Good evening, ladies and gentlemen and thank you for standing by. Welcome to Allison Transmission's First Quarter 2021 Earnings Conference Call. My name is Hilary [ph], and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management team from Allison Transmission will conduct a question-and-answer session and the conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. [Operator Instructions] I'd now like to turn conference over to Mr. Ray Posadas, the Company's Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Hilary [ph]. Good evening and thank you for joining us for our first quarter 2021 earnings conference call. With me this evening are Dave Graziosi, our President and Chief Executive Officer and Fred Bohley, our Senior Vice President, Chief Financial Officer and Treasurer. As a reminder, this conference call webcast and this evening's presentation are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through May 5th. 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 first quarter 2021 earnings press release and our Annual Report on Form 10-K for the year ended December 31, 2020, uncertainties related to the COVID-19 pandemic and related responses by governments, customers and suppliers and other factors as well as general economic conditions. 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 first quarter 2021 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 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 you with a brief operational update; Fred Bohley will then review our first quarter financial performance and update full year 2021 guidance. Finally, Dave will conclude the prepared remarks prior to commencing the Q&A. Now, I'll turn the call over to Dave Graziosi.

Thank you, Ray. Good evening and thank you for joining us. I'll begin our prepared remarks by once again expressing my appreciation to Allison's employees, customers, suppliers and communities for their continued dedication and resilience during this critical period. Despite these severe disruptions to global supply chain that are currently impacting our end markets, customer demand is improving and our team continues its tireless efforts to fulfill the Allison promise. I'm extremely proud of the Allison extended family and the commitment demonstrated every day. So much progress has been made in addressing the effects of the pandemic and there's good reason to be optimistic. The risk persists and our top priority remains to health and well-being of Allison's extended families and its communities. Many safety measures and precautions that have been implemented throughout the pandemic remain in place today and Allison is now providing on-site COVID testing and vaccinations to our employees in our Indianapolis plants and global headquarters. We continue to encourage everyone to get vaccinated follow the recommended guidelines and lookout for one another. As we discussed last quarter, supply chain across the globe continued to be strained challenges include labor constraints and shortages of component materials, global demand surpasses capacity recovery and availability, logistics issue continue adding to freight delays and cost and certain electronic components such as semiconductors or chips remain in short supply across many industries. Our procurement and global supply chain teams continue to work closely with our suppliers at every levels to understand and mitigate constraints. Our suppliers understand importance of Allison as an essential, critical infrastructure manufacture and the impact both to commercial vehicle and defense industries have in the global pandemic recovery. Continued coordination with our suppliers, customers and industry participants from order to delivery remains critical as we work collaboratively to further mitigate the ongoing risk caused by the global pandemic. Besides these challenges the delivery of our product with minimal disruptions since the beginning of the pandemic continues and we're pleased to report that Allison's first quarter results reflect the ongoing global economic recovery. Thanks to improving customer demand, a resilient outlook and the efforts of the Allison team to maintain operational [indiscernible] and meet our commitments. We're raising our full year 2021 results guidance including our full year net sales guidance from a midpoint increase of 12% to midpoint increase of 15% compared to net sales for 2020. We also continue to fund significant investments in engineering, research and development and capital expenditures to further position to Allison to capitalize on meaningful growth opportunities across all of our end markets. Finally, during the first quarter we continued our well-defined approach to capital allocation by settling approximately $96 million of share repurchases or over 2% of outstanding shares and increasing the quarterly dividend from $0.17 to $0.19 per share. Thank you and I'll now turn the call over to Fred.

Thank you, Dave. Following Dave's comment I'll discuss the Q1, 2021 performance summary. Key income statement line items and cash flow. I'll then update full year 2021 guidance before turning the call back over to Dave. Please turn to Slide 5 of the presentation for the Q1, 2021 performance summary. Year-over-year net sales decreased 8% to $588 million compared to the same period in 2020. However sequential net sales increased 10% as a recovery in customer demand and the global economies that began in the second half of 2020, continued through the first quarter of 2021. Gross margin for the quarter was 49.5%, a decrease of 170 basis points compared to 51.2% for the same period in 2020. The decrease was principally driven by lower net sales and unfavorable material cost partially offset by price increases on certain products. Net income for the quarter was $120 million compared to $139 million for the same period in 2020. The decrease was principally driven by lower gross profit partially offset by lower interest expense as a result of the refinancing of our long-term debt in November 2020. Adjusted EBITDA for the quarter was $222 million or 37.8% of net sales compared to $257 million or 40.3% of net sales for the same period in 2020. The decrease was principally driven by lower gross profit and increased incentive compensation expense partially offset by lower commercial activities spending. A detailed overview of our net sales by end market can be found on Slide 6 of the presentation. Please turn to Slide 7 of the presentation for the Q1, 2021 financial performance summary. Selling, general and administrative expenses decreased $2 million from the same period in 2020 principally driven by lower commercial activity spending and lower intangible amortization expense. Engineering, research and development expenses increased…

Thank you, Fred. Last summer we launched Allison's eGen brand of fully electric and electric hybrid propulsion solutions positioning Allison to lead the charge into the future of commercial vehicle, electric propulsion. Shortly after we launched the eGen Flex, Allison new zero emission capable electric hybrid system and subsequently, we launched eGen Power Allison's new line of fully electric and fully integrated zero emission electric axles for medium and heavy-duty commercial trucks. Since then we've announced several milestones for both eGen Flex and eGen Power beginning with last summer's announcement from IndyGo, the Indianapolis Public Transportation Corporation that will be the lead fleet partner for Allison's revolutionary new eGen Flex electric hybrid systems demonstrating the trends of properties commitment to reducing its independence on fossil fuels, enhancing the quality of life in their community and protecting the environment while minimizing the total cost of ownership. Last fall, Hino Trucks and Hexagon Purus showcased a fully electric eGen Power 100D equipped Hino XL7 Truck during Hino's Project Z announcement. Hino's zero emission vehicle development program. The new fully electric eGen Power 100D is most the powerful and fully integrated electric axle system in the world and Allison's first electric axle variant within the eGen Power series of products. In February, GILLIG announced that will begin offering Allison's eGen Flex Electric Hybrid Propulsion System later this year providing bus fleet with up to 10 miles of full electric propulsion for zero emission zones with no additional infrastructure investment required. And last week, we announced the introduction of the eGen Flex by the New York City Transit Authority to enhance the quality of life and help the environment. This latest development with nation's largest transit authority followed the successful evaluation and subsequent 50 unit order last year by the New City Transit Authority…

[Operator Instructions] Our first question is from Jamie Cook of Credit Suisse. Please state your question.

I guess just first a question on the margins for 2021. Is there any change in your assumptions with regards to R&D? You talked about 30% increase or changes with supply chain cost are free and then. How to think about margins longer term given some of the investments we need in EV, is it impossible to get back to prior peak or exceed? Thanks.

Sure, Jamie. As far as assumptions relative to margin I mean we continue to see the elevation of raw material. And we talked about on the first quarter call expecting to be price cost neutral. What you saw in the first quarter was about $10 million in price and $7 million of unfavorable material performance. So slightly favorable. As we look through the year, I think still in that cost price neutral range is there kind of depends on the pace at which raw materials maintain. As you know our pass throughs on aluminum through our aluminum die cast manufacturing. Those are more real time in the quarter. The commodity pass throughs we have with our long-term on highway supply agreements tend to lag a little bit. At this point, once you weigh in the pass throughs that will happen because of the elevated material cost. We expect to get more price. We talked about 50 to 75 basis points probably closer to 100 basis points for the full year as we're modeling it. Right now. Relative to engineering spend up 30% year-over-year this still our expectations. It's looking like it's going to break a little bit heavier in the second half to probably 45% spend in the first half, maybe 55% in the second half from an R&D standpoint. Relative to longer term margins beyond 2021 I think in all of in manufacturing right now are dealing with inefficiencies. Whether it's expedited cost, freight. So I think as the supply chain gets back up some of those costs will come out. The amount of investment we spend on R&D will really be determined by the opportunities in front of us and really as you know from watching us for a number of years Jamie, I mean there's a significant amount of operating leverage in the business. Assuming revenues continues to improve, the drop through should be attractive.

Our next question is from Larry De Maria of William Blair. Please state your question.

Dave, thanks for the discussion around eGen and some of the wins you guys got. I was wondering if you can take a little bit further, kind of thinking about timing and economics. And I know it's obviously early so, it probably doesn't hit the income statement for a while. But as you're getting this wins, I just want to try to understand what kind of value Allison is getting if you're supplying eGen [indiscernible] integrator and take us through that three to 10x cost differential you talked about before - we can kind of think about how this evolves from where we are now. Thank you.

Sure, Larry. Good afternoon. Let me handle the first part of that and then I'll take it over to Fred. So on the easy certainly appreciating the announcements that we made. I think team continues to very engaged as I mentioned in my prepared remarks globally and that's important. So we're not just focused on one market. I would say timing wise I think we probably mentioned over the last few quarterly calls. What we're receiving in terms of initial inbounds about potential timelines and volumes seems to be pushing to the right on the calendar and the volumes with tend to wind up moving to the lower end of the range, when all of it is said and done. Timing, I expect that it will continue to be stretched out here a bit. So I think your specialist or your so-called forecast experts. But the reality is, things continue to be challenged out there from a timings perspective. So what we're doing is, as we've said before is really focused on probable outcomes that are frankly within our addressable markets at the same time, looking to expand upon our existing conventional addressable markets. So as you think about space and we talked before about moving into some different applications that's part of the conversations and development work we're doing. But I would say, at this point anything that we're hearing about initial volumes and timing is relatively low and there's good reason for that because as we've discussed before the customer demand side of this process will take some time to evolve and as we also mentioned on the February call. There's certainly a lot of expectations around funding, stimulus if you will or other programs that could potentially accelerate, electrification having said that, the numbers are rather large as you all know in terms of trying to make a real impact there and move the timeline instead of to the right, to the left. So with that, let me turn it over to Fred in terms of your content question.

Sure, Larry as you mentioned three to 10x, that's our expectation of price we get relative to class [ph] six, seven average selling price which is approximately 5,000. So on the low end there, content would be just a base E axle. On the higher end you're looking at content all the way up to inclusive of the battery system. So those are still our expectations as we move forward.

Our next question is from Tim Thein of Citi. Please state your question.

Dave, thanks for the comments or maybe just piggyback on the last thread there. Just in terms of your discussions with OEMs and the comment that maybe the timing is more delayed and the volumes are lower than what is maybe get to picked up. Can you just maybe - a lot of the end market - a lot but some of the key end markets for Allison perceived to be where electrification gets first and where we talked about this for several years. So you presumably have a really good lens into this. Is it just a function of who's going to pay for it? I mean there's a probably litany of reasons. But maybe, what again it's a little counter to maybe what some of the sentiment is publicly. So maybe you could expand on that a bit in terms of your discussions with some of the customers in terms of what's influencing that? Thank you.

You're welcome, Tim. So couple things, I think we've touched upon in some more recent calls. The fact is, I think it's all - I don't question any of the intentions and the broader task. We want zero emissions at some level and the all the associated benefits with it and that's why we supported both in our operations and in our products. And you know over the years in the conventional side as well in terms of fuel efficiency and emissions reduction. So having said all that, the intentions are all good I think the challenge though is as you point out is, what we stated. Who's going to pay for it? And I would take a step back from that and say that, the answer to that is a number of different potential parties. But history has proven that the adoption is on the front end extremely cost and you're also dealing unlike the automotive phase, commercial vehicles end users are very conservative and the idea of trying things is one thing, the idea of converting an entire fleet is another. And I think what is being discovered along the way and we do have access as you can appreciate to both our team with the level of engagement and network we have is not only to OEMs, it's end users. When you talk to end users many will tell you they're really not seeing much necessary near-term demand. But what they're really looking for and I harp on this for a reason is, we perform as an industry within commercial vehicle at a very high level, extraordinarily high reliability. I think a very predictable total cost of ownership, that's the expectation that's been set. So that is the, the ask. So when you would naturally expect the…

Our next question is from Rob Wertheimer of Melius Research. Please state your question.

Dave, you talked a lot and know about the future power trends and I appreciate that, a lot of this is [indiscernible] in the future. Nonetheless, in addition sort of content per truck you have opportunity to go up on. You have the potential to broaden out and market to bid I suppose. I'm just curious if you can characterize the projects you're working on, looking at, whether it be in different segments in North America or whether it be in different OEMs or customers, globally. Whether you're seeing any tangible evidence of that blobbing out can happen versus, hope to happen. I don't know if this is fair to tack on question. It seems like there's a little bit of positive news out of China sales this quarter. I don't know if you have any comment on that. Thanks.

You're welcome, Rob. So let me cover the EV questions and then I'll let Fred cover up on China sales. So briefly in terms of the comments we made about future solutions alternatively propulsion energy etc. So as you know over the years, we've certainly applied our technology to a number of different energy sources being somewhat energy agnostic if you will, as we think about the future with EV is not only the electrification if you will that can make its way into fuel cell electric etc. As we've discussed before are taking an approach that we believe will allow us to broaden our markets as you mentioned. So the discussions we're having with a number of OEMs and end users it covers a very broad slice of the market. So as you think about not only our addressable space there are discussions that impact beyond our addressable space. There's also frankly other potential applications outside of the On-Highway end markets that we have. As we're able to apply conventional technology, we have the same thought process around electrified solutions across all of our end markets. The key point here is, it's global. It's across multiple segments. It continued to be focus on broadening our footprint. But the key, the end objective to all of that is being able to meet or exceed the conventional experience and deliver the Allison promise. Let me turn it over to Fred to your China sales questions.

Sure. Rob. Relative to China and really outside North America in total up year-over-year 17%, up sequentially 9%. On the year-over-year I mean we did touch in Q1 of 2020 some softening in the tailwind of the quarter relative to COVID-19 specifically in China. But it was again China's rebounded really nicely for us. Year-over-year $12 million, outside North America $9 million of that driven by China. But as we look out, all those regions outside North America are really well positioned for year-over-year growth. China leading the way. Japan, Europe as well as Latin America we're expecting really good forward momentum of where we [indiscernible].

Our next question is from Ian Zaffino of Oppenheimer. Please state your question.

I just looked into guide and to obviously it does not include anything from any potential infrastructure build I imagine. And what you've been able to see as far as discussions and kind of what's in there. What do you think the benefits to you guys would be, maybe what areas you would see it in, where you would see? And any type of color you could give us, would be helpful. Thanks.

Ian, its Dave. Good afternoon. I appreciate the question there. So our guidance does not in fact assume anything relative to an infrastructure build if you would. I would just kind of level setting expectations and I'm sure you're well aware of some of the OEM reporting that's already taken place. But the idea of infrastructure coming through in terms of driving more demand in 2021, it's certainly a possibility on that again we've not included in our guidance. That being said, I would offer that given where the industry currently sets is, we understand it with relatively full order boards and extended vehicle build times. In our view, I think that starts to really create the and I think I mentioned this on the February call relative to the question about cycle being I think at peak. We talked at that stage about expectations. The market was really set up to be stronger for longer so to speak. I think your point in terms of any additional infrastructure spending would create further tailwind to that process because again it's just - I don't believe the industry at this point is in a position that they can really significantly pick up beyond what you already heard about in terms of guidance. So I'm just - there's too many our view, opinion at least - too many issues out there. Whether it's supply chain issues and then you get into labor availability and of course labor affects a number of different things as we talked about before. It certainly provides I think an even better set up than exist today already for 2022.

Our next question is from Jerry Revich of Goldman Sachs. Please state your question.

Dave, can you talk about how your transmission compares to the HD transmission obviously the pack R [ph] and as of yesterday on the private label side of offering the ZF option as a default option going forward. I'm wondering if you could just weigh in, this is was occasion than performance of Allison product versus ZF.

Sure. You're welcome. So couple of things, obviously I'm aware of that announcement. The TX 58 [ph] as you may or may not know is based on an automotive solution. And I would note similar to offerings from others over the last decade that you're well aware of. We certainly would recognize ZF's a very capable organization and certainly have a lot of respect for their team. That being said, specifically with the TX 8 [ph]. It really offers single solution, one ratio set and only one PTO option. So as you compare and contrast, I think to your question. Our 2000 and 3000 series transmissions are released with over 350 global OEMs including Peterbilts and Kenworths every other major North America OEM. That being said, our product really have a bulletproof reputation and that wasn't easily earned and it was really done over many decades and over what is told now, a 100 billion miles globally. So that's a very proven solution to your question and as I mentioned earlier on the call. The commercial vehicle users are very conservative bunch. They don't take risk lightly to their businesses or to this - will put at risk to superior residual values that the Allison products have. I can certainly point again to the history I mentioned with several other similar offers within the last decade. We understand the experience was not a good one. In terms of the number, the end users both the utilization of that particular solution or the impact on residuals. So as we see it. We're certainly very confident and our product, the improvements that we made over the years, that we continue to invest and as I mentioned with fuel economy, durability, safety, new requirements that are coming out relative to safety and overall value to our customers. In summary, I think we're certainly confident in our products and capabilities. We believe our customers are better served with more options and with that in mind, certainly welcome the opportunity to meet ZF in a highly competitive OEM medium duty market.

Our next question is from Brett Linzey of Vertical Research Partners. Please state your question.

I was hoping you could provide an update on just the state and muni funding environment and utilization to some of those fleets. Obviously reopening should drive utilization and better activity. But any sense by the metrics you track, age of the fleet, conversations you're having, how that deferral process looks. And I guess the question two and the follow-on is, are you potentially going to see further delays on some of the replacement as they re-evaluate some of the alternative technology, just curious what the messaging is from that channel? Thanks.

You're welcome, Brett. It's Dave. A few points to hit there. So as we've discussed on a number of other calls and as I'm sure you're well aware. Municipal fleets at least from a transit perspective have been very much underutilized due to the pandemic. That's now starting to change. It's improving. The fact is, I think the - as you know many of the properties are having budget challenges because of lack of revenue that was certainly the case probably a quarter ago. I think what you're starting to sense, we're starting to be aware of a fair bit of optimism concerning statutory stimulus funding and what that ultimately means to provide some level of relief. The fact is, it will be - we're seeing signs of slowly improving utilization rates and the optimism attached to this statutory funding. So you should start seeing here sooner rather than later pick up in after market for that particular segments. The other thing though be aware of, is you do have labor constraints in the service channel. So as much as we're seeing it in other areas of our business. Labor availability is also an issue. In terms of service end of things. So I think the bottom line it's improving, slowly. Some of them impact on renewing fleets or otherwise. I think that's largely the impact will largely depend on how the stimulus fund are ultimately earmarked that there's requirement or otherwise. I would say, the transit properties in general want to see very low proven if you will solutions with predictable outcome. So the small test that are going on we would expect to those would certainly continue, but I do not believe any are in a position where they're necessarily beyond. I think a select amount of fleets…

Our next question is from Ross Gilardi of Bank of America. Please state your question.

I just wanted to piggyback off of Jerry's question a bit. Just on the packer announcement. Is most of Allison's business with packer are on the medium duty line and I'm just kind of contextualize what just happened. I mean is this kind of status quo development or does it represent potential share loss for Allison, if the new standard option on those vehicles is a fully automatic solution.

Ross, its Dave. Obviously, I think the ZF is in the markets globally. Certainly a new enter into North America and medium duty. We're obviously still available to Peterbilt and Kenworth customers. I think there's a reasonably strong existing preference for Allison. I think there with ZF, I do not believe anybody could make this statement at this point. That there they won't have some impact in terms of the medium duty business. That being said, as you know we continue to grow our position in medium duty and have for many years. So the extent I think their standard offering I would expect that there certainly will have some volumes that comes with that. That being said, we continue to enjoy very strong strategic relationship with the Pack R [ph] team and support their business in many ways and we have across the board releases whether it's our one, two, three or 4000 series products. We're certainly again confident that the market will test the technology as it's done with similar offerings over the last decade. I think the history although certainly not indicative of the future. We're confident in the performance of our product and frankly the preference of our end users.

Our next question is from Ann Duignan of JPMorgan. Please state your question.

Most of my questions have been answered. But I did want to circle back to your competitive position on the electric axle in particular and recently we saw and the management from [indiscernible] with electric commercial vehicles in Europe. They're collaborating on fully integrate eAxle. And I'm just curious where does Allison stand in terms of collaborating with others. It does seem like you're going to get left behind because you're doing it all on your own and others are developing partnerships and growing their businesses in Europe and then suddenly, we wake up and we have a similar situation where North America OEMs are bringing over European suppliers just like they've done with ZF.

Ann, its Dave. Maybe where we've given the market and the stake and impression that the idea that we're going it alone is really not our approach as we mentioned on prior calls. Part of our process here is collaboration as I think we've said several times. We view EV just by the nature of the solutions that are going to be required and the integration of the technology. It will require collaboration. So we're working with a number of different parties. I don't see that changing frankly. I think the idea of going in alone is interesting. But that is not Allison's approach. I would also note that there are many so called collaborations that are ascribed to grants or certain statutory program that's not unusual. We've been involved with those in a number of different areas. But I would certainly tell you the interaction that we're having with the market and across the globe really looks at not only end users, OEMs. But a number of industry players. So I think we're very confident in terms of how we're going about the process and I would offer from a capital allocation perspective. It seems to us to be probably the most prudent way to go through. About that process right now just given the relative position and immaturity of the overall market. So those things will continue to evolve as you know. But our process I think we're very comfortable in terms of where we're currently aligned with a number of different parties.

We have reached the end of the question-and-answer session. I will now turn the call over to Dave Graziosi for closing remarks.

Thank you, Hilary [ph] and I would like to thank everybody again. Your continued interest in Allison and for participating on today's call. I hope you enjoy the rest of your evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.