Allison Transmission's Q3 2025 Earnings Call: Contradictions in On-Highway Sales, Defense Segment Outlook, and Tariff Impact

Date of Call: October 29, 2025

Financials Results

• Revenue: $693.0M, down 16% YOY
• Operating Margin: Adjusted EBITDA margin 37%, essentially flat year-over-year

Guidance:

• Net sales expected to be $2.975B to $3.025B for full-year 2025.
• Net income expected $620M to $650M (includes >$60M of Dana acquisition expenses).
• Adjusted EBITDA expected $1.09B to $1.125B (midpoint of implied margin maintained).
• Net cash provided by operating activities expected $765M to $795M (includes ~ $70M acquisition cash outlays).
• Capital expenditures $165M to $175M.
• Adjusted free cash flow $600M to $620M.

Business Commentary:

• Market Challenges and Revenue Impact:
• Allison Transmission reported a 16% decrease in year-over-year revenue, with $693 million in Q3 2025.

• The decrease was primarily due to reduced demand for Class 8 vocational and medium-duty trucks in the North American On-Highway end market, influenced by extraordinary global macroeconomic factors and cautious purchasing decisions from end users.

• Defense Segment Growth and International Presence:

• Net sales in the defense end market increased by 47% year-over-year in Q3 2025.

• This growth was driven by expanding international defense presence and successful partnerships with local service providers, such as WZM in Poland, and winning contracts like the Turkish Land Forces Korkut program.

• Cost Management and Cash Flow:

• Despite a challenging operating environment, Allison maintained an adjusted EBITDA margin of 37% and generated adjusted free cash flow of $184 million in Q3 2025.

• This was achieved through disciplined cost management, flexing the operating cost structure, and strong operational resilience, enabling the company to maintain a solid balance sheet with over $900 million in cash on hand.

• Strategic Acquisitions and Expansion:

• Allison is working diligently towards the acquisition of Dana's Off-Highway business, which is expected to expand their global footprint and provide local content capabilities.
• The acquisition is anticipated to enhance market access and leverage common customers and market opportunities, although revenue synergies have not been quantified.

Sentiment Analysis:

Overall Tone: Neutral

• Management: revenue down 16% YOY but 'adjusted EBITDA margin of 37%' and 'adjusted free cash flow of $184 million'; commentary: 'operating environment to persist' and company has 'over $900 million of cash on hand' — cautious outlook but emphasizes resilience and cash generation.

Q&A:

• Question from Robert Wertheimer (Melius Research LLC): Can you disaggregate the steep fall in on‑highway sales between channel inventory and end‑user demand—how much is inventory vs true end‑market weakness?
  Response: Management: The decline was driven by continued OEM build‑rate reductions and inventory rationalization; we view it largely as deferred demand rather than a permanent market contraction and the company remains flexible to adapt.

• Question from Robert Wertheimer (Melius Research LLC): Was vocational as weak as medium duty, and can you quantify channel inventory versus prior cycles?
  Response: Management: Medium‑duty is much tougher; vocational is less challenged with OEMs maintaining share—no precise channel‑inventory quantification provided.

• Question from Timothy Thein (Raymond James & Associates, Inc.): The full‑year guide implies ~5% sequential revenue improvement into Q4 despite fewer build days—what offsets that?
  Response: Management (Fred Bohley): The sequential improvement reflects normalization after significant Q3 OEM downtime plus an aggressive defense business ramp that is expected to continue into Q4.

• Question from Ian Zaffino (Oppenheimer & Co. Inc.): When did you start to see the weakness and were SG&A/R&D cuts reactive or preplanned?
  Response: Management: Weakness began early Q3; cost actions were part of a year‑long approach to align resources with demand rather than a sudden Q3 reaction.

• Question from Tami Zakaria (JPMorgan Chase & Co): How should we think about tariff impacts, including recent Section 232 announcements?
  Response: Management (Fred Bohley): ~85% of components come from US/Mexico/Canada (majority US), so direct tariff cost impact is minimal and US manufacturing positions Allison favorably; tariffs affect demand/vehicle pricing more than our material costs.

• Question from Angel Castillo Malpica (Morgan Stanley): If current conditions persist (Dana acquisition aside), can earnings grow in 2026 without volume recovery?
  Response: Management (Fred Bohley): Earnings growth depends on end‑user demand; pricing gains (~450 bps this year) and cost control help, but volume recovery will be key—guidance for 2026 to be provided in February.

• Question from Angel Castillo Malpica (Morgan Stanley): Given pricing taken this year, what price increase should we expect next year?
  Response: Management (Fred Bohley): Pre‑pandemic we saw 50–100 bps; modeled expectations indicate pricing next year will be meaningfully higher than that.

• Question from Luke Junk (Robert W. Baird & Co.): How much leeway remains to maintain margins and prevent high decremental margins amid lower volumes?
  Response: Management: Margins are a top priority; with pricing and cost actions plus sizing investments to market, management expects to maintain margins within a reasonable range though demand uncertainty is the main unknown.

• Question from Kyle Menges (Citigroup Inc.): What does international On‑Highway need to hit double‑digit growth, and how does the Dana acquisition help?
  Response: Management (David Graziosi): International On‑Highway has low penetration and large opportunity; Dana expands local footprint and content, addressing regional trade/tariff needs and opening market/customer access—no quantified synergies yet.

Contradiction Point 1

On-Highway Sales Decline and Market Demand

It involves differing perspectives on the suddenness and nature of the on-highway sales decline, which could impact strategic decisions and investor expectations.

Can you explain the sudden on-highway sales decline compared to channel inventory and end market demand? - Robert Wertheimer(Melius Research LLC)

2025Q3: Revisions to build rates were early in Q3, with expectations of normalization. While body builders have inventory, it's improving. The uncertainty for end users, including market size and tariffs, leads to deferral. - David Graziosi(CEO)

Can you clarify which areas are impacted by the guidance change? Are there additional tax savings opportunities from the One Big Beautiful Bill Act beyond those mentioned? - Ian Alton Zaffino(Oppenheimer & Co. Inc.)

2025Q2: The guidance change mainly reflects revisions in North America On-Highway build rates due to market demand conditions, with OEMs adjusting their production and staffing. - David Graziosi(CEO)

Contradiction Point 2

Defense Segment Performance and Outlook

It involves differing expectations regarding the defense segment's performance, which could influence strategic focus and investor expectations.

What is the offset for the implied Q4 revenue growth? - Timothy Thein(Raymond James & Associates, Inc., Research Division)

2025Q3: Significant downtime by OEMs in Q3, expected fewer workdays in Q4. Defense segment saw a ramp in Q3, expected to continue in Q4. - G. Bohley(COO)

Can you explain the guidance adjustment and other factors beyond North America On-Highway contributing to maintaining decremental margins? - Timothy W. Thein(Raymond James & Associates, Inc.)

2025Q2: We see positive momentum exiting the quarter, especially with the defense business improving. Fundamentally solid order backlog and new opportunities going forward. - G. Bohley(COO)

Contradiction Point 3

On-Highway Sales Decline Analysis

It involves the analysis of on-highway sales decline and the factors contributing to it, which are critical for understanding the company's market positioning and strategic response to market conditions.

What is your view on the sudden on-highway sales decline compared to channel inventory and end market demand? - Robert Wertheimer (Melius Research LLC)

2025Q3: Revisions to build rates were early in Q3, with expectations of normalization. While body builders have inventory, it's improving. The uncertainty for end users, including market size and tariffs, leads to deferral. - David Graziosi(CEO)

Can you discuss vocational demand trends and what areas are driving the growth? - Isaac Chausen (Oppenheimer)

2025Q1: Dave Graziosi noted North America vocational demand remains strong and relatively flat year-over-year. Key drivers include municipal support, infrastructure investments, and the government's continued support. - David Graziosi(CEO)

Contradiction Point 4

Defense Segment Performance

It involves differing statements about the Defense segment's performance and expectations, which could impact revenue projections.

What's driving the Q4 revenue growth? - Timothy Thein (Raymond James & Associates, Inc., Research Division)

2025Q3: Defense segment saw a ramp in Q3, expected to continue in Q4. - G. Bohley(COO)

Can you provide details on the guidance for non-North America On-Highway markets? - Luke Junk (Robert W. Baird & Co. Incorporated, Research Division)

2024Q4: The Defense segment activities are at pre-pandemic levels. However, some of that is offloaded to our supplier base. - G. Bohley(COO)

Contradiction Point 5

Tariff Impact on Business

It involves differing statements about the impact of tariffs on Allison's business, which could affect cost and pricing strategies.

How should we think about tariffs impacting your business? - Tami Zakaria (JPMorgan Chase & Co, Research Division)

2025Q3: Tariffs primarily impact vehicle pricing and demand. - G. Bohley(COO)

Can you discuss the FX headwinds and tailwinds for 2025? - Ian Zaffino (Oppenheimer & Co. Inc., Research Division)

2024Q4: We've got a purchase component to our aluminum buy that we have been hedging for several quarters now. So we've got -- we had about $20 million of hedges on the quarter on the aluminum. - G. Bohley(COO)