Q3 2020 Allison Transmission Holdings Inc Earnings Call
The delivery of our products throughout the year year to date Allison continues to demonstrate solid performance as well as the consistent generation of earnings and positive cash flow.
Sequential net sales increased over 40% as the severe economic weakness and customer shutdowns experienced during the second quarter abated and a rebound in relevant business activity and sentiments generated improved demand for both medium duty in class eight straight vocational trucks. Furthermore.
For the third quarter.
We settled 16 million in share repurchases and paid a dividend of 17 cents per share.
Due to our long standing commitment to prudent balance sheet management ample liquidity and profitable operations Allison remains well capitalized then position to navigate the challenges presented by the evolving and uncertain environment benefit from a recovery in demand and capitalize on future growth opportunities.
Finding a product an issue spending.
During the third quarter of $23 million product warranty adjustment with recorded to address the transmission performance issue associated with shift quality on a specific population product.
We stand behind Allison brand promise a quality reliability invariably for every product precariously out may. This unwavering commitment is supported by investments in our people equipment and processes that has enabled an average probably work expenses as a percentage of net sales of just 1% from 2013 through 2019.
But just EBITDA for the quarter was $174 million for 32, 7% of net sales compared to $269 million for 42% of net sales for the same period in 2019, the decrease essentially driven by lower gross profit and unfavorable product Lauren.
The adjustment, partially offset the lower commercial activity gaming and the interior timing of product initiatives spending.
Adjust visa without the product warranty adjustment recorded in the third quarter was $197 million with 37% of net sales.
A detailed overview of our net sales and market can be found on slide fixed as the presentation.
Please try to slide several of the presentations to the Q3 2020 financial performance stomach.
So in general and administrative expenses increased $8 million or 9% from the same period in 2019 constantly driven by unfavorable product warranty adjustments, partially offset by lower intangible amortization expense lower commercial activity spending and lower compensation expenses.
Engineering research and development expenses decreased $6 million from the same period in 2019.
Really driven by the entered your timing of product initiatives spending.
Please turn slightly to the presentation for Q3 2020 cash flow performance summary.
Adjusted free cash flow for the quarter was $136 million compared to $150 million to $65 million from the same period in 2019. The decrease was principally driven a low gross profit partially offset by reductions in cash income taxes capital expenditures operating working capital requirements and can.
Herschel activity, Cindy and the interview timing of products and issued spending.
Please turn to slide nine of the presentation for the Q3 2020 liquidity update.
Ended the quarter with the net leverage ratio of 3.0 times $251 million of cash and $595 million is available revolving credit facility commitment. We continued to maintain a flexible long Vegas and covenant like that structure with year lease maturity due in September of 2024.
During the third quarter, we settled $60 million in share repurchases and pay the dividend and 17 cents per share we ended the quarter with approximately $856 million of authorized share repurchase capacity.
As we continue to navigate the compatibility year are unwavering commitment and well-defined approach to capital structure improved balance sheet management remains intact. As a result, Alison continues to operate from a position of strength and maintains the optionality to pursue growth and capitalize on my opportunities that are consistent with our strategic priority.
We started to slide kind of the presentation for the 2020 guidance update.
Given improvements and customers outlook and supply chain readiness in the United States and other major markets in which we operate we are reintroducing full year 2020 guidance.
Our update the full year 2020 guidance include net sales expected to be in the range of $2.02522075 billion net.
Net income expected to be in the range of 285 million to $350 million adjusted EBITDA expected to be in the range of 690% to 75 $730 million.
And net cash provided by at operating activities expected to be in the range of $490 million to $520 million adjusted free cash flow expected to be in the range of $385 million to $425 million and capital expenditures expected to be in the range of 107 to 117.
Million dollars.
Alison full year 2020, net sales guidance reflect lower demand across all and market, except the defense and market as a result of the pandemic, partially offset by price increases uncertain products.
As Dave mentioned, we remain focused on the line and operations programs and spending current and market conditions, and we will continue to make adjustments as conditions Warner.
Finally, new remain steadfast in our commitment to the future growth about and we will continue to fund P product development initiatives that will drive the expansion of our business and further secured our leadership position and market revenue serve.
Thank you and I will now turn the call back over today.
Price at first earlier this month free announced the launch or Degermed power Allison New line of fully integrated zero emission electric actual for medium and heavy duty commercial truck. We also announced the new Aegean power 100 D outcomes first electric actual various would be John powers series or.
BJ power 100, <unk> is one of the most powerful and fully integrated electric actual systems in the world. In fact, several major global OEM comp chosen to integrate Allison Dijon power of westrich actual into their electric truck development and validation program. Most recently.
Truck and hexagon purist.
Showcase the knee Jen power 100 D. Equip piano XL seven chart guarantee nose October 5th 2020 announcement of their project can be there zero emission vehicles development program Degermed power 100, <unk> will be manufactured palaces recently completed 110000 square foot.
Electric actual development and manufacturing facility and offer until Michigan.
Features product features two electric motors capable of generating 400 kilowatts of continuous power it Pete.
Pete combined power 550 kilowatts.
It also integrates with two speed transmission into the central housing facilitating a high starting gradability and top speed increased efficiency and an optional differential lock Allison fully integrated Degermed power line of electric actual to eliminate many of the inefficiencies of competitive <unk> solution the efficiency.
<unk> advantage translates to increase range capability or a reduction in battery pack size optimizing the economic value of the germ power electric actual.
Livery.
Full electric propulsion technology remains in the early stages of development the opportunity for Alison as meaningful we anticipate content per vehicle for it fully integrated electric actual solution could range from three to 10 times out of a conventional transmission or a classic southern truck.
Broad range accounts for the Optionality customers will have as it relates to the level of integration and components are you available. Our engineers have been developing electric solutions for commercial and military vehicles for decades, and we are well positioned to continue delivering youtz and promise a quality durability and reliability.
With our new line, a fully integrated electric propulsion solution.
These empower product family is the second offering under the recently announced Allison EJ Brown fully electric electric hybrid propulsion solutions earlier in the third quarter, we announced the launch of the June Flex Alphons, New zero emission capable electric hybrid system, providing birth.
With a full electric engine off propulsion up to 10 miles and full electric accessory power operation capability ideal for zero emission zellman and depo operation without the range limitations or infrastructure requirements are full electric solution.
Singly indigo the Indianapolis Public Transportation Corporation announced that it will be a lead fleet partner for Allison Revolutionary New electric hybrid propulsion products, demonstrating yet commitment to reducing its independent.
Dependent on.
Fossil fuels enhanced quality of life American entity and protecting the environment, while minimizing the total cost of ownership.
As interest in electrification continues to gain momentum many fleets remain reluctant to go all in on full electric at this early stage critical feedback from our customers is what inspired Allison to develop bejan flex with enhanced capabilities for coach at transit buses effectively serving over the bridge solution between.
Conventional fuel and full electric solution Degermed flexible enabled transit fleets to evaluate forward electric capability and their needs, while it's still having the availability of a diesel range extender.
Where they are needed for longer or flexible route unplanned congestion or an inability to recharge due to power grid challenges no additional capital infrastructure investment is required to utilize this full electric operation capability.
With the new region power lines of electric axles, and the new eject Flex electric hybrid system. Allison is building on a foundation of safe sustainable an efficient propulsion solutions created throughout our of 105 year history.
Our unwavering commitment to innovation and product development combined with our financial strength robust cash flow generation and strong margin profile positions Allison to lead the way into the future of commercial vehicle electric propulsion.
Then portfolio is the latest example from abroad and diverse range of product development initiatives. We are undertaking it out as we've highlighted throughout the year. The resiliency analysis businesses is harrison that strong market position and diverse and markets. While the pandemic continues to impacted commercial demand.
Cecil business of the United States National Defense continues unabated analysis and remains committed to supporting the United States military on current and future programs.
U S. Army is currently evaluating two prototypes for new armored life tank the mobile protected firepower program to support infantry units with additional firepower Allison 30, 40, Amex Cross drive transmission designed for medium track combat vehicles weighing between 25 and 40.
<unk> has been selected by both manufacturers competing for the Army MTF program testing of their prototypes NPS platform begins this winter with a final selection plans for the summer.
<unk> 2022 volumes for the MTF program are anticipated to reach more than 500 vehicles over 10 years and.
In addition to the domestic opportunity for hours from 30, 40, Amex Cross drive transmission, we're collaborating with U S dollars to meet their transmission requirements for medium weight armored vehicles.
We also continue to work with our defense and market partners in the pursuit of additional wheeled and tracked opportunities around the world.
Alexandra has always been at the forefront of innovation and notwithstanding the considerable uncertainty that lingers in global markets. We remain committed to meeting the current and future needs of our customers across all of the end market Sweeter. We will continue turned us currently and appropriately to drive growth expand our market Lee.
Or ship and further position Allison that they preferred in long term partner.
We look forward to providing you with additional product in collaboration updates in the coming months.
This concludes our prepared remarks layfield. Please open the call for questions.
Thank you if you would like to ask a question on the phone lines today cause signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your immune options turned off to allow your signal to retire equipment. As a reminder, everyone. Please limit yourself to one question.
We'll take our first question from Jamie Cook with credit Suisse.
Hi, good morning, and night clutter.
I've I just understanding it's still early but you generally have a good read on the market. Your initial views without quantifying on 2021 based on somewhat somewhat but the industry guys are saying, which market kept the best opportunity to grow and in that vein should we expect above average increments incremental.
Margins from Allison typical of of history, and as you don't have some of the temporary costs headwinds coming back in 2021 like some of your camps. Thanks.
Good evening.
Amy.
Appreciate those questions. So.
First thank you for the you know the recognition on a quarterly results was outside of the prepared remarks with him.
The team here with all of our partners continue to work very diligently to stay safe and work appropriately by a meeting.
I think very challenging conditions is everybody is.
Having said that I think your questions. On 2021 is you know at this point in the year typically we are in a strong position to provide guide I would I would certainly offer a few thoughts in that regard.
Generally speaking reached the tonality from the market greed that we have and if you think about it which our largest and marketing.
North America on highway.
I would say generally speaking and market participants in third party third party forecasters of pure cautiously optimistic.
That demand conditions were further improves subjects.
Numerous caveat relative to the pandemic why I say that as you well know.
She or he defines controls and this is one of those where.
As we start.
20, thinking about 2021 and number of changes we've already made in our business to your point on cost.
That's that's one has some near term focus for us because we are certainly making assumptions as everybody out there is I would generally tell you to the feedback that I just provided certainly there's an expectation that there's better market conditions in in 21, I think the challenging part of that though is how you start.
Year, because as we currently sick we've provided guide for the balance of 2020, and we've also made a number of assumptions.
Relative to the pandemic I think recent developments here over the last few weeks cause you're well aware.
Are somewhat concerning from the standpoint of if we ever return to restrictions what does that really mean.
Set up to 2021, so I think as we currently sick today with general expectation, certainly expect better market conditions, I would say almost across.
The board all of our end markets for next year, but again I think it's far too early as it normally is this time of year, but I think with the pandemic to give you a very clean.
Clean read I would also offer to the comments that were made in the prepared remarks, we invest through the cynical as you know we are continuing to drive despite what I would.
Certainly describe is challenging conditions.
The initiatives that we set out that are market driven. So we are we are continuing to execute along those lines.
Back to your point on incremental certainly with better market conditions next year, we would.
Expect better Incrementals I would also.
Offer as part of the cost.
Structure changes that we made earlier this year, we continue to feel very good about.
I think you would also expect us we've outperformed our expectations.
Some of those costs of prep back in but they're really more variable.
Certainly happy to have the incremental margins that are attached to those.
So with that.
We'll certainly look forward to the first.
Call in the first quarter to provide a more fulsome answer to your question.
I appreciate it thank you.
We'll take our next question from <unk> with Oppenheimer.
Alright, great. Thank you very much.
Thank you all color on the side.
I think you mentioned Korea Tenex what we.
Would expect from a traditional vehicle how you arrived at that.
Including a pillow and what needs to be included at the Harlem and I know <unk> Super far away from a close knit. This bye bye as you talk to your customers.
And make sure we may be expecting an average in between we'll do that three in 10 10 that tracks.
Yeah I appreciate the question there so the <unk> broad range.
As you note.
The reason for that is we are we are assuming.
That.
There is a number of customers and users that some may require a complete solution so to speak that being electronics batteries and the propulsion solution itself, but overall, that's a complete system you can imagine the costs those.
Batteries on the electronics in addition to.
Ever propulsion device there is.
So our range Incorporators gives you a range, which assumes just for instance, electric Axel all the way up to a full system potentially so that's really the range, but if you think about.
On average with a medium.
Medium class vehicle by North American standards that racist you could size pretty quickly in terms of what our basic transmission sales for with support equipment as a source of that multiplier, but it's.
It's really not I think.
Reach or unreasonable at this point I would also offer the reason why we're providing a range is as we said in the prepared remarks, we are assuming there'll be a range of customer desires in terms of what they look forefront a either a component or a solution set and we we certainly believe that.
And users.
We'll look to pick and choose frankly, the best overall solution for them I think that will evolve over time from what you're seeing in the early days here two more.
A more mature solutions and technology, but.
As we sit today, there's a very high level of variability around.
What's desired, but you don't have a mature long term view and.
From our perspective at this point in terms of what.
Each end user these the vehicle manufacturers, they're going to be looking for I think every one of them has a slightly different playbook and theirs.
Long long period of time here to play that out.
Well, thank you very much.
You're welcome.
We'll take our next question from Robert.
Melleous research.
Hey, good evening, everybody in one day and thanks for all of the on the on.
Jim Sighed I did I actually want to ask one more question on that if I could and just have you could talk about.
Obviously, you have long experience in hyperdrive Drivetrains in August of lots of OEM experience too but.
What do you see as your natural sort of hook into the actual business is it.
And you know a lot of calculated towards et cetera, as a color manufacturing or is it simply acknowledges in customer I'm just thinking about your tour competitive advantages. It felt some of the next couple of years.
Bravo appreciate.
Questions. So we.
If you think about Alex in our history work, where propulsion solutions provider, we don't consider.
Ultimately the energy source to be in different firm to differentiate right at the end of the day. It's provide we provide propulsion solution because you think about what we do.
That's a series of tasks.
And it starts with the last time, you mentioned in terms of knowledge of vocational.
Duty cycles and applications you know, there's a fairly high level of variability we've talked many times about the number of calibrations. Our team has developed over decades to run a very wide range of vehicle they will wallets at some level required different.
Controls for different behaviors that end users what we believe.
In our history speaks for itself in terms of the reliability and durability of the solutions, we put out there and understanding that demanding.
Lola duty cycles better required.
We are very focused on providing a best solution if you will.
I would offer to you as we think about electrification to your point about what differentiates us we start out with.
With the objective, which is to provide a conventional experience.
With an electrified solution right, so you'd think about today, they're extremely high.
Highly reliable system's overall.
And users typically know at a very finite level with the experienced who is going to be what the total cost of ownership is et cetera.
Can't say that about electrification today, it's evolving but our intention as as we've.
Work on the space Center, and frankly, our history with even hybrid.
Electric solutions as you learn a lot and that's a very high expectation in a bar to meet.
And we thank our controls experienced vocational.
Knowledge and application across the globe.
As well as our.
The canticle understanding as we think about we mentioned the efficiency of the electric artwork solution that that we're developing and offering ultimately is the more.
Fishing solution than others, there's a reason for that because it's ultimately going to.
Cost so you want to deliver something that's highly reliable ultimately mirroring a conventional experience for the end user.
Really touches upon many of the strengths that we have as a as a team and as a business.
Looking forward to continuing to apply those to the electric electrification space and a number of different solutions, whether that's full electric or the the continued extension of evolution of hybrid.
Okay, well thank you.
A little bit of a another growth one another.
Another company and your you mentioned that the long today M. P transmissions in China will not too many units at this point.
I just want much revenue paid on fully automatic Charles solutions in Charlotte I'll stop there okay.
You're welcome.
China, We obviously continue to look at it it's still an emerging.
Market in terms of requirements the standard the vehicles are improving.
Our team certainly is working hard to to.
Spread the word so to speak in terms of the advantages of fully automatic we're obviously aware of.
For products that you mentioned, there, which is understandable I think as you look at the broad range of different duty cycles.
Kinda has I would offer that.
That particular technology as you well know is not a fully automatic.
Solution and typically is best applied in.
Let's shift.
Duty cycle. So my assumption is that it will be applied as such.
Which when you look at the development of their demographics and at the same challenges we face here, which is the lack of.
Manual drivers I would note Fortunately for Allison.
China facing the same thing so I think it's a natural evolution, but it really does give back to the proposition. We've always talked about what we focus our growth opportunities on which is.
Pushing the advantages, which are obvious in terms of fully automatic solutions into.
That particular market and our team continues to support that through a number of different initiatives very focused with the.
Right Odm's and frankly, the right location.
Okay. Thank you.
I'll take our next question from Raska lighting with Bank of America.
Uhm pulled over by.
For us.
Had a bit of a two part or just still on the the actual topic.
We just built this facility in Auburn Hills, Michigan.
I would assume you wouldn't have invested in that.
If you are into Iraq will tech didn't have a number of OEM relationships well into development for <unk>. So could you would you agree with that statement. If you could comment on that and then.
Back end of that you you said in your formal remarks, several major Oems had chosen to integrate each empower you announced tino, but nobody else to my knowledge can you comment at all how far in development.
Other Oems and should we expect to see additional announcements like the Hino announcements with one of the majors in the next few months.
Sure.
Ross.
Just briefly.
I'd say during the prepared remarks, several major global Oem's I've chosen integrated with our agent power.
The actual into their existing electric truck development and validation programs.
In fact, working on full of electric vehicle initiatives to answer your question with Oems representing over 70% of our North America on highway revenue.
We certainly plan on making consequence announcements at the appropriate time, so as you well know we don't get out in front of our customers for obvious reasons I think that that really gets back to one of the other comments I made which is long term stroke.
Strategic partners with these though and we believe it's very important for them free.
Frankly to drive their programs in that process and make the announcements.
As appropriate.
Also offer you will no doubt our announcements are done in coordination with our customers. So again to answer your question I think when when appropriate will certainly consistent with our collaborative approach be looking to make a number of announcements, but our position going in as to be continue to be there for.
Occurred.
Partner supplier and then frankly, a very trusted wanted that so I think that their respect for ultimately the Oems.
Running their businesses and not getting ahead of them is really critical tier.
Comment Auburn Hills are obviously.
We invested for a reason.
I think it's also located.
Well for purposes of.
Working through a number of different supplier relationships as well so I think the coordination that in our team is built since the acquisition second quarter of last year and give them a tremendous amount of credit for really creating a global product engineering organization and the teams are working.
Well together.
Purpose.
Been purpose develop there and offered so so we're very pleased with the progress there and I think it's also.
Again to your point really shows our commitment to the overall solutions in further developing the.
The technology.
Thank you.
You're welcome.
Check our next question from anti can J P. Morgan.
Hi, Thank you and.
The real quick clarification, you said that the evenings are expected to add content. That's between 10 10 first is that conventional transmission.
And what did you mean by convention out of transmission is that this is the menu on transmission and then if you could address bed.
Margin dollars I know, it's early but since you're not gonna be manufacturing a lot of the component or a navy and I would imagine that large and dollars would be much lower than a torque converter automatic transmission.
And a good evening.
Let me, let me take the second part of that question and I'll, let Fred handle the first part so.
Understand that's where 17 18 years into selling the electric hybrid propulsion solution as I'm sure you know, we make essentially one out of the three components of that system.
We also enjoy I would say appropriate margins.
Given the content that we don't manufacture on that system I would also offer that.
As you know as well the initial introduction of our products over the.
The years.
In many many cases do not start out with 50% gross margins for the conventional side. So we've earned those margins over time through the teams work as you know and perfecting or trade.
But also it's really a function of value.
We do not enter the efforts with electrification almost two decades ago now without a without a few towards what could be successful and it's really based on customer input that being said those margins do in fact evolve over time and mature with.
Both value add as well as as you can appreciate the.
The volume side of it which is cost et cetera. So.
We're pleased.
Without history.
Really informed a number of decisions, we're making around electrification.
Development with that I'll turn the first part over to France, Sharon spread.
Relative to the.
The revenue expectations at three to 10 times is as you said over our product and sell in the conventional class six seven so that's the transmission in support equipment content in class six seven that's roughly about $5000.
Per vehicle, so we'd expect funston three to tenex that.
Okay, that's very helpful and as a follow up then guess Sunday he no opportunity since that's a brand new product training class seven.
Okay cannibalize at other Olean products and is that many of net net and positive incremental revenue source or is it just substitution. Thank you.
I think it's early and in terms of exactly what the.
They're going to apply.
I would expect over time as I think everybody does at some level given.
The meaningful market position that we have set at some level assuming make your assumption on electrification penetration.
We would look obviously.
Cannibalize ourselves to a degree but I think it's early in terms of exactly what.
He will ultimately target and where and when and I think it's extremely early days, but I think the important point stands which is we're working through they're working through.
Their development programs that there.
Fairly high level of Optionality around what can be done, but we need to let the process run.
And the development ultimately take place to their satisfaction.
Okay I appreciate that thank you.
You're welcome.
We'll take our next question from England vertical research.
Alright, good evening everyone.
David you prepare democracy touchdown.
The resiliency of of the model and what we see through challenging markets here and you don't get credit for that and the market and obviously a lot of focus on the electrification side and.
I'm interested in what what the perception of that is internally in terms of maybe misplaced disruption concerns and then to what degree.
There's a falling agenda to more actively address that uhm, whether through education more formalized longer term plans cancelled the plane and commitments just how can I just get the opportunity to address some of the concerns out there.
Yes, Joseph stay very I appreciate it.
That question.
We've talked before.
Electrification has a number potential impacts on our business and we're certainly.
Bracing, the opportunity and driving it.
Would say more broadly as you look at our.
Fire portfolio of end markets I think to your to your point.
Certainly the the market attribute in many cases are very attractive relative too.
Different levels of challenges for potential competition or otherwise on where we as I'm sure you have noticed.
Very overtly over the last few years of driving investment to grow those businesses as well. So I would I would look at our entire portfolio frankly beyond.
The existing convention with emerging markets, there's plenty of opportunity for our team I would also tell you the activities that we have across the Bath was our end markets are.
Probably one of the highest in that analysis modern history in that range is from off highway next generation.
<unk> and control through defense, we've talked about the 30 40 MMX here.
On this call. We're also working on a number of other developments and I think the portfolio I think it really shows.
More active engagement by our team globally.
Really.
Further entrench ourselves in these markets and the portfolio and I think it's speak.
Speaks for itself in terms of the type of demand both proactively that we're seeking as well as reacting to a number of inquiries.
And then of course, the annuity that comes with the aftermarket business I would say across all of them.
We feel very good about the broader portfolio I do think it's fair.
Four.
For a party staff questions around electrification because of the.
Certainly I think top of mind for a lot of obvious reasons.
That being said, we see it as an opportunity, but I think timelines will be interesting because there's so many different factors that drive that in the meantime, we have very.
Focused effort here across the the entire portfolio. So I think certainly I appreciate our team's efforts as well as all of our partners to to continue to drive the development of Franklin Challenge us to be even better than we've been.
And we take that to heart in terms of what what other things were going to be able to do is.
Hopefully these markets improve near retirement and get back so I think a more normalised way of settling in.
Proactively engaging in the market.
Okay. Thanks.
Well take our next question looks chunk Eric.
Yeah. Thanks for asking me here does just wondering relative to the discussion around your three to Tenex content opportunity for electrification community to talk about the payback that you see inherent in that for the end customer maybe relative to what your target for a traditional on that transmission.
Think that we're ultimately getting to something that is going to be more commercially viable at this point.
I'll do the business Fred.
We started on the conventional side too.
Two to three year payback.
On a premium product.
And that's what our end users demand.
And the electrification systems that we're developing or for those samian users and I think their expectations are the same.
Date mentioned earlier.
The station around payback or they're going to get the reliability durability.
That they get in the conventional space. So I think initially.
In new product.
You need to prove itself, there's no minutes skepticism.
It's prudent lifecycle.
Really fit today.
Significant improvement in.
And battery costs and capability.
To get anywhere close to the payback Emusic expect so and then they're going to be location.
Or more prone to adopting the bad and the appropriate pay that location.
Have other funding sources, such as the transit properties, but again there.
Challenges there with.
Being able to meet the duty cycle and that's why we're also seeing the electric hybrid being very good solution. There so and the answer is our expectations on payback of them are the same our customers are the same.
Really battery capability improve and then you also have to factor in in the infrastructure investment.
To get to the appropriate payback.
Okay. Thank you for that.
And we'll take our next question comes stuff like I like RBC capital markets.
Hi, Good evening this is brendan on for Seth.
<unk> service business was a little bit better than we had expected. It's wondering if there's anything wash calling out there I just any additional color that would be appreciated.
Very new stay in I guess to your point in terms of.
What you expect that call it a few things.
The third quarter feature too.
Really a full quarter of additional sales from Walker Dicast cigarette that acquisition occurred September of last year. So.
That's one aspect when you look at it over.
Year over year basis, that's included and we continue to be pleased with.
That acquisition in the progress of our team there and frankly responding to.
The market conditions, and as well as I think some increase interest apparently which is more broadly known as you're aware around locally.
Localization.
The book I would say the balance of it in terms of on a highway.
I would describe as stabilizing as you know.
Pretty pretty simple cough with cute too.
But as as we think about the market here certainly stabilizing there's some level of seasonality as you're well aware in queue for although I think some of that may.
May be mitigated a bit, but I would I would describe the spaces.
Cable I as in globally relatives on highway.
Clearly off highway is much much softer as you know with hydraulic fracturing out of North American theme.
Largely a rebuild maintenance mode at this point and working.
True end users equipment owners, cannibalizing equipment, and reducing fleet sizes.
And I would expect that overall concept to carry itself.
As a focused over the bleach the medium term.
Balance of the portfolio support equipment really follows volume volume is obviously up sequentially.
And we look at it a year over year, obviously down but I think those are the broader.
Attribute there I would call out to your question.
Right. Thank you.
Welcome.
And that does conclude the question and answer session I would like to turn it back over to the gate.
I, just smart closing remarks.
Thank you Lisa.
Thank you again for your continued interest analysis for participating on this evening's call on behalf of the entire.
<unk> family, we wish all of you your families and colleagues good health and safety enjoy the rest of your evening.
And that does conclude today's presentation. Thank you for your presentation you may now disconnect.
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Okay.
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Good evening, ladies and gentlemen, and thank you for standing by welcome to Alison transmission start quarter of 2020 earnings call. My name is Sam I will be your conference operator today at.
At this time, all participants or any listen only mode.
Prepared remarks to management team from Allison transmission will conduct a question and answer session and conference call participants will become instructions at that time.
Migrate this conference is being recorded.
Would now like to turn the call over to Mister right beside us the company's managing director of Investor Relations. Please go ahead Sir.
Thank you Lisa.
Evening and thank you for joining us for our third quarter of 2020 earnings Conference call with me this evening or Dave Guy DOZ, Our President and Chief Executive Officer, and Fed Bully, our senior Vice President and Chief Financial Officer and Treasurer.
As a reminder, this conference cough webcast and this evening presentation are available on the Investor Relations section of our website Allison transmission Dot com.
A replay of this call will be available through November 5th.
As noted on slide two of the presentation. Many of our remarks today contains 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 of 2020 earnings press release, our annual report on form 10-K with a year ended December 31 2019.
<unk> and our quarterly reports on form 10-Q for the quarters ended March 31, 2020, and June 30th 2020, uncertainties related to the COVID-19, pandemic and related responses by governments customers and suppliers and other factors as well as general economic condition.
One or more of these risks or inside to materialize or should underlying assumptions or estimates proved incorrect actual results may vary materially from bills that we express today and.
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.
Can find reconciliation of the non-GAAP financial measures to the most comparable gap measures attached as an appendix to the presentation and to our third quarter of 2020 earnings press release.
Today's call if at the end at 545 P. M. Eastern time in order to Maximise participation opportunities on the call will take one question from e-tail.
Please turn to slide for the presentation for the call agenda.
During today's call Dave guys Yogi will provide you with a brief operation of a big Red Bull. We will then review our third quarter financial performance provide an update analysis liquidity and review our full year 2020 guidance finally able to conclude the prepared remarks prior to commencing the Q&A.
Now I'll turn the call over to date gradually.
Thank you right good evening and thank you for joining US we're pleased to report that Allison third quarter results improved significantly following the severe disruptions experienced in the second quarter, our customer demand in the global economy continue to recover.
Despite the positive momentum uncertainty associated with the global pandemic percent going forward, we will continue to prioritize the health and well being about since extended family in the line or operations program and spending with current and market conditions, while mitigating the risks that we anticipate will last for the foreseeable.
Future and maintaining the flexibility to respond quickly and appropriately I'd.
I would also like to take this opportunity to thank all of Allison's employees customers and suppliers once again for their commitment dedication and resilient that is supported the uninterrupted delivery of our products throughout the year year to date Alison continues to demonstrate solid performance as well as the consistent Jen.
Horatian earnings and positive cash flow.
Sequential net sales increased over 40% as a severe economic weakness and customer shutdowns experienced during the second quarter abated and it rebounded relevant business activity and sentiments generated improved demand for both medium duty in class a street vocational trucks. Furthermore.
The third quarter, we settled $16 million in share repurchases impede the dividend 17 cents per share.
Due to our longstanding commitment to prudent balance sheet management ample liquidity unprofitable operations Allison remains well Capitalised, then physician to navigate the challenges presented by the evolving and uncertain environment benefit from a recovery in demand and capitalize on future growth opportunities.
We look beyond 2020 for prudent in disciplining pursuit of our strategic priorities and commitment to improving the way the world work indoors.
Thank you and I'll turn the call over to for Us.
Thank you David Hollandaise comment I'll discuss the Q3 2020 performance summary can contain the line items and cash flow I will then review alphons liquidity and reintroduce full year 2020 guidance before turning to call back over to date. Please.
Please turn to slide five of the presentation for the 232020 performance summary.
Net sales decreased 20% to $532 million compared to the same period in 2019 will decrease net sales essentially given by the ongoing effects and the pandemic on global economy rebuilding lower demand across all of our end market, except for the defense the market.
Gross margin through the quarter was 47, 7% a decrease of 430 basis points considered 52% for the same period in 2019. The decrease is principally driven by lower net sales, partially offset at price increases on certain products and moving same compensation expenses.
Net income for the quarter was $77 million compared to $140 million for the same period in 2019 will decrease expenses driven by Willamette sales and higher sales general administrative expenses due to unfavorable product warranty adjustment, partially offset by will in manufacturing.
Expenses price increases on certain products and enter the year timing of product an issue spending.
During the third quarter of $23 million product warranty adjustment with recorded to address the transmission performance issue associated with ship quality on a specific population products.
We stand behind Allison brand promise, a quality reliability invariably for every product precariously Ousmane. This unwavering commitment is supported by investments in our people equipment and processes that has enabled an average product boards expenses as a percentage of net sales and just 1% from 2013 through 2019.
Adjusted EBITDA for the quarter was $174 million with 32, 7% of net sales compared to $269 million from 42% of net sales with bank period in 2019, the decrease essentially driven by little gross profit and unfavorable product Lauren.
The adjustment, partially offset the lower commercial activity ending in the into your timing of product initially spending.
I just needed without the product warranty adjustment recorded in the third quarter was $197 million with 37% of net sales.
A detailed overview of our net sales and market can be found on slide fixed as a presentation.
Please try to slide seven presentations to the key three 2020 financial performance stomach.
So in general and administrative expenses increased eight will know to 9% from the same period in 2019 pencil me in driven by unfavorable product warranty adjustment, partially offset the lower intangible amortization.
Lower commercial activity spending and Lola Sydney compensation.
Engineering research and development expenses decreased $6 million from the same period in 2019.
Since we were driven by the interview timing of product initiatives spending.
Please turn slightly with the presentation for Q3 2020 cash flow performance summary.
Adjusted free cash flow for the quarter was $136 million compared to $150 million to $65 million from the same period in 2019. The decrease is principally driven a low gross profit partially offset by reductions in cash income taxes capital expenditures operating working capital requirements and can.
Commercial activity, Cindy and the interior timing of product initiatives spending.
Please turn to slide nine and the presentation for the Q3 2020 liquidity update.
We ended the quarter with the net leverage ratio, a 3.0 times $251 million in cash and $595 million as available revolving credit facility commitment. We continue to maintain the flexible long David and covenant liked that structure with the earliest maturity due in September of 2024.
During the third quarter, we snuggled $60 million in share repurchases and pay the dividend 17 cents per share. We ended the quarter was approximately $856 million of authorized share repurchase capacity.
As we continue to navigate the competitive new year are unwavering commitment and well-defined approach to capital structure improved balance sheet management remains impact as a result, Alison continues to operate from a position of strength and maintains the optionality to pursue growth and capitalize on my opportunities that are consistent with our strategic triangle.
We sent to slide candidate presentation for the 2020 guidance update.
Given improvements and customers outlook and supply chain readiness in the United States and other major markets in which we operate we are reintroducing full year 2020 guidance.
Our update the full year 2020 guidance include net sales expected to be in the range of $2.5 billion to $2.075 billion net income expected to be in the range of 285 million to $315 million adjusted EBITDA expected to be in the range of.
$697 at $730 million.
Net cash provided by at operating activities expected to be in the range of $409 million to $520 million adjusted free cash flow expected to be in the range of $385 million to $425 million and capital expenditures expected to be in the range of 107 to 117 moving.
Allison full year 2020, net sales guidance reflect lower demand across all and market, except the defense and market as a result of the pandemic, partially offset by price increases uncertain products and and Dave mentioned, we remain focused on aligning operations programs and spending current and Mark.
Conditions, and we will continue to make adjustments as conditions warrant.
Finally, new remain steadfast in our commitment to the future growth about.
And we will continue to fund key product development initiatives that will drive the expansion of our business and farther secured our leadership position and market that we serve thank.
Thank you and I will now turn the call back over today. Thank.
Earlier this month, we announced the launch or Degermed power Allison New line is fully integrated zero emission electric actual for medium and heavy duty commercial truck. We also announced the new each empower 100 D. Allison's first electric actual various would be Jen powers series of products.
BJ power 100, <unk> is one of the most powerful and fully integrated electric actual systems in the world. In fact, several major global OEM time chosen to integrate Allison each empower westrich actual into their electric truck development and validation program. Most recently.
Trucks and hexagon furious.
Showcase the knee Jen power 100 D equip keno XL seven chart he knows.
<unk> fifth 2020 announcement of their project and be there zero emission vehicles development program. These empower 100 <unk> will be manufactured in palaces recently completed 110000 square foot electric actual development and manufacturing facility and awkward until Michigan.
Combined power 550 kilowatts.
It also integrates with two speed transmission into the central housing facilitating a high starting gradability and top speed increased efficiency and an optional differential lock Allison fully integrated Degermed power line of electric actual eliminates many of the inefficiencies of competitive actual solution the <unk>.
<unk> advantage translates to increase range capability or a reduction in battery pack size optimizing the economic value of the EJ empower electric actual.
However.
Full electric propulsion technology remains in the early stages of development the opportunity for Allison meaningful we anticipate content per vehicle or it fully integrated electric actual fruition could range from three to 10 times out of a conventional transmission for a class fix doesn't truck.
Broad range accounts for the Optionality customers will have as it relates to the level of integration and components are you available. Our engineers have been developing electric solutions for commercial and military vehicles for decades, and we are well positioned to continue delivering youtz and promise of quality durability and reliability.
With our new line, a fully integrated electric propulsion solution.
These empower product family is the second offering under the recently announced Allison EJ brands of fully electric electric hybrid propulsion solutions earlier in the third quarter, we announced the launch of the Egypt Flex Allison New zero emission capable electric hybrid system, providing bust.
With a full electric engine knock propulsion up to 10 miles and full electric accessory power operation capability ideal for zero emission zoning and depo operation without the range limitations or infrastructure requirements are full electric solution.
Recently indigo the Indianapolis Public Transportation Corporation announced that it will be a lead fleet partner for Allison Revolutionary New electric hybrid propulsion product, demonstrating yet commitments, reducing its independent.
Dependence on fossil fuels enhanced quality of life American many and protecting the environment, while minimizing the total cost of ownership.
As interest in electrification continues to gain momentum many fleets remain reluctant to go all in on full electric at this early stage critical feedback from our customers is what inspired Allison to develop bejan flex with enhanced capabilities for coach at transit buses effectively serving as a fridge solution between.
Conventional fuel and full electric solution Degermed flexible enabled transit fleets to evaluate fogel electric capability and their needs, while it's still having the availability of a diesel range extender.
Whether needed for longer or flexible route unplanned congestion or an inability to recharge due to power grid challenges no additional capital infrastructure investment is required to utilize his full electric operation capability.
With the new age empower line of electric axles and the new each and flex electric hybrid system. Allison is building on a foundation of safe sustainable an efficient propulsion solutions created throughout our 105 year history.
Our unwavering commitment to innovation and product development combined with our financial strength.
Above cash flow generation and strong margin profile position balancing to lead the way into the future of commercial vehicle electric propulsion.
Portfolio is the latest example from abroad and diverse range of product development initiatives, we are undertaking it as.
As we've highlighted throughout the year. The resiliency analysis business is inherent in a strong market position and diverse and markets. While the pandemic continues to impacted commercial demand in central business of the United States National Defense continues unabated analysis and remains committed to supporting the United States.
Terry on current and future programs.
U S. Army is currently evaluating two prototypes for new armored light tank the mobile protected firepower program to support infantry units with additional firepower Allison 30, 40, Amex Cross drive transmission designed for medium tracked combat vehicles weighing between 25 and 40.
Has been selected by both manufacturers competing for the Army MTF program.
Testing of their prototypes NPS platform begins this winter with a final selection plans for the summer of 2022 volumes for the MTF program are anticipated to reach more than 500 vehicles over 10 years and.
In addition to the domestic opportunity for hours and 30 40, Amex Cross drive transmission, we're collaborating with us allies to meet their transmission requirements for medium weight armored vehicles.
We also continue to work with our defense and market partners in the pursuit of additional wheeled and tracked opportunities around the world.
Alexandra has always been at the forefront of innovation and notwithstanding the considerable uncertainty that lingers in global markets. We remain committed to meeting current and future needs of our customers across all of the end markets. We serve we will continue to invest currently and appropriately to drive growth expand our market Lee.
Ship and further position Alison as a preferred in long term partner we look.
Forward to providing you with additional product in collaboration updates in the coming months.
This concludes our prepared remarks, Lisa please open the call for questions.
Thank you if you would like to ask a question on the phone lines today cause signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure your immune options turned off to allow your signal to retire equipment. As a reminder, everyone. Please limit yourself to one question.
We'll take our first question from Jamie Cook with credit Suisse.
Hi, good morning, and night clutter.
I've I guess.
Understanding it's still early but you generally have a good read on the market. Your initial views without quantifying on 2021 based on similar similar but the industry guys are staying which markets have the best opportunity to grow and in that vein should we expect above average increments incremental margins from Allison typically.
All of of history, and as you don't have some of the temporary costs headwind coming back in 2021 like some of your camps. Thanks.
Good evening.
Jamie.
Appreciate those questions. So.
Thank you for the the recognition on a quarterly results was outside of the prepared remarks I think.
The team here with all of our partners continue to work very diligently to stay safe and work appropriately by a meeting.
It's a very challenging conditions is everybody is.
Having said that I think your questions. On 2021 is you know at this point in the year typically we are in a strong position to provide guide I would I would certainly offer a few thoughts in that regard.
Generally speaking reached the tonality from the market greed that we have and if you think about it which our largest and marketing North America on highway.
Generally speaking and market participants in third party third party forecasters appear cautiously optimistic.
That demand conditions were further improve subjects.
Numerous caveat relative to the pandemic why I say that as you well know.
She or he defines controls and this is one of those where.
As we start.
20, thinking about 2021 and number of changes we've already made in our business to your point on cost.
That's that's one has some near term focus for us because we are certainly making assumptions as everybody else's private generally tell you to the feedback that I. Just provided certainly there is an expectation that there's better market conditions in in 21, I think the challenging part of that though is how you start.
The year because as we currently sit we've provided guide for the balance of 2020, and we've also made a number of assumptions.
Relative to the pandemic I think recent developments here over the last few weeks because you are well aware.
Are somewhat concerning from the standpoint of if we have a return to restrictions what does that really mean.
As a set of 2021, so I think as we currently sit today with general expectation certainly expect better market conditions, I would say almost across.
The board all of our end markets for next year, but again I think it's far too early as it normally is this time of year, but I think with the pandemic to give you a very clean.
Clean read I would also offer to the comments that were made in the prepared remarks, we invest through the cycle is you know we are continuing to drive despite what I would.
Certainly describe is challenging conditions.
The initiatives that we set out that are market driven. So we are we are continuing to execute along those lines.
Back to your point on incremental certainly with better market conditions next year, we would.
Expect better Incrementals.
I would also.
Offer as part of the cost.
Structure changes that we made earlier this year, we continue to feel very good about.
I think you would also expect us we've outperformed our expectations.
Some of those cost of prep back in but they are really more variable.
We're certainly happy to have the incremental margin better attached to those.
So with that we will we will certainly look forward to the first.
Call in the first quarter to provide a more fulsome answer to your question.
I appreciate it thank you.
We'll take our next question from can subpoena with Oppenheimer.
Alright, great. Thank you very much.
First of all color.
The side.
Mention Korea Tenex what you.
What to expect from our traditional vehicle how you arrived at that.
To include the that the low end button accruable that the home.
Super far away from him.
Close nebulous bye-bye as you talk to your customers.
Unless you we will be expecting an average in between we'll do that three income connect trunks.
I appreciate the question there so.
<unk> broad ranges such as you note.
A reason for that is we are we are assuming.
There's a number of customers and users that some may require a complete solution so to speak that being electronics batteries on the propulsion solution itself, but overall, that's a complete system you can imagine the costs of batteries.
Batteries on the electronics in addition to whatever propulsion device there is.
So our range Incorporators gives you a range, which assumes just for instance, electric Axel all the way up to a full system potentially so that's really the range, but if you think about.
On average with a medium.
Medium class vehicle by North American standards Bev racist.
Sorry, it's pretty quickly in terms of what our basic transmission sales for with support equipment as a source of that multiplier, but it's.
It's really not I think.
Reach or unreasonable at this point I would also offer the reason why we're providing the range is as we said in the prepared remarks, we are assuming there'll be a range of customer desires in terms of what they look for from a either a component or a solution set and we we certainly believe that.
And users will look to pick and choose frankly, the best overall solution for them I think that will evolve over time from what you're seeing in the early days here to.
More mature solutions and technology, but.
As we sit today there is a very high level of variability around.
What's desired, but you don't have a mature long term view.
From our perspective at this point in terms of what.
Each end user these the vehicle manufacturers, they're going to be looking for I think every one of them has a slightly different playbook and there is.
Long period of time here to play that out.
Well, thank you very much.
You're welcome.
We'll take our next question from Robert Wertheimer like Mileas research.
Hey, good evening already in there and thanks for all the one on.
Jim Sighed.
Yeah, I actually want to ask one more question on that if I could just have you could talk about.
Obviously, you have long experience in hyperdrive Drivetrains in August lots of OEM experience too but.
What do you see as your natural sort of hook into the actual business is it is it common Idaho calculated talk et cetera column manufacturing or is it simply acknowledges in customer I'm just thinking about your tour competitive advantages. It felt some of the next couple of years.
And brought up in shape.
Questions. So we.
If you think about Alex in our history, where where propulsion solutions provider, we don't consider.
Ultimately the energy source to be in different firm to differentiate right at the end of the day. It's provide we provide propulsion solution because you think about what we do.
That's a series of tasks and it starts with the last time, you mentioned in terms of knowledge of vocational.
Beauty cycles and applications. There is a fairly high level of variability we've talked many times about the number of calibrations. Our team has developed over decades to run a very wide range of vehicles. They will wallets at some level required different.
Controls for different behaviors that end users lot we believe in.
In our history speaks for itself in terms of the reliability and durability of the solutions, we put out there and understanding this demanding.
Lola duty cycles better required.
We are very focused on providing a best solution if you will.
I would offer to you as we think about electrification to your point about what differentiates us we start out with.
With the objective, which is to provide a conventional experience.
With an electrified solution right. So you think about today, they're extremely high.
Highly reliable system's overall.
And users typically know at a very finite level, what the experience was going to be worth the total cost of ownership is et cetera.
We can say that about electrification today, it's evolving but our intention as as we've.
Work on the space and are and frankly, our history with even hybrid.
Electric solutions as you learn a lot.
And that's a very high expectation in a bar to meet.
And we thank our controls experienced vocational.
Knowledge application across the globe.
As well as.
The canticle understanding as we think about we mentioned the efficiency of the electric actual solution that that we're developing and offering ultimately is the more.
Fishing solution than others, there's a reason for that because it goes milligan and <unk>.
Cost so you want to deliver something that's highly reliable ultimately mirroring a conventional experience for the end user.
Really touches upon many of the strengths that we have as a as a team as a business.
Looking forward to continuing to apply those to the electric what suffocation space and a number of different solutions, whether that's full electric or the the continued extension evolution of hybrid.
Okay.
Okay. Thank you.
A little bit of a another growth one.
That'll accompany you mentioned the loss of ANP transmissions in China without too many units at this point.
I just wanted to have any arcade.
On fully automatic Charles solutions in China, and I'll stop there okay.
You're welcome I had.
China, We obviously continue to look at it.
Still an emerging.
Market in terms of requirements the standard vehicles are improving.
Our team certainly is working hard to to.
Spread the word so to speak in terms of the advantages of fully automatic we're obviously aware of.
Their products that you mentioned, there, which is understandable I think as you look at the broad range of different duty cycles that China has I would offer that.
Particular technology as you well know is not a fully automatic.
Solution and typically is best applied in.
Less shifts.
Duty cycle. So my assumption is that it will be applied as such.
Which when you look at the development of their demographics kind of the same challenges we face here, which is the lack of.
Manual drivers I would note Fortunately for Allison.
China facing the same thing so I think it's a natural evolution, but it really does get back to the proposition. We've always talked about what we focus our growth opportunities on which is.
Pushing the advantages, which are obvious in terms of fully automatic solutions into.
That particular market and our team continues to support that through a number of different initiatives very focused with the.
The ride Odm's and frankly, the right location.
Okay. Thank you.
Okay. Our next question from Raska lighting with Bank of America.
Hello, everybody.
For us.
Yeah.
Quite a bit of a two part or just go on the.
The actual topic.
You could you just built this facility in Auburn Hills, Michigan.
I would assume you wouldn't have invested in that.
If you are into Iraq will tech didn't have a number of OEM relationships well into development for <unk>. So could you would you agree with that statement to comment on that and then.
The back end of that you said in your formal remarks, several major Oems at chosen to integrate each and power you.
Announced tino, but nobody else to my knowledge can you comment all how far in development.
Other Oems and should we expect to see additional announcements likely hemo announcements with one of the majors in the next few months.
Sure.
Gift briefly.
I'd say during the prepared remarks, several major global Oem's have chosen integrated with our agent power.
Actuals into their existing electric Chuck development and validation programs.
In fact, we're working on full of electric vehicle initiatives to answer your question with Oems representing over 70% of our North America on highway revenue.
We certainly plan on making.
Consequence announcements at the appropriate time.
As you well know.
We don't get out in front of our customers for obvious reasons.
I think that that.
Really gets back to one of the other comments I made which is long term.
Strategic partners with these Oem's, we believe it's very important for them.
Frankly to drive their programs in that process and make the announcements as appropriate.
I would also offer you'll note or announcements are done in coordination with our customers. So again to answer your question I think when when appropriate will certainly.
Consistent with our collaborative approach be looking to make a number of announcements, but our position going in there has to be continue to be a preferred.
Partner supplier and then frankly, a very trusted wanted that so I think that their respect for ultimately the Oems.
Running their businesses and not getting ahead of them is really critical tier.
John Auburn Hills are obviously.
We invested for a reason.
I think it's also located.
Well for purposes of.
Working through a number of different supplier relationships as well so I think the coordination that in our team is built since the acquisition second quarter of last year and give them a tremendous amount of credit for really creating a global product engineering organization and the teams are working.
Well together.
Purpose.
Been purpose develop there and an offer and shows that we are very pleased with the progress there and I think it's also.
Against your point really shows our commitment.
To the overall solutions in further developing the.
Technology.
Thank you Dave.
You're welcome.
I think our next question from anti Kinda J P. Morgan.
Hi, Thank you and just stay in the real quick clarification, you said that the evenings are expected to add content. That's between to 10, 10% that conventional transmission and what did you mean by convention out of transmission is that this is a manual transmission and then if you.
That address.
Margin dollars I know, it's early but since you're not gonna be manufacturing a lot of the component or a navy and I would imagine that the large and dollars would be much lower than a torque converter automatic transmission.
<unk>.
Good evening.
Let me, let me take the second part of that question and I'll, let Fred handle the first part so.
Understand that we're.
17, 18 years into selling the electric hybrid propulsion solution.
As I'm sure you know, we make essentially one out of the three components of that system.
We also enjoy.
I would say appropriate margins given the content that we don't manufacture on that system I would also offer that.
As you know as well the.
Initial introduction of our products over.
The years.
In many many cases do not start out with 50% gross margins further conventional side. So we've earned those margins over time through the teams work as you know and perfecting or trade.
But also it's really function of value.
We did not enter the efforts with electrification almost two decades ago now without a without a view towards what could be successful and it's really based on customer input that being said those margins do in fact evolve over time and mature with both.
Both value add as well as as you can appreciate.
The volume side of it which is cost et cetera. So.
We're pleased with on history.
Really inform a number of decisions, we're making around electrification.
Development with that I'll turn the first part over to thread sure and spread.
Relative to the.
The revenue expectations of three to 10 times is hasn't said over our products that we sell in the conventional class 67. So that's.
And our transmission in support equipment content in class six seven that's roughly about $5000.
Per vehicle, some you'd expect from three to 10 X that.
Okay, that's very helpful and as a follow up then guess Sunday he no opportunity since that's a brand new product to end class seven.
One thing Kate cannibalize at other OEM products and is that mainly a net net positive incremental revenue source or is it just substitution. Thank you.
I think it's early and in terms of exactly what the.
They're going to apply.
I would expect over time as I think everybody does at some level given.
The meaningful market position that we have set at.
Some level, assuming make your assumption on electrification penetration.
We would look obviously.
Cannibalize ourselves to a degree but I think it's early in terms of exactly what.
He will ultimately target and where and when and I think it's extremely early days, but I think the important point stands which is we're working through they're working through.
Their development programs that they are.
Fairly high level of Optionality around what can be done, but we need to let the process run.
And the development ultimately take place to their satisfaction.
Okay I appreciate that thank you.
Welcome.
We'll take our next question from England vertical research.
Alright, good evening it wrong.
David in your prepared remarks touchdown.
The resiliency of the model and what we see through challenging markets here and you don't get credit for that in the market and obviously a lot of focus on the electrification side and.
I'm interested in what the perception of that is internally in terms of maybe misplaced disruption concerns and then to what to go.
There's a falling agenda to more actively address that.
Whether through education more formalized longer term plans cancel at the point of commitments just how proud you said the opportunity to address some of the concerns out there.
Yes, Joseph stay very I appreciate.
That question.
Can we talk before.
Electrification has a number potential impact on our business and we're certainly.
Embracing the opportunity and driving it.
Would say more broadly as you look at our.
Higher portfolio of end markets I think to your to your point.
Certainly the the market attributes in many cases are very attractive relative too.
Different levels of challenges for potential competition or otherwise on where we as I'm sure you have noticed.
Very overtly over the last few years of driving investment to grow those businesses as well. So I would I would look at our entire portfolio frankly beyond.
Just the existing convention with emerging market says plenty of opportunity for our team I would also tell you the activities that we have across the balance with our end markets car.
Probably one of the highest in that analysis modern history.
In that range is from off highway next generation.
Products and controls through defense, we've talked about the 34 year Max here.
On this call. We're also working on a number of other developments and I think the portfolio I think it really shows.
The more active engagement by our team globally.
Really.
They're entrench ourselves in these markets and the portfolio and I think it's.
Speaks for itself in terms of the type of demand both proactively that we're seeking as well as reacting to a number of inquiries.
And then of course, the annuity that comes with the aftermarket business I would say across all of them.
We feel very good about the broader portfolio I do think it's fair.
For none.
<unk> parties to ask questions around electrification because it's.
Certainly I think top of mind for a lot of obvious reasons.
With that being said, we see it as an opportunity but.
Think timelines will be interesting because there's so many different factors that drive that in the meantime, we have a very.
Focused effort here across the the entire portfolio. So I think certainly I appreciate our team's efforts as well as all of our partners to to continue to drive the developments of Franklin challenge us to be even better than we've been.
And we take that to heart in terms of what what other things were going to be able to do is.
Hopefully these markets improve near retirement and get back so I think a more normalised way of settling in.
Proactively engaging in the market.
Okay. Thanks.
We'll take our next question from books chunk bird.
Yeah. Thanks for asking me here it is.
Just wondering relative to the discussion around your street, a tenex content opportunity for electrification to maybe talk about the payback that you see inherent in that for the end customer maybe relative to what your target for traditional on action question. Do you think that we're ultimately getting to something that is going to be more commercially viable at this point.
I'll do the business Fred.
We targeted on the conventional side.
Two three year payback.
On a premium product.
And that's what our end users demand.
And the electrification systems that we're developing or for those samian users and I think their expectations are the same.
Date mentioned earlier and their expectations around payback or they're going to get the reliability durability.
That they get in the conventional space. So I think initially.
Any new product.
Needs to prove itself is element of skepticism.
Needs improvement Gobalized cycle.
Really fit today.
Significant improvement in and.
And battery costs and capability.
To get anywhere close to the payback and you should expect so they're going to be location.
Are more prone to adopting abaddon appropriate pay that location.
Have other funding sources, such as the transit properties.
But again, there's there's challenges there with the.
Being able to meet the duty cycle and that's why we're also seeing the electric hybrid being very good solution. There so and the answer is our expectations on payback of them are the same our customers understand.
Really battery capability improve and then you also have to factor in the infrastructure investment in order to get to the appropriate payback.
Okay. Thank you for that.
And we'll take our next question comes up with RBC capital markets.
Hi, Good evening this is brendan on process.
Your <unk> service business was a little bit better than we had expected is wondering if there's anything worse, calling out there just any additional color that would be appreciated.
Go ahead and stay in I guess.
Kia point in terms of what you expect that call. It a few things.
For the third quarter featured too.
Really a full quarter of additional sales from Walker Dicast cigarette that acquisition occurred September of last year. So.
That's one aspect when you look at it over a year over year basis. That's included and we continue to be pleased with.
That acquisition in the progress of our team there and frankly responding to.
The market conditions, and as well as I think some increased interest apparently which is more broadly known as you are aware around.
Localization.
The book I would say the balance of it in terms of on highway.
I would describe as stabilizing.
As you know.
Pretty pretty simple cough with Q too.
But as we think about the market here.
Certainly stabilizing there is some level of seasonality as you're well aware in queue for although I think some of that.
May be mitigated a bit, but I would I would describe the spaces stay.
Stabilizing globally relative to on highway.
Nearly off highway is much much softer as you know with hydraulic fracturing out of North America been largely a rebuild maintenance mode at this point and working.
True end users equivalent owners cannibalizing equipment, and reducing fleet sizes.
And I would expect that overall concept to carry itself.
As a focused over the bleach the medium term.
Balance of the portfolio support equipment really followed volume volume is obviously up sequentially.
And we look at it a year over year, obviously down but I think those are the broader.
Attribute there I would call out to your question.
Great. Thank you.
Welcome.
And that does conclude the question and answer session I would like to call back over to a gay pride sales.
For any additional are closing remarks.
Thank you Lisa.
Thank you again for your continued interest analysis for participating on this evening's call on behalf of the entire.
Alison family, we wish all of you your families and colleagues good health and safety enjoy the rest of your evening.
And that does conclude today's presentation. Thank you for your presentation you may now disconnect.