Good evening, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's First Quarter 2022 Earnings Conference Call. My name is John, and I will be your conference call operator today. I'd now like to turn the conference call over to Mr. Ray Posadas, the company's Managing Director of Investor Relations. Please go ahead, sir.

Thank you, John. Good evening, and thank you for joining us for our first quarter 2022 earnings conference call. With me this evening are Dave Graziosi, our Chairman 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 4. 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 2022 earnings press release and our annual report on Form 10-K for the year ended December 31, 2021. Uncertainties related to the war in Ukraine, 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 2022 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 review highlights from our first quarter 2022 results and provide a brief operational update. Fred Bohley will then review our first quarter financial performance and affirm full year 2022 guidance 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'd like to begin by acknowledging the tragic events that have unfolded in Ukraine. In compliance and support of the actions taken by the United States and its allies, we have ceased all operations in Russia and associated regions. Russia and Ukraine accounted for less than 1% of Allison's revenue in 2021. We do not have a manufacturing presence in the region nor any direct exposure, as it relates to sourcing of raw or direct material. Turning to the quarter. I'd like to thank the Allison team and our partners for their outstanding efforts in delivering solid execution and strong performance we are reporting today. Following a notable year in 2021, first quarter 2022 results continue to demonstrate momentum for Allison's growth objectives. Net sales accelerated to $677 million in the first quarter, returning to pre-pandemic levels and producing the third strongest revenue quarter in Allison's history. Strong customer demand in our Global On-Highway end markets continues to drive us. This unprecedented recovery despite persistent global supply chain challenges. In particular, the Outside North America On-Highway end market, which was the first end market to reach pre-pandemic levels and led the recovery in 2021, achieved record quarterly revenue during the first quarter of this year. And this end market remains positioned for further growth, driven by multiple initiatives around the world. Allison's strong recovery and post-pandemic results are largely attributable to the team's operating experience and disciplined execution through multiple cycles across all of our end markets. Today, we are realizing the benefits of Allison's growth objectives and our continued success remains aligned with our long-term strategy of continuous global market leadership expansion. Last quarter, we discussed several initiatives that are supporting Allison's long-term growth objectives. Among them was Allison's award-winning 3414 Regional Haul Series fully automatic transmission for North America, heavy-duty Regional Haul and day cab tractor market. Currently released with Navistar, Daimler Trucks North America, and Volvo Trucks North America, the 3414 RHS expands our addressable market, enables us to pursue market share growth and represents an incremental revenue opportunity of $100 million annually for Allison. Earlier this week, we announced that one of the largest private fleets in North America, and a major wholesale restaurant food distributor has selected the 3414 Regional Haul Series transmission for its fleet. The 3414 RHS will be integrated into Navistar's RH Series trucks designed to provide customers with optimal productivity and maneuverability and represents an annual purchase of up to 450 units. Elsewhere in the North America On-Highway end market, the Allison 3000 Rugged Duty Series fully automatic transmission will now be offered in the Mack MD series. This release broadens Mack's medium-duty product portfolio to include heavier applications that require increased power and vehicle weight ratings. It also expands the MD Series addressable market to vocational customers and applications such as refuse, recycling, propane delivery, and construction. Allison's 3000 Series Rugged Duty is the third transmission option in Mack's medium-duty product portfolio. Allison's 2500 Series is currently standard on Mack's medium-duty line and the Allison 2500 Rugged Duty Series is optional. Another growth opportunity introduced last quarter was the widebody mining dump truck initiative in China. This program leverages Allison's existing and proven 4000 Series fully automatic transmission and represents more than $50 million annually in incremental revenue potential for the Outside North America On-Highway end market. During the first quarter, multiple awards were announced in support of this initiative. These awards include domestic opportunities with Beishan fleet, a renowned mining and infrastructure company based in Xinjiang, China, and Wugang mining machinery company in support of the Chinese export market. During the first quarter, we also announced the start of production for Allison's next-generation electronic controls platform built on decades of technology evolution and application experience and combined with a state-of-the-art microprocessor and software operating system. This next-generation platform features advanced communications, functional safety, cybersecurity, and over-the-air programming capability. OEMs such as Freightliner Custom Chassis, Mack trucks, Prevost, and MAN are leading the transition to this next generation of Allison electronic controls in an effort to realize the state-of-the-art capabilities enabled by this platform. Next, we are excited to unveil Allison's new Innovation Center in March, located on the campus of our headquarters and primary manufacturing complex in Indianapolis. An all-new engineering center of excellence will promote innovation and collaboration, and features enhanced product and technology development and validation capabilities to support Allison's customers, industry partners, and suppliers. Allison's innovation center will further the evolution of next-generation commercial vehicle propulsion. This includes Allison's eGen Flex electric hybrid propulsion system, which received its inaugural certification from the California Air Resources Board earlier this year. Introduced into revenue service in 2021, Allison's eGen Flex has demonstrated the ability to operate in full engine-off mode for more than 50% of its time in operation across multiple routes within one of North America's largest transit fleets. In the United Kingdom, Allison was recently selected to provide the propulsion system for the country's first hydrogen fuel cell electric powered refuse collection vehicle. The vehicle will be built on a Mercedes-Benz iconic hydrogen chassis and is the latest development in Aberdeen City's Hydrogen Aberdeen Initiative, which aims to bring about a hydrogen economy in the city's region. In 2018, the Aberdeen City Council deployed the U.K.'s first hydrogen-powered sweeper vehicle, which also features an Allison propulsion solution. And in two weeks at the Advanced Clean Transportation Expo in Long Beach, California, we will be announcing exciting new strategic partnerships featuring Allison's eGen Power family of electric axles. As we have often said, there are more growth technology initiatives happening at Allison today than at any other time in our history. We look forward to sharing this news along with more of our team's accomplishments in the coming months and quarters. Turning to the supply chain. We continue to anticipate broad challenges that will impact the commercial vehicle industry's ability to align with customer demand for the foreseeable future. Despite these persistent challenges, as well as uncertainties surrounding various macroeconomic and geopolitical factors, end-user demand remains strong. Production remains limited by input constraints, and the Allison team will continue to monitor the environment and take actions to address and mitigate production challenges. Thank you, and I'll now turn the call over to Fred.

Thank you, Dave. Following Dave's comments, I'll discuss the Q1 2022 performance summary, key income statement line items, and cash flow. I'll then affirm the full year 2022 guidance. Please turn to Slide 5 of the presentation for the Q1 2022 performance summary. Year-over-year net sales increased 15% to $677 million from the same period in 2021, resulting in the third strongest revenue quarter in Allison's history, as production continues to accelerate to meet resilient customer demand. The increase in year-over-year results was led by an 8% increase in the North American On-Highway end market, principally driven by continued strength in customer demand for last-mile delivery, regional haul, and vocational trucks. Year-over-year results were further led by a 30% increase in net sales and record quarterly revenue in the Outside North America On-Highway end market, driven by improving demand across all regions and the continued execution of growth initiatives. A 14% increase in net sales in the Service Parts, Support Equipment and other end market, principally driven by increased demand for North American Service Parts and Global Support Equipment and a $30 million increase in net sales in the Global Off-Highway end markets, driven by improving demand for hydraulic fracturing applications in the Energy sector, as well as higher demand in the mining and construction sector. Gross profit for the quarter was $320 million, a 10% increase from the $291 million for the same period in 2021. The increase was principally driven by higher net sales and price increases on certain products, partially offset by unfavorable material costs and higher manufacturing expense commensurate with increased net sales. Net income for the quarter was $129 million compared to $120 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by a $15 million unrealized loss on marketable securities. Adjusted EBITDA for the quarter was $244 million compared to $222 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by increased product initiatives spending. Diluted earnings per share increased 21% to $1.30 from the same period in 2021, driven by higher net income and lower total shares outstanding. 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 2022 financial performance summary. Selling, general and administrative expenses increased $2 million from the same period in 2021, principally driven by higher commercial activity spending. Engineering, research and development expenses increased $5 million from the same period in 2021, principally driven by increased product initiatives spending. Please turn to Slide 8 of the presentation for the Q1 2022 cash flow performance summary. Adjusted free cash flow for the quarter was $143 million compared to $107 million for the same period in 2021. The increase was driven by higher net cash provided by operating activities and lower capital expenditures. Consistent with Allison's prudent and well-defined approach to capital allocation, we settled $81 million of share repurchases during the first quarter or over 2% of outstanding shares. We also increased the quarterly dividend for the third consecutive year from $0.19 to $0.21 per share. We ended the quarter with a net leverage ratio of 2.8x, a $145 million in cash and $645 million of available revolving credit facility commitments. And we continue to maintain a flexible, long-dated and covenant-light debt structure with the earliest maturity due in 2026. In February, the Board of Directors approved a $1 billion increase to stock repurchase authorization, bringing the total amount authorized under the program to $4 billion. As a result, we ended the quarter with approximately $1.2 billion of authorized share repurchase capacity. Please turn to Slide 9 of the presentation for the full year 2022 guidance. We are affirming the full year 2022 guidance ranges released to the market on February 16. We expect net sales for 2022 to be in the range of $2.625 billion to $2.775 billion. Our 2022 net sales guidance reflects higher demand in the Global On-Highway, Global Off-Highway, and the Service Parts, Support Equipment and other end markets as a result of the ongoing global economic recovery, continued strength in customer demand, and price increases on certain products. In addition to Allison's 2022 net sales guidance, we continue to anticipate net income in the range of $430 million to $520 million. Adjusted EBITDA in the range of $865 million to $975 million. Net cash provided by operating activities in the range of $570 million to $680 million. Adjusted free cash flow in the range of $400 million to $500 million, and capital expenditures in the range of $170 million to $180 million. Thank you. This concludes our prepared remarks. John, please open the call for questions.

Our first question comes from the line of Rob Wertheimer with Melius Research.

Boy, there's a lot going on this quarter. You guys have announced a bunch of stuff, and so it's hard to limit to one question. I guess maybe since we've seen Off-Highway come back so strongly, whether Outside North America or whether we can do the whole thing. You've got a bunch of OEM wins that you maybe didn't have in years past. I don't know if you can help us understand how big that TAM is versus where you were sitting in prior peaks. And maybe just comment on the duration of the momentum of the sales you can see.

Rob, it's Dave. Your question was primarily about the Off-Highway sector and its current dynamics. The recovery in this area has been robust. Oil prices have been on a favorable run for over 18 months now. In North America, we see that tight supply is holding steady, and there is a commitment to capital discipline, which we expect to persist. Public statements from several large fleets reinforce this outlook. Outside of North America, we are observing solid market conditions across mining, construction, and energy sectors. However, some of the regional issues experienced in the first quarter have slightly impacted the supply chain. Generally, lower volume markets seem to be facing more challenges compared to higher-volume markets. We anticipate that this trend will continue for the remainder of the year, reflecting the patterns seen in previous cycles. We believe it is still early days for those markets, particularly given how undersupplied they have been and the broader demand conditions compared to the last peak. In the previous peak, we were significantly above that level, with parts sales exceeding $300 million to $400 million on an annual basis. Therefore, we see potential for further growth from this point.

Our next question comes from the line of Jamie Cook with Credit Suisse.

A nice quarter. I guess a question for you, Fred, just in terms of how we're thinking about the cadence of revenue, and EBITDA, and margins relative to what you said last quarter. I think last quarter, you said you expected Q2 and Q3 revenues and EBITDA to grow from the first quarter. And I'm just wondering where we stand given the better-than-expected first quarter? And does that sort of imply we could be more towards the mid towards the high end of the range? Or am I missing something?

Thanks, Jamie. This is Fred. We had a strong revenue quarter in North America On-Highway, with an increase of 8%. Based on industry production numbers, it appears we outperformed in that area. Dave already mentioned the strength in Global Off-Highway. Looking ahead, we anticipate Q2 and Q3 revenues to show slight growth. However, I want to emphasize that this growth will be modest. For Q4, we expect a decrease in line with typical seasonal trends, particularly in terms of absolute EBITDA, not margin, due to the softer revenue. Most of the insights we've shared regarding the income statement guidance remain unchanged. SG&A has seen a slight increase, but our spending remains on track, and we're still projecting engineering R&D to rise by 10% year-over-year.

Our next question comes from the line of Larry De Maria with William Blair.

Questions here. First, you announced several wins, and now you're looking to form partnerships. Can you discuss what to expect regarding these partnerships? Will they involve collaborations with other suppliers or OEMs? More importantly, I'm trying to understand how this may impact margins in the future. Additionally, regarding your R&D investment, which is up 10%, I'm curious about your ability to adjust that if next year, for instance, sees a downturn due to a recession. Can you flex R&D spending up or down if necessary?

It's Dave. I want to clarify your question regarding partnerships. Allison has built partnerships at various levels over the years. As we evaluate our strategic relationships, the team has committed significant time and effort to support our customers and suppliers, especially in challenging conditions. We feel confident in this area. There are ongoing opportunities for collaboration, and the interactions we've had over time have benefited both sides. Currently, our thinking is broader than it was a few years ago. To address your question directly, we're open to all possibilities. We have considerable options regarding how we approach different markets and what the future may bring. We've also maintained a strong level of financial flexibility to be opportunistic while providing support in various situations. The growth initiatives we talk about will require substantial interaction, and our relationships with customers, suppliers, and technology partners have been beneficial, and I anticipate this will continue. Regarding your question on R&D, we invest based on available opportunities, which are currently promising. The announcements from Allison over recent years reflect this. We plan to keep investing as long as there are opportunities, but we've faced market adjustments in the past, and the team is prepared to adapt. Nothing is set in stone at this point, and we will take action to navigate changing market conditions. The key takeaway is that we are focused on maintaining a high level of flexibility as we consider our business and markets moving forward.

Our next question comes from the line of Tami Zakaria with JPMorgan.

I have a couple, if I may. First question is, is the higher-than-expected first quarter revenue related to a timing of shipments? And if not timing-related, what's driving your conservatism and not raising the lower end of the revenue guide for the year?

Sure, Tami. This is Fred. Timing is always challenging in these uncertain environments. Certainly, as I mentioned, our revenue, we would look to, as if we've outperformed industry builds. I think if you did a weighted average of industry builds, you'd expect our revenue to be flat. Certainly, we have some price in there. This is all relative to the North America On-Highway. There could be an element of timing there. Like I said, you still have situations where OEMs are red tagging trucks and stuff. Relative to the total guide, our initial guide was broader than normal, just due to the global uncertainties. And as we sit here today, I'd say uncertainty is elevated with the war in Ukraine, the supply chain still very challenged, and some of the pandemic shutdowns you're seeing in Asia. So as we looked at all of the variables, we felt that it was prudent to affirm our initial guide.

Got it. That's fair. And if I can ask another one. What's the buyback cadence we should expect this year? Should it be similar to last year?

Yes, Tami, this is Fred again. Last year, we repurchased 12% of our outstanding shares, totaling over $0.5 billion. In the first quarter, as mentioned in our prepared remarks, we settled over $80 million in repurchases, which is about 2% of shares outstanding. From a capital allocation perspective, our priorities remain focused on funding organic revenue and earnings growth, developing new products and technologies, and we are actively pursuing those goals. We anticipate a midpoint guide for capital expenditures of $175 million and plan to spend $190 million on engineering and R&D. Additionally, we are considering strategic acquisitions, returning capital to shareholders, managing our balance sheet prudently, and maintaining flexibility with our low-cost, prepayable debt structure. This flexibility is crucial for us, and we are fortunate to generate more cash than we need. We have increased the dividend for three consecutive years, and we intend to support our capital allocation priorities, including returning capital to shareholders in an opportunistic manner. While we do not publicly outline the specific timing for these actions, our past history serves as a solid example, and we maintain a very shareholder-friendly capital allocation policy.

Our next question comes from the line of Tim Thein with Citigroup.

Fred, I'm curious about your guidance and what it indicates regarding price and cost. The commodity environment seems different from our last conversation. Have there been any changes in that regard? I also understand there might be opportunities for additional pricing actions. How are these factors settling as you consider the remainder of the year?

Sure, Tim. As I mentioned with the initial guidance, we are definitely still experiencing cost pressures. While we initially discussed a 275 basis point price increase, we are actively seeking additional opportunities. When considering prices, fuel costs have risen, and the total cost of vehicles has increased. Our transmissions are designed to be more fuel-efficient and to accomplish more tasks in a day. Therefore, as vehicle prices rise, our transmissions hold greater value. With our current updates, we have incorporated approximately 375 basis points in pricing, representing an increase of around 100 basis points year-over-year. This is primarily related to commercial pricing. Initially, we projected a 150 basis point increase, which has now adjusted to 250 basis points. Additionally, commodity pass-throughs are expected to add about 125 basis points to reach the total of 375. Most of these pass-throughs to our customers will take effect on January 1, 2023. Currently, we find ourselves in a relatively similar situation, slightly favoring price over costs, and we anticipate realizing about 100 extra basis points in pricing, although we have continued to face cost inflation. Our costs have increased compared to our initial guidance. I hope that clarifies things.

Our next question comes from the line of Courtney Yakavonis with Morgan Stanley.

I appreciate the update on price cost. Maybe if you can also just give us an update on the supply chain. I think last quarter, you characterized it very much as impacting industry production and not necessarily you specifically. Is that still the case? And acknowledging that you haven't raised the consolidated sales guidance, any comment about the changes of maybe some of the makeup of the guidance by end market that you were targeting, especially given that you're outperforming On-Highway in the first quarter?

Courtney, it's Dave. Let me begin with an update on the supply chain. As I noted in the last call, managing the supply chain continues to require a significant amount of time from our team and partners. Unfortunately, I wouldn't say there has been a substantial improvement in the resources necessary to handle it. We have experienced some limited progress in certain areas, and it seems that chips are receiving less attention than before, which is a positive development. However, this situation is still quite variable and largely depends on the specific applications. Overall, we feel better positioned in that regard. That said, when it comes to input constraints, it's a broader issue that encompasses not only finished components and subcomponents but also labor, logistics, and lead times for raw materials. I would argue that there hasn't been much improvement across the board, and we continue to keep a close eye on the situation and invest our efforts into it. OEMs seem to have a clear understanding of their order books, but the challenge remains that we need a complete set of components to finish a product, and this continues to be a widespread challenge in the industry. For certain regions, particularly North America, there's an ongoing trend to prioritize the delivery of higher-margin vehicles, like trucks, which can be observed in the market mix. This trend is likely to persist until there is greater certainty and availability in production. However, as I mentioned earlier, lower volume models can present more challenges since they are typically produced in smaller batches, leading to trade-offs with our supply base. Our team is working exceptionally hard with our partners to navigate these issues. The key takeaway is that while there has been slight improvement, managing the supply chain still requires a considerable amount of time and attention. As for the sales guidance based on end markets, following Fred's comments and the press release confirming the full year guide, I wouldn't say the overall situation has changed dramatically. In terms of the markets we are targeting, I feel we are in a slightly better position, particularly in Global On-Highway, and we still see pricing opportunities that we discussed back in February. Overall, my perspective on the end markets remains consistent with what we conveyed in February.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

Nice quarter. Dave, you've spoken about working with the bulk of your current customer base on electric vehicle products. I'm wondering if you could just talk about when do you expect major platform decisions or major milestones in the valuation process. And as we look at the R&D that you're devoting to those efforts, your R&D to sales is up 2%, 2.5% of sales over the past 5 years. Is it fair to view that as how much you're investing in developing those new products?

I appreciate that question. We continue to see a high level of interest in our electrified products. Efforts are ongoing, and from a timing perspective, I would highlight what the OEMs are forecasting, which, as I understand, is in the range of hundreds in many cases. This isn't even considered low rate initial production by industry standards. To answer your question directly, I expect a very slow ramp in this area. Regarding the earlier question about supply chain issues, these challenges aren't limited to the conventional business. When examining electrification and the supply chain involved, we see difficulties as well, particularly due to the lower volumes mentioned earlier. This creates a compounded problem regarding real underlying demand and market readiness for products. There's obviously some demand, but it's at an extremely low level right now. We'll allow the OEMs to advance their programs. We feel good about our overall positioning. However, as we’ve stated, we are focused on taking the necessary time to ensure we do it right with the right partners and outcomes. Concerning your spending comment, as mentioned in the 2022 guide, a significant portion of R&D expenditure is committed to EVs. It's opportunity-driven, and we continue to recognize significant opportunities in that area to expand our addressable market. That said, we are still facing relatively slow ramp rates, which is likely why you're hearing feedback from the commercial vehicle side about expectations for the near to medium term. Nonetheless, we're pleased with the progress we're making and continue to engage meaningfully with our customers.

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to Dave Graziosi for any closing remarks.

Thank you, John. Thank you for your continued interest in Allison and for participating in today's call. Enjoy 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.