Allison Transmission Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

There are 10 speakers on the call.

Operator

Good afternoon. Thank you for standing by. Welcome to Allison Transmission's First Quarter 2024 Earnings Conference Call. My name is Doug, and I will be your conference call operator today. At this time, all participants are in a listen only mode.

Operator

After prepared remarks, Allison Transmission Executives will conduct a question and answer session, and a conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jackie Bowles, Executive Director of Treasury and Investor Relations. Go ahead, Jackie.

Speaker 1

Thank you, Doug. Good afternoon, and thank you for joining us for our Q1 2024 earnings conference call. With me this afternoon are Dave Graziosi, our Chair 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 allatantransmission.com. A replay of this call will be available through May 9.

Speaker 1

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 Q1 2024 earnings release, our annual report on Form 10 ks for the year ended December 31, 2023, as well as other general economic factors. Should 1 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 Q1 2024 earnings press release.

Speaker 1

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.

Speaker 1

Fred will review our Q1 2024 financial performance and full year 2024 guidance. Dave will then close with an update on recent announcements across our business prior to commencing the Q and A. Now, I'll turn the call over to Fred Bohley.

Speaker 2

Thank you, Jackie. Good afternoon and thank you for joining us. Building on record performance in 2023, Q1 2024 results demonstrate the continued momentum in our business. 1st quarter net sales were a record $789,000,000 an increase of 6% from the same period in 2023. Our year over year top line increase was driven by robust global on highway demand as well as strength in our defense and outside North America off highway end markets.

Speaker 2

Please turn to Slide 5 of the presentation for the Q1 twenty twenty four performance summary. Year over year net sales increased 6% from the same period in 2023 to a record of $789,000,000 The increase in year over year results was led by a 12% increase in the North American on highway end market, driven by strengthened in demand for Class 8 vocational and medium duty trucks and price increases on certain products. Our defense end market net sales increased 78% from the Q1 of 2023, principally driven by higher demand for tracked vehicle applications. Year over year results increased 83% in our outside North America off highway end market, principally driven by strength in demand from the energy, mining and construction sectors. Net sales in the outside North American on highway end market increased by 6% leading to record 1st quarter net sales, principally driven by higher demand in Asia and price increases on certain products, partially offset by lower demand in Europe.

Speaker 2

Gross profit for the quarter was $366,000,000 an increase of $5,000,000 from $361,000,000 for the same period in 2023. The increase in gross profit was principally driven by increased net sales and price increases on certain products, partially offset by higher manufacturing expense, including $13,000,000 of non reoccurring UAW contract signing incentives and higher direct material cost. Net income for the quarter was $169,000,000 a decrease of $1,000,000 from the same period in 2023. The decrease was principally driven by higher manufacturing expense, dollars 14,000,000 of non reoccurring UAW contract signing incentives, dollars 10,000,000 of unrealized mark to market adjustments for marketable securities and higher direct material costs partially offset by increased net sales, price increases on certain products and lower income tax expense. Adjusted EBITDA for the quarter was $289,000,000 compared to $276,000,000 for the same period in 2023.

Speaker 2

The increase in adjusted EBITDA was principally driven by increased net sales and price increases on certain products, partially offset by higher manufacturing expense and higher direct material cost. Diluted earnings per share increased 3% from the same period in 2023 to $1.90 which includes a $0.13 impact from $14,000,000 of non recurring UAW contract signing incentives incurred in the quarter. A detailed overview of our net sales by end market and Q1 2024 financial performance can be found on Slides 67 of the presentation. Please turn to Slide 8 of the presentation for the Q1 2024 cash flow performance summary. Adjusted free cash flow for the quarter was $162,000,000 compared to $169,000,000 for the same period in 2023.

Speaker 2

The decrease was principally driven by higher cash incentive compensation payments and non reoccurring UAW contract signing incentive payments, partially offset by higher gross profit and lower capital expenditures. During the Q1, we paid a dividend of $0.25 per share and repurchased $52,000,000 of our common stock. We ended the quarter with a net leverage ratio of 1.7 times, $551,000,000 of cash $745,000,000 of available revolving credit facility commitments. In addition, we continue to maintain a flexible long dated and covenant light debt structure. Over $2,400,000,000 of outstanding debt, $518,000,000 is subject to variable interest rates, of which $500,000,000 is hedged, resulting in nearly all of our debt being fixed through the Q3 of 2025.

Speaker 2

Please turn to Slide 9 of the presentation for the 2020 4 guidance. We are reaffirming our full year 2024 guidance provided to the market on February 13. Allison expects net sales to be in the range of $3,050,000,000 to $3,150,000,000 In addition to Allison's 2024 net sales guidance, we anticipate net income in the range of 635,000,000 dollars to $685,000,000 adjusted EBITDA in the range of $1,070,100,000 to $2,130,000,000 net cash provided by operating activities in the range of $700,000,000 to $760,000,000 and capital expenditures in the range of $125,000,000 to $135,000,000 and adjusted free cash flow in the range of $575,000,000 to $625,000,000 Thank you. I'll now turn the call over to Dave for an update on recent announcements.

Speaker 3

Thank you, Fred. We continue to make investments and realize initiatives in order to grow our business in new markets and regions where automatic transmission penetration remains low. Today, I would like to highlight a few recent announcements relating to our outside North America on highway end market. In 2022, we highlighted our growing presence in South American agriculture sector since our entrance in 2015. At the time, we noted that leading OEMs in Argentina selected the Allison 2000 and 3000 series transmissions for use in their agricultural sprayers due to the enhanced performance in soft soil, which is critical in this application.

Speaker 3

Today in Argentina, most ag sprayers are now equipped with Allison fully automatic transmissions where traditionally hydrostatic or manual transmissions were used. During the Q1, we announced that the 1st Allison equipped agricultural sprayer built in Brazil was showcased at an industry trade show in the region. After adoption in Argentina, our successful entry into the Brazilian ag sprayer market is a milestone in our strategic initiatives as we target growth in new markets and applications around the world. We look forward to expanding our global presence as we enter a new application in South America's largest agricultural economy. Also in our outside North America on highway end market, we recently highlighted our collaboration with Yutang, a leading Chinese bus OEM in their delivery of transit buses to Rwanda.

Speaker 3

Rwanda's capital city will once again upgrade its fleet with Allison equipped buses. Utahn buses utilizing Allison fully automatic transmissions have been in service in Rwanda since 2014, enabling easy and efficient operation while optimizing the driver and rider experience. We are pleased to collaborate with global OEMs and customers showcasing Allison's commitment and initiatives towards growth in global export markets. Continuing in our outside North America On Highway end market, last week we announced the expansion of our partnership with Sonne to provide our 4,000 series specialty transmissions for integration into their 500 ton all terrain cranes. Our partnership with Sonne spans several construction and mining applications including Sonne's 60 ton crane and wide body mining dump trucks.

Speaker 3

Our proven performance and severe duty cycles and harsh conditions will provide increased productivity and maneuverability for cranes operating in remote areas of China, including desert and mountain terrain. We are pleased to expand defense end market, we maintain our outlook and target for realization of $100,000,000 of incremental annual revenue as we capitalize on the defense upcycle both internationally through increased defense investments globally amidst geopolitical uncertainties and domestically through opportunities the United States modernization programs as well as increased international sales to the U. S. Department of Defense. In support of our international defense growth and our $100,000,000 incremental annual revenue opportunity, last week we announced delivery of the first X1100 Cross Drive Transmissions to Turkey for their Fortina self propelled howitzer program.

Speaker 3

Partnering with HST Automotive, Allison's licensed manufacturer in Turkey, Allison's 1100 transmission will be utilized by the Turkish Armed Forces in their next generation tracked vehicle. As part of the initial delivery, 10 transmissions have been successfully provided to Turkey with several already installed in vehicles. Full production of the new vehicle is scheduled for mid 2024 with a total of 140 for Tina howitzers expected to be delivered to the Turkish Armed Forces. Finally, in our North America on highway end market, in the last few years, we have made numerous announcements of transit properties across the United States selecting the Allison eGen Flex electric hybrid system for their city buses. During the Q1, we added Orleans Regional Transit Authority or RTA to the list.

Speaker 3

Emergency preparedness is critical for the New Orleans RTA and during a natural disaster access to the electrical grid can be disrupted leaving fully electric vehicles no ability to charge. The eGenFlex Hybrid system does not face the same limitations and can continue to operate using diesel fuel in situations where grid accessibility may not be available as well as the battery system for fully electric engine off propulsion. We were pleased to add the New Orleans RTA to our list of transit properties in states such as Indiana, Wisconsin, Nevada, California and Texas that recently selected the eGen Flex as their propulsion solution of choice. We are excited for this partnership and remain committed to collaborating with transit agencies nationwide to support them in both emissions reduction goals and emergency preparedness plans. Just this week also in our North America On Highway end market, we announced that the Allison 3,414 Regional Hall Series and 4,000 Series are available to order as the exclusive fully automatic transmission in Navistar International's RH and HX series trucks respectively.

Speaker 3

We previously launched the 3414 RHS with Navistar in 2020 paired with the A26 engine and have seen adoption by some of the largest fleets in North America, including leading wholesale food distributors. We are proud to collaborate with International Truck to further release both the 3,414 RHS and 4,000 series transmissions in the new Navistar S13 engine and we look forward to further success and adoption across the regional haul market. Also during the Q1, we completed a refinancing of our revolving credit facility and term loan. As part of the refinancing, we increased commitments under our revolving credit facility to $750,000,000 extending the maturity date to 2029 and refinanced $518,000,000 of term loan debt paying down $101,000,000 of existing term loan debt and extending the maturity to 2,031. We maintain our longstanding commitment to prudent balance sheet management and our focus on a low cost flexible and prepayable debt structure with long dated maturities.

Speaker 3

In addition to our commitment to prudent balance sheet we remain committed to returning capital to shareholders through our share repurchase program and quarterly dividend. During the Q1, we repurchased nearly 1% of our outstanding shares and increased our quarterly dividend by 9% to $0.25 per share, the 5th consecutive annual increase to our quarterly dividend. In summary, Allison's first quarter results demonstrate not only the current strong performance of our business, but the notable growth opportunities to come. We continue to invest in our business in order to achieve our growth ambitions, while returning capital to shareholders and delivering on our brand promise to improve the way the world works. This concludes our prepared remarks.

Speaker 3

Doug, please open the call for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer

Speaker 4

Our first question comes from

Operator

the line of Ian Zaffino with Oppenheimer. Please proceed with your question.

Speaker 5

Great. Nice quarter, guys. Congratulations. Question would be on the On Highway business, specifically North America. Very, very strong.

Speaker 5

How are we looking at it throughout the year? Can we maintain that strength throughout the second quarter, maybe the back half of the year? And then also on the renegotiations, I know you've been honoring pre COVID contracts in a lot of that business. Have you started any of those negotiations yet talking about what the pricing is going to look like when those contracts expire, or any other kind of detail you could give us? And if you remind us what that the benefit might be as we renegotiate these and get kind of the pricing back that you've been honoring previously?

Speaker 5

Thanks.

Speaker 3

Hey, Ian, it's Dave. Good afternoon and thank you for the questions. So on the North America On Highway timing, I guess, as you laid out your question comparing Q1 to the balance of the year, As we said on the Q4 call, we are expecting relatively strong conditions entering the year for both medium duty and Class 8 vocational that certainly has played out as other some of the public OEMs have already reported and you're receiving other commentary. So I think where our view has not changed in terms of the strength of the underlying markets, we continue in certain cases to see some level of supply chain challenges out there. So I think that mitigates some level of extrapolating the Q1 through the balance of the year.

Speaker 3

So I think overall, there's also seasonality as you know with some of the underlying users of medium duty and obviously Class 8 vocational. So having said all that, we continue to stay very close to the OEMs as well as end users with the underlying demand for the products. Our expectation at this point as we see the year playing out is strong first half. As you know, seasonality kicks in and typically in the Q4 there's less production days because of holidays etcetera. We don't think that's going to be different for Q4 of this year as it has been slightly off cycle there the last few years just because of the displacement from the pandemic.

Speaker 3

We see the market normalizing more in that direction from a seasonality perspective. So as we think about the balance of the year, again, what I would think about and stay focused on is really the first half, second half. I'd also say our understanding at least from meetings with OEMs and otherwise is that's a relatively consistent view. On your second question in terms of long term agreement negotiations for North America on highway, It's still relatively early in the year for that. Majority of them are calendar year agreement.

Speaker 3

So we'll get to that as we get further into the year. I think to Fred's comments on the Q4 call, point stands in terms of your ask there and trying to quantify what the potential impact is. We have not in a position to quantify that at this stage, but it's worth repeating though, roughly 60 percent of that North America book of business is subject to those LTAs. So I think you can run your own sensitivities in that regard. And I think it goes also without saying that as we've said before, we sell our products based on the value that they deliver.

Speaker 3

It's clear that the services provided by those vehicles are up, labor rates are up. So the inflation underlying from those services reflects the additional value that our product provides relative to safety, driver training, reliability, uptime, total cost of ownership, etcetera. So and very much aligned with what you've seen in terms of vehicle pricing.

Speaker 5

Great. Thank you very much.

Speaker 4

Our next question comes from

Operator

the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Speaker 6

Hi, everybody. This is Justin Pellegrino on for Rob. Thanks for taking our questions. We were just curious if you could kind of dive into gross margin a little bit. It was down a little bit this quarter.

Speaker 6

We're just hoping if you could maybe talk about some mix or different that were going on the gross margin line? Thanks.

Speaker 2

Sure, Justin. This is Fred. As you mentioned, gross margin down, I think the one thing you need to take into consideration is that through gross margin runs a UAW contract signing incentives, that was $13,000,000 So if you exclude those and you look at our gross margins on a sequential basis, they're actually up 10%. And then if you look at EBITDA margins on a sequential basis, our EBITDA margins are up 90 basis points. So gross margin up 10 basis points, excluding the signing bonus and then up 90 basis points on EBITDA margins.

Speaker 6

Wonderful. Thank you.

Speaker 4

Our next question comes from

Operator

the line of Tammy Jekaria with JPMorgan. Please proceed with your question.

Speaker 7

Hi, thank you so much. So my first question is, could you provide some pointers regarding how to think about the 2nd quarter sales and margins versus what we saw in the Q1?

Speaker 2

Yes, Tammy, this is Fred. And Dave talked to kind of timing earlier, the biggest end market being North America on highway. But as we have things laid out from a margin profile, we have EBITDA margin in the second quarter very close to what we saw in Q1. And then we have things softer in the back half of the year, particularly Q4, just based on an expectation that there's going to be lower top line revenue. From a cost standpoint, things feel fairly stable.

Speaker 2

Clearly, we understand our hourly labor cost, anticipating SG and A being relatively flat for the year. Engineering R and D will probably step up a little bit off of Q1, but pretty close to what you saw in the back half of twenty twenty three.

Speaker 7

Got it. And so from a top line perspective, should we expect also sequentially a similar number? I'm just trying to understand first half versus second half, second half is weaker. Is 2Q sort of in line with the run rate we saw in 1Q for sales?

Speaker 2

Yes, directionally, obviously, it's still quite a bit to go in Q2, but I think that's a good expectation is that it will be in line with Q1 and really looking relatively consistent across the 1st three quarters with the 4th quarter being a little lower just based on the number of workdays.

Speaker 7

Got it. And if I can ask one quick follow-up. I think services revenue decline was a little weaker than we were expecting. Is there anything one off to call out there? Or do you still expect services growth to be about down 2% for the year?

Speaker 2

Yes. I think the one thing to call out and that's a good point. If you think about the cadence of revenue in 2023, we came into the 1st part of 2023 with some backlog that got solved in the Q1 and then somewhat into the Q2. So when you look at the service parts revenue that we ran for Q1, set almost exactly on top of where we were for the Q4 of 2023. So it's really more the more challenging comp on a year over year basis.

Speaker 7

Okay, wonderful. Thank you.

Speaker 4

Our next question comes from

Operator

the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Speaker 8

Hi, thanks for taking my question. Just first maybe on Highway, I was hoping you could kind of parse out a little bit more, kind of the specific growth that you saw within vocational, as well as the medium duty kind of those 2 separate. And then also could you just give us a little bit more color just regarding the supply chain challenges that you noted? Any particular kind of step change? It seemed like there's maybe potential that some of these things are getting a little bit worse.

Speaker 8

So if you could just give us a little bit more color there, that'd be helpful.

Speaker 3

Hi, Al, it's Dave. I appreciate the questions there. So North America, just to be clear, as you know, the Allison team over probably the last decade now, has gained share in the Class 8 vocational market. There are a number of reasons for that as we talked about the value proposition of the product that continues to be the case. If nothing else, I think COVID further highlighted the advantages of our product when you start to get into we all talk about labor constraints constantly.

Speaker 3

The demographics where you have people retiring and effectively exiting the industry with certain skills. Our product does not require the, I would say, training experience to manage a manual gearbox. So it's a fully automatic product that has proven to be even more attractive in the context of limited labor availability. So we continue to experience a fairly high level of demand for our Class 8 straight products. So whether that be the that are applicable in our 3000, 4000 series.

Speaker 3

So that's effectively what we continue to see and experience in the market. Tremendous amount of demand for those customers have become very accustomed to those products and have really built, if you will, their fleets, the context, the content as well as the labor pool. So we saw those that play out as we entered 1st quarter. We also talked on the 4th quarter call about the fact that there was a bit of pent up demand as you know vocational not being produced as close to demand as end users would like it that so we entered you could see that starting to develop in half of twenty twenty three that's carried into twenty twenty four. So, we're also a beneficiary of that level of demand that carried into 2024.

Speaker 3

As I said earlier, our expectation currently based on what we're hearing from OEMs and end users is we expect it to continue to be a very busy year on the vocational front. Medium duty had also a level of lack of supply post the pandemic. That market is improved in terms of supply demand balance. We're seeing fleets do some level of resizing. That's not surprising frankly when you start to look at developments in certain segments of the medium duty market.

Speaker 3

So that is firming up a bit in terms of supply demand, but continues to be a relatively busy market for us. So as we think about again that playing out throughout the year, when you look at the level of simultaneous demand that you see, especially in the vocational market across the entire industry, it can be rather challenging for the industry as you're dealing with relatively high levels of pull for certain components. So again, the industry is not necessarily fully capacitized for that type of sustained peak. So that has now certainly is causing many parties to address some of those underlying constraints. I won't get specific in terms of what those are, but I would just offer that as far as I'm aware, all the industry participants are trying their best to produce to those levels of demand, but I would describe that demand at some level being almost unprecedented in terms of overall response pull from the market right now.

Speaker 3

So we'll continue to manage through that process and the team here is certainly committed to deliver to the best of our abilities and make sure that the end users are receiving the level of support that they need. But I would just offer the labor issue more broadly, leaving aside the cost issues that we've and others have addressed, it's an availability challenge across the board. So and I think that's one that we're working very closely with both our internal team and our supply base to make sure that we're doing our best in terms of making that labor available. But it's one issue that I think will continue to be challenging as we get further into the year.

Speaker 8

Very helpful. Thank you.

Speaker 4

Our next question comes from

Operator

the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Speaker 9

Hi, good afternoon, good evening. I'm wondering if you could just talk about your views on truck industry inventories for Class 5 through 7, just the total unit counts on dealer lots is up at cyclically high levels. And I'm wondering if you could tell what type of equipment that is and to what extent it's one of the factors that you're considering, Fred, when you're talking about potentially softer revenue outlook in the back half of the year. Just if you could share your views around that dynamic that would be helpful.

Speaker 2

Yes. Jerry, this is Fred. I mean, my earlier comments were more around typical seasonality. Our read through through our sales force is that inventory is still pretty tight. I think the question may be how much is at a dealer versus at bodybuilders.

Speaker 2

And I think relative to bodybuilders and their ability to get all the parts to complete the trucks, I think there's some challenges there.

Speaker 9

Interesting. So you think the hold up in terms of the building dealer inventories because of the constraints at the final assemblers?

Speaker 2

Yes. I think there's more challenges in that piece of the chain than as opposed to just excess vehicles sitting on dealers' lots.

Speaker 9

Okay. And then separately, you continued good margin performance by the team despite being hamstrung on the part of your business where you folks haven't been able to raise pricing? Outside of North America on highway, are there any other pockets of pricing opportunities from here? Can you update us on your price realization in the quarter and potential pockets of pricing updates for $25,000,000 ahead of the bigger pricing opportunity that you mentioned last quarter?

Speaker 2

Sure, Jerry. It's Fred again. Most of the pricing actions were effective January 1. But with demand as robust as it is, we're certainly in the position where some in customer incentives that maybe you've historically done to conquest new customers, you can pull back on those somewhat. And then relative to the book of business available to price in 2025, clearly we've talked about what's available North America on highway, which is meaningful, the 60 plus percent.

Speaker 2

But there is more available to price across the other end markets. So we're obviously spending a lot of time thinking about that. And as Dave mentioned, it's too early to really be in negotiations with customers, but there is a broader book of business available to price than just the 60% of North America on highway.

Operator

There are no further questions in the queue. I'd like to hand it back to Dave Graziosi for closing remarks.

Speaker 3

Thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Allison Transmission Q1 2024
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