Allison Transmission Holdings, Inc.

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's first quarter 2021 earnings conference call. My name is Hillary and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management team from Allison Transmission will conduct a question and answer session and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Mr. Ray Posadas, the company's Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Hillary. Good evening, and thank you for joining us for our first quarter 2021 earnings conference call. With me this evening are Dave Graziosi, our President and Chief Executive Officer, and Fred Boley, our Senior Vice President, Chief Financial Officer, and Treasurer. As a reminder, this conference call webcast this evening's presentation are available on the investor relations section of our website alicentransmission.com a replay of this call will be available through may 5th as noted on slide 2 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 first quarter 2021 earnings press release and their annual report on Form 10-K for the year ended December 31st, 2020, uncertainties related to the COVID-19 pandemic and related responses by governments, customers, and suppliers, and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we expressed today. In addition, as noted on slide three of the presentation, Some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2021 earnings press release. Today's call is set to end at 545 p.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take one question from each analyst. Please turn to slide four of the presentation for the call agenda. During today's call, Dave Graziosi will provide you with a brief operational update. Fred Boley will then review our first quarter financial performance and update full year 2021 guidance. Finally, Dave will conclude the prepared remarks prior to commencing the Q&A. Now I'll turn the call over to Dave Graziosi.

Thank you, Ray. Good evening and thank you for joining us. I will begin our prepared remarks by once again expressing my appreciation to Allison's employees customers, suppliers, and communities for their continued dedication and resilience during this critical period. Despite the severe disruptions to global supply chains that are currently impacting our end markets, customer demand is improving, and our team continues its tireless efforts to fulfill the Allison promise. I'm extremely proud of the Allison extended family and the commitment demonstrated every day. So much progress has been made in addressing the effects of the pandemic, and there's good reason to be optimistic. The risks persist, and our top priority remains the health and well-being of Allison's extended family and its communities. Many safety measures and precautions that have been implemented throughout the pandemic remain in place today, and Allison is now providing on-site COVID testing and vaccinations to employees in our Indianapolis plants and global headquarters. We continue to encourage everyone to get vaccinated, follow recommended guidelines, and look out for one another. As we discussed last quarter, supply chains across the globe continue to be strained. Challenges include labor constraints and shortages of component materials as global demand surpasses capacity recovery and availability. Logistics issues continue adding to freight delays and costs. and certain electronic components such as semiconductors or chips remain in short supply across many industries. Our procurement and global supply chain team continue to work closely with our suppliers at every level to understand and mitigate constraints. Our suppliers understand the importance of Allison as an essential critical infrastructure manufacturer and the impact both the commercial vehicle and defense industries have in the global pandemic recovery. Continued coordination with our suppliers, customers, and industry participants from order to delivery remains critical as we work collaboratively to further mitigate the ongoing risks caused by the global pandemic. Despite these challenges, the delivery of our products with minimal disruptions since the beginning of the pandemic continues. And we are pleased to report that Allison's first quarter results reflect the ongoing global economic recovery. Thanks to improving customer demand, a resilient outlook, and the efforts of the Allison team to maintain operational alacrity and meet our commitments, we are raising our full year 2021 results guidance, including our full year net sales guidance from a midpoint increase of 12% to a midpoint increase of 15% compared to net sales for 2020. We also continue to fund significant investments in engineering research and development and capital expenditures to further position Allison to capitalize on meaningful growth opportunities across all of our end markets. Finally, during the first quarter, we continued our well-defined approach to capital allocation by settling approximately $96 million of share repurchases or over 2 percent of outstanding shares and increasing the quarterly dividend from 17 cents to 19 cents per share. Thank you, and I'll now turn the call over to Fred.

Thank you, Dave. Following Dave's comments, I'll discuss the Q1 2021 performance summary, key income statement line items, and cash flow. I will then update full year 2021 guidance before turning the call back over to Dave. Please turn to slide five of the presentation for the Q1 2021 performance summary. Year-over-year net sales decreased 8% to $588 million compared to the same period in 2020. However, sequential net sales increased 10% as the recovery in customer demand and the global economy that began in the second half of 2020 continued through the first quarter of 2021. Growth margin for the quarter was 49.5%, a decrease of 170 basis points compared to 51.2% for the same period in 2020. The decrease was principally driven by lower net sales and unfavorable material costs partially offset by price increases on certain products. Net income for the quarter was $120 million compared to $139 million for the same period in 2020. The decrease was principally driven by lower gross profit partially offset by lower interest expense as a result of the refinancing of our long-term debt in November 2020. Adjusted EBITDA for the quarter was $222 million, or 37.8% of net sales, compared to $257 million, or 40.3% of net sales for the same period in 2020. The decrease was principally driven by lower gross profit and increased incentive compensation expense, partially offset by lower commercial activity spending. A detailed overview of our net sales by end market can be found on slide six of the presentation. Please turn to slide seven of the presentation for the Q1 2021 Financial Performance Summary. Selling general and administrative expenses decreased $2 million from the same period in 2020, principally driven by lower commercial activity spending and lower intangible amortization expense. Engineering research and development expenses increased $2 million from the same period in 2020, principally driven by the entry year timing of product initiatives spending. Please turn to slide eight of the presentation for the Q1 2021 cash flow performance summary. Adjusted free cash flow for the quarter was $107 million compared to $127 million for the same period in 2020. The decrease was principally driven by higher operating working capital requirements and lower gross profit partially offset by lower cash incentive compensation expense and lower cash income taxes. We ended the quarter with a net leverage ratio of 3.2 times, $295 million of cash, and $645 million of available revolving credit facility commitment. We continue to maintain a flexible, long-dated, and covenant-like debt structure with the earliest maturities due in March 2026. During the first quarter, we settled $96 million in share repurchases and paid a dividend of 19 cents per share. We ended the quarter with approximately $731 million of authorized share repurchase capacity. Our longstanding commitment to prudent balance sheet management, ample liquidity, profitable operations, and purposeful investments continues to position Allison well to navigate the current environment and realize future opportunities. Please turn to slide 10 of the presentation for the 2021 guidance updates. As Dave mentioned earlier, thanks to the improving customer demand, a resilient outlook, and operational execution, we are raising our full year 2021 results guidance. We expect net sales for 2021 to be in the range of $2.325 to $2.475 billion, or a midpoint increase of 15% versus our prior expectation of a midpoint increase of 12% compared to net sales for 2020. Our 2021 NetSouth guidance reflects higher demand in the global on-highway, service parts support equipment and other, and North America off-highway end markets as a result of the ongoing global economic recovery and price increases on certain products. Our full-year 2021 guidance update takes into account the continuation of supply chain challenges for the foreseeable future. In addition to the 2021 net sales guidance update, we further anticipate net income in the range of $395 to $465 million, up from our prior expectation of $375 to $445 million. Adjusted EBITDA in the range of $795 to $885 million versus our prior expectation of $770 to $860 million. Net cash provided by operating activities in the range of $585 to $655 million, up from our prior expectations of $560 to $630 million. Adjusted free cash flow in the range of $415 to $475 million versus our prior expectations of $390 to $450 million. And capital expenditures in the range of $170 to $180 million including approximately $60 million of sustainment and over $100 million for growth initiatives. As we have often discussed, consistent investments in CapEx and R&D through the pandemic will enable product development initiatives in support of our long-term growth across all of our end markets. We remain steadfast in our commitment to fund initiatives that will drive growth and the expansion of our end markets while simultaneously delivering strong financial results and creating value for all of our stakeholders. Thank you, and I'll now turn the call back over to Dave. Thank you, Fred.

Last summer, we launched Allison's eGen brand of fully electric and electric hybrid propulsion solutions, positioning Allison to lead the charge into the future of commercial vehicle electric propulsion. Shortly after, we launched the eGen Flex, Allison's new zero emission capable electric hybrid system. And subsequently, we launched eGen Power, Allison's new line of fully electric and fully integrated zero emission electric axles for medium and heavy duty commercial trucks. Since then, we've announced several milestones for both eGen Flex and eGen Power, beginning with last summer's announcement from Indigo the Indianapolis Public Transportation Corporation, that it will be the lead fleet partner for Allison's revolutionary new eGenFlex electric hybrid system, demonstrating the transit property's commitment to reducing its independence on fossil fuels, enhancing the quality of life in their community, and protecting the environment while minimizing the total cost of ownership. Last fall, Eno Trucks and Hexagon Purists showcased a fully electric e-gen power 100D equipped Hino XL7 truck during Hino's Project Z announcement, Hino's zero-emission vehicle development program. The new fully electric e-gen power 100D is the most powerful and fully integrated electric axle system in the world and Allison's first electric axle variant within the e-gen power series of products. In February, Gillig announced that it will begin offering Allison's eGen Flex electric hybrid propulsion system later this year, providing bus fleets with up to 10 miles of full electric propulsion for zero emission zones with no additional infrastructure investment required. And last week, we announced the introduction of the eGen Flex by the New York City Transit Authority to enhance the quality of life and help the environment. This latest development with the nation's largest transit authority follows the successful evaluation and subsequent 50-unit order last year by the New York City Transit Authority for Allison's H40EP electric hybrid propulsion system, the predecessor to the eGen Flex. And last week, we announced the Strategic Memorandum of Understanding with Emergency the market leader in the United Kingdom in the manufacture, service, and support of fire and rescue vehicles. Emergency One and Allison will integrate the eGen Power 100D electric axle into Emergency One's fire, rescue, and emergency vehicle platform. This development is another critical step in our collaborative drive to reduce emissions and carbon footprints while improving vehicle performance and delivering the proven reliability and durability that our mutual customers expect. The eGen Power 100D architecture is tuned for high gradability and high top speed without sacrificing efficiency. This ensures Emergency 1's fire and rescue trucks will continue to deliver exceptional performance and reliability, fast acceleration and maneuverability in an application where failure is not an option and every second counts. We are pleased to continue our long-standing partnership with Emergency One to deliver innovative solutions to our mutual customers, including many fire brigades and rescue teams across Europe. The Allison 3000 series fully automatic transmission is the standard transmission offering in Emergency One's conventional diesel-powered fire and rescue vehicles, so it's natural to expect Emergency One and Allison to partner and bring the same proven performance reliability and durability to emergency ones, electric fire and rescue trucks. As I've previously stated, we maintain a global focus as it relates to our electrified propulsion initiatives. In North America, we continue to work on fully electric vehicle initiatives with OEM partners representing over 70% of our North America on highway revenue. Outside of North America, we are actively working with our global partners on full EV initiatives throughout Europe and Asia. Allison understands vocational demands and is applying that knowledge to electric propulsion. We hold ourselves to a very high standard and we will deliver fully electric solutions that meet or exceed conventional expectations. Our conventional products have been delivering the Allison brand promise of quality, reliability, and durability for decades and our customers can trust that our fully electric solutions will continue to build on this legacy. Finally, last week, We released our first environmental, social, and governance report. Allison's 2020 ESG report is designed to provide transparent data on Allison's environmental performance and social impact. Since its inception in 1915, Allison has been committed to being a responsible and passionate corporate citizen. Our founder, James A. Allison, recognized the power of community, education, and innovation. He instilled philanthropy and strengthening communities into Allison's culture, and today this culture is personified by our company, Maxim, quietly do good work. Allison has consistently integrated sound environmental practices into our business decisions and activities and strives to create an inclusive workplace where people of all genders, races, faiths, and backgrounds can reach their full potential. On behalf of the Allison team, we are delighted to present the 2020 Allison Transmission ESG Report, highlighting our commitment to the ideals of corporate citizenship and to protecting human health and well-being, our natural resources, and the local and global environment. We invite everyone to download and review the report from our investor relations website. This concludes our prepared remarks. Hilary, please open the call for questions.

At this time, we will be conducting a question and answer session. As a reminder, we ask that you limit yourselves to one question per person. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Jamie Cook of Credit Suisse. Please state your question.

Hi, good evening. I guess just first a question on the margins for 2021. Is there any change in your assumptions with regards to R&D? You talked about a 30% increase or, you know, changes with supply chain costs are free. And then how to think about margins longer term given some of the investments we need in EV? Is it impossible to get back to sort of prior peak or exceed. Thanks.

Sure, Jamie. As far as assumptions relative to margins, I mean, we continue to see the elevation of raw material. And we talked about on the first quarter call expecting to be price-cost neutral. What you saw in the first quarter was about $10 million in price and $7 million of unfavorable material performance, so slightly favorable. As we look through the year, I think still in that cost-price neutral range is there. It kind of depends on the pace at which raw materials maintain. As you know, our pass-through is on aluminum. Through our aluminum die-cast manufacturing, those are more real-time in the quarterback. The commodity pass-throughs we have with our long-term on-highway supply agreements tend to lag a little bit. At this point, once you weigh in the pass-throughs that will happen because of the elevated material cost, we expect to get more price. We talked about 50 to 75 basis points, probably closer to 100 basis points for the full year as we're modeling it right now. Relative to engineering spend, the up 30% year-over-year is still our expectations. It's looking like it's going to break a little heavier in the second half, so probably 45% spend in the first half and maybe 55% in the second half from an R&D standpoint. Relative to longer-term margins beyond 2021, I think all of us in manufacturing right now are dealing with inefficiencies, whether it's expedited costs, freight. So I think as the supply chain gets back up, some of those costs will come out. The amount of investment we spend on R&D will really be determined by the opportunities in front of us. And really, as you know from... watching us for a number of years, Jamie. I mean, there's a significant amount of operating leverage in the business. And, you know, assuming, you know, revenues continue to improve, you know, the drop-through should be attractive.

Our next question is from Larry DeMaria of William Blair. Please state your question.

Thanks. Good afternoon, good evening, everybody. Dave, thanks for the discussion around eGen and some of the wins you guys got, but I was wondering if you'd take it a little bit further. You know, kind of thinking around timing and economics, and I know it's obviously early, so it probably doesn't really hit the income statement for a while, but as you're getting these wins, I just want to try to understand what kind of value Allison is getting if you're supplying eGen or if you're adding the integrator, and take us through that 3 to 10x cost differential that you talked about before, so we can kind of think about how this evolves from where we are now. Thank you.

Sure, Larry. Good afternoon. So I'm going to handle the first part of that, and then I'll kick it over to Fred. So on the EV, certainly appreciating the announcements that we made. I think the team continues to be very engaged, as I mentioned, in the prepared remarks globally, and that's important. So we're not just focused on one one market, I would say timing-wise, as I think we've probably mentioned over the last few quarterly calls, what we're receiving in terms of initial inbounds about potential timelines and volumes seem to be pushing to the right on the calendar, and the volumes would tend to wind up moving to the lower end of the range when all is said and done. Timing, I expect that it'll continue to be stretched out here a bit. So pick your specialist or your so-called forecast experts, but the reality is things continue to be challenged out there from a timing perspective. So what we're doing, as we've said before, is really focused on probable outcomes that are frankly within our addressable markets at the same time looking to expand upon our existing conventional addressable markets. So as you think about space, and we've talked before about moving into some different applications, that's part of the conversations and development work we're doing, but I would say At this point, anything that we're hearing about initial volumes and timing is relatively low. And there's good reason for that, because as we've discussed before, the customer demand side of this process will take some time to evolve. And as we also mentioned on the February call, there's certainly a lot of expectations around funding stimulus, if you will, or other programs that could potentially accelerate electrification. Having said that, the numbers are rather large, as you well know, in terms of trying to make a real impact there and move the timeline instead of to the right, to the left. So with that, let me turn it over to Fred in terms of your content question.

As you mentioned, 3 to 10x, that's our expectation of the price we'll get relative to Class 6-7 average selling price, which is approximately $5,000. So on the low end there, content would be just a base e-axle. On the higher end, you're looking at content all the way up to inclusive of the battery system. Those are still our expectations as we move forward.

Our next question is from Tim Stein of Citi. Please state your question.

Great. Thank you. Good evening. Dave, thanks for the comment there. Maybe just piggyback on that last question. thread there, just in terms of your discussions with OEMs and the comment that maybe the timing is more delayed and the volumes are lower than what maybe gets picked up. Can you just maybe, a lot of the end markets, or not a lot, but some of the key end markets for Allison perceived to be where electrification its first, and we've talked about this for several years, but so you presumably have a, you know, really good lens into this. Could you, is it just a function of just, you know, who's going to pay for it? And I mean, there's probably a litany of reasons, but maybe what, again, it's a little counter to maybe what some of the sentiment is publicly. So maybe you could expound on that a bit in terms of of your discussions with some of the customers in terms of what's influencing that. Thank you.

You're welcome, Tim. So a couple things. We've touched upon in some more recent calls. The fact is, I think it's all... I don't question any of the intentions and the broader task of we want zero emissions at some level and all the associated benefits with it, and that's why we support it both in our operations and in our product. And you know over the years we've worked in the conventional side as well in terms of fuel efficiency and emissions reduction. So having said all that, the intentions are all good. I think the challenge, though, as you point out, is, you know, bluntly stated, who's going to pay for it? And I would take a step back from that and say that the answer to that is a number of different potential parties. But, you know, history has proven that the adoption is on the front end extremely costly. And you're also dealing, unlike the automotive space, you know, commercial vehicles and users are very conservative. And the idea of, trying things is one thing. The idea of converting an entire fleet is another. And I think what is being discovered along the way, and we do have access, as you can appreciate, to both our team with the level of engagement and network we have is not only to OEMs, it's to end users. And when you talk to end users, many will tell you they're really not seeing much necessary near-term demand. But what they're really looking for, and I harp on this for a reason, is we perform as an industry within commercial vehicle at a very high level. Extraordinarily high reliability, I think a very predictable total cost of ownership. That's the expectation that's been set. That is the ask. So when you would naturally expect the ask then to translate over to EV and very simply say, well, that's what we'd like to see in EV solutions. Well, my Our response to that is we couldn't agree more. Having said that, where is the technology solutions to make all of that happen? That includes, by the way, standardization and ultimately being able to deal with the industry's desire for a minimal amount of proliferation as we've talked about. As best we can tell, there's still many open switches about how that all comes together ultimately. We still believe there will be EV adoption. I think to your comment on the adjustable space, and certainly much of it is in Allison's wheelhouse, I would also observe there isn't one. We do not expect at this point there is a one solution set for that space. There will be different solutions required. And that's really what it's going to come down to. Your point is who's going to pay for it, how long is it going to take to ultimately meet the requirements of the commercial vehicle end users. That's going to take some time. Is it better than it was years ago? Is it moving faster than many expected? Yes. Having said that, there's still a tremendous amount of work to be done, and we're certainly confident we're on a path to be able to respond to those attributes and those requirements consistent with our brand promise, as we've always done. There are a number of technical hurdles and challenges to be overcome in addition to the economics that you mentioned.

Our next question is from Rob Wertheimer of Milius Research. Please state your question.

Hi. Dave, you've talked a lot about the future of powertrains, and I appreciate that a lot of this is a ways in the future. Nonetheless, in addition to the sort of content per truck that you have an opportunity to go up on, you know, you have the potential to broaden out your end markets a bit, I suppose. And I'm just curious if you can characterize the projects you're working on, looking at, whether it be, you know, in different segments in North America or whether it be in different OEMs or customers globally, whether, you know, you're seeing any tangible evidence of that broadening out can happen versus hope to happen globally. And I don't know if this is a fair to tack on the question or not, but it seems like there's a little bit of positive news out of the China sales this quarter. I don't know if you have any comments on that. Thanks.

You're welcome, Rob. So let me cover the easy questions and then let Greg cover off on China sales. So, you know, briefly in terms of comments we've made about future solutions, alternatives, propulsion, energy, et cetera. As you know, over the years, we've certainly applied our technology to a number of different energy sources, being somewhat energy agnostic, if you will. As we think about the future with EV, it's not only the electrification, if you will, that can make its way into fuel cell electric, et cetera. As we've discussed before, taking an approach that we believe will allow us to broaden our markets, as you mentioned. So the discussions we're having with a number of OEMs and end users, it covers a very broad slice of the market. So as you think about not only our addressable space, there are discussions that impact beyond our addressable space. frankly, other potential applications outside of the on-highway end market that we have. So as we're able to apply conventional technology, we have the same thought process around electrified solutions across all of our end markets. So I think that's the key point here is it's global. It's across multiple segments. It continues to be focused on broadening our footprints But the key, the end objective to all of that is being able to meet or exceed the conventional experience and deliver the Allison promise. Let me turn it over to Fred to your China sales question.

Sure, Rob. Relative to China, and really outside North America in total, you know, up year over year 17%, you know, up sequentially 9%. You know, on the year-over-year, I mean, we did start to see in Q1 of 2020 some softening in the tail end of the quarter relative, you know, to COVID-19, you know, specifically in China. But, you know, again, China's rebounded really nicely for us, you know, year-over-year up 12 million outside North America, 9 million of that driven by China. But as we look out, all of those regions outside North America are really well positioned for year-over-year growth. China leading the way, but Japan, Europe, as well as Latin America, we're expecting really good forward momentum off where we sit today.

Our next question is from Ian Zasino of Oppenheimer. Please state your question.

Hi, guys. Thank you very much for taking my question. I wanted to ask you, just on the guidance, obviously it does not include anything from any potential infrastructure bill, I imagine. And, you know, what you've been able to see as far as discussions and kind of what's in there, you know, what do you think the benefit to you guys would be, maybe what areas you would see it in, where you would see it? And any type of color you could give us would be helpful. Thanks.

Ian, it's Dave. Good afternoon. So I appreciate the question there. So our guidance does not, in fact, assume anything relative to an infrastructure bill, if you would. I would just kind of level setting expectations. And I'm sure you're well aware of some of the OEM reporting that's already taken place But, you know, the idea of infrastructure coming through in terms of driving more demand in 2021 is certainly a possibility, one that, again, we have not included in our guidance. That being said, I would offer that given where the industry currently sits, as we understand it, with relatively full order boards and extended vehicle build times, I In our view, I think that starts to really create the, you know, and I think I mentioned this on the February call relative to the question about cycle being, I think, at peak. You know, we talked at that stage about expectations that the market was really set up to be stronger for longer, so to speak. I think your point in terms of any additional infrastructure spending would create further tailwind to that process because, again, it's just I don't believe the industry at this point is in a position that they can really significantly pick up beyond what you've already heard about in terms of guidance. There's too many, in our view, opinion at least, too many issues out there, whether it's supply chain issues, and then you get into labor availability. Of course, labor affects a number of different things, as we've talked about before, but It certainly provides, I think, an even better setup than exists today already for 2022.

Our next question is from Jerry Revich of Goldman Sachs. Please state your question. Yes, hi.

Good evening. Good evening.

Dave, can you talk about how your transmission compares to the ZF 8-speed transmission? Obviously, the PACCAR announced it yesterday on the private label side of offering the ZF option as the default option going forward. And I'm wondering if you could just weigh in on the specifications and performance of Allison product versus ZF. Thanks.

Sure. You're welcome. So a couple things. Obviously, I'm aware of that announcement. The TX58, as you may or may not know, is based on an automotive solution. And I would note, similar to offerings from others over the last decade that you're well aware of, we certainly would recognize ZF's very capable organization and certainly have a lot of respect for that team. That being said, specifically with the TX58, It really offers a single solution, one ratio set, and only one PTO option. So as you compare and contrast, I think, to your question, our 2,000 and 3,000 series transmissions are released with over 350 global OEMs, including Peterbilt and Kenworth and every other major North America OEM. That being said, our products, really have a bulletproof reputation, and that wasn't easily earned, and it was really done over many decades and over what is totaled now 100 billion miles globally. So it's a very proven solution to your question. And as I mentioned earlier on the call, the commercial vehicle users are a very conservative bunch. They don't take risks lightly. to their businesses or will put at risk the superior residual values that the Allison products have. I can certainly point out again to the history that I mentioned with several other similar offers within the last decade. We understand the experience was not a good one in terms of the number of the end users, both the utilization of that particular solution for the impact on residuals. So as we see it, we're certainly very confident in our product, the improvements that we've made over the years that we continue to invest in, as I mentioned, with fuel economy, durability, safety, new requirements that are coming out relative to safety and overall value to our customers. So in summary, I think we're certainly confident in our products and capabilities. We believe our customers are better serve with more options. And with that in mind, I certainly welcome the opportunity to meet ZF in the highly competitive OEM medium-duty market.

Our next question is from Brett Lindsay of Vertical Research Partners. Please state your question.

Hi. Good evening, everyone. I was hoping you could provide an update on just the state and muni funding environment and utilizations of some of those fleets. Obviously, reopening should drive utilization and better activity, but in any sense by the metrics you track, age of the fleets, conversations you're having, how that deferral process looks. And I guess the question, too, and the follow-on is, are you potentially going to see further delays of a reboot and some of the replacement as they reevaluate some of the alternative technologies. Just curious what the messaging is from that channel. Thanks.

You're welcome, Brad. Dave, so a few points to hit there. So as we've discussed on a number of other calls, and as I'm sure you're well aware, municipal fleets, at least from a transit perspective, have been very much underutilized due to the pandemic. That's now starting to change. It's improving. The fact is, I think, as you know, many of the properties are having budget challenges because of the lack of revenue. That was certainly the case probably a quarter ago. I think what you're starting to sense, we're starting to be aware of, is a fair bit of optimism concerning statutory stimulus funding and what that ultimately means. means to provide some level of relief. The fact is it will be, you know, we're seeing signs of slowly improving utilization rates and the optimism attached to the statutory funding. So you should start seeing here sooner rather than later pick up an aftermarket for that particular segment. The other thing, though, to be aware of is you do have labor constraints in the service channel. As much as we're seeing it in other areas of our business, labor availability is also an issue in terms of the service end of things. I think the bottom line is it's improving slowly from an impact on renewing fleets or otherwise. I think that's largely the impact will largely depend on how the stimulus funds are ultimately earmarked if there's requirements or otherwise I would say you know the transit properties in general want to see very well proven if you will solutions with predictable outcomes so that the small scale tests that are going on we would expect those would certainly continue but I don't do not believe any are in a position where they're necessarily beyond, I think, a select amount of fleets in a position where that's going to allow them to accelerate EV. I think there's many more innings to play in terms of how they think about EV solutions ultimately and how they're going to be able to budget for those particular solutions, even given, frankly, duty cycles that they're running the equipment through and And that gets back to, as I mentioned, with the advances that we're making with our hybrid transit solution, that's really viewed for the ability of many properties to address ZEV zones, so to speak, without the requirements for full EV, because it really is a significant infrastructure requirement. Beyond that, The other thing I would say is outside of transit with roads and highway departments, again, some of that equipment utilization has been deferred, as we mentioned on the February call, a very tough winter. So for those fleets that are exposed to that type of market or weather, there was a pretty high consumption rate, so you're starting to see some of that. Having said all of that, relative to truck, they're facing the same issues everybody else is in terms of the truck market right now with vehicle availability and long lead times.

Our next question is from Ross Gilardi of Bank of America. Please state your question.

Hi, guys. Thanks for squeezing me in. I just wanted to piggyback off of Jerry's question a bit, just on the PACCAR announcement. Is most of Allison's business with PACCAR on the medium-duty line? And I'm just trying to contextualize what just happened. I mean, is this kind of a status quo development, or does it represent potential share loss for Allison if the new standard option on those vehicles is a fully automatic solution?

Ross, it's Dave. Obviously, I think ZF is in the markets globally. It's certainly a new entrant to North America in medium duty. We're obviously still available to Peterbilt and Kenworth customers. I think there's a reasonably strong existing preference for Allison. I think with ZF, I do not believe anybody could make the statement at this point that they won't have some impact in terms of the medium duty business. That being said, as you know, we continue to grow our position in medium duty and have for many years. So to the extent I think they're a standard offering, I would expect that there certainly have some volume that comes with that. That being said, we continue to enjoy a very strong strategic relationship with the PACCAR team and support their business in many ways. We have across the board releases, whether it's our 1, 2, 3, or 4,000 series products. We're certainly, again, confident that the market will assess the technology as it's done with similar offerings over the last decade. I think the history, although certainly not indicative of the future, we're confident in the performance of our product and, frankly, the preference of our end users.

Our next question is from Anne Dagnon of JP Morgan. Please state your question.

Yeah, hi. Most of my questions have been answered, but I did want to circle back to your competitive position on the electric axle in particular. And recently we saw an announcement from Danfoss and Meritor with Electra Commercial Vehicles in Europe. They are collaborating on a fully integrated e-axle. And I'm just curious, where does Allison stand in terms of collaborating with others? It does seem like you're going to get left behind because you're doing it all on your own and others are developing partnerships and growing their businesses in Europe and then suddenly we wake up and we have a similar situation where North America OEMs are bringing over European suppliers just like they've done with ZF.

And it's Dave. So maybe we've given the market a mistaken impression, but the idea that we're going it alone is really not our approach, as we mentioned on prior calls. Part of our process here is collaboration. As I think we've said several times, we view EV just by the nature of the solutions that are going to be required and the integration of the technology, it will require collaboration. So we are working with a number of different parties. I don't see that changing, frankly. I think the idea of going it alone is interesting, but that is not Allison's approach. I would also note that there are many so-called collaborations that are ascribed to grants or certain statutory programs, that's not unusual. We've been involved with those in a number of different areas. But I would certainly tell you the interaction that we're having with the market and across the globe really looks at not only end users, OEMs, but a number of different industry players. So I think we're very confident in terms of how we're going about the process and I would offer from a capital allocation perspective it seems to us to be probably the most prudent way to go through about that process right now just given the relative position and immaturity of the overall market. So those things will continue to evolve as you know, but our process I think we're very comfortable in terms of where we're currently aligned with a number of different parties

We have reached the end of the question and answer session. I will now turn the call over to Dave Graziosi for closing remarks.

Thank you, Hillary. And I'd like to thank everybody again for your continued interest in Allison and for participating on today's call. I hope you enjoy the rest of your evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.