Allison Transmission Holdings Inc Q3 FY2024 earnings call

• Allison sees robust demand for on-highway products, especially 3000 and 4000 Series due to Class 8 vocational vehicle demand from infrastructure spending. Invested in supply chain and operations to manage capacity. - Announced plans to nearly double the manufacturing footprint of the Chennai, India facility to increase fabrication capabilities for 3000 and 4000 Series products, with over $100 million investment over years. - Partnered with Lugan for wide-body dump initiative and with Ashok Leyland to introduce low-floor city buses with fully automatic transmissions in Southern India. - Defense business had program wins, including 4000 Series transmissions for British and German military vehicles, and contracts with Canadian and Romanian defense departments. - Allison's transmissions are fuel agnostic, integrated into hydrogen fuel cell and hydrogen internal combustion engine trucks, and collaborated with Cummins for transit bus propulsion solutions to meet EPA Phase III emissions regulations. - Upgraded B400 and B3400XFE transmissions to meet EPA Phase III requirements.

Year-over-year net sales increased 12% to $824 million. North American On-Highway end market saw a 22% increase led by Class 8 vocational vehicles and medium-duty trucks. Defense end market had a 23% increase due to increased demand for tracked vehicles. Outside North America On-Highway end market had a record third quarter with higher demand in Asia and price increases offsetting lower demand in Europe. Gross profit was $396 million, up $39 million from the prior year. Net income was $200 million, up 27%. Adjusted EBITDA was $305 million. Diluted earnings per share were $2.27, up 29%. Adjusted free cash flow was $210 million. Ended the quarter with a net leverage ratio of 1.4x, $788 million of cash, and $745 million of available revolving credit facility commitments.

• Raised full-year guidance midpoint for revenue, earnings, and cash flow. Net sales expected to be in $3,135 million to $3,215 million range. Net income in $675 million to $725 million range. Adjusted EBITDA in $1,115 million to $1,175 million range. Net cash provided by operating activities in $740 million to $800 million range. Capital expenditures in $135 million to $145 million range. Adjusted free cash flow in $605 million to $655 million range.

• Forward-looking statements subject to known and unknown risks, including those in the third quarter 2024 earnings press release, annual report on Form 10-K for 2023, and general economic factors. If risks or uncertainties materialize or assumptions prove incorrect, actual results may vary materially from expectations.

Q: What's the pricing outlook for next year?

A: About 60% of revenue in North America On-Highway LTAs are due for negotiation. Delivering significant value, strong demand, and negotiations likely concluding in later half of Q4.

Q: Pausing on share buyback?

A: Capital allocation priorities are funding organic growth, then returning capital to shareholders. Holding higher cash balance but primary focus is returning capital to shareholders with 63% of shares repurchased since going public and dividend increased 5 years.

Q: Progress towards $400 million growth opportunity?

A: Defense is advanced, regional haul affected by tractor market softness, frac trend muted due to low CapEx, wide-body mining dump making progress. Depends on market conditions and time.

Q: Fourth quarter EBITDA range?

A: Affected by fewer workdays for OEMs, averaging $12-13 million revenue per day. Q4 likely soft due to seasonality, driven by top line and margins.

Q: India facility capacity increase?

A: Doubling manufacturing square footage in India for 3000 and 4000 Series fabrication, expecting 10-20% incremental volume increase by 2027.

Q: Vocational truck demand outlook?

A: No near-term pullback seen, strong demand into 2025, emissions changes in 2027 may affect, but industry at max capacity with constraints.

Q: Parts performance?

A: Year-over-year parts performance not significant, Q4 may be mildly down sequentially, 2025 outlook robust but not returning to H1 2023 levels.

Q: Capacity and overhead?

A: Investing in suppliers and internal operations, industry running at high rates challenging, investments in India to relieve pressure, defense business has capital plans.

Q: EPA 2027 and Class 8 demand?

A: Confident in portfolio for EPA 2027, demand for product is unprecedented with stimulus money still out, but industry constrained at current levels.