Unprecedented Vocational Truck Demand Drives Allison Profits
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Record demand for Class 8 vocational trucks propelled profits and revenues at Allison Transmission Holdings higher in the second quarter of 2024.
Price increases helped too, the company said, with more likely to come in 2025.
Allison posted net income of $187 million in the most recent quarter, up 6.9% from $175 million in the same period in 2023. The company’s diluted earnings per share were $2.13, up 11% year over year from $1.92 a year earlier.
Indianapolis-based Allison beat both EPS and revenue consensus analyst expectations, according to Zacks Equity Research. Analysts expected EPS of $2.04 and revenue of $799 million.
The automatic transmission specialist reported a record $816 million net sales in Q2, up 4.2% compared with $783 million in the same period a year earlier.
Graziosi
Demand for Class 8 vocational vehicles and medium-duty trucks saw North American On-Highway revenue jump 14.9% to $456 million from $397 million a year earlier, the company said July 25, adding that price increases also helped boost revenue.
“Unprecedented demand for Class 8 vocational vehicles drove record quarterly revenue in our North America On-Highway end market,” CEO David Graziosi said in a statement accompanying the results.
“Second-quarter performance was also improved by year-over-year increases in our Defense and Outside North America On-Highway end markets,” he said.
Graziosi added more detail during the company’s July 25 earnings call.
“Funding and spending for infrastructure projects has led to extraordinary demand for Class 8 vocational vehicles in North America. With Allison’s share in 2023 at roughly 80% in these vocational vehicles, we are seeing unprecedented demand for our 3000 Series and 4000 Series On-Highway products,” he told analysts.
Another factor boosting Allison’s sales is a changing workforce.
“From a labor perspective, what you have seen is through COVID, as you know, a number of retirements where … the workforce has shed a number of more experienced workers, and specifically, drivers,” said Graziosi.
Allison Q2 2024 Earnings Release
“So, from an equipment perspective, whereas … some fleets could use [manual transmission vehicles], those drivers are now retired,” he said. “So, you’re looking at not only the shortage in vehicles coming into a pretty significant uptick in overall vehicle demand, but also a change in the demographics of the driver base. So, we’re seeing the combination start to drive its way through, so to speak, the market. In order to meet this elevated demand, we have made investments in our supply chain and operations to not only manage capacity, but also improve manufacturing throughput.”
That does not mean Allison will be adding manufacturing capacity, he clarified to analysts. “We’re not, I would say, if your question is building new plants or assembly lines, etc., the answer to that is no,” he said. “It really comes down to breaking some constraints with our existing capital footprint.”
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Analysts responded positively to the results and the company’s upside in the coming quarters.
“Allison’s operations were solid, with historical margins showing there’s still considerable room to go (again, in contrast to some other machinery companies, where margins reached high peaks on strong pricing),” Melius Research founding partner Rob Wertheimer wrote in a research note.
“The numbers were generally ahead of our machinery group average. Revenue grew 4%, slightly ahead of our machinery group estimate of 2% core growth,” he wrote, adding that operating margin increased by 130 basis points or 1.3%, compared with an expected 20 basis points, while the 11% EPS jump was more than double the expected 4%.”
Wertheimer said the next couple of years look “very solid on both revenue and margin,” and there are other sources of revenue growth to add in after that.
One of those is the end of multiyear contracts, the analyst said, a factor Graziosi offered details on during the earnings call.
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“There is a significant amount of our North American On-Highway business up for pricing in 2025. Over 60% is available to price. And as we look at the value that our product delivers, the value proposition is very high right now,” Graziosi said.
“Obviously, the [original equipment manufacturers] have increased the price of the vehicles; all the costs that, in effect, our transmission saves — maintenance costs, getting more productivity in a day, able to size fewer trucks, fewer drivers — all those costs have elevated,” he said. “And that puts us in a situation where our products [are] delivering a significant amount of value. And we’ve been under multiyear contracts predating the level of inflation we’ve seen the last couple of years.”
He added, “It’s still rather early for negotiations with OEMs. And I would suspect that most of the negotiations will go down to the wire. But we feel very well-positioned based on the value our product is delivering and the demand in the marketplace for our product to achieve meaningful price.”
