Allison Transmission Holdings, Inc. Aktie

Good afternoon. Thank you for standing by. Welcome to Allison's First Quarter 2026 Earnings Conference Call. My name is Shamali, and I will be your conference call operator today. [Operator Instructions] 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. [Operator Instructions]

I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Shamali. Good afternoon, and thank you for joining us for our first quarter 2026 earnings conference call. With me this afternoon are Dave Graziosi, our Chair, President and Chief Executive Officer; Scott Mell, our Chief Financial Officer and Treasurer; Fred 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 in this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through May 18.

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 December 31, 2025. Should one or more of these risks or uncertainties materialize, or the underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today.

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. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached in the appendix to the presentation and to our first quarter 2026 earnings press release.

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.

Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will provide a business update and briefly review the company's performance. Scott Mell will then discuss Allison's segment reporting structure and further review Allison's first quarter 2026 financial performance and Allison's full year guidance update prior to commencing the Q&A.

Now I'll turn the call over to Dave.

Thank you, Jackie. Good afternoon, and thank you for joining us. Please turn to Slide 5 of the presentation for our first quarter business update. First, I want to recognize and thank our global employee base for all the work done so far this year. Our teams have been working diligently on integration and value capture within both Allison business units. Our execution has tracked closely with our planning and the integration process is proceeding in a disciplined and structured manner. Having said that, it has not been without a tremendous amount of effort by the Allison teams to arrive at where we are today. As our teams more closely coordinate efforts, we are beginning to see the initial phases of synergy realization to take shape across several key areas and expect to begin to see financial benefits later in 2026.

It's been encouraging to see the groundwork late prior to the transaction, translate into real momentum and reaffirmed guidance in achieving our target of $120 million of annual run rate synergies. We remain confident in our acquisition thesis, accelerating sales growth through the strategic combination of the two business units, strengthening our localized production footprint and generating sustainable cost reductions that enhance long-term shareholder value.

Allison's reach is now greatly expanded with our global operations, allowing for more localized production and opportunities for cost reductions. By leveraging increased purchasing scale and utilizing manufacturing in best-cost countries, we expect to drive value creation and margin improvement across our business. I want to give another welcome to our new colleagues around the world, and thank you for all that you do. It's been a productive first quarter and exciting times for Allison as we enter this new chapter.

Moving now to a brief update on our first quarter sales performance and end market outlooks for both of our business units. Please turn to Slide 6. Starting with our legacy Allison Transmission business. First quarter net sales were $733 million, a year-over-year decline of 4% when compared against a robust first quarter of 2025. For the North America Off-Highway end market, we continue to view the truck market with cautious optimism. Although order trends have shown strength and implies a slight ramp throughout the year, we believe there is still uncertainty surrounding geopolitical impacts, including tariffs and final rulings on emissions regulations that are hindering end users new vehicle purchasing decisions.

Continuing with the Allison Transmission business unit, the defense end market had an extremely strong first quarter, with revenue up 64% year-over-year. We continue to see strength from international customers, primarily in track programs with both legacy and new products, including our 3040 MX cross-drive transmission. We hold a favorable outlook for the defense end market as national security becomes even more relevant to nations around the world, leading to increased budgets and new programs being funded.

Please turn to Slide 7. The Allison Off-Highway business unit generated $673 million of sales in the first quarter with continued growth in the mining end market driven by elevated commodity prices, including gold, copper and rare earth minerals. The construction and material handling end market also performed in the first quarter as global construction markets are seeing steadier investments and positive developments, particularly in Europe. In the agriculture end market, while commodity prices remain a driving factor, there are early positive indicators in certain subsegments and regions, for example, the low horsepower market in India. But overall, a fairly muted environment even prior to the start of the conflict in the Middle East.

On that topic, the conflict in the Middle East currently has undetermined impact and implications, both favorable and unfavorable from multiple end markets across Allison business units. While the duration of the conflict remains uncertain, we have not seen any material disruption to our business at this time. We recognized the potential for indirect impacts across our supply chains, energy markets and broader macroeconomic conditions, and our teams are actively monitoring and maintaining close coordination.

In summary, integration is progressing as expected and value capture is materializing. End markets, although impacted by uncertainty in some aspects are steady, if not showing signs of recovery. To everyone across our organization, thank you for the extraordinary commitment, resilience and teamwork you've shown. Your efforts have laid a strong foundation for Allison's futures. To our investors, we are confidently positioned Town lock meaningful synergies, accelerate growth and create lasting value.

Now I'll pass the call over to Scott for a review of Allison's segment reporting structure first quarter 2026 financial performance and full year guidance update. Scott?

Thank you, Dave, and thanks to those of you joining us on the call. Please turn to Slide 8 of the presentation. Before we begin with segment and consolidated results, I want to quickly go over some housekeeping items and outline our new reporting structure. First quarter results now include segment reporting for Allison Transmission, Allison Off-Highway and Allison Central Group. The Allison Transmission business unit is the company's legacy business, excluding certain costs now accounted for within the Allison Central Group. While the Allison Off-Highway business unit reflects the business acquired from Dana at the beginning of the year. Allison Central Group is a centralized cost center, which includes certain functional costs that support the company's global operations.

Now on the left-hand side of Slide 8, we provide sales, operating profit and adjusted EBITDA by segment. Segment operating income flows over to the consolidated table on the right. With further detail down to net income, and non-GAAP financial measures of adjusted diluted EPS and consolidated adjusted EBITDA. Please note that first quarter gross profit in the Allison Off-Highway segment was negatively impacted by approximately $76 million of onetime acquisition-related purchase price accounting items.

On a consolidated basis, first quarter net income decreased year-over-year to $112 million, driven by the addition of costs from the Allison Off-Highway business unit, including approximately $76 million of expenses related to the stepped-up basis in inventory and incremental depreciation expense related to the step-up basis in fixed assets and an additional $22 million of intangible asset amortization expense. The year-over-year decrease in net income was also driven by higher interest expense net, along with approximately $17 million of onetime acquisition-related integration expenses.

Moving down to per share earnings. First quarter diluted EPS was $1.33. When excluding the effect of noncash nonrecurring, infrequent or unusual items, including the costs associated with the acquisition of the Allison Off-Highway business unit, adjusted net income and adjusted diluted EPS were $216 million and $2.57 per share, respectively. As a reminder, reconciliations from non-GAAP financial measures can be found in the appendix of the first quarter earnings presentation and earnings press release. There will also be more detail provided in our 10-Q to be published later this week.

Please turn to Slide 9 of the presentation. First quarter adjusted diluted EPS of $2.57 increased 6% year-over-year, and we expect the acquisition of the Allison Off-Highway business unit to be accretive to earnings on a full year basis. Adjusted EBITDA for the first quarter was $362 million, increasing 22% year-over-year with adjusted EBITDA margin at 26%, reflecting disciplined execution across our business units despite the less than ideal operating environment.

As we have discussed previously, we believe that improving end market conditions in both business units will have a favorable impact on margins. Our value capture and synergy realization will also provide an uplift to our margins with our target for adjusted EBITDA margin in the 27% to 29% range.

Cash generation continues to be a key attribute of Allison with the ability to generate substantial cash flow while successfully integrating the Allison Off-Highway business unit and navigating uncertain end market environments, including geopolitical policies and conflicts.

Now I will briefly highlight our capital allocation priorities. We continue to invest for long-term and sustainable growth across our business units with new products and initiatives targeting identified growth opportunities. We are also focused on debt reduction to achieve our near-term leverage targets while simultaneously returning capital to the shareholders through share repurchases and our quarterly dividend.

At the bottom of the slide, you can see how we allocated capital in the first quarter. During the quarter, we repaid $150 million of the $300 million of outstanding borrowings under our revolving credit facility, which were used as part of the funding for the Allison Off-Highway acquisition.

During the quarter, we also increased our quarterly dividend for the seventh consecutive year. Currently at $0.29 per share, our quarterly dividend has nearly doubled over the last 7 years. And finally, we maintained our commitment to share repurchases with $20 million of our common stock bought back in the first quarter. We ended the first quarter with approximately $1.2 billion of share repurchase authorization remaining.

Even with the recent appreciation in our share price, we continue to view our stock is undervalued relative to the underlying strength of our business units and long-term earnings potential and believe share repurchases remain an attractive use of capital at this time.

On the right side of Slide 9, you can see Allison's liquidity and leverage metrics at the end of the first quarter. We ended the first quarter with $311 million of cash on hand and approximately $845 million of available revolving credit facility commitments. Our net debt is just under $4 billion resulting in a pro forma net leverage ratio below 3x when giving consideration to a full year of earnings from the Allison Off-Highway acquisition. In the near term, we plan to reduce our net leverage to a target of 2x, through a recovery in our end markets, along with margin improvement through value capture and synergy realization, we will reduce our leverage ratio through both increased earnings and a concerted effort towards debt reduction.

Before moving on to the 2026 guidance update, building on Dave's comments, I want to summarize our financial performance for the quarter. In summary, our businesses are performing well. Macroeconomic clarity across our end markets would be well received and likely drive increased volumes with favorable drop-throughs to margin performance and per share earnings. Importantly, we continue to generate substantial cash flow and invest for long-term growth while also reducing debt and returning capital to the shareholders.

Please turn now to Slide 10 for a review of our full year 2026 guidance. Given first quarter results and taking into consideration current macroeconomic and geopolitical uncertainty, we are reaffirming our full year 2026 guidance provided to the market on February 23. For 2026 revenue, we expect consolidated net sales in the range of $5.575 billion to $5.925 billion. This includes net sales for the Allison Transmission business unit in the range of $3.025 billion to $3.175 billion, and net sales for the Allison Off-Highway business unit in the range of $2.55 billion to $2.75 billion.

For earnings, we expect consolidated net income in the range of $600 million to $750 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 more than $100 million of onetime pretax expenses associated with the separation, integration and restructuring of the Allison Off-Highway business unit. 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 $1.365 billion to $1.515 billion. At the midpoint, this implies a 25% adjusted EBITDA margin.

For our 2026 cash flow guidance, we anticipate consolidated net cash provided by operating activities in the range of $970 million to $1.1 billion. Consolidated capital expenditures in the range of $295 million to $315 million including onetime separation and integration capital of approximately $45 million and consolidated adjusted free cash flow in the range of $655 million to $805 million. Please note that our consolidated net cash provided by operating activities guidance includes approximately $55 million of onetime cash outlays associated with our acquisition of the off-highway business unit.

This concludes our prepared remarks. Shamali, please open the call for questions.

[Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research.

There's been a lot that's changed in the world since you announced the deal and even since you closed. I wonder if you could kind of talk about what versus your deal model has changed most of the positive and most of the negative, if you would.

Rob, it's Dave. Thank you for the question. So to your point, and I think we made this comment on the last call when we were asked about tariffs. And so we -- we just got on the call. We haven't checked the news in a minute or 2 to see what happened. That continues, right? The rate of change in volatility in the overall market, every day is truly an adventure. Having said that, -- we're very pleased with the acquisition. Frankly, I think you -- we would assess it currently is exceeding expectations in terms of the additional capabilities. And frankly, I think the attributes that are required to really excel in this type of market with the level of volatility that we're seeing, the operational footprint flexibility that we now have, the additional talent in multiple regions to really address and try to mitigate. At the same time, I think, as you know, with trade developments being what they are in some of the regional realignment that's going on, a broader footprint is really much more to our benefit than, frankly, we had anticipated when we originally put the deal thesis together. Having said all that, currently, the team is very engaged dealing with those developments. But also, as I mentioned in the prepared remarks, working on value capture as well. One thing that's become clear as we're dealing with various issues is other opportunities as well that are arising out of that. But again, if we go back to pre acquisition, the ability to deal from an Allison perspective, would have been, I think, a bit more challenged, frankly, just given the rather limited footprint we had at that stage. So I'd say, in summary, very pleased from with what we've seen and what we continue to work on, but also our ability to deal with the volatility in the broader markets.

Okay. That's helpful. So more internal capability and flexibility that's more beneficial in this changed world. And then on end markets, I mean, you inherited some trough-ish end markets. Any change overall in where you see those either standing or going? I'll stop there.

No, it's good in terms of an update there between the prepared remarks and what we had listed out in the press release as well as the IR package, I would say, overall, our view on that in terms of end market conditions haven't really changed, I think, to use your word troughy that still really is our view. It's nothing else, I think it's really pointing out, again, some further opportunities as I think we hopefully get some clarity all of us in terms of these geopolitical developments what the future holds, but it's very clear equipment in our end markets continues to be utilized, and that will always lead to demand. It's just a question of when exactly that will happen, but we feel very good about overall the point that we entered the markets.

Our next question comes from the line of Tim Thein with Raymond James.

The question is on the target for adjusted EBITDA margins of 27% to 29%. Dave, just curious what -- in terms of your internal model, and when you see that as a potential realization. And to the extent has that move up or down in terms of -- as you close the acquisition, essentially, the time line to hit that has it changed? And what -- how are you're thinking in terms of realization of that target?

Tim, I appreciate the question. So I would say, overall, very comfortable with the target range that you mentioned. From a timing perspective, given a few of the near-term issues that have arisen that we -- that I just mentioned really having no, I think, longer-term impact in terms of our timing. So I think as we said at the time of the acquisition announcement and close, -- we still feel that's very attainable within a few years. So one thing I would certainly repeat is the work that the team has been doing on value capture and synergies with some of these market condition changes have really pointed out, again, a number of other areas that the team is diving into as well. So again, we feel very good about the range. And I would say both the target range as well as timing being realized over the next handful of years.

Our next question comes from the line of Ian Zaffino with Oppenheimer & Company.

Just wanted to ask on the medium-duty side. When do we think that starts bottoming out and improving in a larger way? And then when we think about just the business in general, what could potentially offset that as far as like vocational? Any other color you can give us there?

Sure, Ian. This is Fred. Relative to medium duty, the first quarter was still extremely soft. I will say we're starting to see some signs that would give you some optimism there relative to sort of the lease rental guys, some of them leaning into the market a little bit. I think kind of the unknown for the second half of '26 is really where do we end up on medium-duty engines, which I think we need some direction from the EPA and how that's going to impact the cost of engines going into 2027. As we've had the year modeled, we have had and continue to have the second half stepping up somewhat from the first half. Relative to Class 8 straight, I would say it was a little stronger in Q1 than our initial expectations and continues to remain steady demand.

Okay. And then just as a follow-up on use of capital or use of cash flow, I know you talked about buybacks and deleveraging. How are you kind of prioritizing one versus the other because I know the stock is cheap, but at the same time you want to delever. And then are we kind of done on the M&A side for the foreseeable future just given you're in the midst of integrating a very large one. And yes, just any color there?

Yes, it's Scott. On the capital allocation, I think as I mentioned on the call, I mean, Fortunately, we haven't had to make overly challenging decisions on the allocation of capital, we feel very comfortable with the cash-generating abilities of both the business units and the enterprise overall. So we've talked about this year targeting getting down to 2x net leverage multiple here in the very near future, next couple of years. We paid $150 million off in the first quarter. I think we should anticipate to see that rate somewhat continue as we go throughout the course of the year. And obviously, we're still in the market repurchasing shares. Obviously, at share prices where they are today, it's not as dilutive to shares outstanding, but still demonstrative of our ability to continue to buy back shares. So that's -- that's not going to change. So I think what you saw in the first quarter, there is a good precursor to what we expect to see over the course of the rest of the year.

And the second question...

And Ian, on your -- the second question there in terms of future inorganic opportunities otherwise, we continue to be active assessing different opportunities. So our capital allocation model that Scott went through overall leverage targets, et cetera, the ability of the business the new business, so to speak, to generate cash. We're continuing to be active looking at different opportunities. So -- that being said, as you know, in your comments there, the team is very engaged working on a sizable acquisition with our new team members. So in the meantime, we're also assessing as part of the combined business, what other opportunities could present themselves from an inorganic perspective. So we, as I said, in summary, we remain engaged in that process, and we'll certainly provide an update should one be necessary. .

Our next question comes from the line of Jerry Revich with Wells Fargo Securities.

I'm wondering if you could just talk about your expectations for sequential performance in the business. So I think normally for both the Allison and the Dana Off-Highway business, we had production ramping up sequentially 2Q versus 1Q and margins up sequentially. Is that how we should be thinking about this year? And then separately, can you just comment on your expectations of synergy capture as we go through the year? Do you expect any cost benefits 2Q versus 1Q?

From a sequential standpoint, Jerry, this is Fred. We do expect things to on the transmission side to step up sequentially. And as we have it modeled, we have Q2 up of Q1, and then Q4, based on the number of days, stepping down a little. I think the drivers there will really be whether there's a meaningful prebuy in Q4. And Craig, maybe you want to talk a little bit about what you're seeing sequential?

Yes, sure. So from the Off-Highway side, there is a step-up in Q2. And then obviously, a greater portion of our business is in the European segment where in Q3, we get into the European holiday mode. So Q3 and Q4 kind of tend to go down for us, but that's the picture from the Off-Highway side.

Go ahead.

No, perfect. You read my mind. I was going to ask the synergy capture part of the question.

Yes. It's Scott, Jerry. As Dave and I mentioned, look, we're getting -- we're starting to get much clearer line of sight relative to the specific opportunities, size, timing, everything that you need to get start to see that impact through the financials. What I will tell you is our expectations on the amount of opportunity and the timing of the opportunity has not changed whatsoever. And as we go throughout the course of the year, I think you should expect to see and hear from us relative to providing more detail on impact and updates on kind of when we think we'll get the full run rate of those impacts.

Super. And Fred, can I just ask a clarification? You mentioned we'll see what the EPA wants to do. What's the range of outcomes? Is there a scenario under which EPA '27 is delayed or considering the timing of engine rollout? Is there a potential for higher prebuy and media beauty? What's the range of outcomes that you alluded to that you think is reasonable?

We're not expecting a delay. I think most are expecting some sort of modification to the warranties. And then my question -- my -- that specific comment was really relative to medium duty and the ability of everybody to meet the requirement at the beginning of 2027. And if not, what could be some associated fees for being noncompliant and then how that might impact a prebuy or not in the second half of '26.

Our next question comes from the line of Tami Zakaria with JPMorgan.

The $673 million of Off-Highway revenue this quarter, could you tell us how that compares to last year? And related to that, price realization, could you comment on price realization by segment On-Highway and Off-Highway, please?

I'll take the price one first and then let Craig -- this is Fred. Let Craig rolled through what he's seeing kind of in generalities on a year-over-year basis. But from a price standpoint, with Allison transmission, in the quarter, we generated about 325 basis points of price. We expect to be in that range for the full year. And then as we talked about at the last -- on the last earnings call, anticipating price for Allison Off-Highway to be neutral year-over-year.

And then from the Off-Highway end market, year-over-year comparison. So I would say that we were up probably about 10% year-over-year, just over 10%. It was a combination of currency factor, given the footprint in sales in Europe. Obviously, we went from a euro conversion of [ 107, 108 ] to 117. But we also saw a significant strong demand across a number of our segments. As Dave alluded to in his prepared remarks, we saw the construction market that was positive for us in Europe, but was slightly negative in North America. Agriculture was a positive trend as well for us. The different subsegments of high horsepower business in Europe was strong, also the low horsepower business out of India came in strong. And then obviously, the mining segment was up significantly as well, obviously driven by the higher commodity prices that have seen at this time.

Our next question comes from the line of Angel Castillo with Morgan Stanley.

Just was hoping to go back to the end market discussion. I think, Dave, you mentioned that end market views haven't really changed, but it sounds like at least the North America On-Highway, there are some pockets that maybe are coming in a little bit better than expected? And I fully understand, I guess there's still a lot of uncertainty in the second half. But as you think about the unchanged full year guide, could you just go through the other transmission end markets? Any others where you're seeing particular kind of pockets of maybe better performance. I don't know if defense looked like it was a pretty good quarter here. Any others that maybe are offsetting that and where you're seeing a little bit more weakness in particular, would love any kind of commentary you have in terms of order books or customer commentary?

Angel, this is Fred. So I think we've sort of already covered North America On-Highway, the largest end market. But you mentioned decent. I mean, it was an amazing quarter in revenue [ 64% ] We do anticipate the balance of the year looking a lot like Q1. I'd say relative to the quarter, things were a little softer outside North America On-Highway than what we had initially modeled. We do have that stepping up sequentially into Q2. I expect the service parts business to be fairly steady. And Craig mentioned what he's seeing from a mining standpoint, and his BU. I think we do have some upside in our global Off-Highway relative to mining as well as hydraulic fracking.

Got it. That's helpful. And maybe just some housekeeping questions just as we try to kind of model the pro forma business. I guess -- the $12 million of corporate, I think, is that -- that was on the first quarter, is that a good run rate for how we should think about that part of the business, the central group on an EBITDA basis? And then will you be giving the end markets that you gave for Off-Highway historicals for 2025?

Yes, it's Scott. I'll answer the Second question first. No, we do not intend to provide that level of detail for the business since we did not own it. Relative to the Central Group function EBITDA number of 12 when you carve out the nonrecurring and the noncash stock comp, I think that's a reasonable number to apply on an annualized basis. So yes.

Our next question comes from the line of Luke Junk with Baird.

Maybe just continuing on the defense thread. Fred, wondering how you think about the interplay between defense and North America On-Highway, the ladder comes back later this year. If we look Historically, there's been a level of inner relationship there from a supply chain standpoint, at least to some extent in the past. But maybe looking forward, that relationship is not as strong or as relevant in the current geopolitical environment. Can you just talk about that or play a little bit?

Yes. I would say at this point, with a lot of the growth in defense being driven by non-U.S. government outside North America volume. And we talked about the successes we're having with Hana in Korea with can Houter, our 3040 MX and our 40-40 MX new products for us, with the Bezu out of Poland, or cut out of Turkey, BAE Hagelin. So there's a lot of -- as we just said here, I mean, it's a really good backdrop for defense -- we've invested in these products beginning even pre-pandemic. They're coming to market. We're extremely excited about them. and expect to have a great year in defense. So I would not just based on the fact that, again, it's primarily driven by outside North America, CMOS connectivity back into the North America On-Highway end market.

And maybe just related to that, is any of this flowing through the outside North America On-Highway side, I know you can tend to pick up some commercial terms that are better there? Are we seeing any of that in that part of the business?

We do flow the wheel portion of the defense through the outside North America On-Highway, primarily because we're selling a lot of times through the same OEMs. And we are seeing strength primarily in Europe relative to wheel volume. We're also seeing some strength in Europe from a locational standpoint as well.

Our next question comes from the line of Kyle Menges with Citigroup.

I just wanted to go back to some of the pricing comments and how to think about price versus cost for the two business units for the year, the 350-or-so basis points for the Allison Transmission piece of the business. At that level, are we price/cost positive for the year? Are we confident in that? And then I guess, it sounds like for the Off-Highway business, if price is flat, assuming cost inflation is greater, so the price cost would be negative in that business for the year?

Yes. So -- it's Scott. Let me I'll try to answer, and then I'll let Dave and Fred lean in if they like. But on the analyst transmission business, I mean, yes, we do anticipate our year-over-year price to cover our inflationary cost factors with obviously, the delta in the first quarter being the volume and mix impact there. On the Off-Highway side, while they obviously have less pricing leverage, they certainly have shown the ability to take costs down on a year-over-year basis relative to either operations or purchasing. But I think there may be something, Craig, you can expand on a bit.

Yes, sure. I would classify it as pretty neutral. I think that to Scott's point, there's some, let's say, minor price giveback, but we're able to offset those within our operational structure.

Our next question comes from the line of Sherif with Bank of America.

Just looking at the first quarter, adjusted EPS was up about 6% year-over-year and adjusted free cash flow is down about 34%. I understand reaffirm guide calls for both to grow on a year-over-year basis for 2026. But can you give us some color on the seasonality of working capital for the new business? And what Allison's free cash flow profile looks like now through the year?

Yes. So a couple of questions in there. I think the cash flow profile is going to be very similar to what you experienced prior to the acquisition. With that being said that the first quarter for the Off-Highway business segment or business unit is obviously a substantially meaningful use of cash during the quarter just given some of the seasonality and the fact that it's a European-centric organization. But I think as you think about your modeling on a go-forward basis, you should expect to see the quarterly quarter-to-quarter trends that you've seen in the past in terms of Q1 being a use of cash, Q2 turning the other way, Q3 kind of turning back into Q4 as we get to the end of the year -- generating cash as we get to the end of the year.

We have reached the end of the question-and-answer session. I would like to turn the floor back to Dave Graziosi, for closing remarks.

Thank you, Shamali. And thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Good afternoon. Thank you for standing by. Welcome to Allison's Fourth Quarter 2025 Earnings Conference Call. My name is Paul, and I will be your conference call operator today. [Operator Instructions]. 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. [Operator Instructions] I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Paul. Good afternoon, and thank you for joining us for our Fourth Quarter 2025 Earnings Conference Call. With me this afternoon are Dave Graziosi, our Chair, President and Chief Executive Officer; Scott Mell, our Chief Financial Officer and Treasurer; Fred 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 March 9. 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 December 31, 2024, and quarterly report on Form 10-Q for the quarter ended September 30, 2025. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today.

In addition, as noted on Slide 3 of the presentation, some 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 fourth quarter 2025 earnings press release.

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. Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will reaffirm strategic opportunities presented by the acquisition of Dana's Off-Highway business and introduce Craig Price, Allison Off-Highways President. Following remarks from Craig, Dave will present the Allison go-forward business unit reporting structure prior to reviewing highlights from Allison Transmission's full year 2025 results.

Fred Bohley will then review recent announcements across our business. Scott Mell will end the prepared remarks with a review of Allison's Transmission's Fourth Quarter 2025 financial performance and Allison's full year 2026 guidance prior to commencing the Q&A.

Now I'll turn the call over to Dave.

Thank you, Jackie. Good afternoon, and thank you for joining us. In January, we announced the completion of our acquisition of the Off-Highway Drive & Motion Systems business of Dana Incorporated. I would like to welcome our new colleagues around the world. We are excited to bring these two world-class businesses together with 14,000 employees operating in 25 countries, creating a truly global leader in the end markets we serve.

In late January, we welcomed our new colleagues and celebrated our combined company through nearly 50 events across our global sites. I want to thank everyone who participated in these events marking our first opportunity to come together as one Allison team. The sense of unity across our sites was clear and encouraging. Together, we begin this journey with a substantially expanded market reach, a much broader portfolio of high-quality and reliable products, creating a platform that will continue to deliver strong financial performance from both organic and inorganic growth.

Our talented colleagues are dedicated to helping support our customers and their end users as they continue to respond to the global megatrends shaping the modern industrial world.

On Slide 5 of the presentation, we outline attributes strengthening our position as a premier industrial company. As a combined company, Allison will leverage an expanded global footprint for more local-for-local production with increased proximity to customers and markets providing advantages in meeting both commercial and government customers requirements.

Allison will also utilize our global technology centers for local development with realization of cost synergies through combined engineering, research and development. We believe that complementary technical knowledge within the combined business in areas such as software and controls, fully- integrated commercial duty propulsion solutions and electrification will accelerate product innovation and progress on key engineering capabilities and initiatives.

We will continue our long history of engineering expertise, delivering products known for quality, reliability and durability across diverse drivetrain components and work solutions. With greater purchasing scale as well as vertical integration opportunities and manufacturing in best-cost countries, Allison expects opportunities for synergy realization and cost reduction initiatives within our operations.

Finally, while our focus over the last two months post close has been on successful combination and integration of our businesses, our teams are working diligently on synergy capture and growth initiatives. In this transformational moment in Allison's history, we are confident in our ability to combine the two businesses while realizing annual run rate synergies, maintaining our focus on solid financial performance and continued growth as a premier industrial company.

With regards to our reporting structure, as described in the press release announcing the acquisition close, the combined company will be comprised of two business units Allison Transmission and Allison Off-Highway Drive and Motion System. Allison Transmission will be led by Fred Bohley and Allison Off-Highway Drive and Motion Systems will be led by Craig Price, both hold the title of President and Business Unit Leader reporting to me. Fred will continue to serve as Allison's Chief Operating Officer. Craig, if you'd like to say a few words?

Thank you, Dave. Good afternoon, everyone. I'm honored to step into the role of Off-Highway President and excited to be part of this pivotal moment in Allison's history. With the close of the acquisition, we are entering a new chapter focused on sustainable growth, disciplined execution and long-term value creation.

From my earliest conversations with Allison's leadership team, it was clear that our businesses share a strong alignment around innovation, operational excellence and delivering meaningful value to customers and shareholders. This combination brings together highly complementary strengths. The Off-Highway business contributes deep end markets expertise, a proven track record and a highly capable, engaged team.

Together, we are positioned to leverage enhanced scale, resources and global platforms to accelerate growth opportunities. As we move forward, our priorities are clear, seamless integration whilst maintaining disciplined execution. We are confident in our ability to implement our plans and look forward to updating you on our progress in the quarters ahead. Dave?

Thank you, Craig. Moving on to Allison Transmission's Full Year 2025 performance highlights. Before I begin, please note that these 2025 results do not reflect the financial results of the Off-Highway business we acquired from Dana on January 1. The year began with strong momentum. However, as the year progressed, our performance was negatively impacted by broader macroeconomic factors, including global trade policies, uncertainties and sluggish economic growth in most of the regions in which we operate.

Despite these external headwinds, we remain disciplined, focusing on cost control and execution. Although full year revenue was down 7% year-over-year, we increased full year adjusted EBITDA margin by 140 basis points year-over-year to 37.5%, with recent events, providing improved clarity on the timing and impact of tariffs and emissions regulations, we are beginning to see early signs of demand improvements within our largest end market, North America On-Highway, and a rebound from the trough in the third quarter of 2025.

We entered 2026 confident in our ability to navigate ongoing uncertainty. In addition, we are pleased with the ongoing performance of our defense end market, which for the year increased revenue by 26% to $267 million. We have now achieved our $100 million incremental annual revenue objective for this end market and remain focused on further growth opportunities given substantial increases in global defense spending commitments.

Throughout the year, we are also satisfied our capital allocation priorities. For the full year, we repurchased $328 million of common stock, representing 4% of outstanding shares. We also increased our quarterly dividend in the first quarter of 2025 to $0.27 per share. The ability to complete an acquisition while simultaneously returning capital to shareholders underscores the strength of our balance sheet and the resilience of our cash flow.

We remain focused on maintaining our shareholder-aligned capital allocation priorities as we progress with the integration of the Allison Off-Highway business segment. In summary, although 2025 was challenging, we exited the year with reaffirmed confidence in our business, and we look forward to the future as we enter a new chapter in Allison's over 110-year history.

Now I'll pass it over to Fred to review recent announcements across our business. Fred?

Thank you, Dave. Good afternoon, everyone. In early December, we outlined our expanding footprint and investment in India with strategic initiatives spanning multiple sectors. Starting with defense. We recently signed a memorandum of understanding with Armoured Vehicles Nigam Limited, a government-owned defense manufacturer. The multiphase agreement marks a significant step towards establishing a maintenance repair and overhaul center in India to service current and future Allison cross-drive transmission programs.

This partnership aligns with India's broader defense modernization and localization efforts, including the ongoing future Infantry Combat Vehicle program utilizing our 3040 MX cross-drive transmission. In the Indian mining sector, Allison's industry-leading value proposition continues to drive business expansion by contributing to the nation's infrastructure development and resource extraction efficiency.

End users are expanding their fleets of wide-body dump trucks equipped with our 4800 Series fully-automatic transmissions, citing the consistent reliability and performance of Allison products in challenging environments. The integration of local production and global sales is underscored by Allison's strategic position within India's export hub.

Daimler India commercial vehicles has begun shipments of Allison's 3000 Series fully-automatic transmissions integrated into FUSO's medium-duty trucks exported South Africa. These developments are supported by Allison's capital investments in the region. The company's state of art facility expansion in Chennai announced in late 2024 is operational and will ramp to full capacity in 2027.

In addition, we are excited for the opportunities presented by our expanded footprint and presence in India with four manufacturing plants and around 4,000 employees joining Allison from the Off-Highway Drive and Motion System team.

Our strategic investments not only reinforce Allison's ability to meet increasing demand across global markets, but it also solidifies the company's role as a key partner in India's industrial growth. With more local for local production and partnership with OEMs supporting the Made in India framework. Allison's opportunities are expanded and our competitive advantages are strengthened. Thank you, and I'll now turn the call over to Scott for a recap of Allison Transmission's Fourth Quarter 2025 financial performance and the introduction of Allison's 2026 guidance.

Thank you, Fred. Please turn to Slide 6 of the presentation for the Q4 2025 performance summary. Year-over-year net sales of $737 million were down 7% from the same period in 2024. In the outside North American On-Highway end market, we achieved record fourth quarter revenue leading to record full year revenue of $507 million.

In the defense end market, we continue to execute on our growth initiatives with fourth quarter net sales of $73 million up 7% year-over-year. Although fourth quarter net sales were down year-over-year in our North America On-Highway end market, the sequential improvement of 10% from the trough in the third quarter demonstrates the positive impact that improved clarity has had on end user purchasing decisions.

Net income for the quarter was $99 million, a decrease of $76 million from $175 million for the same period in 2024. This year-over-year decrease in net income reflects two meaningful onetime items. First, we recorded a $29 million impairment related to our investment in electrification.

Second, we incurred approximately $26 million of expenses related to the Dana Off-Highway business acquisition. When adjusting net income for the impairment loss and the acquisition-related expenses, our fourth quarter net income was $141 million, with diluted earnings per share of $1.68. Despite a net sales decrease of 7% year-over-year, adjusted EBITDA margin increased over 200 basis points to 36% for the fourth quarter.

Net cash provided by operating activities for the quarter was $243 million, an increase of $32 million from the same period in 2024. The increase was principally driven by lower cash income taxes, reduced engineering R&D spending and lower operating working capital funding requirements, which more than offset lower gross profit and $17 million of payments for acquisition-related expenses.

Our cash generation remains a key strength of our business with adjusted free cash flow of $169 million in the fourth quarter. We continue to maintain solid operating cash flow, reflecting in the resilience of our operations and disciplined cost management.

We expect to continue to generate substantial and sustainable free cash flow as a combined business with our robust cash generation, ensuring our capital allocation priorities remain intact. We will continue to invest in our businesses to drive long-term growth and innovation with accelerated debt reduction, which will allow us to reach our leverage targets in the near term.

We have already started to pay down debt incurred for the Off-Highway acquisition, and we'll continue to provide updates as we progress. Importantly, Allison remains fully committed to returning capital to shareholders through ongoing share repurchases and consistent dividend payments, reinforcing our disciplined approach to creating long-term value.

A detailed overview of Allison Transmission's net sales by end market and Q4 2025 financial performance can be found on Slides 7, 8 and 9 of the presentation.

Please turn to Slide 10 of the presentation for Allison's 2026 guidance. Before I cover our 2026 guidance, I want to highlight that starting with our Q1 2026 10-Q, we will be providing two segment reporting, one for the Allison Transmission business unit, which will, for the most part, reflect the historical Allison transmissions business and one for the Allison Off-Highway Drive and Motion Systems business unit, which will reflect the business acquired from Dana.

In addition, we will report financial results for the Allison Group, which will include primarily functional costs that support both business segments. We will provide additional details on this reporting structure as we move forward.

For the full year 2026, we are providing the following guidance: Consolidated net sales in the range of $5.575 billion to $5.925 billion. This includes net sales for the Allison Transmission segment in the range of $3.025 billion to $3.175 billion, and net sales for the Allison Off-Highway Drive and Motion Systems segment in the range of $2.550 billion to $2.750 billion.

Consolidated net income in the range of $600 million to $750 million, subject to the completion of purchase price accounting associated with the acquisition of the Allison Off-Highway segment. Our net income guidance for 2026 includes approximately $70 million of onetime pretax expenses associated with the separation, integration and restructuring of the Allison Off-Highway segment.

Even with 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 $1.365 billion to $1.515 billion. At the midpoint, this implies a 25% adjusted EBITDA margin. Our adjusted EBITDA margin guidance assumes continued softness in the North America On-Highway end market, particularly for medium-duty trucks with no meaningful recovery model for Class 8 vocational trucks.

Also, key Allison Off-Highway end markets are expected to remain at or near trough. As previously communicated, we expect to capture approximately $120 million of annual run rate synergies over the next few years. Once the full synergy capture is realized and we see moderate improvements in end market conditions, we expect consolidated adjusted EBITDA margins in the range of 27% to 29%.

For our 2026 cash flow guidance, we anticipate consolidated net cash provided by operating activities in the range of $970 million to $1.100 billion. Consolidated capital expenditures in the range of $295 million to $315 million, including onetime separation and integration CapEx of approximately $45 million and consolidated adjusted free cash flow in the range of $655 million to $805 million.

Please note that our consolidated net cash provided by operating activities guidance includes approximately $55 million of onetime cash outlays associated with our acquisition of the Off-Highway Drive and Motion Systems business unit. In addition to our financial guidance, Slides 11 and 12 in the presentation provide commentary on our 2026 outlook for the Allison Transmission and Allison Off-Highway end markets, respectively.

This concludes our prepared remarks. Paul, please open the call for questions.

[Operator Instructions] Our first question is from Rob Wertheimer with Melius Research.

Could you talk just briefly about what your pricing expectations are for 2026, what your rate of inflation is and just kind of what you embedded in the ever-changing tariff situation? And just for clarity, when you do disclose the segment data, you were doing EBITDA by segment or operating income by segment? And any comments on kind of the core legacy business, whether profits are up or down in your embedded guide?

You want take the first piece and maybe I'll chime in towards the end.

Yes. Yes, I'll take the first question, which I think started with pricing and led into tariffs. So I think as we've talked about before, given our LTA negotiations over the last few years, we expect to continue to see meaningful year-over-year pricing. And I think we've also said it certainly may not be at the rate that we've seen in the last few years.

I think somewhere between 250 and 400 basis points of pricing is probably directionally where we'll end up. I think us like others are facing substantial inflationary pressure across not only people cost, but material costs or otherwise, I would point you to sort of what you're seeing in inflationary forward indicators is what we're experiencing.

And then obviously, on the tariffs, I haven't been online today, so I'm not sure where we're at, but I think we expect to recover a meaningful amount of our tariff on a year-over-year basis through pricing actions that we've taken. But it certainly will be a net drag on margins on a year-over-year basis. I think that answered the beginning of the question, Fred.

In I guess I would say, to Scott's comments relative to pricing were for the Allison Transmission business unit. We'll obviously be combining looking at pricing in total. And to his point, we do have customers we put on LTAs, and we do expect better than traditional pricing that we've done in the past of 50 to 100 basis points.

And then the other question really was on level reporting, Scott, down to...

Yes. So I think the expectation is that you'll see from net sales down through an operating profit level with enough detail around depreciation and amortization that you can get to an EBITDA number. So there'll probably be some cash flow metrics as well. But I think you'll certainly have enough detail as we report the first queue here to be able to distinguish between the two business segments.

Our next question is from Tim Thein with Raymond James .

Thank you. And congrats on getting all this work done and behind you. Just on the -- I recognize that there's always challenges in fixing to a midpoint. But just if we did that, if you think about the kind of the midpoint EBITDA estimate of $1.4 billion, if we assume it's probably not the right assumption, but if we assume that the Allison business is flat year-over-year despite growing on the top line, that would imply that the Off-Highway business is doing something like 11%, 12% EBITDA margin on, call it, around at 2.6 in revenues. Is that -- are there things we should think about?

Is that, I don't know, some onetime items going through there? Or maybe just help us there in terms of the implied EBITDA of the acquired business.

Well, this is Scott. Thank you for the question. I think as you try to do your math there, I would encourage you to keep in mind that while we're going to have sales growth on the top line as we start to look at the end markets, in particular, the Class 8 straight, we are going to have a substantially different mix than we had in 2025. And as Fred mentioned or Dave mentioned on the call, 2025, the first quarter into the second quarter was stronger in the North America On-Highway end market, and we're as I mentioned in our call, we're not expecting a meaningful improvement, and we're modeling it or we're looking at it closer to kind of where it was in the second half of last year. So that will impact the margin outlook for the traditional Allison Transmission business.

And then we still have to work out .

Your North America Highway forecast is assuming kind of run rate where you exited the year. Is that right, Scott?

I'll take that, Tim. This is Fred. Yes, I mean we were -- what we're seeing and what we said in our prepared remarks is, is very, very soft conditions relative to. And we have not modeled any meaningful recovery in Class 8 straight. So to Scott's point, on a year-over-year basis, that would be negative from a mix standpoint, because the first half was very, very robust from a Class 8 straight truck.

And then really getting down into each segment's margins at this point is challenging, because there's still a lot of work being done here relative to how corporate costs are going to be allocated and that work still yet to be done in the first quarter and will be represented in the results that we posted up in May.

Our next question is from Ian Zaffino with Oppenheimer & Co.

I wanted to drill down on the acquisition. I guess you've been operating it for a couple of months now. How should we think about synergies? I think you initially outlined, I think, $120 million or $125 million. How do you feel about it now? And then what amount of that is actually in guidance? And how do we think about kind of the cadence of that?

Ian, I appreciate the question. It's Dave. So in terms of the synergies back to the prepared comments and what we actually talked about when we announced the acquisition, that $120 million run rate of synergies a few years out, that's exactly where we sit today.

The team and I say that both Allison Transmission and the Off-Highway segment are very engaged right now at a functional level, analyzing what you would expect. So I believe you were kind in two months with the company if you actually think about just closing and getting the teams organized. It's been a very busy 40 to 50 days.

But despite that, I give the team a tremendous amount of credit and really digging in on the synergies work that was outlined. As you would expect, from our perspective, operations, procurement, engineering and some SG&A are really the focus areas for our team.

So we're certainly excited about that when you think about the global footprint that we now enjoy, especially in the context of some of these trade policy developments that are out there. And frankly, I think the team is very engaged in analyzing some broader opportunities there. I would also offer -- we really have scratched the surface in terms of other synergies as well.

So as the year progresses here, we'll be providing some level of update -- to answer the last part of your question, we have not assumed any synergies in the 2026 guide at this point. So Scott's comments, I think it's important when you look at the reoccurring business guidance that's being provided is really the -- I think, the go forward in terms of setting expectations where we are, but there's a tremendous amount of work that the global team is undertaking this year, as you could imagine from some of the investments that we announced.

Our next question is from Jerry Revich with Wells Fargo Securities.

Congratulations on the closing. I want to ask, Fred, as we think about the margin profile for the legacy Allison business going forward, are the 40% EBITDA margins that we saw the business hit in 2018, 2019, are those feasible in this coming cycle, the way you see the business setting up? Can you just give us an update on if we think we can go back to those margin levels? And then, Craig, just a follow-up on the last question. Would you mind just sharing your maybe top two or three priorities for the business over the next 12 months?

Jerry, this is Fred. So clearly, you look at the performance we had in 2025, revenue down 7% and EBITDA margin up 140 basis points with a significant amount of cost pressures relative to tariffs, to the extent that you get a lift in the top line and we've made investments such that we are bringing on additional capacity. We're growing the business outside North America, record revenue outside North America in 2025, again, with some choppy end markets.

The opportunities that we have relative to the combined footprint that Dave talked about and ability to just leverage and optimize a much larger global footprint. The fact that our products are very well received. Our largest obviously driver in North American On-Highway is Class 8 straight truck share last year was up 1%. So we've been able to pass on price. We've been able to actually increase share. So we have a significant value proposition.

So I certainly would not rule out returning to those peak margins, 40%. I think what needs to be understood is we are making peak earnings on everything we send out the door. So we saw significant cost increases, and we haven't been able to price at $2 for every dollar of cost increase.

Obviously, margins compressed on a percentage basis, but absolute margins on what we sell has never been higher. And the team is very focused on getting after costs, best in quality and continue to grow in -- outside North America.

So again, that doesn't always come with, with the same margins initially. Sometimes there's an element of penetration pricing. But the short of it is putting it all together, I think 40% is achievable. But from our standpoint, it is what's the dollar amount of EBITDA we make? And ultimately, how much of that can we convert to cash. I mean that's truly what the team is focused on.

And Jerry, it's Dave, to your question for Craig. The good news is his top three priorities are the same as everybody else in Allison, which is meeting customer commitments, seamless integration in combination, which is a tremendous amount of work this year and execution. As Fred mentioned, we're right back into it here, many of the end markets that we're dealing with are at or coming off trough levels.

There'll be a fair bit of work continuing to be highly aligned with our customers around return of volume, managing the supply release, et cetera, and so forth. So a lot of work there to be done this year. But again, it's really back to meeting customer commitments, the separation integration work, most importantly, just execution across the board.

Our next question is from Tami Zakaria with JPMorgan.

I wanted to clarify two things. The first one on Off-Highway Drive and Motion segment guide. That guidance, the midpoint, how much is Dana Off-Highway growing like-for-like year-over-year embedded in that guide?

Tami, it's Dave. If you look at it and again, like-for-like, understanding the 2025 results are not out there on a, I would say, an apples-to-apples basis for what we, as Allison, have as Allison Off-Highway now, but I would put it in -- on a year-over-year basis, mid-plus single-digit rate on a year-over-year basis at top line.

Understood. That's helpful. And then the second question, I hear the 25% EBITDA margin guide for the year, how should we model the seasonality between the 4 quarters and related to that, how should gross margin be throughout the year versus the high 40 that you ended with last year?

Tami, it's Dave. Let me take the first part of that and then Scott can chime in. In terms of seasonality, it's interesting when you look at the way our guide is built this year, it's really not, I would say, very uneven quarter-to-quarter at this point, just given the nature of the two segments we now have.

So if you broadly looking at sales first half, second half, very similar on a total Allison basis. So as you know, historically, Allison's had some level of seasonality in the fourth quarter, the last few years have changed that dynamic a bit -- so -- and I would say, generally speaking, as you think about the year from an overall pace perspective as we sit today, relatively level. So -- and Scott, on the margins.

Yes. I mean working toward the annual midpoint of 25%. I don't think you're going to see, to Dave's point, substantial swings in margins just given some of the, the nature of the sales, which are going to be even over the course of the year. So I wouldn't build in any substantial changes in margins, although I would say we -- as we get to the second half of the year, on the transmission side, we're cautiously optimistic that we'll start to see some improvement in medium-duty demand potentially. So that might be a driver in the second half of the year.

Our next question is from Angel Castillo with Morgan Stanley.

Just I was hoping you could unpack the end market guidance in a little bit more detail. I guess, I'm a little bit surprised just the assumptions around no-recovery Class 8 trucks. And I think you mentioned, assuming off-highway remains kind of at or near drop just when I think about versus what we're hearing from either other OEMs on the truck side or even on construction or ag side, it seems like there's a little bit more kind of upbeat sentiment that there could be a little bit more recovery or improvement at least in the second half?

And I think you mentioned various soft conditions, I think, in the vocational market. So just to your impact a little bit more, like, to what degree is that you're seeing something in kind of the latest order books that seems to suggest a little bit more cautiousness is warranted versus maybe just being early in the year versus what other people are seeing.

Angel, this is Fred. I'll take on the Allison Transmission portion, and then Dave will go through the Allison Off-Highway. Start with our largest end market, North America On-Highway, again, we are seeing very, very soft medium-duty activity. A lot of that's driven by the large lease rental players. They have really not reentered the market.

Class 8 straight is, I would call it, steady and there's still a decent amount of uncertainty as to whether there's going to be a prebuy in the second half of the year. We have not modeled in that pre-buy. So really, when you look at it on a year-over-year basis with the strength we had in the first half, certainly, unit volumes for us are down.

Now that's being offset by continued momentum in defense primarily outside North America and non-U.S. government sales volume going to Hanwha, out of Korea with their [indiscernible], the Poland Borsuk, the Turkey Korkut, so programs that we've talked about that are -- have been announced, but are now generating revenue.

So we definitely expect defense to continue to accelerate. And a decent portion of that we have in the plan as well is going in that direction. Outside North America, again, record in 2025, but we expect continued growth. And we're seeing some strength in vocational truck in Europe, wheel defense. As Dave mentioned, Japan was really dealing with Australian vehicle regulations, was a little soft last year. Some of that volume was pulled into 2024. So we had that in our favor, and that's a market that in certain classes, we have over 60% share.

China, forward momentum on the wide body mining dump business, vocational haul, [ fired crane ], South America, we penetrated school buses. We're seeing success in vocational truck. So walk through the end markets outside North America, since up, but in you get lower volume assumptions in North America on-highway. With that, Dave, do you want to comment Off-Highway.

Angel, it's Dave. So just on Off-Highway, just to level set, if you think about five end markets for off-highway that we list in the call presentation. The largest of those is construction and material handling, that's the right behind that would be service parts, specialty and other and then agriculture and then obviously, in industrial mining.

So I think to your comments in terms of what some of our customers are saying in terms of relevant to those individual end markets. I would offer as we think about starting with construction material handling, although construction markets, you're seeing, I would say, a steady level in terms of civil engineering and some of the infrastructure work that's going on. The fact is residential is still relatively weak, as we know, given its rate sensitivity.

If you think about the material handling side, again, very much subject to what's been going on in the trade space. As we mentioned earlier, I would certainly provide some backdrop to that by saying the team, I believe, overall, the guidance that we're providing on this call for 2026, we're taking a prudent approach.

So I would say the same thing, frankly, when you start thinking about agriculture. A lot of moving pieces there. As you know, if you look through the public comments from customers, there's many assumptions that are going into that at this point.

There's bifurcation in terms of equipment sizing, where the market is, where inventory levels are. Commodity price is certainly a bit challenged right now for a number of reasons. There's some assumptions that some are making around farm subsidies, et cetera, that drive that market as well, but margins are still very challenged for farming overall.

So the team has taken that into account. Beyond that, industrial, they certainly expect to benefit from some of these larger projects that are tied to industrial output and manufacturing. And finally, mining we have some assumptions there around just giving commodity prices for things we find most or at least relevant to our Off-Highway business being gold, copper, rare minerals, et cetera.

We are certainly assuming some growth there, directional with what you've heard from some. But again, that's a bit of a first half, second half story as well in terms of overall approach or expectations for the year.

Our next question is from Luke Junk with Baird.

Just hoping we could maybe discuss pricing in the Off-Highway business that you acquired both in the near term, I would assume there's probably some tariff impacts and recovery in the business this year, but also be curious just to get your bigger picture thoughts on aspirations for pricing in that business longer term as well.

Luke, I appreciate the question there. So I would say for 2026, as we've done with the Allison Transmission business, as we've discussed the team's approach certainly is to mitigate the tariffs. So that's incorporated into some of the top line changes you see from '26 versus '25. I would say, overall, for the Off-Highway business in totality, price relatively neutral year-over-year with the exception of some of the tariff activity that I mentioned.

The approach, as you know, for Allison is to sell our products based on value. I think the off-highway team certainly is aligned with that approach, historically I think some of that, frankly, in terms of our expectations are really tied to overall market conditions. As you know, as we mentioned, relatively trough levels almost across the board. So we would expect commensurate with those market conditions improving some improvement in terms of overall price. But as we again entered the year, top priority being meeting these customer commitments. We're obviously staying close to overall volume expectations and developments.

Our next question is from Kyle Menges with Citigroup.

I was hoping we could revisit the cost synergies. It sounded like that there were no cost synergies embedded in your guidance. I just wanted to clarify that. And then just would love to hear what cost synergies you're targeting for the first 12 months and how to think about the magnitude of impact that could potentially drive .

Kyle, it's Dave. So on the synergies, again, very confident in the $120 million annual run rate that we've talked about. There's a tremendous amount of work amongst the global team -- you can imagine the scope of that undertaking just given the amount of facilities, different products, et cetera.

So we're taking as best we can, a very thoughtful, measured approach by functions, whether it's operations, procurement, et cetera, is being very deliberate about stepping through that. That is wide answer or answer your question there in terms of 12-month assumption really aligns with our 2026 guide.

The answer is we've not assumed any for that reason as we get, as I mentioned earlier, further into the year and certainly for 2027 guidance, we can provide a pretty fulsome update at that point.

But I would tell you, just given the amount of activity that's being undertaken around separation that does involve a number of agreements, et cetera, there's a fairly high-level work that's involved there. So this is the same group of people doing many, many things right now. So we're going to do it right and make sure that we have the outcome that we're looking for, but there's certainly no doubt from the Allison team's perspective that we are committed to deliver those synergies.

Thank you. That is all the time we have for questions today. I would now like to pass the floor back over to David Graziosi for any closing comments.

Thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Third Quarter 2025 Earnings Conference Call. My name is Shamali, and I will be your conference call operator today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Shamali. Good afternoon, and thank you for joining us for our third quarter 2025 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bohley, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast in this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through November 12.

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 December 31, 2024, and quarterly report on Form 10-Q for the quarter ended June 30, 2025.

Should 1 or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. 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. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached appendix to the presentation and to our third quarter 2020 earnings press release. 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 1 question from each analyst. Please turn to Slide 4 of the presentation for the call agenda.

During today's call, Dave Graziosi will provide a business update and a fully will review recent announcements across our business. Scott Mell will then review our third quarter 2025 financial performance and full year 2025 guidance update prior to commencing the Q&A. Now I'll turn the call over to Dave.

Thank you, Jackie. Good afternoon, and thank you for joining us. Throughout 2025, our largest end market, North America On-Highway, has been negatively affected by extraordinary and volatile global macroeconomic factors leading to substantial reductions in demand for commercial vehicles. External pressures related to tariffs evolving trade policies and upcoming emissions regulations in addition to broader economic uncertainties have led to more cautious purchasing decisions from end users, which has impacted visibility and predictability in terms of demand.

We expect this operating environment to persist in the near term with market activity likely to remain subdued until there is greater clarity around these regulatory and economic factors. A meaningful shift will depend on a clear catalyst or resolution to the aforementioned issues impacting demand. Despite these challenges, we remain focused on what we can control, including meeting our commitments to operational excellence, quality, customer service and maintaining strong execution across all aspects of our business. Our performance during the third quarter reflects Allison's resilience with the ability to flex our operating cost structure and generate meaningful cash flow during low demand environment.

For the quarter, although revenue decreased 16% year-over-year, we achieved an adjusted EBITDA margin of 37% and generated adjusted free cash flow of $184 million. Importantly, we remain agile and responsive to evolving market dynamics, ensuring we can quickly adapt as conditions change. As mentioned on our last earnings conference call, we see the reductions in demand in North America on-highway as a deferral of purchases by end users as opposed to a permanent change in market size.

In summary, while the operating environment remains challenging, we are managing through the uncertainty with discipline, maintaining a solid balance sheet with over $900 million of cash on hand. A sequential quarterly increase of $124 million and making prudent decisions to preserve financial strength with a commitment to delivering long-term value to our stakeholders. At the same time, we are working diligently to successfully close our acquisition of Dana's off-highway business.

I would like to thank the Allison team for their hard work and dedication during this period. Now I'll pass the call over to Fred to review recent announcements across our business. Fred?

Thank you, Dave, and good afternoon, everyone. Starting with our outside North America on-Highway end market -- in early August, we were excited to announce that Valora microbus is equipped with Allison T100 fully automatic transmissions were delivered in Brazil in support of the country's student transportation modernization initiatives. In collaboration with the National Fund for Educational Development -- these vehicles represent the first school buses utilizing fully automatic transmissions in South America.

Allison's fully automatic transmissions eliminate the need for manual gear ships, simplifying operations on the roads with mud, gravel and steep incline, drivers report less physical strain and greater control, particularly in challenging driving conditions in rough terrain. We're pleased to support better access to education while demonstrating the performance, reliability and efficiency of Allison's fully automatic transmissions. In addition to the social impact, this milestone reflects our strategic priorities for growth in markets outside of North America.

In our North American on-highway end market during the quarter, we announced that Allison's Neutrostop technology has been standardized by PACCAR on the Kenworth and Peterbilt trucks equipped with Allison's 4,700 Rugged Duty Series transmission. Allison's neutral to stop technology is designed to improve fuel efficiency, and lower operating costs by reducing engine load at stops and reducing unnecessary fuel consumption when vehicles are at idle.

Our technology ensures that fuel is used for movement, not for idling, enhancing overall fuel efficiency. We are proud to partner with PACCAR to make this innovative solution a standard offering for customers, supporting fleets and their goals to reduce fuel consumption and vehicle emissions. Also in our North American on-Highway end market, earlier this month, we announced that Ozinga Renewable Energy Logistics has successfully deployed Kenworth's T 88 tractors utilizing the Cummins X15 in natural gas engine integrated with our Allison 4500 Rugged Duty Series transmission.

The paring sets a new standard for sustainable heavy-duty transportation delivering exceptional power and innovative technology. The integration also demonstrates how sustainability and operational excellence can go hand in hand, allowing industries to adopt cleaner fuel solutions like natural gas without compromising on performance. With these announcements, we reiterate the field mastic nature of Allison's fully automatic transmissions.

Our products pair well with all propulsion solutions, providing customers with power of choice in selecting the energy source that best suits their needs. Moving on to our defense end market. This morning, we announced that [ WZM, ] a state-owned defense vehicle service provider in Poland is now an official channel partner for tracked vehicles. Allison's propulsion solutions power a wide range of wheeled and tracked defense vehicles that are actively deployed in more than 80 U.S. allied and partner nations worldwide. As a result of our growing international defense presence, Allison now enables local commercial or government service providers to become Allison authorized channel partners.

We're excited to add [ WZM ] to our global network of authorized service providers to support Allison's cross-drive transmissions for defense applications. Allison continues to enhance our global support capabilities through strategic partnerships with local service providers further solidifying our commitment to improving the operational readiness of defense vehicles worldwide. Also in our defense end market, we're pleased to announce that Allison was selected by FNSS Defense Systems, a subsidiary of Neuro Holdings to supply our 3040 MX medium-weight cross-drive transmissions for the Turkey Land Forces [indiscernible] program, the [indiscernible] system is a mobile air defense solution developed in Turkey to protect ground forces from drones, helicopters and low flying aircraft.

The system consists of 2 tracked vehicles, is designed to move with armored units and operate across difficult terrain, adding fast and flexible protection for defense forces. This partnership with FNSS and our participation in the [indiscernible] program is a testament to the trust and confidence in Allison's capabilities to deliver high-quality, reliable transmissions that meet the demanding requirements of modern defense vehicles. In addition, this partnership further solidifies Allison's presence in the Turkish defense sector, where we are supporting numerous wheel platforms and actively engaged supplying our X1100 transmission for the Turkey for [indiscernible] self-propelled Hollister program.

Thank you, and I'll now turn the call over to Scott.

Thank you, Fred. I will now review our third quarter financial performance and provide an update to our full year 2025 guidance. Please turn to Slide 5 of the presentation on the Q3 2025 performance summary. Year-over-year net sales of $693 million were down 16% from the same period in 2024 and primarily due to lower demand for Class 8 vocational and medium-duty trucks in the North American On-Highway end market. In the defense end market, we continue to execute on our growth initiatives with third quarter net sales increasing 47% year-over-year.

Net income for the quarter was $137 million, a decrease of $63 million from $200 million in the same period of 2024. The decrease was primarily driven by lower gross profit and $14 million of expenses related to the acquisition of Dana's Off-Highway segment. Despite a challenging operating environment, adjusted EBITDA margin was essentially flat year-over-year at 37%. Net cash provided by operating activities for the quarter was $228 million, a decrease of $18 million from the same period in 2024. The decrease was primarily driven by lower gross profit and $13 million of payments for acquisition-related expenses, partially offset by lower cash income taxes and lower operating working capital funding requirements.

Our strong cash generation remains a key strength of our business, with adjusted free cash flow of $184 million in the third quarter. We continue to maintain solid operating cash flow, reflecting the resilience of our operations and disciplined cost management. We ended the third quarter with a net leverage ratio of 1.33x and $1.65 billion of liquidity, comprised of $902 million of cash and $745 million of available revolving credit facility commitments. We continue to maintain a flexible, long-dated and covenant-light debt structure with our earliest maturity due in October 2027.

A detailed overview of our net sales by end market and Q3 2025 financial performance can be found on Slides 6, 7 and 8 of the presentation. Please turn to Slide 9 of the presentation for our 2025 guidance update. Given third quarter results and current market -- current end market conditions, we are revising our full year 2025 guidance provided to the market on August 4. Allison now expects net sales to be in the range of $2.975 billion to $3.025 billion.

In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $620 million to $650 million including over $60 million of expenses related to our acquisition of Dana's off-highway business. Adjusted EBITDA in the range of $1.9 billion to $1.125 billion. Net cash provided by operating activities in the range of $765 million to $795 million, which includes approximately $70 million of cash outlays related to our acquisition of Dana's off-highway business.

Capital expenditures in the range of $165 million to $175 million and adjusted free cash flow in the range of $600 million to $620 million. We are maintaining the midpoint of the implied full year adjusted EBITDA margin guidance. This concludes our prepared remarks. Shamali, please open the call for questions.

[Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research.

Thank you. So it's really no surprise, I guess, given truck orders that on-highway sales are down. This is a little bit of a steeper decline than we modeled and maybe we should apologize for that. But even so, it felt a little steeper than I would have thought. And I wonder if you could give, maybe this is a little bit of a soft question, but your opinion because there's some different factors this cycle with body builders haven't been a bit backed up, so maybe there's more channel inventory. This cycle was a little bit higher than it was in recent downturns at least.

And so I wonder if you could help us disaggregate the suddenness of this fall versus channel inventory and end market demand, which may or may not be as dramatic as this.

Rob, thank you for the question. So just a quick reference back to our August call when we talked about -- I mentioned what we were starting to see in terms of revisions to build rates. Getting to your question with the OEM announcements that we referenced at the time, layoffs, et cetera. That just was early Q3. There was certainly an expectation that those build rates would, at some level, start to normalize to your point about steeper than we thought, so to speak, we, all of us, those reductions continued, frankly.

So as we looked at getting by the end of third quarter or certainly earlier this quarter, you've started to see some level of normalization at those lower levels. So to your question, in terms of how everybody is reading the market right now. No question that body builders continue to, in many cases, sit with quite a few chassis there. It really does depend on the end use as you know, in terms of overall inventory levels that are out there. I think that's starting to improve in most cases.

But the reality is that inventories needed to be further rationalized. I think the OEM comments about even third quarter results that are pretty fresh here, all support that point. So again, we talked about in August, medium-duty being a very tough year, locational certainly starting to soften. And I think the comments that we referenced in our prepared script, certainly, there is no doubt that the level of uncertainty is extremely high. So it makes anybody's job at this point, relatively difficult to forecast.

And I think, frankly, even the ranges that the OEMs have provided for the balance of this year and even thinking about '26 are pretty wide, as you know. So we've had a very strong cycle coming out of COVID, as you mentioned. I think that certainly filled some of the gap that was there. Having said all that, equipment is being utilized. So to our prepared comments, we don't really view this as a change in market size. It's more a deferral and you can't blame frankly, the end users with the amount of uncertainty that they're all facing, capital costs more, there's a higher risk premium.

So from our perspective, anybody that's making investment decisions right now is likely looking for a more attractive risk-reward balance, and that's very difficult to come by until we all have more certainty around whether it be missions, interest rates, trade, et cetera. So there's a lot out there at this point for all of us to digest. We feel very good about our market position as we continue to have very strong share, strong pull in terms of end users and our positioning to respond to whatever demand the market presents to us.

So with our structure as we talked about, whether that be cost, labor, et cetera, the investments that we've made in capacity, we feel very well placed to respond to whatever the market conditions are. But we're going to -- as I said, focus on the things we can control at this point. And the revenue -- when you look at the revenue reduction on a year-over-year basis, I think, again, supports the idea that we are flexible organization.

We respond accordingly, and the margin performance really speaks to that.

And then what -- I mean, you're seeing some mix trends, let's say, in construction equipment, which may be overlaps a little bit on the heavy side on vocational. Was vocational as bad as medium duty? And then if you have any way to quantify how much inventory was in the channel versus prior cycles, that would just help a little bit understand where we are. But the answer was comprehensive and I appreciate it.

Yes, I would just offer on the medium duty by far, much tougher sledding right now in terms of overall market, we don't necessarily view vocational as nearly as that has been challenged. And I would just point you to, I think, the OEM comments that do have meaningful share in the vocational space. They continue to support that very overtly and we believe, given all the infrastructure investment that's underway with AI, data centers, et cetera, that, that certainly bodes well for the utilization of those relevant fleets. And as I said, that equipment is certainly being used right now.

Our next question comes from the line of Tim Thein with Raymond James.

Just a quick one, and it's just on the implied revenues for the fourth quarter, the full year guide implies something like a 5% sequential improvement. And we just spent plenty of time talking about the challenges in North America on-highway and fewer build days and OEM build plan, certainly not being revised higher. So what's the offset there again, just what, I don't know, if defense or other segments that you'd point to in terms of why we see an improvement sequentially on the top line?

Thanks, Tim. This is Fred. As Dave mentioned, a tremendous amount of downtime by the OEMs in Q3, aggressively adjusting inventory levels rolling into Q4 is, clearly, we're going to have fewer workdays, which would generally drive that down versus Q3, but you need to take into consideration the significant amount of down days. And you also saw a defense ramp pretty aggressively off of Q2 into Q3, and we expect that to continue into Q4.

[Operator Instructions] Our next question comes from the line of Ian Zaffino with Oppenheimer & Company.

Great. Just trying to understand maybe when you guys sort of to notice the weakness? And how did it look maybe by month throughout quarter. And I guess what I'm trying to get at here is you guys did a great job of kind of curtailing SG&A, some of the R&D. So was that kind of a reaction to what you had seen? Or was this kind of preplanned? And then how do we think about kind of going forward in this environment?

Ian, it's Dave. I appreciate the questions there. So as we mentioned on the Q4 -- the August 4 call, really started to this weakness in build and reductions in build rates really started to manifest itself early Q3. What's -- to Fred's comments, there was certainly an expectation at least what we were being provided with from a build rate or forecast perspective at that stage was really focused on Q3 at that point in terms of adjustments.

So what has since transpired as some level of adjustment, we would certainly look at it from a bit of a normalization from Q3 into Q4. So I think it appears to be starting to settle out simply because adjustments have been made to Fred's comments around inventory, also importantly, just bill rate capabilities.

Once you start taking out your headcount, it very much does restrict output, obviously. So we see that some level of balance from Q3 into Q4. Our cost approach, as you know, you've covered us for a number of years, is pretty consistent as we entered the year and certainly focused on the macro environment and frankly, the volatility, the uncertainty, we would view as almost unprecedented other than COVID to a level because you had so many things coming into the market that became clear to us that, that was going to have the impact we believe that the time of really inserting a tremendous amount of uncertainty into the end market for end users. So that implies that there -- if they have the ability to defer which they, in fact, have done then we needed to better align ourselves accordingly.

So what we've done has really been throughout the year, it wasn't -- we arrived in Q3 and decided to do certain things. It's been more of a full year approach. And again, thank the Allison team for their managing that situation in a way that is certainly consistent with our view, which is what we can control and really looking at the broader markets in terms of feedback to take whatever advantage we can, but also, I think, understanding the voice of the market in terms of what's needed, absolutely needed at this stage, and that's what's been reflected in our activity level.

Our next question comes from the line of Tami Zakaria with JPMorgan.

I wanted to ask about tariffs. Given the latest Section 232 announcement. How should we think about your tariff impact, if there was any at all before this? And also the ability to offset some of these past tariffs given your U.S.-based manufacturing. So any color on the latest about tariffs would be helpful.

Sure, Tami. This is Fred. I think first, maybe just stepping back, big picture, our guide is $3 billion in revenue, that's down $250 million year-over-year, so down 7%. Dave talked through, certainly, the driver is our largest end market, North America on-highway, primarily Class 6/7, Class 8 straight, which are 80% of that total end market and the build is just being down. But operationally, we're performing at a very high level, 7% revenue down and EBITDA margin, we're guiding to being 80 basis points up.

So certainly, we're able to perform well in this challenging environment. Specific to tariffs, it's really important to continue to highlight that 85% of our components are purchased in the U.S., Mexico and Canada with the majority of those being in the U.S. The bigger impact on tariffs and then Section 232 tariffs becomes, I think, vehicle pricing, total uncertainty and how that impacts demand.

But when you think about Section 232, our OEMs are certainly going to increase their prioritization on U.S. made content and components. And that really well positions us as everything that we're providing to the OEMs in the U.S. is manufactured here in Indianapolis. So I think we're well positioned there. As far as additional cost to us, I think you can see in our disclosures, our material cost has been up very minimal because of just the footprint we have from a supply chain standpoint.

And as we've talked about, we've always intended to offset that and even in a challenging top line revenue, you see that we are doing that

Our next question comes from the line of Angel Castillo with Morgan Stanley.

Just, Dave, Fred, I guess as you roll everything up that we kind of have in place all the puts and takes, exiting 2025. I know it's still early, but if we do assume everything stays as it is today, Dana acquisition aside, and assuming you continue to focus on what cost or what you can control on your end as you noted. Do you believe that, I guess, ultimately, you can grow earnings next year? Or do we need to see volume recovery in order for earnings to grow next year? How should we kind of think about that?

That's a tough one. We'll provide our guidance in February. What we have talked about publicly is we've got meaningful price this year. we'll end up for the year with over $130 million in price north of 450 basis points of price. And we also talked about the long-term agreements that we've signed. We didn't take all that price in year 1. So we have some visibility on pricing going into 2026, clearly, good visibility on cost structure. I think what everybody is still really trying to get their arms around is going to be end-user demand and Dave talked to it.

The uncertainty with tariffs, the people feel a little bit better with 232 with some, I guess, some level of more clarity now. the emissions change? Is there going to be any sort of meaningful pre-buy in 2026. So fortunately, we have a couple of months to continue to gather data points and really try to model the top line, and we'll provide our viewpoint in February

Understood. Maybe just, I guess, given the part that you have visibility into that price, with the 450 that you did this year, the long-term agreements you have in place and the pass-through of kind of the tariffs that are -- have already kind of rolled through. What kind of the price increase we should expect next year?

If you go back to pre-pandemic, we would pick up 50 to 100 basis points of price. And as we've got things modeled out, it's going to certainly be quite a bit higher than that.

Our next question comes from the line of Luke Junk with Baird.

Maybe a tricky question to answer, but I'm just wondering maybe what your gut says in terms of how much more leeway there is in the model to maintain similar margins or at least to prevent decremental from getting closer, I think, 60% maybe is the historical threshold. I know there's inefficiencies that were in the P&L last year because of the huge surge on production, clearly, you're on the front foot in terms of taking tactical actions plus the incremental price into next year? Just how do you think through those permutations and sort of the level of buffer that's left in the business right now?

Luke, it's Dave. I appreciate the question there. So certainly, our approach, our history is that we focus a fair bit as we should on margins. I think here question on incrementals and thinking about that. The biggest unknown for us right now as we think about the future is just what this overall demand picture is going to look like. We've made, I think, good progress on our growth initiatives. The investments have been made in terms of capacity, we'll be winding up the balance of those by the end of next year, certainly early '27.

So the efforts that we've also put into resourcing as well and optimizing our footprint and again, pre the Dana acquisition. But we feel very good about our ability to certainly come in within a reasonable range of maintaining margins. So we will size our -- continue to size our investments and initiatives with market opportunities. But to Fred's point, certainly have some initiatives around pricing cost line going into '26, and we'll take whatever appropriate actions there are consistent with end market conditions, which you would certainly view today in terms of North America on-highway being a bit of a question mark.

But when you look at our business in terms of whether it's parts, support equipment, et cetera, defense, off-highway relatively, I think, stabilized at a lower level right now. We feel very good about positioning overall in terms of approaching market needs. But margins are right at the top of our list in terms of focus, and we continue to work through our plans and feel relatively good about what we're seeing, at least from an initial pass, and we'll provide our guidance come February.

Our next question comes from the line of Kyle Menges with Citigroup.

I understand you're not wanting to give too much guidance on 2026 yet, but I would love to hear your thoughts on what you need to see for international On-Highway to hit your double-digit growth target next year.

And then perhaps it would be good to hear an update on how you think the Data acquisition positions you to win in international markets.

Yes. The -- it's Dave, Kyle. So on the overall, I would say, international On-Highway continues to be a very significant opportunity for our team. We're actually in this time of year involved in a number of regional meetings to look at the status of our growth initiatives. I believe the team there is doing a great job identifying a number of different opportunities for us. I think our relationships are where they need to be from an OEM and release plan perspective.

There's always been a tremendous amount of opportunity out there. I think the team has become very focused on that, adjusting for some regional differences. The Japanese market last year moved around a fair bit because of emissions and safety rigs and a number of things coming into the market that, that's a softer market this year.

We expect that certainly to improve next year. And again, their ability to sell into the balance of Asia and relevant markets we're excited about. The team has done a very good job looking at applications for our product that certainly make the most sense, but where we sell based on value, as you know, versus cost, so I think on-highway outside North America continues to be a relatively large opportunity for us with very low penetration. So as you think about what that means over the longer term, all the investments that we've made in regional production, et cetera, and the investments specifically in China now to really be able to support Asia from the Asian region is important to us. It also reduces cost in a number of other areas.

So I think all of that fits together. In terms of the Dana acquisition, we continue to work diligently towards closing that. We're pleased with the progress to date. As we mentioned on the calls around the announcement as well as the August earnings call, the attributes are very attractive to us. It's an accomplished team. It's a high-quality business. It really does allow us as a legacy Allison business to have a global footprint that starts to address some of the macro issues that I mentioned earlier.

It's clear with tariffs and trade developments that there is much more of a focus from a number -- in a number of different regions for local-for-local content. The Dana footprint certainly fits well with that overall outcome, and you could look at that across all of our end markets. So for us, it's very attractive to have access to that type of footprint. It also allows us to further analyze make versus buy in a number of areas for our products as well and ultimately, really start to leverage, although we've not quantified revenue synergies. We do have common customers in a number of different end markets, but also allowing our respective teams access to new customers, new markets.

So overall, I think it's an exciting time for both respective teams, and we look forward to getting the acquisition closed and getting on with the business.

And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, David Graziosi, for closing remarks.

Thank you, Shamali and thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good afternoon. Thank you for standing by. Welcome to Allison Transmission Second Quarter 2025 Earnings Conference Call. My name is Paul, and I will be your conference call operator today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Paul. Good afternoon, and thank you for joining us for our second quarter 2025 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bohley, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. .

As a reminder, this conference call, webcast in this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through August 18. 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 second quarter 2025 earnings press release and our annual report on Form 10-K for the year ended December 31, 2024.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today. In addition, as noted on Slide 3 of the presentation, some 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 second quarter 2025 earnings press release.

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 1 question from each analyst. Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi and Fred Bohley will review recent announcements across our business, including the recently announced acquisition of Dana Inc. Off-Highway business. Scott Mell will then review our second quarter 2025 financial performance and full year 2025 guidance prior to commencing Q&A.

Now I'll turn the call over to Dave.

Thank you, Jackie. Good afternoon, and thank you for joining us. Starting with recent nonacquisition-related news during the quarter. We were pleased to announce that the Allison 3000 Series is now available in the CNG-powered Mac Granite truck. Following the successful launch in 2023 of our 4,500 series in the same vehicle, this expanded powertrain option gives customers more flexibility to optimize their trucks, specifically for lighter-duty waste applications. .

As mentioned on previous calls, Allison fully automatic transmissions are fuel agnostic, leveraging our tour converter to ensure peak performance and fuel efficiency, pairing well, with different fuel types, including diesel, compressed natural gas and other alternatives. Unlike manuals and automated manual transmissions, our automatics maintain seamless full power shifts enabling vehicles to travel farther in less time. This allows fleets to achieve sustainability goals without sacrificing productivity.

We are proud to partner with MAC on this initiative, highlighting Allison's ability to deliver optimized performance and capability and demanding vocations indifferent to the fuel source for the powertrain. Also during the quarter, we announced that the Maryland Department of Transportation selected buses equipped with the Allison eGen Flex hybrid propulsion system to operate in Metropolitan Baltimore region.

Allison remains committed to collaborating with transit agencies nationwide supporting them in their emission reduction goals by providing innovative solutions to achieve their sustainability goals. Over the last few years, we have made numerous announcements of transit properties across the United States, selecting the Allison eGen Flex as the propulsion solution of choice for their city buses. We are excited to add Maryland to the growing list.

Finally, within our defense end market, we were excited to announce that Allison has secured a new order for 3040 MX cross-drive transmissions for Poland, for such, infantry fighting vehicle program. This order follows the memorandum of understanding announced in 2023 between Allison and PGEC, one of the largest defense companies in Europe for the cooperation on tracked vehicle programs and the expansion of our authorized service network in Poland.

Our new 3040 MX brings Allison's proven durability, reliability, performance and innovation to the medium tracked vehicle segment. The 3040 MX offers several key improvements that enhance its overall performance, including advanced electronic controls with integrated diagnostics, making it a significant step forward in defense vehicle propulsion. Also in our defense end market, Allison was recently awarded a multimillion dollar contract by the United States Army through their ground vehicle system center for the second phase of the next-generation electrified transmission or NGET program. We also referred to this product as the eGen Force.

Following our announcement in 2022, highlighting the award of funding for Phase 1 of the NGET program. We are excited to continue our partnership with the ground vehicle systems center on this vital project. Phase 2, which will focus on enhancing the e-machine and inverter system will bring us one step closer to delivering propulsion systems that not only meet but exceed the performance and efficiency needs of modern armored combat vehicles.

With the eGen Force, Allison anticipates meeting requirements across a wide spectrum of applications, including the U.S. Army's optionally manned fighting vehicle or OMFV and main battle tank markets around the world. As a reminder, the OMFV program is expected to replace nearly 3,000 aging legacy Bradley vehicles, making it the U.S. Army's largest armored vehicle procurement since the 1980s. The Allison eGen Force has been selected by American Ryan Matta for integration into its OMFV offering. Currently in the development and prototype phase, the OMFV program is expected to progress into 2026 with U.S. government testing of vehicles and start of production in 2029.

With our expanded portfolio and authorized service network, Allison is well positioned to continue growth in the defense end market. We look forward to further announcements and awards with realization of our over $100 million incremental annual revenue objective this year and future growth opportunities, including products such as the eGen Force. I will now turn the call over to Fred for a recap of our strategic priorities and growth opportunities related to our recently announced acquisition of Dana's Off-Highway business. Fred?

Thank you, Dave. Good afternoon. As we announced in June, Allison has entered into a definitive agreement to acquire Dana's Off-Highway business. Today, I would like to briefly review the transaction while providing additional details on the strategic rationale and future growth opportunities.

Please turn to Slide 5 of the presentation for an overview of the transaction highlights. The purchase price of approximately $2.700 billion to be financed with new debt and cash on hand, represents a 6.8x multiple on 2024 adjusted EBITDA of approximately $400 million, including identified annual run rate synergies of $120 million, the transaction value represents a 5.2x multiple on the same metric. The $120 million of identified annual run rate synergies are expected to be primarily -- expected to be driven primarily by opportunities in operations, procurement, engineering, R&D and SG&A.

Synergies are expected to ramp with full realization anticipated by year 4. We anticipate closing in late Q4 2025.

Please turn to Slide 6 of the presentation. As discussed on prior earnings calls, we believe Allison merits evaluation that is more aligned with other publicly traded premier industrial assets. Our robust and stable cash generation and comparative margin performance, along with current market position and future growth opportunities warrant disbelieve. The acquisition of Dana's Off-Highway business will strengthen our position as a premier industrial company accelerating current growth objectives while multiplying future global growth opportunities. Starting with facilities and people, Allison's global reach will increase significantly with the addition of the Dana Off-Highway team and manufacturing presence across the globe.

We will leverage Dana's Off-Highway global footprint for more local-for-local production with increased proximity to customers and markets providing advantages in meeting both commercial and government customers requirements. One example of this is in the India defense market where content requirements are critical for program releases and awards. We are excited for the post-close welcome of the Dana Off-Highway team joining Allison. The combined company will comprise a sophisticated global workforce of nearly 15,000 employees with the addition of Dana's Off-Highway teams, which are located primarily outside of North America.

This complements Allison's current workforce demographics where 90% of our employee base is located in the United States. In terms of products and customers, Allison is well positioned for growth within corresponding propulsion categories that will extend the applications of our existing and combined portfolios. We believe that the combined businesses, increased set of capabilities and products will allow Allison to penetrate and expand into markets that are growing, yet currently underserved by our core business such as the agricultural and construction markets.

In addition, the acquisition allows us to utilize and advance electrified products that are already serving mature early adopting end markets and segments. Through the combined business, Allison will utilize the Dana Off-Highway business global technology centers for local development and realized cost synergies through combined engineering IR&D, we believe that complementary technical knowledge within the combined businesses in areas such as software and controls will accelerate product innovation and progress on key engineering capabilities and initiatives.

Allison also expects to reduce costs through greater purchasing scale as well as vertical integration opportunities, while manufacturing locations in best-cost countries provides opportunities for cost reduction initiatives within our operations. With this acquisition, Allison will continue our long history of engineering expertise, delivering products known for quality, reliability and durability across diverse drivetrain components and work solutions.

Finally, while our focus on day 1 post close will be the combination of the 2 businesses, the Dana Off-Highway business, established M&A playbook and the broader platform of the combined companies expands Allison's opportunities for further inorganic growth. In this transformational moment in Alison's history, we are confident in our ability to combine the 2 businesses while realizing the identified and new run rate synergies and maintaining our focus on solid financial performance and continued growth as a premier industrial company. We appreciate your support as we move through this period. Thank you, and I'll now turn the call over to Scott.

Thank you, Fred. I'll begin on Slide 7 with a review of our second quarter financial performance, followed by an update to our full year 2025 guidance. Year-over-year net sales of $814 million were flat from the same period in 2024. In the defense end market, we continue to execute on our growth initiatives with second quarter net sales increasing 47% year-over-year. Our top line results were further improved by record quarterly net sales of $142 million, an 11% increase year-over-year in the outside North America On-Highway end market. .

The increase was principally driven by higher demand in South America and Europe. Finally, in the service parts, support equipment and other end market, year-over-year net sales increased 6% in the second quarter, principally driven by higher demand for service parts and price increases on certain products, partially offset by lower demand for aluminum die cast components.

The aforementioned year-over-year net sales increases were offset by a 30% decrease in the global off-highway end market and a 9% decrease in the North America On-Highway end market. Our second quarter results demonstrate the diversity of Allison's end markets and the incremental sales opportunities available from growth initiatives.

Moving on with our second quarter financial performance. Gross profit for the quarter was $402 million, an increase of $8 million from $394 million for the same period in 2024. The increase was principally driven by price increases on certain products partially offset by lower volumes and unfavorable direct material costs. Net income for the quarter was $195 million, an increase of $8 million from $187 million for the same period in 2024. The increase was principally driven by higher gross profit and unrealized mark-to-market adjustments for marketable securities, partially offset by increased selling, general and administrative expenses, including $15 million of costs associated with the acquisition of Dana's Off-Highway business.

Adjusted EBITDA for the quarter was $313 million, an increase of 4% year-over-year. Adjusted EBITDA margin for the quarter was 38.5%, an increase of 160 basis points year-over-year. Diluted earnings per share increased 8% year-over-year to a quarterly record $2.29. The increase was driven by higher net income and lower total diluted shares outstanding. A detailed overview of our net sales by end market and Q2 2025 financial performance can be found on Slides 8 and 9 of the presentation.

Please turn to Slide 10 of the presentation for the Q2 2025 cash flow performance summary. Net cash provided by operating activities for the quarter was $184 million compared to $171 million for the same period in 2024. The increase was principally driven by lower operating working capital funding requirements and higher gross profit, partially offset by acquisition-related expenses. We ended the first quarter with a net leverage ratio of 1.38x, $778 million of cash and $745 million of available revolving credit facility commitments.

We continue to maintain a flexible, long-dated and covenant-light debt structure with our earliest maturity due in October of 2027.

Please turn to Slide 11 of the presentation for our 2025 guidance update. Given current end market conditions, anticipated acquisition-related expenses and expected favorable cash income tax impacts from the recently passed One Big beautiful Bill Act, we are revising our full year 2025 guidance provided to the market on May 1.

Allison now expects net sales to be in the range of $3.075 billion to $3.175 billion. In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $640 million to $680 million, adjusted EBITDA in the range of $1.130 billion to $1.180 billion. Net cash provided by operating activities in the range of $785 million to $835 million, capital expenditures in the range of $165 million to $175 million and adjusted free cash flow in the range of $620 million to $660 million.

Finally, I'd like to note that we are maintaining the midpoint of the implied full year adjusted EBITDA margin guidance. This concludes our prepared remarks. Paul, please open the call for questions.

[Operator Instructions] Our first question is from Rob Wertheimer with Melius Research.

I wanted to see if you'd expand on your comments, I mean with the acquisition, bringing you incremental geographic and other capabilities. You talked about the potential for inorganic growth. Could you characterize that? Does that mean there's bolt-ons, tuck-ins, et cetera, that could fit? Or do you have in mind any potentially other large assets?

Rob, this is Fred. Relative to potential organic growth, if you think of us pre-acquisition, North American-centric, very strong market share, clearly, growing outside North America, record quarter. But what we believe is that this transaction with a larger global footprint across on-highway, off-highway, agricultural, construction in markets presence in Europe, significant presence in Asia will ultimately provide more opportunities for potential bolt-on acquisitions.

Obviously, our focus day 1 is on combining the business, generating the cost synergies. And then even as we talked to in the prepared remarks, we -- well, we haven't baked any revenue synergies into our business case. We do anticipate this is very complementary, being able to leverage footprint engineering capability, local for local. So we're very excited on the potential organic growth opportunities as well.

Our next question is from Kyle Menges with Oppenheimer.

It's Ian Zaffino. It's an I just wanted to kind of maybe drill down a little bit on the guidance change kind of exactly what kind of -- what lines are you seeing that? What areas are you seeing that in? Maybe just a little bit more color on that. And then as a follow-up, as you think about kind of the provisions and the One Big Beautiful Bill, I guess you kept CapEx the same, but are there any opportunities there? And then is there a possibility for any additional tax savings from the recent acquisition you did that you didn't know about prior to this bill.

Ian, it's Dave. I appreciate the questions. Let me cover that first part in terms of guide change, and then I'll turn it over to Scott. So relative to what we've changed in the guide, as you know, from February to May, maintained the overall guide, what we have certainly seen as the second half has shaped up and I'm certainly not going to tell you or anybody else things you don't know at this point, but revisions in North America on-highway build rates are significant. So as we frankly entered late Q2, early Q3, you started to see announcements of layoffs, shift reductions, down days, extended summer shutdowns, I would observe. We probably haven't seen anything quite like that in several years. .

The fact is OEMs are responding to near-term market demand conditions. You'll notice plenty of comments, I think, from the OEMs relative to supporting market demand from dealer inventory. Inventories are relatively elevated. We talked earlier in the year about the expectation of medium-duty softening this year, that, in fact, has been the case. OEM comments for Q2 also indicated some level of moderation on the Class 8 straight locational side as well. So that combination, if you really look at focus on the overall changes in the guide, that would be probably the most relevant thing to note for the second half as we rolled up everything.

So again, we're staying close to the market and are making sure that we can certainly meet customer requirements and timing. But at this point, we're sizing, as I think we even talked about in May, our run rates ourselves in terms of overall manpower and our own production rates. So for us, it's really getting back to a more lean capacity rate operations, as we've talked about in the past, very attractive to us in terms of incrementals, also allowing our team to really invest a little bit more time in the day-to-day operations relative to maintenance and also some of the quality initiatives that we've been pursuing. So that, combined with some operational efficiency projects and other things we've been looking to get some time to implement, we will be pursuing in this, I would say, quiet period. But overall, better positioned, we believe, to certainly meet market demand, as we've talked about the last few years with the number of investments in capacity both in North America as well as outside North America with projects coming on, capacity coming online or coming online shortly.

I think it's also very important to us as we think about current market conditions as more of a deferral versus any type of real permanent change in demand. So let me turn it over to Scott for the second part.

Karl, it's Scott. So we, like many have been quickly assessing the anticipated impact of the BBA on our cash taxes, as I mentioned in the -- in my comments. This year, we're expecting it to be a substantial item given really the catch-up on the full amortization of the R&D tax credit. So that's going to be something in the mid-triple digits for the year. That includes both the R&D amortization as well as the fixed asset bonus depreciation and some of the changes in the foreign-derived intangible income rates.

And then going forward, less of an impact primarily just because there's a onetime gain related to the amortization of the R&D this year. That's going to be, I would say, in the mid- to upper teens on an annualized basis, at least for the near term.

So expected benefit this year in the mid-double-digit millions, right?

Yes, mid-double digit.

Our next question is from Kyle Menges with Citi.

Could we just talk about what's embedded in the margin guidance a little bit for the back half and maybe some of the key puts and takes. Curious how strong pricing was in the quarter and expectations for pricing in the back half? And then any incremental steel cost headwinds or other cost headwinds or tailwinds assumed in the back half, I would love to just hear you guys on back what's in the assumed margin guidance?

Yes, it's Scott. So as we've guided toward pricing in the quarter, as we've done previously, it was north of 400 basis points. As we look at the second half of the year, we anticipate to see some of the same positive tailwinds from pricing. But obviously, we're going to see some volume deterioration relative to what we've seen in the same quarter last year. Really some of that's going to be driven by the vocational activity in terms of the mix component.

And then obviously, the tariff impact, which is changing daily, but we do anticipate some meaningful impact from tariffs in the second half of the year, although we do anticipate to be able to recover a substantial amount of that from our customers. And so that's really -- I mean, there's really no meaningful material impact. It's really the volume story in the second half of the year. I don't know, Fred, if you have some other thoughts on that.

I think as we think about what we talked about last quarter, our overall exposure to tariffs is limited as 85% of our direct material spend is with suppliers based in North America. Majority of those are located in the United States and those in Canada and Mexico are currently under USMCA exemptions. We do also with our agreements with our OEM customers have passed through for the majority of our costs on steel and aluminum. Those do tend to lag 6 to 12 months. So again, pretty fluid environment, but we continue to monitor and plan to offset the impact .

Our next question is from Tim Thein with Raymond James.

I just had a question on just thinking about the incremental change to guidance, so call it, mid-30s or your ability rather than to hold decrementals to kind of a mid-30% number in the context of -- with the vocational market being a lot heavier, obviously, there's some good margin in that 4,000 series. So I'm just curious, are there other segments or benefits beyond the North American highway coming off is the parts business a little better? I'm just curious if there are other factors. I think all else equal, I would think that if -- when you see that level of step down in that business in North American on-highway, I would normally think of it as carrying a little heavier decremental. So maybe just if there's any color on that. .

Yes. I mean we do -- and we are anticipating and seeing some improvement in our defense business in the second half of the year relative to both the second half of last year as well as the first half of this year in terms of both our wheeled and tracked vehicles. So we do have some real tailwinds there helping to offset what you're circling around on the North American on-highway. We also continue to see some stability in the outside North America On-Highway segment as well. So those 2 combined are helping, not completely offsetting what we're seeing in North America, but are mitigating some of the impact. And obviously, we're also managing our costs very closely here over the second half of the year.

Yes, Tim, this is Fred. So while we are seeing some softness in the Class 8 straight truck, the municipal business is still very strong. Really where we've seen, I'd say, the most near-term softness has been in medium duty. So I think that probably addresses some of your mix concerns. .

Our next question is from Tami Zakaria with JPMorgan.

I wanted to get some color on your intended buyback. It seems like you did buy back some stock in 2Q. Do you plan to keep buying back while the Dana deal is pending? And post close of the deal, do you intend to pause buyback or until leverage comes down to 2 or below? Or do you want to keep buying back as and when cash is available?

Tami, this is Fred. Thanks for the question. Our capital allocation policies really haven't changed. I mean, first and foremost, it's to fund the business for organic revenue, earnings growth, new product and technology development. We're in a position where this really for us isn't a -- do you buy back share, do you pay down debt? I mean, we can do all of those. So we intend to return cash to shareholders via the dividend.

We'll use a meaningful amount of cash from the balance sheet in the direction of the transaction. Obviously, we'll take on some additional debt. And as we've talked about looking at getting to 2x net leverage in the near term. But it really is a little bit all of the above and probably most important is we like to be opportunistic. But to your point, we did buy back over $100 million worth of shares in the quarter. As we talked about in our prepared remarks and our view on us as a premier industrial company, really compelling future growth opportunities with the transaction, accelerating the combined businesses' current growth objectives, multiplying with future growth objectives. And we think we kind of laid it out what is a premier industrial.

We've got robust stable cash generation, best-in-class margins, great market position. We've been growing this business since really our record pre-pandemic 2019 revenue is up 20% into 2024, up $500 million. We've identified $400 million of growth opportunity. But I think in order to get what we consider a premier industrial multiple, which for us is at least double digits, we need to grow faster, and we think the transaction will enable us to and really is what we believe is, as you look forward at this company, and you take the combined EBITDA, the double-digit multiple from the capital allocation priority of paying down debt, repurchasing shares, the current dividend policy. Again, 3 years out from now, we believe that our stock should be trading north of $200. And when you have that level of belief, it's very attractive to buy a basket $90 a share.

Our next question is from Angel Castillo with Morgan Stanley.

Just wanted to touch base just based on the backlog that you see today, the kind of order trends that we've had year-to-date. I recognize it's just extremely early, but I think I heard you say that maybe you kind of see some of these pockets of weakness or maybe more push out of demand versus destruction. Could you then -- are you, I guess, willing to kind of comment on how you see 2026 demand maybe shaping out as you think about some of these markets, like medium-duty or vocational? And in particular, just kind of any thoughts on Section 232 review or kind of the EPA 27 regulation and what that might mean for customers' appetite to buy ahead of that or to wait until 2026 and buy then?

Angel, it's David, thank you for those questions. Let me -- I got a lot in there. Let me try to unpack that one a little bit. So your question or your comment on backlogs, clearly, the industry is catching up with what was a very challenging time for all market participants. So a lot of costs being incurred to get product out the door. Clearly, the market dramatically improved. Suppliers have caught up. The one, I think, portion of the market that really is not -- it's improved, but I don't think it's really moved yet, thus still a constraint, our body builders. So to your point on backlogs, yes, those have certainly come down. Inventory is in a better position at the retail level. There's also a fair amount of chassis sitting at body builders, which is why we believe the North America OEMs, which I think is to your question, why they've made the adjustments. I don't think any of them really want to be in a position of entering 2026 to get to your other point there and really what is an oversupplied market, especially given the amount topics for uncertainty would seem to be, frankly, endless and being added to every day, whether it be tariffs.

You asked about EPA emissions, financing costs, macroeconomic outlook, et cetera, pick your item, but it's hard -- it's not unreasonable to appreciate the position of end users, which are really in a highly uncertain wait-and-see mode. So that reluctance has then translated into this point about deferring investment decisions to more clarity is available. And I think some of the OEMs have talked about that, thus the reduction in build rates, which I think better positions the overall industry going into '26 to get to your other points there in terms of 232, certainly, the commercial vehicle industry has commented on that extensively with public comment letters, et cetera. So we're tracking it as well as everybody else.

Having said that, to earlier comments on the call, we believe we're very well positioned in terms of USMCA sourcing. So the vast majority of what we use is actually sourced out of the U.S. and to a degree the balance out of Mexico and Canada. But we're, I think, very well placed in that regard and positioned. Also, as part of that, as you think about other things that are happening from a regulatory perspective, the most recent announcements from the EPA over the last probably 2 to 3 weeks, as you know, are very meaningful in terms of potentially changing the entire missions regimen, if you will, around whether it be greenhouse gas, et cetera.

So we, like the rest of the industry are waiting for clarity there. That being said, as I think you're familiar, our products do not require significant meaningful changes with emissions changes. So our product portfolio exists today for On-Highway. It is very well placed to be compliant, whether that be current regs or future regulations. So the work is done. The products are ready and I think we'll await more clarity from the market. But as I said earlier, overall, our view right now is North America On-Highway is more of a deferred versus a loss in longer-term demand.

That's very helpful. And if I could, just one quick follow-up. I think I heard you say that the outside North America and defense continue to be stronger in the second half. What about the service parts business that seem to be pretty healthy in the first half as well? Just what do you expect there in the second half?

Part of, obviously, that particular end market for us is support equipment. So it follows volume, right? So to my comments in terms of the way the volume breaks first half, second half, we'll have less demand for support equipment. That being said, I think the overall trends in terms of service requirements seem to be somewhat stable at this point. So our channel checks would tell us that -- they're better positioned from a labor perspective. The one item to keep an eye on, as I mentioned, with deferrals or uncertainty with end users is they're deferring capital investments. It's very hard to defer maintenance. At some point, that becomes a challenge. So these aging fleets vehicles are being utilized. We feel good about the overall market trends in terms of aftermarket and our continued high capture rate there. .

There are no further questions at this time. I would like to hand the floor back over to David Graziosi for any closing comments.

Thank you, Paul, and thank all of you for your continued interest in Allison and for participating on today's call. Enjoy your evening. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good morning. Welcome to Allison Transmission's Analyst and Investor Call covering the recently announced acquisition of Dana Inc. Off-Highway business. My name is Melissa, and I will be your conference call operator today.

[Operator Instructions] After prepared remarks, Allison Transmission executives will conduct a question-and-answer session and conference call participants will be given instructions at that time. As a reminder, this conference is being recorded.

I would now like to turn the call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Melissa. Good morning, and thank you for joining us. With me this morning are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bohley, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast and presentation are available on the Investor Relations section of allisontransmission.com.

As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on our 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 December 31, 2024 and the press release we issued on June 11, 2025.

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.

Please turn to Slide 3 of the presentation for the call agenda. Today's call is set to end at 9:30 a.m. Eastern Time. During today's call, Dave Graziosi will provide an overview of the transaction and its alignment with Allison's strategic priorities. Fred Bohley will then give an overview of Dana's off-highway business and cover strategic rationale behind the acquisition. Scott Mell will cover financial details of the transaction and acquisition benefits prior to commencing the Q&A.

Now I'll turn the call over to Dave.

Thank you, Jackie, and thank you to those joining us on this call. We are pleased to host this call today to discuss our acquisition of Dana's Off-Highway business. As shown on Slide 4 of the presentation, this acquisition aligns with Allison's strategic priorities to expand our emerging markets footprint, enhance our core technologies and deliver strong financial results.

We believe this transaction will accelerate Allison's growth and innovation as a global commercial duty work solutions provider to the on-highway, off-highway and defense end markets. Upon closing of the transaction, Allison will be able to offer a wider range of commercial duty powertrain and industrial solutions to more customers and end users worldwide.

Please turn to Slide 5 of the presentation for transaction highlights. The purchase price of $2.7 billion to be financed with new debt and cash on hand represents a 6.8x multiple on 2024 adjusted EBITDA of approximately $400 million.

Including identified annual run rate synergies of around $120 million, the transaction value represents a 5.2x multiple on 2024s adjusted EBITDA. We expect to substantially achieve identified annual run rate synergies by year 4, primarily from operations, procurement, IR&D and SG&A.

The acquisition of Dana's Off-Highway business is expected to be immediately accretive to Allison's diluted earnings per share and has been approved by both Boards of Directors. The transaction is supported by fully committed debt financing and is subject to customary regulatory approvals.

From a financial perspective, this acquisition will substantially increase Allison's revenue while increasing our adjusted EBITDA by 40% and provides a broad range of new growth opportunities.

We are confident in our ability to maintain our strong financial performance with continued commitment to prudent balance sheet management and stockholder-friendly capital allocation priorities.

I want to express my gratitude to the Allison and Dana teams and their advisers and partners. Your efforts have been instrumental in making this opportunity possible. This acquisition marks a transformative step in Allison's commitment to empowering our current and future customers with propulsion and powertrain solutions that improve the way the world works.

Thank you, and I'll now turn the call over to Fred.

Thanks, Dave. Please turn to Slide 7 of the presentation for an overview of Dana's Off-Highway business. The business currently operates in over 25 countries and serves a global customer base supported by approximately 11,000 employees. For 2024, business generated $2.8 billion of revenue with adjusted EBITDA of $400 million and adjusted free cash flow of $280 million.

Importantly, aligning with our strategic priorities to expand our global presence, last year, over 70% of revenue was generated outside of North America and over 90% of revenue was generated in product categories other than transmissions.

Providing solutions for a wide range of applications in construction, forestry, agriculture, specialty, aftermarket, industrial and mining segments, Dana's Off-Highway business is recognized for its industry-leading powertrain technologies encompassing axles, propulsion solutions and drivetrain components.

Additionally, the business specializes in electric and hybrid drivetrain systems tailored to diverse customer needs and is further distinguished by its global network of manufacturing facilities and technical centers.

A detailed overview of Dana's Off-Highway product portfolio and end markets and its combination with Allison's current product portfolio can be found on Slide 8 and 9 of the presentation.

Strategically, this acquisition will expand our product portfolio with a complementary range of products, including axles, gears and gearboxes. We will leverage, share core competencies in software and controls, system integration and electrified propulsion to accelerate product innovation and expand into adjacent, diverse and attractive end markets.

We believe these advantages will not only improve our position today, but will also lay the foundation for future growth. This acquisition will further enhance our ability to deliver innovative solutions, positioning Allison as a leader in the transition to more sustainable future across a wide variety of end markets.

Please turn to Slide 10 of the presentation. Consistent with our strategic priority of growing our international presence, this transaction will provide Allison with access to new end markets while also expanding our off-highway product offerings in construction, mining and agricultural sectors, all while preserving our current portfolio mix that has historically been less cyclical than the broader end markets.

Slide 11 of the presentation highlights the expanded global platform achieved by the acquisition, including enlarging our local innovation, research and development, engineering and manufacturing footprint outside North America, and broadening our customer base globally.

To summarize, this acquisition aligns with Allison's strategic priorities to expand our emerging market footprint, enhance our core technology and deliver industry-leading financial results.

With this transaction, Allison will be able to offer a wider range of commercial duty powertrain and industrial solutions, expanding our position as a leader in the end markets we serve.

Thank you, and I'll now pass the call to Scott.

Thanks, Fred. Please turn to Slide 13 of the presentation. With the acquisition of Dana's Off-Highway business, Allison's net sales will nearly double to approximately $6 billion. We expect to maintain our designation as a premier industrial asset. Including anticipated annual run rate synergies of $120 million, we expect adjusted EBITDA to grow over 40% to $1.7 billion and maintain our industry-leading adjusted EBITDA margins.

Moving on to Slide 14 of the presentation. Allison is committed to prudent balance sheet management, maintaining ample liquidity and flexible financing. Our debt structure remains long-dated and covenant-light with our earliest maturity due in October 2027.

Importantly, our commitment to our capital allocation priorities remain unchanged. We Allison's robust cash flow enables our continued prioritization of returning excess cash to stockholders through our quarterly dividend and share repurchase authorization.

We remain confident in our financial outlook and our ability to execute on both near-term and long-term priorities and growth opportunities. We are pleased to share this announcement with our stakeholders and look forward to providing further updates as we progress through integration.

This concludes our prepared remarks. Melissa, please open the call for questions.

[Operator Instructions] Thank you. Our first question comes from the line of Rob Wertheimer with Melius Research.

This is Paddy Bogart on the call for Rob Wertheimer. Regards on the deal, we're just trying to get an understanding of what the rough market share would be of Dana's Off-Highway business. And aside from the synergies, how do you think about margin potential?

Paddy, it's Dave. Thank you for the question. In terms of Dana's Off-Highway market share, certainly a significant player in that particular end market. And obviously, when you look at the combination, as we've talked about here this morning of Dana's Off-Highway business with Allison's, we're certainly looking forward to our broader platform, both products and solutions for that particular end market.

So I think from a execution perspective, certainly looking forward to having that talented team join ours and certainly be able to approach the market again from a broader local platform perspective.

Our next question comes from the line of Ian Zaffino with Oppenheimer & Company.

Congratulations on the deal. Question would be on, I guess, help us understand the go-to-market strategy here. I know Allison has been very successful on kind of a two-pronged, where you go to the OE, you go to the customer and you drive your pricing more in vocational.

What's sort of the opportunity to do that at the new acquired company? Can you do that? Is there anything to learn from the other side as well as you kind of go to market and think about your pricing and kind of the value of your product?

It's Dave. Thank you for the question. So first of all, we look at the -- both of our businesses in terms of values and frankly, brand promises, very consistent quality, innovation, integrity, team work, customer focused, from a brand, you think about reliability, durability, value performance.

To your question in terms of how we -- Allison has historically priced its products, as you know, we priced on the value that's delivered to the end user. I do not believe that you would find a different answer in terms of Dana's Off-Highway business. Their customers, their end users expect and deserve a high level of reliability and performance.

So we expect and certainly we'll approach it from the standpoint historically that, that team has approached the market from go-to-market, which is to ultimately sell based on value and ultimately stand behind that in terms of reliability and performance.

So we see tremendous amount of consistency and are excited to have the combination of the two organizations and these teams with very extensive go-to-market reach as well as duty cycle application and market knowledge, et cetera. So it's very exciting, as I said, for our team and ultimately welcome the opportunity to work with Dana's off-highway team.

Our next question comes from the line of Angel Castillo with Morgan Stanley.

This is Brendan on for Angel. You mentioned a robust combined free cash flow and the ability to continue to prioritize returning cash to shareholders. Does that mean that you plan on maintaining your dividend and share repurchase programs while deleveraging back to that near-term below 2x leverage target?

Brendan, this is Fred, and thanks for the question. What I would say is when you think about our capital allocation priorities, nothing has changed. I mean, first and foremost, we're going to fund the business for organic revenue growth, new product development.

Obviously, this is a meaningful acquisition. And if you think about what we've done in the M&A space really pre-pandemic and supply chain challenges, the acquisition of [ aluminum ] die-cast manufacturer, the pace at which we've spent on electrification, acquiring the AxleTech Electric Vehicle Systems division but also spending at a pace for when we thought market adoption would be there.

One thing that we benefit from is a very consistent cash flow stream. And thinking back all the way into the middle of the pandemic, we generated in 2020 over [ $450 million ] in free cash flow.

One thing that's attracting about the Dana Off-Highway business is it also consistently delivers from a financial performance, generate significant cash and like us, has a relatively low capital requirement, something like 2%, maybe 2.5% of sales.

As we think about going forward, fortunately, we're in a position where we can delever. We can continue, obviously, to pay the dividend. I mean we've raised the dividend over the last 5 years by 67%. And we're still going to be repurchasing shares.

Just thinking about coming up through this acquisition in the second quarter, we've already repurchased close to 1 million shares, so 1.1% of shares outstanding quarter-to-date. So we still look at the marketplace and see our shares as being meaningfully undervalued. So that's certainly a place that we plan to allocate capital.

Obviously, we'll be focused on delevering as well in the near term. But again, our business generates consistent cash flow combined with the Dana business. And that's -- all the things that Dave said, I mean, this acquisition of Dana checks a significant number of marks. But it's also a business that generates significant cash flow, which is something that we find very attractive.

Got it. And then can you talk to the carve-out portion of the transaction that's associated with this? I think Dana has said this morning that they were going to keep a portion of their Off-Highway business that was $130 million in revenue or so. Just curious if you could provide more color there, please.

Brendan, it's Dave. So to Dana's comments is there is a portion of their Off-Highway segment that they will retain. When you think about the balance of the portfolio and the integration efforts that will have to take place, historically, this business has largely been operated very much stand-alone with some level of oversight obviously from the Dana corporate side, but very much operated stand-alone over time.

So -- and I think the team there has proven themselves very capable over the years, as I'm sure you know, portions of this business were acquired not that long ago. So the team has certainly steeped in integration efforts as well in M&A. So we're, again, looking forward to having them join us and expect -- do not expect significant issues with the integration and ultimately carving out this business as there are some, as you would expect, entanglements there.

Our next question comes from the line of Tami Zakaria with JPMorgan.

Good morning. Thank you so much. Exciting news. So my first question is, I think the synergy of $120 million, it seems more like on the cost side. So just wanted to understand, how you're thinking about potential revenues synergies going forward? Can Allison's North America products go into Europe and vis-a-vis -- or are the technologies quite different in those markets, so not a lot of overlap? Any color on revenue synergies as you see today?

Tami, it's Dave. So I appreciate that question. So as you know, Allison's footprint has been very much focused in North America. We do obviously have operations in Hungary and India et cetera. But I would say, to your question, in terms of penetration of fully automatics on highway outside of North America, a tremendous amount of opportunity there with that market around 5%.

As I'm sure you know, one of the challenges that we've had as a business is really accessing certain markets for growth. So as we said in the prepared remarks, the part of this transaction is attractive to us.

To answer your question on commercial opportunities is having a platform to actually be in market, so to speak. And certainly with some developments earlier this year,in terms of tariffs and non-tariff barriers, this transaction opens up and mitigates, from our perspective, a number of those barriers when you think about our footprint over the years, relatively small in places like South America, China, which has been a consuming market for us for many years.

Europe being viewed as very much an outside looking in, and then ultimately, India, where we've been for now a little over a decade and are expanding our operations, certainly, the ability to gain access to the Dana Off-Highway footprint in that particular country and end market and especially with the amount of demand that's moving into India; this is a very attractive access point from an evaluation perspective, to acquire assets in India.

Ultimately, all of that enabling growth from our perspective, both from a near and longer term when you think about opportunities from a commercial perspective and the results that should accrue to us from that perspective.

We have included -- we have not included those in the synergies. To your point, they're very much cost focused. They will be, for us, certainly the near-term -- from a near-term perspective, as you would imagine, from integration efforts and transition, et cetera, but the commercial will be quickly followed.

Understood. That's very helpful. And I apologize if I missed it earlier, but is there a timeline of getting back to that 2x leverage from 3 turns right out of the gate?

We didn't provide a timeline, to your question. I will say, to the prepared comments and Fred's follow-up comments. Certainly, near to medium term is the target there. As you know, we've talked about our reoccurring view on net leverage and ultimately, how that impacts the capital allocation. To Fred's comments, we continue to be committed to prudent balance sheet management, but also continuing to return capital to shareholders.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

This is Jatin Khanna on behalf of Jerry Revich. Could you please provide any color on the drivers of opportunity set related to wallet share expansion and maybe product capability expansion?

Sure. This is Dave. Just quickly to our prepared comments and as you could see the broad portfolio that the Dana Off-Highway business will provide access to -- when you look across their portfolio and compare that to where Allison historically has been, when you think about accessing for us, construction, agriculture, et cetera, and then you think about other areas where we have some connectivity context in terms of adjacency. From our perspective, when you start to think about growth areas ultimately for us, that's where the focus really is, having access to that type of footprint.

But across -- when you start to really think about where we've been, where we'd like to be, we've talked for a number of years with our growth intentions in adjacent markets. This, from our perspective, fits very well, especially when you start to expand opportunities across -- whether it be powertrain, driveline or industrial applications.

So with our core competencies, the overlay that we have, we're very excited to ultimately get access to this combined portfolio and ultimately bring that into the market.

So what we expect, as we ultimately close on the transaction, we will then provide the Street with follow-up in terms of what that opportunity set starts to look like. But certainly, from our perspective, having access to a much broader portfolio, we see as very additive to our intentions to grow our business.

Our next question comes from the line of Sherif El-Sabbahy with Bank of America.

Just a quick follow-up on the business mix by products and the product portfolio, looks like a large portion of Off-Highway sales from our Dana are coming from axles. You mentioned core competencies being leveraged. But what opportunities do you see to leverage Allison's platform to expand outside of axles? Or where do you see the most focus to be initially when you're looking through the product portfolio?

I appreciate the question. When you think about -- again, let's talk about a bit about corporate core competencies, both of us, Dana's Off-Highway business and Allison, you think about precision gearing, high-to-low toric software and control systems integration, testing and development, validation; these are really deep competencies.

When you start to then think about what else we can do with those, as I said earlier, we've been somewhat constrained from a footprint perspective over the years. We've also noticed as we're trying and executing the team as against growth initiatives, it becomes much more challenging with back of a more localized footprint.

And frankly, the view, especially now, as I said earlier, in terms of some changes from an international trade perspective, where that takes things, it will become that much more, in our view, complicated. So we also look at opportunities to accelerate product innovation and electrified capabilities with this acquisition of Dana's business.

So I'd say overall, for us, when you start to think about what's next, as I said earlier, getting the transaction closed and starting to really take much broader control of these particular end markets from our perspective to really start to apply our combined core competencies and technologies.

But from just a pure perspective of looking at really high-quality businesses, as we said, very excited about having an extremely accomplished Dana Off-Highway team and their capabilities combined with what we believe is a world-class team here.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Graziosi for any final comments.

Thank you, Melissa, and thank you for your continued interest in Allison and your participation on today's call. Enjoy your day.

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