Allison Transmission Holdings, Inc. Q3 FY2025 earnings call

Key Points

• North America On-Highway has been negatively affected by macroeconomic factors, leading to reduced demand for commercial vehicles. However, the company showed resilience with an adjusted EBITDA margin of 37% and generated adjusted free cash flow of $184 million in the third quarter.
• The company is working to close the acquisition of Dana's Off-Highway business.

Business Updates

• In Brazil, Volare microbuses equipped with Allison's T2100 fully automatic transmissions were delivered.
• Allison's Neutral at Stop technology was standardized by PACCAR on Kenworth and Peterbilt trucks.
• Ozinga Renewable Energy Logistics deployed Kenworth's T880 tractors with the Cummins X15N natural gas engine integrated with Allison's transmission.
• WZM became an official channel partner for tracked vehicles in defense.
• Allison was selected by FNSS Defense Systems to supply 3040MX medium-weight cross-drive transmissions for the Turkish Land Forces Korkut program.

Year-over-year, net sales were $693 million, a 16% decrease. The North America On-Highway segment was negatively impacted by macroeconomic factors, while the defense end market saw net sales increase 47% year-over-year. Adjusted EBITDA margin for the quarter was 37%. Revenue from North America On-Highway contributed a significant portion of the total, and defense contributed a growing revenue contribution.

Full Year 2025 Guidance

• Net sales expected to be in the range of $2.975 billion to $3.025 billion.
• Net income anticipated in the range of $620 million to $650 million including acquisition expenses.
• Adjusted EBITDA expected in the range of $1.09 billion to $1.125 billion.
• Net cash provided by operating activities expected in the range of $765 million to $795 million including acquisition-related cash outlays.
• Capital expenditures expected in the range of $165 million to $175 million.
• Adjusted free cash flow expected in the range of $600 million to $620 million.

Risks

• Uncertain macroeconomic factors impacting demand visibility and purchasing decisions.
• Tariffs, evolving trade policies, and upcoming emissions regulations creating uncertainty in the operating environment.

Q: Rob Wertheimer asked about the sudden fall in North America On-Highway sales, disaggregating channel inventory and end market demand.

A: David Graziosi responded that build rate revisions started early in Q3, reductions continued, and inventory levels needed further rationalization with OEM comments supporting this.

Q: Tim Thein inquired about the implied sequential revenue improvement in Q4 and the offsetting segments.

A: Fred Bohley replied that while there were fewer workdays in Q4, the defense segment ramped aggressively and would continue into Q4.

Q: Ian Zaffino asked about when the weakness was noticed and cost control.

A: David Graziosi stated the weakness started early in Q3, adjustments were made throughout the year, and the team managed costs consistently.

Q: Tami Zakaria asked about tariff impact.

A: Fred Bohley mentioned 85% of components are purchased in the U.S., Mexico, and Canada, and the company is well-positioned with U.S.-made content.

Q: Angel Castillo asked about earnings growth in 2026 and price increase.

A: Fred Bohley said price increase would be higher than pre-pandemic levels, with modeled figures showing a significant rise.

Q: Luke Junk asked about margin buffer.

A: David Graziosi noted focus on margins, progress on growth initiatives, and ability to maintain margins based on market opportunities.

Q: Kyle Menges asked about international growth and Dana acquisition.

A: David Graziosi said international On-Highway is a significant opportunity, and the Dana acquisition provides a global footprint to address macro issues and local content focus.