Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Second Quarter 2024 Earnings Conference Call. My name is Diego, and I will be your conference call operator today. At this time, all participants are in a listen-only mode. 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 call is being recorded. [Operator Instructions] I would now like to turn the call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jack.

Thank you Diego. Good afternoon and thank you for joining us for our second quarter 2024 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer and Fred Bohley, our Chief Operating Officer, Chief Financial Officer and Treasurer. 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 August 8th. 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 2024 earnings press release, our annual report on Form 10-K for the year ended December 31, 2023, as well as other general economic factors. 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 2024 earnings press release. Today's call is set to end at 5:45 pm 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, Fred will review our second quarter 2024 financial performance and review update to our full year 2024 guidance. Dave will then close with an update on recent announcements across our business prior to commencing the Q&A. Now I'll turn the call over to Fred.

Thank you, Jackie. Good afternoon and thank you for joining us. Closing out the first half of the year, we are pleased to report record revenue of $816 million for the second quarter of 2024. Demand for Class 8 vocational vehicles intensified during the quarter, leading to record quarterly revenue of $456 million in our North American On-Highway end market. Year-over-year top-line results were also improved by increases in our defense and outside North American On-Highway end markets as we continue to execute on our growth objectives. Please turn to slide five of the presentation for the Q2, 2024 performance summary. Year-over-year net sales increased 4% from the same period in 2023 to a record of $816 million. The increase in year-over-year results was led by a 15% increase in the North American On-Highway end market, principally driven by strength and demand for Class 8 vocational vehicles and medium-duty trucks and price increases on certain products. Year-over-year net sales were further improved by a 30% increase in our defense end market. The increase was principally driven by increased demand for tracked vehicle applications. Finally, year-over-year results were improved by a record second quarter in our outside North America On-Highway end market. The increase in net sales in the outside North America On-Highway end market was principally driven by higher demand in Asia and price increases on certain products partially offset by lower demand in Europe. Gross profit for the quarter was $394 million, an increase of $13 million from $381 million for the same period in 2023. The increase in gross profit was principally driven by price increases on certain products and increased net sales partially offset by higher manufacturing expense. Net income for the quarter was $187 million, an increase of $12 million from the same period in 2023.…

Thank you Fred. Please join me in congratulating Fred on his new role and responsibilities at Allison. In early June, Fred was appointed to the newly created position of Chief Operating Officer. Over the course of his 30-year career at Allison, Fred has demonstrated exceptional leadership and a deep understanding of our company and their end markets. We are excited for Fred to step into this new position, enhancing our ability to meet the opportunities ahead and continue our tradition of innovation and excellence. Allison has begun an extensive search for a new CFO with Fred continuing to serve in his current roles in order to ensure a smooth transition. Before moving on to other recent announcements, I would like to take a moment to discuss the current environment in our North America Off-Highway end market. Funding and spending for infrastructure projects has led to extraordinary demand for Class 8 vocational vehicles in North America. With Allison's share in 2023 at roughly 80% in these vocational vehicles we are seeing unprecedented demand for our 3,000 series and 4,000 series on highway products. In order to meet this elevated demand we have made investments in our supply chain and operations to not only manage capacity but also improve manufacturing throughput. With that being said, increasing production at the rate and scale demanded by the market has not been without challenges. Allison remains committed to meeting near-term opportunities while diligently evaluating investments to position the company for long-term growth. Moving on to other announcements during the second quarter. In the middle of May, we announced a commitment to invest $10 million in EnerTech Capital through our recently announced venture capital arm Allison Ventures. EnerTech Capital is a venture capital firm focused on the development of emerging technologies and business models in the…

Thank you. [Operator Instructions] Our first question comes from Tim Thein with Raymond James. Please state your question.

Thank you. And hey Fred, congrats on the announcement. Very well deserved.

Thank you.

Just thinking through the question relates to the guidance as you laid out for the back half of the year. If you look at the incremental EBITDA flow through in the second quarter was just under 40%. As I look at the midpoint of the revenue and EBITDA guidance for the back half of the year it would imply that EBITDA generation is essentially flat year-over-year. The question being was there some kind of a maybe a mixed benefit in the quarter that doesn't persist or you anticipate the costs and just inefficiencies arise as you need to stretch to meet the higher demand in the back half of the year or either or above just maybe some color on how we should think about the framework for the back half of the year. Thank you.

Sure Tim this is Fred. If you think about the back half of 2023, Q4 came in extremely strong and as we have things modeled currently it's modeled with more normal seasonality, so we've got Q4 you know a little lighter in the in the back half of the year that's primarily what's driving the margin difference between first half and second half.

Thank you.

And our next question comes from Rob Wertheimer with Melius Research. Please state your question.

Yes, hi thanks evening everybody. There's a lot going on in North America on the highway and obviously your segments never saw the kind of peaks or accesses that the long haul stuff did but I'm curious about the kind of uptick and strength is that you guys kind of know the pie chart I guess the vocational trucks a lot better than we do and what you sell to but is that end market driven, is that maybe supply chain constraints on getting dump bodies or whatever else built loosening up. I mean what kind of is leading to that and how fundamental is the strength in North America on the highway?

Hey Rob, it’s Dave. Thank you for that question. So we've mentioned this on a pretty near term recent calls, but there are a number of factors to answer your question. Vocational, if you go back to COVID and the lack of production probably suffered more than other areas. So post COVID as the infrastructure bill was signed and other funding was being provided it was clear you were coming into an upcycle in terms of demand without the vehicles. So you're now working through the industry is working through a very soft period of vehicle production in a period of very high demand, so you have an aged fleet with very high underlying demand at the same time from a labor perspective what you have seen is through COVID as a number of retirements where you the workforce has shed a number of more experienced workers and specifically drivers, so from an equipment perspective where some fleets could use with manuals per se. Those drivers are now retired, so you're looking at not only the shortage in vehicles coming into a pretty significant uptick in overall vehicle demand, but also a change in the demographics of the driver base. So we're seeing the combination start to drive its way through so to speak the market. The other fact is, with that demand as you would expect and I would certainly refer you to other comments that already been made here recently by the vehicle OEM in terms of results, but they're producing what the market demand is and right now with the softness you'd say with the line haul business, they're going to do I assume as much as they can to deliver the vehicles that people want thus I think you're seeing this real emphasis to not only catch up and cover the gap that we had post COVID but really start to address that backlog down to a more normalized level. As we mentioned on the April call, I do not believe, we do not believe that there's been significant improvement necessarily in some of the other supply chain constraints for vocational specifically around bodybuilders and such, so lead times continue to be extended and that's a labor issue to a degree as well. So that will provide, I believe, a bit of a governor in terms of necessarily going much higher per se because they just can’t process the vehicles fast enough, so our expectation of Fred's earlier comments and we talked about again on the April call is a reasonably high level of demand here as we work our way through the second half, you know we'll see what the balance of the year presents as we get laid into it relative to 2025. I think the comments at least the more recent public ones by some of the OEMs would indicate pretty stout order books for Q3 and at this point a decent start on Q4 relative to vocational.

Thank you.

And our next question comes from Ian Zaffino with Oppenheimer. Please state your question.

Hi guys, thank you very much, good color. Question would be on some of the On-Highway contracts, I know you've been not necessarily taking price on a lot of those contracts, and I think they're up for negotiation. I believe now or we're kind of getting into that season so maybe kind of give us a maybe some color on what's going on there as far as how you feel being or how you position going into that and kind of what the environment is to maybe get those contracts mark-to-market, thanks.

Hi Ian, it's Fred. Yes, as we as we mentioned on earlier earnings calls there is a significant amount of our North American On-Highway business up for pricing in 2025. Over 60% is available to price and as we look at the value that our product delivers the value proposition is very high right now obviously the OEMs have increased the price of the vehicles. All the cost that in effect our transmission [Indiscernible] maintenance cost getting more productivity in a day, able to size fewer trucks, fewer drivers all those costs have elevated and that puts us in a situation where our products delivering a significant amount of value and we've been under multi-year contracts predating the level of inflation we've seen the last couple years. So we do anticipate in 2025 pursuing price relative to the value that we're delivering. It's still rather early for negotiations with OEMs, and I would suspect that most of the negotiations will go down to the wire, but we feel very well positioned based on the value our product is delivering and the demand in the marketplace for our product to achieve meaningful price.

Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Please state your question.

Hi thanks for taking my question. And Fred, let me just join in congratulating you on the new role. Dave, just wanted to go back, you gave a lot of good color on the dynamics that you're seeing kind of on highway and vocational but just wanted to kind of take a step back and think about the second half guide. It sounds like, if I recall correctly the assumptions baked into the kind of the full year guide were for kind of a slowdown in the second half and you mentioned some seasonality in the fourth quarter, but just given the dynamics of continued kind of pent up demand and the supply chain trying to meet this vocational demand that you talked about, it would seem at least high level that you should be able to run kind of full out just to try to continue to meet that. So maybe just if you could help kind of explain what would cause any kind of slowdown, kind of in the second half given that you're more exposed to vocational versus something like the line hole or areas where we're hearing a little bit more weakness.

Angel, thanks for that question. So in terms of second half to build upon Fred's comment with seasonality typical with the Allison business just given the most businesses but the holidays in the fourth quarter calendar quarter of course you're looking at five at least 5% less production days so that normally results in a softer if you will fourth quarter because of the lack of production days that was not necessarily the case in Q4 of last year. It was unusual because I think as you know tracking the numbers, we started to really see a pickup and vocational into the second half of last year which really started to elevate when you look at those fourth quarter results. To your question, we now see and we talked about this on the last call a bit is that we certainly expect a more normalized fourth quarter relative to that seasonality regardless of demand. It's just a fact in terms of the lack of production days, so unless there's a significant change in schedules if you will, we would expect some of that seasonality to be dealt with in the fourth quarter. Other things that can certainly drive, I guess attempt to drive more or less demand. And as I mentioned our understanding is order books for Q3 are pretty full if not completely full relative to vocational. So when you think about Q4 I'm sure there's some to be filled in, but I think the reality is, as we mentioned in the prepared remarks we're doing everything we can as a team to meet that market demand. I would also offer the market isn't perfectly supplied outside of Allison relative to components. So that's the other part of the answer to your question is we can continue to drive the supply into the market but the market has to have all those other components to build these trucks. So I would say it's less of an issue certainly than it was during COVID, but you do see sporadically some level of disruptions, I think the OEMs that we're fortunate enough to work with do their best to work through those constraints as they pop up. But it's -- some of those are certainly unplanned and there’s always the unplanned situations that are much broader in terms of displacing a particular supplier that has broad market share that can always create some challenges. But the short answer is we expect a pretty robust level of vocational demand right through into fourth quarter again subject to the seasonality that I just talked to.

Thank you. And our next question comes from Tami Zakaria with JPMorgan. Please state your question.

Hi, thank you so much, very impressive results. So congrats to the team. I wanted to follow up on an earlier question about the guide. So seems like the midpoint of the guide assumes revenues still up, call it, about 1% year-over-year in the back half. But EBITDA margin down almost 160 basis points. And so if I were modeling, I would have modeled EBITDA margin at least flat if sales are flat to up a bit. So is this margin guide just conservatism? Or are you seeing any cost pressure or mix headwinds that makes you guide as such?

Tami, it's Fred. When you look at really the movement that we made on guide, obviously, we increased guide at a top line level, at the midpoint, $30 million. $15 million of that dropped through to EBITDA with our EBITDA guide up $15 million. So a 50% drop-through guide to guide. As we look out to the balance of the year, there's certainly puts and takes to what the second half will look like. We've seen raw materials come off a little bit here this month. Does that continue to hold? We've talked about what the top line could look like. We certainly modeled a more normal fourth quarter. Demand was more robust. Certainly, the incremental drop-through would be favorable. Thanks.

Thank you. Our next question comes from Luke Junk with Baird. Please state your question.

Good evening, everyone. Fred, just hoping you could flow through the updated guidance to the major segments on the top line just at a high level. In terms of any variances versus the original same [ph] guidance you gave in the fourth quarter, beyond North America vocational specialty. I guess I'm thinking about defense in terms of the supply chain and how much growth could allow you into the back half of the year, and then also maybe puts and takes in outside North America On-Highway, given the dynamics of growth in Asia but maybe some headwinds in Europe. Thank you.

Thanks, Luke. And this is Fred. The -- we obviously guide and provide that in market detail when we publish initial guide. So I'm not going to get down to specifics. But it's safe to say that looking back to when we came out with those numbers in February, that the demand in North America On-Highway is stronger. And then when you look across outside North America, fewer vehicles being produced. We are, and continue to have very good traction in Asia, and that's what's been driving the performance year-to-date outside North America. But even that performance is light of our initial full year guide where we had suggested we'd be up 14% outside North America On-Highway. I expect at this point with the challenges in Europe that, that will be a real challenge for the team to meet. From a supply chain, I think the piece that we continue to work through, we have a significant demand on the defense side and continuing to work through, getting parts in, getting the throughput through our manufacturing facilities. So we'll see how we run for the balance. But certainly, it's a challenge to ramp up at the pace in which we currently have demand. From a service parts standpoint, we knew the first half was going to be a difficult comp with the records that we ran in the first half. But as we look at it, we do see second half looking a lot like first half from a service parts, support equipment and other end market.

Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please state your question.

Yes. Hi, good afternoon and Fred, congratulations.

Thanks, Jerry.

So Fred, can we just talk about the -- your cost comment that you made a moment ago. You spoke about some material costs are starting to decline. Are we at a point where we could maybe see a tailwind from material costs? And if you wouldn't mind, just bridge the year-over-year margin performance in the quarter between pricing cost and absorption, just so we understand the moving pieces relative to the back half guide?

So Jerry, it's interesting. From a material cost, we were neutral in the quarter, and it's been a while since we saw that. We had -- we took some increases from a value-add to our supply chain, but that was offset with lower commodity cost. From a price cost standpoint, we've got a little over $20 million in price in the quarter. So 260 basis points. Manufacturing cost was up $12 million and material cost was flat. So when you pull that through, sort of kind of a normal type drop-through for Allison, high 40%. I think there's going to be continue for, I think, for all industrial companies, pressure with the value-add from suppliers, just driven by the labor comments that Dave made earlier on the call. I mean, it's still a challenge to recruit and attract skilled manufacturing employees. From a raw materials standpoint, I think a lot of things can move that, obviously, we see softening in the economy, we could potentially see that continue to roll off. But it's moved quite a bit throughout the quarter. So as we're looking at it and modeling it, we're modeling it kind of at current commodity prices for the balance of the year.

Thank you. And our next question comes from Kyle Menges with Citigroup. Please state your question.

Thank you. I was curious, just given the robust demand you're seeing for Class 8 vocational, are you entertaining the idea of building more capacity? And is there enough visibility to potentially do so? I suppose it sounds like there's other supply chain constraints that are outside of your control that could keep you from adding capacity. Just how are you thinking about that?

Kyle, thank you for the question. It's Dave. So we mentioned briefly in the prepared comments, we are making investments in some of our On-Highway products to enhance capacity, if you will. We're not, I would say, if your question is building new plants or assembly lines, etcetera, the answer to that is no. It really comes down to breaking some constraints with our existing capital footprint. That goes for house and transmission as well as some of our suppliers. So it's not only investments that we're making in our own footprint, if you will, from an operating perspective, but also within supply chain, some of that frankly, will get timed in here over the next, call it, 6 to 18 months depending on the equipment. The other thing though that it really comes back to is labor availability as you can certainly add, portions of shifts or more shifts, if you will. But there are inefficiencies inherent in those -- some of those operational strategies. So we're looking at all of that to really come back to a, I would say, more efficient operation. I would also offer with the supply base in certain cases running north of what we referred to as a lean capacity rate. You're generating very high supplemental cost to drive that additional capacity through. So it gets back to the investments to break some of those constraints and get to a more, what we would consider to be a lean capacity type of rate. So those are the investments that are being made very broadly, both and Allison and inside of Allison as well as our supply base. We're also looking at some further opportunities in terms of upgrading as we normally do maintenance and sustainment capital. The team is implementing what we would refer to as best of breed in terms of operational performance excellence. So the capital we continue to expand in terms of sustainment. It's also focused on improving actual output. So units per hour, etcetera. So scrap rates, you name it, but the team is very engaged in that. And with our global footprint, we do have the capability to shift around to rebalance some of that production. But beyond that, it's really back to the comment Fred made in terms of continuing to recruit, attract and retain some of these skills that our team members need to produce the kind of quality products that our customers have come to expect from Allison.

Thank you. And our next question comes from Rob Wertheimer with Melius Research. Please state your question.

Hi, thanks for squeezing me in for the follow-up. Dave, in your response, you kind of mentioned an idea on the manual transmission fading that we think about a bit, but I haven't asked you about a long time. And even with your high market share, that's still, I don't know, 20% to 25% upside, I guess, if you eventually take the whole market. The question is, is AMT a material part of that part that you don't have? Is it mostly manual? And is AMT gaining traction fading? I'm just not sure where that balance lies. I've asked you in a long, long time. Thank you.

Rob, thank you for that question. So the -- we do, as you stated, enjoy very high market share. And I think the team has worked extremely diligently over decades to reach that point. The fully automatic transmission, has significant advantages over any power interrupted transmission, which would be defined as a manual or an AMT. The manuals, as a percentage of market, continued to shrink at least within the spaces that we are addressable market. Focus is, which is high shift dense as well as severe duty vehicles such as vocational. AMTs have, for a number of years, been very effective at displacing manuals where you have duty cycles that do not feature heavy start or very rugged service applications. So to your point, we continue to look at ways, always looking at ways to grow our share position. But I think the AMTs have done a very, I think, adequate job displacing manuals because to my earlier comment on drivers, you do not have the amount of drivers trained for those manual gearboxes at this stage. So it's a natural attrition that you're seeing our market share gain for AMT is at the expense of manuals again and really non-Allison duty cycles and segments.

Thank you. And that concludes our question-and-answer portion of this call. I'll now turn the floor back over to David Graziosi for closing comments.

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

Thank you. And that concludes today's call. All parties may disconnect. Have a good day.