Q3 2023 Allison Transmission Holdings Inc Earnings Call
Good afternoon. Thank you for standing by welcome to Allison transmission 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 transmissions executives will conduct a question and answer session and conference call participants will be given instructions at that time.
As a reminder, this conference call is being recorded.
Once you require operator assistance during the conference. Please press Star zero on your telephone keypad I would now like to turn the conference call over to Jacky Bowls executive director of Treasury and interest or deletions. Please go ahead Jackie.
Thank you Alicia good afternoon, and thank you for joining us for our third quarter 2023 earnings Conference call.
With me. This afternoon are they've got the empty, our chairman and Chief Executive Officer, and Fred Boyd, 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 Allison transmission Dot com.
Replay of this call will be available through November eight.
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 third quarter 2023 earnings press release.
Our annual report on Form 10-K for the year ended December 31st 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 three of the presentation. Some of our remarks today contain non-GAAP financial measures as defined by the SEC.
Can find a reconciliation of the non-GAAP financial measures. 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 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 will review highlights from our third quarter 2023 results and provide an update on recent announcements across our product portfolio Fred.
Fred believe will then review our third quarter financial performance and the full year 2023 guidance.
David will close with a review of our wide body mining dump and defense end market growth opportunity prior to commencing the Q&A.
Now I'll turn the call over to Dave got easy. Thank you Jackie and 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 level in the first half of the year net sales growth was outperformed by growth in net income of 14% and diluted EPS up 21% to $1.76.
Furthermore, our teams 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.
Our evolving end market.
These next generation initiatives, along with the various financial operational and strategic milestones that we've achieved over the last several years demonstrates the power of Allison to capitalize on market opportunities with new products to drive innovation and growth 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 our 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 need.
Some 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.
Idled truck to meet the need of refuse collection customers Allison's proven and 4000 series transmission was seamlessly paired with a C. N. G engine. This partnership is the latest example of allison's ability to deliver optimized performance and capability and demanding vocations indifferent to the fuel source for the powertrain moving.
Forward with Allison's transit hybrid offering our <unk> flex system, adding to the many nationwide releases, we have highlighted in recent quarters. We are pleased to announce earlier this month that it be metro the public transit system in Brownsville, Texas has chosen to equip their buses with the Allison each M flex system.
Brownsville joined the growing list of transit properties in states, such as Indiana, Wisconsin, Nevada, and California that will utilize the gen flex electric only capabilities.
Activated by Geo fencing technology to automatically switched 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 Aegean power is fully electric E. Axles, we were excited to launch the Gen power 85, as the newest addition to the Aegean power family partner partnering with anecdotal I Susu. The 85 deaths was integrated into a fully electric eight meter mini bus and released that bus World Europe in early October.
D. J empower 85 S was specifically developed to address the needs of many boss and small truck applications enjoins. The larger 100 S. M 130 S and the single motor each empower.
E axle family.
The introduction of the 85 Das is the latest example of allison's commitment to expanding our propulsion solution portfolio to meet the demands of the wide range of applications and market segments, we serve and summary, Allison's third quarter results demonstrate strong operating performance with the business well positioned across our fuels.
Sourcing different product portfolio, our products have been developed to support our customers' needs as they adapt to different technology sources and driving future growth across our business. Thank you and I'll now turn the call over to Fred.
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 five of the presentation for the Q3 2023 performance summary.
Third quarter net sales increased 4% from the same period in 2022.
Two $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 markets, principally driven by strength in customer demand for class eight 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 markets, 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 defense end market, principally driven by increased demand for track 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 expense.
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 a lower total shares outstanding.
A detailed overview of our net sales by end market in Q3 2023 financial performance can be found on slides six and seven of the presentation.
Please turn to slide eight 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 23 cents 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 one nine times $501 million of cash and $645 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 of our $2 5 billion of outstanding debt $620 million is subject to variable interest rates of which $500 million hedge resulting in 95% of our debt being fixed.
The third quarter of 2025.
Please turn to slide nine 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 and demand in the majority of our end market price increases on certain products and the continued execution of our growth initiatives, leading to another anticipated record net sales year.
In addition to al since 'twenty twenty-three 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 a $125 million to $135 million and an 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 depth and defense end market opportunities.
Your friend 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 a resizing.
Have the opportunity to $100 million of annual incremental revenue during the first quarter, our long standing partnerships with major mining Oems in China continued to lead to further global penetration in this vocation.
Allison is growing our international defense business through partnerships with global Defense Oems, such as Honda Aerospace with utilization of Allison products, not only in South Korea, but in various tracking wheeled applications for customers around the world last week, we announced that our Allison X 1100 Cross drive transmission.
It was selected as the propulsion solution for the Hanwha read back armored vehicle. The read back as Han was newest tracked vehicle chosen chosen to be Australia's infantry fighting vehicle with the future in selected for Australia is land 400 phase III program.
Back strives to duplicate the success upon was canine self propelled howitzer family of vehicles, which has been chosen for numerous European Asian, and North African programs utilizing the Allison.
X 1100 during the quarter Allison was awarded a 13 million dollar second phase low rate initial production contract for the U S. Army's M 10, Bulker and light tank program formally the MTS, we look forward to ramping into higher production volumes with the M. <unk> bulker utilizing allison's new <unk>.
30, 40, Amex medium weight Cross drive transmission development of new products, such as the 30 40, Amex will drive international growth in the near future as the demand for medium weight armored combat vehicles increases was shifts and geopolitical dynamics.
During the quarter Allison signed a memorandum of understanding with P. G Z a Polish defense holding group and one of the largest defense companies in Europe. The Mou includes cooperation on track 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 Han was canine howitzers using Allison product.
<unk> has also recently been awarded a contract for over.
1000 <unk>.
Good afternoon. Thank you for standing by.
Infantry 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.
Alicia: Welcome to Allison's Transmission, 3rd quarter 2023, Ernie's 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 Transmissions Executives will conduct a question and answer session. In conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad.
This concludes our prepared remarks, Alicia please open the call for questions.
Okay.
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 your line is in the question queue.
Jackie Bolles: I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Interester Relations. Please go ahead, Jackie. Thank you, Alicia. Good afternoon, and thank you for joining us for a 3rd quarter 2023 Ernie's Conference Call. With me this afternoon, our Dave Graziosi, our chairman and chief executive officer, and Fred Bolles, 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 Allison Transmission.com.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Jackie Bolles: A replay of this call will be available through November 8th. As noted on slide 2 of the presentation, many of our remarks today contain 4 looking statements based on current expectations. These 4 looking statements are subject to known and unknown risks, including those set forth in our 3rd quarter 2023 Ernie's press release. Our annual report on form 10K for the year ended December 31st, 2022, and other general economic factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Larry de Maria with William Blair. Please proceed with your question.
Hi, Thanks, good afternoon everybody.
And thanks for all the color on the mining stuff.
The.
You had very strong operating performance in the quarter, especially margins sales were a little bit below but you noted you had a slow start on supply chain. So just to clarify that did you catch up throughout the quarter or is 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 rest of the year, whether that becomes an issue or not thank you.
Jackie Bolles: Actual results may vary materially from those that we expressed today. In addition, as noted on slide 3 of the presentation, some of our remarks today contain non-gap financial measures as defined by DSEC. You can find recommendations of the non-gap financial measures to the most comparable gap measures attached as an appendix to the presentation into our 3rd quarter 2023 Ernie's press release. Today's call is set to end at 5.45 p.m. Eastern Time.
Larry It's Dave Good afternoon, and 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 level. So as we entered our expectation was more of a normal run rate frankly for July that proves to be.
Bit disconnected from from what the the Oems were experiencing I would refer you to the Oems that are publicly reported already in terms of some of their commentary around.
Jackie Bolles: In order to maximize participation opportunities on the call, we'll take this one question from each analyst. Please turn to slide 4 of the presentation for the call agenda. During today's call, Dave Reviosi will review highlights from our 3rd quarter 2023 results and provide an update on recent announcements across our product portfolio. Fred Bowley will then review our 3rd quarter financial performance and the full year 2023 guidance. Dave will close with a review of our wide-body money dumps and defense and market growth opportunities prior to commencing the Q&A.
The constraints that unfortunately, they were dealing with and we reacted accordingly as we noted in our prepared remarks, certainly August and September run rate it 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 that mid point, 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.
David Graziosi: Now, I'll turn the call over to Dave Reviosi. Thank you, Jackie.
David Graziosi: Good afternoon, and thank you for joining us. During the 3rd quarter, DSEC increased 4% year-over-year to $736 million. DSEC 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 without performed by growth in net income of 14% and diluted EPS of 21% to $1.76.
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.
David Graziosi: 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 and markets. We've 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.
A team of Allison management, and UAW local 933 leaders have begun discussions at an off site location.
The company is focused on negotiating 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.
The automakers.
Would just offer that and I'm sure you know.
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.
David Graziosi: The next generation initiative also underscores 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.
As such the UAW strike affecting the big three does not have any direct impact on our local operations.
Pretty much.
Yeah.
Thank you our next question comes from.
David Graziosi: 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 Mac 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 the CNG engine. This partnership is the latest example of Allison's ability to deliver optimized performance and capability and demanding vocations in different to the fuel source for the power train.
Line of Rob.
With Melisa Melisa.
I apologize.
Hi, Thank you.
I know, it's not your biggest business, but a 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 or if it's just energy if theres anything construction or mining that materially changed and I don't know if that's.
Synchronous or coincidental decline because I assume the international is more China gas fracking anyway could you maybe just elucidate what happened there.
David Graziosi: Moving forward with Allison's transit hybrid offering, our EGN 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 Brownville, Texas has chosen to equip their buses with the Allison EGN Flex system. Brownville joins the growing list of transit properties in states such as Indiana, Wisconsin, Nevada and California that will utilize the EGN Flex electric only capabilities activated by geofencing technology to automatically switch to engine off mode and 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.
Rob It's Dave So a few things just a little context the off highway business by definition is probably one of our more volatile end markets in history has certainly proven that.
As we entered this year, our expectation was certainly more of a.
Our stable setting in terms of players, especially within the North America.
Energy market I think as you know theres been a number of transactions that have been announced.
That was certainly not part of our plan coming into the year that has naturally led to a reconsideration of those impacted players and I would say the broader industry around <unk>.
David Graziosi: We are wrapping up with our EGN power of fully electric e-actuals. We were excited to launch the EGN power 85s, the newest addition to the EGN power family. Partnering with Anadolu, Asuzu, the 85s was integrated into a fully electric 8 meter midi bus and released at bus world Europe in early October. The EGN power 85s was specifically developed to address the needs of midi bus and small truck applications and joins the larger 100s and 130s in the single motor EGN power e-actual family. The introduction of the 85s is the latest example of Allison's commitment to expanding our propulsion solution portfolio to meet the demands of the wide range of applications and market segments we serve.
Fleet sizing capital deployment as well as replenishment so.
Where we're seeing some of that frankly play its way.
The market in North America, I think as you well know is largely an energy market for us. So the other thing that continues.
Is the high level of capital discipline within that particular.
Particular end market and the increased cost to cap is certainly proven that out as the players continue to focus on cash flow and return on their operations and frankly margins. So we would expect that situation to play out.
Near to medium term our senses.
Our fleets are pretty well equipped at this point they've done a number of refurb projects. Some of that is then lead into some new unit sales, but our sense is that there.
David Graziosi: 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 adapt to different technology sources and driving future growth across our business.
There is adequate amount of equipment. When you look at supply demand balance and I think service companies will not will naturally try to maintain that balance outside North America that portfolio is more.
Evenly split between energy and mining construction hauling if you will so that portfolio continues to evolve well in our prepared remarks, referring to the wide body.
Fred Bolles: Thank you, and I'll now turn the call over to Fred. Thank you, Dave. Following Dave's third quarter, 2023 comments, I'll discuss Q3 2023 performance summary and the Q3 2023 cash flow performance.
Mining dump I would say.
Fred Bolles: I'll then reaffirm the full year 2023 guidance. Please turn to slide five of the presentation for the Q3 2023 performance summary. $136 million, the increase in year-over-year results was led by a $36 million increase in net sales in the North American on-highway and market, princely driven by strength and customer demand for classic 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 princely driven by strength in North American on-highway service parts and support equipment and price increases on certain products.
To my comment in terms of one of our more volatile end markets. Some of that activity is really tied to tenders that are being executed by the vehicle OEM so to the extent that there.
Our occurring on time or the buyers are actually executing the tenders that really drives the obviously the volume through our side.
Our experience at least entering.
The fourth quarter and in a portion of the third quarter was some of those tenders getting pushed a bit. So we will be revisiting all of that as you would expect as part of our 2020 for guidance in the first quarter, but it's something we're obviously staying close to from from a volume and timing expectation.
Perfect and if I can just ask one that matters more I guess.
Fred Bolles: Year-over-year results were also improved by an $8 million increase in the net sales in the defense and market princely driven by increased demand for track and wheeled vehicle applications. Growth profit for the quarter was $357 million and increased the $29 million from $328 million for the same period in 2022. The increase was princely 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.
Vocational medium duty outlook or or customer orders or your impression of the current state of the market. There I don't suppose it's experiencing kind of weakness you might see in the.
On highway afraid at all side, but just just to make sure that that still looks on track.
We wouldn't disagree with your assessment there I think.
We're fortunate with the port our portfolio as you all know being weighted in.
Medium duty as well as vocational and municipal as well, but those markets continue to hold up.
Well again, the public comments by the Oems the references back to some continued.
Fred Bolles: The increase was princely driven by higher growth profit partially offset by increased selling general and administrative expense. Adjusted EBITDA for the quarter was $267 million compared to $245 million for the same period in 2022. The increase was princely driven by higher growth profit partially offset by increased selling general and administrative expenses. Deluted earnings per share increased 21% from the same period in 2022. Third quarter deluded 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.
Gaps in what fleets are looking for from a replacement perspective, and I think the industry is still trying to.
Catch up a bit the average age of vehicles continues to increase so.
We're following that trend, but you know as you as you mentioned.
Continue to see a pretty firm market for medium duty as well as class eight vocational and I think as again public comments by the Oems are consistent in that view.
Thank you.
Thank you.
Next question comes from the line of Timothy.
<unk> with Citigroup.
Please proceed with your question.
Fred Bolles: 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 shareholders through a quarterly dividend of 23 cents 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.
Thanks, Good evening question, David or Fred just on on pricing I think the expectation for the year was.
Just under 500 basis points of price capture for this year is that still the expectation and then you know just to continue on on that last thread in terms of what.
<unk> seem to be signaling in terms of relative strength in the on highway markets. Most important to you, especially the vocational segment.
Thanks, so much communicated at least there at tims initial attempts for price increases in 'twenty four.
Fred Bolles: Since our IPO in 2012 we have repurchased over 60% of our outstanding shares. We ended the quarter with a net leverage ratio of 1.9 times $501 million of cash and $645 million of available revolving credit facility commitment. In addition we continued to maintain a flexible long dated and covenant like debt structure with the earliest maturities due in 2026. Up our 2.5 billion about standing debt 620 million is subject to variable interest rates of which 500 million is hedge resulting in 95% of our debt being fixed through the third quarter of 2025.
<unk>.
Alison.
No that's fair and that kind of backdrop should that hold thank you.
Yes, Tim this is Fred.
From a from a pricing standpoint it was.
Another strong quarter from a pricing standpoint.
As you know we passed on.
Pricing throughout 2022, so the the comps.
Comps become difficult as you progressed through the year, but and over $30 million in price close to 470 basis points in the in the quarter.
Really up.
About 400 basis points, so you're really looking at.
Price.
Fred Bolles: Please turn to slide nine of the presentation to review our 2023 guidance. Given third quarter results and current in market conditions, we are reaffirming our full year 2023 guidance provided to the market on July 27th, 2023. We can 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.
Driving the revenue performance I say, what's what's encouraging about that is on.
Fairly constant volume.
You know our gross margins are up 230 basis points EBITDA margins up 180 basis points. So we're in a situation, where we clearly had price outrunning cost and youre seeing those really drop through from a margin standpoint.
For the full year.
We're still tracking to that that total 500 basis points roughly $150 million in price realization on a year over year basis.
And you know relative to 2024.
Fred Bolles: In addition to Allison's 2023 net sales guidance, we anticipate net income in the range of $575 to $625 million. Adjusted EBITDA in the range of $1.05 to $1.11 billion net cash provided by operating activity in the range of $675 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 to $590 million.
As we've talked about on numerous calls.
As the vehicles continue to increase in price.
So our value prop is that we make those vehicles you run more efficiently.
Less repair time more vehicle uptime ultimately you can get from point a to point B quicker you can size fewer vehicles in your fleet.
Is it the vehicles continue to advance whether it's inflation cost pressures driving that or outside North America moving up the emissions curve and added safety features it just significantly increases our value proposition and we've been in a position to both take advantage of that from a price and the share standpoint.
David Graziosi: Thank you, and I'll now turn the call over today for an update on our wide-body mining depth and defense in market opportunities. 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.
So we're certainly going to continue to monitor.
You know what the OEM price actions will look like going into 2024, but we do anticipate another think historically pre pandemic 50 to 100 basis points of price, we do anticipate in 2024 pricing significantly above those.
David Graziosi: 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 vocation. Allison is growing our international defense business through partnerships with global defense OEMs, such as Hanwa Aerospace, with utilization of Allison products not only in South Korea, but in various tract and wheeled applications for customers around the world.
Those historical pre pandemic levels.
Yeah.
Thank you Fred.
Thank you.
Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.
Hey, good afternoon. This is Isaac salad and Entre Ian just a follow up on off highway does the reaffirmed guidance assume we see off off highway recover in fourth quarter.
David Graziosi: Last week, we announced that our Allison X-1100 cross-drive transmission was selected as the propulsion solution for the Hanwa Redback Armored Vehicle. The Redback is Hanwa's newest track vehicle, chosen to be Australia's infantry-fighting vehicle at the future and selected for Australia's land 400 phase-3 program. The Redback strides to duplicate the success of Hanwa's K-9 self-propelled Howitzer family of vehicles, which has been chosen for numerous European, Asian, and North African programs utilizing the Allison X-1100.
We're well on highway perhaps make up for some of our performance there given.
The dynamics you discussed in off highway.
Yes, I think as Dave commented on.
On off highway.
Our expectation with the outside North America is that Theres been an element of timing and you know we do have.
And elevated expectation for you know for Q4 and outside North America off highway versus what we saw in Q3.
Relative to North America, that's something we're going to continue to closely monitor.
David Graziosi: During the quarter, Allison was awarded the $13 million second-phase low-rate initial production contract for the U.S. Army's M10 Booker Light Tank Program, formerly the MPS. 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.
North America on highway I mean, Dave hit on it I mean.
There is a significant amount of demand for medium duty and class eight straight.
And we feel very solid about where that order book is going into the fourth quarter.
Okay.
Okay, great. Thanks very much.
Okay.
Thank you.
Next question comes from the line of.
Tammy.
Is it Korea with J P. Morgan. Please proceed with your question.
David Graziosi: 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 track, 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 Abram tanks, as well as hundreds of Han was K-9 Hoursers using Allison products.
Hi, Thank you so much.
So my question is on the impressive gross margin expansion to 30 basis points. I think this is the highest we've seen this year.
How should we think about it.
For the fourth quarter and also how should we think about gross margin in general.
You start lapping the expansion next year.
Hi, Tami this is Fred.
David Graziosi: PGZ has also recently been awarded a contract for over 1,000 horse-book infantry 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.
Yeah, obviously, I think you know with us.
Providing full full year guide.
You can you can back into the midpoint guide for fourth quarter.
We are historically fourth quarter has been our lowest margin quarter.
You know obviously a lot of that is dependent on top line revenue, but.
Alicia: Alicia, 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 1 on your telephone keypad. A confirmation to indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you.
North America, you've got the you know the holidays.
November and December which are traditionally you have a little bit more fixed costs is it puts a little pressure on.
Our margins in the quarter.
Yes, as things play forward.
There's a lot of moving pieces we've seen.
Commodity prices come off yeah, that's been advantageous to us but.
We continue to see labor pressure, you know through our supply chain.
That's driving increases to our value add.
You know as we've talked about.
Still the challenges in the supply chain and some inefficiencies that are out there for us to get after expedited freight.
Manufacturing efficiencies within.
David Graziosi: Our first question comes from the line of Larry Demoria with William Blair. Please proceed with your question. Thanks. Good afternoon, everybody. Thanks for all the color on the mining stuff. Question. You know, you have very strong operating performance in the quarter, especially in margins. Sales were a little below, but you noted you had a slow start on supply chain. So, you know, to clarify that, did you catch up throughout the quarter where there's some more wood to chop that goes into the fourth quarter. And the second part is, you know, describe the UAW situation, both upstream downstream and how that's, you know, implied in the guidance for rest of the year, whether that becomes an issue or not. Thank you.
Our facilities.
Carrying a little bit more inventory than you'd like them and then obviously I commented early on where we are from a price expectation. So we.
We continue to you know to form our view on 2024 and all of those puts and takes will be taken into consideration when.
When we provided that initial guidance February.
Great. Thank you.
Thank you.
Next question comes from the line of Jerry Revich with Goldman Sachs.
Please proceed with your question.
Yes, hi, good afternoon.
David Graziosi: Larry, stay a good afternoon and 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 level. 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 are publicly reported already in terms of some of their commentary around the constraints that unfortunately they were dealing with and we reacted accordingly as we noted and prepared remarks, certainly August and September run rated at a higher level or more consistent with what we saw in the second quarter.
I'm wondering if you could just talk about.
Capital deployment from here, obviously strong track record of returning cash to shareholders. You ended the quarter I think with your highest quarterly balance as a public company. So I'm just wondering.
How are you folks were thinking about.
Capital deployment from here and why we can see more significant.
Stock buyback in the quarter, given the cash generation.
Sure Jerry.
I mean you are.
Capital allocation priorities have been consistent I mean, we're going to.
Fund the business for organic revenue earnings growth.
Focus on new product technology development, and you really see that in you know the capital expenditures. So we've had the engineering R&D. The fact that we kept our foot down on those investments throughout the pandemic.
David Graziosi: 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.
You know what's out there from strategic acquisitions, but we've returned a significant amount of capital to shareholders.
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You know repurchase over 60% of our shares.
We've raised the dividend over the last five years.
The dividend.
Dividend payout per share by over 50%.
Obviously, a big driver for us as.
You know always have.
David Graziosi: So, in terms of your question on... The UAW negotiations, you know, 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, you know, the company is focused on negotiating 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, you know, in terms of the activities that are going on with the automakers, you know, I would just offer that, and I'm sure you know, 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. Thank you very much. Thank you.
It would be managing the balance sheet and have a low cost flexible pre payable debt structure, you know long dated maturities.
So as we sit here the priorities they haven't changed.
Uh huh.
You know at this point, obviously as you mentioned carrying a little higher cash balance than we have historically you know we're also earning you know quite a bit higher interest rate than we have historically.
But we will continue to ultimately return the cash to our shareholders in the most opportunistic way.
Thanks.
Thank you.
There are no further questions at this time I would like to turn the floor back over to David for closing comments.
Thank you Alicia.
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. Thank you for your participation.
Okay.
Yeah.
Yes.
Oh.
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Rob Whittheimer: Our next question comes from the line of Rob Whittheimer with Melisius Research. I apologize. Not a bad high, thank you.
Hmm.
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Rob Whittheimer: So, I know it's not your biggest business, but the reasonably sharp decline in off-highway both domestically 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 mining that mature leans, and I don't know if that's a synchronous or a quencentle decline because I assume the international is more China gas-facking. Anyway, could you maybe just loose say what happened there?
David Graziosi: Rob, it's Dave, so a few things, just a little context. The off-highway business by definition is probably one of our more volatile end markets and history has certainly proven that. As we entered this year, our expectation was certainly more of a stable setting in terms of players, especially within the North America energy market. I think, as you know, there's been a number of transactions that have been announced. That was certainly not part of our plan coming into the year.
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David Graziosi: That has naturally led to a reconsideration of those impacted players, and I would say the broader industry around fleet sizing, capital deployment, as well as replenishment. So, we're seeing some of that, frankly, play it the way the market in North America, I think as you well know, is largely an energy market for us. So, the other thing that continues is the high level of capital discipline within that particular end market, and the increased cost of the cap has certainly proven that out as the players continue to focus on cash flow and return on their operations, and frankly margins.
Mhm.
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David Graziosi: So, we would expect that situation to play out. And a near-to-medium term, our sense is that fleet are pretty well equipped at this point. They've done a number of refer projects. Some of that has been led into some new unit sales, but our sense is that there's an adequate amount of equipment when you look at supply-demand balance, and I think service companies will naturally try to maintain that balance.
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David Graziosi: Outside North America, that portfolio is more evenly split between energy and mining construction, hauling, if you will. So that portfolio continues to evolve well in our prepared remarks, referring to the Y-body mining dump. I would say to my comment in terms of one of our more volatile end markets, some of that activity is really tied to tenders that are being executed by the vehicle OEM. So to the extent that there are occurring on time or the buyers are actually executing the tenders, that really drives obviously the volume through our side. Our experience at least entering the fourth quarter and an portion of the third quarter was some of those tenders getting pushed a bit.
David Graziosi: So we'll be revisiting all of that as you would expect as part of our 2024 guidance in the first quarter. But it's something we're obviously staying close to from a volume and timing expectation.
Rob Whittheimer: Perfect.
David Graziosi: If I can just ask one that matters more, I guess. Vocational and medium-duty outlook or customer orders are your impression of the current state of the market there. I don't suppose it's experiencing the kind of weakness you might see in the on how we freight heavy all side, but just to make sure that that still looks on track.
David Graziosi: We wouldn't disagree with your assessment there. I think it's, you know, we're fortunate with the portfolio as you well now being weighted in medium duty as well as vocational and municipal as well, but those markets continue to hold up well. Again, the public comments by the OEMs, you know, the references back to continued gaps in what fleets are looking for from a replacement perspective. And I think the industry is still trying to catch up a bit the average age of vehicles continues to increase.
David Graziosi: So, you know, we're following that trend, but we, you know, as you as you mentioned, continue to see a pretty firm market for medium duty as well as class eight vocational and I think is again public comments by the OEMs are consistent in that view.
Rob Whittheimer: Thank you.
Tim Thein: Our next question comes from a line of Tim theme with city group. Please proceed with your question. Thanks.
Fred Bolles: Good evening. The question Dave is a Fred just on pricing. I think the expectation for the year was, you know, we just under 500 basis points of price capture for this year is that that's still the expectation. And then, you know, just to continue on on your on that last thread in terms of what the OEM seemed to be signaling in terms of relative strength in the on highway markets, most important to you, especially the vocational segment and some of communicated at least their attempts initial attempts for price increases in 24. How do you think? Allison Affairs, and that kind of backdrop should that hold. Thank you.
Fred Bolles: Okay, and this is Fred. From a pricing standpoint, it was another strong quarter from a pricing standpoint. As you know, we passed on pricing throughout 2022, so the comps become difficult as you've pressed the year, but over 30 million in price, close to 470 basis points, in the quarter. You know, revenue really up, you know, about 400 basis points, so you're really looking at, you know, price, you know, driving the revenue performance.
Fred Bolles: I say what's encouraging about that is on, you know, fairly constant volume, you know, our gross margins are up to an 30 basis points. You know, even the margins up 180 basis points, so we're in a situation where we clearly have price, outrun and cost, and you're seeing those really drop through from a margin standpoint. You know, for the full year, you know, we're still tracking to that, you know, that total, you know, 500 basis points, roughly 150 million in price realization on a year over your basis.
Fred Bolles: And you know, relative to 2024, you know, as we talked about on numerous calls, you know, as the vehicles continue to increase in price, you know, our value prop is that we make those vehicles, you run more efficiently, less repair time, more vehicle up time. Ultimately, you can, you know, get from point A to point B quicker, you can size fewer vehicles in your fleet. So as the, you know, the vehicle is continued advance, whether it's, you know, inflation cost pressures driving that or, you know, outside North America moving up the emissions curve and adding safety features, it just, you know, significantly increases our value proposition.
Fred Bolles: And, you know, we've been in a position to both take advantage of that from a price and a share standpoint. So we're certainly going to continue to monitor, you know, what the, the OEM price actions will look like going into 2024, but we do anticipate, you know, another, you think historically pre pandemic 50 to 100 basis points of price, we do anticipate in 2024, you know, pricing significantly above those historical pre pandemic levels.
Fred Bolles: Thank you, Fred. Thank you.
Ian Zaffino: Our next question comes from the line of Ian Zafino with Oppenheimer. Please proceed with your question. Hey, good afternoon.
Ian Zaffino: This is I think Sal is on for Ian, just to follow up on off highway, you know, does the real from guidance to soon we see off a off highway recover in fourth quarter. You know, or will on highway perhaps make up for some other performance there, given, you know, don't have to see discussed in off highway. Yeah, I think, you know, as Dave commented, you know, on on off highway, you know, our expectation with outside North America is there's been an element of timing, and, you know, we do have, you know, an elevated expectation for, you know, for Q4 and outside North America off highway versus what we saw in Q3.
Ian Zaffino: Related to North America, that's something we're going to continue to closely monitor. You know, North America, you know, on highway, I mean, Dave hit on it, I mean, there's a significant amount of demand for medium duty and class state straight. And, you know, we feel very solid about where that order book is going into the fourth quarter. Great, thanks very much. Thank you.
Tami Zakaria: Our next question comes from the line of Tami Zakaria with JP Morgan. Please proceed with your question. Hi, thank you so much. So my question is on the impressive Bruce Margin expansion, 230 basis points. I think this is the highest you've seen this year. How should we think about it for the fourth quarter and also, how should we think about Bruce Margin in general as you start lapping these expansions next year?
Fred Bolles: Hi, Tami. This is Fred. Obviously I think with us providing full your guide, you can back into the midpoint guide for fourth quarter. We historically, four quarters, been our lowest margin quarter. Obviously, a lot of that is dependent on top line revenue, but North America, you've got the holidays in November and December, which traditionally have a little bit more fixed cost, puts a little pressure on margins in the quarter. As things play forward, there's a lot of moving pieces.
Fred Bolles: We've seen commodity prices come off. That's been added in pages to us, but we continue to see labor pressure through our supply chain. Let's drive and increase this to our value add. As we talked about, still the challenges in the supply chain and some inefficiencies that are out there for us to get after, expedited freight, some manufacturing efficiencies within our facilities, carrying a little bit more inventory than you'd like. Then, obviously, I commented early on where we are from a price expectation. We continue to form our view on 2024 and all those puts and takes will be taken consideration when we provide that initial guide in February.
Tami Zakaria: Great. Thank you.
Gary Rivitz: Our next question comes from the line of Gary Rivitz with Goldman Sachs. Please proceed with your question. Yes, I'm good afternoon.
Fred Bolles: Fred, I'm wondering if you just talk about capital deployment from here, obviously, strong track record of returning cash to shareholders. You end of the quarter. I think with your highest quarterly balance as a public company, so I'm just wondering how you folks are thinking about capital deployment from here and why we've been seeing more significant stock buyback in the quarter given the cash generation. Thanks.
Fred Bolles: Sure, Jerry. I mean, our capital allocation priorities have been consistent. We're going to fund the business for organic revenue earnings growth. You know, focus on new product technology development and you really see that in, you know, the capital expenditures we've had, the engineering R&D, the fact that we kept our foot down on those investments throughout the pandemic, you know, what's out there from strategic acquisitions, but we've returned in a significant amount of capital to shareholders.
Fred Bolles: You know, I mean, we've, you know, repurchased over 60% of our shares. You know, we've raised the dividends in over the last five years, you know, on a dividend payout per share by over 50%. You know, obviously a big driver for us is, you know, always have, you know, you know, to be managed in the balance sheet and have, you know, low cost flexible, prepayable debt structure, you know, long dated maturities.
Fred Bolles: So, you know, as we sit here, the priorities, you know, they haven't changed, you know, we're, you know, at this point, obviously as you mentioned, carrying a little higher cash balance than we have historically, you know, we're also earning, you know, quite a bit higher interest rate than we have historically. But, you know, we'll continue to, you know, ultimately return the cash to our shareholders and, you know, the most opportunistic way.
Fred Bolles: Thanks. Thank you.
Alicia: There are no further questions at this time.
David Graziosi: I would like to turn the floor back over to David Reziosi for a closing comment. Thank you, Alicia. Thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.
Alicia: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. [inaudible]