Allison Transmission Holdings, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's second quarter 2022 earnings conference call. My name is Kyle 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference call over to Mr. Ray Posadas, the company's managing director of investor relations. Please go ahead, sir.

Thank you, Kyle. Good afternoon, and thank you for joining us for our second quarter 2022 earnings conference call. With me this afternoon are Dave Graziosi, our chairman and chief executive officer, and Fred Boley, our senior vice president, 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 our website, allisontransmission.com. A replay of this call will be available through August 10th. As noted on slide two of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks. including those set forth in our second quarter 2022 earnings press release, our annual report on Form 10-K for the year ended December 31, 2021, and our quarterly report on Form 10-Q for the quarter ended March 30, 2022. Uncertainties related to the war in Ukraine, the COVID-19 pandemic, and related responses by governments, customers, and suppliers, and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying 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 second quarter 2022 earnings press release. Today's call is set to end at 545 p.m. Eastern time. In order to maximize participation opportunities on the call, we'll take one question from each analyst. Please turn to slide four of the presentation for the call agenda. During today's call, Dave Graziosi will review highlights from our second quarter 2022 results and provide a brief operational update. Fred Boley will then review our second quarter financial performance and the full year 2022 guidance prior to commencing the Q&A. Now I'll turn the call over to Dave Graziosi.

Thank you, Ray. Good afternoon, and thank you for joining us. We are pleased to report solid performance for the second quarter of 2022, including a 25% increase in diluted EPS. Following the strong start to the year, second quarter results demonstrate the resiliency of customer demand and continued year-over-year growth. And in spite of the challenging environment, the Allison team continues to deliver balanced execution while driving multi-year growth initiatives across all of our end markets. Net sales for the quarter were $664 million. Notably, net sales growth of 10% was once again surpassed by diluted EPS growth of 25% as Allison's disciplined and well-defined approach to capital allocation continues to support per share returns in excess of net sales and net income growth. As a result of the ongoing strength in Allison's global on-highway and off-highway end markets, We are pleased to reaffirm the full year guidance midpoints while narrowing the guidance ranges provided to the market on February 16th. Despite concerns of a slowdown in economic activity, customer demand remains robust with industry production limited primarily by persistent supply chain constraints. We anticipate the current complex and uncertain operating environment will continue for the foreseeable future. Those supply chains have not uniformly improved end-user demand remains strong, and the Allison team continues to take actions that address and mitigate production challenges. In prior quarters, we have discussed several initiatives that are supporting Allison's long-term growth objectives. Among them is Allison's award-winning 3414 regional haul series fully automatic transmission for the North America heavy-duty regional haul and day cab tractor market. Currently released with Navistar, Daimler Trucks North America, and Volvo Trucks North America, the 3414 RHS expands our addressable market, enables the pursuit of market share growth, and represents an incremental revenue opportunity of $100 million annually. Following the initial launch during the summer of 2020, the Allison 3414 RHS has surpassed expectations, realizing meaningful success in a short amount of time. The 3414 RHS is now operating in three of the top five largest private fleets in North America, which collectively operate approximately 25,000 regional haul tractors. Another growth opportunity is Allison's next generation hydraulic fracturing transmission, Fractran, purpose-built to meet the unique demands of the hydraulic fracturing industry. This new offering represents another incremental growth opportunity of $100 million in annual revenue. Following the delivery of the first Fractran units to several industry partners during the first quarter, last month we announced that Calfrac Well Services, one of the largest hydraulic fracturing companies in the world, had introduced Fractran into their field operations beginning in April. Calfrac employees have been impressed and noted an improvement in the productivity of the Fractran-equipped hydraulic fracturing equipment. Fractran's early success in the field along with customer feedback reinforces our expectations. Allison's Fractran is the only purpose-built hydraulic fracturing transmission in the market and offers a unique combination of versatility, power, and efficiency to maximize customer productivity with high reliability and powerful performance under pressure. Allison's defense and market is also positioned to drive long-term growth. In recent months, We've announced multiple initiatives in support of our defense customers, including the U.S. Army's newest tactical wheeled vehicle program, the Common Tactical Truck, or CTT. Allison will support multiple customers, leveraging our 4,000 series fully automatic transmission. CTT has the potential to replace more than 7,000 heavy duty trucks within the Army's tactical wheeled vehicle fleet. representing over $150 million in aggregate revenue for Allison. Prototype vehicle testing will begin in late 2023 with an award decision expected to occur as early as 2025. Allison has also been selected to provide the X1100-5B propulsion solution for the US Army's new M88A3 Hercules heavy tracked recovery prototype vehicle that is expected to upgrade and replace the M88A2. This initiative is consistent with the Army's continued investments in combat readiness and fleet modernization. Following the prototype stage of the M88A3 Hercules, a decision by the Army to transition to production is expected as early as 2024. Currently, There are more than 900 M88 vehicles in the U.S. Army. If the Army were to modernize the entire fleet, the total revenue opportunity for Allison could represent nearly $500 million over the next two decades. And last week, we announced that Allison's 3040MX cross-drive transmission will be featured in the U.S. Army's newest tactical armored combat vehicle, the Mobile Protected Firepower MPF program. The MPF program is one of the Army's highest priority modernization initiatives. The Army is expected to purchase more than 500 MPF vehicles through 2035, collectively representing approximately $250 million in revenue for Allison's defense and market. Allison is proud to team up with General Dynamics Land Systems on the MPF program and to provide the Army with the transformational technology necessary for future battlefields. Allison has consistently been at the forefront of transformational technology. In June, in partnership with Gillig and Cummins, we announced the delivery of the first transit buses equipped with Allison's next generation electric hybrid propulsion system, eGen Flex, to the Indianapolis Public Transportation Corporation. The eGen Flex continues to make inroads throughout the Midwest with multiple transit properties, selecting eGen Flex equipped buses for their fleets, including recent announcements with Evansville and Muncie, Indiana, and Oshkosh, Wisconsin. Introduced in 2020, Allison's eGen Flex has demonstrated the ability to operate in full engine-off mode for more than 50% of its time. in operation across multiple routes within one of North America's largest transit fleets. Allison is proud to partner with public transit agencies across the Midwest to support their efforts to reduce carbon footprints and dependence on fossil fuels, protect the environment, and enhance the quality of life for their passengers as fleets move to electric hybrid or full EV technology to support sustainability goals, Allison will continue to be a partner of choice supported by our track record of delivering innovative and reliable technology specifically designed to meet the needs of the transit industry. Earlier in the second quarter at the Advanced Clean Transportation Expo in Long Beach, California, we were proud to announce a new strategic partnership with Exos, a leading manufacturer and services provider of Class V through Class VIII battery electric vehicles, powertrains, charging infrastructure, and fleet management software to jointly develop heavy-duty Class VII and VIII commercial electric vehicles. Allison's 100S and 100D eGen power electric axles will be integrated into Exos battery electric commercial trucks. And finally, during the quarter, Emergency One unveiled their fully electric EV0 fire engine equipped with the EGEN power 100D electric axle. This first of its kind vehicle was released at intershoes 2022 in late June and already has orders from the Scottish Fire and Rescue Service with an expectation to enter service in early 2023. Emergency One is the United Kingdom's largest manufacturer of fire and rescue vehicles, and we are proud to play a key role and their next generation electric vehicle platform. Thanks to the Allison team's relentless execution over the years and through multiple cycles, we are realizing the benefit of our growth objectives. Our success remains aligned with our long-term strategy of continuous global market expansion. And coupled with continuous product and technology innovation and the Allison brand promise of quality, reliability, and durability, we remain positioned to improve the way the world works for years to come. Thank you, and I'll now turn the call over to Fred.

Thank you, Dave. Following Dave's comments, I'll discuss the Q2 2022 performance summary, key income statement line items, and cash flow. I'll then reaffirm the full year 2022 guidance. Please turn to slide five of the presentation for the Q2 2022 performance summary. Year-over-year net sales increased 10% to $664 million from the same period in 2021, driven by price increases, resilient customer demand, and the continued execution of our growth initiatives, despite persistent supply chain challenges. The increase in year-over-year results was led by a 13% increase in the North American on-highway end market, principally driven by the continued strength in customer demand for last-mile delivery, regional haul, and vocational trucks. Year-over-year results were also improved by a $25 million increase in net sales in the global off-highway end markets, driven by sustained demand for hydraulic fracturing applications in the energy sector, as well as stronger demand in the mining and construction sectors. An 8% increase in net sales in the service parts, support equipment, and other end market, principally driven by North American service parts and global support equipment. and a 7 percent increase in the net sales in the outside North American on-highway end market, principally driven by higher demand and increasing penetration in Europe and South America. Gross profit for the quarter was $311 million, an 8 percent increase from the $288 million for the same period in 2021. The increase was principally driven by price increases on certain products and higher net sales, partially offset by unfavorable material cost. Net income for the quarter was $122 million compared to $110 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by increased product initiative spending. Adjusted EBITDA for the quarter was $227 million compared to $213 million for the same period in 2021. The increase was principally driven by higher gross profit, partially offset by increased product initiative spending. Earnings per share increased 25% to $1.26 from the same period in 2021, driven by higher net income and lower total shares outstanding. A detailed overview of our net sales by end market can be found on slide six of the presentation. Please turn to slide seven of the presentation for the Q2 2022 financial performance summary. Selling general and administrative expenses decreased $2 million from the same period in 2021, principally driven by lower commercial activity spending. Engineering research and development expenses increased $5 million from the same period in 2021, principally driven by increased product initiative spending. Please turn to slide 8 of the presentation for the Q2 2022 Cash Flow Performance Summary. Adjusted free cash flow for the quarter was $36 million compared to $95 million for the same period in 2021. The decrease was driven by higher operating working capital funding requirements and higher cash income taxes partially offset by higher gross profit and lower capital expenditures. The increase in operating working capital funding requirements during the second quarter was driven by increased by an increase in inventory early in the quarter to mitigate supply chain constraints and position Allison to meet customer demand in the second half of the year. The timing of the inventory increases and corresponding accounts payable balances paid during the second quarter had an unfavorable impact on operating working capital. Further contributing to the increase in operating working capital funding requirements, net sales experienced a gradual ramp up as the quarter progressed, with June being the highest revenue month of the quarter. The late quarter cadence in net sales and corresponding accounts receivable balances to be received during the third quarter also had an unfavorable impact on operating working capital. Consistent with Allison's discipline and well-defined approach to capital allocation, we settled $34 million of share repurchases during the second quarter. Year to date, Allison has repurchased 3% of outstanding shares. We ended the quarter with a net leverage ratio of 2.7 times, $122 million of cash, and $645 million of available revolving credit facility commitments. In addition, we continue to maintain a flexible, long-dated, and covenant-like debt structure with the earliest maturity due in 2026. Finally, we ended the quarter with approximately $1.2 billion of authorized share repurchase capacity. Please turn to slide nine of the presentation for the full year 2022 guidance. As Dave mentioned earlier, we are reaffirming the full-year 2022 guidance midpoints while narrowing the guidance ranges released to the market on February 16. We expect net sales for 2022 to be in the range of $2.65 to $2.75 billion. Our 2022 net sales guidance reflects higher customer demand in the global on-highway, global off-highway, and service parts support equipment in other end markets, as well as price increases on certain products, and the continued execution of our growth initiatives. In addition to Allison's 2022 net sales guidance, we anticipate net income in the range of $450 to $500 million, adjusted EBITDA in the range of $885 to $955 million, net cash provided by operating activities in the range of $590 to $660 million, adjusted free cash flow in the range of $420 to $480 million, and capital expenditures in the range of $170 to $180 million. Thank you. This concludes our prepared remarks. Kyle, please open the call for questions.

At this time, we will be conducting a question and answer session. If you 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'd like to remove your question from the queue. for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Larry Demaria with William Blair. Please proceed with your question.

Thanks. Good afternoon, everybody. Just curious, I wanted to touch on e-axles long-term and not specifically the quarter right now, but obviously, you know, comes in Meritor tie-up. which will eventually ultimately be an integrated solution with including e-axles. I'm just curious how you're thinking about strategically from your end, if you need to partner elsewhere, and how does this change your product development roadmap and expense plan, and just broadly how you're thinking about your competitive positioning given some of the consolidation. Thank you.

Good afternoon, Larry. It's Dave. So to your question, first of all, the Cummins Meritor, frankly, makes a lot of sense for both parties. I think to your comment there about, you know, what they're bringing in terms of integration, you know, I'm sure as you know, the architecture that we're pursuing in terms of the e-axle is a fully integrated e-axle. So, I would also note, you know, our ability as we've done for probably 20 years now, in terms of experience around delivering fully integrated solutions back to the eGen Flex product that we have, which is second gen versus our H4050 transit system. You know, we certainly have that experience and capability. We've also talked previously about, you know, our efforts to partner in a number of different areas and, frankly, a number of announcements, investments we've made, as well as others that we're working on. But, you know, we think certainly the e-axles as a solution set given many other technologies that are out there continues to be preferred for a number of reasons. So we're very pleased with where we're at from both the design perspective as well as the progress that we're making on a number of engagements as we mentioned in the prepared remarks continue to make progress with what we consider to be very focused engagement with the marketplace, but also I think being very clear-eyed about the expectation, which is the experience of delivering at or better performance than what the industry has come to expect from, you know, the industry standard of Allison in terms of performance, durability, reliability, et cetera. That's really where, you know, how we see things playing out over the longer term. We believe it will certainly be a significant portion of the market in terms of solutions demand and, you know, look forward to delivering products consistent with our brand promise.

Okay. Thank you.

Our next question is from Rob Wertheimer with Milius Research. Please proceed with your question.

Thanks. Good evening. Could you please update us on just price costs in the quarter and where you feel you are on recapturing the rising cost curve? I don't know if you're a little bit behind, maybe some others, maybe OEMs. And then just in general, I don't know if you're willing to comment on how you see the cost curve developing right now in real time on labor, inflation peaking, on you know, on transport costs, on material costs, and anything else, if you could sort of give us a sense of how that balance of price costs is trending for the rest of the year, you know, as far as you can see.

Sure, Rob. This is Fred. You know, for the quarter, you know, we had $33 million in price, had material costs up $25 million, so slightly favorable. You know, we have, you know, as the year progressed, and we talked about on the Q1 call, continued to see, you know, costs escalating. Obviously, here recently, you've seen commodity costs start to roll off. You know, but as we look at it, we still feel for the year we'll be slightly price-cost favorable. Obviously, that's had, you know, an impact, you know, on our margin percentages, you know, When you think about adding roughly $100 million in revenue and close to $100 million in cost, clearly it's diluted to margins. So if you just took that into consideration itself, that's diluting our margins by about 130 basis points and impacting clearly. We've got the operating leverage, but we have to overcome that headwind. As we go forward, we haven't seen any signs of inflation letting off. Like I said, you started to see some relief from commodities, but labor rates continue. It's a tight labor market. So if we formulate our thoughts around 2023, certainly I think it's an environment where you're positioned to go out and get price and will need to cover the inflation.

Thank you.

Our next question is from Tim Thine with Citigroup. Please proceed with your question.

Great. Thank you. Good afternoon. Yeah, and maybe just, Fred, just continuing along that same thread with respect to pricing and inflation. You know, historically, the long-term supply agreements have always, you know, long been kind of a feature for Allison as a means to, to provide a bit more visibility and I guess somewhat of a hedge. But I'm just curious, you know, if we've never been, or certainly in the last decade or so, as long as Alice has been public at least, we've never been in an environment of this level of just broader inflation. So I'm just curious as you, you know, renegotiate, as you look to renegotiate those agreements as they roll off, as the tenor of the contract, and I'm sure the discussions, obviously, there's a limit to what you want to divulge a call as to how those are going. But basically, the question is, are you able to, or are there components of the agreements that may be changing just given the backdrop that we're in as, again, from an inflationary standpoint that we haven't seen in quite some time. So, Just basically how you're approaching those agreements as they roll off is the spirit of the question. Thank you.

Thanks, Tim. Again, this is Fred. So, I mean, you know, certainty in price in this environment comes at a cost. You know, and so as we have discussions, and as you know, Tim, those are cadence to roll off at, you know, at multiple points. They're not all lined up on a single calendar year. They're typically three to five years in length. We're certainly willing to provide certainty of price, but it will come at a cost. So I think if we have those discussions, it's certainly possible that just based on the environment, that it might be in both parties' interest to just do annual pricing or pricing a time of delivery. But those are discussions that are ongoing. You know, we're very cognizant of, you know, of our cost profile and, you know, anticipate, you know, picking up meaningful price. You know, and that's, for us, that's not, you know, well, we say cost, and you're seeing it, and certainly we want to protect our margins. But the important thing to remember is, you know, our product delivers value. So if an OEM is going to increase the price of the truck 10%, 15%, the value of our product just went up 10%, 15%. If the price of fuel goes up, the value of our product goes up because we make the vehicle more fuel efficient. You get more work done with a vehicle with our product. Therefore, you need fewer vehicles in the fleet. So really, the fact that we deliver value and a pretty aggressive payback, two- to three-year payback, in a rising inflationary environment, we're well-positioned to charge for that value.

Hey Tim, are you still there?

Nope, I'm all good. Thank you.

Yep. Our next question is from Ian Zafino with Oppenheimer. Please proceed with your question.

Hi, great. Thank you very much. You know, I know you kind of answered this question a little bit, but as you look on the electric side, do you feel like you have any holes where you would need to maybe go out and buy something? You know, and in that vein, how are you thinking about shareholder returns and capital returns, you know, in an environment where you may or may not need to make M&A? Thanks.

Ian, it's Dave. Good afternoon. So, as we've said, our position has quite a history in terms of electrification. We fast forward to today. As you know, we've made a number of investments already, continue to invest. We're also certainly fully aware of the potential evolution, adoption of EV. and all the variables and attributes that need to be met to do that. So we start with, as I said earlier, delivering our brand promise, and that's a very high standard of performance. As Fred just mentioned, we deliver real value. We see that certainly in the context of EV solutions, which really gets to your question, holes or gaps, if you will, in terms of whether that be capabilities, content, et cetera, you know, we're constantly looking at improving our overall position. So I think it's, you know, safe to say based on our history as well as, you know, our spending profile, you know, we're moving certainly at a fairly rapid pace with the market. Nevertheless, you're always cognizant of what the, you know, returns are, what your return targets are to your point there in terms of I guess capital allocation more broadly, you know, we have said since prior to going public as we continue to look at opportunities to invest our shareholders' capital, we have reasonably high expectations there. And I think we've proven that through, you know, a very disciplined approach. So, whatever we consider, whatever we look at is really done in light of those metrics and that evaluation process. We don't see that changing. and we continue with the level of activity that we've had, certainly the knowledge that's being built and the awareness of what's in the market, what customers want, you know, I would also offer the voice of customer at some level here remains somewhat incomplete. So, you know, we're looking at a number of different options about how to deliver that brand promise. with that voice of customer in mind as it evolves. So, you know, I would say more broadly, we're going to continue that analysis, but I certainly can give you some level of assurance that we're staying very close to the market and very active on a number of different fronts to evaluate methods, opportunities to improve our overall position in EV.

Okay, great. Thank you very much.

Our next question is from Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good evening. I guess Dave's question to you, you tend to, you know, a lot of concerns out there on the macro and recessions and you're starting to see it on the consumer side. You tend to be probably a little more balanced in terms of your views. I'm wondering, it doesn't sound like you're seeing any cracks, but can you talk to, you know, whether you're taking any precautionary measures types of things that you're watching, you know, just to see if the downturn, you know, eventually happens. And then, sorry, follow-up question. Just wondering, you've made a lot of great announcements and partnerships, you know, overseas. When you think about, you know, EV, we're starting to hear those announcements. Anything pending or coming from your more core customers in North America or is it still too far out? that there's no point in formalizing anything at this point. Thanks.

Jamie, thanks for those questions. I guess on the appreciating our approach to forecasting and looking at the market, I think to your comment there, are we seeing any Cracks and such, you know, if you take a buy-in market, certainly the North America on highway market, as others have already reported for the quarter, and I think done a very complete job of describing the overall conditions and expectations there. I wouldn't, we don't certainly disagree with the vast majority of that. As you get down into certain segments, there will be some level of differences. Over-the-road market as you know is in North America is not a market we play in I Think some of the the initial activity that's being seen there is not really surprising relative to use vehicle values You know as you take a step back for though the reality is the market has been under supplied for quite a period of time as you well know and The inventory levels continue to be challenged. Our understanding is if there are cancellations, they're being absorbed by wait lists, and the OEMs continue to be in a position of very full order books. And I think from an overall scheduling perspective and trying to manage your business, that's obviously a good position to be in, subject to getting some of these continued supply or input constraints resolved. We see that as a pretty healthy environment going into 23. You also have the dynamic, as you know, of emissions changes for 2024, which further, I think, supports the broader market. Having said all that, we tend to take a pretty tight view of things. As you know, the majority of the team here was present for the unfortunate developments of 2008 and 09, where, you know, we took appropriate steps and I thought we're relatively well positioned. You know, we're in better shape, I would argue, as an organization today to manage through, you know, if there is a downturn, to be able to manage through that and take appropriate action. I think the flexibility we have especially to react to things is still relatively High, especially when you look at some of the the work that the team great work that the team has done in terms of our operating footprint both within North American and outside North America, so I think those are Real positives, but you know back to your you know, your your point there, you know We are certainly keeping a very close eye on things the other thing I would just throw in as you think about the amount of statutory spending whether that's you know out of the US government or other governments continues to be at a relatively elevated level so some of these areas are going to you know provide are going to receive some level of tailwind there the challenge I think broadly will be back to some of these input constraints that you know were mentioned on the call already and how those are going to be ultimately resolved so on your you know the EV partnerships and such certainly with some of the activity we have, you know, we're continuing to work on several other opportunities and look forward to providing some updates here as we get further to the year. But back to I think the team is internally is doing a phenomenal job working with these engagements and staying very focused I would also offer, for what it's worth, input constraints are not isolated to conventional. The EV market continues to have its challenges from an input constraints perspective as well, especially when you look at the inherent volumes that are present or being requested. That's very challenging, and I would say that more broadly throughout. even the conventional side with lower volume products are pretty challenged right now in terms of getting in the queue, so to speak, to be generated from the supply base.

Appreciate the insights.

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

Yes, hi. Good afternoon. Fred, I'm wondering if you'd just talk about the margin cadence that you're expecting over the course of this year. You know, I think normally your margins are about flattish, 2Q with 1Q. This year we were down, you know, a point and a half. Can you just talk about the sequential drivers and then how you're thinking about margin progression heading into 3Q, where under normal seasonality you're typically flattish, 3Q versus 2Q? Thanks.

Sure, Jerry. As we're looking at it right now, we see Q3 very similar to Q2, and then with the outlier being Q4. And that's really just driven by the number of production days, the holidays around Thanksgiving end of the year. So the cadence looks fairly balanced, Q2, Q3. and Q4 tailing off slightly. Really driven by top line revenue, Jerry.

And Fred, thank you for that color. It could just be more about the progression, 2Q versus 1Q. Why do we have a margin step down? Was that supply chain or what drove the step down 2Q versus 1Q?

If you look at the quarters, we did continue to see And we saw some cost increases, Q1 to Q2, you know, from our suppliers. You know, commodities continued to elevate. You know, volume was slightly lower. So those are the primary drivers, Jerry.

I appreciate it. Thanks, Fred. Thanks, everyone.

Our next question is from Felix Beauchene with Raymond James. Please proceed with your question.

Hey, good afternoon, everybody. Good afternoon. Hey, you know, I was hoping we could maybe expand a little bit on the supply chain commentary. I think in the prepared remarks, you had noted they really haven't gotten uniformly better. Just curious if you could talk about maybe pain points in your own supply chain and maybe what you're hearing on the OEMs from a planning perspective, you know, to the second half of the year. Appreciate it.

You're welcome, Felix. It's Dave. So I guess in addition to some of the prepared commentary, I first start with something I mentioned on, I believe, our first quarter call. The amount of effort that it's taking the industry to manage the constraints right now continues to be very high. So, you know, I would start by recognizing the efforts of the Allison team as well as our supply base and our customers trying to work as cooperatively as possible to get through these things. You can imagine, I certainly, with my time with the business, we've never had to do this level of very deep coordination. And it's one that I think is, again, taking a lot of time. It's also generating supplemental cost in terms of a number of different areas. But if you I wouldn't say anything in particular is proving to be problematic for us. I think for the industry, based on some of the remarks that are public, electronics continue to confound the industry a bit. I would say if you look at some of the surveys that were done around the industry, at least for second quarter, One development that was interesting there is that you had the availability of raws Fall back a bit in terms of you know top five, but labor moved up a notch So point of mentioning that is when we use the phrase inputs for a reason Because I think people tend to think about components, but you really need to think about everything that goes into a supplying those components. And labor continues to be a really significant issue. I would note mostly on the U.S. side of things in North America, you're also having some level of disruption in a number of regions around, whether it's unfortunately with the China lockdowns and the hangover effect from those, as well as energy issues in a number of areas. We're not really being significantly impacted by that at this point. I'm sure the OEMs, much as they try, we all try to mitigate, you know, you have to think about the entire supply chain that goes into each one of the components you're using, which as you do that level of work, I think you'll find it continues to be a relatively global supply chain, and those issues are As we said in the prepared remarks, we do not expect to see significant improvement there. But I think the final point, just looking at the scheduling and the amount of demand, as I mentioned, takes a little bit of pressure off of the industry from the standpoint of at least trying to align with the supplier availability. You've seen some favoring of the higher margin products going out from the industry versus some of the lower margin. That will eventually, we believe, catch up with itself as you look at fulfilling the demand from the customer base. Overall, again, still a lot of heavy lifting there. Challenges continue. But I would say overall a bit better than it's certainly been over the prior quarters. But we'll wait and see what tomorrow brings us as every day appears to be an adventure sometimes.

Super helpful. I appreciate it.

Our next question is from Tammy Zakaria with JPMorgan. Please proceed with your question.

Hi. Thank you so much for taking my question. So going back to that Exos partnership with 100S and 100D, can you just remind us what the revenue opportunity you see with this partnership and what kind of margin do you expect from this versus the conventional business?

Tammy, it's Dave. I guess a few things. We do not get ahead of our customers, so I would certainly point you to exos as they develop their forecast and and ultimately talk to vehicle development timelines and programs that's that's really the answer to your question in terms of margins as we've over the years learned full well we didn't achieve the margins that we had today immediately in terms of in product introduction so and I'm fairly confident others that are providing a number of different solutions in the EV space right now are feeling that same position in terms of addressing costs for relatively low volume introductions. I would say a number of the announcements that have been made aren't even by industry standards, low rate initial production. in the concept or design validation stage than they are, you know, start of production type of numbers. So that by definition leads you to a path of, you know, relatively low expectations initially in terms of margins on these types of solutions.

Got it. Thank you so much.

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

Thank you, Kyle, and thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening.

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