Allison Transmission Holdings, Inc.

Good afternoon. Thank you for standing by. Welcome to Allison Transmission's first quarter 2023 earnings conference call. My name is Camilla 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. I would now like to turn the call over to Jackie Bowles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Thank you, Camilla. Good afternoon, and thank you for joining us for our first quarter 2023 earnings conference call. With me this afternoon are Dave Graziosi, our Chairman and Chief Executive Officer, and Fred Bowley, 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 allisontransmission.com. A replay of this call will be available through May 11th. 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 first quarter 2023 earnings press release, in our annual report on Form 10-K for the year ended December 31st, 2022, as well as other general economic factors. 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 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 gap measures attached as an appendix to the presentation and to our first quarter 2023 earnings press release. Today's call is set to end 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 four of the presentation for the call agenda. During today's call, Dave Graziosi will review highlights from our first quarter 2023 results and provide an operational update. Fred Boley will then review our first quarter financial performance and update to our full year 2023 guidance prior to commencing the Q&A. Now, I'll turn the call over to Dave.

Thank you, Jackie. Good afternoon, and thank you for joining us. After a record year for Allison in 2022, our first quarter results show a strong start for 2023 and an exciting year to come for the business. During the first quarter, we achieved record revenue of $741 million, an increase of 9% from 2022. Not unlike previous quarters, sales growth was outperformed by EBITDA margin growth and EPS growth, demonstrating Allison's commitment to operating performance. In the first quarter, we grew EPS to $1.85, up 42% year over year. Our quarterly results demonstrate not only the strength of our core end markets, particularly in North America, but also the value proposition of the Allison fully automatic transmission, which enables customers to get more work done with our quality, durability, and reliability promise. As cost inflation continues throughout the industry, vehicle prices inflate and Allison's value proposition increases, providing an opportunity to further increase market share as well as realize price. For the first quarter, we achieved gross margin expansion of 145 basis points compared to the same period in 2022. Our operating performance has enabled us to maintain our capital allocation priorities by investing in Allison's conventional and next-generation propulsion products. We also remain committed to returning capital to shareholders through our quarterly dividend and share repurchase program. During the first quarter, we increased our quarterly dividend by 10% to 23 cents per share, marking the fourth consecutive year of dividend increases. Also during the quarter, we repurchased 1% of our shares outstanding, with 60% of our shares outstanding repurchased since Allison's IPO in 2012. We ended the first quarter with approximately $1 billion of authorized share repurchase capacity. During the quarter, Allison attended the Raymond James Institutional Investors Conference where we highlighted progress of our China wide-body mining dump growth initiative. We have resized the annual revenue opportunity from $50 million to $100 million as our Allison Automatic 4000 series has gained quick adoption in the Chinese market as well as export markets. As we discussed on the last earnings conference call, we are pleased with the early success of the initiative, gaining over 10 percent share in 18 months. In early April, we announced another growth initiative for the wide-body mining dump export market through our partnership with Sani, a global heavy equipment manufacturer for the mining and construction markets. Our letter of intent to supply Allison's 4000 Series 7-speed transmission for Sani's 96-ton wide-body mining dump truck for the India market demonstrates our commitment to expanding our global penetration in this vocation. This partnership will draw on our joint success in the Chinese wide-body mining dump market to create an ecosystem of innovation and growth in the fast-developing India market. On our last earnings call, we reiterated the announcement of Allison's award-winning 3414 Regional Hall Series transmission by being available in DTNA's Class 8 Freightliner Cascadia day cab model paired with Cummins natural gas engine. Today, we would also like to announce that the 3414 paired with the Detroit DD13 diesel engine is now available for order in DTNA's M2 truck. The 3414 is the lightest transmission in the segment at up to 11% lighter power. than the closest competitor and provides numerous benefits including improved fuel economy by up to 8% regardless of fuel type. The announcement represents the fuel agnostic nature of Allison's products and the commitment to evolving our propulsion solutions to help OEMs and fleet customers meet sustainability goals. We have made numerous announcements for our defense end market in the last few quarters and today we would like to take some time to outline our strategy and opportunities in this unique market. Historically, Allison's defense and market sales were primarily attributable to United States Department of Defense, and we continue to provide the transmissions for all tactical wheeled vehicles heavier than the Humvee and more than half of the armored combat vehicles used by the US military. In February, the contract award for the JLTV A2 was announced by the US Army. Allison has been the propulsion supplier of the JLTV A1 since 2015, and we are proud that our 2500 specialty series will remain the propulsion solution of choice for this program with the JLTV A2. The first delivery is expected in Q3 of 2024 with the U.S. Department Defense Department forecasting 55,000 JLTV A1 and JLTV A2 vehicles over the next two decades. Today, global defense spending is on the rise, driven by the Ukraine war, shifts in geopolitical dynamics, and the U.S. Department of Defense modernization priorities. Allison is poised to capture growth in this cycle by continuing our longstanding partnership with the U.S. Department of Defense, while diversifying our revenue sources by increasing our international sales. In the next few years, we expect this growth to drive $100 million of incremental annual revenue in our defense and market. Starting in the US, we have already announced several programs, such as the Army's Mobile Protected Firepower, or MPF, the M88A3 recovery vehicle, and the continuation of the Abrams contract. These programs mentioned are all tracked vehicle programs where we expect to see the most growth. In addition to these track programs, there are numerous wheeled vehicle programs with the U.S. Department of Defense, which will continue to drive growth in the coming years. All of these programs are expected to last decades and continue Allison's longstanding partnership with the U.S. Department of Defense. We also expect a significant portion of growth in the defense and market to come from international opportunities. In 2022, international sales accounted for 29% of the revenue in our defense and market. In coming years, we expect the international revenue will grow to more than 50% as a result of these strategies. First, the expansion of sales of existing products, such as our X-1100 and the Abrams main battle tank. Over the next three years, the U.S. government plans to sell more than 430 Abrams tanks to Taiwan, Australia, and Poland. Second, our sales to the international defense market through partnerships with global defense OEMs such as South Korea's Hanwha Aerospace. Hanwha is a global leader in armored combat vehicles and increased sales of its K-9 Thunder self-propelled howitzer to both Egypt and Poland has led to Hanwha becoming one of Allison's largest defense OEMs. And finally, our development of new products such as the 3040MX medium-weight cross-drive transmission and product variants such as the Abrams X1100 variant developed for the Turkish Fertina self-propelled howitzer program, which are gaining interest around the world. The 3040MX has already been selected for the U.S. Army's MPF program and has since gained traction in new programs in countries such as Poland, Turkey, and India. Last quarter, we mentioned India's future infantry combat vehicle, or FICV, and the opportunity for approximately 750 units over the next two decades utilizing the Allison 3040MX. With our new eGen Force electric hybrid propulsion system for tracked combat vehicles, we are looking forward to even longer-term growth opportunities in our defense and market. The Allison eGen Force has already been selected by American Ryan Mittal, for the optionally manned fighting vehicle, or OMFV, with the U.S. Army planning to down select this summer, followed by testing in 2026, an estimated start of production in 2029. The defense end market is unique in that armored vehicle programs typically take between seven and 10 years from idea to production. This requires the industry to self-invest prior to final vehicle selection and production. often with uncertain timelines, with the opportunity being decades-long production and aftermarket for most programs. Allison is committed to investing in and pursuing growth in our defense and market in order to capture the opportunities from an expected multi-year increase in global defense spending, and we look forward to providing updates on specific milestones. In summary, Allison's first quarter results demonstrate not only the current success of our business, but the notable growth opportunities to come. We continue to invest in our business in order to achieve our growth ambitions while returning capital to shareholders and delivering on our brand promise to improve the way the world works. Thank you, and I'll now turn the call over to Fred.