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. 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 thank you 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 and 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 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 American 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, 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 and price increases on certain products, partially offset by higher manufacturing expenses. Net income for the quarter was $200 million, an increase of $42 million or 27% from the same period in 2023. The increase was principally driven by higher gross profit and lower interest expense net. Adjusted EBITDA for the quarter was $305 million compared to $267 million for the same period in 2023. The increase in adjusted EBITDA was principally driven by higher gross profit. Diluted earnings per share increased 29% year-over-year to an all-time quarterly record of $2.27, driven by higher net income and lower total shares outstanding. A detailed overview of our net sales by end market in the Q3 2024 financial performance can be found on Slides six and seven of the presentation. Please turn to Slide 8 of the presentation for the Q3 2024 cash flow performance summary. Adjusted free cash flow for the quarter was $210 million compared to $182 million for the same period in 2023. The increase was principally driven by higher gross profit, partially offset by higher operating working capital funding requirements and increased cash taxes and capital expenditures. During the third quarter, we paid a dividend of $0.25 per share and repurchased over $50 million of our common stock. We ended the quarter with a net leverage ratio of 1.4x, $788 million of cash, and $745 million of available revolving credit facility commitments. In addition, we continue to maintain a flexible, long-dated, and covenant-light debt structure. Please turn to Slide 9 of the presentation for the update to our 2024 guidance. As a result of the ongoing strength in the North American On-Highway end market, we are raising our full-year guidance midpoint for revenue, earnings, and cash flow. Allison expects net sales to be in the range of $3,135 million to $3,215 million. In addition to Allison's 2024 net sales guidance, we anticipate net income in the range of $675 million to $725 million, adjusted EBITDA in the range of $1,115 million to $1,175 million, net cash provided by operating activities in the range of $740 million to $800 million, capital expenditures in the range of $135 million to $145 million and adjusted free cash flow in the range of $605 million to $655 million. Thank you, and I'll now turn the call over to Dave for an update on recent announcements across our business.

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 assemble our 1000 and 2000 Series transmissions in 2012, 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, with 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 investment will support our long-term growth objectives in the outside North America regions, raising our global capacity and offering operational efficiencies. 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 adoption of automatic transmissions. We look forward to providing further updates as the project progresses. In support of our wide-body dump initiative representing a $100 million incremental annual revenue opportunity during the quarter, we announced our strategic partnership and executed a memorandum of understanding with Lugan, a top-tier global construction equipment manufacturer. The MOU signing took place in Indonesia as part of a customer Ride and Drive event showcasing Lugan's latest 70-ton wide-body dump truck equipped with Allison's innovative 4,800 wide-body dump series transmission. Our long-standing partnership with Lugan has been instrumental in our success in the global mining sector with this MOU promising continued collaboration and innovation as we progress towards our incremental annual growth revenue target through market expansion. Also, in our outside North America On-Highway end market, we recently announced our collaboration with Ashok Leyland, one of India's leading commercial vehicle manufacturers, to introduce the first low-floor city buses equipped with fully automatic transmissions in the Southern India market. Allison's Torgmatic Series transmissions will equip the 12-meter diesel buses, which are specially designed to accommodate passengers with disabilities. The Allison-equipped buses will replace buses currently equipped with manual transmissions, advancing transportation in the region and showcasing our efforts to lead the transition to automaticity outside North America. Further driving our growth in the outside North America On-Highway end market is our wheel defense business. As a reminder, the wheeled portion of our defense business utilizes variants of our conventional on-highway products, with revenue from international customers flowing through our outside North America On-Highway end market. Last week, we highlighted numerous releases, which will support continued growth as a result of our strategic partnerships with vehicle manufacturers to support wheel defense programs internationally using Allison specialty series On-Highway transmissions. To start, variants of our 4000 Series fully automatic transmissions were chosen for the British Ministry of Defense Boxer armored vehicle program. The German Federal Armed Forces will also begin receiving boxer vehicles equipped with Allison fully automatic transmissions starting in 2025. This is in addition to over 700 Boxer vehicles that have been delivered in recent years to countries, including Australia, Lithuania, and the Netherlands. The Canadian Department of National Defense and the Romanian Ministry of Defense will also be receiving wheel defense vehicles equipped with a 4000 Series variant. In Poland, a new contract was signed for the procurement of light armored reconnaissance carriers equipped with a variant of Allison's 3000 Series fully automatic transmission. Deliveries will span over the next decade to 2035. And finally, the United Kingdom Ministry of Defense has placed an order for high mobility trucks that will utilize a variant of Allison's 2000 Series fully automatic transmission. As demonstrated by these releases, Allison has made significant strides in the global defense market with achievement of key program wins. We look forward to further growth across the defense industry as we leverage our commercial vehicle expertise and relationships with OEMs, along with decades of proven reliability and durability to offer a wide range of propulsion solutions that meet the diverse application requirements for technical wheel vehicles. Finally, as our end markets evolve, we remain committed to offering a portfolio of products designed to meet the needs of customers and industry regulations, regardless of technology and fuel source. Allison fully automatic transmissions are fuel agnostic, offering optimal integration with any fuel source, including gasoline, natural gas, propane, and hydrogen. Delivering durability and reliable performance to strengthen sustainability initiatives without sacrificing fleet productivity and efficiency. To compensate for lower power and slower engine response associated with alternative fuels, Allison's PowerShift technology and torque converter significantly improve start ability, drivability and overall productivity, particularly when compared to competitive manual and automated manual transmissions. In late August, we were pleased to announce that GLS, a global shipping leader, successfully completed 30,000 kilometers in its evaluation of the Allison equipped Hyundai hydrogen fuel cell truck. Since late 2023, GLS, Germany has used the hydrogen fuel cell truck equipped with Allison's 4000 Series fully automatic transmission to deliver packages in the greater Cologne area. Additionally, since March 2024, the truck has been used for long-distance trips between Cologne and Mannheim. Allison's patented torque converter multiplies the drive motor's torque at start-up, allowing the vehicle to operate with a smaller and less powerful drive motor, maximizing range and efficiency, and helping to reduce vehicle costs. This pioneering integration exemplifies Allison's alternative fuel advantage and is a further step in the testing of environmentally-friendly propulsion technologies, furthering our capabilities with hydrogen as a fuel source. We were pleased to announce our 4000 Series fully automatic transmission was also integrated into a Class 8 truck equipped with a hydrogen internal combustion engine that was displayed by Southwest Research Institute at Convex in September. The integration of the Allison 4000 Series in the hydrogen internal combustion engine vehicle demonstrates the critical role internal combustion engine powertrain solutions can and will play in moving the industry closer to ultra-low emissions. As our industry approaches 2027, there will be transitions in technologies for compliance under the EPA's Phase III emissions regulations. Announced during the quarter, we recently collaborated with Cummins to integrate and certify the Cummins B Series engines with our Allison eGen Flex electric hybrid propulsion solutions system for the transit bus market. The integration will meet the EPA's Phase III requirements while providing a reliable, low-emission propulsion solution in 2027 and beyond. Also, in pursuit of compliance to emission standards, we were pleased to announce an upgrade to our B400 and B3400XFE fully automatic transmissions, as the non-articulated bus industry transitions to the Cummins X10 engine to meet the EPA's Phase III requirements. The increased ratings for our B400 and B3400XF models will enable fleets to continue specifying them as the propulsion solution of choice. As shown by these integrations, collaborations, and technology advancements, Allison is dedicated to offering products which comply with upcoming emissions regulations while continuing to deliver differentiated value that supports our customers' operational and sustainability goals. In summary, Allison's third quarter results demonstrate not only the robust demand in our core end markets but also our long-term plans for growth as we invest in our manufacturing operations and our product portfolio. Our growth opportunities and investments highlight Allison's commitment to providing a diverse array of propulsion solutions that contribute to a reliable, more sustainable future in transportation. This concludes our prepared remarks. Kevin, please open the call for questions.

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 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 contracts are coming due, and we're in negotiations there 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 types of things that are more efficient and savings we provide 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 our fully automatic transmissions deliver have continued to elevate. As we sit here right now, we definitely feel well-positioned. We're delivering a significant amount of value, and there is very strong demand for our product. We'll continue the negotiations and anticipate most of them concluding probably towards the latter 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. As you mentioned, our capital allocation priorities are pretty clear. First, funding organic revenue and earnings growth. You're seeing that with the recent announcement we made relative to manufacturing in India. We've 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. Since becoming a public company, we have repurchased 63% of our shares. We've increased the dividend for five consecutive years, bringing it from $0.15 per share per quarter to $0.25 per share per quarter. It's factual that we're holding a slightly higher cash balance than we have historically, but we are still earning appropriate returns on that. Our long-term goal is to follow our capital allocation priorities and fund the business while ultimately returning 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 of a timing differential, maybe you have an acquisition you're not going to talk about, but more timing differential on spending that cash. Do you intend to keep a higher-than-average balance long-term, do you think?

No, I think it really is just the 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 you guys have outlined for some time. It's a little hard to see externally where you're falling on that. But you talked about – and maybe defense is where we've seen a little bit more traction. I guess just kind of those four drivers that you talked about, where are we in terms of moving towards that? Is there any sort of framework on a potential timeline? I know it's purposely intentionally nebulous in terms of when you said it, but I'm curious if you could go back to that and how we're moving towards those targets or goals?

Tim, it's David. Let me try to cover that off for you, and I appreciate the question. So, from a growth initiative perspective, we've highlighted four things: wide-body mining dump, frac trend, regional haul or Class 8 tractor day-cab, and of course, defense. Starting with defense, as you mentioned 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 spreading our customer base outside the U.S. at this point. We've focused on working with allies, and we see a tremendous amount of opportunity there. In terms of our overall progress towards our targets, that's probably the most advanced of the four at this stage, with a fair bit of tailwind to achieve our balance of that growth target, if not more. The defense upcycle continues, and we're receiving a high level of inquiry. The product development work we've done around the eGen force and other cross-drive products continues to be well-received in the market. So, the focus there will be some of the newer U.S.-sponsored programs, along with several outside North America initiatives. For the regional haul Class 8 tractor day cab, we're making decent progress there. Market conditions have shown some softness in the tractor market, affecting overall volume but the team has done a very good job securing releases and driving from a pull perspective with various fleets. The frac trend has been fairly muted in terms of CapEx from end users this year, and that market outcome will be tied to overall demand. The wide-body mining dump initiative is making solid progress. Despite mixed global demand, our partnerships with OEMs have helped secure market positions. We are confident in achieving this as well as the other three initiatives — it's really a function of time and broader market conditions.

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

Thanks gentlemen. And I appreciate 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, kind of a 20% decline year-over-year to potentially flat. Seems like a wide range. As you think about the level of visibility you have to the fourth quarter, I recognize 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 tough comp. Can you just help us understand maybe 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. We've highlighted this a couple of quarters in a row, but I think it is really important to just think about six or seven fewer workdays for the OEMs this year. This year, we’ve averaged $12 million to $13 million in revenue per day. Our expectation is that they are not going to build at the levels they've built over the last couple of years, and they are probably going to go back to some normal seasonality that we've seen pre-pandemic in '18 and '19, where Q4 would traditionally be soft. That is the starting point driving our midpoint guide sequentially. It's flowing through from an EBITDA standpoint. We do have slightly elevated engineering expenses. But the biggest driver is the top line and the type of margins we make. What would drive performance higher is clearly if the OEMs work more days, basically working Saturdays or into the holidays. But at this point, their total order boards and the softness in the tractor market suggest this year will look different from the past couple of years.

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

Thanks gentlemen. I appreciate 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. 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 meet the growth demand from our facility in Hungary that assembles our 3,000 and 4000 Series transmissions as well. Assuming an 8-hour shift schedule, the capacity increase for on-highway products is approximately a 10% to 20% increase, depending on availability for all components. We're not expanding capacity for assembly but for fabrication to meet demand outside North America.

Got it. That's very helpful. 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. How would you answer that question?

It's an excellent question. Many parties are contemplating that. I would tell you we don't use the word unprecedented lightly. The amount of demand we've seen throughout this year began in the second half of last year. We have not heard from the market, whether from end-users or OEMs, indicating any pullback on overall demand. Infrastructure spending and other investment initiatives keep driving demand for vocational products. We see no near-term end in sight. Vehicle OEMs indicate very strong demand into '25. Additionally, as we approach 2027 with emissions changes, that could accelerate some of the normal dynamics. While the demand is solid, there's a governor in this process about how much higher it can realistically go, as many industry participants are operating at max capacity currently, which isn't sustainable. There remains a limit to how much higher it can go on a quarter-to-quarter basis. Therefore, one could conclude the cycle stretches further simply because demand cannot be currently met. Also, there's been a governor on capacity levels for body builders due to skilled labor availability.

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

Thanks. If you could provide more insight into parts performance in the quarter. I noticed North America has been an area of weakness, but now we're globally seeing some weakness. It would be helpful to understand which geographies are potentially still seeing some weakness or maybe recovery and how to think about parts into next year and what it would take to see parts growth next year.

Sure, Kyle. This is Fred. On a year-over-year basis, there wasn't significant movement from parts. For the full year, the first half of 2023 was a challenging comp coming into 2024. As we look at the balance of the year, Q4 may see a mild sequential decline. In 2025, I think it's still going to be a fairly good year, where 2024 will be your second-best year on record, next to 2023. It's also an end market where we've been able to achieve pricing, so the outlook looks robust rolling into 2025. However, we don’t see parts returning to H1 2023 levels since all the pent-up demand has been satisfied.

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, specifically in North America without adding materially to capacity. It seems like there might be some additional breathing room opportunity. If you could touch on potential prebuys as we move through 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.

Luke, it's Dave. I appreciate the question. So, in terms of capacity, as we mentioned, the investments Allison is doing are internal and for our suppliers. It's a comprehensive program of initiatives. It’s important to note that the industry is running at high rates which becomes a challenge for capital consumption. Pressure on labor and operations require diligent industry-wide initiatives around maintenance. We've invested in upgrading equipment and automation to address your point about overhead structure. However, there are limits in the industry. It takes all components to make a vehicle, and there's not a tremendous motivation to increase capacity meaningfully above current levels because it's inefficient. The investments in India justify relieving pressures throughout our operations and supply chain to return to lean capacity rate operations, leading to cost savings. There are significant capital plans for our cross-drive facility funded by U.S. government contracts that allow for a relatively asset-light business. To your point about overhead, we staff and structure it efficiently, but low-volume batch manufacturing presents its challenges.

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 could ask two questions. One, on EPA 2027, with the increase in trucks, you folks have a higher value proposition and higher cost trucks. Can you comment on whether you have an opportunity to increase your penetration rates on vocational trucks with EPA '27 given that backdrop? And then separately, just to continue the Class 8 straight truck conversation, can you talk about your level of confidence in the sustainability of demand? We're down to 4.5 months of backlog, but we had peaked at 10 or 11 months. What gives you confidence we won't hit that same point here as we look out 3, 4, or 5 months, especially given where Class 8 trade inventories are?

Jerry, it's Dave. I appreciate the question. In terms of EPA 2027, there are still a lot of questions about implementation. The OEMs' portfolios continue to evolve in reaction. We're always trying to increase our penetration rates and focus on our value proposition. While I wouldn't necessarily say penetration is impacted over the longer term, I would say the current push for Class 8 straight trucks significantly demonstrates the value of our fully automatic technology in that space. We're optimistic about our portfolio going into 2027 as we're aligned with alternative energy sources developed for the market. Fred can cover the Class 8 straight truck question.

Jerry, everything we see indicates no slowing down. I mean, OEMs have made it clear that the demand for our products is unprecedented. ACT Research highlighted where the stimulus programs are. We're in the early stages regarding the chip stack, with perhaps only 20% in at this point. The Infrastructure Investment and Jobs Act is about 50% in. There's still a significant amount of stimulus money in the U.S., and predicting the future is tough. We also have a potential pre-buy in '26 into '25. There’s a real question of how much higher it can go because the vocational space is constrained. Component suppliers and body builders are in a similar position.

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 in 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.