Q2 2025 Allison Transmission Holdings Inc Earnings Call

Paul: Good afternoon. Thank you for standing by. Welcome to Allison Transmission's second quarter 2025 earnings conference call. My name is Paul, and I will be your conference call operator today. 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. As a reminder, this conference call is being recorded. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Jackie Bowles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Good afternoon, thank you for standing by. Welcome to Allison Transmissions, second quarter 2025 earnings conference call. My name is Paul, and I will be your conference call Operator. Today 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 begin given instructions at that time.

Jacalyn Bolles: Thank you, Paul. Good afternoon, and thank you for joining us for our second quarter 2025 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bollie, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. 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 August 18th. 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 2025 earnings press release and our annual report on Form 10-K for the year ended December 31st, 2024.

As a reminder, this conference call is being recorded. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference. Call over to Jackie Bulls executive director of Treasury and investor relations. Please go ahead, Jackie.

Thank you, Paul. Good afternoon, and thank you for joining us for our second quarter 2025 earnings conference.

With me this afternoon, our Dave grovel, our chair and chief executive officer spread bully, our chief operating officer and Scott Mel our Chief Financial Officer and treasurer.

As a reminder this conference call webcast. In this afternoon's, presentation are available on the investor relations section of Allison, transmission.com.

A replay of this call will be available through August 18th.

As noted on slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations.

Jacalyn 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 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 and the most comparable GAAP measures attached as an appendix to the presentation and to our second quarter 2025 earnings press release. Today's call is set to end at 5:45 PM Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst. Please turn to slide four of the presentation for the call agenda. During today's call, Dave Graziosi and Fred Bollie will review recent announcements across our business, including the recently announced acquisition of Dana Incorporated's off-highway business.

These forward-looking statements are subject to known and unknown risks, including those set forth in our second quarter 2025 earnings press release and our annual report on Form 10-K for the year ended December 31, 2024.

Materially from those that we expressed today.

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.

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 2025 earnings press release.

Today's call will conclude at 5:45 p.m. Eastern Time in order to maximize participation opportunities on the call. We'll take just one question from each analyst.

Please turn to slide 4 of the presentation for the call agenda.

Jacalyn Bolles: Scott Mell will then review our second quarter 2025 financial performance and full year 2025 guidance prior to commencing Q&A. Now, I'll turn the call over to Dave.

During today's call Dave, gravios, and Fred boly will review recent announcements, AC our business, including the recently announced acquisition of Dana Incorporated, its off-highway business.

Scott Mel will then review. Our second quarter 20125. Financial performance in full year 2025 guidance, prior to commencing Q&A.

David Graziosi: Thank you, Jackie. Good afternoon, and thank you for joining us. Starting with recent non-acquisition related news during the quarter, we were pleased to announce that the Allison 3000 Series is now available in the CNG-powered Mack Granite truck. Following the successful launch in 2023 of our 4500 Series in the same vehicle, this expanded powertrain option gives customers more flexibility to optimize their trucks, specifically for lighter-duty waste applications. As mentioned on previous calls, Allison fully automatic transmissions are fuel agnostic, leveraging our torque converter to ensure peak performance and fuel efficiency, pairing well with different fuel types, including diesel, compressed, natural gas, and other alternatives. Unlike manuals and automated manual transmissions, our automatics maintain seamless full-power shifts, enabling vehicles to travel farther in less time. This allows fleets to achieve sustainability goals without sacrificing productivity.

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

Thank you, Jackie. Good afternoon, and thank you for joining us. Starting with recent non-acquisition related news during the quarter, we were pleased to announce that the Allison 30000 series is now available in the CNG, powered Mack, Granite truck.

Following the successful launch in 2023 of our 4500 Series in the same vehicle this expanded. Powertrain option. Gives customers customers more flexibility to optimize their trucks specifically for lighter Duty, waste applications,

As mentioned on previous calls, Allison, fully automatic transmissions are fuel-agnostic, leveraging our torque converter to ensure peak performance and fuel efficiency. This pairing works well with different fuel types, including diesel, compressed natural gas, and other alternatives.

Unlike manuals and automated manual transmissions our automatic maintains seamless, full power shifts, enabling vehicles to travel farther in less time.

David Graziosi: We are proud to partner with Mack on this initiative, highlighting Allison's ability to deliver optimized performance and capability in demanding vocations indifferent to the fuel source for the powertrain. Also, during the quarter, we announced that the Maryland Department of Transportation selected buses equipped with the Allison E-Gen Flex hybrid propulsion system to operate in the metropolitan Baltimore region. Allison remains committed to collaborating with transit agencies nationwide, supporting them in their emission reduction goals by providing innovative solutions to achieve their sustainability goals. Over the last few years, we have made numerous announcements of transit properties across the United States, selecting the Allison E-Gen Flex as the propulsion solution of choice for their city buses. We are excited to add Maryland to the growing list.

This allows fleets to achieve sustainability goals, without sacrificing productivity.

We are proud to partner with Mac on this initiative highlighting, Allison's ability to deliver optimized performance and capability and demanding vocations in different to the fuel source for the powertrain.

Also, during the quarter, we announced that the Maryland Department of Transportation. Selected buses equipped with the Allison een Flex hybrid propulsion system to operate in Metropolitan Baltimore region,

Allison remains committed to collaborating with transit agencies nationwide, supporting them in their emission reduction goals by providing innovative solutions to achieve their sustainability goals.

David Graziosi: Finally, within our defense and market, we are excited to announce that Allison has secured a new order for 3040 MX cross-drive transmissions for Poland's Porsuk Infantry Fighting Vehicle Program. This order maintains the follows the Memorandum of Understanding announced in 2023 between Allison and PGZ, one of the largest defense companies in Europe, for the cooperation on track vehicle programs and the expansion of our authorized service network in Poland. Our new 3040 MX brings Allison's proven durability, reliability, performance, and innovation to the medium track vehicle segment. The 3040 MX offers several key improvements that enhance its overall performance, including advanced electronic controls with integrated diagnostics, making it a significant step forward in defense vehicle propulsion.

Over the last few years, we have made numerous announcements of Transit properties across the United States, selecting the Allison eGen Flex as the propulsion solution of choice for their city buses. We are excited to add Maryland to the growing list.

Finally, within our defense and market, we are excited to announce that Allison has secured a new order for 3,040 MX cross drive transmissions for Poland's Pursuit Infantry Fighting Vehicle program.

This order maintains the me follows the memorandum of understanding announced in 2023 between Allison and PGC 1 of the largest Defence companies in Europe. For the cooperation on track vehicle programs and the expansion of our authorized service network in Poland.

David Graziosi: Also, in our defense and market, Allison was recently awarded a multimillion-dollar contract by the United States Army through their Ground Vehicle System Center for the second phase of the Next Generation Electrified Transmission, or NGEP program. We also refer to this product as the E-Gen Force. Following our announcement in 2022, highlighting the award of funding for phase one of the NGEP program, we are excited to continue our partnership with the Ground Vehicle System Center on this vital project. Phase two, which will focus on enhancing the e-machine and inverter system, will bring us one step closer to delivering propulsion systems that not only meet but exceed the performance and efficiency needs of modern armored combat vehicles. With the E-Gen Force, Allison anticipates meeting requirements across a wide spectrum of applications, including the U.S.

Our new 3040 MX Springs. Allison's proven durability, reliability, performance and Innovation to the medium tracked, vehicle segment. The 3040 MX offers several key improvements that enhance its overall performance, including Advanced electronic controls with integrated Diagnostics, making it a significant step forward in Defence vehicle propulsion.

Also, in our defense and Market Allison was recently, awarded a multi-million dollar contract by the United States Army through their ground Vehicle Systems center, for the second phase of the Next Generation, electrified transmission, or engine program.

We also refer to this product as the ijen force following our announcement in 2022, highlighting the award of funding for Phase, 1 of the nje program. We are excited to continue our partnership with the ground vehicle system center on this vital project.

Phase 2, which will focus on enhancing the e-m machine and inverter system will bring us 1 Step Closer to delivering propulsion systems, that not only meet, but exceed, the performance and efficiency needs of modern armored combat vehicles.

David Graziosi: Army's Optionally Manned Fighting Vehicle, or OMFV, and main battle tank markets around the world. As a reminder, the OMFV program is expected to replace nearly 3,000 aging legacy Bradley vehicles, making it the U.S. Army's largest armored vehicle procurement since the 1980s. The Allison E-Gen Force has been selected by American Rheinmetall for integration into its OMFV offering. Currently in a development and prototype phase, the OMFV program is expected to progress into 2026, with U.S. government testing of vehicles and startup production in 2029. With our expanded portfolio and authorized service network, Allison is well-positioned to continue growth in the defense and market. We look forward to further announcements and awards, with realization of our over $100 million incremental annual revenue objective this year and future growth opportunities, including products such as the E-Gen Force.

Ally man fighting vehicle or omfv and main battle, tank markets around the world.

As a reminder, the MFE program is expected to replace nearly 3,000 aging Legacy Bradley vehicles, making it the U.S. Army's largest armored vehicle procurement since the 1980s.

The Allison EJ and force has been selected by American Ryan Matal for integration into its OMFV offering.

Currently in the development and prototype phase. The MFE program is expected to progress into 2026 with US Government testing of vehicles and startup production in 2029.

David Graziosi: I will now turn the call over to Fred for a recap of our strategic priorities and growth opportunities related to our recently announced acquisition of Dana's off-highway business. Fred?

With our expanded portfolio and authorized service network, Allison is well positioned to continue growth in the defense market. We look forward to further announcements and awards with the realization of our over $100 million incremental annual revenue objective this year, as well as future growth opportunities, including products such as the eEN Force.

Frederick Bohley: Thank you, Dave. Good afternoon. As we announced in June, Allison has entered into a definitive agreement to acquire Dana's off-highway business. Today, I would like to briefly review the transaction while providing additional details on the strategic rationale and future growth opportunities. Please turn to slide five of the presentation for an overview of the transaction highlights. The purchase price of approximately $2,700 million to be financed with new debt and cash on hand represents a 6.8 times multiple on 2024 adjusted EBITDA of approximately $400 million, including identified annual run rate synergies of $120 million. That transaction value represents a 5.2 times multiple on the same metric. The $120 million of identified annual run rate synergies are expected to be primarily driven primarily by opportunities in operations, procurement, engineering, IR&D, and SG&A. Synergies are expected to ramp with full realization anticipated by year four.

I will now turn the call over to Fred for a recap of our strategic priorities and growth opportunities related to our recently, announced acquisition of Dana's off-highway business Fred. Thank you, Dave, good afternoon.

As we announced in June Allyson has entered into a definitive agreement to acquire, Dana's off Highway business.

Today, I would like to briefly review the transaction while providing additional details on the Strategic, rationale, and future growth opportunities.

Please turn to slide 5 of the presentation for an overview of the transaction highlights.

The purchase price of approximately $2.7 billion, to be financed with new debt and cash on hand, represents a multiple of 6.8 times on 2024, based on EBITDA of approximately $400 million.

Including identified annual run rate synergies of $120 million, that transaction value represents a 5.2 times multiple on the same metrics.

The 120 million.

Of identified annual run rate, synergies are expected to be primarily...

Or, or expected to be driven, primarily by opportunities and operations, procurement engineering R&D and sgna.

Frederick Bohley: We anticipate closing in late Q4 2025. Please turn to slide six of the presentation. As discussed on prior earnings calls, we believe Allison merits evaluation that is more aligned with other publicly traded premier industrial assets. Our robust and stable cash generation and comparative margin performance, along with current market position and future growth opportunities, warrant this belief. The acquisition of Dana's off-highway business will strengthen our position as a premier industrial company, accelerating current growth objectives while multiplying future global growth opportunities. Starting with facilities and people, Allison's global reach will increase significantly with the addition of the Dana off-highway team and manufacturing presence across the globe. We will leverage Dana's off-highway global footprint for more local-for-local production, with increased proximity to customers and markets, providing advantages in meeting both commercial and government customers' requirements.

Synergies are are expected to ramp with full realization anticipated by year 4.

We anticipate closing in late Q4 2025.

Please turn to slide 6 of the presentation as discussed on prior earnings calls. We Believe Allison merits evaluation. That is more aligned with other publicly traded Premier industrial assets.

Our robust and stable cash generation.

And comparative margin performance along with current market position and future growth opportunities, warrant disbelief.

The acquisition of Dana's off-highway business will strengthen our position as the premier industrial company, accelerating current growth objectives while multiplying future global growth opportunities.

Starting with facilities and people Allison's Global reach will increase significantly with the addition of the Dana off Highway team and Manufacturing presence across the globe.

Frederick Bohley: One example of this is in the India defense market, where content requirements are critical for program releases and awards. We are excited for the post-close welcome of the Dana off-highway team joining Allison. The combined company will comprise a sophisticated global workforce of nearly 15,000 employees, with the addition of Dana's off-highway teams, which are located primarily outside of North America. This complements Allison's current workforce demographics, where 90% of our employee base is located in the United States. In terms of products and customers, Allison is well-positioned for growth within corresponding propulsion categories that will extend the applications of our existing and combined portfolios. We believe that the combined business's increased set of capabilities and products will allow Allison to penetrate and expand into markets that are growing, yet currently underserved by our core business, such as the agricultural and construction markets.

We will leverage Dana's off, Highway Global footprint for more local for local production, with increased proximity to customers and markets, providing advantages and meeting both commercial and government customers requirements.

One example of this is in the India defense market, where content requirements are critical for program releases and awards.

We are excited for the post-close welcome of the Dana off-highway team joining Allison. The combined company will comprise a sophisticated global workforce of nearly 15,000 employees with the addition of Dana's off-highway teams, which are located primarily outside of North America. This complements Allison's current workforce demographics.

We're 90% of our employee Base is located in the United States.

In terms of products and customers, Allison is well-positioned for growth within corresponding propulsion categories that will extend the applications of our existing and combined portfolios.

Frederick Bohley: In addition, the acquisition allows us to utilize and advance electrified products that are already serving mature, early-adopting markets and segments. Through the combined business, Allison will utilize the Dana off-highway business global technology centers for local development and realize cost synergies through combined engineering IR&D. We believe that complementary technical knowledge within the combined businesses in areas such as software and controls will accelerate product innovation and progress on key engineering capabilities and initiatives. Allison also expects to reduce costs through greater purchasing scale, as well as vertical integration opportunities, while manufacturing locations in best-cost countries provides opportunities for cost reduction initiatives within our operations. With this acquisition, Allison will continue our long history of engineering expertise, delivering products known for quality, reliability, and durability across diverse drivetrain components and work solutions.

We believe that the combined businesses increase set of capabilities and products will allow Allison to penetrate and expand into markets that are growing yet currently underserved by our Core Business, such as the Agricultural and construction markets. In addition, the acquisition allows us to utilize and advanced electrified products that are already serving mature, early adopting in markets and segments

Realized cost synergies through combined engineering ir&d. We believe that complimentary technical knowledge within the combined businesses in areas such as software and controls will accelerate product Innovation and progress on key engineering capabilities and initiatives.

Allison also expects to reduce costs through greater purchasing scale as well as vertically vertical integration opportunities.

While manufacturing locations in best cost countries, provide opportunities for cost reduction initiatives within our operations.

Frederick Bohley: Finally, while our focus on day one post-close will be the combination of the two businesses, the Dana off-highway business's established M&A playbook and the broader platform of the combined companies expand Allison's opportunities for further inorganic growth. In this transformational moment in Allison's history, we are confident in our ability to combine the two businesses while realizing the identified annual run rate synergies and maintaining our focus on solid financial performance and continued growth as a premier industrial company. We appreciate your support as we move through this period. Thank you, and I'll now turn the call over to Scott.

With this acquisition, Allison will continue our long history of injury and expertise delivering products known for Quality reliability and durability across diverse, drivetrain components, and work Solutions.

finally while our focus on day 1 post-close will be the combination of the 2 businesses, the data off Highway business established m&a Playbook, and the broader platform of the combined companies, expands Allison's opportunities for further inorganic growth,

In This transformational Moment In Allison's history, we are confident in our abilities combined into businesses where realizing the identified annual run rate synergies and maintaining our focus on solid financial performance and continued growth as a premier Industrial company.

We appreciate your support as we move through this period.

David Graziosi: Thank you, Fred. I'll begin on slide seven with a review of our second quarter financial performance, followed by an update to our full year 2025 guidance. Year-over-year net sales of $814 million were flat from the same period in 2024. In the defense and market, we continue to execute on our growth initiatives, with second quarter net sales increasing 47% year-over-year. Our top-line results were further improved by record quarterly net sales of $142 million, an 11% increase year-over-year in the outside North America on-highway and market. The increase was principally driven by higher demand in South America and Europe. Finally, in the service parts, support equipment, and other in-market, year-over-year net sales increased 6% in the second quarter, principally driven by higher demand for service parts and price increases on certain products, partially offset by lower demand for aluminum die cast components.

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

Thank you, Fred.

I began on slide 7 with a review of our second-quarter financial performance.

Followed by an update to our full-year 2025 guidance.

Year-over-year, net sales of $814 million were flat from the same period in 2024.

In the defense End Market, we continue to execute on our growth initiatives with second quarter, net sales, increasing 47% year-over-year.

To Topline results were further improved by record quarterly, net sales of 142 million and 11% increase year-over-year in the outside North America on Highway and Market.

The increase was principally driven by higher demand in South America and Europe.

Finally, in the service Parts support equipment and other in Market year-over-year, net sales increased 6% in the second quarter.

Principally driven by higher demand for service parts and price increases on certain products.

David Graziosi: The aforementioned year-over-year net sales increases were offset by a 30% decrease in the global off-highway and market and a 9% decrease in the North America on-highway and market. Our second quarter results demonstrate the diversity of Allison's in-markets and the incremental sales opportunities available from growth initiatives. Moving on with our second quarter financial performance. Gross profit for the quarter was $402 million, an increase of $8 million from $394 million for the same period in 2024. The increase was principally driven by price increases on certain products, partially offset by lower volumes and unfavorable direct material costs. Net income for the quarter was $195 million, an increase of $8 million from $187 million for the same period in 2024.

Partially offset by lower demand for aluminum die-cast components.

the aforementioned year-over-year, net sales increases for offset by a 30% decrease in the global off-highway and Market

And a 9% decrease in the North America on Highway in Market.

our second quarter results, demonstrate the diversity of Allison's in markets and the incremental sales opportunities available from growth initiatives,

Moving on with our second quarter financial performance.

Gross profit for the quarter was 402. Million.

An increase of 8 million from 394 million for the same period in 2024.

The increase was principally driven by price increases on certain products, partially offset by lower volumes and unfavorable direct material costs.

David Graziosi: The increase was principally driven by higher gross profit and unrealized mark-to-market adjustments for marketable securities, partially offset by increased selling, journal, and administrative expenses, including $15 million of costs associated with the acquisition of Dana's off-highway business. Adjusted EBITDA for the quarter was $313 million, an increase of 4% year-over-year. Adjusted EBITDA margin for the quarter was 38.5%, an increase of 160 basis points year-over-year. Diluted earnings per share increased 8% year-over-year to a quarterly record of $2.29. The increase was driven by higher net income and lower total diluted shares outstanding. A detailed overview of our net sales by in-market and Q2 2025 financial performance can be found on slides eight and nine of the presentation. Please turn to slide 10 of the presentation for the Q2 2025 cash flow performance summary.

Net income for the quarter was 195, million and increase of 8 million from 187 million. For the same period in 2024.

The increase was principally driven by higher gross profit and unrealized mark-to-market adjustments for marketable, securities.

Partially offset by increased selling General and administrative expenses.

Including 15 million dollars of costs associated with the acquisition of Dana's off-highway business.

Adjusted. EBA for the quarter was 313 million.

An increase of 4% year-over-year.

But a margin for the quarter.

Was 38.5%.

An increase of 160 basis points year-over-year.

Due to the increase in earnings per share of 8% year-over-year.

To a quarterly record $2.29.

The increase was driven by higher net income.

And lower total diluted shares outstanding.

Presentation.

Please turn the slide. 10 of the presentation for the Q2, 2025, cash flow, performance summary.

David Graziosi: Net cash provided by operating activities for the quarter was $184 million, compared to $171 million for the same period in 2024. The increase was principally driven by lower operating working capital funding requirements and higher gross profit, partially offset by acquisition-related expenses. We ended the first quarter with a net leverage ratio of 1.38 times, $778 million of cash, and $745 million of available revolving credit facility commitments. We continue to maintain a flexible, long-dated, and covenant-like debt structure, with our earliest maturity due in October of 2027. Please turn to slide 11 of the presentation for our 2025 guidance update. Given current end market conditions, anticipated acquisition-related expenses, and expected favorable cash income tax impacts from the recently passed One Big Beautiful Bill Act, we are revising our full year 2025 guidance provided to the market on May 1st.

Net cash provided by operating activities for the quarter was 184 million.

Compared to 171 million for the same period in 2024.

The increase was principally driven by lower operating working capital funding requirements and higher gross profit, partially offset by acquisition-related expenses.

We ended the first quarter with a net leverage ratio of 1.38 times.

778 million of cash.

And $745 million of available revolving credit facility commitments.

We can continue to maintain a flexible long-dated and Covenant, light debt structure with our earliest maturity due in October of 2027.

Please turn to slide 11 of the presentation for our 2025 guidance update.

Given current and market conditions.

Anticipated acquisition related expenses and expected favorable, cash income tax impacts from the recently passed 1, big beautiful, bill act.

We are revising our full year 2025 guidance provided to the market on May 1.

David Graziosi: Allison now expects net sales to be in the range of $3,075 million to $3,175 million. In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $640 to $680 million, adjusted EBITDA in the range of $1,130 million to $1,180 million, net cash provided by operating activities in the range of $785 to $835 million, capital expenditures in the range of $165 to $175 million, and adjusted free cash flow in the range of $620 to $660 million. Finally, I'd like to note that we are maintaining the midpoint of the implied full-year adjusted EBITDA margin guidance. This concludes our prepared remarks. Paul, please open the call for questions.

Allison. Now expects net sales to be in the range of 3 billion. 75 million

To 3,175 million.

In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $640 million to $680 million, and adjusted EBITDA in the range of $1.13 billion to $1.18 billion.

Net cash provided by operating activities in the range of 785 to 835 million.

Capital expenditures in the range of 165 to 175 million.

And adjusted free cash flow in the range of $620 million to $660 million.

Finally, I'd like to note that we are maintaining the midpoint of the implied, 4-year adjusted IBA, ibida, margin guidance.

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

Operator: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation column will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment, please, while we pull for questions. Thank you. Our first question is from Rob Wertheimer with Mellie's Research.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation time will indicate your line is in the question queue? You may press star 2 to remove your question from the queue. For participants using speaker equipment and may be necessary to pick up the handset. Before pressing the star keys, in the interest of time, we have the participants limit themselves to 1 question and 1 follow-up.

1 moment, please while we pull for questions.

Thank you. Our first question is from Rob wartimer with Melius research.

Rob Wertheimer: Hey, Johnny. I wanted to see if you could expand on your comments. I mean, with the acquisition bringing you incremental geographic and other capabilities, you talked about the potential for inorganic growth. Could you characterize that? Does that mean there's bolt-ons, tuck-ins, et cetera, that could fit, or do you have in mind any potentially other large assets? Thank you.

I wanted to see if you'd expand on your comments. I mean, with the acquisition bringing you incremental graphic and other capabilities, you talked about the potential for immigrant growth. Could you characterize that? Does that mean there's bolt-ons, tuck-ins, etc., that could fit, or do you have in mind any potentially other large assets? Thank you.

Scott Mell: Hi, Rob. This is Fred. You know, relative to potential inorganic growth, you know, if you think of a pre-acquisition, you know, North American-centric, you know, very strong market share, clearly growing outside North America, you know, record quarter, you know, but we believe is that this transaction with a larger global footprint across on-highway, off-highway, agricultural, construction, you know, in markets, presence in Europe, significant presence in Asia will ultimately provide more opportunities for potential bolt-on acquisitions. Obviously, our focus day one is on combining the business, generating the cost synergies. And then even as we talked to in the prepared remarks, we, well, we haven't baked any revenue synergies into our business case. You know, we do anticipate this is very complementary, you know, being able to leverage footprints, engineering capability, local-for-local.

Hi, Rob, this is Fred.

You know relative to to potential organic growth. You if you if you think of us you know pre-acquisition

in North American Centric uh you know very strong market share clearly growing outside, North America, you know, record quarter.

um,

but what we believe is that this transaction, with a larger Global footprint, a cross on Highway off Highway agricultural construction, um, you know, in markets, uh presence in in Europe, significant presence in Asia will ultimately provide um more opportunities. Uh for potential bolt-on Acquisitions. Obviously our Focus day 1 uh is on combining the business uh generating the cost synergies.

We what we haven't baked any Revenue synergies, you know, into our business uh case.

Scott Mell: So we're, you know, very excited, you know, on the potential, you know, organic growth opportunities as well.

You know, we do anticipate, uh, this is very complimentary, uh, you know, being able to leverage Footprints, uh, engineering capability, local for local.

So we're, you know, very excited uh, you know, on the potential, you know organic growth opportunities as well.

Rob Wertheimer: Okay. Thank you.

Um, okay. Thank you.

Operator: Our next question is from Kyle Menzies with Oppenheimer.

Our next question is from Kyle Mendes with Oppenheim.

Ian Zaffino: Hello. Can you hear me?

Hello. Can you, um,

Frederick Bohley: Yes. Yeah.

Can you hear me?

Ian Zaffino: Okay. Sorry. It's Ian Zaffino. I just wanted to kind of maybe drill down a little bit on the guidance change, kind of, you know, exactly what kind of what lines are you seeing that, what areas are you seeing that in, maybe just a little bit more color on that. And then as a follow-up, you know, as you think about kind of the provisions in the One Big Beautiful Bill, and I guess the CAPEX is the same, but are there any opportunities there? And then is there a possibility for any additional tax savings from the provision acquisition you did that you didn't know about prior to this bill? Thanks.

Yes. Yep.

Okay, sorry, it's it's Ian zafino. Um,

I just wanted to kind of maybe um drill down a little bit on the guidance change kind of you know exactly what kind of what lines you seeing that. What areas are you seeing that in? Um maybe just a little bit more color on that. And then as a follow-up, um, you know, as you think about kind of the provisions and the uh, 1 big, beautiful bill. Um and I guess you kept kept back the same. But are there any opportunities there? Um, and then is there a possibility for any additional tax savings? Um, from the the recent acquisition you did that you didn't know about prior to this

Bill. Thanks.

David Graziosi: Ian, it's Dave. Good evening, and I appreciate the questions. Let me cover that first part in terms of guide change, and then I'll turn it over to Scott. So relative to what we've changed in the guide, as you know, from February to May, maintained overall guide, what we have certainly seen as the second half is shaped up, and I'm certainly not going to tell you or anybody else things you don't know at this point, but revisions in North America on-highway build rates are significant. So as we frankly entered late Q2, early Q3, you started to see announcements of layoffs, shift reductions, down days, extended summer shutdowns. I would observe we probably haven't seen anything quite like that in several years. The fact is OEMs are responding to near-term market demand conditions.

Ian it's uh, Dave, good evening and I appreciate the the question. Let me questions. Let me cover that first part in terms of guide, uh, change and then I'll turn it over to to Scott. So, uh, relative to what we've, uh, changed in the guide as as, you know, from February to May maintained overall guide. What we have, uh, certainly seen as the the second half the shaped up and I'm certainly not going to tell you or anybody else things. You don't know at this point but

David Graziosi: You'll notice plenty of comments, I think, from the OEMs relative to supporting market demand from dealer inventory. Inventories are relatively elevated. You know, we talked earlier in the year about the expectation of medium duty softening this year. That, in fact, has been the case. OEM comments for Q2 also indicated some level of moderation on the Class H straight vocational side as well. So that combination, if you really look and focus on the overall changes in the guide, that would be probably the most relevant thing to note for the second half as we rolled up everything. So again, we're staying close to the market and are making sure that we can certainly meet customer requirements and timing.

Uh, revisions in, uh, North America on Highway. Build rates are significant. So as we, uh, frankly entered, uh, late, you know, late Q2 early, Q3, uh, you started to see announcements of layoffs, shift reductions down days extended, uh, summer shutdowns, I would observe, we probably haven't seen anything quite like that in in several years. Uh, the fact is, uh, oems are are responding to, uh, near-term market demand conditions. Uh, you'll notice plenty of comments. I think from the, the oems relative to supporting market demand from dealer inventory, uh, inventories are relatively elevated. You know, we talked earlier in the year about the expectation of medium duty softening. Uh, this year that in fact has been um, the case uh, OEM comments for Q2, also indicated some level of moderation on the uh, class.

David Graziosi: But at this point, you know, we're sizing, as I think we even talked about in May, our run rates ourselves in terms of overall manpower and our own production rates. So for us, it's really getting back to a more lean capacity rate. Operations, as we've talked about in the past, are very attractive to us in terms of incrementals, also allowing our team to really invest a little bit more time in the day-to-day operations relative to maintenance and also some of the quality initiatives that we've been pursuing. So that combined with some operational efficiency projects and other things we've been looking to get some time to implement, we will be pursuing in this, you know, I would say quieter period.

State Street, vocational side as well. So that combination if you really, uh, look at focus on the overall changes in the guide, uh, that would be probably the most, uh, relevant thing, uh, to note for, uh, the second half as we rolled up everything. So again, we're staying close to the market and our, uh, making sure that we can certainly meet uh, customer requirements and timing. But at this point, you know, we're uh sizing as I think we even talked about in May uh our run rates are ourselves in terms of overall Manpower and our own production rates. So uh for us it's really getting back to uh more lean capacity rate.

David Graziosi: But overall, better positioned, we believe, to, you know, certainly meet market demand, as we've talked about the last few years with the number of investments in capacity, both in North America as well as outside North America, with projects coming on, capacity coming online or coming online shortly. I think it's also very important to us as we think about current market conditions as more of a deferral versus any type of real permanent change in demand. So let me turn it over to Scott for the second part.

Uh, operations as we've talked about in the past very attractive to us. In terms of um, incremental is also allowing, you know, our team to, uh, really invest a little bit more time in the day-to-day, uh, operations relative to maintenance and also, some of the quality initiatives that we've been pursuing. So, uh, that combined with some operational, uh, efficiency projects, and other things we've been, uh, looking to get some time to implement. We will be pursuing in this, you know, I would say quieter period. But overall better positioned We Believe to, you know, certainly meet market demand as we've talked about the last few years with the number of investments in capacity, both in North America as well as outside uh North America uh with projects coming up

Capacity coming online or coming online shortly, I think, is also very important to us as we think about current market conditions as more of a deferral versus any type of real permanent change in demand. So let me turn it over to Scott for the second part.

Scott Mell: Yeah. Hi, Cole. It's Scott. So we, like many, have been quickly assessing the anticipated impact of the OBVA on our cash taxes, as I mentioned in my comments. This year, we're expecting it to be a substantial item given really the catch-up on the full amortization of the R&D tax credit. So, you know, that's going to be something in the mid-triple digits for the year. That includes both the R&D amortization as well as the fixed asset bonus depreciation and some of the changes in the foreign derived intangible income rates. And then going forward, less of an impact, primarily just because there's a one-time gain related to the amortization of the R&D this year. That's going to be, you know, I would say in the mid to upper teens on an annualized basis, at least for the near term.

Act of the obba on our on our cash taxes. As I mentioned in the

In my comments.

Um, this year we're we're expecting it to be a substantial item given really the catch up on the full amount of the R&D tax credits. So you know, that's going to be something uh, in the mid triple digits.

For the year, uh, that includes both the R&D payments and as well as the fixed asset bonus depreciation and some of the changes in the foreign derived intangible income rates. And then going forward, um, less of an impact primarily just because there's a 1-time gain related to the the amortization of the R&D this year that's going to be you know, I would say in the mid to Upper teens on the annualized basis at least for the near term.

Rob Wertheimer: So expected benefit this year in the mid-double-digit millions, right?

So expected.

Benefit this year.

Scott Mell: Yeah. Mid-double digit.

In in the in in the mid double digit Millions, right? Yeah, mid double digit.

Ian Zaffino: Okay. Thank you very much.

Okay, thank you very much.

Operator: Our next question is from Kyle Menzies with City.

Our next question is from Kyle Mendes with City.

Rob Wertheimer: Thank you. Can we just talk about what's embedded in the margin guidance a little bit for the back half and maybe some of the key puts and takes? You know, curious how strong pricing was in the quarter and expectations for pricing in the back half, and then any incremental steel cost headwinds or other cost headwinds or tailwinds assumed in the back half. We'd love to just hear you guys unpack what's in the assumed margin guidance. Thank you.

Uh, thank you. Um, can we just talk about what's embedded in the margin guidance? A little bit for the back half, um, and, and maybe some of the key puts and takes, um, you know, curious how strong pricing was in the quarter and expectations for pricing in the back half. And then any incremental, steel cost, headwinds or or other cost headwinds or Tailwinds, assumed in the back half, would would love to just hear you guys on pack? What's what's in the assumed margin guidance. Thank you.

Scott Mell: Yeah. It's Scott. So, you know, as we've guided toward pricing in the quarter, as we've done previously, it was north of 400 basis points. As we look at the second half of the year, you know, we anticipate to see some of the same positive tailwinds from pricing, but obviously, we're going to see some volume deterioration relative to what we'd seen in the same quarter last year. Really, some of that's going to be driven by the vocational activity in terms of the mixed component. And then, obviously, the tariff impact, which, you know, is changing daily, but we do anticipate, you know, some meaningful impact from tariffs in the second half of the year, although we do anticipate to be able to recover a substantial amount of that from our customers. And so that's really, I mean, there's really no meaningful material impact.

Yeah. Hi it's it's Scott. So you know as we've guided toward to pricing in the quarter as we've done previously, it it was north of 400 400 basis points. Um, as we look at the the second half of the year, you know, we anticipate to see some of the same positive Tailwinds from from pricing, but

Um, obviously, we're going to see some volume deterioration relative to what we'd seen in the same quarter last year. Really, some of that's going to be driven by The Vocational, uh, activity, uh, in terms of the mix component and then obviously the Tariff impact, which, um, you know, is changing daily. But we do anticipate, um,

You know.

Scott Mell: It's really the volume story in the second half of the year. I don't know, Fred, if you have some other thoughts on that.

Some meaningful, uh, impact from tariffs in the second half of the year. Although we do anticipate to be able to recover a substantial amount of that from our from our customers. Um and and so that's really. I mean, there's really no meaningful material impact. It's really the the volume story in the second half of the year. Um, I don't know.

David Graziosi: Well, I think, you know, as we think about what we talked about last quarter, you know, our overall exposure to tariffs is limited as, you know, 85% of our direct materials spend is with suppliers based in North America. You know, the majority of those are located in the United States, and those in Canada and Mexico are currently under USMCA exemptions. We do also, with our agreements with our OEM customers, have passed through for the majority of our costs on steel and aluminum. Now, those do tend to lag, you know, 6 to 12 months. So again, pretty fluid environment, but, you know, we continue to monitor and plan to offset the impact.

Fred if you have some other thoughts on that, I think, you know, as we think about what we talked about last quarter, you know, our our overall exposure to tariffs is is limited. As you know, 85% of our direct materials spend is with suppliers based in North America. You know, majority of those are located in the United States and those in

Canada and Mexico are currently under USMCA exemptions.

We do also, with our agreements with our OEM customers, have passed through.

Uh, for the majority of our costs on steel and aluminum. Now those do tend to lag, you know, 6 to 12 months.

Um, so again, it's a pretty fluid environment, but, um, you know, we continue to monitor.

and plan to offset the impact.

Rob Wertheimer: Got it. Thank you, guys.

Got it. Thank you guys.

Operator: Our next question is from Tim Fine with Raymond James.

Now, our next question is from Tom Tim fine with Raymond James.

Ian Zaffino: Thank you. Good evening. I just had a question on, I'm just thinking about the incremental change to guidance, so call it a, you know, mid-30s, or your ability, rather, to hold decrementals to kind of a mid-30% number in the context of, you know, with the vocational market being a lot heavier. Obviously, there's some good margin in that 4000 series. So I'm just curious, are there other segments or benefits beyond the North American on-highway coming off? I don't know. Is the parts business a little better? I'm just curious if there are other factors. I think all else equal, I would think that if when you see that level of step down in that business in North America on-highway, I would normally think of it as carrying a little heavier decremental. So maybe just if there's any color on that. Thank you.

Thank you, good. Good evening. Uh, I just had a question on and I was just thinking about the the incremental change to guidance. Um, that if you'll call it a, you know, mid 30s, uh, or your ability rather to to hold decremental, um, to kind of a mid 30% number in the, in the context of, you know, with, with the vocational Market being a lot heavier, obviously that, there's some good margin in that 4000 series. So, um, I'm just curious of their other segments, or, or benefits. Um,

If, when you see that level of step down,

In that business in North America on a highway, I would normally think of it as carrying a little heavier decremental, so maybe.

Um, just if there's any color on that, thank you.

Scott Mell: Yeah. I mean, we do, and we are anticipating and seeing some improvement in our defense business in the second half of the year relative to both the second half of last year as well as the first half of this year in terms of both our wheeled and tracked vehicles. So we do have some real tailwinds there helping to offset, you know, what you're circling around on the North American on-highway. You know, we also continue to see some stability in the outside North America on-highway segment as well. So those two combined are helping, you know, not completely offsetting what we're seeing in North America, but are mitigating some of the impact. And obviously, we're also, you know, managing our costs very closely here over the second half of the year.

Yeah. I mean we we do and we are anticipating and seeing some improvement and our defense business and the second half of the Year relative to both the second half of last year as well as the first half of this year. Uh in terms of both our wheel and and track vehicle. So we do have um some real Tailwind there, helping to offset, you know what, you're circling around on the North American on Highway, you know. We also continue to see some stability in the outside, North America.

Um, on the highway segment as well. So

David Graziosi: Yeah, Tim, this is Fred. So you know, while we, you know, while we are seeing some softness in the Class 8 straight truck, the municipal business is still very strong. Really, where we've seen, I'd say, the, you know, the most near-term softness has been in medium duty. So I think, you know, that probably addresses some of your mixed concern.

the those 2 combined are are helping, you know, not completely offsetting what we're seeing in North America. But are are mitigating, some of the impact? Uh, and obviously, we're also, you know, managing our costs very closely here over the second half of the year.

Yeah. Tim, this is Fred. So,

Yeah. Well we, you know what? We are seeing some softness in the uh Class 8, straight truck. The the municipal business is still very strong.

Really, where we've seen the, I'd say, the most near-term softness has been in medium duty.

So I, I think, you know, that probably addresses some of your your mixed concerns.

Ian Zaffino: Got it. Thank you.

Got it. Thank you.

Operator: Our next question is from Tammy Jacaria with JP Morgan.

Our next question is from Tammy Jakaria with JP Morgan.

Tami Zakaria: Hey, good afternoon. Thank you so much for taking my question. I wanted to get some color on your intended buyback. It seems like you did buy back some stocks in 2Q. Do you plan to keep buying back while the Dana deal is pending? And post-close of the deal, do you intend to pause buyback or until leverage comes down to 2 or below, or do you want to keep buying back as and when, you know, cash is available?

Hey, good afternoon, thank you so much for taking my question. I wanted to get some um, color on your intended buyback. It seems like you did buy back some stocks in 2 Q. Do you plan to keep buying back? While the Dana deal is pending and post close of the deal. Do you intend to pause by back or until leverage comes down to 2 or below or or do you want to keep buying back as and when you know, cash is available

David Graziosi: Hi, Tammy. This is Fred. Thanks for the question. You know, our capital allocation policies really haven't changed. I mean, first and foremost, it's to fund the business, you know, for organic revenue, earnings growth, new product and technology development. You know, we're in a position where, you know, this really, for us, isn't a, you know, do you buy back share? Do you pay down debt? I mean, we can do all of those. So, you know, we intend to return cash to shareholders via the dividend. You know, we will use a, you know, a meaningful amount of cash from the balance sheet in the direction of the transaction. Obviously, we'll take on some additional debt. And, you know, as we've talked about, you know, looking at, you know, getting to two times net leverage in the near term.

Hi Tammy, this is Fred. Thanks for the question.

You know, our Capital allocation policies, really haven't changed. I mean, first and foremost, it's fun. The business, you know, for organic Revenue, earnings growth new product and Technology development.

You know, we're in a position where, you know, this is really for us isn't a, you know, do you buy back share? Do you pay down debt? I mean, we, we can do all of those so, you know, we, you know, we intend to return cash to shareholders via the via the dividend.

You know, we uh, we'll use a, you know, a meaningful amount of cash from the balance sheet, uh, in the direction of the transaction. Obviously, we'll take on some additional debt.

and, you know, as we've talked about, you know, looking at

David Graziosi: But it really is a little bit all of the above. And probably, you know, most important is, you know, we like to be opportunistic, you know. But to your point, you know, we did buy back, you know, over $100 million worth of shares in the quarter. You know, as we talked about in our prepared remarks, and, you know, our view on us as a premier industrial company, the really compelling future growth opportunities with the transaction, you know, accelerating, you know, the combined business's current growth objectives, multiplying with future growth objectives. And we think, you know, we kind of laid it out. You know, what is a premier industrial? You know, we've got robust, stable cash generation, best-in-class margins, you know, great market position. You know, we've been growing this business, you know, since, you know, really our record pre-pandemic 2019.

You know, getting to 2 times that leverage in the near term.

But it, it really is a little bit of all the above and probably.

You know most important is, you know, we like to be opportunistic, you know, but to your point, you know, we did buy back, you know, over a hundred million dollars worth of share in the uh, in the quarter. You know, as we talked about in our prepared remarks and you know, our view on us as a premier Industrial company.

The really compelling future growth opportunities with the transaction, you know, accelerating, you know, the combined businesses, current growth objectives, multiplying, really future growth objectives.

And we think, you know, we kind of laid it out. You know, what is it from your industrial, you know,

you know, we've got robust, stable, cash, generation best-in-class, margins, you know, great Market position,

you know, we've been growing this business.

you know since uh,

David Graziosi: You know, revenue is up, you know, 20% into 2024, up to $500 million. We've identified $400 million of growth opportunity. But, you know, I think in order to, you know, to get what we consider, you know, a premier industrial multiple, which for us is at least double digits, you know, we need to grow faster, and we think the transaction will enable us to. And really, what we believe is as you look forward at this company and you take the combined EBITDA, the double-digit multiple, the capital allocation priority, paying down debt, you know, repurchasing shares, the current dividend policy, again, three years out from now, we believe, you know, that our stock should be trading north of $200. And when you have that level of belief, it's very attractive to buy it back to $90 a share.

You know, really, our record pre-pandemic in 2019, you know, revenues were up, you know, 20%. Into 2024, we are up, you know, $500 million. We've identified $400 million of growth opportunity.

but you know, I think in order to, you know, to get what we consider, you know, a premier industrial multiple which for us is at least double digits, you know, we need to grow faster and we think the transaction will enable us to and really is, you know, what we believe is as you as you look forward at this company

You take the, the, the combined, EBA, uh, the Double Digit multiple.

The capital allocation priority, you know, paying down debt. You know um repurchasing shares the current dividend policy again 3 3 years out. From now we we believe you know, that our stocks should be Trading North to hundred dollars.

And when you have that level of belief, it's very attractive to buy it back at $90 a share.

Tami Zakaria: Understood. Thank you.

Um, just to thank you.

Operator: Our next question is from Angel Castillo with Morgan's.

Our next question is from Angel Castillo with Morgan.

Rob Wertheimer: Hi. Thanks for taking my question. Good afternoon. Just wanted to touch base just based on the, you know, the backlogs that you see today, the kind of order trends that we've had year to date. I recognize it's just extremely early, but I think I heard you say that maybe you kind of see some of these pockets of weakness as maybe more push-out of demand versus destruction. Could you then, you know, are you, I guess, willing to kind of comment on how you see 2026 demand maybe shaping out as you think about some of these markets like medium duty or vocational? And in particular, just kind of, you know, any thoughts on Section 232 review or kind of the EPA 27 regulation and what that might mean for, you know, customers' appetite to buy ahead of that or to wait till 2026 and buy then?

Hi. Thanks for taking my question and good afternoon. Just wanted to touch base. Just based on the, you know, the backlogs that you see today the kind of order trends that we've had um, year to date. I I recognize it's it's extremely early but I think I heard you say that maybe you kind of see some of these pockets of of weaknesses, maybe more push out of Demand versus destruction. Um could you then you know, are you I guess willing to kind of comment on how you see 2026, the man maybe shaping out as as you think about some of these markets like uh medium duty, or vocational, and and in particular, just kind of, you know, any thoughts on Section 232 review or or kind of the EPA 27 regulation and what that might mean for, you know, customers appetite to buy ahead of that or, or to wait till 2026 and by then

David Graziosi: Angel, it's Dave. Thank you for those questions. You got a lot in there. Let me try to unpack that one a little bit. So your question or your comment on backlogs, clearly, you know, the industry is catching up with what was a very challenging time for all market participants. So a lot of costs being incurred to, you know, get product out the door. Clearly, the market's dramatically improved. You know, suppliers have caught up. The one, I think, portion of the market that really is not, it's improved, but I don't think it's really moved yet. That's still a constraint. Our bodybuilders. So to your point on backlogs, yes, those have, you know, certainly come down. Inventory is in a better position at the retail level.

David Graziosi: There's also a fair amount of chassis sitting at bodybuilders, which is why we believe the North America OEMs, which I think is to your question, why they've made the adjustments. I don't think any of them really want to be in a position of entering 2026 to get to your other point there in really what is an oversupplied market, especially given, you know, the amount of topics for uncertainty, which seem to be, frankly, endless in being added to every day, whether it be tariffs. You asked about EPA emissions, financing costs, macroeconomic outlook, et cetera. Pick your item, but it's hard, it's, you know, not unreasonable to appreciate the position of end users, which are really in a highly uncertain wait-and-see mode. So that reluctance is then translated into this point about deferring investment decisions till more clarity is available.

Angela said, thank you for those uh questions. You got, you got, let me uh, got a lot in there. Let me try to unpack that 1 a little bit. So um, your question or your your comment on backlogs clearly? You know, the the industry is catching up with what was a very challenging time for all Market, participants? So um, a lot of costs being incurred to, you know, get product out the door. Um, clearly the markets dramatically improved, you know, suppliers have caught up, uh, the 1, I think, uh, portion of the market that really is not, it's improved, but I don't think it's really moved yet. Thus still a constraint uh, our bodybuilders. So to your point on backlogs. Yes, those have, you know, certainly come down inventories in a better position at the retail level. Uh there's also a fair amount of um chassis sitting at bodybuilders, which is why we believe uh the North America oems. Which I think is to your question why they've made the adjustments.

I don't think any of them really want to be in a position of, uh, entering 2026 to, to get to your other point there. Uh, and really, what is an oversupplied, uh, Market, uh, specially given, you know, the the amount topics for uncertainty, which seem to be, um, frankly, endless and being added to every day. Whether it be tariffs, uh, you asked about EPA emissions, financing costs, macroeconomic Outlook, Etc,

David Graziosi: And I think some of the OEMs have talked about that. Thus, the reduction in build rates, which I think better positions the overall industry going into '26. To get to your other, you know, points there in terms of 232, you know, certainly the commercial vehicle industry has commented on that extensively with public comment letters, et cetera. So, you know, we're tracking it as well as everybody else. Having said that, you know, to earlier comments on the call, you know, we believe we're very well positioned in terms of USMCA sourcing. So the vast majority of what we use is actually sourced out of the US and to a degree, the balance out of Mexico and Canada. But we're, I think, very well placed in that regard and positioned.

Uh, pick your item, but it's hard. It's, you know, not not, uh, unreasonable to, uh, appreciate the the position of end users which are really in a highly uncertain, wait and see mode. So that reluctance is then translated into this point about uh deferring investment decisions to more clarity is available. And I think some of the oems have talked about that thus the reduction in

uh, build rates, which I think are better positions, the overall industry going into 26,

To get to your other points, there in terms of 232, you know certainly the commercial vehicle industry has commented on that extensively with public comment letters, etc. So, you know we're tracking it as well as everybody else.

David Graziosi: Also, as part of that, you know, as you think about other things that are happening from a regulatory perspective, the most recent announcements from the EPA over the last probably two to three weeks, as you know, are very meaningful in terms of potentially changing the entire emissions regimen, if you will, around whether it be greenhouse gas, et cetera. So we, like the rest of the industry, are waiting for clarity there. That being said, as I think you're familiar, our products do not require significant meaningful changes with emissions changes. So our product portfolio as it exists today for on-highway is very well placed to be compliant, whether that be current regs or future regulations. So the work is done. The products are ready.I

Uh, having said that, you know, to earlier, comments on the call, you know, we believe we're very well positioned in terms of, um, us usmca sourcing. So, uh, the vast majority of what we use is actually uh, sourced out of the US and to a degree, uh, the balance out of Mexico and Canada. But we're I think very well placed in that regard and positioned. Uh, also, as part of that, you know, as you think about other things that are happening from a regulatory perspective, the most recent announcements uh, from the EPA over the last probably 2 to 3 weeks as, you know, our our very meaningful in terms of uh, potentially changing the the entire uh,

Emissions, uh, regimen, if you will around, uh, whether it be greenhouse, gas, Etc. So, we like the rest of the industry are waiting for, uh, Clarity there. That being said, is I think you're familiar our products. Uh, do not require significant, meaningful changes with emissions changes. So our product portfolios exists today for on Highway

Paul: think we'll await more clarity from the market. But, you know, as I said earlier, overall, our view right now is North American Highway is more of a defer versus, you know, a loss in longer-term demand.

Operator: That's very helpful. And if I could just one quick follow-up, I think I heard you say that outside North America, defense continued to be stronger in the second half. What about the service parts business? That seemed to be pretty healthy in the first half as well. Just what do you expect there in the second half?

Regulations. So, the work is done. The products are ready. Uh, and I think we'll await more clarity from the market. But, you know, as I said earlier, overall our view right now is that North America on-highway is more of a defer versus, uh, you know, a loss in longer-term demand.

Paul: Yeah, they, you know, part of obviously that particular end market for us is support equipment. So it follows volume, right? So to my comments in terms of the way the volume breaks first half, second half, we'll have less demand for support equipment. That being said, I think the overall trends in terms of service requirements seem to be somewhat stable at this point. So, you know, our channel checks would tell us that they're better positioned from a labor perspective. The one item to keep an eye on, as I mentioned, with deferrals or uncertainty with end users is they're deferring capital investments. You know, it's very hard to defer maintenance. You know, at some point that becomes a challenge. So these aging fleets, vehicles are being utilized.

It's very helpful. And if I could just have one quick follow-up. Um, I think I heard you say, uh, the outside North America and the defense segments continue to be stronger in the second half. What about the Service Parts business? That seemed to be pretty healthy in the first half as well. Just, what do you expect there in the second half?

Yeah. The, you know, part of, obviously, that, that particular End Market for us to support equipment, so it follows, uh, volume, right? So, uh, to my comments, in terms of the way, the volume breaks first half second half, we'll have, uh, less demand for support equipment. Um, that being said, I think the overall, uh, Trends in terms of, uh, service requirements, uh, seem to be somewhat stable at this point. So, you know, our Channel checks would tell us that, uh, they're better positioned from a labor perspective. Uh, the 1 item to keep an eye on is I mentioned with, um, uh, deferrals or uncertainty within users is they're deferring Capital Investments.

You know, it’s very hard to defer maintenance. At some point, that becomes a challenge. So, these aging fleets...

Paul: You know, we feel good about the overall market trends in terms of aftermarket and our continued high capture rate there.

Operator: Very helpful. Thank you. Thank you. There are no further questions at this time. I would like to hand the floor back over to David Graziosi for any closing comments.

Vehicles are being utilized, you know. We feel good about the overall market trends in terms of aftermarket and our continued high capture rate.

very helpful. Thank you.

Paul: Thank you, Paul. And thank all of you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Dave, David Graziosi, and comments.

Thank you, Paul. And thank all of you for your continued interest in Allison. And for participating on today's call, enjoy your evening.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.