Q3 2021 Allison Transmission Holdings Inc Earnings Call

October 27, 2021

Good evening, ladies and gentlemen, thank you for standing by welcome to Allison transmission third quarter 2021 earnings Conference call. My name is Paul and I will be your conference call operator today at.

At this time all participants are in a listen only mode. After the prepared remarks, the management team from Allison transmission will conduct a question and answer session.

Call participants will be given instructions at that time.

As a reminder, this conference call is being recorded if anyone should require operator assistance.

Assistance. Please press star zero on your telephone keypad I would now like to turn the call over to Mr. Ray Posadas, the company's managing director of Investor Relations. Please go ahead Sir.

Thank you Paul Good evening and thank you for joining us for our third quarter 2021 earnings Conference call with me. This evening are Dave grabbed DOZ, our chairman 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 evening's 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 3rd.

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 third quarter 2021 earnings press release and our annual report on Form 10-K for the year ended December 31 2000.

20, uncertainties related to the COVID-19, pandemic and related responses by governments customers and suppliers and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect actual results may vary materially from those that we express today.

In addition, as noted on slide three of the presentation. Some of our remarks today contain non-GAAP financial measures as defined by the SEC.

You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2021 earnings press release.

Today's call is set to end at 545 P. M. Eastern time in order to maximize participation opportunities on the call. We'll take one question from each analyst.

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

During today's call Dave <unk> will provide you with a brief operational update Fred <unk> will then review our third quarter financial performance and update full year 2021 guidance finally, Dave will conclude the prepared remarks prior to commencing the Q&A.

Now I'll turn the call over to Dave <unk>.

Thank you Ray good evening and thank you for joining us I'd like to begin by thanking allison's employees suppliers customers and partners for their continued dedication and tireless efforts since the beginning of the pandemic. The Allison team has consistently demonstrated its unwavering commitment to supporting essential workers and critical infrastructure.

As well as delivering the Allison brand promise today, despite broad and ongoing challenges to global supply chains, Allison remains positioned to meet customer demand.

Marshall vehicle industry production global demand is approaching pre pandemic levels looking ahead as the global economy emerges from the pandemic supply chain will continue to face broad challenges the availability and utilization of labor global shortages of electronic components across all industries logistics.

Disruptions, including air and Ocean freight and port delays as well as the limited availability of raw materials will all continue to impact the industry's ability to align with the accelerating customer demand for the foreseeable future. Finally, I am pleased to report that allison's well defined approach to capital allocation and prudent balance sheet.

<unk> management remains intact during the third quarter, we settled $100 million of share repurchases, representing over 2% of outstanding shares and paid a quarterly dividend of <unk> 19 per share.

September 30th Allison had repurchased over 7% of its outstanding shares in 2021, and notably Allison received credit rating upgrades from both Moody's and Fitch during the third quarter. Thank you and now I'll turn the call over to Fred.

Thank you Dave following Daves comments I will discuss the Q3 2021 performance summary.

Key income statement line items and cash flow.

<unk> full year 2021 guidance before turning the call back over to Dave.

Please turn to slide five of the presentation for the Q3 2021 performance summary.

Year over year net sales increased 7% to $567 million from the same period in 2020 as robust customer demand remains tempered by persisting commercial vehicle industry production constraints due to global supply chain challenges.

The increase in year over year results was led by a 31% increase in the outside North America on highway end market.

Even by ongoing strength in global on highway customer demand and the continued execution of growth initiatives.

Year over year results were further led.

By a $19 million increase in the North American off highway end market driven by an improving demand.

For hydraulic frac fracturing applications and the $10 million increase in the outside North America off highway end market driven by higher demand in the energy mining and construction sectors.

The global off highway end markets are benefiting from increasing global demand for energy and raw materials as a recovery in global economic activity continues to build momentum.

Gross margin for the quarter was 46%.

About 170 basis points compared to 47, 7% for the same period in 2020.

The decrease was essentially driven by unfavorable material costs, partially offset by higher net sales and price increases on certain products.

Net income for the quarter was $94 million compared to $77 million for the same period in 2020, the increase was principally driven by lower selling general and administrative expenses and a higher gross profit partially offset by increased product initiatives spending.

Adjusted EBITDA for the quarter was $189 million or 33, 3% of net sales compared to $174 million or 32, 7% of net sales for the same period in 2020 <unk>.

Consistent with net income the increase was principally driven by lower selling general and administrative expenses and higher gross profit, partially offset by increased product initiatives spending.

A 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 Q3 2021 financial performance summary.

Selling general and administrative expenses decreased $20 million from the same period in 2020, principally driven by unfavorable 2020 product warranty adjustments that did not recur in 2021, partially offset by higher commercial activity spending.

Engineering research and development expenses increased $9 million from the same period in 2020, principally driven by increased product initiatives spending.

Please turn to slide eight of the presentation for the Q3 2021 cash flow performance summary.

Adjusted free cash flow for the quarter was $153 million compared to $136 million for the same period in 2020.

The increase was principally driven by lower operating working capital requirements and higher gross profit, partially offset by higher cash interest expense increased capital expenditures and increased product initiatives spending.

We ended the quarter with a net leverage ratio of two eight times $261 million of cash $645 million of available revolving credit facility commitments and approximately $500 million of authorized share repurchase capacity, we continue to maintain a flexible long dated and covenant light debt structure.

<unk> with the earliest maturity is due in 2026.

Please turn to slide nine of the presentation for the 2021 guidance update.

As Dave mentioned earlier Alison is currently positioned to meet customer demand. However, global supply chain challenges continue to have an adverse impact on commercial vehicle industry production. As a result, we are updating the full year 2021 guidance ranges reaffirmed to the market on July 28, we now expect.

Net sales for 2021 to be in the range of $2 325 to $2 4 billion.

Our 2021 net sales guidance reflects higher demand in global on highway global off highway.

And service parts support equipment and other end markets.

As a result of the ongoing global economic recovery and price increases on certain products.

Our full year 2021 guidance also assumes the continuation of commercial vehicle industry production constraints and global supply chain challenges for the foreseeable future.

In addition to Allison's 2021, net sales guidance, we are updating our guidance ranges for net income in the range of $395 million to $440 million.

Adjusted EBITDA in the range of $795 million to $845 million.

Net cash provided by operating activities in the range of $585 million to $635 million.

Adjusted free cash flow in the range of $415 million to $455 million.

Capital expenditures in the range of $170 million to $180 million, including approximately $60 million for sustainment and over $100 million for growth initiatives.

As we've mentioned in the past ongoing and consistent investment in Capex and R&D through the pandemic, while simultaneously delivering strong financial results. We will continue to enable product development initiatives in support of long term growth across all of our end markets as well as the continued creation of value for all of our stakeholders.

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

Thank you Fred so far the second half of the year has been active across all of our end markets behind each development and every milestone that we collectively bring to the market. There was a thorough and rigorous process as well as a tremendous amount of work by our team and our partners with this in mind I'd like to review some of the team's latest achievements.

In August at the advanced clean Transportation Expo in long Beach, California, We announced an expansion of our <unk> power portfolio with the introduction of two new E axle bearing the 100 S. As Allison's first single motor EXL variant within the Aegean powers series designed for medium duty in tandem axle heavy.

<unk> applications and 130 <unk> is a dual motor variance with a 13 metric ton gross axle weight rating ideal for European and Asia Pacific markets. These new variance leverage many of the core components of the 100 day actual variant first unveiled by Hino trucks in October of 2020.

Along with this expansion of the EJ and power portfolio.

Truck selected Allison as its E axle development partner for class six seven and eight battery electric vehicle trucks.

And this will be the first global OEM to integrate the 100 F. A few weeks later, Allison and premium Chinese OEM as they see hung announced a strategic memorandum of understanding to integrate the 130 D into saic's regional and long haul tractors for the Chinese electric.

Commercial vehicle market.

Significant enhancements to the electric testing capabilities of our vehicle electrification Environmental Test center are currently facilitating and accelerating electric field development and validation programs for both Allison Engineers and our OEM partners. These enhancements are enabling a round the clock test with <unk>.

The need to stop and recharge batteries modified state of charge testing additional DC load in battery replacement. During test. We also executed a global strategic collaboration agreement with Beijing, China base changing electric a leader in electric motor inverter and integrated electric electrified.

Propulsion systems within the largest electric vehicle market in the world.

This development presents the latest opportunity to accelerate EV products and programs across multiple regions and offer differentiated value propositions to our global customers and end users in connection with the strategic collaboration agreement Allison is participating.

<unk> initial public offering as our strategic investor along with top Chinese OEM <unk> group, we partnered with El Dorado National to bring electric hybrid propulsion to the San Francisco Municipal Transportation Agency, and New Flyer, North America's largest transit bus manufacturer and a subsidiary of <unk>.

<unk> and <unk> group, one of the world's leading independent global bus Oems will begin offering Allison's next generation <unk> Flex electric hybrid propulsion system beginning in January 2022.

Our defense end market team is driving electrification innovation as well through the development of transformation of electrified transmission technologies for future U S. Army combat vehicles in coordination with the U S. Army ground vehicle system Center, Alison will design develop and validate a motor generator and invert.

Our system integrated within attract vehicle transmission to accelerate the next generation of electrified transmission program Alice.

Allison's conventional products had been driving substantial reductions in global commercial vehicle emissions for decades recent partnerships with leading Chinese bus Oems Zhong, calling and King long are bringing CMG powered buses to eastern Europe, and Mexico, and our proprietary <unk> software continues to be installed by new and existing <unk>.

<unk> around the world to significantly reduce fuel consumption and carbon emissions Allison's award winning $34 14 regional haul series fully automatic transmission is now available for quote on Daimler trucks, North America's Freightliner Cascadia.

Providing class eight tractor customers with improved fuel economy and faster acceleration in the demanding short haul and metro applications production is expected to begin early next year outside North America, the Allison fully automatic transmission equipped Honda.

Light duty truck has captured 40% of the Korea light duty truck market in the first year. The success of this release has been driven by customers such as Coca Cola beverage company, which is expanding its fleet of Allison equipped Hyundai Mighty trucks added logistics centers in Korea.

Allison's Global off highway end market team is also keeping its foot on the throttle following new product releases earlier this year, including Allison's next generation hydraulic fracturing transmission frac trend and Tara trend a variant of Allison's proven 4000 series transmission purpose built for the global construction and <unk>.

Mining markets, we announced an agreement to acquire the off highway transmission portfolio of India based AD Tech this acquisition positions Allison to pursue incremental growth in the India off highway market and for expansion in the Asia and Middle East markets. It also expand allison's product portfolio for new applications, including wheel.

Loaders and heavy duty forklifts.

With both new and existing customers. Finally on October 6th Allison held a virtual technology day, our management team presented information on the company's long standing commitment to innovation latest product development initiatives electrification and conventional market trends and Alison strategy for its portfolio of electrified.

And internal combustion propulsion solutions.

Videos of the event, including two Q&A sessions with management are available on our Investor Relations website as.

As we've often said today is there are more opportunities to pursue growth across all of our end markets than at any other time in our history.

There's a lot happening at al can right now and there's much more to come the commercial vehicle industry is undergoing a pivotal transition and Allison is fully engaged in this activity I'd like to commend the Allison team for continuing to execute at a very high level, we understand how to develop validate integrated and highly customized commercial vehicle.

Propulsion solutions that actively manage power and torque Alison will leverage its organic well established and proven capabilities to continue developing differentiated products that deliver value to our customers and meet the needs of the market today and in the future.

We understand the challenges and the opportunities the most important we understand our customer Allison knows how because we've done it for decades.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Formation tone will indicate that Youre line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you. Our first question comes from Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good evening.

I guess.

Question, Dave can you just talk about sort of when you expect to see supply chain issue CES I think you said last quarter you expected it to.

Into 2022, what your expectation is now.

And then.

I guess, another sort of longer term strategic question.

You are talking a lot about the ability to outgrow the market.

Based on all of these opportunities whether it's on your conventional product line or on your alternative product line.

Is there any way you can help frame how you think about market outgrowth over the next couple of years relative to whatever the industry can do.

Where that would come from thank you sure Jamie I appreciate the.

Questions first on supply chain to be clear. Unfortunately, I think we were our expectations were met given our Q2 call comments I think it's.

Having said that.

I would say again credit the.

The team at Allison as well as our partners customers and suppliers. You know this is a tremendous amount of effort behind the scenes and I'm not sure everybody fully appreciates that but I will tell you.

It's not for a lack of effort and thats through multiple tiers of the supply chain.

And it's a daily daily process frankly.

Nevertheless, as we see things today.

We mentioned on our Q2 call. We did expect some improvement in at least Allison specific issues.

For the most part that's occurred.

Would certainly describe is well positioned to meet demand I'd argue we're demand constrained at this point.

With that in mind.

We're only as good as what we know right today and I think it continues to be a very fluid.

Situation and Im certainly aware of public reporting that youre aware of that.

There are.

Muted expectations for the balance of certainly this year I would also note when you think about what's possible given the amount of working days Thats left with building rates et cetera.

It is very challenged and I think we mentioned that on Q2 as well so with all of that in mind, we're certainly looking forward to 'twenty two for better.

Conditions, but again keep in mind that.

There's a number of activities that are going to need to occur a number of constraints that are going to need to be resolved I will tell you the level of engagement that we have right now solving.

Problems through multiple levels or challenges, making some strategic investments as well to break constraints, it's all underway.

But that of course assumes that labor is going to be available in a timely way that logistics. There is a lot of assumptions that go into that so.

The takeaway from all of that is we're working as hard as we can.

Certainly be in a position to meet customer demand and I would describe as again as demand constrained your comment in terms of your question around.

Outgrowing the markets if we just take.

The six end markets.

Certainly we report North America on highway as we talked about we're excited about the 34 14 regional haul series being fully available in the marketplace through at least the major Oems.

That target market is plus or minus 30 plus percent of the.

To date, the date tractor day cab market right as you think about it so significant opportunity for us with very low penetration today.

We continue to be well positioned in class eight vocational we've we've gained shares over the year as you know despite I think certain alternative technologies that are out there that was speculated to be.

Much more applicable in the heavy heavier more demanding duty cycles thats not happened. So the team continues to grow certainly sure. There were pleased with our positioning in class four five with.

The Navistar and GM releases that those products are doing well in the marketplace as we go to north the outside North America on highway market as we talked about on the virtual technology day running through very.

Low penetration in at least a larger core markets that being.

China as well as.

Parts of Asia at this point, we see more opportunity to grow there we already have significant share in certain niche.

Smaller sub segments of the market that are very similar to what you've seen in Europe and North America.

We're also looking at our off highway market outside of North America in terms of <unk>.

Mining and construction applications and new products in terms of the Tera <unk> relief I think we're doing very well there with the team. It's received I think very good uptake from the market.

That's a sizable opportunity as we look at that particular market and again just growing in core vocations very similar and aligned to to North American and Europe defense multitude of programs going on there as we've talked about defenses on an asset light business.

Typically longer to get programs launched but very long lives in terms of platforms. So the abrams is been around since the late <unk> early <unk> it continues to be.

Modified having with that in mind, we're also behind both of them the Oems competing for the MTF terms of sizing those there.

The MTF.

In a market as you think about that what does that start to look like longer term. The <unk> platform that we are certainly exposed through through the.

The team working with American Ryan Mittal, that's about a 4000 unit potential market over a number of years.

We're also on the VM 88 platform, which is heavy duty recovery.

Platform with Bae's. So you start to add those up those are very significant long running platforms and then of course the work that the team is doing outside of North America.

The service service support equipment and other market for US the team continues to grow our franchise, there and a number of different regions.

And also benefiting from some of the growth that we're seeing in our defense business as well. So the team has done I think a very good job.

Job there as well so when you start to put it all together I think it's a strong story, which frankly explains why we are investing the way we are and Fred mentioned it earlier, but.

<unk> appointed programs from us to grow this business and I think when you look at it whether it's a limited amount of clean sheet clean sheet design, so to speak but mostly variants we have been very successful.

Leveraging those with.

Attractive returns and incremental investment so.

Hopefully that covers the waterfront a bit for you.

Sure.

Thank you. Our next question comes from Larry de Maria with William Blair. Please proceed with your question.

Hi, Thanks, good afternoon everybody.

Yeah.

So obviously the fuel center software when post Q, just curious first of all if.

We can expect more of those.

Ascription recurring revenue that's going to come every year.

It could ultimately be material in the next couple of years and secondly.

Two you said noted you're able to fill demand, but if you have any evidence of Oems stockpiling of gear transmissions.

Flowing through to finished goods I'm, just trying to understand to make sure that you can produce to whatever production is next year and there won't be any.

Pushback, because they have inventory of your product.

Hey, Larry It's Dave if you could just do me a favor repeat that I think the first half of your second question.

You noted that youre able to fill demand.

So im curious if theres any OEM stockpiling of your transmission or maybe you can't produce that many as it is but trying to understand if you are doing.

I'm just going to produce towards production next year or if the inventory of your product at the Oems.

Okay I appreciate the fuel.

To your question there, yes, we would expect fuel sense revenue to grow with with volume.

And as.

As you think about the cost of fuel continuing to go up.

That creates a better backdrop frankly for fuel cell sales as we go forward. So again you can look at the overall on highway volume, but also look at the economics, which become much.

That much more attractive given fuel prices and frankly, the opportunity to reduce emissions as well.

Terms of your question on on highway, there's certainly the ability to for Oems They do it.

Inventory, our transmissions I would say, though their ability to do that relatively limited just given the scope and size of what that starts to look like so.

I would say, though to your question, we can certainly as we sit here today, we're demand constrained from what we understand.

For at least third party forecast for next year, I think we're very well positioned to meet.

That demand I think the other nuance to understand and frankly I think it gets back to some of the questions around supply chain and why you see disruptions.

Pre pandemic there was there were buffers that were in throughout the supply chain and frankly throughout.

Oems in a number of the <unk>.

Over the component suppliers right.

That was largely wiped out on the front end as we see it in terms of the pandemic. So anything that happens today is almost an instantaneous impact versus pre pandemic you had some time to recover with a buffer those buffers are largely been depleted so part of the process going forward. Besides.

The tailwind of under producing to demand for the industry right now there is some level of.

Inventory that'll have to be rebuilt over time as well. So that's something we're staying close to trying to understand especially as you know when you look at the inventory numbers that are out in the market right now that'll be another element of as the market.

Tries to catch up and recover that's something to watch as well.

Okay. Thanks very much.

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

Yes, hi, good evening everyone.

Good evening.

Dave since Unfortunately, you were right about the supply chain for this quarter as you said.

I think I heard you say that you feel better about the supply chain from here can I trouble, you just to clarify and expand.

On those comments, because if thats the case that would certainly bode well for everyone.

Yes.

And again I will.

Isn't.

I wasn't right I think the team here was right in terms of how they manage the situation day to day and the input that they provide to run this business I would just to your comment there.

Certainly feel better about a number of our positioning right now versus.

At the end of second quarter coming into third quarter.

I would say we are staying again very close to things, but an overall perspective right now.

Harder lift than it was at this time last year I think I said that on the second quarter call as well in terms of the amount of effort to do what the team needs to do to run the business on a day to day basis that being said overall.

I think we're certainly better positioned than we've been.

But we're only as good as when the demand is ultimately going to be there as I said, we're demand constrained and we say this often here.

Typically it takes all the components to make the vehicle and that that is going to continues to be I think a broader challenge for.

The industry. So we're staying close probably as close as we've ever been.

So our customers to make sure that were aligning our resources and our timing with what theyre, telling us, but where I think better better positioned from that standpoint too.

To meet demand.

And as we think about your operating leverage from here is there anything that would keep you from putting up historical Allison type incremental margins. If the demand is there over the next.

12 months, either anything from rising R&D or SG&A or price cost, so we need to be aware of or.

We look forward to typical alpha type incremental margins if the demand part of equation is there.

Hey, Jerry this is Fred.

Yes.

As you know.

The operating Leverages.

Pretty significant with the business.

Yes, I think about what's incurred this year you had a significant rise in <unk>.

Raw material and we've talked about price cost.

We are going to be negative price cost this year.

Probably to the tune of about $15 million.

We also talked about the fact that our raw material pass throughs lag anywhere from six months to a year.

So we have those in front of us for for 2022 at this point.

Anticipating about a little over 100 basis points in <unk> and.

And pricing just from those commodity pass throughs.

So think of something sort of in the.

$25 million to $30 million range, we will have that going for us.

Clearly subject to where commodities are going to look like next year.

On top of that pricing will procure are normal.

Commercial pricing.

Where we've historically gotten anywhere from 50 to 100 basis points.

Yes. It is.

The challenging environment to function in today, Dave talked about the supply chain I mean theres certainly.

Lot of cost leakage, so I think as you see that.

Stabilized I think everybody will get some costs out of the system and then just the the operating leverage that the business has.

Certainly.

Is significant and we would expect to.

To see that play through.

As volumes do do rise.

Terrific I appreciate the discussion thanks.

Thank you. Our next question is from Ian Zaffino with Oppenheimer. Please proceed with your question Hi.

Alright, great I, just kind of wanted to follow up on the pricing equation here.

Early it's always been.

I guess, just trying to move to location of pricing.

How are you going to market with price increases or are you doing it from a vocational pricing standpoint, or you're doing it just some kind of a cogs and raw material recovery perspective.

Any kind of details with that and then.

Second question would just be what's the ending share count.

For the quarter end.

What are your thoughts on buybacks going forward from here because I know you bought back up around $100 million.

Thanks.

Sure and this is this is Fred.

From a pricing standpoint.

As you mentioned, we we price for the vocational value we deliver.

But our long term supply agreements the vast majority of them have pass through.

Methodologies for for raw materials so.

Pegged the three great to steel and aluminum.

And you typically pass through about 75% of the cost so.

So we've incurred the costs in.

2021 and will.

Passing them on per those agreements in 2022.

We continue to increase the value of our product from a durability reliability standpoint.

The fuel economy that we deliver.

Spoke to fuel sense earlier so.

So we've been in a position as we increase that valued really to do two things historically, the one recognize that you'll provide more value and then.

We've been able to price for that value, while simultaneously taking share and.

Yes, I think thats as we look out through 2020 to expect that that.

Relative to.

To share count.

We will be putting out the Q tomorrow, but.

As of the 15th of October.

104 3 million shares outstanding.

And thoughts on buying back more stock going forward.

I mean.

Clearly part of our capital allocation priorities right now.

Organic revenue earnings growth, new product technology development.

No.

Look at strategic acquisition opportunities, but return capital to shareholders is front and center, we're fortunate as a business that.

We generate more cash than the business needs. We're clearly funding it from an R&D from a capex standpoint.

But we will plan to return excess cash to shareholders via the.

Via the quarterly dividend.

And share repurchases.

Perfect. Thanks, so much.

Thank you. Our next question is from Rob Wertheimer with Melius Research. Please proceed with your question.

Yeah.

Howdy.

Hi, it's kind of the same question, but maybe you just answered it adequately but I'm curious if you.

Have any more more deliberate conversations around buyback just given where the share price has been obviously.

The market value of EUR, but your cash flow is pretty good so is there.

Does that in any of your conversations in the board level discussions or no.

Certainly.

Where our stock is valued.

As always front and center in the board discussions relative to <unk>.

The pace of share repurchases.

Can you talk can you just in that context, just give us your ranges on net debt to EBITDA again, and then just in curiosity you made a lot of strides in electrification internal investment relationships external investment is there anything large on the horizon.

I don't know if you have a funnel of acquisitions or investments et cetera that could be a large use of cash in that direction and I will stop there. Thanks sure.

Sure Rob.

I'll take the first part I mean.

Okay.

We talked about below three five times.

Net debt to EBITDA.

Honestly well below that.

At two eight times.

As you think about us over time, we haven't really changed.

Other than ensuring that the.

The debts.

Long dated when we've extended maturities but.

That net net net leverage ratio has really moved around based on LTM EBITDA.

As to the back half of that question and I'll, let Dave address.

Thank you for that question so.

Talked about before Fred mentioned and as well here in terms of we are being.

I would say try to be very thoughtful and deliberate about what steps. We are taking in terms of investing whether that's internal or external.

Honestly the most recent announcement with participating in <unk> IPO is one of a number of different opportunities and alternatives that we have been and will continue to pursue.

That's both in the conventional space as EV frankly so.

We've said our job is to generate results and deploy that cash.

Capital to the to the advantage of all of our shareholders and I think as we think about that there are definitely opportunities out there that we're tracking and interested in.

With that being said as we look at our portfolio you will see us continue to make I think very.

Focused steps.

I would also offer.

There is.

As part of electrification.

Conventional is another opportunity as you start to think about what's next in that world. So we're always looking at that in the broader context of.

How do we best deploy Allison's resources are advantages, we've talked about what we're leveraging in the EV space.

At the latest.

Announcements around collaborating with JJ is a good example of that we look at a number of different opportunities to collaborate as well on the conventional side. So we'll continue to.

Pursue our disciplined process there.

But rest assured we are very engaged across a number of different end markets looking at opportunities.

Thank you.

Thank you. Our next question is from Courtney <unk> with Morgan Stanley. Please proceed with your question.

Hi, Good evening guys. Thanks for the question, maybe just on the sales or the net sales guidance reduction is the right way to be thinking about that that that is entirely in North America on highway reduction or are there any other.

Areas that you feel are I think you referred to as demand constrained.

Earlier.

Accordingly, it's Dave Thank you for the question.

I would say is as I'm sure you've been.

Paying close attention to a number of the OEM announcements already.

I would certainly attribute some of the change that we that we made in our guide.

<unk> to North America in terms of as I said, we're demand constrained so I think that's fair.

Having said that I think we've to the other end of the spectrum seen better results out of.

North America off highway.

And market really driven largely by hydraulic Frac is you know our portfolio.

Outside North America, I would say both on highway and off highway.

It's performing the outlook a bit better than we thought there as well to be balanced about the whole package. So.

They those markets continue to perform.

Say a bit better in terms of supply.

Strains understanding that and our focus there are typically our end use.

Customers are reasonably prioritized in those local markets. So I think that explains some of what.

We are seeing there in terms of improved performance if you will versus.

In our earlier.

Expectations.

The other side of that is with our service.

Parts business, there are labor constraints out in the channel right now that I would say are somewhat constraining demand as well so just can't.

Can't get the labor too.

To an adequate enough level, so youre seeing extended lead times out there to get the vehicle service, we don't lack.

Certainly the parts to provide to the channel, but again I think there is some level of constrained.

And in there as well.

Okay. Thanks, that's helpful and if I could just follow up on the pricing discussion I think previously.

<unk> guided to being price cost negative.

In the third quarter, just wanted to make sure that the expectation for the fourth quarter as well and we shouldnt expect to see.

Gross margin expansion again until until.

Until 2022.

Is that the right way to be thinking about it.

I mean, we have taken obviously some pricing actions.

During the year, but we do expect for Q4 to be a price.

Price cost.

Unfavorable as I said, a lot of the commodity pass throughs kick in on one one.

Which I spoke to earlier.

Okay. Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to David <unk> for any closing comments.

Thank you Paul Thank you again to everyone for joining us this evening for our call and we look forward to.

And to updating you on our fourth quarter call.

The rest of your evening.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful evening.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

At this time all participants are in a listen only mode. After the prepared remarks, the management team from Allison transmission will conduct a question and answer session.

Call participants will be given instructions at that time.

As a reminder, this conference call is being recorded if anyone should require operator assistance.

Assistance. Please press star zero on your telephone keypad I would now like to turn the call over to Mr. Ray Posadas, the company's managing director of Investor Relations. Please go ahead Sir.

Thank you Paul Good evening and thank you for joining us for our third quarter 2021 earnings Conference call with me. This evening are Dave Grad, DOZ, our chairman and Chief Executive Officer, and Fred <unk>, Our senior Vice President Chief Financial Officer and Treasurer.

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

A replay of this call will be available through November 3rd.

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 third quarter 2021 earnings press release, and our annual report on Form 10-K for the year ended December 31 two.

20, uncertainties related to the COVID-19, pandemic and related responses by governments customers and suppliers and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect actual results may vary materially from those that we express today.

In addition, as noted on slide three of the presentation. Some of our remarks today contain non-GAAP financial measures as defined by the SEC.

You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2021 earnings press release.

Today's call is set to end at 545 P. M. Eastern time in order to maximize participation opportunities on the call. We'll take one question from each analyst.

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

Now I'll turn the call over to Dave Brad.

As well as delivering the Allison brand promise today, despite broad and ongoing challenges to global supply chains, Allison remains positioned to meet customer demand.

Turning to the quarter Allison's third quarter 2021 results reflect the ongoing recovery in the global economic activity customer demand remains robust and despite global supply chain issues that are tempering commercial vehicle industry production global demand is approaching pre pandemic levels looking ahead as the globe.

Little economy emerges from the pandemic supply chain will continue to face broad challenges the availability and utilization of labor global shortages of electronic components across all industries.

It just takes disruptions, including air and Ocean freight and port delays as well as the limited availability of raw materials will all continue to impact the industry's ability to align with accelerating customer demand for the foreseeable future. Finally, I am pleased to report that allison's well defined approach to capital allocation and prudent.

Balance sheet management remains intact during the third quarter, we settled $100 million of share repurchases, representing over 2% of outstanding shares and paid a quarterly dividend of <unk> 19 per share.

30th Allison had repurchased over 7% of its outstanding shares in 2021, and notably Allison received credit rating upgrades from both Moody's and Fitch during the third quarter. Thank you and now I'll turn the call over to Fred.

Thank you Dave following Daves comments I will discuss the Q3 2021 performance summary.

Key income statement line items and cash flow I will then update full year 2021 guidance before turning the call back over to Dave.

Please turn to slide five of the presentation for the Q3 2021 performance summary.

Year over year net sales increased 7% to $567 million from the same period in 2020.

Robust customer demand remains tempered by persisting commercial vehicle industry production constraints due to global supply chain challenges.

The increase in year over year results was led by a 31% increase in the outside North America on highway end market driven by ongoing strength in global on highway customer demand and the continued execution of growth initiatives.

Year over year results were further led by a $19 million increase in the North American off highway end market driven by an improving demand.

For hydraulic frac fracturing applications and the $10 million increase in the outside North America off highway end market driven by higher demand in the energy mining and construction sectors.

The global off highway end markets are benefiting from increasing global demand for energy and raw materials as a recovery in global economic activity continues to build momentum.

Gross margin for the quarter was 46% a decrease of 170 basis points compared to 47, 7% for the same period in 2020. The decrease is essentially driven by unfavorable material cost, partially offset by higher net sales and price increases on certain products.

Net income for the quarter was $94 million compared to $77 million for the same period in 2020, the increase was principally driven by lower selling general and administrative expenses and higher gross profit, partially offset by increased product initiatives spending.

Adjusted EBITDA for the quarter was $189 million or 33, 3% of net sales compared to $174 million or 32, 7% of net sales for the same period in 2020.

A 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 Q3 2021 financial performance summary.

Engineering research and development expenses increased $9 million from the same in 2020, principally driven by increased product initiatives spending.

Please turn to slide eight of the presentation for the Q3 2021 cash flow performance summary.

Adjusted free cash flow for the quarter was $153 million compared to $136 million for the same period in 2020.

<unk> with the earliest maturity is due in 2026.

Please turn to slide nine of the presentation for the 2021 guidance update.

We now expect net sales for 2021 to be in the range of $2 325 to $2 4 billion.

Our 2021 net sales guidance reflects higher demand in global on highway global off highway.

And service parts support equipment and other end markets.

As a result of the ongoing global economic recovery and price increases on certain products.

Our full year 2021 guidance also assumes the continuation of commercial vehicle industry production constraints and global supply chain challenges for the foreseeable future.

In addition to Allison's 2021, net sales guidance, we are updating our guidance ranges for net income in the range of $395 million to $440 million.

Adjusted EBITDA in the range of $795 million to $845 million.

Net cash provided by operating activities in the range of $585 million to $635 million.

Adjusted free cash flow in the range of $415 million to $455 million.

Capital expenditures in the range of $170 million to $180 million, including approximately $60 million for sustainment and over $100 million for growth initiatives.

Thank you and I'll now turn the call back over to Dave. Thank you Fred So far the second half of the year has been active across all of our end markets behind each development and every milestone that we collectively bring to the market theres, a thorough and rigorous process as well as a tremendous amount of work by our team and our partners with.

This in mind I'd like to review some of the team's latest achievements in.

In August at the advanced clean Transportation Expo in long Beach, California, We announced an expansion of our <unk> power portfolio with the introduction of two new E axle bearings. The 100 S. As Allison's first single motor EXL variant within PJM power series designed for medium duty in tandem axle heavy duty applications.

Occasions, and the 130 <unk> is a dual motor variance with a 13 metric ton gross actual weight rating ideal for European and Asia Pacific markets. These new variants leverage many of the core components of the 100 day actual variant first unveil buy Hino trucks in October of 2020.

Along with this expansion of the EJ and power portfolio Hino trucks selected Allison as its E axle development partner for class six seven and eight battery electric vehicle trucks.

And this will be the first global OEM to integrate the 100 S. A few weeks later Allison and premium Chinese OEM.

C hung on announced a strategic memorandum of understanding to integrate the 130 D into saic's regional and long haul tractors for the Chinese electric commercial vehicle market.

Significant enhancements to the electric testing capabilities of our vehicle electrification Environmental Test center are currently facilitating and accelerating electric vehicle development and validation programs from both Allison Engineers and our OEM partners. These enhancements are enabling a round the clock test without the need.

To stop and recharge batteries.

Modified state of charge testing additional DC load in battery replacement during test. We also executed a global strategic collaboration agreement with Beijing, China base changing electric a leader in electric motor inverter and integrated electric electrified propulsion systems within the largest electric via.

Nicole market in the world.

<unk> initial public offering as our strategic investor along with top Chinese Oems <unk> group, we partnered with El Dorado National to bring electric hybrid propulsion to the San Francisco Municipal Transportation Agency, and New Flyer, North America's largest transit bus manufacturer and a subsidiary of <unk>.

And <unk> group, one of the world's leading independent global bus Oems will begin offering Allison's next generation <unk> Flex electric hybrid propulsion system beginning in January 2022.

Our defense end market team is driving electrification innovation as well through the development of transformation of electrified transmission technologies for future U S Army combat vehicles and coordination with the U S. Army ground vehicle system Center, Alison will design develop and validate a motor generator and inverter.

System integrated within attract vehicle transmission to accelerate the next generation of electrified transmission program.

Fleets around the world to significantly reduce fuel consumption and carbon emissions Allison's award winning $34 14 regional haul series fully automatic transmission is now available for quote on Daimler trucks, North America's Freightliner Cascadia.

Providing class eight tractor customers with improved fuel economy and faster acceleration in the demanding short haul and metro applications production is expected to begin early next year.

North America, the Allison fully automatic transmission equipped Hyundai Mighty light duty truck has captured 40% of the Korea light duty truck market in the first year. The success of this release has been driven by customers such as Coca Cola beverage company, which is expanding its fleet of Allison equipped Hyundai Mighty truck.

At its logistics centers in Korea.

And mining markets, we announced an agreement to acquire the off highway transmission portfolio of India based AD Tech this acquisition positions Allison to pursue incremental growth in the India off highway market and for expansion in the Asia and Middle East markets. It also expand allison's product portfolio for new applications, including <unk>.

Real loaders and heavy duty forklifts.

<unk> combustion propulsion solutions.

Videos of the event, including two Q&A sessions with management are available on our Investor Relations website.

As we've often said today is there are more opportunities to pursue growth across all of our end markets than at any other time in our history.

There's a lot happening at al can right now and there's much more to come the commercial vehicle industry is undergoing a pivotal transition and Allison is fully engaged in this activity.

Like to command the Allison team for continuing to execute at a very high level, we understand how to develop validate integrated and highly customized commercial vehicle propulsion solutions that actively manage power and torque Alison will leverage its organic well established.

Proven capabilities to continue developing differentiated products that deliver value to our customers and meet the needs of the market today and in the future.

We understand the challenges and the opportunities the most important we understand our customer Allison knows how because we've done it for decades.

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

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate that your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Thank you. Our first question comes from Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good evening.

I guess.

Question, Dave can you just talk about sort of when do you expect to see supply chain as Judy I think you said last quarter you expected it to.

Continue into 2022, what your expectation is now.

And then.

I guess, another sort of longer term strategic question.

You are talking a lot about the ability to outgrow the market.

Based on all of these opportunities whether it's on your conventional product line or on your alternative.

<unk> line.

Is there any way you can help frame how you think about market outgrowth over the next couple of years relative to whatever the industry can do and where that would come from thank you.

Sure Jim.

I appreciate the questions first on supply chain to be clear. Unfortunately, I think we were our expectations were met given our Q2 call comments I think it's.

Having said that I would say again credit the.

It is not for a lack of effort and thats through multiple tiers of the supply chain.

And it's a daily daily process frankly.

Nevertheless, as we see things today.

We mentioned on our Q2 call. We did expect some improvement in at least Allison specific issues.

For the most part that's occurred I would say.

Certainly describe is well positioned to meet demand I'd argue we're demand constrained at this point.

With that in mind.

We're only as good as what we know right today and I think it continues to be a very fluid.

Situation I'm, certainly aware of public reporting that youre aware of that.

There are.

Muted expectations for the balance of certainly this year I would also note when you think about what's possible given the amount of working days Thats left with building rates et cetera.

It is very challenged and I think we mentioned that on Q2 as well so with all of that in mind, we're certainly looking forward to 'twenty two for better.

Conditions, but again keep in mind that.

There's a number of activities that are going to need to occur a number of constraints that are going to need to be resolved I will tell you the level of engagement that we have right now solving.

Problems through multiple levels, our challenges, making some strategic investments as well to break constraints, it's all underway.

But that of course assumes that labor is going to be available in a timely way that logistics. There is a lot of assumptions that go into that so.

The takeaway from all of that is we're working as hard as we can.

<unk> be in a position to meet customer demand and I would describe as again as demand constrained your comment in terms of your question around.

Outgrowing the markets if we just take.

The six end markets.

Certainly we report North America on highway as we talked about we're excited about the $34 14.

<unk> Hall series being fully available in the marketplace through at least the major Oems.

That target market is plus or minus 30 plus percent of.

The day the day tractor day cab market right as you think about it so significant opportunity for us with very low penetration today.

We continue to be well positioned in class eight.

Occasional we've we've gained shares over the year as you know despite I think certain alternative technologies that are out there that was speculated to be.

Much more <unk>.

Bowling the heavy heavier more demanding duty cycles thats not happened. So the team continues to grow certainly sure. There were pleased with our positioning in class four five with the.

The Navistar and GM releases that those products are doing well in the marketplace.

As we go to north the outside North America on highway market as we talked about on the virtual technology day running through very well.

Low penetration in at least the larger core markets that being.

China as well as.

Parts of Asia at this point.

We see more opportunity to grow there we already have significant share in certain niche.

Smaller sub segments of the market that are very similar to what you've seen in Europe and North America.

We're also looking at our off highway market outside of North America in terms of.

Mining and construction applications and new products in terms of the Tera <unk> release, I think we're doing very well there with the team. It's received I think very good uptake from the market.

That's a sizable opportunity as we look at that particular market and again just growing in core vocations very similar and aligned to.

To North America, and Europe defense.

<unk> have programs going on there as we've talked about defense as an asset light business.

Typically longer to get programs launch, but very long lives in terms of platform. So the Abrams is been around since the late <unk> early <unk> it continues to be.

Modified having with that in mind, we're also behind both of them the Oems competing for the MTF terms of sizing those there.

The MTF.

Market as you think about that what does that start to look like longer term. The <unk> is a platform that we are certainly exposed through through the.

The team working with American Ryan Mittal, that's about a 4000 unit potential market over a number of years.

We're also on the VM 88 platform, which is heavy duty recovery.

Platform with Bae's. So you start to add those up those are very significant long running platforms and then of course the work that the team is doing outside of North America.

The service service support equipment and other market for US the team continues to grow our franchise, there and a number of different regions.

And also benefiting from some of the growth that we're seeing in our defense business as well. So the team has done I think a very good job.

Job there as well so when you start to put it all together I think it's a strong story, which frankly explains why we are investing the way we are and Fred mentioned it earlier, but.

Pointed programs from us to grow this business and I think when you look at it whether it's a limited amount of clean sheet clean sheet design, so to speak but mostly variants we have been very successful.

Leveraging those with.

Attractive returns and incremental investment so.

Hopefully that covers the waterfront a bit for you.

Sure.

Thank you. Our next question comes from Larry de Maria with William Blair. Please proceed with your question.

Hi, Thanks, and good afternoon everybody.

So obviously the fuel center software when post Q just curious first of all if we can expect more of those if that's subscription recurring revenue that's going to come every year.

Ultimately be material in the next couple of years and secondly are you able to you said noted youre able to fill demand, but is there any evidence of OEM stockpiling of gear transmissions.

Or is it flowing through to finished goods I'm just trying to understand to make sure that you can produce to whatever production is next year and there won't be any.

Pushback, because they have inventory of your product.

Hey, Larry It's Dave if you could just do me a favor repeat that.

The first half of your second question.

You noted that youre able to fill demand.

So I'm curious if there's any OEM stockpiling of your transmission or maybe you can produce at many as it is but trying to understand if you didn't produce towards production next year or if there's an inventory of your product at the Oems.

I appreciate the fuel sense.

To your question, Yes, we would expect fewer fence revenue to grow with volume.

And as.

As you think about the cost of fuel continuing to go up.

That creates a better backdrop frankly for fuel cell sales as we go forward. So again you can look at the overall on highway volume, but also look at the economics, which become much.

That much more attractive given fuel prices and frankly, the opportunity to reduce emissions as well.

Your question on on highway, there's certainly the ability to for Oems They do it.

Inventory, our transmissions I would say, though their ability to do that relatively limited just given the scope and size of what that starts to look like so.

I would say, though to your to your question. We can certainly as we sit here today, we're demand constrained from what we understand.

For at least third party forecast for next year, I think we're very well positioned to meet.

That demand I think the other nuance to understand and frankly I think it gets back to some of the questions around supply chain and why you see disruptions.

Pre pandemic there was there were buffers that were in throughout the supply chain and frankly throughout.

Oems in a number of the <unk>.

Over the component suppliers right.

The tailwind of under producing to demand for the industry right now there is some level of.

Inventory that will has to be rebuilt over time as well. So that's something we're staying close to trying to understand especially as you know when you look at the inventory numbers that are out in the market right now that will be another element of as the market.

Tries to catch up and recover that's something to watch as well.

Okay. Thanks very much.

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

Yes, hi, good evening everyone.

Good evening.

Okay.

David since Unfortunately, you were right about the supply chain for this quarter as you said.

I think I heard you say that you feel better about the supply chain from here can I trouble, you just to clarify and expand.

On those comments, because if thats the case that would certainly bode well for everyone.

Yes.

And again.

Wasn't.

I wasn't right I think the team here was right in terms of how they manage the situation day to day and the input that they provide to run this business I would just to your comment there.

Certainly feel better about a number of our positioning right now versus.

At the end of second quarter coming into third quarter.

I would say we are staying again very close to things, but an overall perspective right now it's it's a harder lift than it was at this time last year I think I said that on the second quarter call as well in terms of the amount of effort to do what the team needs to do to run the business on a day to day basis that being said overall.

<unk>.

I think we're certainly better positioned than we've been.

But we're only as good as when the demand is ultimately going to be there as I said, we're demand constrained.

We say this often here.

Typically it takes all the components to make the vehicle and that that is going to continues to be I think a broader challenge for.

The industry. So we're staying close probably as close as we've ever been.

To our customers to make sure that were aligning our resources and our timing with what they are telling us, but where I think better better positioned from that standpoint too.

To meet demand.

And as we think about your operating leverage from here is there anything that would keep you from putting up historic allow some type incremental margins. If the demand is there over the next.

12 months, either anything rising R&D or SG&A or price cost, so we need to be aware of or.

Can we look forward to typical Allison type decremental margins if that demand part of the equation is there.

Hey, Jerry this is Fred.

Yes.

As you know.

The operating leverage is.

Pretty significant with the business.

Yes, I think about what's incurred this year in a significant rise in <unk>.

Raw material and we've talked about price cost.

We are going to be negative price cost this year.

Probably to the tune of about $15 million.

We also talked about the fact that our raw material pass throughs lag anywhere from six months to a year.

So we have those in front of us for for 2022 at this point.

Anticipating about a <unk>.

Little over 100 basis points in <unk> and.

And pricing just from those commodity pass throughs.

So think of something sort of in the.

25 to 30.

$30 million range, we'll have that going for us.

Clearly subject to where commodities are going to look like next year.

On top of that pricing will secure our normal.

Commercial pricing.

Where we've historically gotten anywhere from 50 to 100 basis points.

Yes.

It's a challenging environment to function and today, Dave talked about the supply chain I mean, theres certainly a lot of cost leakage. So I think as you see that.

Stabilized I think everybody will get some costs out of the system and then just the the operating leverage that the business has certainly.

Is significant and we would expect to.

To see that play through as.

As volumes do do rise.

Terrific I appreciate the discussion thanks.

Thank you. Our next question is from Ian Zaffino with Oppenheimer. Please proceed with your question Hi, Great I, just kind of wanted to follow up on the pricing equation here.

Ordinarily it's always been.

I guess, you've tried to move to vocational pricing.

How are you going to market with price increases or are you doing it from a vocational pricing standpoint, or you're doing it just some kind of a cogs and raw material recovery perspective.

Any kind of details with that and then.

Second question would just be what's the ending share count for.

For the quarter end.

What are your thoughts on buybacks going going forward from here because I know you bought back up that $100 million.

Thanks.

Sure Ian this is Fred.

From a pricing standpoint.

As you mentioned, we we price for the locational value we deliver.

But our long term supply agreements the vast majority of them have passed.

Methodologies for raw materials so.

Peg the three great to steel and aluminum.

And you typically pass through about 75% of the cost so.

So we've incurred the cost in.

2021 and will.

Passing them on per those agreements in 2022.

We continue to increase the value of our product from a durability reliability standpoint.

The fuel economy that we deliver.

Polk to fuel sense earlier so.

So we've been in a position as we increase that valued really to do two things historically, one recognize that you'll provide more value and then.

We've been able to price for that value, while simultaneously taking share and.

Yes, I think thats as we look out through through 2020 to expect that that.

That will continue.

Relative to.

To share count.

We will be putting out the Q tomorrow, but.

As of the 15th of October.

104 3 million shares outstanding.

And thoughts on buying back more stock going forward.

I mean.

Clearly part of our capital allocation priorities right now.

Organic revenue earnings growth, new product technology development.

No.

We look at strategic acquisition opportunities, but return of capital to shareholders is front and center, we're fortunate as a business that.

We generate more cash than the business needs. We're clearly funding it from an R&D from a capex standpoint.

But we will plan to return the excess cash to shareholders via the.

Via the quarterly dividend and share repurchases.

Perfect. Thanks, so much.

Thank you. Our next question is from Rob Wertheimer with Melius Research. Please proceed with your question.

Howdy.

I'm sorry, it's kind of a same question, but maybe I'll just answer that adequately.

Curious if you.

Have any more more deliberate conversations around buyback just given where the share price has been obviously.

The market value of EUR, but your cash flow is pretty good so.

Does that in any of your conversations in the board level discussions or no.

Certainly.

Where our stock is valued.

As always front and center in the board discussions relative to <unk>.

The pace of share repurchases.

Can you talk can you just in that context, just give us your ranges on net debt to EBITDA again, and then just in curiosity, you've made a lot of strides in electrification internal investment relationships external investment is there anything large on the horizon.

I don't know if you have a funnel of acquisitions or investments et cetera that could be a large use of cash in that direction and I will stop there. Thanks sure Rob.

Take the first part I mean.

We talked about below three five times.

Net debt to EBITDA, obviously, well below that.

Yeah.

At two eight times.

As you think about this over time, we haven't really changed.

Other than ensuring that the.

The debt.

Long dated when we've extended maturities but.

Net net leverage ratio has really moved around based on LTM EBITDA.

As to the back half of that question and I'll, let Dave address.

Thank you for that question so.

Talked about before Fred mentioned as well here in terms of we are being.

I would say try to be very thoughtful and deliberate about what steps. We are taking in terms of investing whether that's internal or external.

Honestly the most recent announcement with participating and JJ is IPO is one of a number of different opportunities and alternatives.

We have been and will continue to pursue.

That's both in the conventional space as EV frankly so.

As we've said our job is to generate results and deploy that.

Capital to the to the advantage of all of our shareholders and I think as we think about that there are definitely opportunities out there that we're tracking and interested in.

With that being said as we look at our portfolio.

<unk> continued to make I think very.

Im focused.

Steps.

I would also offer.

There is.

As part of electrification.

Conventional is another opportunity as you start to think about what's next in that world. So we're always looking at that in the broader context of.

How do we best deploy Allison's resources are advantages, we've talked about what we're leveraging in the EV space.

At the latest.

Announcements around collaborating with J&J is a good example of that when we look at a number of different opportunities to collaborate as well on the conventional side. So we'll continue to.

Pursue our disciplined process there.

But rest assured we are very engaged across a number of different end markets looking at opportunities.

Thank you.

Thank you. Our next question is from Courtney <unk> with Morgan Stanley. Please proceed with your question.

Hi, Good evening guys. Thanks for the question, maybe just on the sales or the net sales guidance reduction is the right way to be thinking about that that that is entirely North America on highway reduction or are there any other.

Areas that you feel are I think you referred to as demand constrained.

Earlier.

Accordingly, it's Dave Thank you for the question.

I'd say as I'm sure you've been.

Paying close attention to a number of the OEM announcements already.

I would certainly attribute some of the change that we that we made in our guide.

Attributed to North America in terms of as I said, we're demand constrained so I think that's fair.

<unk> said that I think.

To the other end of the spectrum seen better results out of.

North America off highway.

And market really driven largely by hydraulic Frac is you know our portfolio.

Outside North America, I would say both on highway and off highway.

It's performing the outlook a bit better than we thought there as well to be balanced about the whole package. So.

They those markets continue to perform.

Say a bit better in terms of supply.

Strange understanding that and our focus there are typically our end use.

Customers are reasonably prioritized in those local markets. So I think that explains some of what we.

We're seeing there in terms of improved performance, if you will versus.

Our earlier.

Expectations.

The other side of that is with our service.

<unk> business there are labor constraints out in the channel right now that I would say are somewhat constraining demand as well so just can't.

Get the labor too.

Two an adequate enough level, so youre seeing extended lead times out there to get the vehicle service, we don't lack.

Certainly the parts to provide to the channel, but again I think there is some level of constrained.

And there as well.

Okay. Thanks, that's helpful and if I could just follow up on the pricing discussion I think previously.

<unk> guided to being price cost negative.

In the third quarter, just wanted to make sure that the expectation for the fourth quarter as well and we shouldn't expect to see.

Gross margin expansion again until until.

Until 2022.

Is that the right way to be thinking about it.

I mean, we have taken obviously some pricing actions.

During the year, but we do expect for Q4 to be a price cost unfair.

Unfavorable as I said, a lot of the commodity pass throughs kick in on one one.

Which I spoke to earlier.

Okay. Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to David <unk> for any closing comments.

Thank you Paul Thank you again to everyone for joining us this evening for our call and we look forward to it.

And to updating you on our fourth quarter call.

The rest of your evening.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful evening.

Q3 2021 Allison Transmission Holdings Inc Earnings Call

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