Allison Transmission Holdings Inc — Earnings Call Q3 2026

Operator: Good afternoon. Thank you for standing by. Welcome to Allison's Third Quarter 26 Earnings Conference Call. My name is Samantha, and I will be your conference call operator today. At this time, all participants are in a listen only mode. After prepared remarks, Allison 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. I would now like to turn the conference over to Jacalyn Bolles, executive director of treasury and investor relations. Please go ahead, Jacalyn. Jacalyn C. Bolles: Thank you, Samantha. Good afternoon, and thank you for joining us for our third quarter 2026 earnings conference call. With me this afternoon are David S. Graziosi, our Chairman, President and Chief Executive Officer Scott A. Mell, our Chief Financial Officer and Treasurer; G. Frederick Bohley, Allison's Chief Operating Officer and Allison Transmission business unit leader, and Craig Price, Allison Off-Highway business unit leader. 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 through November 16. As noted on slide 2 of the presentation, many of our remarks today contain forward looking statements based on current expectations. These forward looking statements are subject to known and unknown risks including those set forth in our annual report on Form 10-K for the year ended 12/31/2025. Should 1 or more of these risks or uncertainties materialize, should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we expressed today. Addition, as noted on slide 3 of the presentation, of our remarks today contain non-GAAP financial measures, as defined by the SEC. You can find reconciliations of the non GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2026 earnings press release. Today's call is set to end at 05:45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we will take just 1 question from each analyst. Please turn to slide 4 of the presentation for the call agenda. During today's call, David S. Graziosi, our Chairman, President and Chief Executive Officer, will provide a business update, including recent announcements across Allison. David will also provide detail on capabilities of the combined Allison product portfolio, a key piece of our growth strategy. Before concluding with a brief review of the business units' net sales performance for the third quarter. Scott A. Mell will then review Allison's third quarter 2026 financial performance and our full-year guidance update. Prior to commencing the Q&A. Now I will turn the call over to David S. Graziosi. David S. Graziosi: Thank you, Jacalyn. Good afternoon, and thank you for joining us. Please turn to slide 5 of the presentation for our third quarter business update. Before we begin, I would like to take a moment to reiterate our go forward brand architecture announced last month. Under this structure, the Allison Transmission and Allison Off-Highway business units, with their combined product portfolios now operate under the Unified Allison name. Our products have a long history, earning the trust of customers over many decades Much of what they value about Allison is embodied in the product brands themselves. As we announced, trusted brands such as Allison Transmission Spicer, Brevini, GWB, Fairfield, and Graziano will be retained and will continue to be developed, sold, and serviced as they have been. Importantly, customers, distributors and dealers across both business units can continue to expect the high standards of the product and parts they rely on. Now strengthened by the resources and global reach of the Allison enterprise. Moving on to a few articles that were recently posted on our Allison in Action page, located in the newsroom on our corporate site. allisonTransmission.com. First, I want to highlight a milestone from Japan that shows how the Allison value delivers in real world applications. In August, we celebrated the delivery of our 20 thousandth Allison equipped Isuzu Erga city bus to Keisei Bus Chiba-Nishi, which runs roughly 2.3 thousand buses across Tokyo, Chiba, and Ibaraki. This story highlights the structural megatrends shaping our end markets and the positioning of Allison for growth around the world. In Japan, some of the world's most congested city roads meet a shrinking labor force and driver pool, operators are finding it increasingly difficult to recruit drivers for manual transmission vehicles because of the physical strain and skill required for manual transmission shifting. Under these conditions, it is no surprise that Isuzu has moved entirely away from manual transmissions in its city buses. With Allison's fully automatic transmissions now found in over 70% of large city buses across Japan. Our second highlight comes from the UK, with Supacat and their high mobility transporter, HMT, known with the British Army as the Jackal, The Jackal is a wheeled defense vehicle used for reconnaissance and long range patrol tasked with getting soldiers deep into hostile terrain and bringing them home safely. More than 25 years after Supacat was first integrated with the Allison 2.5 thousand Series fully automatic transmission into the HMT platform, They continue to specify the same drivetrain underscoring the durability and reliability of Allison products in demanding defense applications. The long service life of these vehicles, the trust we have built as a long standing partner. Finally, showcasing the power of Allison from the harsh conditions of the Gobi Desert in Mongolia, Vertex, an end user at the Mongolia Energy Resources coal mine, had been struggling with unusually high transmission failure rates across the wide body mining dump trucks. With no local service network, downtime and fleet availability became an even greater challenge. So when Vertex expanded its by 100 in 2025, choos-- Choosing Allison was the clear decision. In addition to improving reliability of our products, our service network stands out with our local presence allowing operators to cut troubleshooting repair times that once took weeks. To experience the full testimonials, I encourage those of you that have not already done so to visit the Allison in Action page and subscribe to our email alerts by clicking the link at the top of the page. Before covering Allison's third quarter net sales performance, please turn to Slide 6 of the presentation for an outline of Allison's combined product portfolio opportunities, a key piece of our growth strategy. As a combined company, Allison is moving up the value chain, transitioning to a full scale integrated propulsion systems provider capable of designing, validating, and delivering complete optimized propulsion systems. This improves performance, efficiency and time to market for OEMs, and unlocks the value for Allison and our shareholders. With an expanded product portfolio and a pipeline of combined drivetrain products in development Allison has opportunities to capture more content, fundamentally changing our position in the end market we serve. As we leverage our suite of capabilities, we believe we can capture more content per vehicle with an enhanced value selling approach leading to margin expansion opportunities across the business. Our expanded portfolio is energy agnostic with solutions that span conventional ICE platforms, hybrid as well as advanced electric propulsion. This portfolio reduces concentration risk, protects revenue streams through market transitions, and enables Allison to meet customers wherever they are in their technology journey. Finally, with the combined global footprint, we can support our customers with local engineering, manufacturing, sales and service. This not only increases Allison's competitive position but also unlock synergies and opportunities for margin expansion scaling our profitability. Importantly, our combined product portfolio and our role as an integrated propulsion systems provider are only part of the story. With our combined portfolio, we can provide complementary products to existing customers and unlock cross selling opportunities. This positions us to capture additional value as customer needs evolve and further strengthens our long term growth potential. Turning to the right hand of the slide, you will see some representative applications utilizing Allison's developing product portfolio. To summarize, the Allison Off-Highway acquisition has transformed the Allison growth algorithm. We are transitioning to a full scale integrated propulsion systems provider able to capture more content, expand value selling opportunities, and strengthen OEM relationships at this single source offering energy agnostic solutions. This transition positions us to win more programmes, realize new growth opportunities and leverage our global capabilities and presence to unlock synergies and expand margins. The result is a strengthened position as a premier industrial asset. Moving now to Allison's third quarter net sales performance and end market outlook. For both of our business units. Please turn to Slide 7 of the presentation. Third quarter net sales were $1.534 billion an increase of 121% year over year. In addition to the $653 million contributed by the newly acquired Allison Off-Highway business unit, revenue in the Allison Transmission business unit, increased 27% year-over-year, reaching a quarterly record of $881 million. Within the Allison Transmission business unit, all 5 end markets were up year over year. Demand accelerated for medium duty and Class A vocational truck driving record quarterly revenue of $462 million for the North America on highway end markets, an increase of 41% year-over-year. Within the Allison Off-Highway business unit, when we step back and take a look across our end markets, it is clear that demand patterns are not uniform. We continue to see strong momentum in mining and the construction and material handling end market accelerated year over year across every region exceeding our expectations heading into 2026. However, our industrial and agricultural end markets remain muted as ongoing geopolitical developments continue to temper customer purchasing activity. You can find detailed breakdowns by end market for both business units on Slides 8 and 9 of the presentation. Now I will turn the call over to Scott for a review of Allison's third quarter 26 financial performance. And full year 2026 guidance update. Scott? Scott A. Mell: Thank you, David. Thanks to those of you joining us on the call. Please turn to slide 10 of the presentation. As David covered in his prepared remarks, net sales in the third quarter increased 121% year over year to $1.534 billion. The year over year increase was driven by the addition of the Allison Off-Highway business unit and a 27% increase in the Allison Transmission business unit with record quarterly net sales of $881 million. Consolidated adjusted EBITDA for the quarter was $400 million, increasing 56% year over year representing a 26.1% margin. Third quarter adjusted diluted EPS was $2.90, increasing 59% year over year. Favorable end market demand conditions and operational execution drove strong cash generation in the third quarter. While capital expenditures increased $21 million year-over-year, adjusted free cash flow of $278 million increased $94 million or 51%. During the third quarter, we repurchased $57 million of our common stock and paid $23 million for our quarterly dividend. We also completed a partial redemption of $100 million of our 2027 notes bringing total debt repayment year to date to over $400 million. Despite near term headwinds from increased raw material costs, and other inflationary pressures, our margin outlook remains positive. Allison's ability to generate substantial cash flow is hard to overstate. Also, as a combined company, our top line growth opportunities have never been stronger. You can find further detail on our financial performance by segment on slide 11 of the presentation. will also have more detail provided in our Form 10 Q to be published later this week. Please turn to slide 12 for our full year 2026 guidance update. Given our third quarter results, and improved conditions across the majority of our key end markets, we are increasing our full year 2026 guidance for revenue, earnings, and cash flow for the second consecutive quarter. For 2026 revenue, we expect consolidated net sales in the range of $5.975 billion to $6.075 billion. And for earnings, we expect consolidated net income in the range of $645 million to $685 million subject to the completion of purchase price accounting associated with the acquisition of the Allison Off-Highway business unit. Our net income guidance for 2026 includes approximately $125 million of 1-time pretax expenses associated with the separation integration, and restructuring of the Allison Off-Highway business unit. This includes restructuring charges related to manufacturing footprint optimization in our European operations and approximately $65 million of expenses related to the stepped up basis in the inventory. Despite these onetime costs, we expect the Allison Off-Highway acquisition to be accretive to net income and earnings per share in 2026. Further, we expect consolidated adjusted EBITDA in the range of $1.53 billion to $1.58 billion At the midpoint, this implies a 25.8% adjusted EBITDA margin. For our 2026 cash flow guidance, we anticipate consolidated net cash provided by operating activities in the range of $1.11 billion to $1.14 billion consolidated capital expenditures in the range of $240 million to $260 million including onetime separation and integration spending approximately $20 million, and consolidated adjusted free cash flow in the range of $850 million to $900 million, Please note that our consolidated net cash provided by operating activities guidance includes approximately $60 million of 1-time cash outlays associated with our acquisition of the Allison Off-Highway business unit. This concludes our prepared remarks. Samantha, please open the call for questions. Operator: Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to 1 question. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 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. 1 moment, please, while we poll for questions. Our first question is from Robert Wertheimer with Melius Research. Please proceed with your question. Robert Wertheimer: Thanks. A lot of numbers going up to ask about. I guess I will pick a couple of the biggest and medium and vocational. Just 1 question on just channel inventory there. I know there is some kind of flex and accordion kind of structures, you know, bodybuilders, etcetera. Could you remind us of where you think that stands right now? And then is it your view some of this demand is prebuy related, or is it just that the market needs replacement and therefore continue into next year? Thanks. G. Frederick Bohley: Robert, this is Fred. Relative to the channel inventory, you know, our checks would suggest there is not significant number of trucks on the OEM dealer lots. And then relative to bodybuilders, the vast majority of that is been worked through. So we would define that as, you know, somewhat normalized at this point. Then I think your second question was relative to demand in medium duty as well as for us class 8 vocational. So from a medium duty standpoint, you know, we have seen a gradual ramp throughout the year, and talked about it on the Q1 and Q2 calls. But certainly saw, you know, a significant uptick in medium duty in the third quarter. If you think about our, you know, our end market where, you know, we are up 41% year-over-year, I think ACT has class 7 up about 30% year-over-year and class 8 straight truck up 29%, school bus relatively flat. So certainly some strong performance from, you know, our standpoint within the end market. Specific to demand, we are starting to see the lease rental guys to lean into the medium duty market. We really do not see this necessarily as a prebuy activity. Fleets are very aged, and we think there is a some element of pent up demand in the market that should continue to drive things upward from where we sit into Q4 and on into 2027. And then with class 8 vocational, I would just continue to describe it as you know, robust, and it is been very steady and strong primarily being driven by all the infrastructure spend going on. So again, from a. From an outlook standpoint going into 2027, that feels that feels good as well. Operator: Thank you. Our next question is from Timothy Thein with Raymond James, Please proceed with your question. Timothy Thein: Thank you. Good evening. I will ask 1 with a little bit more of a longer term bent to it. And I am just curious, you know, if we could speak to the margin profile of the business. You know, now that you have had a bit more time with the Off-Highway guys, you know, under your belt, You did, you know, 26% EBITDA margins in what is I would imagine, the seasonally softest quarter of the year. So maybe speak to, as you look beyond this year, obviously, synergies will play an important role. But just kind of how you would think about again, looking out a bit longer term, kind of the. Where you see the underlying margin performance of this newly configured asset. Thank you. Scott A. Mell: Yes. Timothy, it is Scott. I will take a shot at this 1. I mean, I think as you mentioned, we delivered 26%-plus margins in the third quarter. Recognizing that the third quarter is typically the softest quarter for the off highway business unit given the holiday shutdowns in August. So, you know, I think the takeaway is we remain you know, very positive relative to our ability to continue to grow the margin profile of the combined business You know, we will we. We have noted in the release that, you know, while we are price cost positive on a consolidated basis in the quarter, you know, we are seeing, you know, meaningful material cost increases impacting the margin profile just given some of the cyclicality, timing of getting those recoveries. So as we look forward, we think, to your point, you know, volume growth, will be incremental. The synergies that we continue to have high confidence in delivering as we get into next year, And then if we start to see some improvement relative to inflationary pressure, not only material, but otherwise. You know, that is an upside opportunity for us as you look going forward. Operator: Got it. Thank you, guys. Our next question is from Ian Zaffino with Oppenheimer & Co. Please proceed with your question. Ian Zaffino: Hi. Great. Thank you very much. You know, on slide 6, I found this very interesting, and maybe we could just get a little bit more color here. What are you seeing either from the market or your customer as it relates to transitioning to anything related to electrification? I know in the past, you have talked about lack of standards and some other kind of difficulties there. But are you seeing any type of acceleration there or anything that kind of is driving. You know, calling it out in this slide? And then maybe talk about the costs you might have to incur to do any type of transition, whether it is a dollars, margins, people, or anything like that. Thank you. David S. Graziosi: Ian, it is David. I appreciate that question. So on electrification, you know, as you know, post acquisition as part of bringing the Allison Off Highway product portfolio in. What that what that did amongst other things is really allow our portfolio to expand from high voltage all the way back to low voltage. So I am sure as you know, low voltage continues to be, I would say, a much more mature adopting end market and space versus high voltage The fact is, I think putting if you look at the overall portfolio now with off highway with Allison Off Highway, whether it is e axle, e transmission, e-hub drives, etcetera, we have a pretty fulsome portfolio. it is also, I think, very much applicable or weighted to where you have adoption heavy, which is low voltage. So for us working across that spectrum from low to high, I think to your question, we are very much focused on the lower voltage range right now simply because that is where the demand is. We have, you know, we have talked about that for a number of years, as you know, which is the right products at the right time. Clearly, the right products being in more so in low voltage, we are not seeing much, I would tell you, in terms of high voltage adoption. We continue to stay close. Our development work, our relationship with the OEMs, end users, etcetera, but we do not see that necessarily that adoption curve is accelerating on the high voltage side. That being said, you know, we are continuing to monitor overall developments in the technology. And again, we will stay close to that. And I would just offer as you know, our strategy right along has been to really time our activities appropriate with market development. And I think you have seen whether that is certainly a North America On-Highway, quite a few things have really slowed down from some of the initial plans for the broader industries. So again, we are there. We are following the trends, and we will continue to stay close From an overall investment perspective, I would say our R&D curve, just looking at the combination with the off highway business at some level, has allowed us to combine and conquer, if you will. So the teams are working together very well and also looking at the application of the different teams' frankly, know-how and technology across that entire range, whether it be low voltage or high voltage. So again, we are excited about the opportunities that we have near term but also continue to stay close to the overall market development. Operator: Okay. Thank you very much. Our next question is from Jerry Revich with Wells Fargo. Please proceed with your question. Jerry Revich: Hi, good afternoon everyone. I am wondering if we could just have a high level conversation around the moving pieces for margins overall for next year? And obviously, we can put a finer point on guidance in 3 months. But it sounds like pricing in the base business should be moving higher. We have got the synergies on the off highway business. Coming in. Any other big ticket moving pieces that we should be keeping in mind as we think about 27 margins versus 2026? Scott A. Mell: Well, Jerry, it is Scott. Thanks for the question. I mean, I think consistent with what I said on the previous question, You know, I think we have incremental volume opportunities as we move into 2027. You know, we are not going to get into that conversation on this call, but certainly, you know, I think we are optimistic 27 will continue, you know, some of the demand momentum that we have seen. Know, obviously, agriculture within the off highway business unit has been very soft this year. You know, to the extent you see fundamentals improving in agriculture. that is that is an opportunity as we get into 2027. You know, I think you mentioned, you know, pricing you know, we expect to continue to have positive price cost on a consolidated basis for the enterprise. So, you know, that is an expectation for next year. And then, really, again, not to repeat myself, but to the extent that we see some softening stabilization as it relates to commodity costs, specifically steel and aluminum have been a meaningful headwind this year. You know, if we start to see some resolution in The Middle East and some of the other geopolitical issues going on, We are hopeful that, that could be another tailwind as we get into next year. G. Frederick Bohley: And, Jerry, specific to the ATBU, I mean, we were clearly you know, price cost positive in the quarter. Scott's mentioned some of the meaningful cost pressures, really the largest being raw material. As you know, we do have commodity pass throughs and you have seen some of that flow through. And we initially talked about 325 basis points of price for the BU. We were 460 basis points year-over-year in Q3. You know, going forward, I mean, we have numerous cost reduction initiatives across the company. You know, above and beyond, you know, the $120 million of synergies have been identified. Then as we have talked about relative to the transmission business, you know, when you have you know, inflationary technology changes that drive up the price of the vehicle, that really just increases the value proposition that our products deliver. In our products, really improved the way the vehicles function You know, increased productivity, vehicle uptime, with more work completed with fewer vehicles, reduced maintenance costs, you know, improve fuel economy, you know, safety, driver retention. So again, if those things inflate up, which you are seeing, the vehicles, the maintenance cost, the drivers, the value of our product, really shines. So, you know, for that reason, know, as Scott mentioned, you know, we have got high level of confidence being able to price in an inflationary environment. And we clearly expect to be price cost positive in 2027. Operator: Thanks, Fred. Thanks, Scott. Our next question is from Angel Castillo with Morgan Stanley, Please proceed with your question. Angel Castillo Malpica: Hi, good evening and thanks for taking my question. Just maybe wanted to touch a little bit on the margin, and continue to unpack that a bit more, but specifically on the third quarter, your SG&A in the legacy Allison business was pretty low around 7% of sales. Just could you just unpack that? And to the extent that there was anything there that was onetime, or should we think about that as kind of the right run rate going forward here? Just. I think that was pretty solid performance and helped offset some of the cost inflation that you have been talking about. And maybe as a secondary or follow on to that, if you could just also comment on you just mentioned numerous cost reduction initiatives beyond the $120 million in synergies. Curious if any of that is initiatives that you have in flight that are maybe impacting that SG&A number. Any more color or kind of finer points that you can put on quantifying what those cost reduction initiatives might be and maybe what segment do they hit That would be all. Thank you. G. Frederick Bohley: Let me take the cost reduction initiatives and throw it over to Scott for some commentary on SG&A. You think about the, you know, the investment that we have made in our India plant in Chennai, you know, doubling the size of that plant, You know, that is going to allow us to reduce cost Probably more importantly, increase capacity And then our sales teams are actively out selling that capacity. Case in point, you know, all 5 end markets up, record, record quarterly revenue. You know, pre transaction we had a lot of activities in flight relative to purchase components. And, you know, engineering and resourcing activities to take cost out of our product. That way. Scott, want to speak a little bit to the SG&A? Scott A. Mell: Yeah. I mean, I think a couple things, Angel. 1 is obviously, this year, we started reporting a Central Group function. And we have talked about it before, but essentially costs that kind of sit at the corporate level and support those business units. So Number 1, we have moved some costs out of the legacy Allison Transmission business unit. But specific to the question, I think, you know, the 7% number is probably you know, a good estimate for you as you go forward. I will say that we are seeing some positive trends within the SG&A To Fred's point, you know, we are looking to optimize our cost structure now that we have a much broader global platform. And that includes, you know, where do we put SG&A and other type of back office activities. You know, we are also seeing some positive trends on warranty expense in the quarter. You know, I think coming out of COVID, you know, we, like many others,, were challenged as it related to just the change in the labor force and we saw some strength in the warranty expense in the quarter, which impacted that number as well. But I think going forward to Fred's point, you know, we are very focused on you know, cost containment, I would say, just ensuring that we are taking advantage of the synergies from combining the 2 businesses, and that includes the SG&A side as well. Operator: Very helpful. Thank you. Our next question is from Kyle Menges with Citigroup, Please proceed with your question. Kyle Menges: Great. Thank you. I would love to hear a little bit more about the defense and specifically just the capacity investments that you have been making maybe plan to make over the next 12 months or maybe even beyond that. And on the order book as well, I noticed that there was a comment about the order book being nearly full for 2027. So we would just love to understand maybe the investment in capacity that has already happened this year. And it sounds like, I think, there is some plan for next year. Not sure if there is anything with the acquired Dana facilities that can help add some defense capacity. And I guess, also, what I am trying to get at is if that order book for 2027 does end up filling completely, which it sounds like there is a good chance just what that would mean for year over year volume growth in that business. G. Frederick Bohley: Yes, Kyle, it is Fred. Let me let me first address kind of demand. Obviously, clearly a very, you know, robust year You have seen our business move from being to the U.S. government to you know, to much more exposure to outside North America We are also you know, launching, you know, 2 new products the eGenforce and the 40 and 40 MX. With the, you know, the 40 MX primarily focused outside North America. So from a capacity standpoint, most of the investments have been to be positioned to ramp up those 2 products. You know, specific to, you know, 2027, And we have pretty good line of sight at this point, and we will need to see how we finish the year, but I think that you know, the big step up that you saw from 2025 to 2026 that pretty much kind of sets us to where we expect to be for 2027. Again, there is just some room for more volume to come in. it is more of a transition from the traditional business we sold to the U.S. government into new products and sales outside North America. in Europe, into you know, Korea. We announced the BAE Hägglunds order back middle of the year. That was our largest defense order in history in over $250 million in revenue associated with that order. So the. Definitely, as you asked, the order book is filling in nicely. Operator: Our next question is from Tami Zakaria with JPMorgan, Please proceed with your question. Tami Zakaria: Hi. Thank you so much. So I think I heard you mention the third quarter is seasonally the softest quarter, and I think that is for Off-Highway as well. So your off highway EBITDA margin was 12.7%. what is the typical sequential step up in margins for that segment in the fourth quarter. Is it similar to what we saw in the first half or still below the first half but better than Q3? Craig Price: So, hey, Tami. This is Craig. So, yeah, Scott said in the remarks, the third quarter for us, just given such a significant part of our business in Europe is typically our weakest quarter. The second quarter typically is our strongest. So the fourth is somewhere in between. So we would naturally see a step up that is predominantly due to that increase in that in that volume. Operator: Understood. Thank you. We have reached the end of the question and answer session. I would like to turn the floor back over to David S. Graziosi for closing comments. David S. Graziosi: Thank you, Samantha, and thank you for your continued interest in Allison and participating on today's call. Enjoy your evening. Operator: This concludes today's teleconference. You may disconnect your lines at this time. You for your participation.