Allison Transmission Holdings, Inc. (NYSE:ALSN) Q3 2023 Earnings Call Transcript

Allison Transmission Holdings, Inc. (NYSE:ALSN) Q3 2023 Earnings Call Transcript October 25, 2023

Allison Transmission Holdings, Inc. beats earnings expectations. Reported EPS is $1.76, expectations were $1.72.

Operator: Good afternoon. Thank you for standing by. Welcome to Allison Transmission’s Third Quarter 2023 Earnings Conference Call. My name is Alicia, and I’ll be your conference call operator today. At this time, participants are in a listen-only mode. After prepared remarks, Allison Transmission’s executives will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions]. I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Jackie Bolles: Thank you, Alicia. Good afternoon and thank you for joining us for our third quarter 2023 earnings conference call. With me this afternoon are Dave Graziosi, our Chairman and Chief Executive Officer; and Fred Bohley, our Senior Vice President, Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast and this afternoon’s presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through November 8. As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks including those set forth in our third quarter 2023 earnings press release, our annual report on Form 10-K for the year ended December 31, 2022 and other general economic factors.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today. In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2023 earnings press release. Today’s call is set to end at 5:45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we’ll take just one question from each analyst. Please turn to Slide 4 of the presentation for the call agenda.

During today’s call, Dave Graziosi will review highlights from our third quarter 2023 results and provide an update on recent announcements across our product portfolio. Fred Bohley will then review our third quarter financial performance and the full-year 2023 guidance. Dave will close with a review of our wide-body mining dump and defense end market growth opportunities prior to commencing the Q&A. Now I’ll turn the call over to Dave Graziosi.

Dave Graziosi: Thank you, Jackie. Good afternoon and thank you for joining us. During the third quarter, net sales increased 4% year-over-year to $736 million. Sales gained momentum throughout the quarter after a slow start, driven by supply chain constraints and expanded OEM shutdowns in July, resulting in August and September sales volumes above monthly levels in the first half of the year. Net sales growth was outperformed by growth in net income, up 14% and diluted EPS up 21% to $1.76. Furthermore, our team’s efforts towards price realization and cost mitigation drove gross margin expansion of 230 basis points year-over-year. Our capital investments continue to fund the ongoing expansion of our technology capabilities as well as product development focused on value propositions that address the challenges of our evolving end markets.

These next-generation initiatives, along with the various financial, operational and strategic milestones that we have achieved over the last several years demonstrate the power of Allison to capitalize on market opportunities with new products to drive innovation and growth and create value for all of our stakeholders. The next-generation initiatives also underscore our dedication to remain a leader in propulsion solutions across all of the end markets we serve and are instrumental to driving future growth. Allison is committed to offering a portfolio of conventional electric hybrid and fully electric propulsion solutions designed to meet the needs of customers. Today, I would like to highlight recent announcements across our on-highway product portfolio.

Starting with alternative fuel sources for our Conventional products in the quarter, we announced our currently exclusive release with Mack Trucks for their compressed natural gas-powered Granite model truck. To meet the need of refuse collection customers, Allison’s proven 4000 Series transmission was seamlessly paired with a CNG engine. This partnership is the latest example of Allison’s ability to deliver optimized performance and capability and demanding locations indifferent to the fuel source for the powertrain. Moving forward with Allison’s transit hybrid offering, our eGen Flex system, adding to the many nationwide releases we have highlighted in recent quarters, we are pleased to announce earlier this month that the B Metro, the public transit system in Brownsville, Texas has chosen to equip their buses with the Allison eGen Flex system.

Brownsville joins the growing list of transit properties in states such as Indiana, Wisconsin, Nevada and California that will utilize the eGen Flex electric-only capabilities, activated by geofencing technology, to automatically switch to engine off mode in densely populated areas of the city. We are excited for this partnership and remain committed to collaborating with transit agencies nationwide to support them in their emissions reduction goals. Wrapping up with our eGen Power of fully electric e-axles, we were excited to launch the eGen Power 85S, the newest addition to the eGen Power family partnering with Anadolu Isuzu, the 85S was integrated into a fully electric 8-meter minibus and released at Busworld Europe in early October. The eGen Power 85S was specifically developed to address the needs of minibus and small truck applications and joins the larger 100S and 130S in the single motor eGen Power e-axle family.

The introduction of the 85S is the latest example of Allison’s commitment to expanding our propulsion solution portfolio to meet the demand of the wide range of applications and market segments we serve. In summary, Allison’s third quarter results demonstrate strong operating performance with the business well positioned across our fuel source in different product portfolio. Our products have been developed to support our customers’ needs as they adopt to different technology sources and driving future growth across our business. Thank you, and I’ll now turn the call over to Fred.

Fred Bohley: Thank you, Dave. Following Dave’s third quarter 2023 comments, I’ll discuss the Q3 2023 performance summary and the Q3 2023 cash flow performance, I’ll then reaffirm the full-year 2023 guidance. Please turn to Slide 5 of the presentation for the Q3 2023 performance summary. Third quarter net sales increased 4% from the same period in 2022 to $736 million. The increase in year-over-year results was led by a $36 million increase in net sales in the North American On-Highway end market principally driven by strength in customer demand for Class 8 vocational and medium-duty trucks and price increases on certain products. And a $14 million increase in the service parts, support equipment and other end market, principally driven by strength in North American on-highway service parts and support equipment and price increases on certain products.

Year-over-year results were also improved by an $8 million increase in the net sales in the defensive market, principally driven by increased demand for tracked and wheeled vehicle applications. Gross profit for the quarter was $357 million, an increase of $29 million from $328 million for the same period in 2022. The increase was principally driven by price increases on certain products, partially offset by higher manufacturing expense. Net income for the quarter was $158 million compared to $139 million from the same period in 2022. The increase was principally driven by higher gross profit, partially offset by increased selling, general and administrative expenses. Adjusted EBITDA for the quarter was $267 million compared to $245 million for the same period in 2022.

The increase was principally driven by higher gross profit partially offset by increased selling, general and administrative expenses. Diluted earnings per share increased 21% from the same period in 2022. Third quarter diluted EPS of $1.76 was driven by higher net income and lower total shares outstanding. A detailed overview of our net sales by end market and Q3 2023 financial performance can be found on Slide 6 and 7 of the presentation. Please turn to Slide 8 of the presentation for the Q3 2023 cash flow performance summary. Adjusted free cash flow for the quarter was $182 million, flat from the same period in 2022 driven by increased net cash provided by operating activities, offset by increased capital expenditures. During the third quarter, we returned capital to shareholders through a quarterly dividend of $0.23 per share.

We also repurchased $20 million of our common stock with nearly 4% of our shares outstanding, repurchased in the first three quarters of 2023. Since our IPO in 2012, we have repurchased over 60% of our outstanding shares. We ended the quarter with a net leverage ratio of 1.9x, $501 million of cash and $645 million of available revolving credit facility commitments. In addition, we continue to maintain a flexible, long-dated and covenant-light debt structure with the earliest maturities due in 2026. Over $2.5 billion of outstanding debt, $620 million is subject to variable interest rates of which $500 million is hedged, resulting in 95% of our debt being fixed through the third quarter of 2025. Please turn to Slide 9 of the presentation to review our 2023 guidance.

Given third quarter results and current end market conditions, we are reaffirming our full-year 2023 guidance provided to the market on July 27, 2023. Allison expects net sales to be in the range of $2.96 billion to $3.04 billion. At the midpoint, this represents over 8% year-over-year growth based on the continued strength in demand in the majority of our end markets, price increases on certain products and the continued execution of our growth initiatives, leading to another anticipated record net sales year. In addition to Allison’s 2023 net sales guidance, we anticipate net income in the range of $575 million to $625 million, adjusted EBITDA in the range of $1.05 billion to $1.11 billion. Net cash provided by operating activity in the range of $675 million to $725 million and capital expenditures in the range of $125 million to $135 million and adjusted free cash flow in the range of $550 million to $590 million.

Thank you, and I’ll now turn the call over to Dave for an update on our wide-body mining dump and defense end market opportunities.

Dave Graziosi: Thank you, Fred. During the quarter, we announced that several Chinese mining equipment manufacturers have expanded their exports of wide-body mining dump trucks equipped with Allison Transmissions to the Americas, Asia and the Middle East. Increasing export opportunities for wide-body mining dump trucks was one factor that led to our resizing of the opportunity to $100 million of annual incremental revenue during the first quarter. Our long-standing partnerships with major mining OEMs in China continue to lead to further global penetration in this location. Allison is growing our international defense business through partnerships with global defense OEMs such as Hanwha Aerospace, with utilization of Allison products not only in South Korea, but in various tracked and wheeled applications for customers around the world.

Last week, we announced that our Allison X1100 cross-drive transmission was selected as the propulsion solution for the Hanwha Redback armored vehicle. The Redback is Hanwha’s newest track vehicle chosen to be Australia’s inventory fighting vehicle of the future and selected for Australia’s LAND 400 Phase 3 program. The Redback strives to duplicate the success of Hanwha’s K9 self-propelled howitzer family of vehicles, which has been chosen for numerous European, Asian and North African programs, utilizing the Allison X1100. During the quarter, Allison was awarded a $13 million second phase low-rate initial production contract for the U.S. Army’s M10 Booker light tank program formally the MPF. We look forward to ramping into higher production volumes with the M10 Booker utilizing Allison’s new 3040 MX medium-weight cross-drive transmission.

Development of new products such as the 3040 MX will drive international growth in the near future as the demand for medium-weight armored combat vehicles increases with shifts in geopolitical dynamics. Also during the quarter, Allison signed a memorandum of understanding with PGZ, a Polish Defense Holding Group and one of the largest defense companies in Europe. The MOU includes cooperation on tracked vehicle programs as well as partnership to provide service and repair in Poland, adding to Allison’s network of authorized dealers and distributors. Poland has contracted to purchase several hundred Abrams tanks as well as hundreds of Hanwha’s K9 howitzers, using Allison product. The PGZ has also recently been awarded a contract for over 1,000 or so inventory fighting vehicles.

This partnership will further Allison’s relationships with global defense industry participants and advance the realization of our $100 million incremental annual revenue opportunity. This concludes our prepared remarks. Alicia, please open the call for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Larry De Maria with William Blair. Please proceed with your questions.

Lawrence De Maria: Thanks. Good afternoon everybody. Thanks for the color on the mining stuff. Question, you had very strong operating performance in the quarter, especially in margins. Sales were a little bit below, but you noted you had a slow start on supply chain. So to clarify that, did you catch up throughout the quarter? Were there some more wood to chop that goes into the fourth quarter? And the second part is, can you describe the UAW situation, both upstream, downstream and how that’s implied in the guidance for the rest of the year, whether that becomes an issue or not? Thank you.

Dave Graziosi: Larry, it’s Dave. Good afternoon. I appreciate the questions. On your first question in terms of the activity that we saw in the third quarter. The slow start really referred to component constraints at the OEM levels. So as we entered, our expectation was more of a normal run rate, frankly, for July, that proved to be a bit disconnected from what the OEMs were experiencing. I would refer you to the OEMs that have publicly reported already in terms of some of their commentary around the constraints that, unfortunately, they were dealing with, and we’ve reacted accordingly. As we noted in the prepared remarks, certainly, August and September run rated at a higher level or more consistent with what we saw in the second quarter.

So in terms of carryover into the fourth quarter, obviously, as our midpoint implies which is a lack of change in the midpoint, we see a number of activities happening in the fourth quarter. Some of that will be some level of carryover at least expectation that constraints will be mitigated a bit. So and I think, again, referring you back to the public comments of OEMs, I think that’s consistent with some of the comments that they’ve made as well. So in terms of your question on the UAW negotiations. Allison is certainly committed to providing competitive wages and benefits to all our employees, which includes those represented by the United Auto Workers. A team of Allison management and UAW Local 933 leaders have begun discussions at an off-site location.

The company is focused on negotiating an agreement that creates flexibility, simplicity, and efficiency. This focus allows us to continue to provide the highest quality product to all of our current and future customers in terms of the activities that are going on with the automakers. I would just offer that, and I’m sure you know, at Allison, our UAW represented employees have a labor contract that is unique to our organization and negotiated separately from the contracts of the big three, so to speak. So as such, the UAW strike affecting the big three does not have any direct impact on our local operations.

Lawrence De Maria: Thank you very much.

Operator: Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research, I apologize.

Robert Wertheimer: I know it’s not your biggest business, but the reasonably sharp decline in off-highway, both domestically and international was a bit of a surprise. Your slides called out, I guess, energy. And I’m just curious what happened there. I don’t quite know your mix within those segments, if it’s just energy, if there’s anything, construction on mining that [indiscernible]. And I don’t know if that’s a synchronous or coincidental decline, because I assume the international is more China gas tracking. Anyway, could you maybe just elucidate what happened there?