Allison Transmission Holdings, Inc. (ALSN) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's First Quarter 2013 Earnings Conference Call. My name is Shannon Gunta, and I will be your conference operator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Dave Graziosi, the company's Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Shannon. Good afternoon, and thank you for joining us for our first quarter 2013 results conference call. With me this afternoon is Larry Dewey, Allison Transmission's Chairman, President and Chief Executive Officer. As a reminder, this conference call, webcast and the presentation we are using this afternoon are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through May 6. As shown on Page 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 2013 results press release and our Annual Report on Form 10-K for the year ended December 31, 2012, and uncertainties 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 we express today. In addition, as noted on Page 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2013 results press release, both of which are posted on the Investor Relations section of our website. Today's call is set to end at 5:30 Eastern Time. [Operator Instructions] Now I'll turn the call over to Larry Dewey.

Thank you, Dave. Good afternoon, and again, thanks, to everyone, for joining us today. Our first quarter 2013 results are consistent with the guidance we provided to the market on February 19. Despite challenging end market demand conditions, Allison continued to demonstrate strong operating margins and cash flow by executing initiatives to proactively align costs and programs across our business. Although these initiatives affected our entire organization, we believe Allison continues to be well positioned for a cyclical recovery in the North America On-Highway end market, while supporting its Outside North America growth plans. Maintaining our prudent approach to capital structure management, we refinanced the remaining balance of our Senior Secured Credit Facility Term B-1 Loan due in 2014, reduced the applicable borrowing margin of our Senior Secured Credit Facility Term B-2 Loan due in 2017, extended the maturity of our $400 million revolving credit facility to 2016 and paid a quarterly dividend to our shareholders. In addition, on April 15, Allison's Board of Directors approved an increase in its quarterly dividend, doubling it from $0.06 to $0.12 per share, further highlighting our commitment to cash flow generation and the return of capital to shareholders. Please turn to Slide 4 of the presentation for the call agenda. On today's call, I'll provide you with an overview of our first quarter 2013 performance, including sales by end market. Dave will review the first quarter 2013 financial performance, including adjusted EBITDA and free cash flow. I'll wrap up the prepared comments with our full year 2013 guidance update prior to Q&A. Please turn to Slide 5 of the presentation for the Q1 2013 performance summary. Net sales decreased approximately 24% from the same period in 2012, principally driven by considerably lower demand in the North America energy sector's hydraulic fracturing market, relative to the same period in 2012, due to weakness in natural gas pricing, previously considered reductions in U.S. defense spending and weaker Global On-Highway end markets. Partially offsetting these declines were price increases on certain products. Gross margin for the quarter was 43.4%, down from Q1 2012, yet an increase of 60 basis points from a gross margin of 42.8% for the fourth quarter of 2012, the most recent quarter, with a similar level of net sales. The fourth quarter of 2012 gross margin excludes $15 million of costs and charges incurred to conclude a new 5-year labor agreement. Adjusted net income decreased by $64 million from the same period in 2012, principally driven by decreased adjusted EBITDA, partially offset by decreased cash interest expense as a result of debt refinancing and repayments and $14 million of premiums and expenses in 2012 related to redemptions of long-term debt. Adjusted free cash flow decreased $72 million from the same period in 2012, principally driven by decreased net cash provided by operating activities, partially offset by reduced capital expenditures. The decrease in capital expenditures was principally driven by the 2012 expansion of our Chennai, India facility and lower product initiatives spending, partially offset by increased investments in productivity and replacement programs. Please turn to Slide 6 of the presentation for the Q1 2013 sales performance summary. North America On-Highway end market net sales were down 14% from the same period in 2012, principally driven by lower demand for Rugged Duty Series models, partially offset by increased demand for Motorhome Series models. North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 11% from the same period in 2012, principally driven by municipal subsidy and spending constraints, engine emission improvements and non-hybrid alternative technologies that generally require a fully automatic conventional transmission, specifically the natural gas engines. North America Off-Highway end market net sales were down 89% from the same period in 2012, principally driven by lower demand from hydraulic fracturing applications due to weakness in natural gas pricing. Defense end market net sales were down 26% from the same period in 2012, principally driven by continued reductions in U.S. defense spending to longer-term averages experienced during periods without active conflicts. Outside North America On-Highway end market net sales were down 6% from the same period in 2012, reflecting weakness in Asia, partially offset by strength in Latin America. Outside North America Off-Highway end market net sales were down 34% from the same period in 2012, principally driven by weakness in the mining sector. Service Parts, Support Equipment & Other end market net sales were down 9% from the same period in 2012 principally, driven by lower demand for North America Off-Highway service parts and global support equipment commensurate with lower transmission unit volumes, partially offset by price increases on certain products. Now I'll turn the call back over to Dave Graziosi.

Thank you, Larry. Please turn to Slide 7 of the presentation for the Q1 2013 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and adjusted EBITDA. Selling, general and administrative expenses decreased $13 million from the same period 2012. The decrease was principally driven by $8 million of lower intangible asset amortization and reduced global commercial spending activities, reflecting actions to align costs and programs across our business with expectations of weakened near term end market demand. Engineering, research and development decreased $5 million from the same period in 2012, excluding the 2013 technology-related license expenses of $6 million to expand our position in transmission technologies. The decrease was principally driven by lower product initiative spending, reflecting actions to align costs and programs across our business with expectations of weakened near term end market demand. The technology-related expenses represent the final noncontingent exclusivity payments for the use of Torotrak's Infinitely Variable Transmission technology and design fields. As we said in the past, these types of technology access arrangements are infrequent and should not be considered a reoccurring research and development cost. Interest expense net decreased 17% from the same period in 2012, principally driven by lower interest expense as a result of debt repayments and purchases and favorable mark-to-market adjustments for our interest rate derivatives, partially offset by refinancing transactions over the last year. Other expense decreased 90%, principally driven by the 2012 payments to terminate the services agreement with the sponsors, 2012 premium and expenses related to redemptions of long-term debt and 2012 fees and expenses related to our initial public offering. Income tax expense of $17 million resulted in an effective tax rate of 38.1% versus an effective tax rate of 30.3% for the same period in 2012. The change in the effective tax rate was principally driven by a $90 million reduction in discreet activity. Adjusted EBITDA, excluding technology-related license expenses for the quarter, was $147 million or 32.1% of net sales, an increase of 180 basis points from an adjusted EBITDA margin of 30.3% in the fourth quarter of 2012, the most recent quarter, with a similar level of net sales. The fourth quarter 2012 adjusted EBITDA margin excludes costs incurred to conclude a new 5-year labor agreement and a product warranty charge for a specific product issue. Allison's first quarter of 2013 adjusted EBITDA margin performance demonstrates our capability and commitment to deliver strong operating margins during a period of slower demand by executing initiatives to proactively align costs and programs across our business, while supporting growth activity. Please turn to Slide 8 of the presentation for the Q1 2013 cash flow performance summary. In view of Larry's comments, I'll focus on specific cash flow activity during the first quarter. Allison continues to demonstrate a solid free cash flow conversion rate during the first quarter despite the challenges of continued softness in North America Off-Highway end market demand and weaker Global On-Highway end market entering 2013. We are managing operating working capital levels closely through prudent production planning and further rationalization of inventory levels consistent with near term end market conditions. The reduction in cash paid for interest during the quarter reflects the benefits of deleveraging and refinancing activities over the last year. Finally, Allison ended the quarter with $121 million of cash, $375 million of revolver availability after letters of credit and net leverage of 4.33. Now I'll turn the call over to Larry Dewey.

Thanks, Dave. Please turn to Slide 9 of the presentation for the full year 2013 guidance update. We are affirming our full year 2013 guidance release to the market on February 19. Net sales decline in the range of 6% to 8%. Adjusted EBITDA margin, excluding technology-related license expenses in the range of 32% to 34%. Adjusted free cash flow in the range of $325 million to $375 million. Capital expenditures in the range of $80 million to $90 million and cash income taxes in the range of $15 million to $20 million. Consistent with our previous guidance, we expect low levels of demand in the North America energy sector's hydraulic fracturing market, reductions in U.S. defense spending, returning to longer-term averages experienced during periods without active conflicts, and lower demand in the North America Hybrid-Propulsion Systems for Transit Bus end market due to municipal spending constraints would lead to net sales reductions in these end markets. We also expect that the majority of the full year 2013 net sales reduction implied by the midpoint of our guidance has occurred in the first quarter and will be followed by growth in the Global On-Highway end markets for the balance of the year. Our full year 2013 adjusted EBITDA margin, excluding technology-related license expenses, guidance incorporates initiatives to proactively align costs and programs across our business with Allison's net sales guidance. Thank you for your time this afternoon. Shannon, please open the call for questions.

[Operator Instructions] And our first question will come from Tim Thein of Citigroup.

First question, could you maybe just take us through a little bit more on the non-North American On-Highway segment. I would've -- I guess I was thinking there'd be a little bit more of a year-on-year decline there just given the role that Europe played and presumably some of the numbers we've seen recently in terms of the truck and bus production out of Europe would have weighed on that segment a bit more. And can you just talk about some of these other growth markets where presumably you're capturing a bit more kind of a penetration?

Sure. Let me give you a little bit of a world tour and bear with me here. This will take a couple of minutes. Certainly, the Cyprus situation just kind brought a lot of things back into focus that I think had kind of stepped back a little bit in Western Europe. And so it has been choppy there in Western Europe. And certainly, the small countries in Central Europe, we think, are going to remain weak unless there's a significant change in developments there. However, in our case, when we talk about Europe, Middle East and Africa, that will also include Russia, Turkey, and of course as I said, Middle East and Africa. Turkey and Russia remain outperformers. Certainly, the Middle East and Southern Africa markets are improving due to more limited linkage to the E.U. economy. And just kind of touching a little more detail there. In Q1, Russia and its former CIS, bus sales were up significantly versus Q1 in 2012. We've now got 4 different Russia and CIS, formerly CIS, bus OEMs with significant releases of Allison product. We always talk about the release, secure the release, promote the release and sell the end user. KamAZ, MAZ, LiAZ and PAZ, all of them are selling Allison-equipped vehicles. KamAZ has even signed an agreement with Venezuela for a delivery of a significant number of front engine bus chassis all equipped with Allison models in 2013, and that's certainly a new piece of business for us as well. In Turkey, our strategy continues to be to leverage Turkish bus OEM relationships, both for the business in Turkey, but also as kind of a side-door entrance into Europe as those Turkish bus OEMs begin to compete with some of the more established Western European bus OEMs. In addition to coming into Europe that way, certainly some of them will be coming here to the U.S. market. And so it gives us good positioning there as well to the extent that they start capturing share. We achieved our first 12-meter bus release with a company, Turkish bus OEM TCV. And they're using us in both their diesel and their CNG buses, and that's put some pressure on some of the other OEMs to also release. And so we've got releases in the works for Autocar, TEMSA and even Isuzu as they look to compete in some of those same markets. South Africa, there, a significant part of our business is tied to a company called Bell Equipment, and they're building the first production 25 and 30-ton articulated dumps with Allison product as per a long term supply agreement that we signed with them here recently. And that will make us the exclusive power shift transmission supplier to Bell in their articulated dumps and rigid haulers. So that certainly positions us well as they continue to drive their business around the world in both Southern Africa and other places as well. They also announced that they'll be reentering, this is Bell, the North America market with the largest artic sold here. And we are -- the product that is released in that. So that provides some color on the Europe situation.

Okay, got you. That's helpful. Then just coming back to North America, Larry in terms of the medium-duty market, this has been ongoing, but we've seen that kind of GVW move down in size, i.e., the Class 5 has been growing at the expense really of the Class 7. So curious how one of your OEM partners there has had kind of some other things going on, so I'm curious how well you're moving there in terms of further penetrating or getting back into the Class 5 market in North America?

Well, certainly, a large part of our presence there is tied to the -- I assume OEM that you're referring to there and where we are the exclusive product in their TerraStar vehicle. They have been challenged on a -- with a couple of situations here that they're -- and I'm sure you follow their releases as well. They're starting to resolve a number of issues in the broader space. And then relative to ours, they have now started the release or some of the new variants of that vehicle, which we think positions us as their transmission within that vehicle platform for some additional volume.

And we'll take our next question from Ann Duignan of JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: You didn't provide an update for the outlook by segment. Could you just talk about whether there were any changes within the segments to your outlook for full year?

Ann, this is Dave. We hadn't -- we're not really changing the guide for the year. So certainly, as we provided by end market back on the 19th of February, so I think there's -- safe to say, there's some puts and takes throughout that portfolio. Having said that, we are comfortable with where we're at in terms of the full year numbers by end market that we laid out. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And is there a reason why you're not providing an update by segment?

There's really not much to update at this stage, and as I said, there's some put and takes. But overall they're not -- we don't believe meaningful at this point in the mix. I think there's a fair bit of sector relevant information that's been pushed out by others over the last few weeks. We've certainly taken that back into our process to review, but don't believe there's any adjustments that are necessary at this stage. I think it is safe to say, as you think about the full year, and I think that message has come out over the last couple of weeks that the expectation for a stronger first half versus second half is clear for certainly NAFTA On-Highway.

[indiscernible] Ann P. Duignan - JP Morgan Chase & Co, Research Division: Second [indiscernible]

So yes, I think that's borne itself out and frankly was incorporated into our thinking back in February. Anyway, I think some other information relative to NAFTA Off-Highway has come out of the fracking space and some expectations there. I don't think that's dramatically different from anything that we've talked about. We took a pretty conservative view of the year end. As you know, if you take the full year guide versus even the first quarter of last year, sales for that end market is less. So we feel, again, good about where that is and if anything, did not -- had not assumed that natural gas prices were -- have achieved the level that they have this quickly, frankly. So again, that's all in the mix. But not something we're prepared to update at this stage. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. And on the trucking side, if natural gas prices stay at about current levels or increase further, where would you expect to see it drop this time around? Would we just expect it in parts and there would be little pickup in footprint, at least for the foreseeable future?

I think, this is Larry, I think the first place we would, and you're correct in your presumption there. The first place we would expect to see it is in the parts. There is a fair amount of parts activity going on which is encouraging because, as you know, that's an industry that if they don't think they got a chance to use those rigs, they'll park them and just leave them. And there is some activity going on, some of our distributors actually have overhaul lines, albeit at relatively low levels, but they are overhauling rigs for customers. But we would expect to see an upturn there because as you know, there's a lot of rigs that are idled. And so they've all got to get back to work. And to the extent that some of them will need a little bit of refurb or repair before they're put back into service, we'd expect to see that first, then followed by new unit build.

And Ann, I think overall, if you look at the horsepower in the NAFTA market right now and our numbers have that around 18 million plus-or-minus million horsepower. 2/3 of that is fielded so out of the balance our understanding is roughly half is idled and half is essentially in need of repairs. So to Larry's point, in terms of if you see some return to the market, I think that gives you an idea in terms of size what's out there right now in terms of the field and condition. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. Yes, that's helpful color. On the North America side, just real quick. Can you talk about the shipments for CNG applications, how did they shape up this quarter versus your goal or versus fourth quarter? And are you seeing any pickup for the automatic transmission with the 12-liter NG yet?

Anecdotally, it's up. Fortunately or unfortunately, one of the realities of our product line is, we're able to run with the CNGs without having special models or variants. So we don't really have the visibility at the exact unit volume level as to how many are going with the nat gas. I mean, as you well know, the trend is they're buying a lot more nat gas. So yes, we've seen some of that, but that's a relatively small part of the total market, although probably a significant part of the CNG. But I wouldn't want to speculate a guess and lead you wrong there, Ann.

The next question will come from Jerry Revich of Goldman Sachs.

Larry, I'm wondering if you could extend the discussion on how your penetration is going to Asia and South America and China? You had some excellent penetration last year. I'm wondering how momentum, if you sustain momentum into the first quarter here. So if you could talk about your production versus industry in China and Brazil, that would be helpful.

Let me provide you some color on some of the stuff that's going on and where -- if we jump to Asia for a minute, we talked a little bit about Europe, Middle East and Africa earlier. Asia on the truck side, certainly we're seeing some downtick, some slow down in the mining sector. And that's one that a lot of folks have talked about. We have seen some slow down there as well. However, in the rest of the truck space, where we've got a significant, virtually a doubling of our terminal tractor, the dock spotters in the ports, in the market segment not only in China, but also -- and some of the OEMs are exploring into places like Saudi Arabia, Malaysia, Angola. And then we've also, with these releases, when we talk about, and I'll come back to a number here in a moment. We are now entering into new segments with specialty vehicles 4x4 kind of configurations, as well as other airport service vehicles with some of the 1000, 2000 On-Highway products. And that's just starting to happen in Q1 of 2013. In 2013, Q1, we have now 96 releases in trucks in China. And in a year ago, we had 73. So that's about a 31% increase year-over-year and certainly continue to drive that growth through the rest of 2013. On the bus side, we continue to be well positioned there. Certainly compete very aggressively with the likes of ZF and Voith on some of the bus tenders. One of the new developments is we now have some releases, when we say bus, we meant transit bus, city bus kind applications. We now have some applications and releases in coaches, which is the first time that's happened. And we continue to see the Chinese bus OEMs selling their products around the world. In fact, 9 different OEMs in the first quarter sold buses with Allison's in them to 15 different countries around the world. And again, that tied to our strategy of, if the release is for both the Chinese domestic market, as well as positioning ourselves with those OEMs as they continue to drive their business and grow their business around the world. And then Off-Highway, of course, I mentioned the mining is a little choppy in China, but certainly the energy sector has been something, which has continued to be robust. Certainly, the Chinese have placed a focused on that. Energy exploration and development in their country, and we're well positioned there and have -- that business has actually grown in the context of the North America decreases here in the last year or so. India, the commercial sector's soft, and it's likely to continue to be soft until after the elections in September. We are seeing continued activity in the military space. Like I mentioned in some recent meetings, we did get the multibarrel rocket launcher contract. That award, the first beyond development kind of volume business with the Indian military. There's also some activity, they're going to be joining some United Nations peacekeeping activities as we understand it. And as a result, that's generating some request for proposals that include automatic transmissions in those vehicles, and we think we're well positioned. If you look at the truck and wheeled military vehicles, again, comparing Q1 2013 to Q1 2012, we're up about 3 to 1. Still relatively small numbers compared to China, but they're moving down the curve following kind of the same general construct as China. Moving over to Latin America, they've been doing a lot of work in the truck space as well with release programs. They've got some activity now for the first time with Iveco and Scania in refuse trucks in airport, let's see, fire and rescue vehicles. We're also launching with MAN in Latin America, Volkswagen formerly, in construction. Cement mixture and armored cars, a little later this year, so that release activity is going strong. Mining there, we've got some new applications, Scania and Perlini have release the Allison's down there, so that's -- we think that positions us even though the overall outlook's a little down. We've got a shot there at some share. And then another one, Volvo Brazil did their VM 270 vehicle with the Allison 3000 series for refuse and that's the first time we've been selling to Volvo Latin America in 15 years. So again, it just kind of underscores the push on the releases. And then in buses, if you look at Brazil and Argentina as a couple of the big players there. We're expanding our releases in Brazil. We're getting into -- we're in the transit -- the regular conventional transit, but now we're trying to expand more into small buses, front-engine buses, and then the heavy Scania has got a bi-artic, which is a 3-segmented bus that we're getting released in. And then Argentina in the artics, articulated and front-engine chassis as well. We've got a big tender in Bogota, Columbia that we are captured and are starting to see some of the volume flow there. Blue Bird, they got the first big order, and that's 100% with Allison. So those are some of the things that we've been pushing on in Latin America also. Energy, we're starting to line up with some of the local players there. A couple of them in Brazil -- excuse me, in Argentina and Chile, San Antonio and QM are releasing our 8000 Series models from the Off-Highway series, and we're seeing some product, BJ, Weatherford's coming in with some frac rigs here out of the states that is going into Argentina and Chile. So a lot of activity on the release side. Certainly, as we continue to drive the business, we get a little more attention. We've got nearly double the inbounds from journalists outside of North America from 2013 over 2012. So getting a little more visibility as we continue to drive the business in those spaces.

Okay. And then on the TC10, I'm wondering if you could just talk about quantifying initial customer interest in the platform? And if you're willing to comment on what you think is the medium-term penetration opportunity for you on that platform?

Well, let me give you a little status update on the program. We continue to work -- Navistar has announced at the Mid-America Truck Show, as you're probably aware, that they intend to start taking orders here midyear and will build vehicles towards the end of the year down the line and then they will be available for customer shipment the first part of 2014. So that's the announced program. Currently, we work with other OEMs and a lot of that is based upon the end-user experience. We have had, at the end of the first quarter, we had 99 fleets that use the TC10. Over 620,000, I mean, 619,000 miles. 400,000 of which, the lower 400,000 of which are revenue service, which is significant because what it says is, typically when they take one of these trial vehicles, they're not going to take a chance on their business with it so they typically run it in a controlled environment, not in revenue service. And they were comfortable enough with it and liked the performance that they put it into revenue service. Out of those customers, roughly 2/3 of them have seen anywhere between 3% and 5% total fuel economy improvement, which has created a great deal of interest given their cost profile and how much of their total expenses fuel comprises. So there's a lot of interest. They have certainly, those end-using fleets have certainly been in dialogue with the OEMs as have we to try to see how they might get some Allison TC10s into the vehicle models that they would like to purchase. So there's a lot going on there. Obviously, Navistar has made the announcements and there are others that are, I'll just say, working behind the scenes that haven't disclosed, and so we'll guard those programs our confidentiality.

[Operator Instructions] At this time, we're going to take Andy Kaplowitz with Barclays.

This is Vlad Bystricky on for Andy. Can you guys give us any color on the initiatives that you're taking to align cost? Any specifics really on the actions that you have taken? And what further things you could do to defend margin if end markets did weaken?

As we talked about on the call in February, we've taken initiatives by function, frankly. And it's very similar to the actions that we took back in 2008 leading into '09 with the trough. That's a combination of essentially realigning our priorities and programs with the near-term outlook for end markets. That includes a variety of things, whether it's program spending, headcount, external services, et cetera. You could also think about that in the context of marketing sales and service initiatives. What's critical near term versus further out. To Larry's comments on the non-NAFTA, it's pretty clear. We're continuing to drive that process and have not taken or put off that particular accelerator in terms of growth there. At the same time, I think we need to be realistic about what the near-term opportunities are. So I think you could look at all of our cost in the context of that type of background. We've done the same thing from a manufacturing perspective as well in terms of headcount. We've talked about the fact that we are not adding hourly heads. Have not done that and have used overtime to balance daily rates, requirements, et cetera, so we continue to do that. Having said that, we have, certainly, since the beginning of the year, taken some reductions on both the hourly headcount side, as well as salaried here. So it's broad-based. Again, it impacts every corner of the company, but it's not something that's new to us. To your comment in terms of what else can we do, I think that we certainly have numerous levers that we can push and pull in terms of what the outlook is. At this point, we don't feel there's another step that's necessary. That being said, we are certainly prepared to take whatever action is necessary to defend our margin performance and cash flow generation as we've talked about.

Okay. That's very helpful. And then I noticed in the release that you mentioned some unfavorable material costs which I haven't really heard from many of our companies. Can you elaborate on where you're seeing input cost headwinds and what kind of expectations you have for material costs going forward?

Yes, certainly, on the commodity said, we're actually slightly favorable year-over-year. And I'm sure you've heard that from others. That being said, as we've mentioned in the past, there are pockets within the supply chain that represent some challenges, frankly, given coming out of the 2009 trough and some capacity that's been rationalized. We're dealing with those as they come through. And frankly, also focused on longer term strategic agreements with various supplies. So the net-net of that was, in the first quarter, on a year-over-year basis, we had some unfavorability there. I would not necessarily extrapolate that to the balance of the year per se. Having said that, we have multiple programs underway within our teams to further reduce our cost at the purchased component level. So we feel very good about, again, the guidance that we provided. From a commodity standpoint, certainly favorable a bit, as I said, year-over-year in the first quarter. And I think you have most of the forward market data in front of you to take a look at that. But that's certainly not bad news for us in terms of the balance of the year.

And our next question will come from Jamie Cook of Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: A couple of questions. First, just on the mining side. I mean, you gave a little bit of color, but I'm just wondering if you could speak to -- from talking to your customers, how much of the inventory issue that we had in the channel? Do you think that's over? Or do you think the OEs are still sitting there with too much inventory and they'll have to underproduce retail in the first half of the year. Is that behind us? And then my second question, can you just talk about what you're seeing within your Military business? Any change in sort of government paying you guys that's impacting your receivables? Or any change in terms of margin pressure?

Let me answer the second one first and then we'll come to the inventory thing. In terms of the Military, no, as we laid out the programs and as they were contracted, we're tracking those pretty much as we laid out. We are not seeing any changes in the payment terms. Of course, we supply the primes and our contract is with them. But nonetheless, we continue to track pretty much as we laid out at the beginning of the year. Relative to the inventory, we tend to follow the ACT inventory and retail sales. We don't do a lot with the backorder information because we think that's not as firm, let's say, as the other data once it gets stabilized by ACT in their historical reporting. But if you take a look at the inventory for Class 6, 7, it's certainly, if you take a look at it, it's up certainly from towards the end of last year, maybe a week or 2 added inventory compared to, again, to the end of the year they added about a month. So they worked a little bit of that off. Class 8 has actually come down from the middle of last year. Class 8 straight truck now. I'm referring to straight truck only. But they've ticked up just a little bit over the last couple of months. So it's certainly not as lean as it's been. It's also not as bad as it's been. It doesn't appear that anything is way out of whack and the real issue is going to be, what level of recovery is in the second half because if it tracks as some are forecasting, it's probably light on the inventory. In our case, we've taken a little more conservative view than some of the robust enthusiast for the second half, but we've shown uptick as well. So looks within a row of apples of being workable in that kind of a recovery context. Jamie L. Cook - Crédit Suisse AG, Research Division: What about, I'm sorry, within the mining segment specifically?

Oh, I'm sorry, within the mining? Jamie L. Cook - Crédit Suisse AG, Research Division: Yes, sorry, yes.

Well, I would say, our guidance as we came into the year, I will tell you that we probably didn't share some of the enthusiasm that others did, especially with the non-NAFTA market. Based on our contacts and the latest forecast we have, I think a fair bit of that air has been taken out of some of the OEM schedules. I think China, frankly, has been choppy, as Larry mentioned, and I think that's been more or less flushed out of schedule. At this point, I think if anything, hopefully it positions the market for a better start going into 2014 as I look at -- to your comment, '13 is more of an adjustment. I think you've certainly heard that story from others that are in the space, and some pretty significant downticks there. But we did not have, I would say, extraordinarily high expectations for 2013 coming into the year.

And our next question will come from David Leiker of Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Just 2 things. Can you talk in the parts and service business, how much of that decline that you're seeing there is coming out of the energy markets? Is there any color you could provide us along those lines?

Certainly, the run rates last year, it's pretty significant. If you look at the overall change quarter-over-quarter for Q1, again, it's -- majority of that is Off-Highway. As we said, given the first quarter performance last year, both the new unit sales and aftermarket was high. That came off, stepped down significantly in Q2 last year and then took a further step in the second half and more or less leveled off. Since we were thinking about this year and incorporated into our guidance a pretty slow recovery there. That being said, some of the math that we talked about earlier on the call in terms of the number of idled rigs, as well as ones in need of repair, I think that's anybody's guess. I think we are pretty conservative in that regard. It's very hard to gauge the status of that equipment, and frankly, its condition and ability to return. How much of a repair are we really talking about? As we've said, certainly an overhaul has plus-or-minus about $50,000 in sales in terms of parts for us. So as you think about it on a per unit basis, that's pretty significant. But it's not something that we're anticipating a significant recovery in for this year. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And I know some of the oil services companies are talking about 3 months ago, 6 months ago, they were talking about putting no rigs in the market this year, they're now targeting the second half. If they do that, would you see that show up here in Q2 or to the extent that that did happen or is that, it's hard to tell because of the mix of what goes back in the field?

That would be a bit mix depending on the strategy, it's Larry. But it would probably more concurrent with their activity. If they're not building rigs, they don't need as much lead time. They could order the parts almost concurrent with getting those rigs back into the field. So I'd expect it would be tieing to more with what they're looking at. Certainly, $4 in a quarter gas feels a lot better than $1.88. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Sure does. One last item here, do you expect that the volumes come back on the straight truck side and some of these other things fall into place, do you end up flexing your labor and your cost back up with that, that the contribution margin is fairly similar on the way down or do we get some extra kick on the way up as those volumes come back?

I would -- my expectation is that it should be similar to what you saw on the way down. We don't, per se, have new programs, but I would tell you every year we have productivity gains with the manufacturing teams. So there's some tailwind that should be there, as well as, as you know, the contract that we have with the UAW and any benefit of retirements as well. So that's certainly something that's in front of us. Obviously, we don't control the retirement rates, but you would certainly expect that -- or just based on demographics that there'll be some of that occurring this year as well. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And if you take your headcount down there in the manufacturing side and the hourly side, I'm presuming you're taking out higher costs both. As you bring them back, are you bringing back lower cost folks, or do you have to bring the same ones back?

Their retirements obviously are at the higher end of the headcount that we took down earlier this year is at the lower cost because based on seniority in the contract they would come out first.

And our next question will come from Ian Zaffino of Oppenheimer. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Just really quickly, I know you alluded to a lot of your pricing that you got in the quarter, but then on your margin guidance, you aren't indicating anything about pricing, you just really call it mix and a couple of other items. Does that mean if you continue to price, that should help you with that margin and sort of exceed that margin? Or is that sort of baked in? Or how do you think about that?

Most of the pricing we do is either tied to the long-term supply agreements where it's laid out for 5 years in those cases or it's done on an annual basis. So we would have -- while we certainly saw it take effect in the first quarter, it's something we would have comprehended in the full year estimates and forecasts. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. So any pricing that you previously got or you'll prospectively get has already been negotiated and it's in your guidance?

Yes.

And our next question comes from Rob Wertheimer from Vertical Research Partners.

Just a small one to start with. The $6 million technology license, that was unrelated to Torotrak? And could you give any color on whether it is current, the timeframe on which it applies?

The $6 million is related to Torotrak. It's the final noncontingent payment to secure exclusivity for their IVT technology and design space relevant to Allison. So you won't see any of those charges going forward. It's not something that we do on a reoccurring basis, if you will. But these technology add-ons are complements to Allison's base architecture and market presence is critical to us in terms of accessing that type of promising technology on a near-term basis. So that's something that we're continuing to be focused on. The same can be said about, frankly, what we've done with Fallbrook, as well as Odyne last year in terms of complementary positioning.

Got it. And then we've talked a lot about parts, but would you say that the parts business is going to be -- you mentioned revenues up for the rest of the year, has the parts business bottomed out as well given the utilization on rigs? And it sounded like you didn't really see on On-Highway any decline in parts, just to confirm that as well.

In terms of parts for the balance of the year, as we're thinking about Off-Highway, certainly, as we talked about down on first quarter year-over-year after we took that step down from first quarter of last year, it's leveled off a bit. That would be a fair, I think, expectation certainly going forward for us. And just given, I think, the expectations on unit volumes for the way the year is weighted, first half, second half, that support equipment certainly should be higher as the year rolls out from a unit volume perspective.

And you didn't see any negative trend in On-Highway parts?

First, essentially, first quarter was flat. So -- and I would say for more globally it was essentially flat on the service side.

And our final question will come from Alex Potter of Piper Jaffray.

I just have one really quick question here on, I guess, fracking in China. Obviously, in North America people aren't exactly falling over each other to get those rigs started back up again. But in China, that's the opposite of the case, I guess. I was just wondering if you could help us quantify or understand the size of that market opportunity? And when you might think that could potentially start rolling through your P&L?

Well, starting at the end, we are actually -- since we started selling there and continue to sell there, it's actually in the P&L currently at the levels that we're seeing. And then relative to how it will expand, certainly 3 years ago, we sold nothing to speak of in China, maybe a handful of units. And on a more normal year, I would probably peg it at perhaps 15% to 20% of our total here in the near term. Obviously, this is not a normal year with North America being down so far, so it's actually going to be a more significant percentage, but that's probably an aberration. It is something that's going to be tied to what the Chinese government decides to do in terms of how they handle the rates. As you might imagine, that's considered a pretty strategic and therefore, political set of decisions that are made within the Chinese government. And I certainly won't speak for them, but they, thus far, have been aggressive about opening up some of the fields and people are in there doing the work and, again, we're in there with some of those local rig builders doing some of that work.

And it does appear there are no further questions at this time, I'll turn the conference back over to Larry Dewey for closing remarks.

I want to appreciate -- express my appreciation to everyone for participating in the call, and thank you for your time.

And again, that does conclude today's teleconference. Thank you, all, for your participation.