Q4 2024 Allison Transmission Holdings Inc Earnings Call
Paul: Good afternoon. Thank you for standing by. Welcome to Allison Transmission's fourth quarter 2024 earnings conference call. My name is Paul and I will be your conference operator today. At this time all participants are in a listen-only mode.
Paul: After prepared remarks, Allison Transmission Executives will conduct a question and answer session, and conference call participants will be given instructions at that time.
Paul: As a reminder, this conference call is being recorded. If anyone should require operator assistance, please press star zero on your telephone keypad.
David: I would now like to turn the conference over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie. Thank you, David.
Jackie Bolles: Thank you, Paul. Good afternoon and thank you for joining us for our fourth quarter 2024 Earnings Conference Call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer, and Fred Bolle, our Chief Operating Officer, Chief Financial Officer, and Treasurer.
Jackie Bolles: As a reminder, this conference call, webcast, and this afternoon's presentation are available on the Investor Relations section of AllisonTransmission.com. A replay of this call will be available February 25th.
Jackie Bolles: As noted on slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations.
Jackie Bolles: These forward-looking statements are subject to known and unknown risks, including those set forth in our fourth quarter 2024 earnings press release and our annual report on Form 10-K for the year ended December 31, 2023.
Jackie Bolles: 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 expressed today.
Jackie Bolles: In addition, as noted on slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC.
Jackie Bolles: You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our fourth quarter 2024 earnings press release.
Jackie Bolles: Today's call is set to end at 5.45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst.
Jackie Bolles: Please turn to slide 4 of the presentation for the call agenda.
Jackie Bolles: During today's call, Dave Graziosi will review highlights from our full year 2024 results.
Jackie Bolles: Fred Bolle will then review our fourth quarter 2024 financial performance and introduce full year 2025 guidance. Dave will then close with an update on recent announcements across our business prior to commencing the Q&A.
Now, I'll turn the call over to Dave.
Dave Graziosi: Thank you, Jackie. Good afternoon and thank you for joining us.
Dave Graziosi: I would like to start by thanking the Allison team and all of our partners for their support in making 2024 another record year as we achieved all-time high net sales of $3.2 billion.
Dave Graziosi: In our North America on-highway end market, demand for our 3- and 4000-series products drove full-year net sales to a record $1.8 billion, an increase of 15 percent from 2023.
Dave Graziosi: We have invested in our operations and supply chain to increase output for these products and look forward to another notable year in 2025 as we anticipate ongoing U.S. infrastructure spending to drive continued strong demand for Class VIII vocational vehicles.
$212 million
Dave Graziosi: Through the expansion of our product offerings and heightened geopolitical uncertainty across the world
Dave Graziosi: We expect continued growth in this end market. Also contributing to our full-year performance in 2024, we achieved record net sales of $493 million in our outside North America on-highway end market.
Dave Graziosi: Our wide-body mining dump truck initiative, representing $100 million of incremental annual revenue opportunity, continues to drive growth in this end market.
Dave Graziosi: We are pleased with the progress of this initiative ending 2024 with realization of around half of the opportunity.
Dave Graziosi: Finally, in addition to the significant top-line performance in 2024, Allison's full-year earnings per share increased to a company record diluted EPS of $8.31, up 12% from 2023.
Dave Graziosi: We look forward to continued growth in our business while increasing earnings and maintaining our well-defined capital allocation priorities. Thank you. I'll now turn the call over to Fred.
Fred Bolle: Thank you, Dave. Following Dave's full year 2024 results comments, I'll discuss our fourth quarter financial performance and introduce our full year 2025 guidance.
Fred Bolle: Please turn to slide 5 of the presentation for the Q4 2024 Performance Summary.
Fred Bolle: The increase in year-over-year results was led by a 10% increase in the North American on-highway end market, principally driven by strength in demand for Class VIII vocational vehicles and price increases on certain products.
Fred Bolle: Year-over-year net sales were further improved by a 5% increase in net sales in the service parts, support equipment, and other in-market, principally driven by price increases.
Fred Bolle: Finally, year-over-year results were improved by an 8% increase in net sales in the defense and market. The increase was principally driven by increased demand for tracked vehicle applications.
Fred Bolle: Gross profit for the quarter was 373 million dollars, an increase of two million dollars from 371 million dollars for the same period in 2023. The increase in gross profit was principally driven by price increases on certain products, partially offset by higher manufacturing expense.
Fred Bolle: The increase was principally driven by lower selling general and administrative expenses, lower interest expense net, and higher gross profit partially offset by unfavorable foreign exchange.
Fred Bolle: Adjusted EBITDA for the quarter was $270 million compared to $277 million for the same period in 2023.
Fred Bolle: Diluted earnings per share increased 5% year-over-year to $2.01. The increase was driven by higher net income and lower total diluted shares outstanding.
Fred Bolle: Adjusted free cash flow for the quarter was $136 million compared to $186 million for the same period in 2023. The increase was driven by lower net cash provided by operating activities and higher capital expenditures.
Fred Bolle: In 2024, we generated $658 million of adjusted free cash flow. A portion of this excess cash was used to delever the business as we paid down over $100 million of existing term loan debt.
Fred Bolle: We ended the year with a net leverage ratio of 1.4 times, 781 million dollars of cash, and 744 million dollars of available revolving credit facility commitments.
Fred Bolle: We continue to maintain a flexible, long-dated, incumbent-like debt structure with our earliest maturity due in October 2027.
Fred Bolle: In addition to repayment of debt, we continue to return cash to shareholders through our quarterly dividend.
Fred Bolle: Our current quarterly dividend of 25 cents per share has increased 67% over the last 5 years.
Fred Bolle: We also maintained our focus on returning cash to shareholders through our share repurchase program, ending 2024 with over $500 million of authorization remaining.
Fred Bolle: Under the repurchase program, we repurchased over 1% of our outstanding shares in the fourth quarter, bringing the total repurchase amount in 2024 to over $250 million.
Fred Bolle: For the year, we repurchased shares at a weighted average price of $88 per share.
Fred Bolle: Since the IPO in 2012, we have repurchased over 63% of our outstanding shares. We continue to view share repurchases as an opportunistic and appropriate use of cash at current share prices.
Fred Bolle: Even after our outperformance in 2024, we believe Allison is deserving of a valuation that is more aligned with other publicly traded premier industrial assets.
Fred Bolle: Given our robust and stable cash generation, in addition to our market position and comparative margin performance.
Fred Bolle: We're committed to continuing our longstanding history of delivering premier products that are recognized by name and desired by customers for quality, reliability, durability, and we're excited to further grow our business while continuing to deliver our brand promise to provide the most reliable and valued propulsion solutions in the world.
Fred Bolle: With that being said, please turn to slide 9 of the presentation for initial 2025 guidance.
of $735 to $785 million.
Adjusted EBITDA in the range of $1,170,000,000 to $1,230,000,000.
Fred Bolle: Net cash provided by operating activities in the range of $800 to $860 million.
Fred Bolle: Capital Expenditures in the range of $165 to $175 million Adjusted Precast Flow in the range of $635 to $685 million
Fred Bolle: Thank you, and I'll now turn the call over to Dave for an update on recent announcements.
Dave Graziosi: Thank you, Fred. Last month, we announced the debut of our 6,000-series transmission specifically for wide-body dump, or WBD, applications, originally designed for heavy-duty vehicles, including off-highway trucks.
Dave Graziosi: oil field rigs and cranes. This transmission now supports higher tonnage WBD trucks, reaching a maximum gross vehicle weight of up to 136 metric tons.
Dave Graziosi: Accompanying this release, we also announced our partnership with XCMG, one of the largest construction machinery manufacturers in the world, for the release of our Terratran in their XG110 WBD trucks.
Dave Graziosi: An uprated variant of our proven 4000 series transmission, the Terratran is purpose built for global construction and mining markets.
Dave Graziosi: As the WBD truck market continues to expand and evolve, Allison is committed to continually updating our products to provide customers with their broader portfolio of solutions based on their unique needs.
Dave Graziosi: The release of our 6625 WBD transmission and introduction of the Terratran into the same segment marks yet another milestone in support of our realization of our $100 million of incremental annual revenue opportunity.
as discussed in my opening remarks.
Dave Graziosi: Our defense and market continues to drive growth in our business as we capitalize on the defense upcycle, both internationally through increased defense investments globally amidst geopolitical uncertainties, and domestically through opportunities with the United States modernization programs.
Dave Graziosi: as well as increased international sales through the U.S. Department of Defense.
Dave Graziosi: and new X1100 transmission supporting Abrams main battle tank variants used by the United States Army as well as foreign military sales customers.
Dave Graziosi: Allison has long supported the U.S. Army and its close partners and is proud to be part of the world's premier
Dave Graziosi: main battle tank. We look forward to continuing our partnerships and support of these customers in the decades to come.
Dave Graziosi: In closing, 2024 was a solid year of top-line records and a demonstration of Allison's commitment to our capital allocation priorities.
Dave Graziosi: Our 2024 results and our 2025 guidance demonstrate the power of Allison as we continue to capitalize on opportunities in our end markets and make strides towards the realization of our growth initiatives.
Paul: This concludes our prepared remarks. Paul, please open the call for questions.
Speaker Change: Thank you. We'll 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 tone will indicate your line is in the question queue. You may press star 2 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 poll for questions.
and David Graziosi. Thank you.
Speaker Change: Thank you. Our first question is from Tammy Zakaria with J.P. Morgan. Please proceed with your question.
Tammy Zakaria: Hey, thank you so much. So my question is on the North America on-highway guide. I think you're expecting 1% growth.
Tammy Zakaria: Could you give us some color on how much of volume versus price is embedded in there? The reason I ask, I think I heard you say pricing for the enterprise would be about 400 basic points, so just trying to understand what that could look like for North America on highway.
Fred Bolle: Hi Tammy, this is Fred. So you're correct in our prepared remarks we talked about 400 basic points of price across our business.
Speaker Change: You know, we've secured price across, you know, all of the end markets. Certainly, as we've talked about previously, a large portion of the North American on-highway markets did have expiring long-term agreements.
Fred Bolle: and we've talked about the value that we've delivered and we have executed agreements with all those customers.
Fred Bolle: What I would tell you is that traditional long-term agreements have been between three to five years. These have leaned toward the shorter duration and they have positive pricing in each year of the contract.
We certainly have the volume, you know, the expectation down.
Fred Bolle: you know the vehicle OEMs that have announced in front of us their views as well as you know certain engine manufacturer and then industry forecasters as well.
Understood. Thank you. Very helpful.
Fred Bolle: Thank you. Our next question is from Tim Fine with Raymond James. Please proceed with your question.
Tim Fine: Thank you. Maybe Fred, just to continue on that thread, those LTSAs historically have had other...
components to them, obviously, beyond pricing. I'm curious, obviously, I...
Tim Fine: Not the ideal forum to get into, you know, individual contractual agreements, but are there other things beyond, whether it's, you know, content or share, other things that you would highlight?
Tim Fine: that as we think about kind of what these these contracts may entail beyond just what we know about as you just mentioned One year pricing anything else you would find there. Thank you
Sure, Tam. It's Fred again.
Fred Bolle: There are a lot of different components. I think with what's topical in the news, it's probably important to highlight that the vast majority of these contracts have commodity pass-throughs, both up and down.
Fred Bolle: If you think about, you know, our exposure to, you know, aluminum and steel.
Fred Bolle: About two-thirds of the aluminum is passed through through long-term contracts with our OEM customers and closer to 80...
Fred Bolle: Sorry, about two-thirds of steel and closer to 80% of aluminum is passed through long-term contracts, but there are certain, you know, other components within those agreements that are, I think, you know, advantageous to both us and our OEM customers.
Speaker Change: Thank you. Our next question is from Kyle Mendez with Citigroup. Please proceed with your question.
Kyle Mendez: Within that, it would just be helpful to hear just kind of roughly what you're thinking about medium duty versus class 8 straight trucks and those volumes up or down for 2025. Thank you.
Dave Graziosi: Hi Kyle, it's Dave. Thank you for the question. So pretty straightforward as Fred mentioned.
Speaker Change: 24, I think to Fred's comment as well, a number of the OEMs have already publicly reported.
Speaker Change: Well supplied versus a few years ago in terms of overall market position. So we've we've certainly reflected that
Speaker Change: in our guidance relative to vocational, as you know, I mentioned the prepared comments, continue to expect.
David Graziosi, CFO Alphabet and Google
Speaker Change: We don't, at this point, expect a significant change in terms of overall capacity numbers for the industry in terms of vocational. I think, as we've talked about several times,
David Graziosi, CFO Alphabet and Google
Speaker Change: Vocational, certainly different than what medium duty is currently positioned at. So, I'd say overall, short answer, medium duty, softer year over year, vocational more or less the same of what we've seen here over the last 12 to 18 months.
That's helpful, thank you.
Speaker Change: Our next question is from Rob Wertheimer with Mellius Research. Please proceed with your question.
Speaker Change: You know at this point there's really nothing we need to do from a debt financing. Your nearest maturity is October of 2027.
Those are callable at PAR.
beginning in the third quarter, October in effect,
But, you know, relative to capital allocation, I mean, the
Speaker Change: The playbook is the same. First and foremost, as you know, we're going to fund the business for organic revenue, earnings growth.
Speaker Change: We're certainly always looking from a strategic acquisition, is there something that's better inside of Allison than out? But we're always focused on returning capital to shareholders.
Speaker Change: With the dividend now, we've increased the dividend five years in a row, and as we mentioned in our prepared remarks, we've turned a significant amount of capital via share repurchases.
Speaker Change: And we also called out, you know, in our prepared remarks that we do look at, you know, our current valuation and feel like we are significantly undervalued and, you know, that repurchasing shares is a very good return.
Thank you.
Thank you. Thank you. Thank you.
Speaker Change: Our next question is from Ian Zaffino with Oppenheimer & Company. Please proceed with your question.
Ian Zaffino: I agree. Thank you very much for all the color. Question for you on FX. What are sort of the FX headwinds, tailwinds? Just walk us through that a little bit because I know you kind of have a reverse relationship at the end, but you know, which actually seems to be strengthening.
Ian Zaffino: Give us a sense of what the headwinds are, Catalyn, et cetera. Thanks.
Traditionally, we're relatively naturally hedged.
Certainly, you know the currencies we're exposed to, but...
Ian Zaffino: The purchases in yen versus the expense in yen, versus the revenue, isn't what hits us significantly. What will hit us is balance sheet revaluations.
Ian Zaffino: 23, negative on FX. So that hit us from an even margin, close to 100 basis points. So that's really where it's gonna move.
Ian Zaffino: As the dollar strengthens and we're holding assets in foreign currency, you can get potential revaluations. It tends to move around, but specifically for this quarter, both on a sequential and a year-over-year basis, it was more negative than the normal experience.
Thank you.
Thank you very much.
David Graziosi. Thank you.
Speaker Change: Our next question is from Angel Castillo with Morgan Stanley. Please proceed with your question.
Angel Castillo: Hi, thanks for taking my question. Maybe this one's for Fred.
Angel Castillo: as well as kind of areas to drive, you know, incremental operational efficiency. And just kind of related to that, does the new administration's policies accelerate or give you pause?
Angel Castillo: in terms of where you might be or kind of the next steps you might be taking in terms of investments or efficiency, just a long-winded way of saying, you know, what's your ability to kind of expand margins via self-help.
A lot in there, Angel.
Angel Castillo: Yes, back to June when I took on the additional responsibilities, having said that, Dave and I have been working hand-in-hand for 17 years, certainly the type of activities we've been working on, the announced investment in India.
And, you know, when you think about that, it's...
Angel Castillo: Build $3,000, $4,000, best cost country from a fabrication standpoint, that's a couple year process.
Angel Castillo: We've started investing, obviously, yet this year. The step up you saw in CapEx is driven by that project, and we'll continue into.
Angel Castillo: He talked about the new administration, it's, I think, still a lot to be discovered, but I think when you think about the way we've invested in electrification, and we've done it in a meaningful way, but measured.
Angel Castillo: and had, you know, really been, you know, focused on, you know, the right products when the market was going to be available. I think that really positions us well, you know, versus our competition.
You know, there's a lot of unknown clearly.
Angel Castillo: The vast majority of our products in North America. So with the new administration, you know, I think that the type of activity that they're looking to reward via their policies are things that we're already doing, and I think we're well prepared to prosper in that environment.
Angel Castillo: I would say, as we look farther down the road, and Dave and I have our conversations, really one thing we're focused on is just getting back to the operational level of efficiency we had pre-pandemic.
There's still a lot of challenges in the supply chain.
Angel Castillo: You've had a tremendous amount of turnover in employees. So it's really getting back to that level of performance.
Angel Castillo: that we've demonstrated we could do and feel that we are entitled to.
Very helpful, thank you.
Speaker Change: Our next question is from Luke Young with Baird. Please proceed with your question.
Luke Young: Good afternoon. Thanks for taking the question. Fred, just hoping you could double click on the moving pieces in the outside North America on highway guidance. I know trends have been kind of uneven by geography recently in that business, but just trying to square the bloodshot look with the more open-ended nature of that business's growth trajectory longer term, and I think what's a kind of year-in, year-out target of double-digit kind of growth there. Thank you.
Thanks, Luke. And yeah, you start with...
Luke Young: As Dave mentioned earlier, we've been having quite a bit of success in the white-body mining dunks produced in China, now also produced in India.
and really being distributed broadly across the globe.
Luke Young: You know, we had a really good year in Japan in 2024. Some of that was driven by some pull-ahead volume associated with regulations and emissions changes in Australia.
Luke Young: That'll be, you know, a challenge we'll need to overcome as we continue into 2025 within Western Europe.
The truck was very soft last year.
But we've secured a lot of wins in wheel defense.
Luke Young: As we look out to 2025, the truck market feels a lot like 2024, but can we continue to outgrow there with success in bus and wheeled defense?
Luke Young: Down in South America, very excited about what our Brazilian team's doing, penetrating the school bus market.
and that's something that's...
Luke Young: We've been working on it for four or five years and finally secured a portion of that rather large business and plan to continue to expand on that in 2025.
Luke Young: South Africa that we're very focused on, you know, secured line releases.
You know, refuse pickup and delivery applications.
Luke Young: But, you know, having said all that and a lot of really good work that's driving penetration, the backdrop is just fewer commercial vehicles expected to be built in 2025.
Luke Young: Again, our guide to 0%, but trust me, the team is very focused on exceeding that.
Got it. Great comment. Thank you, Trent.
Speaker Change: Our next question is from Jerry Rebich with Goldman Sachs. Please proceed with your question.
Speaker Change: Esperational Comps is just the organic growth track record and M&A track record. I'm wondering, as we think about Allison, within that context, how should we be thinking about the go-forward paradigm versus history?
Speaker Change: I think you hit on some of them. Obviously, it would be our ability to outgrow our markets.
I think the consistency of our cash flow stream.
Speaker Change: A significant amount of our business, 30-40%, runs through municipalities which continue to buy in downturns.
Speaker Change: Our ability to continue to drive our margins higher, we are obviously guiding to margin up this year, year over year with volume down, guiding to margin up 80 basis points versus 2024.
Thank you.
Speaker Change: I think those are the things that separate us, and then we look at the peer set.
Well, we've had a tremendous run and...
Speaker Change: In stock valuation, primarily as the overhead of EVs rolled off, we're not back to where we used to be. You know, we're maybe nine and a half.
Thank you.
Speaker Change: nine and a half turns on EBITDA where we used to be 12. We look at premier industrials that are 18, 20 times EBITDA and see no reason why we shouldn't carry that type of valuation.
Speaker Change: 25 in terms of true underlying inflation versus allocated production costs as volumes are down in parts of the business. Can you just help us understand that a bit?
Speaker Change: When we look at where we are right now, we have manufacturing costs down year over year.
We do have...
You know our purchase components up
our assumptions on, you know, on raw material.
Speaker Change: which were really anything from a free, you know, tariff standpoint. We did have, you know, raw material inflating as the year progressed, and, you know, some negotiated price increases from our suppliers.
Speaker Change: That's where we're seeing cost pressure. Now, certainly, we've got inflation embedded within …
Speaker Change: Manufacturing but we also have performance embedded and you know we're you know guiding to less volume rolling through our facilities and as we mentioned and we took the vast majority of the UAW contract increases in 2024.
Speaker Change: So, you know, rolling out for this agreement, it's a, you know, the economics are much closer to just a normal inflation sort of economics.
Thank you.
Speaker Change: Our next question is from Sharif El-Sabahi with Bank of America. Please proceed with your question.
Afternoon.
Speaker Change: Could you provide some color on maybe what your biggest cost buckets are embedded within that? You've mentioned some of your steel aluminum exposure, and perhaps what contribution fixed cost absorption will have?
Cheers, Sharif.
Speaker Change: I think it's fair. Everybody can pretty much drop to the 400 basis points. You know, that should drive, you know, for us, that should drive margins up.
250 basis points, but clearly we've got revenue down.
Speaker Change: you know roughly due to volume roughly 100 million and we have obviously very attractive drop throughs there so that's hitting us for
you know, offsetting the price by about 90 basis points.
Speaker Change: Then looking at raw material pressures on the upward, with about a third driven by raw and the other two thirds from a direct material purchase driven by value add.
Speaker Change: It's hitting as well. So, you know, it's 250 basis points from price.
Speaker Change: and then pretty equally spread between the volume impact and the decrementals on that and cost increases.
Again, the vast majority of the cost increases are...
Speaker Change: you know, purchase components. We have engineering R&D relatively flat, SG&A relatively flat, and manufacturing costs down year over year.
Thank you.
Speaker Change: Thank you. This concludes our question and answer session. I would now like to turn the floor back over to Dave Graziosi for any closing comments.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.