Q2 2022 Allison Transmission Holdings Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by welcome to Allison transmissions second quarter 2022 earnings conference call. My name is Kyle and I'll be your conference call operator today.
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 and conference call participants will be given instructions at that time.
As a reminder, this conference call is being recorded.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would now like to turn the conference call over to Mr. Ray Posadas, the company's managing director of Investor Relations. Please go ahead Sir.
Thank you Carl and good afternoon, and thank you for joining us for our second quarter 2022 earnings Conference call with me. This afternoon are Dave Grad, DOZ, our chairman and Chief Executive Officer, and Fred Bully, Our senior Vice President and Chief Financial Officer, and Treasurer. As a reminder, this conference call webcast and this afternoon's presentation are available on the investor.
The relations section of our website Allison transmission Dot com a replay of this call will be available through August 10th.
As noted on slide two of the presentation. Many of our remarks today contain forward looking statements based on current expectations. These forward looking statements are subject to known and unknown risks, including those set forth in our second quarter 2022 earnings press release, our annual report on Form 10-K for the year ended December 31 2021.
And our quarterly report on Form 10-Q for the quarter ended March 32022, uncertainties related to the war in Ukraine, The COVID-19, pandemic and related responses by governments customers and suppliers and other factors as well as general economic conditions should one or more of these risks or uncertainties materialize or should underlying assumption.
Our estimates prove incorrect actual results may vary materially from those that we expressed today. In addition, as noted on slide three of the presentation. Some of our remarks today contain non-GAAP financial measures as defined by the 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 second quarter 2022 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 today's call Dave gradual D will review highlights from our second quarter 2022 results and provide a brief operational update.
<unk> will then review our second quarter financial performance and the full year 2022 guidance prior to commencing the Q&A now I'll turn the call over to Dave gradually.
Thank you Ray good afternoon, and thank you for joining US we are pleased to report solid performance for the second quarter of 2022, including a 25% increase in diluted EPS. Following the strong start to the year second quarter results demonstrate the resiliency of customer demand and continued year over year growth and.
In spite of the challenging environment. The Allison team continues to deliver balanced execution, while driving multiyear growth initiatives across all of our end markets.
Net sales for the quarter were $664 million.
Notably net sales growth of 10% was once again surpassed by diluted EPS growth of 25% as allison's discipline and well defined approach to capital allocation continues to support per share returns in excess of net sales and net income growth as a result of the ongoing strength in Allison's globe.
On highway and off highway end markets. We are pleased to reaffirm the full year guidance midpoint, while narrowing the guidance ranges provided to the market on February 16th.
Despite concerns of a slowdown in economic activity customer demand remains robust with industry production limited primarily by persistent supply chain constraints, we anticipate the current complex and uncertain operating environment will continue for the foreseeable future.
Those supply chains have not uniformly improved end user demand remains strong and the Allison team continues to take actions that address and mitigate production challenges in prior quarters. We have discussed several initiatives that are supporting allison's long term growth objectives among them as Allison's Award winner.
<unk> 34, 14 regional haul series fully automatic transmission for the North America heavy duty regional haul and day cab tractor market.
<unk> released with Navistar, Daimler trucks, North America, and Volvo trucks, North America, 34, 14, RHS expands our addressable market enables the pursuit of market share growth and represents an incremental revenue opportunity of $100 million annually. Following the initial launch during the <unk>.
Number of 2020, the Allison 34, 14, our Hs has surpassed expectations realizing meaningful success in a short amount of time to 34 in 2014. Our Hs is now operating in three of the top five largest private fleets in North America, which collectively operate approximately 25.
<unk> thousand regional haul tractors, another growth opportunity as Allison's next generation hydraulic fracturing transmission frac trend purpose built to meet the unique demands of the hydraulic fracturing industry. This new offering represents another incremental growth opportunity of $100 million in annual revenue following that.
Our livery of the first frac trend units to several industry partners. During the first quarter last month, we announced that Cal Frac well services one of the largest hydraulic fracturing companies in the world had introduced Frac train into their field operations beginning in April .
<unk> employees have been impressed and noted an improvement in the productivity of the Frac train equipped hydraulic fracturing equipment Frac Trans early success in the field along with customer feedback reinforces our expectations Allison's Frac train is the only purpose built hydraulic fracturing transmission in the market and.
<unk> has a unique combination of adverse utility power and efficiency to maximize customer productivity with high reliability and powerful performance under pressure.
Allison's defense end market is also positioned to drive long term growth in recent months, we've announced multiple initiatives in support of our defense customers, including the U S. Army's newest tactical wheeled vehicle program, the common tactical truck or C. T T Alison will support multiple customer.
Leveraging our 4000 series fully automatic transmission C. T. T has the potential to replace more than 7000 heavy duty trucks within the Army's tactical wheeled vehicle fleet, representing over $150 million in the aggregate revenue for Allison prototype vehicle testing will begin.
In late 2023, with an award decision expected to occur as early as 2025. Allison has also been selected to provide the X 1100 dash five b propulsion solution for the U S. Army's New M 80, 883, Hercules heavy tracked recovery prototype vehicle.
That is expected to upgrade and replace the M 88, a two this initiative is consistent with the Army's continued investments in combat readiness and fleet modernization. Following the prototype stage of the M. 80, 883 Hercules a decision by the army to transition to production is expected as early as <unk>.
24 currently there are more than 900 M 88 vehicles in the U S Army if the army wear to modernize the entire fleet. The total revenue opportunity for Allison could represent nearly $500 million over the next two decades and last week, we announced that al since 30 40.
IMAX Cross drive transmission will be featured in the U S. Army's newest tactical armored combat vehicle the mobile protected firepower MTF program. The MTF program is one of the Army's highest.
Priority modernization initiatives. The army is expected to purchase more than 500, MTF vehicles through 'twenty 35, collectively representing approximately $250 million in revenue for Allison's defense end market Allison is proud to team up with general dynamics land systems on the MTF Pro.
Graham and to provide the army with the trends.
Formation of old technology necessary for future battlefield.
Allison.
Insistently been at the forefront of trends formation, all technology in June and partnership with Gilead and comments, we announced the delivery of the first transit buses equipped with Allison's next generation electric hybrid propulsion system E. Gen Flex to the Indianapolis Public Transportation Corporation the EEG.
<unk> flex continues to make inroads throughout the Midwest with multiple transit properties selecting Aegean flex equipped buses for their fleets, including recent announcements with Evansville in Muncie, Indiana in Oshkosh, Wisconsin introduced.
Introduced in 2020, Allison Z Gen Flex has demonstrated the ability to operate in full engine off mode for more than 50% of its time and.
In operation across multiple routes within one of North America's largest transit fleet.
Allison is proud to partner with public transit agencies across the Midwest to support their efforts to reduce carbon footprints and dependence on fossil fuels protect the environment and enhance the quality of life for their passengers as fleets move to electric hybrid or full EV technology to support sustainability goals Allison.
We will continue to be a partner of choice supported by our track record of delivering innovative and reliable technology, specifically designed to meet the needs of the transit industry.
Earlier in the second quarter at the advanced clean Transportation Expo in long Beach, California, we were proud to announce a new strategic partnership with XO is a leading manufacturer and services provider of class five through class eight battery electric vehicles, powertrains charging infrastructure and fleet management software.
Sure to jointly develop heavy duty class seven and eight commercial electric vehicles, Allison's 100 deaths and 100 D. E. Gen power electric axles will be integrated into <unk> battery electric commercial trucks and finally during the quarter emergency one.
Unveiled their fully electric E V zero fire engine equipped with the Gen power 100 D electric axle.
This first of its kind vehicle was released at inter shoots 2022 in late June and already has orders from the Scottish fire and rescue service with an expectation to enter service in early 2023 emergency one is the United Kingdoms largest manufacturer of fire and rescue vehicles than we are.
Proud to play a key role in their next generation of electric vehicle platform.
Thanks to the Allison team's relentless execution over the years and through multiple cycles. We are realizing the benefit of our growth objectives. Our success remains aligned with our long term strategy of continuous global market expansion and coupled with continuous product and technology innovation and the Allison brand.
Promise of quality reliability and durability, we remain positioned to improve the way the world works for years to come.
Thank you and I'll now turn the call over to Fred.
Thank you Dave following Daves comments I will discuss the Q2 2022 performance summary.
Key income statement line items and cash flow I'll, then reaffirm the full year 2022 guidance.
Please turn to slide five of the presentation for the Q2 2022 performance summary.
Year over year net sales increased 10% to $664 million from the same period in 2021, driven by price increases resilient customer demand and the continued execution of our growth initiatives, despite persistent supply chain challenges.
The increase in year over year results was led by a 13% increase in the North American on highway end market, principally driven by the continued strength in customer demand for last mile delivery regional haul and vocational trucks.
Year over year results were also improved by $25 million increase in net sales in the global off highway end markets driven by sustained demand for hydraulic fracturing applications in the energy sector as well as stronger demand in the mining and construction sectors.
An 8% increase in net sales in the service parts support equipment and other end market.
Principally driven by North American service parts and global support equipment.
And a 7% increase in the net sales in the outside North America on highway end markets, principally driven by higher demand and increasing penetration in Europe and South America.
Gross profit for the quarter was $311 million, an 8% increase from the $288 million for the same period in 2021. The increase was principally driven by price increases on certain products and higher net sales, partially offset by unfavorable material cost.
Net income for the quarter was $122 million compared to $110 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by increased product initiatives spending.
Adjusted EBITDA for the quarter was $227 million compared to $213 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by increased product initiatives spending.
<unk> earnings per share increased 25% to $1.26 from the same period in 2021, driven by higher net income and lower total shares outstanding.
A detailed overview of our net sales by end market can be found on slide six of the presentation.
Please turn to slide seven of the presentation for the Q2 2022 financial performance summary.
Selling general and administrative expenses decreased $2 million from the same period in 2021, principally driven by lower commercial activities bending.
Engineering research and development expenses increased $5 million from the same period in 2021, principally driven by increased product initiatives spending.
Please turn to slide eight of the presentation for the Q2 2022 cash flow performance summary.
Adjusted free cash flow for the quarter was $36 million compared to $95 million for the same period in 2021. The decrease was driven by higher operating working capital funding requirements and higher cash income taxes, partially offset.
The higher gross profit and lower capital expenditures.
The increase in operating working capital funding requirements. During the second quarter was driven by increased by.
By an increase in inventory early in the quarter to mitigate supply chain constraints and position Allison to meet customer demand in the second half of the year the timing of the inventory increases and corresponding accounts payable balances paid during the second quarter had an unfavorable impact on operating working capital.
Further contributing to the increase in operating working capital funding requirements net sales experienced a gradual ramp up as the quarter progressed with June being the highest revenue month of the quarter.
The linked quarter cadence in net sales and corresponding accounts receivable balances to be to be received during the third quarter also had an unfavorable impact on operating working capital.
Consistent with Allison disciplined and well defined approach to capital allocation, we settled $34 million of share repurchases. During the second quarter year to date, Alison has repurchased 3% of outstanding shares. We ended the quarter with a net leverage ratio of two seven times, a $122 million of cash and 600.
$45 million of available revolving credit facility commitments. In addition, we continued to maintain a flexible long dated and covenant light debt structure with the earliest maturity due in 2026.
Finally, we ended the quarter with approximately $1 $2 billion of authorized share repurchase capacity.
Please turn to slide nine of the presentation for the full year 2022 guidance.
As Dave mentioned earlier, we are reaffirming the full year 2022 guidance mid points, while narrowing the guidance ranges released to the market on February 16, we expect net sales for 2022 to be in the range of $2 65 to $2 $75 billion or 2022, net sales guidance reflects higher customer demand and.
The global on highway global off Highway and service parts support equipment and other end markets as well as price increases on certain products and the continued execution of our growth initiatives.
In addition to Allison's 2022, net sales guidance, we anticipate net income in the range of $450 million to $500 million adjusted EBITDA in the range of $885 million to $955 million.
Net cash provided by operating activities in the range of $590 million to $660 million.
Free cash flow in the range of $420 million to $480 million and capital expenditures in the range of $170 million to $180 million.
Thank you. This concludes our prepared remarks, Kyle please open the call for questions.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate 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.
Our first question is from Larry de Maria with William Blair. Please proceed with your question.
Hi, Thanks, Good afternoon, everybody I'm, just curious I wanted to touch on the actual long term and that's particularly the corner right now, but obviously you know comes in meritor tie up.
Butch will eventually ultimately be an integrated solution with including E. Axles I'm just curious how you're thinking about strategically from your end if you need to partner elsewhere and how does this change your product development roadmap and expense plan and just broadly how you're thinking about your competitive positioning given some of the consolidation. Thank you.
Hi, Good afternoon, Larry it's Dave So to your question first of all.
The Cummins Meritor.
Frankly makes a lot of sense for both parties I think to your comment there about what they're bringing in terms of integration.
You know I'm sure as you know the architecture that we're pursuing in terms of the axle is a fully integrated.
E axle so.
I would also note our ability as we've done for probably 20 years now.
<unk>.
Experience around delivering fully integrated solutions back to the Gen flex product that we have which in second gen versus our age 40 50.
Transit system, we certainly have that experience and capability. We've also talked pre.
Previously about our efforts to partner in a number of different areas and frankly, a number of announcements investments we've made as well as others that we're working on.
But we think certainly the actuals as a solution set given many other technologies that are out there.
Continues to be.
Preferred for a number of reasons. So we're very pleased with.
Where we're at from a both a design perspective as well as the progress that we're making on a number of engagements as we mentioned in the.
Prepared remarks continue to make progress with what we consider to be very focused engagement with the marketplace.
But also I think being very clear eyed about the expectation, which is the experience of delivering at or better performance than what the industry has come to expect from us.
The industry standard of Allison in terms of performance durability reliability et cetera. So that's that's really where you know how.
How we see things playing out over the longer term.
We believe it will certainly be a significant portion of the market in terms of.
Solutions demand and look.
We look forward to delivering.
Products consistent with our brand promise.
Okay. Thank you.
Our next question is from Rob Wertheimer with Melius Research. Please proceed with your question.
Thanks, Good evening.
Could you please update us on just price costs in the quarter and where you feel you are on recapturing the rising cost curve I don't know, if you're a little bit behind.
Maybe some others, maybe Oems and then just in general I don't know if you're willing to comment on how you see the cost curve developing right now in real time on labor inflation, peaking on.
Transport costs on material costs or anything else. If you could sort of give us a sense of how that balance of price cost is trending for the rest of the year you know as far as you can see.
Sure Rob This is a this is fred.
For the quarter.
We had $33 million in price had material costs up $25 million, so slightly favorable.
You know we you know we have you know as the year progressed and we talked about on the Q1 call continued to see them.
Cost escalating obviously here recently, you've seen commodity costs start to.
Start to roll off.
But as we look at it we still feel for the year will be slightly a price cost favorable.
Obviously, that's had an impact on our margin percentages.
When you think about adding roughly $100 million in revenue and are in close to 100 million in cost clearly it's dilutive to margins. So if you just took that into consideration itself. That's diluting our margins by about 130 basis points.
And impact and clearly you know we got the operating leverage, but we have to overcome that that headwind as we go forward.
We haven't seen any signs.
Of inflation letting off.
You said you started to see some relief from commodities, but labor rates.
Can continue and it's a tight labor market. So you know as we formulate our thoughts.
You know around 2023, certainly I think it's an environment.
Where you are positioned to go out and get price and will need to to cover the inflation.
Thank you.
Our next question is from Tim Thein with Citigroup. Please proceed with your question.
Oh, great. Thank you good afternoon, Yeah, and maybe just Fred just continuing along that same thread with respect to pricing and inflation.
Historically, the long term supply agreement.
As you know.
Long been at.
And have a feature for Allison is it is it means two to provide a bit more.
<unk> visibility and I guess somewhat of a hedge.
But I'm just curious.
We've never been or certainly in the last decade, or so as long as as Alex has been public at least we've never been in an environment of this level of just broader inflation. So I'm just curious as you.
<unk> renegotiate as you look to renegotiate those those agreements as they roll off.
And the tenor of the of the contracting and I'm sure the discussions have each day.
One thing to what you want to divulge call as to how those are going but basically. The question is are you able to or are there are there components of the or agreements that may be changing.
Maybe just given the backdrop that we're in.
And again from an inflationary standpoint, we haven't seen in quite some time, so just basically how how you're approaching those agreements as they roll off as the spirit of the question. Thank you.
Thanks, Tim again this is Fred.
I mean.
Certainty.
And price in this environment comes at a cost.
And so as we have discussions and as you know Tim those are.
Those are cadence too.
But you know.
And multiple points you know, they're not all lined up on a single calendar year. There are typically three to five years in length.
We're certainly willing to provide certainty of price, but you know it will come at a cost. So I think as we have those discussions is it's certainly possible that oh.
You just based on the environment that it might be and both parties are interested to just do annual pricing or pricing at time of delivery.
But those are discussions that are ongoing.
We're very cognizant of.
Our cost profile and.
<unk> paid to picking up meaningful price.
And that's for Us that's not.
What we say cost and Youre seeing it and certainly we want to protect our margins, but the important thing to remember is our product delivers value. So if an OEM is going to increase the price of the truck 10, 15%.
Any of our product just went up 10, 15% at the price of fuel goes up value of our product goes up because we make the vehicle more fuel efficient.
To get more work done with a vehicle with our product. Therefore, you need fewer vehicles in the fleet. So so really.
The fact that we deliver value in a pretty aggressive payback two to three year payback.
In a rising inflationary environment, we're well positioned.
To charge for that value.
Hi, Tim you're still there.
No.
Oh good thank you.
Our next question is from Ian Zaffino with Oppenheimer. Please proceed with your question Hi.
Great.
Thank you very much.
As far I know you've kind of answered this question a little bit but.
As you look on the electric side keep forgive any holes, where you would need to maybe go out and buy something.
Zane how are you thinking about shareholder returns and capital returns.
You know in an environment, where you may or may not need to make M&A.
<unk>.
Yes, good afternoon. So.
As we've said our position has has a quite a history in terms of electrification. We fast forward to today as you know we've made a number of investments already continue to.
Invest we're also certainly fully aware of.
You know the potential evolution adoption of EV and all all the variables and attributes that need to be met to do that so we start with as I said earlier.
Delivering our brand promise and that's a very high standard of performance you know as Fred just mentioned.
We deliver.
The real value, we see that certainly in the context of EV solutions, which really gets to your question you know holes or gaps if you will in terms of whether it be capabilities.
Content et cetera, we're constantly.
Constant we looking at.
Improving our overall position so I think it's safe to say based on our history as well as you know our spending profile we're moving.
Certainly at a fairly rapid pace.
With the market.
Nevertheless, you you're always cognizant of what the returns are what your return targets are to your point there in terms of.
Capital allocation more broadly.
We have said.
Since prior to going public as we continue to look at opportunities to invest our shareholders' capital.
We have reasonably high expectations, there and I think we've proven that through a very disciplined approach. So.
Whatever we consider whatever we look at is really done in light of those.
Metrics and that evaluation process, we don't see that changing.
And we continue with.
The level of activity that we've had.
Certainly the knowledge, that's being built and the awareness of what's in the market what customers want I would also offer the voice of customer and at some level here remains.
Somewhat incomplete. So we're looking at a number of different options about how to deliver that brand promise.
With that voice of customer in mind as it evolves. So I would say more broadly we're going to continue that analysis, but I certainly can give you some level of assurance that we're staying very close to the market and very active on a number of <unk>.
Different fronts to evaluate.
There's opportunities to improve our overall position in EV.
Yeah.
Okay, great. Thank you very much.
Our next question is from Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good evening I guess, Dave question for you you tend to have lots of concerns out there on the macro and recessions and you're starting to see it on the consumer side.
You tend to be probably a little more balanced in terms of your views I'm wondering it doesn't sound like you're seeing any cracks, but can you talk to you know they can whether you're taking any precautionary measures.
Types of things that you're watching I, you know just check to see if the downturn eventually happens and then sorry, a follow up question just wondering you've made a lot of great announcements.
And partnerships you know overseas when you think about E V, where we're starting to hear there was announcing anything pending are coming from your more core customers in North America or is it still too far out that you know, there's there's no point in <unk> and <unk>.
Formalizing anything at this point thanks.
Jamie Thanks for those questions I guess on the.
Appreciating I guess our approach to.
Forecasting and looking at the market I think.
To your comment there are we seeing any.
Cracks and such if you take it by end markets certainly the North America on highway market as others have already reported for the quarter and I think done a very complete job of describing.
That's the overall conditions and expectations there I wouldn't we don't.
Certainly disagree with the vast majority of that as you get down into certain segments there'll be.
Some level of differences I think the over the road market. As you know is in North America is not a market we play in.
I think some of the initial activity that's being seen there is not really surprising relative to used.
Vehicle values.
As you take a step back for those the reality is the market has been under supplied for quite a period of time as you well know.
The inventory levels continue to be challenged our understanding is if there are cancellations that are being absorbed.
By Waitlist and the Oems continue to be in a position of very.
Full order books.
And I think from a overall scheduling perspective, and trying to manage a business. That's obviously, a good position and be in subject to getting some of these <unk>.
Continued supply or inputs constraints resolved.
We see that as a as a pretty healthy environment.
Into 'twenty three.
You also have the dynamic as you know of emissions changes for 2024, which further I think supports the broader market.
Having said all of that we tend to take a pretty.
Tight view of things as you know the majority of the team here was.
<unk> for the unfortunate developments of 2008 no nine.
Where we took appropriate steps and I thought we're relatively well positioned we're in better shape I would argue as an organization today to manage.
Through if there if there is a downturn to be able to manage through that and take appropriate.
Action I think the flexibility, we have especially to reactive things as well.
It's still relatively high.
Hi, especially when you look at some of the work that the team great work that the team has done in terms of our operating footprint.
Within North America, and outside North America, So I think those are.
Real positives, but.
Back to your your your point there.
We are certainly keeping a very close eye on things. The other thing I would just throw in as you think about the amount of statutory spending whether that's.
Out of the U S government or other governments.
Continues to be at a relatively elevated level. So.
Some of these areas are going to provide are going to receive some level of tailwind there.
Challenge I think broadly we'll be back to some of these input constraints that.
Were mentioned on the call already and how those are going to be ultimately resolved so on your.
The EV.
Partnerships inside certainly with some of the activity we have we're continuing to work on.
Several other opportunities and look forward to providing.
Some updates here as we get further to the year, but.
Back to I think the team is internally is doing a phenomenal job.
Working with these engagements and staying very focused.
I'd also offer for what it's worth.
Input constraints are not isolated to conventional.
The EV market continues to have its challenges from and inputs constraints perspective, as well, especially when you look at the inherent volumes that are present are being.
Being requested.
Very challenging you know and I would say that more broadly throughout even the conventional side with lower volume products are pretty challenged right now in terms of getting.
Getting into Qs so to speak to be.
Generated from the supply base.
Yeah.
I appreciate the insight.
Yeah.
Our next question is from Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good afternoon.
Fred.
If you could just talk about the margin cadence that youre expecting over the course of this year you know I think it's normally your margins are about flattish <unk>. This year, we were down a point and a half can you just talk about the sequential drivers and then Uh huh.
How you're thinking about margin progression heading into <unk>. We're.
Under normal seasonality.
You're typically flattish through Q2 Q. Thanks.
Sure Jerry.
Yeah, as we were looking at it right now.
We see Q3 very very similar to Q2.
And then with the outlier be in Q4, and that's really just driven by the number of production days.
You know the holidays around Thanksgiving into the year.
So the cadence looks fairly balanced Q2, Q3, and Q4 are tailing off slightly.
Really driven by topline revenue Jerry.
Yeah.
Okay.
Thank you for that color or it could just be more about the progression <unk> versus <unk> why do we have a margin step down it was that supply chain or what drove the step down to Q versus <unk>.
Yes.
If you look at the quarters, we did continue to see and we saw.
Some cost increases a Q1 to Q2.
From from our suppliers.
Commodities continued to.
Elevate.
Volume was slightly lower.
So those are the primary drivers here.
Okay I appreciate it thanks, Brett thanks, everyone.
Our next question is from Felix motion with Raymond James. Please proceed with your question.
Hey, good afternoon everybody.
Good afternoon.
Hey, I was hoping we could maybe expand a little bit on the supply chain commentary I think in the prepared remarks, you had noted they really havent gotten uniformly better.
Curious if you could talk about maybe pain points in your own supply chain and maybe what you're hearing out of the Oems from a planning perspective, we announced the second half of the year I appreciate it.
Youre welcome Alex it's Dave so.
In addition to some of the prepared commentary.
Start with something I mentioned on I believe our first quarter call the amount of effort that it's taking the industry to manage that.
The constraints right now is continues to be very high so.
I would start by recognizing the efforts of the Allison team as well as.
Our supply base and our customers trying to work.
As cooperatively as possible.
Get through these things you can imagine I certainly with my time with the business.
We've never had to do this level of very deep coordination so in it and it's one that I think is again, taking a lot of time, it's also generating.
Supplemental cost in terms of a number of different areas, but if you.
I wouldn't say anything in particular.
Is proving to be problematic for us I think for the industry.
Based on some of the remarks that are public you know electronics continue to confound.
The industry a bit.
I would say.
If you look at the some.
Some of the surveys that were done around the industry for lease for second quarter.
One development that was interesting there is that you had the availability of raws.
Fall back a bit in terms of top five but labor moved up a notch. So point in mentioning that is why we use the phrase inputs for a reason.
Because I think people tend to think about components, but you really need to think about everything that goes into.
Supplying those components and labor is continues to be a really significant issue I would.
Note mostly.
On the U S side of things in North America.
You're also having some level of disruption in a number of regions around whether it's unfortunately with the China Lockdowns end.
The hangover effect from those as well as energy issues in a number of areas, we're not really being significantly impacted by that at this point I'm sure the Oems.
As much as they try we all tried to mitigate.
You have to think about the entire supply chain that goes into each one of the components are using which as you do that level of work I think you'll find it continues to be a relatively global supply chain and those issues are as we said in our prepared remarks don't don't we do not expect to see significant.
There, but I think the final point.
Just looking at the scheduling and the amount of demand as I mentioned.
Makes a little bit of pressure off of the industry from the standpoint of at least trying to align with the supplier availability. So.
<unk> seen some favoring of the higher margin products going out from the industry versus some of the lower margin.
That will eventually we believe catch up with itself as you as you look at fulfilling the demand from.
The customer base so.
Overall, you know again.
Still a lot of heavy lifting their challenges continue.
But I would say overall a bit better than it's certainly been over the prior quarters, but.
We'll wait and see what tomorrow brings us everyday appears to be an adventure sometimes so.
Super helpful. I appreciate it.
Our next question is from Tami Zakaria with JP Morgan. Please proceed with your question.
Hi, Thank you so much for taking my question.
So going back to the ex us.
Partnership.
200, 700 D can you just remind us what the revenue opportunity you see with this partnership and what kind of margin do you expect from this versus the conventional business.
Sure Tim its Dave.
I guess, a few things and we do.
We do not get ahead of our customers. So I would certainly point you to.
Ex us as they develop their forecast and ultimately.
Talk to vehicle development timelines and programs. So that's really the answer to your question in terms of margins as we've over the years learned full well we didn't achieve the margins that we have today.
Immediately in terms of product introductions.
Fairly.
Confident others that are providing a number of different solutions in the EV space right now are.
Feeling that same.
Position in terms of addressing cost for relatively low volume.
Introductions I would say a number of the announcements that have been made arent even by industry standards low rate initial production there more.
The concept or design validation stage than they are.
Startup production type of numbers, so that by definition.
Lead you to a path of.
Relatively low expectations initially in terms of margins on these types of solutions.
Got it thank you so much.
We have reached the end of the question and answer session and I'll now turn the call over to Dave Cresci Yossi for closing remarks.
Thank you Kyle and thank you for your continued interest in Allison and for participating on today's call enjoy your evening.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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