Q4 2024 Atmus Filtration Technologies Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is surgery and I'll be your conference operator today at this.
This time I would like to welcome everyone to the Atlas filtration technologies fourth quarter and full year 'twenty 'twenty four 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.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
The majority of question again press the star one.
Speaker Change: And I'd like to turn the conference over to Todd Cello Executive Director of Investor Relations you may begin.
Todd Cello: Thank you operator, good morning, everyone and welcome to the Atmos filtration technologies fourth quarter and full year 2024 earnings call.
Todd Cello: On the call today, Yes, sure Chief Executive Officer, and Jack Kinzler, Chief Financial Officer.
Todd Cello: Certain information presented today will be forward looking and involve risks and uncertainties that could materially affect expected results.
Todd Cello: 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.
Scott: For additional information please see our SEC filings and the Investor Relations pages available on our website at <unk> Dot Com now I will turn the call over to Scott.
Scott: Thank you Todd and good morning, everyone.
Scott: Team achieved another quarter and full year of strong results by delivering industry, leading filtration solutions for our customers.
Scott: I want to thank our global team for their tremendous efforts throughout the year that made these results possible.
Scott: On the call today, I will provide a summary about fourth quarter and full year financial results.
Scott: And our outlook for 2025.
Scott: I will also share some of the significant progress we have made implementing our four pillar growth strategy.
Jack: Jack will then provide a detailed review of our financial results.
Jack: As I reflect on 2024, I would like to highlight some of the unforgettable accomplishments our team delivered during the year.
Jack: In March the common share exchange was completed and for the first time in a more than 65 year history, we became a fully independent company.
Jack: This has allowed us to accelerate our growth strategy and deliver significant market outperformance.
Jack: We initiated our capital allocation program balancing share repurchases with a consistent dividend returns.
Jack: Since our announcement in July we have repurchased a total of $20 million of stock.
Jack: $10 million in both the third and fourth quarter.
Jack: We have $130 million remaining under our board authorization and expect to continuation of capital returned to shareholders in 2025.
Jack: We have made substantial progress on our operational separation from our former parent Cummins and intend to be complete in 2025.
Jack: As we begin 2025, we have launched our we protect campaign to increase awareness about Atmos brand.
Jack: The campaign is focused on three key elements science that safe guards.
Jack: Championing a cleaner world and.
Jack: And securing a better future.
Jack: Now, let's turn to the four pillars of our growth strategy and highlights from 2024.
Jack: Our first pillar is to grow share in first fit.
Jack: We have realigned our organization and added resources to our account management teams to focus on growth in first fit.
Jack: We're seeing results.
Jack: We announced a new business win with a major European OEM for our industry, leading fuel filtration and crankcase ventilation content in 2024.
Jack: We further expanded our technology leadership in fuel filtration with the launch of our next generation media and our nano net product portfolio no net and three.
Jack: This media has wide ranging applications, enabling compact filter designs, while delivering superior service life in the harshest environments across a wide variety of fuels.
Jack: The reorientation of our organization for growth coupled with industry, leading filtration technology.
Jack: <unk> us with the continued opportunity to expand with new and existing OEM customers around the world.
Our second pillar is focused on accelerating profitable growth in the after market.
Jack: We estimate that we outperformed the market by approximately two percentage points in 2024.
Jack: This consistent outperformance in challenging market conditions demonstrates our ability to grow share.
Jack: We are expanding our product coverage with our industry, leading fleet God brand available to customers through new channels to market.
Jack: We are also investing with our customers in high growth geographies. For example, we recently held a three day Latin American customer event focused on strategic discussions market insights and business development opportunities.
Jack: Additionally, we are using advanced data analytic tools.
Jack: This enhances our team's ability to provide our industry, leading flake out products for our customers when and where they need them.
Jack: Our third pillar is focused on transforming our supply chain.
Jack: In the fourth quarter, we completed the transition of our Belgian warehouse and have now transitioned 95% of the distribution network from Cummins.
Jack: Well, we have not yet realized normal operating levels in Belgium. Our team continues to focus on bringing that facility to its full operational capacity and delivering technology, leading plagued our products to our customers.
Jack: Turning to supply chain efficiency, our adjusted EBITDA performance continues to demonstrate the results of our supply chain transformation and cost reduction efforts, we are driving through the organization.
Jack: Since 2022 we have expanded adjusted EBITDA margin by 410 basis points.
Jack: This is a significant accomplishment by the Atmos team.
Jack: Achieving these results during a period of an extended freight recession and establishing our own operational independence.
Jack: Our fourth pillar is to expand into industrial filtration market.
Jack: Our strategy remains focused on growth into industrial filtration, primarily for inorganic acquisitions.
Jack: As a reminder, we are broadly looking at three verticals industrial air industrial liquids, excluding wausau and industrial water.
Jack: We will continue to take a disciplined approach as we review our robust pipeline of opportunities for inorganic expansion in these three verticals ensure.
Jack: Ensuring any opportunity will be the right strategic fit for atmos and deliver value to all our stakeholders.
Jack: Now, let's discuss our results starting with the fourth quarter.
Jack: Our team delivered another strong financial performance in the fourth quarter sales were 407 million compared to 400 million and during the same period last year.
Jack: An increase of one 8%.
Jack: While a strong outperformance drive sales, we are still experiencing soft end market conditions in both the after market and first fit markets.
Jack: In response to these conditions, we determined it was prudent to reduce costs through restructuring actions in both the U S and China.
Jack: We incurred onetime costs of $4 million associated with employee severance, which are excluded from our adjusted results and my following comments.
Jack: We believe these actions will allow us to navigate current market conditions, while preserving the ability to scale as markets rebound.
Jack: Continuing with our results adjusted EBITDA was $78 million or 19, 1% compared to $71 million was 17, 9% in the prior period.
Jack: Adjusted EBITDA excludes 7 million of one time standalone costs.
Jack: Adjusted earnings per share was 58 cents in the fourth quarter of 2024.
Jack: Adjusted free cash flow was 28 million.
Jack: Adjusted free cash flow excludes 14 million of onetime separation related items in the quarter.
Jack: Now, let's review our results for the full year.
Jack: Sales were $1 67 billion, an increase of two 5% from 2023.
We saw a strong outperformance throughout the year in the face of soft market conditions.
Jack: Adjusted EBITDA was 330 million up from the prior year of 302 million.
Jack: Adjusted EBITDA margin Rose 110 basis points from the prior year to 19, 7%.
Jack: Adjusted EBITDA excludes 25 million of one time standalone costs.
Jack: Expanding margins by 110 basis points is an impressive accomplishment by the atmos team, especially considering the challenging market conditions faced during the year.
Jack: Adjusted earnings per share was $2 50, and adjusted free cash flow was $115 million.
Jack: Now, let's turn to our outlook starting with the after market.
Jack: We are expecting a recovery in freight activity as we progress through the year.
Jack: But the timing of the inflection is still unclear.
Jack: This recovery will be dependent on global economic conditions, which remain fluid.
Jack: Overall, we anticipate global markets for the after market to be flat to up 3% compared to last year.
Our continued execution of our growth strategy will drive market outperformance and is expected to contribute 2% to after market revenue growth.
Jack: Pricing is also expected to provide an additional 1% of year over year increase.
Jack: We do expect continued strength in the U S dollar.
Jack: Which will result in approximately 2% revenue headwind.
Jack: Let's now turn to our first fit markets.
Jack: In the U S. We expect the heavy duty market to be flat to down 10%, while we expected emissions regulations for 2027th to remain unchanged the potential impact of a pre buy in the second half of the year remains unclear.
Jack: For U.S. medium duty, we expect production to be down 5 to 15 percent, driven by a reduction in backlogs.
Jack: We delivered another quarter of impressive financial performance sales were $407 million compared to 400 million. During the same period last year, an increase of one 8%.
Jack: <unk> sales was primarily driven by higher volumes of 2% and pricing of 1%, partially offset by foreign exchange of 1%.
Jack: We continue to outperform in many of our global markets.
Jack: As Jeff mentioned earlier in the call, we incurred $4 million of one time restructuring costs during the fourth quarter related to employee severance costs.
Jack: These costs are excluded from our adjusted results for my following comments.
Jack: Gross margin for the fourth quarter was $107 million compared to $106 million in the fourth quarter of 2023.
In addition to volumes and pricing, we also benefited from lower manufacturing costs, partially offset by higher logistics and material costs.
Jack: Selling administrative and research expenses for the fourth quarter were $59 million, an increase of $1 million over the same period in the prior year.
Jack: Joint venture income was $8 million in the fourth quarter down $1 million to our 2023 performance.
Jack: Other income was $5 million, an increase from $1 million in the fourth quarter of 2023.
Jack: Increase was primarily due to higher interest on cash balances and foreign exchange gains as a result of balance sheet hedging programs.
Jack: This resulted in adjusted EBITDA in the fourth quarter of 78 million or 19, 1% compared to $71 million or 17, 9% in the prior period.
Jack: Adjusted EBITDA for the quarter excludes $7 million of one time standalone costs.
Jack: Adjusted earnings per share was <unk> 58 in the fourth quarter of 2024 compared to <unk> 49 last year.
Jack: Adjusted free cash flow was $28 million this quarter compared to $30 million in the prior year.
Jack: Free cash flow has been adjusted by $3 million for capital expenditures related to our separation from Permian.
Jack: And free cash flow has also been adjusted 12 million for working capital inefficiencies associated with the move from intercompany settlement terms with coverage.
Jack: Now, let's discuss our full year 2024 financial results.
Jack: Sales were $1 67 billion compared to $1 six 3 billion in 2023, an increase of two 5%.
Jack: We benefited from pricing actions and higher volumes, which were partially offset by foreign exchange headwinds.
Jack: Gross margin was $462 million, an increase of $29 million from 2023.
Jack: In addition to favorable pricing and volume, we saw lower variable compensation and material costs, which were partially offset by higher manufacturing and logistics costs, along with an unfavorable foreign exchange impact.
Jack: Selling administrative and research expenses for the full year were $228 million, an increase of $11 million compared to the prior year.
Jack: The increase was primarily driven by increased people related costs.
Jack: Offset by lower costs related to our separation from Cowen.
Jack: Joint venture income was $34 million in 2024.
Jack: To the prior year.
Jack: Other income was $7 million in 2024 compared to $3 million in 2023.
Jack: The increase was primarily due to higher interest on cash balances and foreign exchange gains, resulting from balance sheet hedging program.
Jack: Adjusted EBITDA was 330 million or 19, 7% compared to $302 million or 18, 6% in 2023.
Jack: One time costs related to separation were $25 million.
Jack: We have substantially completed our separation activities from Kevin's and expect it to be finished this year.
Jack: We believe these costs will be in a range of $5 million to $10 million in 2025.
Jack: The effective tax rate for 2024 was 21% compared to 24, 3% in 2023.
Jack: The decrease was driven by a change in the mix of earnings among tax jurisdictions, and one time use of foreign tax credits.
Jack: For the full year 2024, adjusted EPS was $2 50 compared to $2 31 in 2023.
Jack: For the full year 2024, adjusted free cash flow was $115 million compared to $152 million in 2023.
Jack: Adjusted free cash flow was unfavorably impacted by higher inventory balances primarily to support our warehouse transition in Belgium, along with the timing of certain tax and accounts payable related items.
Jack: Free cash flow has been adjusted for the full year about $15 million for capital expenditures related to our separation for Cummins.
Jack: Free cash flow has also been adjusted by $39 million for working capital inefficiencies associated with the move from intercompany settlement terms, where cummins to standalone practices.
Jack: In 2025, we expect to incur $5 million to $10 million of one time capital expenditures related to the completion of our separation from Cummins.
Jack: We do not expect any impact related to intercompany settlement terms in 2025 as this process is now complete.
Jack: Now, let's turn to our balance sheet and the operational flexibility it provides us to execute our growth and capital allocation strategy.
Jack: We ended the quarter with $184 million of cash on hand, combined with a full availability of our $400 million revolving credit facility, we have $584 million of available liquidity.
Jack: Our cash position and continued strong performance during the fourth quarter of 2024 has resulted in a net debt to adjusted EBITDA ratio of one two times for the 12 months ended December 31.
Jack: In closing I want to thank our global team for delivering another year of solid performance to all of our stakeholders now we will take your questions.
Jack: Thank you we will now begin the question and answer session. If you have dialed in we would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Jack: If you would like to withdraw your question simply press Star. One again, if you are called upon to ask your question in a listening via speaker phone or device. Please pickup your handset to ensure that your phone is not on mute when asking your question again fresh Saar wants to join the queue. We also do request for today's session that you. Please limit to one question and one follow up and Ricky.
Jack: To ask additional questions. Thank you.
Joseph: And our first question comes from the line of Joseph <unk> with Wells Fargo. Your line is open.
Joseph: Hi, good morning, Thanks for taking my questions.
Joseph: Ken can we just start on EBITDA margin to 19, 7% in 2024 was clearly very good it was above the high end of the initial guidance range.
Joseph: Just to sort of put in perspective, any kind of non repeats that you saw.
Joseph: In 2004 to re baseline that number.
Joseph: Help us think about 2025.
Joseph: And then just from from a quarterly cadence perspective Q2 of last year was obviously very strong.
Joseph: Should every other quarter in 25 be up year over year.
Joseph: Just any color there on the quarters.
Speaker Change: Good morning, gentlemen, thanks for your question I'll ask Jack to walk through the question on margin and then the sequential quarters as he left.
Speaker Change: Great. Thanks, Joe Good morning, Yes, so as I think about I'll start first maybe with a full year view.
Speaker Change: So as you think about what's driving kind of a step down year over year to the midpoint of our guidance range.
Speaker Change: There's really I would say two factors first of all.
Speaker Change: We are expecting a much more.
Speaker Change: Significant headwind.
Speaker Change: Headwinds from FX this year relative to last year, although obviously that affects our top line.
Speaker Change: As implied with our 2%.
Speaker Change: Guys there on the topline, but also will bleed through to the bottom line, particularly where we have a mismatch. If you will between our revenue and cost base. So thats, one one headwind, which will exist. This year if rates stay where they are relative to.
Speaker Change: The environment, we operated in 2024, the other piece I would just point out is we do operate on a on a lag from a pricing perspective, and so we are anticipating.
Speaker Change: Various input costs to be.
Speaker Change: Headwinds, particularly at the beginning of the year.
Speaker Change: Steel is one of our big commodities and.
Speaker Change: Depending on what happens with tariffs, we do anticipate an increase in overall steel prices.
Speaker Change: And we also envision a inflationary environment as it relates to people costs and.
Speaker Change: And labor costs and so.
Speaker Change: We do anticipate those to be a headwind.
We'll of course look take potential pricing for that but we won't have the flexibility to do that really until.
Speaker Change: The mid year so.
Speaker Change: All in as I think about the sequential build we've talked in the past about.
Speaker Change: The first has generally been about 5% stronger than the second half.
Speaker Change: I would expect this year to look a little different than that based on the overall market cycle dynamics.
Speaker Change: As we've talked we are anticipating an aftermarket recovery, albeit most likely.
Speaker Change: Second half or at least later in the year weighted.
Speaker Change: And Furthermore, on the first fit side any recovery that we may see would also come in the back half of the year and so as I think about comparisons to prior year quarter I think both the first quarter in the second quarter.
Speaker Change: It will be challenging comps.
Speaker Change: And then easier comps as the market recovers in the second half of the year.
Speaker Change: From a margin perspective, I think the first quarter likely looks fairly similar to last year's both topline and margin levels with the sequential improvement as volume picks up.
Price realization kicks in throughout the year.
Speaker Change: That's great color.
Speaker Change: And then.
Speaker Change: Steph just wanted to touch on the outlook for outgrowth and.
Speaker Change: A little maybe additional color on the aftermarket side in the first fit side as you sit here today and those expectations for outgrows. The visibility that you have into that how much of that is carryover from things that happened in 2024, how much of that is sort of new new wins in 2020.
Speaker Change: Five.
Speaker Change: Okay.
Speaker Change: Okay, Yes. Thanks for that chart look I I'd say, we feel very positive about the outflows we've given in our guide of around 2%.
Speaker Change: They like that strongly underpinned by committed business and wins that we have made with new partners.
Speaker Change: And sorry, certainly in the after market that's been a very strong outcome for us throughout 2024 and will flow here into 2025, and so I'd say I feel comfortable with it being underpinned there are certainly some things towards towards the second half that we need to say that that Thailand, but I feel good.
Speaker Change: What about the market share gains being underpinned by pretty solid wins that will carry over into 2025.
Speaker Change: And that's both aftermarket and first fit in terms of share gain.
Speaker Change: Yes, that's right.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Joe.
Speaker Change: Our next question comes from the line of Rob Mason with Baird. Your line is open.
Rob Mason: Yes, good morning, Steph Jack.
Speaker Change: Maybe revisit the prior question asking it a little bit different way just around the cadence and seasonality.
Speaker Change: You may have different numbers, but my math is based on.
Historical seasonality if I run.
Speaker Change: Run that out at historical seasonal lines that kind of land at the midpoint of your revenue guidance, but I guess, Jack you are saying.
Jack: We should wait we should shift though.
Jack: That weighting more towards the second half and I'm just curious.
Jack: If you have any.
Jack: More granularity on how maybe the first half should how much it should be underway.
Jack: Versus history.
Yeah, So Rob I think Youre, absolutely right I think we tended by around 5% overweight in the in the first half and then working days drives a lot of this without heavy exposure to off the market I think what you're seeing in terms of outlook that's embedded in our thinking about.
Jack: Slide through 2025 is obviously depressed phosphate markets in the first half we are expecting a rebound in the second half of first fit.
Jack: And then we're not seeing the turnaround in after market yet in this first quarter is the way I would describe it so we certainly see that more weighted towards the second half.
Jack: As well is how I would describe it and then certainly in the near term on a revenue perspective, we have got these FX headwinds.
Jack: That we that are in that in the first half that we will not be able to price for fully until until the mid year is is how I would describe it I think Jack referenced to you and I'll, let Jack Jack out any remarks. He has yeah, but that's a first quarter in particular that the first quarter of 2024 is a good guide as to as to why.
Jack: We see that's why we say the level what would you add Jack Yes, I think that's particularly true on the on the margin.
Jack: So I'd really driven again by volume.
Jack: FX and input costs.
Jack: That we're experiencing in the market. So I think you said it well.
Jack: Understood.
Jack: And then just again a question as you think about.
Jack: Maybe the latter part of your four strategies for strategy.
Jack: Diversify the business.
Jack: Maybe on the just inter.
Jack: Internally.
Jack: New media technology, New nano net.
Jack: <unk>.
Jack: <unk>.
Jack: Can you speak to any opportunities there to leverage that to move into new markets.
Jack: And maybe.
Jack: Hi.
Jack: Quickly that could be on the horizon, if that if that's an opportunity.
Yeah. Thanks, Rob we really say this launch as new media and then on that.
Jack: Net net portfolio range.
Jack: It gives us optionality across both our power solutions segment and also into new market seem to industrial filtration and so the way, we're thinking about our technology strategy and our latest ship that and the opportunities available to us and what this unlocks is really things like smaller filters being able to make more compact op.
Jack: <unk>, which allow for a better value offering for our customers our existing customers in our existing core markets and new partners in those markets. So it certainly unlock and enable that opportunity will give us greater flexibility on filtering a range of different types of deals as we.
Jack: And I continue to say that <unk>.
Jack: Energy transition in different different fuels that we will need to see.
Jack: So it will give us a lot of flexibility in our core business.
Jack: And then we have always seen the expansion and development of our media technology as a fine particles.
Jack: It really underpins our optionality as we as we step out into industrial filtration I wouldn't link that to an immediate opportunity industrial filtration base is about us building our technology platform.
Jack: To be able to enable our broader strategy and it will leverage both across Alex's thing a market in our power solutions segments and across the industrial filtration market.
Jack: Very good.
Jack: And it back thank you.
Jack: Thanks Ross.
Speaker Change: Next question comes from the line of Andrew <unk> with Bank of America. Your line is open.
Speaker Change: Yes, Hi, this is David Ridley Lane on for Andrew.
Speaker Change: Yeah.
Just on the on sort of the restructuring cost that you took are these more structural in nature or could some of these costs come back as volumes come back and then with a payback period for you on a on a program similar to this.
Speaker Change: Yeah. Thanks for your question.
Speaker Change: I would I would describe it we took structural actions associated with the downturn in the market and so those are those actions were deliberately targeted in the U S and in China.
Speaker Change: I think we expect continued weekend activity in China for an extended period of time, we cannot say recovery that inside 2025 sites and they expect those restructure actions to hold in China and the U S. I think those actions we would we would look to assess the market as the.
Speaker Change: Market rebounds, and we also want to make sure, we're making deliberate and intentional investments in areas, where we want to grow and so we will at.
Speaker Change: That makes some intentional investments are back in associated with growth.
Speaker Change: Largely in the U S but.
Speaker Change: China actions, but they're not structural in a market that is challenged for the foreseeable future.
Speaker Change: Got it and just in terms of payback should we think of this as all else being equal.
Speaker Change: Providing about $4 million benefit to you in 2020 fibers.
Speaker Change: Uh huh.
David: I think it will be David <unk>.
Speaker Change: Little bit longer than that really driven by steps comments there around reinvestment.
David: In our four pillars for growth right. So.
David: I wanted to take those actions given the current market environment, and then as and when we see the markets begin to recover we really want to take that opportunity to fund various initiatives to continue to bolster our top line growth initiatives.
Speaker Change: Got it and just a quick one to clarify the guidance a little bit on the aftermarket.
David: So the aftermarket up 1% to 4%.
Speaker Change: Aftermarket revenue for.
Full year 2025 point before and what it would what would that imply on the first fit side.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yes, so aftermarket would be up for the full year zero to 3%.
Speaker Change: And on the first fit side on a global basis. Both of these numbers are global bonds, but on the first fit side.
Speaker Change: We expect it to be down zero to 10%.
Speaker Change: The market.
Speaker Change: Got it thank you very much.
Speaker Change: Yes.
Thank you next question.
Speaker Change: Next question comes from the line of Tami Zakaria with Jpmorgan. Your line is open.
Tami Zakaria: Hi, good morning, Thank you so much.
Tami Zakaria: First question is on pricing I think I heard you say about 1% for.
Tami Zakaria: For the year and also pricing has lagged.
Tami Zakaria: So are we expecting pricing, 1% throughout the year or is it the expectation that pricing, but actually accelerated in the back half, especially if if steel prices go up because of all this tariff noise.
Tommy: Yeah, Tommy good morning, it's a great question.
Tommy: What's implicit in our guide 1% on price that does not incorporate at this point our second half price increase is the way I would describe it we will continue to monitor conditions. This will involve a number of different conditions as you highlight input costs on steel.
Tommy: And others are it will also include monitoring of FX and how that how that plays out.
And obviously the cash situation is ongoing and uncertain and so it will involve monitoring of that as well, but right now the guide incorporates the pricing, which we've already taken at 1% and does not include an additional pricing action in the second half.
Tommy: At this point.
Speaker Change: Understood. That's very helpful and my second question is.
Speaker Change: It's almost a year since your separation.
Speaker Change: How are you evaluating your efforts.
Speaker Change: And winning the first Sip.
Speaker Change: New first fit deals.
Speaker Change: Deals the reason I asked.
Speaker Change: Do you expect any OEM wins in the near term that could help you outperform the weak OEM build forecast for this year.
Speaker Change: Yeah.
Speaker Change: Hum.
As you know I think that the different parts of our business. The first fit wins tend to be a long range activity in terms of incubating those new customers working through Trialing and testing product and usually because of our strength in fuel filtration for example connected with admission cycle.
Speaker Change: And so I'd say a lot of the cycle changes have been challenged for the next emission cycle for 2027.
Speaker Change: We have certainly announced a win that we had inside 2024, and first state, which will flow Liza and bring benefits into the after market as we also secure the after market associated.
Speaker Change: With that business and we have certainly seen shag rugs on Thursday, and in fuel and crankcase ventilation, which we monitor throughout 2024, so we have seen that share growth.
And we are also continuing to monitor.
Speaker Change: Throughout through our wins our win rate is how we measure it without team through our win rate with quotations and consistently high and low range and planning and adjusting our resource we need actually.
Speaker Change: To support our growth aspirations in Amdocs first fit and after market, we spoke about the reinvestment in growth.
Speaker Change: Related to the restructuring costs, just now a lot of that reinvestment for growth, we're making is in and around in a targeted way this account management focus.
Speaker Change: Understood very helpful. Thank you.
Speaker Change: Yes.
Speaker Change: You're welcome Thanks Tommy.
Speaker Change: And our next question from Bobby Brooks with Northland Capital markets. Your line is open.
Speaker Change: Hey, good morning, guys. Thank you for taking my question first I just wanted to start could you maybe help us understand what actions you could you could take to limit its exposure to tariffs that would impact your manufacturing footprint.
Speaker Change: China and Mexico.
Speaker Change: Maybe just remind us what markets those prime products.
Speaker Change: They're ultimately are then sold into.
Speaker Change: Yes, Thanks, Bobby and good morning.
Speaker Change: Our team had been working extensively on tariffs over the last several months and have modeled various different scenarios. As you are aware its a fairly uncertain environment that we are operating in.
Speaker Change: We have assessed all of the scenarios. The RNA action that has really been currently implemented that has impacted us.
Speaker Change: In an immaterial way I would describe it is the China tariffs that were implemented here recently, we have actually taken action to price for the China tariffs.
Speaker Change: It is impacting only a small part of our business and the reason for that is mostly around the world. Our manufacturing strategy is region for region and in China, and particularly in China for China.
Speaker Change: Where we do have some exposure is our largest manufacturing facilities in Mexico.
Speaker Change: And that Mexico manufacturing facility supports the U S market.
Speaker Change: And obviously, we've modeled a range of scenarios on if there was a tariff implemented on on Mexico.
Speaker Change: We're retaliatory tariffs in place what would be the various actions that we would take in the short and the long term. There are a series of actions that would require our team are very well equipped.
Speaker Change: To respond to this subject to how it plays out it is difficult to fully predict exactly how that's going to play out and you start talking about hypotheticals upon hypothetical sorry, probably not that useful to do that.
Speaker Change: But I feel very confident through them.
Speaker Change: A number of actions whether that be pricing, whether that pay us to shift our sourcing around because we have a lot of flexibility in our sourcing strategy and the resilience of our supply chain. We've got a good handle on the range of scenarios and we'll be we'll be able to act and in the most recent situation with the China tariffs that's that's.
Speaker Change: What we've done we've acted with with pricing already.
Speaker Change: Got it Thats terrific color I do kind of want to double click on that a little bit because it seems like you guys. Do you have plans in place and I take it would be helpful. For investors. So maybe just hear about maybe some of those potential plan. So could you just.
Speaker Change: Specifically with Mexico given the.
Speaker Change: Largest manufacturing facility in that supply in the U S market. So could you maybe just walk us through maybe one example of maybe some levers that you guys have modeled out that you could pull to help insulate the business a bit.
Yeah, Bobby look I would say it does really depend on how the scenarios play out and.
Speaker Change: I think the immediate level would be pricing.
Speaker Change: Obviously this fiscal.
Speaker Change: This is the thing that I would say immediate action, we would need to take and that's the way we have approached the China tariffs and we're set up and ready to be able to do that.
Speaker Change: And then I think the range of other scenarios that we would implement would really depend on how the various.
Speaker Change: Decision, making of the different administrations around the world plays out and.
Speaker Change: So that's the additional color I would give you at this point.
Speaker Change: Very well set up a dynamic decision, making on this is the best way estimated to describe it and and I feel confident that we understand the impacts we do need to be.
Speaker Change: Being able to adapt as the different decisions are made.
I appreciate that answer and thank you and thanks for the color and I think investors shifted you guys. The confidence you and Jack have really executed our simulations for separation so.
Speaker Change: The next question here from me is.
Speaker Change: How's the initial reception been from your first industrial shelter.
Speaker Change: First step into the industrial market that you guys did there organically you mentioned on the last call.
Speaker Change: We will have sales John versus expectations and could you maybe.
Speaker Change: Mind us what type of industrial environment.
Speaker Change: That was it.
Speaker Change: Being Houston.
Speaker Change: Yeah. Thanks for that Bobby I wanted us I have always said that our intention in industrial filtration expansion. Our primary path is through inorganic expansion and through acquisition and we're still actively pursuing that at the same time. The team has identified the opportunity to law.
Speaker Change: A range of products to support industrial applications and have partnered with them.
Speaker Change: A handful single digit of distributors to support the distribution of that product is in its infancy phase is is how I would describe it not a material amount of revenue at this stage and I don't expect a material amount of revenue through 2025.
Speaker Change: From that channel the primary path for industrial filtration expansion is still intended through.
Speaker Change: Acquisition.
Speaker Change: Hopefully.
Speaker Change: And maybe just last one is on <unk>.
Speaker Change: Organic expansion in the industrial.
Speaker Change: Could you, maybe just give us a sense as to.
Speaker Change: What has what is kind of in the biggest delta between your what you guys are willing to pay and stuff that you've been looking at I could it seems like that's probably the reason that you guys have made any actions and any color on what you see happening now in the markets that could maybe change that.
Speaker Change: I appreciate that I look I would just say our process of M&A, we've been very disciplined and diligent around this we've got a team working on it we've got a very.
Speaker Change: We've got a robust set of pipeline.
Speaker Change: Pipeline that we've identified and then we really working that pipeline.
Speaker Change: Targets are to progress and we have progressed a number of targets to the due diligence phase as part of that the reason for not proceeding with those targets has not being valuation actually.
We're pretty comfortable with the targets that we have is sailing in the valuation range.
Speaker Change: What really what we're really trying to marry is this is strategic fit and aspirations that we have at Atmos. How are we going to be on the scale of smaller entry business, either through our global footprint or otherwise.
Speaker Change: We want to be able to see a path to being able to scale that and that has been at a sustained one about one of our restrictions as we've looked at different assets and then of course, we're very focused on this balance off.
Speaker Change: Ensuring we can create value for shareholders and the returns and so the mix of strategic fit and scaling and ensuring we create does does your tons in value, but it hasnt been particularly a valuation issue.
Speaker Change: Very well said I appreciate all the color guys.
Speaker Change: Thank you for the answers and I'll return to Q.
Speaker Change: Thank you Bobby.
Speaker Change: And our last question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Jerry Revich: Yes, hi, good morning, everyone.
Gary: Good morning, Gary Hi.
Gary: So you folks have hit your aspirational margin targets.
Gary: A couple of years ahead of plan can we just talk about do you see incremental margin improvement opportunities from here or are we at the point that we were targeting.
Gary: <unk> IPO.
Gary: Is this essentially the cruising altitude.
Gary: Yeah. Thanks, Gary for the question you're right as we set out on this journey in 2022 and talking about it.
Gary: And we've embarked on the first is a big part of our margin expansion opportunity was the supply chain transformation that third pillar of that strategy and we had a three year program. We're now in that third year of the program and we have delivered ahead of our expectations.
Gary: The margin expansion opportunities, we will continue to deliver cost savings in the supply chain. This year aligned with our plan, but that will put us in this guidance range that we've talked about the 19% to 20%. So I do think we have hit what is a strong margin performance for our business and we intend to continue to.
Gary: And that is how I would articulate it well.
Gary: Where I see us transitioning now in our supply chain transformation is really underpinning.
Gary: In powering our growth strategy on top line growth. So very much focused on how do we value engineer our products. How do we have a better value package for what our customers' needs are and then how do we grow share faster than we have been faster than the market.
Gary: On a sustainable basis and that really is the shift in the supply chain as well as obviously the rest of our organization. So the short answer to your question I think that 19% to 20% of the guide and strong margin performance and where we where we see ourselves operating very focused on unlocking growth.
Gary: Growth potential through our supply chain transformation across the organization going forward.
Gary: Okay.
Gary: And separately I'm wondering if you folks can talk about the <unk>.
Gary: First fit end market assumptions, and particularly what youre assuming in China.
Gary: Demand in China does surprise to the upside.
Gary: Im assuming you folks would be in a strong position to respond.
Gary: Maybe you could just factor it.
And.
Gary: Talk about how quickly you folks can scale.
Gary: If demand does surprise to the upside.
Gary: Hum sort of outlook for China at the moment.
Gary: His continued weaker conditions and the midpoint of our guide is kind of flat. It was a it was a poor year last year, and we kind of see that continuing into this year. It's a wide range for us I think were saying down down five to possibly up five and we've talked about not having great visibility through the China.
Gary: Market I'm sorry.
Gary: Sorry.
Gary: We can scale up if we if we need to our current outlook.
Gary: Is.
Gary: Is that it's a weekend, it's weaker conditions through 2025.
Gary: Okay.
Gary: Thank you.
Gary: Thanks Jerry.
Gary: That concludes our question and answer session I would like to turn the call back over to Todd <unk> for closing remarks.
Gary: Thank you that concludes our conference for today. Thank you all for participating and your continued interest.
Speaker Change: Eight days.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: [noise].