Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Third Quarter 2024 Earnings Conference Call. My name is Kevin, and I'll be your conference call operator today. [Operator Instructions] As a reminder, this conference call 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, Kevin. Good afternoon and for joining us for our third 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 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 third quarter 2024 earnings press release, in 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 three 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 third quarter 2024 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 four of the presentation for the call agenda. During today's call, Fred Bohley will review our third quarter 2024 financial performance and review updates to our full year 2021 guidance. Dave will 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. As we progress through 2024, demand for Class 8 vocational vehicles continues to drive notable performance in Allison's North America On-Highway end market, leading to record results for the business as a whole. I would like to take a moment to thank our team for their combined efforts working diligently to meet the unprecedented demand we are seeing for our 3000 and 4000 Series products in North America, while continuing to work towards the realization of our $100 million incremental annual revenue opportunity in our defense end market, as well as drive our growth objectives outside North America to capitalize on increased adoption of automatic transmissions. Please turn to Slide 5 of the presentation for the Q3 2024 performance summary. Year-over-year net sales increased 12% from the same period in 2023 to a record of $824 million. The increase in year-over-year results was led by a 22% increase in the North American On-Highway end market principally driven by strength in 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 23% increase in our Defense end market. The increase was principally driven by increased demand for tracked vehicle applications. And finally, year-over-year results were improved by a record third quarter in our outside North American 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 $396 million, an increase of $39 million from $357 million for the same period in 2023. The increase in gross profit was principally driven by increased net sales…

Thank you, Fred. Allison continues to see robust demand for our on-highway products, particularly our 3000 and 4000 Series, fully automatic transmissions due to unprecedented Class 8 vocational vehicle demand stemming from sustained infrastructure spending in North America. In order to meet this elevated demand throughout the year, we have made investments in our supply chain and operations to not only manage capacity, but also improve manufacturing throughput. Last week, we announced further plans for long-term sustainable growth and global capacity increases for our on-highway products through investment in our Chennai, India facility. Opening in 2010, our Chennai, India facility serves as the headquarters in the region, expanding our presence while initially fabricating parts to support global production of our 1000 and 2000 Series On-High products. After demonstrating the ability to meet Allison's best-in-class manufacturing practices, the facility expanded capabilities to assess our 1000 and 2000 Series transmissions in 2012, while relying on components provided from our Indianapolis sourcing supply chain. We are excited to invest to nearly double the manufacturing footprint of the India facility increasing fabrication capabilities for components of our 3000 and 4000 Series On-Highway products, giving us the ability to tailor our global production to meet regional demand. Our investment of over $100 million will be spread over the next few years be half of that total project spend expected to occur in 2025. As operations begin in 2026 and ramp up to full production in 2027, this invest will support our long-term growth objectives in the outside North America regions, raising our global capacity and offering operational Through this investment, our global manufacturing operations will return to optimized levels of production, offering cost savings through efficiency gains while increasing Allison's ability to meet the future demand for our on-highway products driven by the continued global…

[Operator Instructions] Our first question is coming from Ian Zaffino from Oppenheimer.

Very good quarter. Just a quick question on the pricing outlook for next year. I know we're kind of getting into -- towards the end of the year. How are discussions going there? And what type of magnitude do we think we're going to expect as the environment changed any of that thinking one way or the other?

Thanks, Ian. This is Fred. I think as you're aware, about 60% of revenue in North America On-Highway LTAs are coming due, and we're in no negotiating these currently. As we've talked about in the past, we continue to deliver a significant amount of value to the end markets. Our fully automatics allow the commercial vehicles to operate more efficiently. So, the type of things that are more efficient and we save on have continued to inflate up. Overall vehicle cost is up, cost of drivers are up, cost of maintaining equipment is up. So, all the advantages that are fully automatic deliver have continued to elevate. And so, as we sit here right now, definitely feel well positioned. We're delivering a significant amount of value. There is very, very strong demand for our product. And we'll continue the negotiations and anticipate most of them concluding probably towards the later half of Q4.

Next question is coming from Rob Wertheimer from Melius Research. Your line is now live.

Good evening. I am sorry to now all the good news on announcements and trials and everything else in operations that you talked about. I wanted to focus just on the balance sheet, use of cash and so on. I mean you guys have been super clear over the years. You've been very aggressive in buying back shares. I think if I'm not mistaken, your cash balancing like 8% or 9% of your market cap, and your maturities, I think, are out to 27%. So, just curious if you're pausing for any reason on aggressiveness on share buyback, if there's anything being contemplated or how to think about that?

Rob, it's Fred. I mean we -- as you mentioned, I mean, our capital allocation priorities are pretty clear. I mean it's first funding organic revenue and earnings growth. And you see that with the recent announcement we made relative to manufacturing in India. Obviously, we talked about a lot going on in the product development space. Certainly, we've done some acquisitions and continue to look proactively at that. But our primary focus has been returning capital to shareholders. 63% of shares repurchased since we became a public company. We increased the dividend 5 consecutive years, bringing it from $0.15 per share per quarter to $0.25 per share per quarter. It's certainly factual that we're holding a little higher cash balance than we have historically. We still are earning a very appropriate return on that. But long-term goal is to follow our capital allocation priorities and fund the business and ultimately return the excess cash to shareholders.

Manufacturing capital needs don't seem to be all that large versus what you have. So, I assume it's more a timing differential, maybe you have an acquisition you're not going to talk about, but more timing differential on spending that cash. I mean do you intend to keep a higher-than-average balance long term, do you think?

No, I think it really is timing of returning cash to shareholders, Rob.

Next question today is coming from Tim Thein from Raymond James. Your line is now live.

Thank you. Good afternoon. I just want to come back to the $400 million growth opportunity or outgrowth opportunity you guys have outlined for some time. And it's a little hard to see externally where you're falling on that. But you talked about -- and maybe defence is where we've seen a little bit more traction. But I guess just kind of those four drivers that you talked about, I mean, where are we in terms of marching towards that? Is it in any sort of framework as to how to think about a potential time line? I know it's maybe purposely intentionally nebulous in terms of the timing when you said it, but I'm just curious if you could come back to that as to how we're moving towards those targets or goals?

Tim, it's David. Let me just try to cover that off for you, and I appreciate the question. So, from a growth initiative perspective, we really highlighted four things: wide-body mining dump, frac trend, the regional haul or Class 8 tractor day-cab and of course, defense, starting with defense, as you mentioned that one specifically. We continue to make very good progress there. I think you could tell by the prepared remarks. I think the team has done an excellent job frankly, spreading our customer base outside of the U.S. at this point. So, obviously, focused on working with allies, but we see -- continue to see a tremendous amount of opportunity there. in terms of our overall progress towards our target, that's probably one of the most advanced outs of the four at this stage with, we believe, a fair bit of tailwind to achieve the balance of that growth target, if not more. So, as we've discussed several times, the defense up cycle continues. So, we're receiving a fairly high level of inquiry. You'll also note that the product development work that we've done around the eGen force as well as variance or other cross-drive products continue to be received very well in the market. So, the focus there, the key will be some of the newer U.S. sponsored programs as well as a number of outside North America initiatives. Regional haul Class 8 tractor day cab, making, I think, decent progress there, although I would tell you market conditions, as you know, we've talked several times on our calls this year and frankly, late last year. So, me of the softness that you're seeing in the tractor market is having an impact there in terms of just overall volume that's actually achievable at this stage. So, the…

Next question is coming from Angel Castillo from Morgan Stanley. Your line is now live.

Thanks gentlemen. And I appreciate that you taking my question. I just wanted to touch base on the fourth quarter a little bit more. It seems like it's a pretty wide range in terms of the EBITDA implied of kind of 20% decline year-over-year to potentially flat, seemed like a pretty wide range. As you think about the level of visibility you have to the fourth quarter, I recognized last quarter or last earnings call, you talked about holidays and some of those dynamics that impact your year-over-year as well as a kind of tough comp. But can you just help us understand maybe the range of what are the assumptions that could result in a minus 20% year-over-year versus it being closer to flat at the top end?

Sure, Angel, this is Fred. The -- and we've highlighted this a couple of quarters in a row, but I think it's really important to just think about six or seven fewer workdays for the OEMs to build. And this year, we've averaged $12 million, $13 million in revenue a day. So, you play that out. Our expectation is that they're not going to build at the levels they've built the last couple of years, and they're probably going to go back to some normal seasonality that we've seen pre-pandemic '18, '19, where Q4 would be soft. So, that's really at the starting point. driving where our midpoint guide is on a sequential basis from a revenue standpoint. And that's really just flowing through from an EBITDA standpoint. We do have -- as you look across, we've got engineering slightly elevated sequentially. But the biggest driver really is the top line and the type of margins that we make. So, what would drive the performance higher is clearly if the OEMs attempt to work more days, basically working Saturdays or into the holidays. But at this point, where they are relative to, I think, their total order boards and the softness that you're seeing across line haul just makes this year stack up a little different than what we've seen in the last couple of years.

Next question is coming from Tami Zakaria from JP Morgan. Your line is now live.

Thanks gentlemen. And I appreciate that you taking my question. Very nice quarter. Two questions for you. The first one is about the facility investment in India. I think you mentioned capacity is doubling there. So, when you ramp to full production in 2027, what kind of incremental volume do you expect versus what it is right now? I'm trying to understand the size of the incremental sales opportunity from this increased capacity in 2027.

Tami, it's Dave. I appreciate the question there. So, -- to be clear, when we talk about capacity expansion, we are doubling the manufacturing square footage in India. In terms of capacity, it's focused on our on-highway products, specifically around fabrication for our 3000 and 4000 Series products. That capability will allow us to frankly meet the growth demand that we're seeing for out of our facility in Hungary that assembles our 3,000 and 4,000 series transmissions as well. So, to answer your in terms of overall capacity, again, assuming an 8-hour shift schedule, a normal shift schedule, that capacity increase for on-highway products is approximately 10 to plus or minus 20% increase. So, you figure somewhere in that range of 10% to 20%. Again, depending on availability for all components, et cetera, but we are not expanding capacity for assembly. It's expanding capacity for fabrication for demand outside North America.

Got it. Got it. Okay. That's very helpful. And my second question is, I think you mentioned unprecedented demand in vocational trucks right now. How do you see this demand playing out over the next few years? Investors often ask where we are in the vocational truck cycle. So, I'm curious, how would you answer that question? Where are we in the vocational truck up cycle?

It's an excellent question. And one, I think a number of parties are contemplating. I would just tell you; we don't use the word unprecedented lightly. The amount of demand that we have seen throughout this year, and frankly, it started, as you probably know, the second half of last year, some ramp up there. We have not heard anything from a market perspective, whether that be end users or OEMs setting any level of pullback on overall demand. As we've talked about on prior calls, you had level of suppressed production because of COVID for a number of reasons. At the same time, you've had this enormous injection of capital into the market, driving demand for vocational products. So, whether that be infrastructure spending, other investment initiatives and incentives, they are out there and driving demand. So, -- we are, again, seeing nothing at this point that would tell us that this is a near-term end in sight. I think quite frankly, at least from the public comments of vehicle OEMs, I think they've indicated across the board, very strong demand well into '25. On the other -- on the back end of '25, you also have this issue of, as you know, emissions changes for 2027 and what that potentially does as well in terms of just taking normal demand and accelerating some of that. As we mentioned on the July call. Having said all of that, there's a bit of a governor in this entire process about how much higher it can go at least when you look at its quarter-to-quarter simply because many industry participants are operating at some level of max capacity right now, which is not long-term sustainable, frankly. So, you are I think, naturally have some level of limit or governor in how much higher it can go on an instantaneous basis. Therefore, one could conclude the cycle gets stretched out further simply because demand can't be currently met. You also have the other governor in the process, which is the amount of capacity that's out there in terms of body builders and what those lead times are. And much of that is not really tied necessarily to material as much as it is just conversion, which is skilled labor availability, et cetera, which we've mentioned many times on our calls and one that w*e continue to see as a constraint throughout the industry.

Next question today is coming from Kyle Menges from Citigroup. Your line is now live.

Thanks. I was hoping if you could provide a little more insight into parts performance in the quarter. I noticed that for the first couple of quarters had been calling out in North America is the area of weakness, but now let's turn to just globally seeing some weakness, so it would be helpful to understand which geographies potentially still seeing some weakness or maybe some recovery and just how to think about parts into next year and what it would take to see parts growth next year and what geographies would be likely to drive that?

Sure, Kyle. This is Fred. Really on a year-over-year basis, there wasn't significant movement from parts. When you think about where we are full year, certainly, the first half of 2023 was a pretty challenging comp coming into 2024. As we're looking at the balance of the year, Q4 could be down mildly sequentially. And then as you look out into 2025, I think it's still going to be a fairly good year. You're sitting here where '24 is going to be your second-best year on record next to 2023. It's also an end market where we've been able to achieve price as well. So, the outlook looks fairly robust rolling into 2025 at this point. But we don't see it returning to the H1 2023 level because all that pent-up demand has really been satisfied at this point.

Next question is coming from Luke Junk from Baird. Your line is now live.

Good evening, everyone. Thanks for taking the question. Another capacity question for me specific to Allison's capacity. Just hoping you can frame up the levers that you have to pull on throughput from here thinking specifically in North America without adding materially to capacity, I guess, if I look through the lens of defense this quarter, it seems like there might be some additional breathing room opportunity? And maybe if you could peak relative to potential prebuy as we move through later next year into '26 and just your ability to scale up without adding significantly to overhead, including maybe offloading some incremental volume into that capacity expansion in India as you move through the peak.

Luke, it's Dave. I appreciate the question. So, in terms of capacity, as we mentioned, it's not only investment that Allison is doing internally for our own operations. We're also investing in our suppliers. So, it's been a fairly comprehensive program of initiatives throughout our supply base as well as the internal that we've already talked about. I would certainly offer the comments in terms of what we prepared. It's important to note, and I mentioned this briefly earlier, the industry is specifically around North American highway for instance, running at very high rates becomes a real challenge from a consumption of capital. So, between the pressure on labor as well as just pressure on operations, it really requires a very diligent industry-wide initiative around maintenance, et cetera. And when you're running at very elevated levels, it really is quite challenging. So, we've -- certainly, throughout our capacity and capital investments, invested in -- investing in upgrading our equipment as well as some level of automation to address, I think, your point about how you think about an overhead structure. But the fact remains, as I said earlier, there are limits right now that we see in the industry. It still takes all the components to make the vehicle. So, there are certainly constraints. I do not believe that across the entire industry, there's a tremendous amount of motivation to increase capacity meaningfully above where it sits today, simply because it's not efficient. When you start breaking shift schedules, et cetera, as we mentioned before on calls, it becomes very inefficient. The investments that we're making in India are part of the reason for that justification is to really relieve some of the pressure that we have throughout our operations and our suppliers. So, to get back to what we…

Next question is coming from Jerry Revich from Goldman Sachs. Your line is now live.

Yes, hi, good afternoon and good evening. I'm wondering if I just ask two questions. One, on EPA 2027 with the increase in trucks, you folks have a higher value proposition and higher cost trucks. And I'm wondering can you comment on whether you have an opportunity to increase your penetration rates on any vacations with EPA '27 given that backdrop? And then separately, just to continue the Class 8 straight truck conversation. Can you just talk about your level of confidence in the sustainability of demand because we're down to 4.5 months of backlog, we had peaked at 10 or 11 months. And so, I guess when we've seen other capital goods product lines have supply outpace demand, what gives you confidence that we're not going to hit that same point here as we look out 3, 4, 5 months, especially given where Class 8 trade inventories are?

Jerry, it's Dave. Appreciate the question. In terms of EPA 2027, I think it's fair to say still quite a few questions out there in terms of exactly how that's all going to be implemented. The position of the OEMs portfolios, as you know, continues to evolve in reaction to that. We think of things in the context of we're always trying to grow our position in terms of penetration rates and focus on the areas, as Fred mentioned earlier, in terms of our value proposition. To answer your question, I'm not sure penetration over the longer term is going to be necessarily impacted. I would say, to your point on vehicle values, I think it's fair to say that the current push on Class 8 straight truck in terms of vocational we are certainly, I think, very much strongly demonstrating the value of our fully automatic technology in that space. The team has done that for well over a decade or two at this point to reach the positions that we have. We continue to try to grow that. But overall, I think we're very pleased going into 2027 with the portfolio that we have. We're well aligned toward with at least what's been developed, and I would say, certainly presented to the market in terms of a number of different alternative energy sources, et cetera. So, we feel very good about that, and I'll let Fred cover that Class 8 straight truck question.

Jerry, I mean it's -- everything we see in here shows no signs of it slowing down. I mean the OEMs have been pretty clear. The demand for our product is clearly unprecedented. And we had last week, ACT Research in here. One thing that they were highlighting was really where the stimulus programs are and still very early innings thinking about the chip stack, IRA, maybe only 20% in at this point. Infrastructure Investment and Jobs Act, about 50% in. So, there's still a significant amount of stimulus money in the U.S. that's out there to ultimately be funded. So, it's obviously tough to predict. And we've got the prebuy potential in '26 and maybe even into '25. I think to Dave's earlier comments there is, I think, a real question of how much higher can it go because everybody in that vocational space is constrained at this point. Component suppliers, body builders, but the demand is clearly there with, I mean, just absolutely no signs of slowing down.

We reach the end of our question-and-answer session. I'd like to turn the floor back over to Dave for any further closing comments.

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

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.