Although FreeMarker was originally designed as a web page template engine, as of version 2.3 it also targets another application domain: transforming XML into arbitrary textual output (e.g. HTML files). Thus, in many cases, FreeMarker is an XSLT alternative.
Technically, there is nothing special in transforming XML documents. It's just like when you do anything else with FreeMarker: you drop the XML document into the data-model (and possibly other variables), and then you merge the data-model with the FTL template(s) that generate the output text. The extra features introduced for better XML processing are the node FTL variable type (symbolizes a node in generic tree structures, usable not only for XML) and the built-ins and directives dealing with them, and the XML wrapper you get out-of-the-box that exposes XML documents as FTL variables for the templates.
What's the difference between using FreeMarker or XSLT? The FTL language has the usual imperative/procedural logic. On the other hand, XSLT is a language with declarative style, designed by "too clever" people, so it's not easy to adopt its logic, nor to use it in many cases. Also its syntax is terribly verbose. However, XSLT's "apply-templates" method can be very handy when you process XML documents, thus FreeMarker supports something similar called the "visitor pattern". So in many applications, it is much easier to write FTL stylesheets than XSLT style-sheets. Another fundamental difference is that FTL "transforms" the node tree to text, while XSLT transforms the tree to another tree. So you cannot always use FreeMarker where you can use XSLT.