Q2 2020 Allison Transmission Holdings Inc Earnings Call

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Good morning, ladies and gentlemen, thank you for standing by welcome to Allison transmission second quarter 2020 earnings Conference call. My name is Kathy and I'll be your conference call operator today.

At this time, all participants Arnie listen only mode. After the prepared remarks, the management team from Allison transmission will conduct a question and answer session and conference call participants will be given instructions at that time as a reminder, at this conference call is being recorded.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

I would now like to Kinda conference call over to Mr. right Posada, the company's managing director of Investor Relations. Please go ahead Sir.

Thank you Jesse good morning, and thank you for joining us for our second quarter 2020 earnings Conference call with me. This morning are Dave Graziosi, our President and Chief Executive Officer, and Fred Bully, Our senior Vice President Chief Financial Officer and Treasurer.

As a reminder, this conference call webcast and this mornings presentation are available on the Investor Relations section of our website Allison transmission Dot com.

Replay of this call will be available through August 12.

As noted on slide two of the presentation. Many of our remarks today contain forward looking statements based on current expectations.

These forward looking statements for subject to known and unknown risks, including those set forth in our second quarter 2020 earnings press release, our annual report on form 10-K for the year ended December 31st 29 C and their quarterly report on form 10-Q for the quarter ended March 30, Onest 2020.

All right fees related to the coordinate pandemic and related responses by government customers fires and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize Porsche underlying assumptions are estimates prove incorrect actual results may vary materially from those that we expressed 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 FTC.

To find a reconciliation of the non-GAAP financial measures. The most comparable GAAP measures attached an appendix the presentation and to our second quarter 2020 earnings press release.

Today's call us at the end the 845 am eastern time in order to maximize participation opportunities on the call. We'll take one question for me town.

Please turn to slide four of the presentation for the call agenda.

During today's call Dave gradually will provide you with a brief operational update.

Fred Boldly will then review our second quarter results and financial performance and provide an update on allison's liquidity and full year 2020 capital spending plan.

Finally, Dave will conclude the prepared remarks prior to commencing the QNX now I'll turn the call over to Dave gradually.

Thank you Greg Good morning, and thank you for joining us I would like to start by thanking all of Allison's employees customers and suppliers for their continued dedication and resilience during CES unprecedented times as a pandemic continues to disrupt populations and economies around the world the health and wellbeing of Allison's.

End of family remains our top priority and we will take the actions necessary to ensure the safety of our people and our communities.

Our second quarter results reflect the pandemics significant impact on global supply chains and customer demand. Despite these ongoing disruptions all of Allison's global facilities are currently producing transmissions and components and the majority of our manufacturing operations have Ryan continuously throughout 2000.

20.

To date, we have achieved uninterrupted delivery of our products and continued to generate earnings in positive cash flow as a result of our longstanding commitment to prudent balance sheet management ample liquidity profitable operations and fully funded defined benefit pension plan al as soon as well capitalized and position.

Through realize future growth opportunities that may emerge from the current environment.

We also remain focused on aligning our operations programs and spending with current end markets conditions, while maintaining the flexibility to respond quickly and appropriately as these conditions evolve. Unfortunately, a weaker global outlook has led to a number of restructuring initiatives, including reductions of both our.

Hourly and salaried workforce and the ongoing reassessment of the timing and cadence of various capital investment commercial and product development initiatives as I've said in the past. These are difficult decisions are significantly impact our employees their families in our communities.

And we do not take down without due consideration.

Finally, the pandemic continues to create a substantial amount of uncertainty so customer demand and supply chains steadily improved throughout the second quarter.

As global shutdowns were gradually ease than economies began to reopen a considerable amount of uncertainty remains as weve entered the second half of 2020.

Numerous events and factors that may occur over the coming months could have meaningful consequences on global demand and supply chains.

The current highly uncertain environment warrants a prudent approach as we manage the second half of 2020. Nevertheless, the disciplined pursuit of our strategic priorities in our commitment to improving the way the world works full persevere as we look ahead to 2021 and beyond.

Thank you I'll now turn the call over to forever.

Thank you good following Dave's comments I'll discuss Q2 2020 performance summary, key income statement line items and cash flow I will then review allison's liquidity and full year 2020 capital spending plans before turning the call back over to David.

Please turn to slide five of the presentation for the Q2 2020 performance summary.

Net sales decreased 49% to $377 million compared to the same period in 2019. The decrease in net sales was principally driven by the ongoing effects of the pandemic on the global economy, resulting in lower demand across all of our end markets, except for the distance in market.

As Dave mentioned.

A weaker global outlook in current end market conditions have led us to implement a number of restructuring initiatives across our business.

As a result, we incurred $12 million in restructuring charges during the second quarter for voluntary and involuntary separation programs for both our hourly and salaried employees.

Gross margin for the quarter was 43.8% a decrease of 900 basis points compared to 52.8% from the same period in 2019.

The decrease was principally driven by lower net sales and restructuring charges, partially offset by lower incentive compensation expense.

Price increases on certain products and favorable material costs.

Net income for the quarter was $23 million compared to $181 million for the same period in 2019. The decrease was principally driven by lower net sale and restructuring charges, partially offset by lower selling general and administrative expenses.

Adjusted EBITDA for the quarter was $115 million per 30.5% in net sales compared to $308 million for 41.8% of net sales for the same period in 2019.

The decrease was principally driven by lower gross profit, partially offset by lower selling general and administrative expenses.

For more detailed overview of our net sales by end market can be found on slide six of the presentation.

Please turn to slide seven of the presentation for the Q2 2020 financial performance summary.

Selling general and administrative expenses decreased $24 million or 26% from the same period in 2019, principally driven by lower commercial activity spending lower incentive compensation expense.

Lower intangible amortization expense and lower stock compensation expense, partially offset by product warranty adjustments and restructuring charges.

Engineering research and development expense increased $1 million from the same period in 2019.

Please turn to slide eight of the presentation for the Q2 2020 cash flow performance summary.

Adjusted free cash flow decreased to $147 million from the same period in 2019, principally driven by lower gross profit and higher cash interest expense, partially offset by lower cash income taxes, lower operating working capital requirements.

And lower commercial activity spending.

Please turn to slide nine of the presentation.

We ended the quarter with a net leverage ratio of 2.7 that 2.78 $434 million of cash and $319 million available revolving credit facility commitments.

We also maintained our flexible long dated and covenant light debt structure with the earliest maturity due in September 2024.

During the second quarter, we paid a dividend 17 cents per share and ended the quarter with approximately $870 million of authorized share repurchase capacity.

As we continued to manage this unprecedented period allison's unwavering commitment to well defined approach to capital structure and prudent balance sheet management.

We remain intact as a result, Allison continues to operate from a position of strength and maintains the optionality to pursue growth and capitalize on opportunities that are consistent with our strategic priorities.

Given the ongoing impact of the pandemic on the United States and other major markets in which we operate around the world, it's uncertain duration as well as the continuously evolving customer demand and supply chain readiness, we cannot conclusively provide a full year 2020 revenue earnings and cash out cash flow outlook.

At this time.

However, as Dave mentioned, we remain focused on aligning operations programs in spending with current end market conditions. We are reaffirming our full year 2020 capital expenditure target of approximately 35% below 2019.

In addition, we anticipate a permanent annual cost savings of approximately $25 million as a result of the restructuring initiatives undertaken during the second quarter.

We will continue to monitor end market conditions, and make adjustments to our operations and spending accordingly.

Finally, we remain steadfast in our commitment to the future growth of Allison and we will continue to fund key product development initiatives that will drive the expansion of of our business and further secure our leadership position in end markets that we serve.

To that end, we anticipate that engineering research and development expenses for the second half of 2020 will be consistent with the first half levels of spending.

Thank you and I'll now turn the call back over to Dave.

Thank you Fred as we've discussed on prior calls the resiliency of allison's businesses inherent than its strong market position and diverse end markets. While the pandemic has inevitably impacted our since commercial business. These central business of the United States National Defense continues unabated and we remain committed to support in the United.

States military on current and future programs recently, Allison partnered with United States armies tank automotive and armaments command to support the Sustainment of the Army's light armored vehicle fleets consistent with the initial contracts requirements. We began delivery of the X 200 Cross drive transmit.

Option in June.

The next 200 is designed for light track to combat vehicles weighing up to 16 tons, including the M 113, Athree armored personnel carrier, which remains the army's single largest armored vehicle fleet with nearly 5000 vehicles.

Housing continues to work with our defense end market partners actively pursuing numerous wheeled and tracked opportunities around the world.

The defense end markets demonstrates the inherent strength and resiliency of allison's diverse business.

Despite the Pandemics impact on our commercial business, we remain committed to our growth initiatives and we will continue to invest prudently and appropriately to drive programs across all of our end markets. Recent growth developments include the latest release of the award winning Allison's 34, 14 Regional Hall series transmit.

Beginning with Navistars International trucks in July.

First introduced late last year at the North America commercial vehicles show the New Regional Hall series is an upgrade variant of Allison's proven and well known 3000 series fully automatic transmission designed to meet the higher engine torque requirements of the class a tractor market.

Last week, we announced that new Flyer and Alison will deliver 50 electric hybrid equipped buses to New York City Transit the largest transit authority in the United States. This 50 unit order follows the successful valuation by the transit authority of buses equipped with Allison's age 40 EV electric.

Hybrid propulsion system.

We also continue to enhance our presence outside of North America with new releases such as the recently introduced UGI kroner medium duty truck in Australia, featuring our son's 3000 series transmission as standard across the vehicle lineup and yup coming to decline heavy duty truck.

Which expands allison's offerings in the international vocational markets.

In China, we continue to make inroads into their competitive export market recent wins with Oems, such as Kim Wynn and encore future Allison transmissions in various bus models for the middle Eastern markets.

Exports of our refuse trucks in LNG.

Yard tractors to Latin America, and other parts of Asia by sign our truck and Sean. She also feature our transmissions in.

In Europe Allison transmissions are featured in new and upcoming transit in articulated plus releases with Kamaz end models for the eastern European and Russian markets as well in South America, we continue to expand our vocational presence with recent truck releases by trade time, and Mercedes Benz for the five.

Okay, and emergency refuse pickup and delivery and armored vehicle locations.

These global releases are key components of our growth strategy, along with ongoing and targeted end user initiatives Allison's expanded offerings will support increased penetration promote demand for our brand and advance our market leadership expansion efforts.

Innovation is another key component of our strategy that will drive growth across our entire business. Allison's recently completed vehicle Environmental Test center is already being leveraged to accelerate the development of our next generation propulsion solutions, including Allison's portfolio of electric propulsion systems.

The test center enables the accumulation of in vehicle durability hours under real world operating conditions and accelerated rates without the downtime required to charge the energy storage system.

And in an electric vehicle.

The test center also facilitate instant evaluation and responses to issues under controlled conditions that ensure the desired operating environments can be isolated tested and replicated that will this capability provides allison with a unique advantage in the development of new products for example, our I'd.

Metric axle architectures, Ken undergo testing under our broad range of real world operating conditions and extreme environments, the ability to simulate and replicate a wide range of conditions expedites the testing of onboard power electronics power consumption and electronic accessories as well as overall.

System performance and efficiency across a range of energy storage systems, including battery electric and hydrogen fuel cell power solutions.

These combined capabilities also facilitate the delivery of the Allison promise of durability and reliability even for the most demanding cycles.

The test center is equipped to help our engineers as well as our OEM partners bodybuilders suppliers and fleet owners innovate their vehicles optimize performance and accelerate time to market by testing safely and confidently and as single environmentally controlled and seasonally seasonably independent located.

Hi.

Alex and remains prepared and committed to meet the current and future needs of our customers our product development expertise with a focus on improved fuel economy, and reduce greenhouse gases combined with our financial strength robust cash flow generation strong margin profile variable cost structure and asset.

Light business model supports that continued pursuit of our strategic priorities and enhances allison's position as a preferred at long term partner.

This concludes our prepared remarks, Jesse please open the call for questions.

Thank you at that time, we will be conducting the question and answer session. If he'd like to ask a question. Please press star one on your telephone keypad.

Confirmation code will indicate that your line is in the question Q. You May proceed start to if you would like Karen will be your question from the Q.

This concludes the speaker equipment and may be necessary to pick up your hands of before pricing with Bernstein. One moment. Please poll for questions.

Thank you. Our first question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.

Thank you good morning, guys.

Good morning.

On the out the North America on highway side can you comment at all on revenue trends in July relative to the down 59% in Q2 and just with that.

Our the SGN a savings in the second quarter sustainable for the balance of the year without what kind of decremental EBITDA margins should we expect in the second half.

Sure more interactive stave terms your question on North America on highway revenue in July relative to.

Second quarter as you know as we mentioned certainly the level of demand improved throughout second quarter.

And obviously carried into Q3, so far I would say, we're we're pleased with what we've seen Adam July and frankly early indications of of August having said that as we talked about on the Q1 call and worth repeating here.

Near term visibility is about where we're at I can offer to you that.

A number of advances as I mentioned in his prepared remarks continue to create.

Some concern for us and frankly, some challenges as the pandemic when you see some of the case history in a number of regions around the country. As you know are pretty critical to other commercial vehicle industry and the broader economy, we are staying very close to that but our expert.

Dictation does we've already discussed are predicated on a continuation of what you see currently in terms of the the supply chains ability to ultimately execute with the guidelines that they have in that were also operating under at the same time.

Oems, having a similar experience, but I would say summary, overall certainly pleased with what we saw in July in early.

Indications for August and beyond that I would say our visibility is pretty limited as we start thinking about Q4 at this point on your acute year Q2 as soon a run rate.

Question, certainly our expectations overall is that.

You should expect and we expect pretty similar level.

Totally run rate for our second half as similar to what you saw in Q2 for SDMA.

Thank you.

Thank you. Our next question comes from the line of Joe I'll begin with vertical research partners. Please proceed with your question.

Hi, good morning, everyone.

As we've seen cost cutting action across the group over the course of earnings R&D has been one area. That's also been hit you didn't do that can you talk about some of the prioritization on R&D spend whether that's shifted at all given the current environment and you've talked about being in.

Being well capitalized and through the potential are being well positioned to realize opportunities that may emerge.

Expand on on that at all and what kind of opportunities you're seeing on the horizon.

Good morning, it's Dave.

I'd say briefly in terms of your R&D question, I mean, our priorities haven't changed hands, we begin our analysis and how we think about that as market driven.

I would say overall, we haven't really come across the need to change I think unlike probably some others that you part of in terms of public comments and redirect Sir.

Significant level of re timing as such as it may be.

We're staying very close to what we believe as market driven demand at this stage. So we've continued to align and pursue.

Those initiatives and I would offer its across all of our end markets. It's not just conventional it is electrification and it also extends to.

Our defense end market as well and off highway for that matter. So we as we've talked many times our view is to invest through the cycle.

Our balance sheet.

And overall leverage levels take that into account, but this is not a situation where we find ourselves.

Needing to significantly change and I think if nothing else, sending a signal to all stakeholders that we continue to be committed to our business in end markets.

As an important point I think frankly it also is.

Significant message to send to not only to broader market, but internally to our team which is continuing to drive what we believe is important to deliver that promise, but also maintain our leadership position in the markets.

In terms of capital allocation I guess is to your question, how we think about that.

We haven't changed that view either work, we continue to be committed to a prudent balance sheet management, our balance sheet management and an appropriate level of.

Leverage over the cycle.

Threaten the team I think continue to do a great job.

Monitoring, where we are and frankly, maintaining a high level of liquidity at the same time. We're also opportunistic so our commitments in terms of generating cash and returning it to our shareholders continues in that as you know.

Takes a number of different forms as we continue to maintain our dividend, but also the flexibility to return capital to shareholders and other.

Assets.

Thanks very much.

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

Yes, hi, good morning, everyone.

Good morning.

I'm wondering if you could talk about the prospects for the electric hybrid products.

A number of years ago was meaningful part of the portfolio, but then customer interest ultimately been pan out can you talk about how demand for electric Highwoods looks looks like from here, which is a one off order or.

There and opportunity for Apollo elsewhere based on your pipeline in the technology more economic today compared to five five or six years ago.

And any other development. So we should be thinking about on alternative propulsion systems for you folks, where we'll get data points on over the balance of this year.

Based on customer announcements thanks.

Morning proprietary it's Dave in terms of your questions on the electric hybrid products.

That we've been producing that for upwards of 17, plus years, now and I would say very successfully with thousands of units.

Running and it does we do take quite a bit of pride and the fact that there literally billions of miles that have been racked up over time.

It's interesting when you compare that to.

Announcements and the alternative propulsion space and statements were made about accumulating some few million miles here there was very.

A number of different alternatives. The fact is we have a lot of experience I think it's from that experience. It's also.

To your question allowed us to improve that particular solution to make it more economic it has more value today than it than it had when it started.

We're also adding additional features to that.

We've talked about the fact that it will.

Introducing extended range for full you'd be operation. There is an important aspect and frankly, what we're hearing from customers I think despite.

But what I think some people may mistakenly believe as there is no market for.

Hybrid. The fact is there are because not every region not every.

And our property has a position where our for a number of reasons fully he may be the solution for their entire fleet. The same time, they want the benefits of reduce greenhouse gas emissions et cetera, I think thats.

The concept here is what is the hybrid product the electric hybrid continued to deliver attend users so where we're proud of where that sets and I think the team continues to do a great job evolving it and it's well received by the market and the the other question you raise in terms of the transit authorities order.

It's now we do not view that as a one off we continue to have strong demand for that particular, our product in terms of our efforts in alternative propulsion we've been.

Certainly in the market for years with products that can be used with alternative fuels that continues to get a lot of attention I mentioned in the prepared remarks, we with CNG and otherwise I think fuel cells are getting.

Just in fuel cells and other forms are getting more attention now the fact is there.

All facilitated ultimately by.

Capabilities, so that is consistent with our strategy in our portfolio and what the team is is currently pursuing I think in general I tell you were pretty pretty pleased with where we are in the progress that we've made.

I would also offer the pandemic has not.

Ben a situation Thats helped in certain regards getting.

A number of things done as we've talked about before it takes all the parts to make a transmission and also takes a lot of things to to.

Performed development work and completed and that that has been somewhat confounding. This year, just given the conditions with the pandemic and limiting our our reach to affect some some issues, but I would say overall very pleased I'd also say terms to my comments on the.

Environmental Test center.

That is really brought to bear.

The advantages of controlling your destiny in terms of your ability to develop in test on site. The idea of keeping our team which is a priority for us safe.

Really does come to pass when you think about doing that.

That type of work in your own facilities with your guidelines and.

Safety requirements and ultimately not having to put people on the road. So we're very pleased with.

The result, so far there.

In terms of expectations going forward I would say overall where were.

Staying very close to Oems and it very targeted way.

We are also has a number of different internal external milestones targeted for early next year that we're working towards relative to alternate propulsion.

Thank you I appreciate the discussion.

Thank you. Our next question comes from the line of Courtney Galanis with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys.

Just curious if you can.

Comment I think last pretty good just given us.

The impact of Walker die cast on.

You know the parts business and also on the margins. If you can just aggregate that and then.

If you can also just comment on supply chain more broadly.

So we have some challenges over the past quarters that you guys.

I have been brain components in house via this acquisition.

Yes, the current environment changed your thinking about vertical integration at all and.

Anything you are rethinking the supply chain at this point.

Sure coordinate let me let me take the first part on on Walker.

We did comment.

Last quarter on the impact.

On.

On gross margins kind of 125 150 basis points.

Yes, I think in in a normal quarter that that's probably a consistent number.

This quarter with all the disruption.

Both.

With the within our parts business down significantly.

The Walker business the challenges there some of the customers they serve.

Really really minimal impact on on margin for for Q2.

But I think going forward.

In a more normalized quarter similar quarter, one you'd see the same impact from Walker die cast.

In terms of the according to your supply chain question.

As we as we talked about on the Q1 call on a number of questions that we received there certainly things have improved as you would expect Fortunately.

Having said that to my prior comments.

The amount of.

Case development shall we say in some of the deterioration that you've seen in.

A number of different regions is.

Really challenging so.

We are I think at the early end of some of that as it continues to roll through by region. As you know a number of regions are more relevant I would say to commercial vehicle and automotive than others.

I think you we are certainly keeping a close eye on those regions in terms of.

What steps they are taking a stair rolling back.

Openings so to speak in what those requirements restrictions will be we certainly support all of our suppliers in terms of operating safely with guidelines and certainly share best practices.

With them I would tell you that.

It continues to be very much at 24, seven operation in terms of managing our supply chain, which is not only north America, but global end.

I would say outside of North America, there continue to be a number of so called hot spots that we're staying close to having said that the vast majority of our supply chain is still in North America.

We continue to work with suppliers looking for.

Alternatives and helping them, where we can contingency planning I think to date, we've been extremely fortunate and successful through the efforts of our team as well as suppliers.

Keeping us.

Hi in a position to operate.

Having said that I think again I give all the credit in the world our team on terms of what they've been able to do I would also offer to you we've had a change in number of our.

Internal processes around managing the business just to just given the amount of issues and I think thats an important point because.

We are literally talking about 24, seven as I mentioned, but also daily if not a weekly updates with a broader leadership team here to drive action and be very proactive. It will also create some challenges in terms of working capital investment to a level because we find ourselves.

Taking I would say certainly leaning forward in a number of areas to ensure supply and try to be helpful. There the same time.

I think we've been fortunate in terms of the support we've been able to offer.

Two suppliers I think it also has highlighted the advantages of some things we've certainly done in the past in terms of.

Proactive capital investment both internally as well as at some of the.

Suppliers I think to your question on vertical.

Fred mentioned.

The Walker operations as as we think about that it continues to.

Frankly outperformed our expectations in terms of the ability to.

Leverage that particular asset not only for allison's purposes, but for a third parties I think it's really provided us a tremendous amount of flexibility and.

Frankly, a surety of supply.

To get some things done, but we continue to look at what.

The rest of our book of business is and I would say at this stage is it causing us to think differently about for article.

We're always thinking I think the question is is there something new there I would offer.

You think about global sourcing and this will be one of the I'm sure. The hot topics amongst many within the market in amongst board meetings is how do you think about offshore cost supply and ultimately do you move from a regional basis to more localization and Thats something were spending a fair but.

At a time on as you can imagine with our.

Operating footprint in summary, overall I think we're very pleased and appreciate the efforts of many parties too.

Keep us operating.

Great. Thank you.

Thank you. Our next question comes from the line of Anthrasil with Oppenheimer. Please proceed with your question.

Hi, great.

Just wanted to drill down a little bit them in North American on highway business.

Maybe particularly in July.

When markets are recovering the past, which ones of the slowest to recover which when sort of has the best momentum in them and.

And then maybe also if you could broaden that to.

Your international markets to like what are you seeing recovering first to whats has recovered first and where the trends there. Thanks.

Good morning, and Dave I guess, let me, let me cover off North America on highway first.

My.

Question I was just asked about supply chain I mentioned some of the changes we've made around internal processes. We've also done.

Similar things in terms of our commercial operations. So.

The team here is on a.

Remarkable job staying close to our customers at multiple levels at this stage I'd offer that.

The one of the.

Fortunate outcomes is there is such a thing from the pandemic I think as us getting.

Even closer to our customers with the level of engagement also understanding of their business.

It's forced us as you can think prior to the pandemic relatively automated industry and process with.

Electronic data being pushed around an updated pretty seamlessly and on a regular basis that broke down as we talked about on the first quarter call. That's come back for the most part certainly significantly improve that being said nada.

Tremendous amount of visibility I would say beyond.

A month or so frankly, and thats steps away. We're planning at this stage to your question in terms of specifically in North America on highway.

I would say the most active.

On segments continue to be broadly.

Construction refuse pickup and delivery.

If you look at some of the more weaker areas I would say.

As you know class eight over the road tractor, we don't participate in but that certainly continues to to be one of the weaker areas food and beverage I would argue as well.

One of the bigger portions of the market as you know, especially medium is.

Lease rental that's Kim is very seasonal in terms of how decisions are made there I think theres a fair bit of equipment out there as you Im sure no.

That needs to work its way through the market so fair bit of activity there around.

Rentals being converted to leases and such so we're seeing that concept and dynamic continue to play out for from North America Municipal is next.

Frankly, it really varies by property and what their source of revenue is how they how they think about ridership right now and frankly going forward I think theres a number of ways that.

The broader economy as revisiting how we do business I think it will certainly have some some impacts there at multiple levels as we think overall.

I would say North America, certainly to my earlier comments as.

And on a positive trends certainly I would offer as well that's one thing were.

We're not paying close attention to.

His order rates is I'm sure you do but thinking about what that means from a backlog to build perspective, and how thats going to be supported going forward as an early indicator or what.

OEM.

Production rates are going to be for the balance of the year. So that's something that's an open switch body build a lead times I would say continue to be stretched as we understand it.

Theres a number of reasons for that but it really gets down to components supply and ultimately delivering.

Those vehicles in a timely way dealer inventories broadly parted stretched at this stage I think there somewhat completed we talked about that on the Q1 call I think theres some level as of rebuilding thats going on there but again.

What we've seen in some of the cultivate experienced turning and an unfavorable direction I think is going to give some level of pause to the to the broader market, but I would say.

Beyond that certainly improved conditions versus what we were thinking about it for the Q1 call outside North America.

China, certainly returned they've done reasonably well in terms of coming back I mentioned some of that the efforts that we saw success we've had around.

Export markets for China domestically. They continue we continue some of our development efforts there.

Europe is certainly back at some level I think the more challenging point there is how clean the read is going to be is holiday season as you know.

That seems to have slowed things down a bit theres theres a number of.

Shutdowns and things that have been at this time here that are pretty consistent seasonally the extent of those though appears to be longer than than usual. So I think there are number dynamics that are playing itself out there.

Beyond China, the rest of Asia, we're seeing some.

Positive developments for.

Australia that as you know is oversupplied.

Back in 18 to 19, I think thats, starting to turn a bit as well.

And the broader market there I would say other markets, Brazil, India.

I really continued to struggle. Unfortunately, we codes I think thats, a real dampening effect.

There and I would say portions of Africa as well in terms of what what that market for tens, but I would say overall.

Challenging conditions beyond that I think we feel very good about.

Defense end market going into the second half I think that we would expect a run rate for.

Second half to be higher than first half and staying close to that and we will meet our commitments.

Obviously off highway overall.

You are seeing some continued to see some softness there outside North America in North America, largely driven by Frac as you know.

Very challenged space right now and Thats something we see.

Turning near to medium term so.

Yes, Thank you very much youre welcome.

Thank you. Our next question comes from the line of Tim signed with Citi. Please proceed with your question.

Thank you good good morning.

Yes, Dave just.

Following up on North America off highway.

Your your largest frac and customer.

Recently on their call so that they would expect capital intensity of business going forward to be roughly half of what it's been in the past them.

I'm not sure they speak for the entire industry and and obviously their capex dollars get allocated to lots of things other than in transmissions, but just at a high level I mean, how do you how should we think about that in terms of.

Yeah, what implications that could have.

Not just from a new unit perspective, but obviously that the aftermarket there can be an important driver.

So again it just.

It is thinking about that kind of stood out to me and I'm just curious as to your thoughts because the narrative there for so long as Ben just takes more and more horsepower and more more capital intensity.

So this is who is quite a shift. So this just curious as to your thoughts on that.

And Tim. Thank you for that question I guess, a few things does that portends can you can you extrapolate or apply that commentary to the broader Mark I think the fact is you start with the broader market it's weak.

For a number of reasons that everybody is familiar with do I take that as those comments as broadly.

As I think some may interpret them I would go back to.

Over the beyond the sort of near to medium term what is the what is the quantity of hydraulic horsepower that's going to be deployed in North America that will drive ultimately units and aftermarket.

On the fact is I think energy is not going to go away in terms of need.

It's still a relatively low cost base, there and that also pertains that there won't be upward pressure on the commodities from.

Global perspective. The fact is they also mentioned at the same time and emphasis and international I think where you're very well positioned in the international.

Markets to participate in that focus and I would say that that is a growing market as well. So I think the overall positioning for US is the right technology with the right and frankly, the right customers. The right solutions I think the intensity as interesting when you talk about the pipe potential plateaued going of of Intel.

Entity or otherwise I think thats, that's interesting I think thats yet to be borne out in terms of what some of their.

Longer term experience will be it does in fact, the case I would expect theyre going to continue all users will push the envelope in terms of more efficiency I would say add to the initiatives. We mentioned, we're certainly investing continue to invest despite cycle currently as near term and off highway in off highway.

Solutions and improvements so I think we're very well positioned to support ultimately.

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Halliburton as well as others for that matter and I think we have.

Very solid opportunity there aftermarket overall as as the annuity may be certainly an aspect of the NAND back to back to the units and ultimately what the utilization rates are but I would say our experience.

Frankly outside of North America is.

Some of those outside North American markets are moving in the direction of North America duty cycles and utilization levels, which were.

Certainly pretend to a higher consumption rate. If you think about it from that perspective. So we have a lot a lot more to see in terms of development there, but as we said many times, it's it's volatile market, it's not for everybody.

Thus I think the profile of participants in the market. We also employ as you know and asset light model. There. So to the extent that there is demand we were certainly position to fill it the same time, we're not sitting here with.

Again absorption issues in terms of waiting for orders to come in.

Very good thanks, Dave.

Welcome.

Thank you. Our next question comes from feel explosion with Raymond James. Please proceed with your question.

Hey, good morning, everybody.

Good morning morning.

I was just hoping you could provide some color on on how the launch of your New Regional Hall series is tracking I appreciate the announcement with Navistar and I believe you partner with Freightliner previously booked but curious if you could talk about your outlook on demand with what you're hearing some customers and maybe what you believe is achievable from the market share perspective in that class eight and Thats.

Aerospace outline longer term.

Good morning feel it's Dave it's very briefly now very pleased with.

The teams work on the RHS launch.

Specifically or near term here with Navistar understand that that was a market pull.

Initiatives. So I think the team did a great job demonstrating the value of that technology, and particularly solution. We believe it's very competitive for the.

The reasons, we've discussed earlier, we also believe there's there's a solid.

Portion of the market that we can obtain with that particular product as the so called Metro as you said.

I think its little early at this point to the.

Indicating expectations around market share other than we obviously think theres theres. Some opportunity there are lots we wouldn't have made the investment in time to.

To do it having said that I think we shall see I think.

Certainly the way Navistar with and we appreciate their support to push that solution and ultimately.

Our friends or Freightliner to get there as well I think to what's what's the market.

Give it the opportunity to speak again.

Vehicles get out their fleets get more experience, we're looking forward to that but again as a market.

Pulled solution, we're very pleased with the response so far.

Thank you ladies and gentlemen, we have reached the end of our question and answer session. I would now like turn the floor back over to Mr. graviano for any additional closing comments.

Thank you Jesse.

Thank you for your continued interest in Allison and for participating on today's call on behalf of the entire Allison family. We wish all of you your families and colleagues good health and safety, we look forward to providing you with further updates and hope you enjoy the rest of your day.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation you may disconnect your lines at this time.

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Yes.

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Good morning, ladies and gentlemen, thank you for standing by welcome to Allison transmission second quarter 2020 earnings Conference call. My name is Kathy and I'll be your conference call operator today.

This time, all participants Arnie listen only mode. After the prepared remarks, the management team from Allison transmission 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.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

I would now like turn the conference call over to Mr. rifle products at the company's managing director of Investor Relations. Please go ahead Sir.

Thank you Jesse good morning, and thank you for joining us for our second quarter 2020 earnings Conference call with me. This morning, our day gradually our president and Chief Executive Officer, and Fred Bully, Our senior Vice President Chief Financial Officer and Treasurer.

As a reminder, this conference call webcast and this mornings presentation are available on the Investor Relations section of our website Allison transmission dotcom.

A replay of this call will be available through August 12.

As noted on slide two 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 2020 earnings press release, our annual report on form 10-K for the year ended December 30, Onest 2019, and our quarterly report on form 10-Q for the quarter ended March 30, Onest 2020, uncertainties related to the coordinating pandemic and related.

The responses by government customers and buyers and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize Porsche underlying assumptions are estimates prove incorrect actual results may vary materially from those that we expressed 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 FCC.

To find a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures the test in appendix the presentation and to our second quarter 2020 earnings press release.

Today's call us at the end the 845 am eastern time in order to maximize participation opportunities on the call. We'll take one question for me channels.

Please turn to slide for the presentation for the call agenda.

During today's call Dave gradually will provide you with a brief operational update.

Red Bull. He will then review our second quarter results and financial performance and provide an update analysis liquidity and full year 2020 capital spending plant.

Finally, Dave will conclude the prepared remarks prior to commencing the QNX now I'll turn the call over to Dave as guilty.

Thank you Greg Good morning, and thank you for joining us I would like to start by thanking all of Allison's employees customers and suppliers for their continued dedication and resilience. During this unprecedented time as the pandemic continues to disrupt populations and economies around the world the health and wellbeing of Allison's Excel.

End of family remains our top priority and we will take the actions necessary to ensure the safety of our people and our communities.

Our second quarter results reflects the pandemics significant impact on global supply chains and customer demand. Despite these ongoing disruptions all of Allison's global facilities are currently producing transmissions and components and the majority of our manufacturing operations have Ryan continuously throughout 2000.

Morning.

To date, we have achieved uninterrupted delivery of our products and continue to generate earnings and positive cash flow as a result of our longstanding commitment to prudent balance sheet management ample liquidity profitable operations and fully funded defined benefit pension plan al as soon as well capitalized and position.

Through realize future growth opportunities that may emerge from the current environment.

We also remain focused on aligning our operations programs and spending with current end markets conditions, while maintaining the flexibility to respond quickly and appropriately as these conditions evolve. Unfortunately, a weaker global outlook has led to a number of restructuring initiatives, including reductions of both our.

Hourly and salaried workforce and the ongoing reassessment of the timing and cadence of various capital investment commercial and product development initiatives as I've said in the past these are difficult decisions that significantly impact our employees their families in our communities.

And we do not take them without due consideration.

Finally, the pandemic continues to create a substantial amount of uncertainty so customer demand and supply chains steadily improved throughout the second quarter.

As global shutdowns were gradually ease than economies began to reopened a considerable amount of uncertainty remains as weve entered the second half of 2020 numerous events and factors that may occur over the coming months could have meaningful consequences on global demand and supply chains the key.

Current highly uncertain environment warrants a prudent approach as we manage the second half of 2020. Nevertheless, the disciplined pursuit of our strategic priorities and our commitment to improving the way the world works full persevere as we look ahead to 2021 and beyond.

Thank you I'll now turn the call over different.

Thank you good following Dave's comments I'll discuss the Q2 2020 performance summary, key income statement line items and cash flow I will then review allison's liquidity and full year 2020 capital spending plans before turning the call back over to David.

Please turn to slide five of the presentation for the Q2 2020 performance summary.

Net sales decreased 49% to $377 million compared to the same period in 2019. The decrease in net sales was principally driven by the ongoing effects of the pandemics on the global economy, resulting in lower demand across all of our end markets, except for the distance in market.

As Dave mentioned.

A weaker global outlook in current end market conditions have led us to implement a number of restructuring initiatives across our business.

As a result, we incurred $12 million and restructuring charges during the second quarter for voluntary and involuntary separation programs for both our hourly and salaried employees.

Gross margin for the quarter was 43.8% decreased to 900 basis points compared to 52.8% from the same period in 2019.

The decrease was principally driven by lower net sales and restructuring charges, partially offset by lower incentive compensation expense.

Price increases on certain products and favorable material costs.

Net income for the quarter was $23 million compared to $181 million for the same period in 2019. The decrease was principally driven by lower net sale and restructuring charges, partially offset by lower selling general and administrative expenses.

Adjusted EBITDA for the quarter was $115 million 30.5 person in the sales compared to $308 million for 41.8% of net sales for the same period in 2019.

The decrease was principally driven by lower gross profit, partially offset by lower selling general and administrative expenses.

More detailed overview of our net sales by end market can be found on slide six of the presentation.

Please turn to slide seven of the presentation for the Q2 2020 financial performance summary.

Selling general and administrative expenses decreased $24 million or 26% from the same period in 2019, principally driven by lower commercial activity spending lower incentive compensation expense.

Lower intangible amortization expense and lower stock compensation expense, partially offset by product warranty adjustments and restructuring charges.

Engineering research and development expense increased $1 million from the same period in 2019.

Please turn to slide eight of the presentation for the Q2 2020 cash flow performance summary.

Adjusted free cash flow decreased $147 million from the same period in 2019, principally driven by lower gross profit and higher cash interest expense, partially offset by lower cash income taxes, lower operating working capital requirements.

And lower commercial activity spending.

Please turn to slide nine of the presentation.

We ended the quarter with a net leverage ratio of 2.7 that 2.78 $434 million, a cash and $319 million valuable revolving credit facility commitments.

We also maintained our flexible long dated and covenant light debt structure with the earliest maturity due in September 2024.

During the second quarter, we paid a dividend 17 cents per share and ended the quarter with approximately $870 million authorized share repurchase capacity.

Yes.

Can you to manage this unprecedented period allison's unwavering commitment to well defined approach to capital structure and prudent balance sheet management remain intact. As a result, Allison continues to operate from a position this strength and maintains the optionality to pursue growth and capitalize on opportunities that are consistent with our strategic.

The priorities.

Given the ongoing impact of the pandemic on the United States another major markets in which we operate around the world, it's uncertain duration as well as the continuously evolving customer demand and supply chain readiness, we cannot conclusively provide a full year 2020 revenue earnings and cash out cash flow outlook at this.

However, as Dave mentioned, we remain focused on aligning operations programs in spending were current end market conditions. We are reaffirming our full year 2020 capital expenditure target of approximately 35% below 2019.

In addition, we anticipate a permanent annual cost savings of approximately $25 million as a result of the restructuring initiatives undertaken during the second quarter.

We will continue to monitor end market conditions and make adjustments to our operations in spending accordingly.

Finally, we remain steadfast in our commitment to the future growth of Allison and we will continue to fund key product development initiatives that will drive the expansion of of our business and further secure our leadership position in end markets that we serve.

To that end, we anticipate that engineering research and development expenses for the second half of 2020 will be consistent with the first half levels of spending.

Thank you and I'll now turn the call back over to Dave.

Thank you Fred as we've discussed on prior calls the resiliency of allison's businesses inherent than its strong market position in diverse end markets. While the pandemic has inevitably impacted allison's commercial business. These central business of the United States National Defense continues unabated, and we remain committed to supporting the United.

States military on current and future programs recently, Allison partnered with United States armies tank automotive and armaments command to support the Sustainment of the Army's light armored vehicle fleets consistent with the initial contracts requirements. We began delivery of the X 200 Cross drive transmit.

Listen in June.

The next 200 is designed for light track to combat vehicles weighing up to 16 tons, including the M 113, Athree armored personnel carrier, which remains the army single largest armored vehicle fleet with nearly 5000 vehicles.

Housing continues to work with our defense end market partners actively pursuing numerous wheeled and tracked opportunities around the world.

The defense end markets demonstrates the inherent strength and resiliency of allison's diverse business.

Despite the Pandemics impact on our commercial business, we remain committed to our growth initiatives and we will continue to invest prudently and appropriately to drive programs across all of our end markets. Recent growth developments include the latest release of the award winning Allison's 34, 14 Regional Hall series transmit.

Beginning with Navistars International trucks in July.

First introduced late last year at the North America commercial vehicles show the New Regional Hall series is an upgrade variant of Allison's proven and well known 3000 series fully automatic transmission designed to meet the higher engine torque requirements of the class a tractor market.

Last week, we announced that new Flyer and Alison will deliver 50 electric hybrid equip buses to New York City Transit the largest transit authority in the United States. This 50 unit order follows the successful valuation by the transit authority of buses equipped with Allison's age 40 EV electric.

Hybrid propulsion system.

We also continue to enhance our presence outside of North America with new releases such as the recently introduced UGI kroner medium duty truck in Australia, featuring our son's 3000 series transmission as standard across the vehicle lineup and yup coming to decline heavy duty truck.

Which expands allison's offerings in the international vocational market.

In China, we continue to make inroads into the competitive export market recent wins with Oems such as Ken Wynn and Encore feature Allison transmissions in various bus models for the middle Eastern markets.

Exports of our refuse trucks in LNG.

Yard tractors to Latin America in other parts of Asia by Sino truck and Sean. She also feature our transmissions in.

In Europe Allison transmissions are featured in new and upcoming transit and articulated plus releases with Kamaz end Mas for the eastern European and Russian markets as well in South America, we continue to expand our vocational presence with recent truck releases by trade time, and Mercedes Benz for the five.

Sure and emergency rescues pickup and delivery and armored vehicle locations.

These global releases are key components of our growth strategy, along with ongoing and targeted end user initiatives Allison's expanded offerings will support increased penetration promote demands for our brand and advance our market leadership expansion efforts.

Innovation is another key component of our strategy that will drive growth across our entire business.

Allison's recently completed vehicle Environmental Test center is already being leveraged to accelerate the development of our next generation propulsion solutions, including Allison's portfolio of electric propulsion systems.

The test center enables the accumulation of in vehicle durability hours under real world operating conditions and accelerated rate without the downtime required to charge the energy storage system.

And then an electric vehicle.

The test center also facilitate instant evaluation and responses to issues under controlled conditions that ensure the desired operating environment can be isolated tested and replicated that will this capability provides dallas and with the unique advantage in the development of new products for example, our.

Electric actual architectures, Ken undergo testing under a broad range of real world operating conditions and extreme environments, the ability to simulate and replicate a wide range of conditions expedites. The testing of onboard power electronics power consumption and electric accessories as well as overall.

System performance and efficiency across a range of energy storage systems, including battery electric and hydrogen fuel cell power solutions.

These combined capabilities also facilitate the delivery of the Allison promise of durability and reliability even for the most demanding cycles.

The test center is equipped to help our engineers as well as our OEM partners bodybuilders suppliers and fleet owners innovate their vehicles optimize performance and accelerate time to market by testing safely and confidently in a single environments controlled and seasonally seasonably independent located.

Allison remains prepared and committed to meet the current and future needs of our customers our product development expertise with a focus on improved fuel economy, and reduce greenhouse gases combined with our financial strength robust cash flow generation strong margin profile variable cost structure and asset.

Light business model supports that continued pursuit of our strategic priorities and enhances allison's position as a preferred at long term partner.

This concludes our prepared remarks, Jesse please open the call for questions.

Thank you at that time, we will be conducting the question and answer session. If he'd like to ask a question. Please press star one on your telephone keypad. The confirmation code will indicate that your line is in the question Q. You May proceed start to if you would like your move your question from the Q, how participant do you think speaker equipment and may be necessary to pick.

Your hands of before pressing the star teams one moment please poll for questions.

Thank you. Our first question comes from the line of roster Lardy with Bank of America. Please proceed with your question.

Thank you good morning, guys.

Good morning.

On the out the North America on highway side can you comment at all on revenue trends in July relative to the down 59% in Q2 and just with that.

Our the SGN a savings in the second quarter sustainable for the balance of the year without what kind of decremental EBITDA margins should we expect in the second half.

Sure. Good morning, Ross, It's Dave in terms of your question on North America.

On highway revenue in July relative to.

Second quarter as you know as we mentioned certainly the level of demand improved throughout second quarter.

And obviously carried into Q3, so far I would say, we're we're pleased with what we've seen Adam July and frankly early indications of of August having said that as we talked about on the Q1 call and worth repeating here.

Near term visibility is about where we're at I can offer to you that.

A number of advances as I mentioned the prepared remarks continue to create.

Some concern for us and frankly, some challenges as the pandemic when you see some of the case history in a number of regions around the country. As you know are pretty critical to other commercial vehicle industry and the broader economy, we are staying very close to that but our expert.

Dictation does we've already discussed are predicated on a continuation of what you see currently in terms of the supply chains ability to ultimately execute with the guidelines that they have in that were also operating under at the same time.

Oems, having a similar experience, but I would say summary, overall certainly pleased with what we saw in July in early.

Indications for August and beyond that I would say our visibility is pretty limited as we start thinking about Q4 at this point on your acute year Q2 as seen a run rate.

Question, certainly our expectations overall is that.

You should expect and we expect pretty similar level.

Totally run rate for second half.

Similar to what you saw in Q2 for Us DNA.

Thank you.

Thank you. Our next question comes from the line of Joe I'll begin with vertical research partners. Please proceed with your question.

Hi, good morning, everyone.

As we've seen cost cutting action across the group over the course of earnings R&D has been one area. That's also been hit you didn't do that can you talk about some of the prioritization on R&D spend whether that shifted at all given the current environment and you've talked about being in.

Being well capitalized and through the potential are being well positioned to realize opportunities that may emerge can you expand on on that at all and what kind of opportunities you're seeing on the horizon.

Good morning, it's Dan.

I'd say briefly in terms of your R&D question.

Our priorities haven't changed as we begin their analysis and how we think about that as market driven.

I would say overall, we haven't really come across the need to change I think unlike probably some others that you've heard of in terms of public comments and redirect or.

Significant level of re timing as such as it may be.

We're staying very close to what we believe as market driven demand at this stage. So we've continued to align and pursue.

Those initiatives and I would offer its across all of our end markets. It's not just conventional it is electrification and it also extends to.

Our defense end market as well and off highway for that matter. So we as we've talked many times our view is to invest through the cycle.

Our balance sheet.

And overall leverage levels take that into account, but this is not a situation where we find ourselves.

Meeting to significantly change and I think if nothing else, sending a signal to all stakeholders that we continue to be committed to our business in end markets.

As an important point I think frankly it also is.

Significant message to send to not only to broader market, but internally to our team which is continuing to drive what we believe is important to deliver that promise, but also maintain our leadership position in the markets.

In terms of capital allocation I guess is to your question, how we think about that.

We haven't changed that view, either we continue to be committed to prudent.

Balance sheet management balance sheet management in an appropriate level of.

Leverage over the cycle.

Threaten the team I think continue to do a great job.

Monitoring, where we are and frankly, maintaining a high level of liquidity at the same time. We're also opportunistic so our commitments in terms of generating cash and returning it to our shareholders continues in that as you know.

Takes a number of different forms as we continue to maintain our dividend, but also the flexibility to return capital to shareholders and other.

Assets.

Thanks very much.

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

Yes, hi, good morning, everyone.

Good morning.

I'm wondering if you could talk about the prospects for the electric hybrid products.

A number of years ago was meaningful part of the portfolio, but then customer interest ultimately didn't pan out can you talk about how demand for electric Highwoods look looks like from here was this a one off order or.

There and opportunity for Apollo elsewhere based on your pipeline in the technology more economic today compared to five five or six years ago.

And any other development. So we should be thinking about on alternative propulsion systems for you folks, where we'll get data points on over the balance of this year.

Based on customer announcements thanks.

Morning, Jerry It's Dave terms your questions on the electric hybrid products.

That we've been producing that for upwards of 17, plus years, now and I would say very successfully with thousands of units.

Running and it does we do take quite a bit of pride and the fact that there literally billions of miles that have been racked up over time.

It's interesting when you compare that to.

Announcements in the alternative propulsion space and statements were made about accumulating some few million miles here or there with very.

A number of different alternatives. The fact is we have a lot of experience I think it's from that experience. It's also.

To your question allowed us to improve that particular solution to make it more economic it has more value today than it than it had when it started.

We're also adding additional features to that.

We've talked about the fact that it will.

Introducing extended range for for full you'd be operation. There is an important aspect and frankly, what we're hearing from customers I think despite.

But what I think some people may mistakenly believe as there is no market for.

Hybrid. The fact is there are because not every region not every.

And our property has a position where for a number of reasons fully the may be the solution for their entire fleet. The same time, they want the benefits of reduce greenhouse gas emissions et cetera, I think thats.

The concept here is what is the hybrid product the electric hybrid continued to deliver attend users so where we're proud of where that sets and I think the team continues to do a great job evolving it and it's well received by the market and the.

Question you raise in terms of the transit authorities order. It's we do not view that as a one off we continue to have strong demand for that particular.

Product in terms of our efforts in alternatives are propulsion we've been.

Certainly in the market for years with products that can be used with alternate fuels that continues to get a lot of attention I mentioned in the prepared remarks, we with CNG and otherwise I think fuel cells are getting hydrogen fuel cells and other forms are getting more attention now the fact is there.

All facilitated ultimately by.

Any be capabilities. So that is consistent with our strategy in our portfolio and what the team is is currently pursuing I think in general I tell you were pretty pretty pleased with where we are in the progress that we've made.

I would also offer the pandemic has not.

Ben a situation that's helped in certain regards getting.

A number of things done as we've talked about before it takes all the parts to make a transmission and also takes a lot of things to to.

Performed development work and complete it and that that has been somewhat confounding. This year, just given the conditions with the pandemic and limiting our our reach to affect some some issues, but I would say overall very pleased I'd also say.

In terms of my comments on the.

Environmental Test center.

That is really brought to bear.

The advantages of controlling your destiny in terms of your ability to develop and test on site. The idea of keeping our team which is a priority for us safe.

Really does come to pass when you think about doing.

That type of work in your own facilities with your guidelines and.

Safety requirements and ultimately not having to put people on the road. So we're very pleased with.

The result, so far there.

In terms of expectations going forward I would say overall, where were staying very close to Oems and it very targeted way.

We also have a number of different internal external milestones targeted for early next year that we're working towards relative to alternate propulsion.

Thank you I appreciate the discussion.

Thank you. Our next question comes from the lineup Courtney Galanis with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys.

Just curious if you can.

I think last pretty good just given us.

The impact of Walker die cast on.

The parts business and also on the margins. If you can disaggregate that and then if you can also just comment on supply chain were broadly obviously, we have from time to is over the past quarters that you guys.

In bringing some components in house via this acquisition.

The current environment changed your thinking about vertical integration at all and.

Anything you are rethinking the supply chain at this point.

Sure coordinate let me let me take the first part on.

On on Walker.

We did comment.

Last quarter on the impact.

On on gross margins kind of 120 550 basis points.

Yes, I think in in a normal quarter, that's that's probably a consistent number.

This quarter with all the disruption.

Both.

With the within our parts business down significantly.

The Walker business the challenges there some of the customers they serve.

Really minimal impact on on margin for for Q2.

But I think going forward.

In a more normalized quarter similar quarter, one you'd see the same impact from Walker die cast.

In terms of the according to your supply chain question.

As we as we talked about on the Q1 call on a number of questions that we received there certainly things have improved as you would expect unfortunately.

Having said that to my prior comments.

The the amount of.

Case development shall we say in some of the deterioration that you've seen in.

A number of different regions is.

Really challenging so.

We are I think at the early end of some of that as it continues to roll through by region. As you know a number of regions are more relevant I would say to commercial vehicle and automotive than others.

I think you we are certainly keeping a close eye on those regions in terms of.

What steps they are taking if they're rolling back.

Opening so to speak and what those requirements restrictions will be we certainly support all of our suppliers in terms of operating safely with guidelines and certainly share best practices.

With them I would tell you that.

It continues to be very much a 24 seven operation in terms of managing our supply chain, which is not only north America, but global end.

I would say outside of North America, there continue to be a number of so called hot spots that we're staying close to having said that vast majority of our supply chain is still in North America.

We continue to work with suppliers looking for.

Alternatives and helping them, where we can contingency planning I think to date, we've been extremely fortunate and successful through the efforts of our team as well as suppliers.

Keeping us.

Hi in a position to operate.

Having said that I think again I give all the credit in the world to our team on terms of what they've been able to do I would also offer to we've had a change in number of our.

Internal processes around managing the business just to just given the amount of issues and I think thats an important point because.

We are literally talking about 24, seven as I mentioned, but also daily if not weekly updates with the broader leadership team here to drive action and be very proactive. It will also create some challenges in terms of working capital investment to a level because we find ourselves.

Taking I would say certainly leaning forward in a number of areas to ensure supply and try to be helpful. There the same time.

I think we've been fortunate in terms of the support we've been able to offer.

Two suppliers I think it also has highlighted the advantages of some things we've certainly done in the past in terms of.

Proactive capital investment both internally as well as at some of the.

Suppliers I think to your question on vertical.

Fred mentioned.

The Walker operations as as we think about that it continues to.

Frankly, outperform our expectations in terms of the ability to.

Leverage that particular asset not only for allison's purposes, but for third parties I think it's really provided us a tremendous amount of flexibility and.

Frankly, a surety of supply.

To get some things done, but we continue to look at what.

The rest of our book of business is and I would say at this stage is it causing us to think differently about for article.

We're always thinking I think the question is is there something new there I would offer as you think about global sourcing and this will be one of the I'm sure. The hot topics amongst many within the market in amongst board meetings is how do you think about offshore cost supply and ultimately.

You move from a regional basis to more localization and that's something we're spending a fair, but a time on as you can imagine with our.

Operating footprint in summary, overall I think we're very pleased and appreciate the efforts of many parties too.

Keep us operating.

Great. Thank you.

Thank you. Our next question comes from the line at the end for Sina with Oppenheimer. Please proceed with your question.

Hi, great.

I wanted to drill down a little bit on the North American on highway business, you, maybe particularly July.

Lending markets are recovering the past, which ones the slowest to recover which when sort of had the best momentum in them.

And then maybe also if you could broaden that to.

Your international markets to like what are you seeing recovering first to whats has recovered first and where the trends there. Thanks.

Good morning, and Dave I.

I guess, let me let me cover off North America on highway first.

My.

Question that was just asked about supply chain I mentioned some of the changes we've made around internal processes. We've also done.

Similar things in terms of our commercial operations. So.

The team here is on a.

Remarkable job staying close to our customers at multiple levels at this stage I'd offer that.

The one of the.

Fortunate outcomes is there is such a thing from the pandemic I think as us getting.

Even closer to our customers with the level of engagement also understanding of their business.

It's forced us as you can think prior to the pandemic relatively automated industry and process with.

Electronic data being pushed around an updated pretty seamlessly and on a regular basis that broke down as we talked about on the first quarter call Thats come back for the most part certainly significantly improve that being said not to.

Tremendous amount of visibility I would say beyond.

Month, or so frankly, and that's that's the way we're planning at this stage tier.

Question in terms of specifically North America on highway.

I would say the most active.

Segments continue to be broadly.

Construction rescues pickup and delivery.

If you look at some of the more weaker areas I would say.

As you know class eight over the road tractor, we don't participate in but Thats certainly continues to be one of the weaker areas food beverage I would argue as well.

One of the bigger portions of the market as you know, especially medium is.

Lease rental that's Kim is very seasonal in terms of how decisions are made there I think theres a fair bit of equipment out there as you Im sure no.

That needs to work its way through the market so fair bit of activity there around.

Rentals being converted to leases and such so we're seeing that concept and dynamic continue to play out for for North America Municipal is next.

Frankly, it really varies by property and what their source of revenue is how they how they think about ridership right now and frankly going forward I think theres a number of ways that.

The broader economy is revisiting how we do business I think it will certainly have some some impacts there at multiple levels as we think overall.

I would say North America, certainly to my earlier comments as.

Then on a positive trends certainly I would offer as well that's one thing were.

Not paying close attention to.

His order rates is I'm sure you do but thinking about what that means from a backlog to build perspective, and how that's going to be supported going forward as an early indicator of what.

OEM.

Production rates are going to be for the balance of the year. So that's something that's an open switch body builders lead times I would say continue to be stretched as we understand it.

There's a number of reasons for that but it really gets down to components supply and ultimately delivering.

Those vehicles in a timely way dealer inventory is broadly.

Parted stretched at this stage I think there somewhat depleted we talked about that on Q1 call I think theres some level of rebuilding thats going on there but again.

What we've seen in some of the co that experienced turning and an unfavorable direction I think is going to give some level of pause to the to the broader market, but I would say.

Beyond that certainly improved conditions versus what we were thinking about it for the Q1 call outside North America, China, certainly returned they've done reasonably well in terms of coming back.

I mentioned some of that the efforts that we use success we've had around.

Export markets for China domestically. They continue we continue some of our development efforts there.

Europe is certainly back at some level I think the more challenging point there is how clean the read is going to be its holiday season as you know.

That seems to have slowed things down a bit theres theres a number of.

Down some things that have been at this time of year that are pretty consistent seasonally the extent of those though appears to be longer than than usual. So I think there are number dynamics that are playing itself out there.

On China, the rest of Asia, we're seeing some.

Positive developments for.

Australia that as you know is oversupplied.

Back in 18 to 19, I think thats, starting to turn a bit as well.

And the broader market there I would say other markets, Brazil, India, I really continued to struggle. Unfortunately, we coated I think thats a real dampening effect.

There and I would say portions of Africa as well in terms of what what that market for tens, but I would say overall some challenging conditions beyond that I think we feel very good about.

Defense end market going into the second half I think that we would expect a run rate for.

Second half to be higher than first half and staying close to that and we will meet our commitments.

Obviously off highway overall.

You are seeing some continued to see some softness there outside North America in North America, largely driven by Frac as you know.

Very challenged space right now and not something we see.

Turning near to medium term so.

Yes, Thank you very much youre welcome.

Thank you. Our next question comes from the line of Tim signed with Citi. Please proceed with your question.

Thank you good good morning.

Yes gave just.

Following up on North America off highway.

Your your largest track and customer.

Recently on their call so that they would expect capital intensity of general business going forward to be roughly half of what it's been in the past.

Im not sure they speak for the entire industry and and obviously their capex dollars get allocated to lots of things other than in transmissions, but just at a high level I mean, how do you how should we think about that in terms of.

Yeah, what implications that could have.

Not just from a new unit perspective, but obviously that the aftermarket there can be an important driver.

So again it just is thinking about that it kind of stood out to me and I'm just curious as to your thoughts because the narrative there for so long as Ben.

Just takes more and more horsepower and more more capital intensity.

So this is who is quite a shift. So this just curious as to your thoughts on that.

And Tim. Thank you for that question I guess, a few things does that pretend can you can you extrapolate or apply that commentary to the broader Mark I think the fact that you start with the broader market it's weak.

For a number of reasons that everybody is familiar with do I take that as those comments as broadly.

As I think some may interpret them I would go back to.

Over the beyond the sort of near to medium term what is the what is the quantity of hydraulic horsepower that's going to be deployed North America that will drive ultimately units and aftermarket on the fact is I think energy is not going to go away in terms of that need.

Still a relatively low cost base there.

Also pertains that there won't be upward pressure on the commodities from our global perspective. The fact is they also mentioned at the same time, an emphasis and international I think where you're very well positioned in the international.

Markets to participate in that focus and I would say that that is a growing market as well. So I think the overall positioning for US is the right technology with the right and frankly, the right customers. The right solutions I think the intensity as interesting when you talk about the pipe potential plateauing of.

I've intensity or otherwise I think that's that's interesting I think it's yet to be borne out in terms of what some of the.

Longer term experience will be it does in fact, the case I would expect they're going to continue all users will push the envelope in terms of more efficiency I would say add to the initiatives. We mentioned we are certainly investing continue to invest despite the cycle currently is near term and off highway in off highway.

Solutions and improvement so I think we're very well positioned to support ultimately.

Halliburton as well as others for that matter and I think we have.

Our solid opportunity there aftermarket overall as as the annuity may be certainly an aspect of the Nam back to back to the units and ultimately what utilization rates are but I would say our experience.

Frankly outside of North America is.

Some of those outside North America markets are moving in the direction of North America duty cycles and utilization levels, which were.

Certainly pretend to a higher consumption rate. If you think about it from that perspective. So we have a lot a lot more to see in terms of development there, but as we said many times that it's volatile market, it's not for everybody.

Thus I think the profile of participants in the market. We also employ as you know as an asset light model. There. So to the extent that there is demand we were certainly positioned to fill it the same time, we're not sitting here with.

Again absorption issues in terms of waiting for orders to come in.

Very good thanks as.

Welcome.

Thank you. Our next question comes from feel explosion with Raymond James. Please proceed with your question.

Hey, good morning, everybody.

Good morning warning.

Hey, I was just hoping you could provide some color on on how the launch of your New Regional Hall series is tracking I appreciate the announcement with Navistar and I believe you partner with Freightliner previously looked like curious if you could talk about your outlook on the man with what you're hearing some customers and maybe what you believe is achievable from the market share perspective in that class.

<unk> Metro space, you have outlined longer term.

Good morning, Philips as stated its very briefly now very pleased with.

The teams work on the RHS launch.

Specifically or near term here with Navistar understand that that was a market pull.

Initiatives. So I think the team did a great job demonstrating the value of that technology, and particularly solution. We believe it's very competitive for the.

The reasons, we've discussed earlier, we also believe Theres theres a solid.

Portion of the market that we can obtain with that particular product as the so called Metro as you said.

I think its little early at this point to the.

Indicating expectations around market share other than we obviously think there's there's some opportunity there Alex we wouldn't have made the investment in time to.

To do it having said that I think we shall see I think.

Certainly the way Navistar with and we appreciate their support the push that solution and ultimately.

Our friends at Freightliner to get there as well I think to what's what's the market.

Given the opportunity to speak again.

Vehicles get out their fleets get more experience, we're looking forward to that but again as a market.

Pulled solution, we're very pleased with the response so far.

Thank you ladies and gentlemen, we have reached the end of our question and answer session. I would now like turn the floor back over to Mr. graviano for any additional closing comments.

Thank you Jesse.

Thank you for your continued interest in Allison inferred participating on today's call on behalf of the entire Allison family. We wish all of you your families and colleagues good health and safety, we look forward to providing you with further updates and hope you enjoy the rest of your day.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation you may disconnect your lines at this time.