million for capital expenditures related to our separation from Cummins, compared to $2 million in the previous year.

Jack: Adjusted earnings per share was <unk> 71 in the second quarter of 2024.

Jack: Compared to <unk> 63 last year.

Jack: The results reflect higher interest expense from a full quarter of debt issued at our IPO in may of 2023.

Jack: Adjusted free cash flow was $34 million this quarter compared to $35 million in the prior year. The higher cash usage was primarily related to increased working capital requirements.

Jack: Free cash flow had been adjusted 5 million for capital expenditures related to our separation from <unk> compared to $2 million in the previous year.

Jack: We expect onetime capital expenditures will be in a range of $10 million to $20 million in 2024, and also to be substantially complete by the end of this year.

Jack Kienzler: We expect one-time capital expenditures to be in a range of $10 to $20 million in 2024 and also to be substantially complete by the end of this year. As we noted in our last call, we are also adjusting free cash flow for working capital inefficiencies associated with the move from intercompany settlement terms with Cummins to standalone practices. In the second quarter, this adjustment is $18 million and relates to Cummins processing payroll on our behalf prior to the full separation, and we reimbursed them on 60-day terms consistent with historical practice.

Jack: As we noted in our last call. We are also adjusting free cash flow for working capital inefficiencies associated with the move from intercompany settlement terms with Cummins to Standalone practices.

Jack: In the second quarter. This adjustment is $18 million and relates to come into the processing payroll on our behalf prior to the full separation and we reimburse them on 60 day terms consistent with historical practices.

Jack Kienzler: As we have taken over the payroll process, these cash obligations are funded as incurred. We expect these inefficiencies will be mostly complete by the third quarter of this year and expect a full-year impact of approximately $35 million. The effective tax rate for the second quarter of 2024 was 21.8% compared to 24.5% in 2023.

Jack: As we have taken over the payroll process.

Jack: <unk> obligations are funded as incurred.

Jack: We expect these inefficiencies will be mostly complete by the third quarter of this year and expect a full year impact of approximately $35 million.

Jack: The effective tax rate for the second quarter of 2024 was 21, 8% compared to 24, 5% in 2023. The decrease was driven by a change in the mix of earnings between U S and foreign operations.

Operator: The decrease was driven by a change in the mix of earnings between U.S. and foreign operations. Now, let's turn to our balance sheet and the operational flexibility it provides us to execute on our growth strategy and deliver total shareholder value. We ended the quarter with $161 million of cash on hand. Combined with the full availability of our $400 million revolving credit facility, we have $561 million of available liquidity. Our cash position and continued strong performance during the second quarter of 2024 have resulted in a net debt-to-adjusted EBITDA ratio of 1.4 times for the trailing 12 months ended June 30th. In closing, I want to thank our dedicated global team for all of their efforts as our momentum accelerates and we execute our growth strategy. Now we will take your questions.

Jack: Now, let's turn to our balance sheet and the operational flexibility. It provides us to execute on our growth strategy and deliver total shareholder value.

Jack: We ended the quarter with $161 million of cash on hand, combined with the full availability of our $400 million revolving credit facility, we have $561 million of available liquidity.

Jack: Our cash position and continued strong performance during the second quarter of 2024 has resulted in a net debt to adjusted EBITDA ratio of one four times for the trailing 12 months ended June 30.

Jack: In closing I want to thank our dedicated global team for all of their efforts as our momentum accelerates and we execute our growth strategy.

Speaker Change: Now we will take your questions.

Speaker Change: Thank you and at this time.

Operator: And at this time, I would like to remind everyone that in order to ask a question, press the star, then the number one on your telephone keypad. Once again, star number one. And in the interest of time, we ask that callers limit their questions to one primary question and one follow-up. Thank you. And we will pause for just a moment to compile the Q&A roster. And it looks like our first question today comes from the line of Joe O'Day with Wells Fargo. Joe, please go ahead.

Speaker Change: I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad once again star one and in the interest of time, we ask that callers limit your questions to one primary question and one follow up thank you.

Jack: And we will pause just a moment to compile the Q&A roster.

Speaker Change: And it looks like our first question today comes from the line of Joe O'dea with Wells Fargo. Joe. Please go ahead.

Joe O'Day: Hi. Good morning, everyone.

Joe O'dea: Hi, good morning, everyone. Thanks for taking my questions.

Joe O'Day: Thanks for taking my question. Clearly, we had really good EBITDA performance in the quarter. Jack, it looks like EBITDA was up $12 million sequentially on revenue that was up $6 million. So, you talked about price, volume, and cost, but could you kind of break that down a little bit more? And in particular, what you saw on the cost side and related, it does look like guidance implies that the EBITDA margin doesn't stay as strong in the back half of the year. So, any bridge details there?

Joe O'dea: Clearly really good EBITDA performance in the quarter.

Jack: Jack It looks like EBITDA was up $12 million sequentially on revenue there was up six so you talked to price volume and cost, but could you kind of break that down a little bit more and in particular, what you saw on the cost side.

Speaker Change: And then related it does look like guide implies that the EBITDA margin doesn't stay as strong in the back half of the year. So any bridge details there.

Jack: Yes, maybe I'll start on the sequential bridge Joe Thanks for the question good morning.

Jack Kienzler: Yes, maybe I'll start on the sequential bridge, Joe. Thanks for the question. Good morning.

Jack: So I would say really.

Jack Kienzler: So I would say, you know, really, as we bridge from the first quarter to the second quarter, it's really primarily a volume story. Volume was up, hours in the plants, and production levels. So that's really what drove it. We did have a few other moving pieces. If you recall, we had some headwinds from a freight perspective in the first quarter, which did not repeat in the second quarter, and a little bit of tailwinds from warranty.

Jack: Bridge from.

Speaker Change: The first quarter to the second quarter, it's really primarily a volume story.

Jack: Volume was up.

Jack: About 8 million in total revenue, which converted to about a 30 basis point benefit. In addition to that we also saw some some benefit from an absorption standpoint, as we had really strong performance across our manufacturing footprint in the second quarter.

Jack: And as we look towards the back half of the year, we would expect.

Jack: Some softening in terms of our hours in the plants and production levels. So thats really what drove we did have a few other moving pieces.

Jack: If you recall, we had some headwinds from a freight perspective in the first quarter, which did not repeat in the second quarter and a little bit of tailwind from warranty, but mostly it was a volume story in the plants and just really strong performance.

Jack Kienzler: But mostly, it was a volume story in the plants and just really strong performance in the second quarter and really the first half overall. Maybe I'll turn it to Steph if you want to talk about kind of the first half, second half story. Yeah, I think

Jack: In the second quarter and really the first half overall.

Jack: Maybe I'll turn it to stuff if you want to talk about kind of the first half second half story, Yeah, I think thats, great Hi, Joe Good morning.

Steph Disher: Yeah, I think that's great. Hi Joe. Good morning.

Joe: Firstly as I talked about in my market outlook I think we see it.

Steph Disher: You know, firstly, as I talked about in my market outlook, I think we see a drop off in the second half relative to the first on volume. And the driver of the margin is really very much volume related. So the two big drivers of the volume decline, second half versus first half, are really firstly the first bit of decline, which we've been discussing for some time now and is broadly aligned with previous expectations. But in addition to that, I would say on the aftermarket side, freight activity, which we were expecting to turn positive by now. We've been in a long and subdued decline in freight activity.

Speaker Change: Drop off in the second half relative to the theft on volume and the driver of the margin associated is really very much volume related so the two big drivers of the volume decline second half versus first half Israeli firstly, the first fit decline, which we've been discussing for some time now and it's.

Speaker Change: Broadly in line with previous expectations, but in addition to that I would say on the aftermarket side fright activity, we were expecting to turn positive by now we've been in a long <unk> acute severe decline on freight activity.

Steph Disher: But that turn in the aftermarket or freight activity, we're now seeing later in the year of 2024 and perhaps early into 2025. So really, you know, volume drivers leading to a lighter second half relative to the first half, that is driving the margin outcomes. I certainly acknowledge that it implies a challenging decremental margin environment. We have certainly delivered strong incrementals as well, and this still implies a midpoint of 19% adjusted EBITDA in our guide, and that delivers strong incrementals year over year is how I'm thinking about it.

Speaker Change: But that that turn in the aftermarket all freight activity. We're now saying later in the year of 2024, and perhaps into 2025 sites really volume drivers leading to a lighter second half relative to first half that is driving.

Speaker Change: The margin outcomes I certainly acknowledge that.

Jack: It implies a challenging decremental margin environment.

Speaker Change: We have certainly delivered strong incrementals as well and and it still implies a midpoint of nine 8%.

Speaker Change: Adjusted EBITDA in our guide and that delivers a strong incrementals year over year is.

Speaker Change: Is how I'm thinking about it we are still establishing a stand alone company.

Steph Disher: We are still establishing a standalone company. Obviously, the cost structure that goes with standing up a separate company and separating activities from comments, and we expect to see growth in the horizon, so don't really expect to be taking short-term costs out, if you like. Hence, the decline you see in margins in the second half is really directly related to the volume story.

Jack: Obviously, the cost structure that goes with standing up the.

Jack: Separate company and and separating activities from comments and we expect to see growth in.

Jack: The horizon, so don't really expect to be taking short term cost out if you like.

Jack: Hence with the decline you see in margins in the second half is really directly related to the volume story.

Speaker Change: Got it.

Joe O'Day: Got it. Those are helpful details. And then, Steph, I wanted to touch on some really good color related to aftermarket, what you're seeing in that market. I guess when we think about the components of growth and think about visibility into the rest of the year and the aftermarket for you, I would think that the pricing is in place at this point. The D stock is a comp situation, and so the swing factors seem like they would be more related to outperformance and market trends. And so could you just talk about the visibility that you have into continued outperformance versus the market and how you think about the volatility of the market into the back half of the year?

Jack: Full details and then.

Jack: Steph wanted to touch on I think some some really good color related to aftermarket.

Jack: Okay.

Speaker Change: Youre seeing in that market I guess, when we think about the components of growth and think about visibility into.

Jack: And to the rest of the year and aftermarket for you.

Speaker Change: I would think that the pricing is in place at this point the.

Speaker Change: The destock as a comp.

Speaker Change: Situation in so the swing factors seem like it would more so be related to our performance and market trends and so could you just talk about the visibility that you have and to continued outperformance versus the market and how you think about the variability of the market into the back half of the year.

Jack: Mhm.

Steph Disher: Mm-hmm. So let me talk about the outperformance. We do feel that we've demonstrated outperformance in the first half of the year in terms of share in the aftermarket. And we see that in the way that we've assumed in our guide, we believe that will continue here through the second half, and we have strong confidence in that. And so I'd say that continuing on this trend, I think the variable that is a little more unknown for us is just really when does the freight activity turn.

Jack: So let me talk about the outperformance we do we do feel that we've demonstrated outperformance in the first half in share.

Speaker Change: In after market.

Speaker Change: And we say that the way that we've assumed in our guide we believe that will continue here through the second half and we have strong confidence in that and so that's I would say that continuing at this trend I think the variable there is a little more unknown for US is just really when does the.

Speaker Change: Fright activity ton.

Speaker Change: It has a lot of uncertainty in the market around that.

Steph Disher: There's a lot of uncertainty in the market around that. I think it's certainly a prolonged downturn period that we're experiencing. And so right now, we've assumed that happens in the back half here of 2024. I think there's just a question of how that plays out. But we've taken a view that we're not going to see much recovery of that inside 2024, and we're going to still see downward pressure on freight activity. And that's what's implied in our guide.

Speaker Change: I think it's certainly a prolonged downturn period that we're experiencing and so right now we've assumed that happens into the back half here of 2024.

Speaker Change: I think that's just a question of us.

Speaker Change: How that plays out but that we've we've taken a view that we're not going to stay much recovery of that inside 2024, and we're going to still see downwards pressure in freight activity and that's what's implied in our guide.

Speaker Change: Got it thanks very much.

Joe O'Day: Got it. Thanks very much.

Jamie: Thanks, Joe and our next question comes from the line of Tami Zakaria with Jpmorgan Jamie. Please go ahead.

Operator: Thanks, Joe. And our next question comes from the line of Tami Zakaria with J.P. Morgan. Tami, please go ahead.

Tami Zakaria: Hey, good morning, Thank you, so much and very nice quarter.

Tami Zakaria: Hey, good morning. Thank you so much and for a very nice quarter. So a couple of questions.

Tami Zakaria: So a couple of questions just following up on that aftermarket question.

Tami Zakaria: Just following up on that aftermarket question from before. So how much was the aftermarket down globally in the first half versus the two to four percent decline you expect this year? The genesis of my question is, do you expect the global aftermarket to be worse than the two to four percent decline in the back half? Yeah. Good morning, Tami.

Speaker Change: Before.

Tami Zakaria: So how much is aftermarket down globally in the first half versus the two 4% decline you expect this year.

Speaker Change: The Genesis of my question is do you expect the global aftermarket to be worse than the two to four in the back half.

Speaker Change: Yeah, Greg Good morning, Tammy great to speak to you and thanks for the acknowledgement on the strong quarter.

Steph Disher: Great to speak to you. And thanks for the acknowledgement on the strong quarter. I guess two dynamics are playing out here that I would club together. I'd broadly say our downturn on the market in the first half of the year in the aftermarket was about 2%. We offset that by just under a percent in de-stocking in the first half. What we're going to see in the second half is still a strong downturn, so down between that 2% to 4% at 3% at the midpoint.

Speaker Change: I guess two dynamics playing out here that I would club together I broadly say out downturn in market in the first half in the after market.

Speaker Change: <unk> was about 2%, we offset that by just under a percent and destocking in the first half what are we going to see in the second half is.

Speaker Change: It's still strong downturns are down down between that two to four.

Speaker Change: A 3% at the midpoint and then you've got Destocking, playing a positive role that offset that slightly more here in the second half we saw a destocking really start to start without customers last year in the second quarter and customers did that at different pacing throughout.

Steph Disher: And then you've got de-stocking playing a positive role that offsets that slightly more here in the second half. We saw de-stocking really start with our customers last year in the second quarter, and customers did that at different rates throughout the year, and it spread out through the fourth quarter. So those are the two dynamics at play.

Speaker Change: The year and it's spread out through the fourth quarter. So so that's the two dynamics at play similar similarly declining market conditions offset by more.

Tami Zakaria: Similarly, declining market conditions were offset by more favourable tailwinds on de-stocking in the second half. Thank you. That is very helpful.

Speaker Change: A more favorable tailwind on de stocking that in the second half.

Speaker Change: Thank you that is very helpful. So so the follow up question is when I look at the guide full year revenue guide.

Steph Disher: So the follow-up question is, when I look at the Foliar Revenue Guide, to get to the midpoint of the sales guide, the back half needs to be down, call it about 1%, year over year, versus the growth you've seen in the first half. So, are you expecting the back half to be down year over year? Is that the trend you're seeing quarter to day? That's right, Tami. And the big driver of that is the first bit of market decline. So particularly in heavy duty truck or class A trucks, that has certainly been, you know, implicit in our guide, but that's the big driver of the decline year over year.

Tami Zakaria: I understand. Okay. Thank you.

Speaker Change: To get to the midpoint of the sales guide the back half needs to be down call it about 1% year over year.

Speaker Change: Firstly the growth you've seen in the first half. So are you expecting back half to be down year over year is that the trends you're seeing quarter to date.

Speaker Change: That's right Tony and the Big driver of that is the first fit market decline sorry, particularly in heavy duty truck class eight trucks that has suddenly been implicit in our in our guide, but that's the big driver of the decline year over year.

Tony: Understood. Okay. Thank you.

Jeremy: Thanks, Jeremy.

Operator: And our next question comes from the line of Rob Mason with Baird. Rob, please go ahead.

Speaker Change: And our next question comes from the line of Rob Mason with Baird. Please go ahead.

Speaker Change: Yes.

Robert Mason: Yes, yeah, again, nice work, Steph and Jack. Maybe we can circle back again to the aftermarket business. So just so I'm clear, you raised the outlook for the full year and aftermarket from flat to two to flat to up five. Again, it sounds like maybe the market conditions are a little bit worse. So it sounds like share gains are better in your outlook. Could you put a little more color around that in terms of where you're gaining share, whether it's domestic or international, whether it leans more on-road versus off-road, just for products in particular? Just a little more color there.

Speaker Change: Yes.

Speaker Change: Nice work Steph and Jack.

Speaker Change: And then if you'll go back just to the aftermarket business.

Speaker Change: So just so unclear.

Speaker Change: You raised the outlook for the full year in aftermarket.

Speaker Change: From flat to 2% to flat.

Speaker Change: Yes.

Speaker Change: And again.

Speaker Change: Again, it sounds like maybe the market conditions are a little bit worse. So.

Speaker Change: It sounds like share gains or better.

Speaker Change: Is your outlook could you put a little more color around that in terms of where you are gaining share whether it's.

Speaker Change: Domestic or international whether it leans more on road versus off road, just or products in particular, just a little more color there. Please.

Speaker Change: Absolutely yeah, good morning, Rob.

Steph Disher: Absolutely. Yeah, good morning, Rob.

Speaker Change: Hi.

Speaker Change: Certainly I just comment on the overall like I think you've crafted it right. We've tried to give a more complete picture now opening comments. This time on after market sorry.

Steph Disher: I, you know, certainly, I just comment on the overall, like, I think you've crafted it right. We've tried to give a more complete picture in our opening comments this time on aftermarket. So I think we may have got ourselves caught up a little bit in the comparisons between the calls of flat to five versus the flat to two, because the flat to two really reflected a view of the market story previously only.

Speaker Change: We may have got ourselves caught up a little bit in the comparisons between the coals of flat flat to 5% versus the flat to two the flat to two really reflected our view of the market story previously only and now we've tried to give them more comprehensive view of after market revenues. So if you if you think about it.

Steph Disher: And now we've tried to give a more comprehensive view of aftermarket revenues. So if you think about a midpoint we were assuming for the market previously of 1%, we're now saying that it's, you know, between two to four down, so a midpoint of three down. That's what we've seen is the sort of decline in market conditions in the aftermarket, completely driven by a push out of, you know, a positive inflection of freight activity.

Dan: Midpoint, we were assuming of market previously of 1%, we're now saying that it's between two to four down so a midpoint of three Dan.

Speaker Change: That's the that's what we're saying is this at a decline in market conditions in the after market completely driven by a pushout of positive inflection of flight activity. So that's just a link to the market story.

Steph Disher: So that's just a link to the market story. We've continued to see ongoing share gains in the aftermarket is how I would describe it. Very strong in North America from a geographic perspective is how I would characterize it.

Speaker Change: We've continued to see ongoing share gains.

Speaker Change: In the after market is how I would describe it very strong in North America from a geographic.

Speaker Change: Perspective.

Speaker Change: This is where I would characterize it are really driven I would say by a combination of the activity of improving our distribution network access to our products you heard in my opening comments that we've been very deliberate on building brand presence with the new campaign on filtration science and how else.

Steph Disher: Really driven, I would say, by a combination of the activity of improving our distribution network and access to our products. You heard in my opening comments that we've been very deliberate in building a brand presence with a new campaign on filtration science and how our FleetGuard products protect. And I really think that the combination of these factors is building greater awareness of our product in the aftermarket, coupled with a much stronger distribution capability to be able to service that. That's how I would, you know, broadly characterize those wins.

Speaker Change: <unk> AD products protect and really think that the combination of these factors are building greater awareness of our product in the after market coupled with a much stronger distribution capability to be out of service. So that's that is how I would.

Speaker Change: Broadly characterize those wins.

Steph Disher: That's very helpful color stuff; I appreciate that. Could you speak to the expansion of your capital allocation strategy here, I guess, in the near term, in terms of how you might be looking at share repurchases versus M&A, just, I guess, given what you may have right in front of you in the M&A pipeline?

Speaker Change: That's very helpful color I appreciate that.

Speaker Change: That's my follow up could you speak to the expansion of your capital allocation strategy here I guess in the near term in terms of.

Speaker Change: Howard you might be looking at.

Speaker Change: Share repurchases versus M&A, just I guess, given what you have may have right in front of you in.

Speaker Change: In the M&A pipeline.

Howard: So I was really excited to be able to launch the capital returns program I know its something ive been asked about for most of this year as we as we started out 2020 for them.

Steph Disher: Sure. I was really excited to be able to launch the Capital Returns Program. I know it's something I've been asked about for most of this year as we start out 2024, so I feel really good about that. As for the Share Repurchase Program, this really gives us now the mechanics and the tools to be able to return cash to shareholders as we move forward and balance that against our stated capital allocation priorities of investing in the growth of the business.

Howard: So I feel really good about that as I think about the share.

Speaker Change: Share repurchase program.

Speaker Change: This really gives us now the mechanics, and the tools to be able to return cash to shareholders as we move forward and balance that against our stated capital allocation priorities of investing in the growth of the business.

Steph Disher: Obviously, the flexibility that comes with a Share Repurchase Program alongside M&A is a really good tool for us from our perspective as to how we do that. Look, I think as this plays out, we'll be able to give more clarity. I think what we can give as clarity here right now is it's great to have the tools and the mechanism in place to deliver on a Share Repurchase Program. We'll obviously balance that against opportunities that we see in the M&A pipeline to give us enough dry powder to be able to act on growth opportunities that will create value for shareholders. So that's how I'd characterize it right now. As the quarters play out, obviously, we'll be able to give further color to this, but really pleased to be able to have this mechanism now in place.

Speaker Change: And obviously the flexibility that comes with a share repurchase program alongside MNI is is a really good tool for us.

Speaker Change: Our perspective as to how we do that.

Speaker Change: Look I think as this plays out we will be able to give more clarity I think what we can give us clarity here right. Now is it's great to have the tools and the mechanism in place to deliver on a share repurchase program. We will obviously balance that against opportunities that we see in the M&A pipeline to give us enough dry powder to be able to act on.

Speaker Change: In our growth opportunities that will create value for shareholders.

Speaker Change: So that's how I'd characterize it right now as the quarters play out obviously, we'll be able to we'll be able to give further color to this.

Speaker Change: But really pleased to be able to have this mechanism now in place.

Speaker Change: Okay.

Speaker Change: Sure sure. Thanks, Joe appreciate it.

Robert Mason: Sure, sure. Thanks, Steph.

Rob: Alright, Thank you Rob.

Operator: And our next question comes from the line of Andrew Obin with Bank of America. Andrew, please go ahead.

Speaker Change: And our next question comes from the line of Andrew <unk> with Bank of America. Andrew. Please go ahead.

Speaker Change: Thank you this is David Ridley Lane on for Andrew.

Andrew Obin: Thank you. This is David Ridley, my agent for Andrew. Could you just maybe give us an update on your progress in adding independent distributors to the FleetGuard network?

Speaker Change: Could you just maybe give us an update on your progress.

Speaker Change: Dependent distributors to our to the fleet card networks.

Speaker Change: So good morning, David.

Steph Disher: So, good morning, David. You know, we've spoken many times about the strength of our channel to market. We have a particularly strong path to market and channel partners across the US. And then, you know, that positioning differs across the world.

Speaker Change: We've spoken many times about the strength of our channel to market, we have a particularly strong path to market and channel partners across the U S. And then you know that that positioning differs across the world is what I would say and.

Steph Disher: And so I think our focus on independent channels and adding those has largely been in more emerging markets like Latin America, as an example. And we've certainly been aggressive there in identifying new partners. And that has contributed to fueling our growth in that region in particular. And then I would say we're focused very much on other emerging markets as to where we'll look to build those independent distributor channels. Certainly, there's still some opportunity to do that in the US.

Rob: So I think our focus on independent channels, and adding noise largely has been in more emerging markets like Latin America as an example.

Speaker Change: And we've certainly been aggressive there in identifying new partners and that has contributed to fueling our growth in that region in particular.

Speaker Change: And then I would say we're focused very much on other emerging market as to where we will look to build those independent distributor channels I'm certainly there's still some opportunities still do that in the U S and we expect to still pursue some of those those opportunities here in the second half and beyond them, but I would say, we've got a very strong.

Steph Disher: And we expect to still pursue some of those opportunities here in the second half and beyond. But I would say we've got a very strong channel position here in the US that we look to leverage further.

Speaker Change: Channel position here in the U S that that we'll look to leverage for them.

Thank you and then maybe a quick one for Jack just a clarification point.

Jack Kienzler: Thank you. And then maybe a quick one for Jack, just a clarification point. Does the guidance now have a 1.5% price for the year, or was that just an aftermarket specific comment? Yeah, so that's the full year.

Speaker Change: This is the goodness now and now have a one 5% price for the year or was that just the aftermarket specific comments.

Speaker Change: Yes, so thats a full year picture David.

Jack Kienzler: Yeah, so that's the full-year picture, David. Obviously, most of the pricing activities generally occur in the aftermarket, so that's that one and a half heavily weighted towards the aftermarket. And that's up from approximately 1% at the beginning of the year. So obviously, that difference is a very modest pricing action taken for the second half.

Jack: Obviously, most of the pricing activities generally occur in the aftermarket so that's that one and a half heavily weighted towards the aftermarket.

Speaker Change: Up from approximately 1% at the beginning of the year. So obviously the differences.

Speaker Change: A very modest price reduction taken for the second half.

David: Thank you very much.

Andrew: Okay. Thanks, Andrew.

Speaker Change: Oh excuse me David.

Operator: Excuse me, David. And our next question comes from the line of Jerry Revich with Goldman Sachs. Jerry, please go ahead.

Speaker Change: And our next question comes from the line of Jerry Revich with Goldman Sachs. Jerry. Please go ahead.

Jerry Revich: Yes, hi, good morning, everyone. On gross margins, just to come back to the quarter, you had a massive step up sequentially this year, over 30% gross margin on pretty similar sales, which I think is well ahead of normal seasonality. What about the business acceleration 2Q versus 1Q? Is it just the normalization of costs? Is that new price increase? And then, as I think about that within the context of the back half guide, obviously, you folks have a track record as a public company and have continually beat expectations, so it does sound like that's part of the framework for the guide, unless you tell me there was something not recurring in the quarter.

Jerry Revich: Yes, hi, good morning, everyone.

Jackie: Good morning, Jackie Hi.

Jerry Revich: You had a massive step up sequentially. This year over 30% gross margins on pretty similar sales, which I think is well ahead of normal seasonality. So.

Speaker Change: What about the business accelerated <unk> versus <unk> is it normalization of cost of the new price increases and then let's see.

Speaker Change: Do you think about that within the context of the back half guide obviously, you folks have a track record as a public company and have continually beating expectations. So it does sound like that's part of the framework for the guide.

Speaker Change: Unless youre, telling me there was something non recurring in the quarter.

Speaker Change: Well good morning, Gerry Thanks for that I'm going to ask Jack to take the pace on a margin step up and then maybe I'll circle back on.

Steph Disher: Well, good morning, Jerry. Thanks for that. I'm going to ask Jack to take the piece on margin step up, and then maybe I'll circle back on the guide comments.

Jack: On the guide comments, yeah, absolutely Gerry.

Jack Kienzler: Yeah, absolutely. So, Jerry, there's really a few different things at play, as I was describing to Joe. So, there is a bit of a volume step-up sequentially, but there really is no impact from a pricing perspective sequentially from Q1 to Q2.

Jack: Theres really a few different.

Jack: Things that play as I was describing suggests there is a bit of a volume step up sequentially. There really is no impact from a pricing perspective sequentially from Q1 to Q2.

Jack Kienzler: And then there are a few bits and pieces of favorability. So, a little bit of favorability on freight, same on materials, same on warranty, all of which taken together contribute to a healthy step-up. And then the last piece and probably the biggest piece is just strength in the manufacturing cost environment. That's both evidence of really strong production that contributed to the strength of our ability to deliver for our customers over the first half.

Jack: And then there's a few bits and pieces of favorability, so a little bit of favorability from freight same.

Same on materials same on warranty all of which taken together contribute to.

Jack: A healthy step up.

Jack: And then the last piece and probably the biggest piece is just strength in the manufacturing cost environment.

Jack: Both evidence of really strong production.

Jack: That contributed to the strength of our ability to deliver for our customers over the first half.

Jack: You can see a little bit in our elevated inventory balances as well.

Jack: Sure.

Jack Kienzler: And you can see a little bit in our elevated inventory balances as well. You know, as we think about them, the, You know, what's a one time, if you will, and there's really nothing one time, there's just a collection of favorability, and then the rest is the volume story from a first half and second half standpoint.

As we think about then the.

Speaker Change: Whats one time, if you will and Theres really nothing one time Theres just a collection of favorability.

Speaker Change: Then the rest of the volume story from a first half second half standpoint, yeah, yeah, So and I might just take at this point on the on the guide and the comments you made.

Steph Disher: Yep, yep. So, and I might just take up this point on the guide and the comments he made. We believe the guide is a prudent guide as we still head into a declining environment here in the second half, declining on first bid and class A truck production and not seeing a positive inflection on freight activity really driving downside in our, you know, aftermarket versus our relative guidance, our previous guidance provision, position.

Speaker Change: We believe the guide is a prudent guide as we still had into a declining environment here in the second half declining on first fit and class eight truck production and not saying a positive inflection on freight activity really driving downside in out after market investors are rare.

Speaker Change: <unk> got in our previous guidance provision position sorry in terms of the margin performance associated with that and we've certainly been discussing that I would say and.

Steph Disher: So, in terms of the margin performance associated with that, we've certainly been discussing that, I would say, and the way I would characterize it, I don't, I don't see a lot of flexibility that I have in the short term to take out fixed costs. Jerry, we're a brand new company, standing up a capable organization that can deliver on our commitments while we're separating from Cummins. And so, certainly no intention to sort of pull out fixed costs here in the short term.

Speaker Change: The way I would characterize it I don't I don't see a lot of flexibility that I have in the short term to take out fixed cost Jerry we're a brand new company standing up a capable organization.

Speaker Change: And that can deliver on our commitments and while we're separating from comments and so certainly no intention to sort of pull out fixed cost here in the in the short term and we do see a recovery of the market that we're talking about it and we want to be well positioned to continue to grow through that cycle in a business that.

Steph Disher: And we do see, you know, recovery in the markets that we're talking about, and we want to be well positioned to continue to grow through that cycle. In a business that is not very cyclical, frankly, like we're a large aftermarket content company, and so we really want to be continuing to position our business for long-term growth.

Speaker Change: He is not very cyclical frankly like way with a large aftermarket content and so we really want to be continuing to position our business for long term growth.

Speaker Change: Okay Super I appreciate it and then can we just follow up on the <unk>.

Jerry Revich: Okay, great, I appreciate it. And then, you know, can we just follow up on the capital deployment policy? You know, one of the big opportunities we've discussed over the past couple of years for your business, separate from Cummins, was to build out the industrial filtration part of the franchise. And, you know, given the dividend and the stock buyback authorization, I'm wondering if you can comment on whether the M&A pipeline maybe less robust than we thought over the past couple of years. And, you know, what does that tell us about the M&A opportunity set over the next 12 to 18 months?

Speaker Change: Capital deployment policy, one of the big opportunities, we have discussed over the past couple of years for your business separate from comments was to build out the industrial filtration part of the franchise.

Speaker Change: Even the dividend the stock buyback authorization I'm wondering if you can comment on that.

Speaker Change: M&A pipeline, maybe less robust than we thought over the past couple of years.

Speaker Change: Tell us about the M&A opportunity set over the next 12 to 18 months.

Speaker Change: Thanks for that question.

Steph Disher: Thanks for that question. You know, we have always viewed that capital returns to shareholders will be part of the mix of our overall shareholder value creation. And so we always expected to be doing this in time. It feels good to be doing that a year out of the gates with a modest dividend return and the balance of that being a flexible program around share buybacks. Obviously, the world of M&A is somewhat opportunistic and based on the opportunities that present themselves.

Speaker Change: Graham around share buybacks, obviously, the world of M&A is opportunistic somewhat and and based on the opportunities that present themselves. So we really wanted the balance of this capital returns to be in share buybacks. So that we could balance capability from an investment perspective.

Steph Disher: So we really wanted the balance of these capital returns to be, you know, in share buybacks so that we could balance capability from an investment perspective to be able to invest in M&A opportunities as they presented them. In terms of our progress there, we are making really good progress. I'd say building the M&A muscle, the strength of our pipeline. We've continued to look at a number of opportunities and work through diligence processes on those, and we will continue to do so.

Speaker Change: To be able to invest in M&A opportunities as they presented it in terms of our progress that we're making really good progress I'd say building the M&A muscle strength of Val.

Speaker Change: About pipeline, we've continued to look at a number of opportunities and walk through diligence processes, all noise and we continue to do so.

Steph Disher: And we will balance our, you know, our foresight on M&A opportunities with returns to shareholders. But very much, the premise is here, we are looking to enter into industrial filtration to grow our business, to increase overall shareholder return. And that's our driver, and it's certainly not growth for growth's sake. And so it's taking time for us to find exactly the right targets there, which is how I would describe it.

Speaker Change: And we will balance out.

Speaker Change: Foresight to M&A opportunity with returns to shareholders.

Speaker Change: But very much the premises here, we are looking to enter into industrial filtration to grow our business to increase overall shareholder return and that's that's that's our driver and it's not certainly not growth for growth's sake and sorry.

Speaker Change: It is taking time for us to find exactly the right right targets there, which.

Speaker Change: Is how I would describe it.

Jerry Revich: I appreciate it, Steph and Jack. Thank you.

I appreciate it thank you.

Gerry: Alright, Thanks Gerry.

Operator: All right. Thank you, Jerry. And one final reminder, again, if you'd like to ask a question, just press one on your telephone keypad. And our next question comes from the line of Bobby Brooks with Northland Capital. Bobby, please go ahead.

Speaker Change: And one final reminder, again, if you'd like to ask a question star one on your telephone keypad and our next question comes from the line of Bobby Brooks with Northland Capital Bobby. Please go ahead.

Robert Brooks: Hey, good morning guys. Thank you for taking my question. I just wanted to kind of double-click on the buybacks. So it sounds like the buyback is more opportunistic than programmatic, given your commentary earlier.

Bobby Brooks: Hey, good morning, guys. Thank you for taking my question.

Just wanted to kind of double click on the buyback.

Speaker Change: Buybacks, so sounds like the buybacks as more opportunistic and programmatic.

Speaker Change: Just given your commentary earlier.

The buyback is maybe a swing the swing factor west how have you leaned into a buyback would be.

Speaker Change: The M&A opportunities.

Speaker Change: Or am I, maybe reading into that too much and it will be a mix of both maybe accrual based programmatic approach.

Speaker Change: Thanks Harvey.

Harvey: Our lean harder into June.

Harvey: What M&A looks like.

Steph Disher: Thanks for the question. I think our priority right now is to get a framework in place to be able to, you know, return cash to shareholders. And certainly, you know, we'll look to act on that in an opportunistic way is a good way to describe it coming out of the gates. And then I expect us to be able to get a clearer view of exactly what that looks programmatically out into 2025 and beyond.

Speaker Change: Thanks for the question you know I think our priority right now is to get a framework in place to be able to return cash to shareholders and certainly we'll look to act on that in an opportunistic way as a good way to describe it coming out of the gate.

Speaker Change: And then I expect us to be able to get a clearer view of exactly what that looks programmatically, adding to 2025 and beyond and we'd be able to share more as as we shape that but I think right now the way you should hold its good to have the framework in place there'll be a base level that we look to build as programmatic that will.

Steph Disher: And we'll be able to share more as we shape that. But I think right now, the way you should hold it, it's good to have the framework in place. There'll be a base level that we look to build as programmatic that we'll communicate more on as we go forward. And then there'll be a balance that is based on opportunistic against our M&A options.

Speaker Change: Communicate more on as we as we go forward and then there'll be a balance that is the highest opportunistic against our M&A options.

Speaker Change: Got it that's great color. Thank you Scott.

Robert Brooks: Got it. That's great, Paul. Thank you, Steph. And then, you know, could you just maybe remind us, so obviously, the tail end of the quarter was lower raw material costs. Could you just remind us what, you know, what maybe are the three most important raw material costs to the business?

Speaker Change: Could you just remind us so obviously they are a good tailwind in the quarter was lower.

Speaker Change: Raw material costs could you just remind us.

Speaker Change: What maybe you are the three most important raw material cost to the business.

Speaker Change: Okay.

Jack Kienzler: Okay, yep, hand that to Jack. Yeah, absolutely.

Jack: Jack Yes, absolutely.

Jack Kienzler: Yeah, absolutely. So, I mean, the biggest is steel, Bobby.

Jack: Biggest.

Bob: Steel Bob is that we've seen.

Jack Kienzler: So, we've seen the index bumping along a little bit, but we do expect, you know, overall for the year, a favorable impact on our business. As a reminder, as you're kind of tracking the index and thinking about the impact on our financials, there is about a three month lag, so about a quarter lag relative to movement in that index. The next would be the kind of plastics and resin overall. Do you think about our..., as you think about our product? And then there are, you know, a number of other small categories, if you will, media, packaging, things like that.

Speaker Change: The index bumping along a little bit, but we do expect overall for the year are favorable.

Speaker Change: Impact for our business as a reminder, as youre kind of tracking the index and thinking about the impact to our financials. There is about a three month lag so about a quarter lag relative.

Speaker Change: Movement in that index.

Speaker Change: The next would be comply six in resin overall do you think about our.

Speaker Change: How do you think about our products.

Speaker Change: And then there is a number of other small.

Speaker Change: Small categories, if you will media packaging things like that.

Speaker Change: Got it thank you.

Robert Brooks: Got it. Thank you. Yeah, I'll turn it over, turn it back into the queue. Congratulations on the great quarter, guys.

Speaker Change: Turn it over back to the queue congrats on a great quarter guys.

Speaker Change: Alright, thank you thanks.

Operator: Thank you. Thanks. Thanks, Bobbie. And that's all the questions we have today. So I will now turn the call back over to Todd Chirillo for closing remarks.

Bobby Brooks: Thanks, Bobby.

Bobby Brooks: That is all the questions. We have today, so I will now turn the call back over to Todd <unk> for closing remarks Todd.

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

Speaker Change: Thanks, Todd and again, ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.

Operator: Thanks, Todd. And again, ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Bobby Brooks: Yeah.

Bobby Brooks: Yeah.

Bobby Brooks: Yeah.