Q4 2023 Allison Transmission Holdings Inc Earnings Call
Good afternoon, and thank you for standing by.
Welcome to the Allison transmission fourth quarter 2023 earnings conference call.
Camilla: 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.
Camilla: As a reminder, this conference call is being recorded.
Camilla: If anyone should require operator assistance during the conference. Please press Star zero.
I would now like to turn the conference over to Jackie Bowls.
Executive director of Treasury and Investor Relations.
Go ahead Jackie.
Thank you good afternoon, and thank you for joining us for our fourth quarter 2020, Three's earnings Conference call.
With me. This afternoon are David Duffy, our chairman and Chief Executive Officer, and Fred Bully, Our senior Vice President Chief Financial Officer and Treasury.
As a reminder, this conference call webcast in this afternoon's presentation are available on the Investor Relations section of Allison transmission Dot com.
Part of this call will be available through February 27.
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 fourth quarter 2023 earnings press release, and our annual report on Form 10-K for the year ended December 31 2022.
Camilla: Well, there's other general economic sector.
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.
Camilla: 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.
You 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 fourth quarter 2023 earnings press release.
Today's call is set to end at 545 P M. Easter 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.
Camilla: During today's call Dave got to hear people will review highlights from our full year 2023 years.
Fred believe will then review our fourth quarter 2023 financial performance and introduce full year 2024 guidance Dave.
Steve will then close with an update on recent recent announcements across our business prior to commencing the Q&A.
Now I'll turn the call over to defense.
Thank you Jackie and good afternoon, and thank you for joining us 20.
2023 finished on a strong note with fourth quarter net sales accelerating 5% sequentially and 8% year over year fourth quarter increases boosted full year topline performance to a record $3 billion $35 million, an increase of 10% from 'twenty to 'twenty two.
Top line performance for the year was driven by robust demand in our North America on highway end market.
13% year over year attributed to strength in the class eight vocational and medium duty trucks.
We hold a favorable outlook for our largest end market into 2024 and beyond as we believe the market has not fully satisfied pent up demand and upcoming emissions changes in 2020 seven will support our medium duty strength also contributing to our full year performance, we realized an 18% increase.
Camilla: <unk> year over year in our service parts support equipment and other end market leading to record annual revenue of nearly $700 million. We expect continued strength in our aftermarket business driven by aging fleets and increased demand for Allison genuine service parts as warranties for units with <unk>.
From high volume production years in 'twenty, 18, and 2019 expire continuing with our full year 2023 performance. We are pleased with our team's commitment to controlling cost in an inflationary environment and expanding margin, while increasing our earnings power adjusted.
Adjusted EBITDA increased to $1.108 billion for 2023 with adjusted EBITDA margin, expanding 100 basis 180 basis points from 2022.
Net income increased 27% year over year to $673 million finally, we achieved full year.
Camilla: Record diluted EPS of $7 40 up 34% from 2022, as we increased earnings while reducing share count through our capital allocation priorities. We expect to further improve our per share performance, while funding the business for growth and returning capital to shareholders through.
Our quarterly dividend and share repurchase program.
In the fourth quarter of 2023, we repurchased over $100 million worth of our shares bringing the total for 2023 to over $260 million and ending the year with almost $800 million of authorized share repurchase capacity remaining shares.
<unk> in 2023 represent nearly 6% of outstanding shares with over 63% of our outstanding shares repurchased since our IPO in 2012.
Camilla: Thank you and I'll now turn the call over to Fred Thank you Dave.
Following Dave's full year 2023 results comments I'll discuss the Q4 2023 performance summary.
And the Q4 2023 cash flow performance.
I will then introduce full year 2020 for guidance.
Please turn to slide five of the presentation for the Q4 2023 performance summary.
Year over year net sales increased 8% from the same periods in 2022 to a fourth quarter record of $775 million.
Camilla: The increase in year over year results was led by a 14% increase in the North American on highway end market due to continued strength in demand for class eight vocational and medium duty trucks and a 34% increase in net sales in the defense end market, principally driven by increased demand for tracked and wheeled vehicle applications.
Year over year year over year results were also improved by 31% increase in net sales in the outside North America off highway end markets, principally driven by higher demand in the mining sector.
Camilla: Gross profit for the quarter was $371 million, a 10% increase from $338 million for the same period in 2022. The increase was principally driven by increased net sales and price increases on certain products, partially offset by higher direct material cost.
Camilla: Net income for the quarter was $170 million, an increase of 21% from $141 million for the same period in 2022, the increase was principally driven by higher gross profit.
Camilla: Adjusted EBITDA for the quarter was $277 million compared to $245 million for the same period in 2022, the increase was principally driven by higher gross profit.
Camilla: Diluted earnings.
Camilla: Earnings per share increased 26% to $1.91 from the same period in 2022.
Driven by higher net income and lower total shares outstanding.
Camilla: A detailed overview of our net sales by end market.
Camilla: In Q4 of 2023 financial performance can be found on slides six and seven of the presentation I'll now turn to slide eight of the presentation for the Q4 2023 cash flow performance summary.
Adjusted free cash flow for the quarter was $186 million compared to $132 million for the same period in 2022.
The increase was principally driven by lower capital expenditures higher gross profit and lower operating working capital funding requirements.
During the fourth quarter, we paid a dividend of 23 cents per share and repurchased $105 million of our common stock. We ended the quarter with a net leverage ratio of 1.8.
Camilla: Times $555 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.
About $2 5 billion of outstanding debt $618 million is subject to variable interest rates of which $500 million is hedged, resulting in 95% of our debt being fixed through the third quarter of 2025.
Please turn to slide nine of the presentation for the 2020 for guidance.
Camilla: For 2020 for Allison expects net sales to be in the range of $3.050 billion to $3.150 billion, we're guiding to another record net sales a year.
In addition to al since 2024 net sales guidance, we anticipate net income in the range of $635 million to $685 million.
Adjusted EBITDA in the range of $1.070 billion to $1.130 billion.
Camilla: Net cash provided by operating activities in the range of $700 million to $760 million.
Capital expenditures in the range of $125 million to $135 million in.
And adjusted free cash flow in the range of $575 million to $625 million.
Thank you and I'll now turn the call back over to Dave for an update on recent announcements. Thank you Fred the 'twenty 'twenty four outlook for North America on highway end market remains robust as infrastructure spending is expected to continue to support class eight vocational demand.
Last month, we made two notable announcements related to this end market first we were pleased to announce that our $100 million incremental annual revenue opportunity in the class eight regional haul and day cab market continues to progress as one of the largest global logistics and delivery companies has specified allison's third.
For 2014 regional haul series as the propulsion solution of choice.
Global logistics and delivery company is purchasing Freightliner Cascadia CMG tractors equipped with Allison is $34 14 RHS for their fleet.
Last year Daimler released our 34 14, RHS paired with a C. N G engine into their Freightliner Cascadia day cab tractor highlighting the benefits of our new product and the fuel agnostic nature of Allison's conventional transmissions second in our North America on highway end market, we were pleased to.
Announced that Alison was selected as the exclusive electric axle supplier for Oshkosh Corporation's new fully integrated electric refuse collection vehicle Allison's EJ and power 100 as has been integrated into iced coffees vocational trucks, specifically designed for the waste management.
Industry in order to minimize environmental impact and reduced noise.
The electric refuse collection vehicle or E RCV, well utilized to Allison EJ and power 100 S E axles in tandem configuration, while delivering cleaner air and quieter operation, where deploy Allison has already established propulsion leader in the North America refuse market.
And we look forward to maintaining our leadership position now and into the future.
Our our outside North America on highway end market is expected to have another record year in 2024 with revenue guidance of 14% year over year at the midpoint. After a record year in 2023, we anticipate continued strength driven by the execution of our growth initiatives.
Month, we announced a strategic partnership agreement with Sony and global heavy equipment manufacturer for mining and construction markets through.
Through the partnership Alison will supply its family of off road series and wide body.
Yup series transmissions for integration into mining vehicles, including the next generation Sonic S. K T 105 wide body mining that this partnership will support Allison's 100 million dollar incremental annual revenue opportunity and strategically aligns with our efforts to grow share in the mining dump.
Market in Africa, Asia, and South America, as part of our outside North America on highway growth initiatives.
Camilla: For our defense end market the fourth quarter was a decade high quarter with revenue of $63 million full year revenue of $166 million, an increase of 14% from 2022 was a solid start toward achieving our $100 million growth initiative.
We expect continued growth in this end market in 2024, as we capitalize on the defense up cycle, both internationally through our increased defense investments globally amidst geopolitical uncertainties and domestically through our opportunities with the United States modernization programs as well as increased inter.
National sales to the U S Department of defense.
Allison remains committed to investing in and pursuing growth in our defense end market, leveraging our asset light business model and long standing relationships with defense Oems as a competitive advantage. We are realizing our investments and are poised for success with a well rounded portfolio of products to satisfy the needs and.
<unk> of global defense customers today.
Today I would like to highlight the recent announcement that Alison was awarded over $83 million to provide upgraded our Nu X 1100 transmission supporting Abrams main battle tank variance used by the U S Army as well as foreign military sales or Fms customers Alan.
Camilla: Alison has long supported the U S Army and its close partners and is proud to be part of the world's Premier main battle tank, we look forward to continuing our partnerships and supported these customers in the decades to come.
In addition to the announced since we have made in our defense end market over the last few years. We are looking forward to a pipeline of programs in the near future, particularly in global wheeled applications. These programs will drive further growth in our defense end market and we look forward to updating you as timelines advance moving on.
The Allison.
Ventures team is focused on increasing our innovation pipeline and supportive of our industry.
Camilla: Technology advancement and expanding our global strategy and evolving the mobility market, we look forward to investing in technologies to grow our portfolio and further our mission our mission to improve the way the World works in closing 2023 was a solid year of topline records and margin expansion, while returning capital to shareholders.
Camilla: We continue to invest in the development of new products and technologies across all of our end markets in order to drive growth.
Our 2023 results and future outlook demonstrate the power of Allison as we continue to make strides forward to realize our growth initiatives and develop the next generation of propulsion solutions that meet the challenges of tomorrow and insurers ensure sustainable growth for our business.
This concludes our prepared remarks Camilo. 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 and.
And you May press star two if you'd like to remove your question from the queue.
Camilla: For participants.
It may be necessary to pick up your handset before pressing the star keys.
Again in the interest of time, we ask that you limit please limit to one question.
Our first question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.
Thank you good evening everybody.
So my question was going to be on North America on highway just to start with.
We saw Cummins guide on medium duty sort of flat to down five so in line with what you did I don't think we have a great look into class eight straight and I'm, just curious about how youre seeing those markets and whether the outlook is in line with current production in line with first half build or whether it assumes.
Acceleration or deceleration from what you've seen in your current order book. Thank you.
Camilla: Hey, Rob it's Steve So a couple of things there so.
Medium duty to start with.
We certainly had a strong result in 'twenty three as we mentioned in the prepared remarks.
It's a space that continues to be in what we referred to as catch up mode.
Some fleets are in better shape than others, but I would say overall it continues to be a market that has a fairly healthy demand.
Camilla: We talk about the class eight straight truck or vocational as we referred to.
That's been relatively on supply and I think as you know a number of constraints.
Camilla: Based on the public.
Comments by the Oems I think that's relatively consistent with what what youre hearing from them as well. So I think that'll be a was a focal point for for many coming into.
The latter part of 'twenty three and certainly at 24 is starting its also typically a seasonally.
Camilla: Strong portion of the year for vocational anyway. So.
I think that emphasis is expected to carry through for a good portion of 24 to your question on timing again, I think that's largely going to be dependent on.
The availability for all the components to make the trucks you know as we've talked about it takes all of them to deliver a compelling.
Complete vehicle and I think Thats one.
A particular attribute as you think about trying to understand how the year is going to play out where the supply base is really capable of performing and ultimately delivering so.
Camilla: Everything we're hearing is certainly strong demand as I said for class eight vocational.
With the intentions of Oems to supply that demand. So we stand ready to do that and certainly prepared to support the industry as best we can.
Okay.
Speaker Change: Okay. Thank you.
Our next question comes from the line of.
Ian Zaffino with Oppenheimer. Please proceed with your question.
Hey, good afternoon. This is <unk> thousand entre Ian yes, congrats on a really strong quarter and year.
Ian Zaffino: Could you help us understand the expectations for volume and price mix, maybe in North America on highway for the year.
Where do we stand on pricing.
As we start this year and your expectations sort of implied in guidance. Thanks.
Hi. This is a this is fred relative to.
Pricing I mean.
Speaker Change: Just to start really with was 2023.
We actually realized 540 basis points of price on a year over year basis.
$155 million of price.
Speaker Change: And that was really up from our initial guidance assumption, which was $400 million. So we continue to as we progressed through 'twenty three to pursue price.
Well, if you take that and you couple that with what we did in 2022.
We've realized in 24 months $275 million of price.
Or 1000 basis points of price.
As we are looking at 2024, we're currently anticipating approximately 200 basis points of price.
I think as most of you aware over 90% of our North American on highway end market. Our largest end market is covered by long term agreements with defined pricing. So yes.
Speaker Change: As we progress through these really high inflationary times, we've certainly honored those agreements.
But looking out to 2025 over 60% of the North American on highway end market will be available to price. So as we've mentioned in previous earnings calls.
The OEM prices increase our value proposition to the end user continues to increase.
So yeah. So it's the vehicle prices continue to increase whether thats inflationary cost pressure outside North America, and moving up the emissions.
Curb and adding safety features we are really well positioned to both take advantage of this from a pricing standpoint, but also from the a market share standpoint.
Yes.
Okay, great. Thank you very much.
Our next question comes from the line of Tami Zakaria with Jpmorgan. Please proceed with your question.
Tami Zakaria: Hi, and good afternoon, how are you.
Tami Zakaria: So my question is around the off highway.
Tami Zakaria: Mark is I think the growth expectations in North America versus outside North America.
Tami Zakaria: That market is.
Pretty you know different.
Defense wide one positive one negative so.
I would understand what what's the what's driving those expectations for each other.
That market.
Tommy It's Dave I appreciate the question there so.
Take the regions.
North America first is as you know North America off highway is largely a.
Energy market you know as we mentioned I think certainly second half last year.
With the continued capital discipline, which is we would we would.
Tami Zakaria: Our view is very much a regulatory and capital markets consider it by.
And users and generally I think the energy space. What you are seeing is a continued high level of capital discipline to maximize cash flow and returns.
Commodity prices are obviously supportive.
As we talked about we view the market is relatively well.
A quick thing capacity <unk>, a new rig.
Tami Zakaria: Builds we saw on the conventional side.
Tami Zakaria: Very limited at this point, so you're seeing some level of refurb some new.
Tami Zakaria: Components going into that particular market, but it's from our perspective very well.
Supplied.
Again, as we talked about second half of last year with that as a backdrop not expecting much in terms of increased <unk>.
Demand there until there is a higher level of equipment that's consumed.
Frankly, which is still in front of us but in this medium term.
Tami Zakaria: I really look at a largely a refurb replacement type of market.
Outside North America for US is a combination of energy and mining construction hauling et cetera that continues to be a relatively busy market.
Coming into the second half of last year, and certainly fourth quarter.
Tami Zakaria: There were some challenges out there in terms of executing.
Tami Zakaria: Against some tenders by the Oems so.
If you think about that in terms of what's actually happening in the underlying market trying to catch up with some level of demand. There. So that's an aspect of 24 as.
As we start the year.
And again I think the general.
Tami Zakaria: Overall market macro conditions for our outside North America off highway business can continue to be.
Relatively strong so we will do our best again.
To supply I think some of that though it gets back to ultimately the broader industry's capability in terms of.
Total components supply meeting demand from a time perspective, so again, we will do our best but we still see that as a relatively strong market.
Great. Thank you.
Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.
Angel Castillo: Alright. Thanks for taking my question just wanted to get a little bit more color you talked about the 200 basis points of price. If we could just kind of walk that through.
Maybe more price cost dynamic and what you kind of anticipate from a margin standpoint, and maybe continuing to flow through the <unk>.
<unk> payments.
Angel Castillo: U S growth and at the sales level, but.
Ultimately net income comes down and free cash flow seems a little bit lower year over year. So can you just help us understand the puts and takes there.
Looking at the kind of impacting each of those pieces.
Angel Castillo: Sure.
Joe This is Fred from a from a cost standpoint in our 2020 for guide.
Does reflect the increased costs associated with the new UAW collective bargaining agreement.
Fred: With the majority of those incremental costs associated with the new labor agreement being incurred in 2024.
Also from a material cost standpoint.
We're anticipating higher material costs.
Fred: Principally driven by increased value add in our supply chain and that's really as a result of increased labor cost within our supply chain.
Sure.
So those are the two primary drivers from a.
From a cost standpoint, as you mentioned.
Fred: <unk>.
We're modeling a couple of hundred basis points of price.
And have you know EBITDA basically flat on a year over year basis.
Okay.
Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.
Thanks, Good afternoon, Fred I just wanted to go back to a comment you made earlier about that I think you said, 65% of the North American LTE assays will come up for renewal I I for memory, that's a much bigger percentage.
What I recall, they tend to be more staggered but from.
From a timing perspective. It is also interesting is its coming on that front and are you now.
Fred: Leading up to potentially one of the larger percentage increases in terms of.
What the vehicle costs.
We're set to increase just given the emissions. So I guess, it's just how youre approaching that.
The vehicles and whats your transmissions her being put into our set to increase pretty significantly so how might that inquiry or kind of influence how you approach those.
Fred: I guess those negotiations.
Yeah, Tim this is Fred so.
Fred: You did hear hear me correctly, so over 60%.
The book of business for North America on highway.
End market, which is obviously, our largest end market over 50% of our revenue will be available for price and Theres reason, obviously called that out at a well.
Well they've been.
Fred: No.
Fred: Relatively consistent in the way they've been staggered you know there are typically four to five years in nature.
There are more that will be negotiated as a in the second half of 2024 for for pricing in 2025.
To your comments relative to <unk>.
Fred: To where the market is where the cost of vehicles are certainly something that you know.
We pay close attention to you know ultimately we price our product for the value that it delivers in the market.
And as we've.
Fred: I think on three or four earnings calls in a row highlighted that value that we deliver is up significantly because the price of the vehicles are up.
Fred: R.
Fred: Our transmissions our products make those vehicles run more efficiently and.
You get more work done in a day to get from point a to b.
You don't have the maintenance cost save on maintenance cost, but you don't have the downtime, it's a lot easier to train drivers and retain drivers in a tough labor market, but ultimately you can size fewer vehicles in your in your fleet. So.
So we definitely believe that we're in a position where we have a significant amount of pricing power.
Fred: And that will be taken into consideration.
As we negotiate a new long term agreements.
Alright, Thank you Fred.
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good afternoon, everyone.
I'm wondering if you could just say more about the margin outlook for it.
Jerry Revich: 2024, generally at the mid point sales and EBIT outlook Youre looking for kind of a.
Pretty close to flattish margins you spoke about the price assumptions can you just flesh out.
The other moving pieces and if you folks were to surprise to the upside what what would those levers looked like.
Sure sure Jerry this is Fred again.
Really walking through.
Fred: From a from an engineering SG&A standpoint.
Flat to slightly up with just some some inflationary pressures.
Sure.
Yes, I think to.
To the upside.
Fred: I think this gets to Dave's comments earlier.
The demand is really strong.
Fred: Doing this situation where can the entire vehicle supply chain.
The proper parts to the Oems to build.
Fred:
Clearly they are building less over the road tractors.
And are focused on building, where they have strong demand, which fortunate for us is right in the middle of our core addressable market medium duty class eight straight truck so.
I think the upside to margins will be stronger top line revenue and as you know we are very very attractive incremental margins. So.
That's what will drive the upside that's unfortunately.
Not entirely in our control, we will control, what we can and will be positioned to supply our products.
Fred: But yeah, that's the biggest upside in the guide that we put in front of you guys today.
Thanks.
Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.
Alright.
For one here.
Maybe I'll just ask just a friday from the standpoint of product mix.
With defense seeing another outsized growth year.
That that business can carry.
The margin dynamics can be.
Might vary depending on whether it's a detail selling to the Dod or international.
Customers. So maybe just a word in terms of how that is that historically a lot of that I guess in March on the wheel or on the track side would be.
A headwind to margins, but just how are we thinking about the impact from this.
Growth in defense and the implications just in terms of the overall impact to mix. Thank you.
Yes, Tim Thanks This is Fred.
As you mentioned, we do have defense you know.
Got it.
Midpoint, 34%.
Fred: Yeah.
And historically, our defense business, especially attractive fence to the U S. Government has been our lowest margin business cost plus fixed fee.
But as we've continued to expand the business you know over half of that track business is being driven by outside North American sales.
Where it's really a commercial negotiation.
So.
We look at that increased 34% certainly don't expect it to be a negative drag on on EBITDA margins.
Fred: Okay.
Okay. Thank you okay. Thank you.
Okay.
Thank you there are no further questions at this time and I'd like to turn the floor back over to chairman and CEO, Dave <unk> for closing comments.
Thank you Camilla. Thank you for your continued interest in Allison and for participating on today's call enjoy your evening.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
Fred: Oh.
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Fred: Hum.
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