Q1 2023 Allison Transmission Holdings Inc Earnings Call
Good afternoon, Thank you for standing by.
Allison transmissions first quarter of 2023 earnings conference call.
My name is Camilla and I will be your conference call operator today.
At this time all participants are in a listen only mode. After prepared remarks, Allison transmission executives will conduct a question and answer session.
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 Jacky <unk> Executive director of Treasury and Investor Relations. Please go ahead Jackie.
Thank you Camilla good afternoon, and thank you for joining us for our first quarter 2023 earnings Conference call with me. This afternoon are they've got DSV, our chairman and Chief Executive Officer, and Fred Bully, Our senior Vice President Chief Financial Officer and Treasurer.
As a reminder, this conference call webcast in this afternoon's presentation are available on the Investor Relations section of Allison transmission Dot com.
A replay of this call will be available through may 11th.
As noted on slide two 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 first quarter 2023 earnings press release and our annual report on Form 10-K for the year ended December 31, 2022, as well as 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 expressed today.
In addition, as noted on slide three 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. The most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2020 earnings press release.
Today's call is set to end at 545 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 four of the presentation for the call agenda.
During today's call Dave Gracias. He will review highlights from our first quarter 2023 results and provide an operational update Fred Bully will then review our first quarter financial performance and update to our full year 2023 guidance prior to commencing the Q&A now I'll turn the call over to Dave. Thank you Jackie and good afternoon, and thank you for joined.
Uh huh.
After a record year for Allison in 2022, our first quarter results show a strong start for 2023 and an exciting year to come for the business. During the first quarter, we achieved record revenue of $741 million, an increase of 9% from 2022.
Not unlike previous quarters sales growth has was outperformed by EBITDA margin growth and EPS growth demonstrating allison's commitment to operating performance in the first quarter, we grew EPS to $1 85.
Up 42% year over year.
Our quarterly results demonstrate not only the strength of our core end markets, particularly in North America, but also the value proposition of the Allison fully automatic transmission, which enable customers to get more work done with our quality durability and reliability problems.
Cost inflation continues throughout the industry vehicle prices inflate and allison's value proposition increase its providing an opportunity to further increase market share as well as realized price.
For the first quarter, we achieved gross margin expansion of 145 basis points compared to the same period in 2022.
Our operating performance has enabled us to maintain our capital allocation priorities by investing in Allison's conventional and next generation propulsion products. We also remain committed to returning capital to shareholders through our quarterly dividend and share repurchase program. During the first quarter, we increased our quarterly dividend by 10% to two.
23 per share marking the fourth consecutive year of dividend increases also during the quarter, we repurchased 1% of our shares outstanding with 60% of our shares outstanding repurchased since Allison's IPO in 2012, we ended the first quarter with approximately $1 billion of authorized share.
Repurchase capacity during the quarter Allison attended the Raymond James Institutional Investors Conference, where we highlighted progress of our China wide body mining dump growth initiatives.
We have resized the annual revenue opportunity from 50 million to 100 million as our Allison automatic 4000 series has gained quick adoption in the Chinese market as well as export markets as we discussed on the last earnings conference call. We are pleased with the early success of the initiatives gaining over 10% share.
And 18 months in early April we announced another growth initiative for the wide body mining dump export market through our partnership with Bonnie.
Global heavy equipment manufacturer for the mining and construction markets.
Letter of intent to supply Allison's 4000 series seven speed transmission for <unk> 96 ton wide body mining dump truck for the India market demonstrates our commitment to expanding our global penetration in this location. This.
This partnership will draw on our joint success in the Chinese wide body mining dump market to create an ecosystem of innovation and growth in the fast developing India market.
On our last earnings call we reiterated.
The announcement of Allison's Award, winning 30 for 2014 regional haul series transmission by.
Being available in <unk> class eight Freightliner Cascadia day cab model paired with comments natural gas engine. Today, we would also like to announce that the 34 14 paired with the Detroit DD 13 diesel engine is now available for order in <unk> and two truck to $34 40.
<unk> is the lightest transmission in this segment at up to 11% lighter than the closest competitor and provides numerous benefits, including improved fuel economy by up to 8% regardless of fuel type. The announcement represents the fuel agnostic nature of allison's products and the commitment to evolving our propulsion.
Solutions to help Oems and fleet customers meet sustainability goals.
We have made numerous announcements for the defense end market in the last few quarters and today, we would like to take some time to outline our strategy and opportunities and this unique market. Historically Allison's defense end market sales were primarily attributable to United States Department of defense and we continue to provide the transmit.
<unk> for all tactical wheeled vehicles heavier than the Ham D and more than half of the armored combat vehicles used by the U S. Military in February as the contract award for the J L. T V.
<unk> was announced by the U S Army Allison has been the propulsion supplier of the J L. T V. A one since 2015 and we are proud that our 2500 specialty series will remain the propulsion solution of choice for this program with the J L. T D a to.
The first delivery is expecting and expected in Q3 of 2024 with the U S Department.
Hence apartment forecasting 55000, J LTV, a one in jail TVA to vehicles over the next two decades.
Today Global defense spending is on the rise driven by the Ukraine War shifts and geopolitical dynamics in the U S Department of defense modernization priorities.
Allison is poised to capture growth in this cycle by continuing our longstanding partnership with U S Department of defense.
Diversifying our revenue sources by increasing our international sales.
And the next few years, we expect this growth to drive $100 million of incremental annual revenue in our defense end market starting in the U S. We have already announced several programs such as the army is mobile protected firepower M. P F.
80, 883 recovery vehicle and the continuation of the Abrams contract. These programs I mentioned are all tracked vehicle programs, where we expect to see the most growth. In addition to these track programs. There are numerous wheeled vehicle programs with the U S Department of defense, which will continue to drive growth.
In the coming years all of these programs are expected to last decades and continue Allison's long standing partnership with the U S Department of Defense. We also expect a significant portion of growth in the defense end market to come from international opportunities and.
In 2022 international sales accounted for 29% of the revenue our defense end market in coming years, we expect the international revenue will grow to more than 50% as a result of these strategies first the expansion of sales of existing products such as our <unk> 1100 in the Abrams main battle tank.
Over the next three years the U S government plans to sell more than 430, Abrams tanks to Taiwan, Australia, and Poland second our sales to the international defense market through partnerships with global Defense Oems, such as South Korea, Taiwan Aerospace hardware as a global leader in <unk>.
<unk> combat vehicles and increased sales of its canine Thunder self propelled howitzer to both Egypt, and Poland has led to Han why becoming one of Allison's largest defense Oems.
And finally, our development of new products, such as the 30 40, Amex medium way Cross drive transmission and product variants such as the Abrams X 1100 variant developed for the Turkish Firtina self propelled howitzer program, which are gaining interest around the world to $3 40.
Max has already been selected for the U S. Army's MTF program and has since gained traction in new programs in countries, such as Poland, Turkey, and India last quarter, we mentioned India's future.
Infantry combat vehicle or <unk> and the opportunity for approximately 750 units over the next two decades utilizing the Allison 30 40 Amex.
With our new lead Gen Force electric hybrid propulsion system for tracked combat vehicles, we are looking forward to even longer term growth opportunities in our defense end market, Dallas and EJ and force has already been selected by American Ryan Mittal for the optionally manned fighting vehicle or OMB with the U S Army planning to.
Down select this summer followed by testing in 2026 and estimated startup production in 2029.
The defense end market is unique in that armored vehicle programs typically take between seven and 10 years from idea to production. This requires the industry to self invest prior to final vehicle selection and production often with uncertain timelines with the opportunity being decades long production and aftermarket for most pro.
Graham Allison is committed to investing in and pursuing growth in our defense end market in order to capture the opportunities from an expected multiyear increase in global defense spending and we look forward to providing updates on specific milestones.
In summary, Allison's first quarter results demonstrate not only the current success 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.
Thank you and I'll now turn the call over to Fred.
Dave following data first quarter 2023 results comments I will discuss the Q1 2023 performance summary, key income statement line items and cash flow I'll, then provide updates to the full year 2023 guidance.
Please turn to slide five of the presentation for the Q1 2023 performance summary.
First quarter net sales increased 9% from the same period in 2022.
Two a record of $741 million the.
The increase in year over year results was led by $40 a $44 million increase in the service parts support equipment and other end market.
Leading to record quarterly sales of $183 million.
The increase was driven by higher demand for global service parts and support equipment higher demand for aluminum die cast components and price increases on certain products.
Year over year results were also improved by $30 million increase in <unk>.
Net sales in the North American on highway end market, principally driven by strength in customer demand customer demand for medium duty and class eight vocational trucks and price increases on certain products.
Gross profit for the quarter was $361 million, a 13% increase from $320 million for the same period in 2022. The increase was principally driven by price increases on certain products, partially offset by higher manufacturing expense and direct material cost <unk>.
Net income for the quarter was $170 million compared to $129 million from the same period in 2022, the increase was principally driven by higher gross profit.
Adjusted EBITDA for the quarter was $276 million compared to $244 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 42% from the same period in 2022.
First quarter EPS of $1 85 was driven by higher net income and lower total shares outstanding.
A detailed overview of our net sales by end market can be found on slide six of the presentation.
Please turn to slide seven of the presentation for the Q1 2023 financial performance summary.
Selling general and administrative expenses increased $12 million from the same period in 2022, principally driven by higher commercial activity spending and increased product warranty expense engineering research and development expenses for the quarter was essentially flat with the same periods in 2022.
Please turn to slide eight of the presentation for the Q1 2023 cash flow performance summary.
Adjusted free cash flow for the quarter was $169 million compared to $142 million from the same period in 2022. The increase was principally driven by higher net cash provided by operating activities, partially offset by increased capital expenditures.
During the quarter, we increased our quarterly dividend by 10% to <unk> 23 per share. This marks the fourth consecutive annual increase to our dividend.
We further return capital to shareholders by repurchasing $40 million of our common stock.
For the quarter. This represents 1% of our outstanding shares was 60% of our outstanding shares repurchased since Allison's IPO in 2012.
We ended the quarter with a net leverage ratio of two two times $344 million of cash and $644 million of available revolving credit facility commitments. In addition, we continued to maintain a flexible long dated and covenant light debt structure with the earliest maturity due in 2026.
Over $2 $5 billion of outstanding debt $623 million.
Dollars is subject to variable interest rates of which $550 million is hedged resulting in <unk>.
95% of our debt being fixed.
Since the third quarter of 2025, please turn to slide nine of the presentation for the update to our 2023 guidance.
Given first quarter 2023 results and current end market conditions, we are raising our full year 2023 guidance Allison expects net sales to be in the range of $2 $9 billion to $3 billion.
At the midpoint this represents over 6% year over year growth based on continued strength in demand in our end markets price increases on certain products and the continued execution of growth initiatives, leading to another anticipated record net sales a year.
In addition to Allison's 2023, net sales guidance, we anticipate net income in the range of $550 million to $600 million adjust.
Adjusted EBITDA in the range of 1.01 billion to 1.09 billion net cash provided by operating activities in the range of $635 million to $695 million capital expenditures in the range of $125 million to $135 million and.
Adjusted free cash flow in the range of $510 million to $560 million.
This concludes our prepared remarks camilo.
Camilla Please open the call for questions.
Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Yeah.
Thank you.
Question is from Tim Thein with Citi. Please proceed with your question.
Hey, guys good afternoon.
And question is on the service parts and support equipment.
Over the years that.
Part of the business is.
<unk> gone through some periods, where we can get kind of outsized growth and just curious as we look at this quarter and maybe what you can foresee or envision for the balance of the year.
Is that.
Tribute to that that's part of the business, we can get some a little bit more pricing leverage so I'm curious did that.
Maybe play a bigger role in the first quarter or and I guess the second part of the question is.
Would you expect this part of the business too.
At least the on highway business to slow just kind of Directionally with.
With new deliveries or is there something else.
Driving the business in China Ultimate Spirit of the question is is this kind of.
A one time.
Deal or do you see further momentum in that particular part of the business. Thank you.
Tim its Dave Good evening and thank you for the question so.
A few items I think your reference to.
Years ago in terms of a bit of an ebb and flow and some increases in I'm, assuming you're referring to some of the off highway that activity that we saw probably five six years ago.
Really that was a result of our fleet size increases years before that and then of course coming in for rebuilds and that market is.
Really run its course in terms of those particular units being replaced with new units such as Youre familiar with.
Q1 results, a number of things driving that as Youre well aware.
The overall industry has been constrained by a number of inputs mostly.
Labor and to a degree parts.
We certainly saw some improvement going into the second half of last year and even into the fourth quarter I think actually if you look at our fourth quarter results.
We are starting to reflect some of that.
The improvements in those input constraints really started to take.
I would say more meaningful hold as we entered 2023.
Channel is able to catch up with some of the work that they've really stacked up at the same time, we've seen some improvement in terms of.
Supplier delivery with what's needed ultimately buy.
Channel. So the Q1 results reflect a number of those.
Attributes as well as when you think about to your question is a one and done I believe.
As we think about the balance of the year, we expect some continuation of that level of improvement.
Improvement some of it is burning through for the industry backlog that you see.
Some impact in the first quarter and we would expect some of that in the second quarter, but ultimately to get back to more.
Normalized levels as you also know with the fleet aging the way it is.
Aftermarket will continue to be.
What we believe is a pretty strong market for us. It's also a market that's seen a range of price increases over the last 18 to 24 months as well which is.
Playing a role there.
I think beyond that those are really.
Vast majority of my comments were really directed to the on highway business and I would just offer as well.
Again as you think about the.
The aftermarket you also mentioned this point about being tied to unit, which is really tied to what we referred to as support equipment, which is tied to new unit sales. So to the extent that volumes are up which our guide implies they are.
That will certainly pull through some increased support equipment sales as well.
Very good thank you Dave I appreciate the color.
Thank you.
Our next question is from Rob Wertheimer with Melius Research. Please proceed with your question.
Thank you I wonder if I can squeeze two together on some of the many announcements of new business that you kind of detailed in the prepared remarks released over the last 12 to 18 months.
The wide body dumped market you expand I guess, the Sony heavy into India I Wonder if you can just give us and I think you've characterized that as a $100 million.
Annual opportunity.
<unk> opportunity in revenue I Wonder if you can give us the current state of that the growth rate I don't know if it will take them a couple of years to design and launch or if it's already launched.
Just an update there and I wonder if you could tell us anything on the <unk> versus the LTV.
How that revenue opportunity annually compares with.
The prior version and just when the.
There is an up shifts when it comes.
Rob Good evening Dave.
Let me, let me cover off that material, so with the wide body mining dump the reference to India.
That's relatively new thus the announcement, having said that it's not a new chair.
<unk> your vehicle per se.
With.
A vehicle that's actually been banned.
Then produce being produced so elsewhere. So the idea there is to ultimately have.
That release ultimately start to take place in India. So to your question relatively early days for India.
Having said that we've had a fair bit of success as mentioned with the China market as well as export markets.
We continue to be pleased there and also with.
The level of engagement with Oems as well as end users in that particular market, but I.
I think it's certainly.
Our prepared comments and a number of other calls.
The realization of that growth initiative has been a bit faster than we were certainly expecting in certain and looking to build upon that.
That success. The teams efforts to then start to look at more directly export markets as well as a market like India, which we believe is relatively early days so.
The pace at which we ultimately get to say that $100 million incremental.
Growth initiatives target largely dependent I think on the success of the Oems ultimately to penetrate with the end users in terms of that particular vehicle application on your J LTV question.
The transmissions between.
And the two are identical so the only differences.
And thats essentially making the vehicle so at this point.
And our per our remarks, we're very pleased.
With the continuation of that program and look forward to working with both of those Oems in terms of the vehicle lineups and delivering.
Two the demand commitments that are out there relative program size of $55 is rather large but when you extend that over a period of time, it's something again that can be.
Subject to the OEM schedules and ultimately end user demand, but we're certainly pleased to continue in the platform and are.
Prepared to supply to demand.
Okay. Thank you.
Thank you.
As a reminder, its star one if you would like to ask a question.
Our next question is from Jamie Cook with credit Suisse.
Please proceed with your question.
Hi, Good evening I guess, just two questions. One can you just talk about your order book for 2023, how much visibility you have it.
How you're thinking about the order book for 2024, and when you start to open that and then my second question is just.
Just with regard to the implied incrementals. It looked like the first quarter is probably the strongest and then it tapers off from there. So any color you could give on that thank you.
Jamie Good evening, it's Dave I'll start and then hand, it over to Fred So the 2023 order book as you mentioned.
It really is consistent with the other public company comments, you've already heard in terms of relatively strong demand.
So we yes.
As our guide implies continued to.
Look forward to supplying to that demand I would say the underlying dynamics of North America right now medium duty and vocational continued to be strong so.
What we're what we're hearing at least relative to OEM expectations or rather full year for 2003.
I think it's a little early to call it 24 forecast the.
The third party forecast providers are out there as you well know I would certainly say.
We've said over a number of quarters now in the last few years, it's really going to be very much dependent on.
The broader industry's ability to both supply the required components and then of course build them.
Constraint situation.
Wood.
Described as some level of improvement I think that's consistent with what other public companies have provided in their comments for the first calendar quarter.
I would offer though.
We continue to see a lack of buffers in the market.
So it does create some level of dis.
Disruption on relatively short notice basis, so we're still seeing.
Some of that and of course labor I think broadly is continues to be a constraint. So 23 strong demand we.
We expected some of that certainly carryover in 'twenty four again.
Subject to the overall ability of the market.
Suppliers as well as the Oems too.
Ultimately produce I'll hand, it over to Fred for your questions other questions.
Yeah. Thanks, Jamie.
As you mentioned it was certainly a strong Q1.
No.
EBITDA margins up 120 basis points.
To 37, two on a year over year basis.
Higher gross profit driving it.
800 over 800 basis points of price on a year over year basis.
Favorable mix with the parts and the North American on highway.
And that's being offset by cost increases and higher.
SG&A expenses in the quarter.
As we think about the the updated guidance.
At the midpoint.
We updated revenue by $75 million.
With $55 million of that dropping through to EBITDA at the midpoint. So.
73% drop throughs, so certainly.
Robust.
The drop through is there and then relative to the comment on Incrementals.
And clearly you've kept them at the midpoint, we have Q2 to Q4.
While down off of the strong margin performance in Q1.
Still the implied guide would have you.
Up close to a 100 basis points versus.
Q2 to Q4 of 2022.
Thank you.
Okay.
Thank you.
Our next question is from Felix <unk> with Raymond James. Please. Please proceed with your question.
Hey, good afternoon everybody.
Good afternoon.
Hey, I'm just curious if you don't mind expanding on a comment you made in your prepared remarks, but with vehicle prices up substantially globally in all the things that makes the value proposition of an Allison transmission higher.
I'm wondering if could you maybe just expand on that idea and what I'm really curious about is to what degree do you think that could open maybe some underpenetrated vehicle verticals or should we think about it really more of a pricing opportunity two cycles I appreciate it.
Good evening, Phil It's Dave I guess, let me, let me try to cover that so just very briefly when you think about or as you mentioned at our end user value proposition.
It's multiple attributes right its productivity, we get into maintenance maintenance savings, which really get to lifecycle costs fuel efficiency.
Driver skill set.
<unk> shipped quality safety residual value.
As you all know the price of vehicles, given inflation and in a number of other market dynamics are all up.
When you look at the value proposition attributes that I, just mentioned inflation has impacted all of those whether it be wages the cost of repairs the downtime for vehicle repairs.
The lead times to actually get the work done.
The availability of skilled drivers to actually operate a manual transmission versus a fully automatic products et.
Et cetera, so the training time, which would be necessarily shorter as you could expect for an automatic versus a manual.
Ultimately the performance of the fully automatic product and certain vocations. So.
To your question when you when you think about all those attributes and all of them have gone up in terms of cost the value proposition of the Allison.
<unk> certainly has increased.
And that's really the focus I think your.
Your comment in terms of opening up other markets we've seen.
Even outside of North America with the dynamics in some of that was certainly accelerated by <unk>.
Covid.
Theres also regions that are struggling with the same thing that the U S. As in terms of.
Skilled drivers relative taught.
Manual transmission. So it is certainly opening up I think more opportunities for a fully automatic.
Penetration in just given all the cost inflation, which is global the last time, we checked.
Have an improved value proposition throughout the world. So the team is obviously taking that opportunity to continue to point out.
Why the Allison is a better solution and we've said many times, we sell based on value to the end user not our cost so.
Everything that I just rolled through certainly pushes you are certainly gets you to a point, where you could conclude that theme.
Allison the value of the Allison has certainly gone up and as we should.
Achieving more value for the product in the marketplace.
Thank you.
Thank you.
Our next question is from Tami Zakaria with Jpmorgan. Please proceed with your question.
Hi, Thank you so much and congrats on excellent results.
My first question is on the different segment I think it's.
Negative growth in the first quarter.
Are you still expecting sort of 8% growth throughout the year and if so what would be the cadence of growth.
In that segment.
Jamie It's Dave Thank you for the question.
<unk> I understand at least with <unk>.
Track programs Gen.
Generally are subject to a number of program execution requirements and timelines in many cases Allison doesn't control those.
We try our best but I would say generally speaking the broader.
Industry at this point is pretty pretty challenged with that.
That's a low volume.
Heavy duty type of products. So we the team here is working through a number of constraints as well as the <unk>.
Mmm first quarter I would certainly describe as an outlier when you look at the balance of the year in terms of our expectation so.
I would.
Look at the <unk>.
Overall, we're certainly still comfortable with that.
Plus or minus 8% year over year.
I would point you to just given schedules on the track side that we expect second half to be heavier than first half for a number of reasons.
Hopefully that answered your question.
It does thank you so much that's very helpful.
And policies.
Eating.
But you already answered earlier, but did.
Did you give what was price cost.
Impacting the quarter and what was pricing in general in the quarter.
Sure Tami this is Fred we realized.
$56 million in price in the quarter.
So over 800 basis points of price.
But when you as you look throughout the year, it's important to realize that we had multiple price actions in 2022. So the first quarter is clearly our easiest comp from a pricing standpoint.
Yes, we're looking at at full year, when we came out with initial guide in February .
We were about 400 basis points of price.
Based on where we've ended up we're anticipating being closer to 475 basis points in price.
We were unfavorable.
From a material and manufacturing cost standpoint in in.
In Q1 on a year over year basis.
Direct material.
Cost excluding volume was up.
$8 million in manufacturing costs was up about $10 million, but certainly have cost significantly or price at this point significantly outrunning cost.
Got it and is that a fair run rate sort of what the remaining three quarters like positive price cost.
It'll be it will be.
Positive price cost is definitely what we're anticipating for the for the balance of the year.
Got it. Thank you so much youre welcome.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Dave Cresci Oc for closing comments.
Thank you Camilla. Thank you for your continued interest in Allison and for participating on today's call enjoy your evening.
This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
Yes.
[music].
Okay.
[music].
Yeah.
[music].