Q3 2024 Allison Transmission Holdings Inc Earnings Call
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Kevin: Good afternoon. Thank you for standing by. Welcome to Allison Transmissions third quarter 2024 earnings conference call. My name is Kevin and I'll be your conference call operator today.
Kevin: At this time, all participants are in a listen-only mode. After prepared remarks, Allison Transmission Executives will conduct a question-and-answer session, and conference call participants will be given instructions at that time.
Kevin: As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.
Jackie Bolles: Thank you, Kevin. Good afternoon, and thank you for joining us for our third quarter 2024 Earnings Conference Call.
Jackie Bolles: With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer, and Fred Bolles, our Chief Operating Officer, Chief Financial Officer, and Treasurer.
Jackie Bolles: As a reminder, this conference call, webcast, and this afternoon's presentation are available on the Investor Relations section of AllisonTransmission.com. A replay of this call will be available through November 12th.
Jackie Bolles: As noted on slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations.
Jackie Bolles: These forward-looking statements are subject to known and unknown risks, including those set forth in our third quarter 2024 earnings press release and our annual report on Form 10-K for the year ended December 31, 2023, as well as other general economic factors.
Jackie Bolles: 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 expressed today.
Jackie Bolles: In addition, as noted on slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC.
Jackie Bolles: You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2024 earnings press release.
Jackie Bolles: 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 just one question from each analyst.
Jackie Bolles: Please turn to slide 4 of the presentation for the call agenda.
Jackie Bolles: During today's call, Fred Foley will review our third quarter 2024 financial performance and review updates to our full year 2024 guidance.
Speaker Change: Dave will close with an update on recent announcements across our business prior to commencing the Q&A. Now, I'll turn the call over to Fred.
Fred Foley: Thank you, Jackie. Good afternoon, and thank you for joining us.
Fred Foley: As we progress through 2024, demand for Class 8 vocational vehicles continues to drive notable performance in Allison's North America on-highway end market, leading to record results for the business as a whole.
Fred: I would like to take a moment to thank our team for their combined efforts, working diligently to meet the unprecedented demand we are seeing for our 3,000 and 4,000 series products in North America.
Fred: as well as drive our growth objectives outside North America to capitalize on increased adoption of automatic transmissions.
Fred: Please turn to slide 5 of the presentation for the Q3 2024 Performance Summary.
Fred: Year-over-year net sales increased 12% from the same period in 2023 to a record of $824 million.
Fred: The increase in year-over-year results was led by a 22% increase in the North American on-highway end market, principally driven by strength in demand for Class 8 vocational vehicles and medium-duty trucks and price increases on certain products.
Fred: Year-over-year net sales were further improved by a 23% increase in our defense-end market.
Fred: The increase was principally driven by increased demand for tracked vehicle applications.
Fred: And finally, year-over-year results were improved by a record third quarter in our outside North American on-highway end market.
Fred: The increase in net sales in the outside North America on-highway end market was principally driven by higher demand in Asia and price increases on certain products, partially offset by lower demand in Europe.
Fred: Gross profit for the quarter was $396 million, an increase of $39 million from $357 million for the same period in 2023.
Fred: The increase in gross profit was principally driven by increased net sales and price increases on certain products, partially offset by higher manufacturing expense.
Fred: Net income for the quarter was $200 million, an increase of $42 million, or 27% from the same period in 2023. The increase was principally driven by higher gross profit and lower interest expense net.
Fred: Adjusted EBITDA for the quarter was $305 million compared to $267 million for the same period in 2023. The increase in adjusted EBITDA was principally driven by higher gross profit.
Fred: Diluted earnings per share increased 29% year-over-year to an all-time quarterly record of $2.27.
Fred: The increase was driven by higher net income and lower total shares outstanding.
Fred: A detailed overview of our net sales by end market and Q3 2024 financial performance can be found on slide 6 and 7 of the presentation.
Fred: Please turn to slide 8 of the presentation for the Q3 2024 Cash Flow Performance Summary.
Fred: Adjusted free cash flow for the quarter was $210 million compared to $182 million for the same period in 2023.
Fred: The increase was principally driven by higher gross profit, partially offset by higher operating working capital funding requirements, and increased cash taxes and capital expenditures.
Fred: During the third quarter, we paid a dividend of $0.25 per share and repurchased over $50 million of our common stock.
Fred: We ended the quarter with a net leverage ratio of 1.4 times, $788 million of cash, and $745 million of available revolving credit facility commitments. In addition, we continue to maintain a flexible, long-dated, and covenant-like debt structure.
Fred: Please turn to slide 9 of the presentation for the update to our 2024 guidance.
Fred: As a result of the ongoing strength in the North American on-highway and market, we are raising our full-year guidance midpoints for revenue, earnings, and cash flow.
Fred: $135 million to $3,215,000,000
Fred: In addition to the Allison's 2024 Net Sales Guidance, we anticipate net income in the range of $675 million to $725 million, adjusted EBITDA in the range of $1,115 million to $1,175 million,
Fred: Net cash provided by operating activities in the range of $740 million to $800 million.
Fred: Capital expenditures in the range of $135 million to $145 million And adjusted pre-cash flow in the range of $605 million to $655 million
Speaker Change: Thank you, and I'll now turn the call over to Dave for an update on recent announcements across our business.
Dave Graziosi: Thank you, Fred. Allison continues to see robust demand for our on-highway products, particularly our 3,000 and 4,000 series fully automatic transmissions.
Dave Graziosi: sustained infrastructure spending in North America. In order to meet this elevated demand, throughout the year we have made investments in our supply chain and operations to not only manage capacity, but also improve manufacturing throughput.
Dave Graziosi: Last week, we announced further plans for long-term sustainable growth and global capacity increases for our on-highway products.
Dave Graziosi: through investment in our Chennai, India facility.
Dave Graziosi: Opening in 2010, our Chennai, India facility serves as the headquarters in the region, expanding our presence while initially fabricating parts to support global production of our 1000 and 2000 series on-highway products.
Dave Graziosi: After demonstrating the ability to meet Allison's best-in-class manufacturing practices, the facility expanded capabilities to assemble our 1,000 and 2,000 series transmissions in 2012, while relying on components provided from our Indianapolis sourcing supply chain.
Dave Graziosi: We are excited to invest to nearly double the manufacturing footprint of the Indian
Dave Graziosi: facility increasing fabrication capabilities for components of our 3,000 and 4,000 series on-highway products giving us the ability to tailor our global production to meet regional demand.
Dave Graziosi: Our investment of over $100 million will be spread over the next few years with nearly half of that total project spend expected to occur in 2025. As operations begin in 2026 and ramp up.
Dave Graziosi: To full production in 2027, this investment will support our long-term growth objectives in the outside North America regions, raising our global capacity and offering operational cost savings.
Dave Graziosi: Through this investment, our global manufacturing operations will return to optimized levels of production, offering cost savings through efficiency gains, while increasing Allison's ability to meet the future demand for our on-highway products, driven by the continued global adoption of automatic transmissions.
Dave Graziosi: We look forward to providing further updates as the project progresses.
Dave Graziosi: and executed a memorandum of understanding with Lugan, a top-tier global construction equipment manufacturer.
Dave Graziosi: The MOU signing took place in Indonesia as part of a customer ride-and-drive event showcasing Lugang's latest 70-ton wide-body dump truck equipped with Allison's innovative 4800 wide-body dump series transmission.
Dave Graziosi: Our long-standing partnership with Lugang has been instrumental in our success in the global mining sector with this MOU promising continued collaboration and innovation as we progress towards our incremental annual growth.
Dave Graziosi: revenue target through share gains and market expansion.
Dave Graziosi: Also in our Outside North America on Highway end market, we recently announced our collaboration with Ashok Leyland.
Dave Graziosi: One of India's leading commercial vehicle manufacturers to introduce the first low floor city buses equipped with fully automatic transmissions in the southern India market.
Dave Graziosi: Allison's Torquematic series transmissions will equip the 12-meter diesel buses which are specially designed to accommodate passengers with disabilities.
Dave Graziosi: The Allison-equipped buses will replace buses currently equipped with manual transmissions, advancing transportation in the region, and showcasing our efforts to lead the transition to automaticity outside North America.
Dave Graziosi: Further driving our growth in outside North America on highway and market is our wheeled defense business. As a reminder, the wheeled portion of our defense business utilizes variants of our conventional on-highway products.
Dave Graziosi: with revenue from international customers flowing through our outside North America on-highway and market.
Dave Graziosi: Last week, we highlighted numerous releases which will support continued growth as a result of our strategic partnerships with vehicle manufacturers to support wheel defense programs internationally using Allison's specialty series on highway transmissions.
Dave Graziosi: To start, variants of our 4000 series fully automatic transmissions were chosen for the British Military Ministry of Defence.
Dave Graziosi: This is in addition to over 700 Boxer vehicles that have been delivered in recent years to countries including Australia, Lithuania, and the Netherlands.
Dave Graziosi: The Canadian Department of National Defense and the Romanian Ministry of Defense will also be receiving wheeled defense vehicles equipped with a 4000 series variant. In Poland, a new contract was signed for procurement of light armored reconnaissance carriers.
Dave Graziosi: equipped with a variant of Allison's 3000 series fully automatic transmission. Deliveries will span over the next decade to 2035.
Dave Graziosi: And finally, the United Kingdom Ministry of Defence.
Dave Graziosi: has placed an order for high-mobility trucks that will utilize a variant of Allison's 2000-series fully automatic transmission. As demonstrated by these releases, Allison has made significant strides in the global defense market with achievement of key program wins.
Dave Graziosi: We look forward to further growth across the defense industry as we leverage our commercial vehicle expertise.
Dave Graziosi: and relationship with OEMs along with decades of proven reliability and durability to offer a wide range of propulsion solutions that meet the diverse application requirements for tactical wheeled vehicles.
Dave Graziosi: Finally, as our end markets evolve, we remain committed to offering a portfolio of products designed to meet the needs of customers and industry regulations, regardless of technology and fuel source.
Dave Graziosi: Allison fully automatic transmissions are fuel agnostic, offering optimal integration with any fuel source including gasoline, natural gas, propane, and hydrogen.
Dave Graziosi: To compensate for the lower power and slower engine response associated with alternative fuels
Dave Graziosi: Allison's PowerShift technology and torque converter significantly improves startability, drivability, and overall productivity, particularly as compared to competitive manual and automated manual transmissions.
Dave Graziosi: In late August, we were pleased to announce that GLS, a global shipping leader, successfully completed 30,000 kilometers in its evaluation of the Allison-equipped Hyundai Exient hydrogen fuel cell truck.
Dave Graziosi: Since late 2023, GLS Germany has used the hydrogen fuel cell truck equipped with Allison's 4000 series fully automatic transmission to deliver packages in the greater Cologne area. Additionally, since March 2024,
Dave Graziosi: The truck has been used for long distance trips between Cologne and Mannheim.
Dave Graziosi: Allison's patented torque converter multiplies the drive motor's torque at startup, allowing the vehicle to operate with a smaller and less powerful drive motor, maximizing range and efficiency and helping to reduce vehicle costs.
Dave Graziosi: This pioneering integration exemplifies Allison's alternative fuel advantage and is a further step in the testing of environmentally friendly propulsion technologies.
Dave Graziosi: furthering our capabilities with hydrogen as a fuel source.
Dave Graziosi: We are pleased to announce our 4000 series fully automatic transmission was also integrated into a Class 8 truck equipped with a hydrogen internal combustion engine. That was displayed by Southwest Research Institute at Comvac in September.
Dave Graziosi: As our industry approaches 2027, there will be transitions in technologies for compliance under the EPA's Phase III Emissions Regulations.
Dave Graziosi: Announced during the quarter, we recently collaborated with Cummins to integrate and certify the Cummins B-Series engines with our Allison E-Gen Flex electric hybrid propulsion solution system for the transit bus market.
Dave Graziosi: The integration will meet the EPA's Phase III requirements while providing a reliable, low-emission propulsion solution in 2027 and beyond.
Dave Graziosi: Also, in pursuit of compliance to emission standards, we were pleased to announce an uprate to our B400 and B3400 XFE fully automatic transmissions.
Dave Graziosi: As the non-articulated bus industry transitions to the Cummins X-10 engine in order to meet the EPA's Phase 3 requirements,
Dave Graziosi: The increased ratings for our B400 and B3400 XFE models will enable fleets to continue specifying Allison products as the propulsion solution of choice.
Dave Graziosi: while continuing to deliver differentiated value that supports our customers' operational and sustainability goals.
Dave Graziosi: In summary, Allison's third quarter results demonstrate not only the robust demand in our core end markets, but also our long-term plans for growth as we invest in our manufacturing operations and our product portfolio.
Dave Graziosi: Our growth opportunities and investments highlight Allison's commitment to providing a diverse array of propulsion solutions that contribute to a reliable, more sustainable future in transportation.
Dave Graziosi: This concludes our prepared remarks. Kevin, please open the call for questions.
Kevin: Certainly. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Kevin: As a reminder, we ask that you please ask one question and then return to the queue, and that star 1 to be placed in the question queue.
Speaker Change: Our first question is coming from Ian Zepino from Oppenheimer, your line is now live.
Ian Zepino: Hi, great. Thank you very much. Good, very good quarter.
Ian Zepino: Just a quick question on the pricing outlook for next year, I know we're kind of getting into towards the end of the year. How are discussions going there? And what type of magnitude do we think we're going to expect?
Ian Zepino: The environment changed any of that thinking one way or the other. Thanks.
Ian Zepino: Thanks, Ian. This is Fred. I think as you're aware...
Ian Zepino: revenue in North America on highway. LTAs are coming due and we're, you know, in the middle of negotiating these currently.
Ian Zepino: As we've talked about in the past, we continue to deliver a significant amount of value to the end market.
Ian Zepino: you know, are fully automatics.
Ian Zepino: allow the commercial vehicles to operate more efficiently.
Ian Zepino: So the type of things that, you know...
Ian Zepino: that were more efficient we save on, have continued to inflate up. You know, overall vehicle cost is up, cost of drivers are up, cost of maintaining.
Ian Zepino: And so as we sit here right now...
Ian Zepino: I definitely feel well positioned. We're delivering a significant amount of value. There is very, very strong demand for our product. And we'll continue the negotiations and anticipate most of them concluding probably toward the later half of Q4.
Speaker Change: Okay, thank you very much.
Speaker Change: Thank you. Next question is coming from Rob Wertheimer from Melius Research. Your line is now live.
Rob Wertheimer: Good evening. I am sorry to ignore all the good news on announcements and trials and everything else in operations that you talked about. I wanted to focus just on the balance sheet, use of cash, and so on. I mean, you guys have been super clear over the years. You've been very aggressive in buying back shares.
Rob Wertheimer: I think, if I'm not mistaken, your cash balance is something like 8% or 9% of your market cap, and your maturities, I think, are out to 27%. So just curious if you're pausing for any reason on aggressiveness on share buyback, if there's anything being contemplated, or how to think about that. Thank you.
Fred Foley: Hi, Rob. It's Fred. I mean, we, as you mentioned, I mean, our, you know, capital allocation priorities are pretty clear. I mean, it's first, you know, funding, you know, organic revenue and earnings growth, and you see that with the recent announcement we made relative to manufacturing in India.
Fred Foley: You know, obviously we talked about a lot going on in the product development space. You know, certainly, you know, we've done some acquisitions and continue to look proactively at that. But, you know, our primary focus has been returning capital to shareholders.
Fred Foley: 63% of shares repurchased since we became a public company. We've increased the dividend five consecutive years, bringing it from $0.15 per share per quarter to $0.25 per share per quarter.
Fred Foley: It's certainly factual that we're holding a little higher cash balance than we have historically. We still are earning a very appropriate return on that. But, you know, long-term goal is to follow our capital allocation priorities and, you know, fund the business.
Fred Foley: and ultimately return the excess cash to shareholders.
Speaker Change: Manufacturing capital needs don't seem to be all that large versus what you have. So, I assume it's more timing differential. Maybe you have an acquisition you're not going to talk about, but more timing differential on spending that cash. I mean, do you intend to keep a higher-than-average balance long-term, do you think? And I'll stop there. Thanks.
Speaker Change: I think it really is timing of returning cash to shareholders, Rob.
Rob Wertheimer: Perfect, thank you.
Speaker Change: Thank you. Next question today is coming from Tim Fine from Raymond James. Your line is now live.
Tim Fine: Thank you. Good afternoon. I just wanted to come back to the $400 million growth opportunity or outgrowth opportunity you guys have outlined for some time and it you know it's it's a little hard to see externally where where you're falling on that but you talked about I mean and maybe defense is where we've seen a little bit more traction but
Tim Fine: and just kind of those four...
Tim Fine: drivers that you talked about. I mean, where are we in terms of marching towards that? Is it in any sort of...
Tim Fine: framework as to how to think about a potential timeline.
Tim Fine: may be purposefully or intentionally nebulous in terms of the timing when you set it, but I'm just curious if you could come back to that as to how we're, you know, moving towards those targets or goals. Thank you.
Dave Graziosi: Tim, it's Dave, let me just try to cover that off for you.
Dave Graziosi: From a growth initiative perspective, we really highlighted four things, wide-body mining dump, Fractran, the regional haul, a Class 8 tractor, DACAB, and of course defense, starting with defense, as you mentioned that one specifically. We continue to make very good progress there. I think you could tell by the prepared remarks. I think the team has done an excellent job.
Dave Graziosi: frankly spreading our customer base outside of the U.S. at this point. So obviously focused on working with allies, but we see, continue to see a tremendous amount of opportunity there.
Dave Graziosi: growth target if not more. So, as we've discussed several times, the defense
Dave Graziosi: the eGenForce as well as variants of our
Dave Graziosi: other cross-drive products continue to be received very well in the market. So the focus there, the key will be some of the newer U.S.-sponsored programs as well as a number of outside North America initiatives.
Speaker Change: Regional Hall, Class 8.
Speaker Change: Tractor Daycab, making I think decent progress there although I would tell you
Speaker Change: market conditions. As you know we've talked several times on our calls this year and frankly late last year. Some of the softness that you're seeing in the tractor market.
Speaker Change: is having an impact there in terms of just overall volume that's actually achievable at this stage. So the team has done, I think, a very good job securing releases and driving it from a pull perspective with various fleets.
Speaker Change: But that market will largely, the outcome there will be tied to overall demand in terms of the tractor market recovering. Fractran, as you know, was purpose-built and designed for hydraulic fracturing applications.
Speaker Change: As we've again said several times during the year on other calls, the hydraulic frac right now in terms of overall capex is rather muted. Very disciplined approach by end users in terms of spend.
Speaker Change: of that particular technology, it's also allowing us to
Speaker Change: expand into some of the newer applications within hydraulic frack around different energy sources, et cetera. So I think the team has done a solid job there, working with a number of core partners of ours. And finally, with the wide-body mining dump,
Speaker Change: beyond the prepared comments and some of the releases that we've talked about this year, that particular initiative I would describe as making very solid progress. Again, some of that being tied to
Speaker Change: market conditions where you're seeing a level of global demand, as you well know, a bit mixed, but despite those market conditions.
Speaker Change: The other three initiatives, it's really just a function of time and broader market conditions there.
Speaker Change: Understood. Thank you, Dave.
Speaker Change: Thank you. Next question is coming from Angel Castillo from Morgan Stanley. Your line is now live.
Angel Castillo: Thanks gentlemen, I appreciate that you're taking my question.
Angel Castillo: I just wanted to touch base on the fourth quarter a little bit more. It seemed like it's a pretty wide range in terms of the EBITDA implied, of kind of 20% decline year-over-year to potentially flat.
Speaker Change: and, you know, this year we've averaged 12-13 million dollars in revenue a day. So, you play that out, you know, our expectation is that they're not going to build at the levels they've built the last couple years.
Speaker Change: And they're probably going to go back to the normal seasonality that we've seen, you know, pre-pandemic, you know, 18-19, where Q4 would be soft. So that's really at the starting point.
Speaker Change: You know we do have
Speaker Change: As you look across, we've got engineering SG&A slightly elevated sequentially, but the biggest driver really is the top line and the type of margins that we make.
Speaker Change: What would drive the performance higher is clearly, you know, if the OEMs, you know, attempt to work more days.
Speaker Change: basically working Saturdays or into the holidays. But at this point, where they are relative to, I think, their total order boards and the softness that you're seeing across line haul.
Speaker Change: just makes this year stack up a little different than what we've seen the last couple years.
Speaker Change: Very helpful.
Speaker Change: Thank you next question is coming from Tammy Zakaria from JP Morgan your line is now live
Speaker Change: Hi, afternoon, very nice quarter. Two questions for you. The first one is about the facility investment in India. I think you mentioned capacity is doubling there.
Tammy Zakaria: So, when you ramp to full production in 2027, what kind of incremental volume do you expect versus what it is right now? I'm trying to understand the size of the incremental sales opportunity from this increased capacity in 2027.
Dave Graziosi: Tammy, good evening. It's Dave. I appreciate the question there. So, to be clear, when we talk about capacity expansion, we are doubling the manufacturing square footage in India.
Dave Graziosi: In terms of capacity, it's focused on our on-highway products.
Dave Graziosi: specifically around fabrication for our 3 and 4,000 series products.
Dave Graziosi: That capability will allow us to, frankly, meet the growth demand that we're seeing out of our facility in Hungary that assembles our 3 and 4000 series transmissions as well. So, to answer your question in terms of overall...
Dave Graziosi: plus, you know, plus or minus 20% increase. So you figure somewhere in that range of 10 to 20%. Again, depending on availability for all components, et cetera, but we are not expanding capacity for assembly.
Dave Graziosi: its expanding capacity for fabrication for demand outside North America.
Speaker Change: Got it, got it. Okay, that's very helpful. And my second question is, I think you mentioned unprecedented demand in vocational trucks right now. How do you see this demand playing out over the next...
Speaker Change: Well, I think it's an excellent question and one I think a number of parties are contemplating I would just
Speaker Change: tell you we don't use the word unprecedented lightly.
Speaker Change: sensing any level of pullback on overall demand. You know, as we've talked about on prior calls, you had a...
Speaker Change: vocational products. So whether that be infrastructure spending, other investment initiatives and incentives, they are out there and driving demand. So.
Speaker Change: We are, again, seeing nothing at this point that would tell us that, you know, this is a near-term
Speaker Change: end in sight.
Speaker Change: I think, quite frankly, at least from the public comments of vehicle OEMs.
Speaker Change: I think they've indicated across the board very strong demand well into 2025.
Speaker Change: One could conclude the cycle gets stretched out further simply because demand can't be currently met. You also have the other...
Speaker Change: Governor in the process which is the amount of capacity that's out there in terms of bodybuilders and what those lead times are and much of that is not really tied necessarily to material as much as it is just conversion which is skilled labor availability etc which we've
Speaker Change: mentioned many times on our calls and one that we continue to see as a constraint throughout the industry.
Speaker Change: Agreed. Wonderful. Thank you.
Speaker Change: Thank you. Our next question today is coming from Kyle Menges from Citigroup. Your line is now live.
Kyle Menges: Thanks. I was hoping if you could provide a little more insight into parts performance in the quarter. I noticed that for the first
Speaker Change: A couple quarters had been calling out North America as the area of weakness, but now it's turned to just
Speaker Change: Globally seeing some weakness, so it would be helpful to understand which geographies potentially still
Speaker Change: still seeing some weakness or maybe some recovery and just how to think about parts into next year and what it would take to see parts growth next year and what geographies would be likely to drive that. Thank you.
Speaker Change: Sure, Kyle. This is Fred.
Speaker Change: Thank you.
Speaker Change: Really on a year-over-year basis, you know, there wasn't significant...
Speaker Change: Movement from Parts. When you think about where we are full year, certainly, you know, the first half of 2023 was a pretty challenging comp coming into 2024.
Speaker Change: You know as we're looking at
Speaker Change: you know, at the balance of the year, you know.
Speaker Change: Q4 could be down, you know.
Speaker Change: mildly you know sequentially and then as you look out into in the you know 2025 I think it's still going to be a you know a fairly good year you're sitting here where you know 24 is going to be your second best year on record next to 2023
Speaker Change: So, I think the outlook, you know, looks fairly robust rolling into 2025 at this point, but we don't see it returning to the, you know, H1 2023 level because all that pent-up demand has really been satisfied at this point.
Speaker Change: Helpful, thank you.
Speaker Change: Thank you. Next question is coming from Luke Young from Baird. Your line is now live.
Luke Young: Good evening everyone, thanks for taking the question. Another capacity question for me, specific to Allison's capacity and just hoping you can frame up the levers that you have to pull on throughput from here, thinking specifically in North America, you know, without adding material, materially to capacity, I guess, if I look through the lens of defense this quarter, seems like there might be some additional breathing room opportunity. And maybe if you could speak relative to potential pre-buy as we move through later next year into 26, and just your ability to scale up without adding significantly to overhead, including maybe offloading some incremental volume into that capacity expansion in India as you move through the peak. Thank you.
Dave Graziosi: Hello, it's Dave. I appreciate the question. So, in terms of capacity, as we mentioned, it's not only
Dave Graziosi: throughout our supply base, as well as the internal that we've already talked about. I would certainly offer the comments in terms of what we prepared. It's important to note, and I mentioned this briefly earlier,
Dave Graziosi: You know, the industry is specifically around North America on highway, for instance, running at...
Dave Graziosi: Very high rates becomes a real challenge from a consumption of capital. So between the pressure on labor as well as just pressure on operations, it really requires a very diligent...
Dave Graziosi: industry-wide initiative around, you know, maintenance, etc. And when you're running at very elevated levels, it really is quite challenging. So, you know, we've certainly throughout our
Dave Graziosi: Investing in upgrading our equipment as well as some level of automation.
Speaker Change: to address, I think, your point about how you think about an overhead structure.
Speaker Change: But the fact remains, as I said earlier, there are limits right now that we see in the industry. It still takes all the components to make the vehicle, so there are certainly constraints. I do not believe that across the entire industry.
Speaker Change: that we're making in India are part of the reason for that, a justification is to really relieve some of the pressure that we have throughout our operations and our suppliers. So to get back to what we refer to as lean capacity rate operations which are.
Speaker Change: in terms of defense on the cross-drive side.
Speaker Change: We have significant capital plans.
Speaker Change: being executed for our cross-drive facility. Some of that capital is actually funded by the U.S. government. It's a contractor-owned, contractor-operated structure that leads us to or puts us in a position of having a relatively asset-light facility.
Speaker Change: business there. So to your point on overhead or really structuring the operation, we staff it and structure it as...
Speaker Change: efficiently as we can.
Speaker Change: efficient operations simply because it's a low volume batch type manufacturing. Our team over the years has.
Speaker Change: that type of variability in terms of volume. We're also mitigating some of that as to the earlier question on growth initiatives to grow our defense business specifically in cross-strike.
Speaker Change: to level out, if you will, production in that facility, which allows us to perform better but also...
Speaker Change: reduce the cost to the U.S. government in terms of cost-plus type
Speaker Change: So a lot of work going on there. But overall, I think capacity, as Fred mentioned earlier in terms of cap allocation, we are investing in growing the business organically, also heavily in terms of research development, et cetera. So we would look at the business today as very well funded.
Speaker Change: and we just need to execute and get these growth initiatives further evolved in terms of market conditions.
Speaker Change: Thank you for all that, Dave. Appreciate it.
Speaker Change: Thank you. Next question is coming from Jerry Revitch from Goldman Sachs. Your line is now live.
Jerry Revitch: Yes, hi. Good afternoon and good evening.
Jerry Revitch: I'm wondering if I just ask two questions. One, on EPA 2027 with the increase in trucks, you know, you folks
Jerry Revitch: They have a higher value proposition and higher cost trucks, and I'm wondering...
Jerry Revitch: conversation. Can you just talk about your level of confidence in the sustainability of demand because we're down to, you know, four and a half months of backlog. We have peaked at 10 or 11 months.
Jerry Revitch: And so, I guess when we've seen other capital goods product lines have supply outpaced demand, what gives you confidence that we're not going to hit that same point here as we look out three, four, five months, especially given where Class H trade inventories are.
Dave Graziosi: Jerry, it's Dave. I appreciate the question. In terms of EPA 2027, I think it's fair to say still quite a few questions out there in terms of
Dave Graziosi: We think of things in the context of we're always trying to grow our position in terms of penetration rates and focus on the areas, as Fred mentioned earlier, in terms of our value proposition.
Dave Graziosi: We are certainly, I think, very much strongly demonstrating the value of our fully automatic technology in that space.
Dave Graziosi: But overall, I think we're, you know, very pleased going into 2027 with the portfolio that we have. We're well aligned to work with at least what's been
Dave Graziosi: developed and I would say certainly presented to the market in terms of a number of different alternative energy sources, etc. So we feel very good about that and I'll let Fred cover that Class H straight truck question.
Fred: Yeah, Jerry, I mean, it's...
Fred Foley: You know is clearly unprecedented and we had last week ACT research in here
Fred Foley: You know one thing that they were highlighting was really where the stimulus programs are and still very early innings You know thinking about the CHIPS Act, you know IRA
Fred Foley: maybe only 20% in at this point. Infrastructure Investment and Jobs Act, about 50% in. So there's still a significant amount of stimulus money in the U.S.
Fred Foley: that's out there to ultimately be funded.
Fred Foley: You know, we've got, you know, the pre-buy potential, you know, in 26 and maybe even into 25. I think those are Dave's earlier comments.
Fred Foley: There is, I think, a real question of how much higher can it go because, you know, everybody in that vocational space is constrained at this point, you know, component suppliers, body builders.
Fred Foley: But the demand is clearly there with, I mean, just absolutely no signs of slowing down.
Speaker Change: Thank you.
Speaker Change: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Dave for any further closing comments.
Dave Graziosi: Thank you, Kevin. And thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.
Speaker Change: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.