Allison Transmission Holdings, Inc. (ALSN) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's Fourth Quarter 2014 Results Conference Call. My name is Melissa, and I will be your conference 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. Conference call participants will be given instructions at that time. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference call over to Dave Graziosi, the company's Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Melissa. Good morning and thank you for joining us for our fourth quarter 2014 results conference call. With me this morning 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 morning are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through February 17. As shown on Page 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectation. These forward-looking statements are subject to known and unknown risks, including those set forth in our fourth quarter 2014 results, press release and our annual report on Form 10-K for the year ended December 31, 2013, 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 proved incorrect, actual results may vary materially from those that 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 fourth quarter 2014 results press release, both of which are posted on the Investor Relations section of our website. Today's call is set to end at 9:00 a.m. Eastern time. In order to maximize participation opportunities on the call, please limit your question to one with one follow-up question. Now, I'll turn the call over to Larry Dewey.

Thank you, Dave. Good morning and thanks to everyone on the call for joining us today. We're please to report Allison's fourth quarter 2014 results exceed the guidance ranges we provided to the market on October 27. Net sales improved on a year-over-year basis for the fifth consecutive quarter, led by the continued recoveries in the North America On-Highway and Off-Highway end markets, and higher demand in the Service Parts, Support Equipment & Other end market, partially offset by lower demand in the outside North America On-Highway and North America Hybrid-Propulsion Systems for Transit Bus end markets. Adjusted EBITDA and adjusted free cash flow also meaningfully outperformed our expectations. 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 fourth quarter performance, including sales by end market. Dave will review the fourth quarter financial performance, including adjusted EBITDA and adjusted free cash flow. I'll wrap up the prepared comments with the 2015 guidance prior to Q&A. Please turn to Slide 5 of the presentation for the Q4 2014 performance summary. Q4 net sales increased 11% from the same period in 2013. Gross margin for the quarter was 47%, an increase of 390 basis points from a gross margin of 43.1% for the same period in 2013. The increase in gross profit from the same period in 2013 was principally driven by increased net sales and price increases on certain products. Adjusted net income increased $39 million from the same period in 2013, principally driven by increased adjusted EBITDA and decreased cash interest expense. Adjusted free cash flow increased $20 million from the same period in 2013, principally driven by increased net cash provided by operating activities, decreased capital expenditures, increased excess tax benefit from stock-based compensation and $3 million increase in technology related license expenses. Please turn to Slide 6 of the presentation for the Q4 2014 sales performance summary. North America On-Highway end market net sales were up 22% from the same period in 2013, principally driven by higher demand for Rugged Duty Series models North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 47% from the same period in 2013, principally driven by intra-year movement in the timing of orders and lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully automatic transmission. North America Off-Highway end market net sales were up 157% from the same period in 2013, principally driven by higher demand from hydraulic fracturing applications. Defense end market net sales were up 9% from the same period in 2013, principally driven by revenue deferred in the prior year period for certain tracked transmissions that were not shipped at the request of the US government, partially offset by previously-considered 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 24% from the same period in 2013, reflecting weakness in China Bus and Europe Truck. Outside North America Off-Highway end market net sales were up 36% from the same period in 2013, principally driven by improved demand in the China energy sector, partially offset by lower demand in the global mining sector. Service Parts, Support Equipment & Other end market net sales were up 13% from the same period in 2013, principally driven by higher demand for North America Off-Highway service parts. Now, I'll turn the call over to Dave Graziosi.

Thank you, Larry. Please turn to Slide 7 of the presentation for the Q4 2014 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and adjusted EBITDA. Selling, general and administrative expenses increased $2 million from the same period in 2013, principally driven by increased global commercial spending activities, partially offset by favorable product warranty expense adjustments. Engineering, research and development expenses for the quarter increased $10 million from the same period in 2013, principally driven by increased product initiative spending and 2014 technology related license expenses of $3 million to expand our position in transmission technologies. As a result of market events and conditions during the fourth quarter of 2014, Allison reviewed certain of its long-lived assets related to the production of the H 3000 and H 4000 Hybrid-Propulsion Systems resulting in a $15 million impairment loss for the fourth quarter of 2014, the loss included approximately $2 million of accrued expenses related to impairment long-lived assets. Deteriorating market conditions for Hybrid-Propulsion vehicles significantly contributed to future cash flows of the related assets being less than the carrying value of both assets. Interest expense, net, increased $9 million from the same period in 2013, principally driven by $19 million of less favorable mark-to-market adjustments for LIBOR swaps, partially offset by the expiration of certain LIBOR swaps, lower amortization of the deferred financing charges and debt repayments. Income tax expense for the fourth quarter of 2014 was $27 million, resulting in an effective tax rate of 35% versus an effective tax rate of 36% in the fourth quarter of 2013. Adjusted EBITDA, excluding technology related license expenses for the quarter was $188 million or 34.6% of net sales compared to $153 million, or 31.1% of net sales for the same period in 2013. The increase was principally driven by increased net sales, price increases on certain products and favorable product warranty expense adjustments, partially offset by increased global commercial spending activities and product initiative spending. Please turn to Slide 8 of the presentation for the Q4 2014 cash flow performance summary. During the fourth quarter, we continue to demonstrate strong operating margins and free cash flow conversion, while investing in growth opportunities despite challenging conditions in the outside North America end markets. In addition, highlighting Allison's commitments to cash flow generation and the return of capital to shareholders, our Board of Directors authorized a stock repurchase program for up to $500 million of common stock and approved an increase in the quarterly cash dividend from $0.12 to $0.15 per share. Finally, we maintained our prudent approach to capital allocations by repaying $69 million of debt and ended the quarter with $263 million of cash, $450 million – $455 million of revolver availability and net leverage of $3.03. Now, I'll turn the call back over to Larry.

Please turn to Slide 9 of the presentation for the 2015 guidance, end markets net sales commentary. Allison serves a wide variety of end markets in various geographies. We have consistently articulated our strategic priorities of global, market leadership expansion, emerging markets penetration, product development, core addressable markets growth, and delivery of solid financial results with emphasis on generating strong cash flow. Despite a cautious approach to 2015 given headwinds and uncertainty in the global Off-Highway end markets, combined with heightened geopolitical volatility, Allison will continue to pursue its strategic priorities. Further, as we've done during other periods of meaningful uncertainty, Allison will proactively implement initiatives to align costs and programs across our business with actual end market conditions and opportunities. Allison expects 2015 net sales to be in range of flat to down 5% compared to 2014. Although we are not providing specific first quarter 2015 guidance, Allison does expect first quarter net sales to be higher than the same period in 2014. The anticipated year-over-year increase in first quarter net sales is principally driven by higher demand in the North America On-Highway and Off-Highway end markets, partially offset by previously considered reductions in defense net sales and lower demand in the North America Hybrid-Propulsion Systems for Transit Bus end market. With that, I'd like to highlight the following end markets assumptions for the full year 2015. North America On-Highway, we expect a net sales midpoint growth of 8%, principally driven by continued market recovery. North America Hybrid-Propulsion Systems for Transit Business, Allison expects a net sales midpoint reduction of 13%, principally driven by engine emissions improvements in non-hybrid alternative technologies that generally require a fully automatic transmission. North America Off-Highway, we expect a net sales midpoint reduction of 30%, principally driven by decreased demand from hydraulic fracturing applications. Defense Allison expects a net sales midpoint reduction of 34%, principally driven by continued reductions in US defense spending to longer term averages experienced during periods without active conflicts. Outside North America On-Highway, we expect a net sales midpoint of flat, principally driven by increased fully automatic penetration offset by continued challenging market demand conditions. Outside North America Off-Highway, Allison expects a net sales midpoint reduction of 20%, principally driven continued weakness in the energy and mining sectors. Service Parts, Support Equipment & Other, we expect a net sales midpoint reduction of 5%, principally driven by decreased demand for North America Off-Highway service parts. Please turn to Slide 10 of the presentation for the 2015 guidance summary. In addition to our 2015 net sales guidance range of flat to down 5% compared to 2014, we expect an adjusted EBITDA margin in the range of 34% to 35.5%with an adjusted free cash flow in the range of $475 to $525 million, or $2.60 to $2.90 per diluted share. Allison expects capital expenditures in the range of $60 million to $70 million; and cash income taxes in the range of $10 million to $15 million. A discussion of our 2015 outlook would be incomplete without noting that Allison will celebrating its centennial throughout the year with a variety of special events and activities, both our company and its founder have incredibly rich and storied histories. Allison was founded on the values use of innovation, quality and reliability and I am very proud to say those remain our driving values today with products and services that improve the way the world works. We look forward to sharing our heritage on a global scale this year with employees, business partners and communities in which we conduct business. Thank you for you time this morning. Melissa, please open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi. Good morning. I guess just a couple questions. First, given the decline in crude prices we've seen, I know your fourth quarter still reflected some pretty good growth. But can you talk about sort of what you've seen in your order book across the different product lines and the impact you've seen from energy, which obviously is the reason why some of your – the significant declines you're seeing in some of your Off-Highway businesses. And then I guess my second question is on the North American On-Highway side, you're still expecting 8% top line growth. Can you talk about your comfort level there? Do you expect any indirect headwinds from the energy side and sort of just generally what you're hearing from OEs? Thanks.

Sure. Let's talk about the Off-Highway and of course North America is primarily energy. Outside in North America's got certainly in energy component, but also the mining, let's deal with the mining and just say, that we continue to see that as continuing in a fairly depressed state. Relative to energy, we have seen some of the indications of the down take that we have described out of China. First quarter North America Off-Highway energy is actually holding up our forecast. However, it takes a fairly conservative view of the remainder of the year. And that’s where we have taken the numbers out. We've seen a few orders pushed around a little bit. But frankly the first quarter appears to be holding up fairly well. It’s really the out quarters for 2015 where we've addressed the down take here in North America of total of 30% year-over-year as I indicated in my comments. Relative to the – relative to North America, On-Highway, certainly we think that our numbers are directionally in line with the lot of the industry forecast for the vehicle build. The other thing is we have seen some share increase as we have been targeting handful of percent here and there. So, in addition to what you're seeing in the industry numbers, we're certainly continuing to drive to add to our market share. Relative to the space for energy, specifically, we do – for that piece of its difficult because that ends up in Rugged Duty Series which goes to a number of different vocations, construction, refuse and then also energy in many cases. So, peeling those out once it get to beyond the OEMs, a little more difficult, but certainly we have tempered our overall numbers based on some expectations of a little bit of moderation there in that one piece.

I guess just one follow-up. Can you just – what is your visibility in North America On-Highway versus as we were sitting here last year? And then I'll let someone else ask a question.

I would say, not to be flip, but the – we've got this – the order boards from the OEMs, it’s about the same visibility. The reality of life is, they gave us many cases a 10 day line set with a 6 month forecast, maybe a 3 month forecast. So those do bounce around depending on conditions. We've seen, it swings both ways. We'll see upfront increases depending if someone gets a big order like one way rental orders or something. We're working pretty hard in our 1000, 2000 plant based on some of the orders that have been captured in that space. But I would say it’s pretty comparable.

Okay. Great. I'll back in queue. Thank you.

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Good morning.

Good morning, Jerry.

I'm wondering if you can just talk about the guidance for roughly similar EBITDA margins in 2015 on lower sales. Maybe step us through the drivers of how much of a tailwind is pricing and what are your plans for SG&A and R&D 2015 versus 2014?

Sure. We certainly saw some progress on pricing in 2014, probably more so in the second half than the first half. You can certainly run rate some of those increases and that’s been baked into our guidance. We continue to make I think very good progress from an operating standpoint in terms of operating leverage realization. We have taken a very conservative view in terms of manning. As you know, we take a pretty prudent view there, just given the legacy cost when you take people on. So we have despite relatively strong order boards, continue to conservatively man the operations, so we will typically do that through over time, but more or less one ship globally. Supply chain initiative continue and making good progress there as well. Beyond that if you look at the balance of the P&Ls, SG&A overall expectation right now is that we'll be down slightly there and then on the engineering and research side of things, we expect to be down slightly there. The starting point of course is to take out the license exclusivity agreement charges that we took last year. So, overall that will provide us with some tailwind. As Larry mentioned, we've seen some of the soft spots in market conditions before it’s not new to the business or this team and we will certainly have taken steps already, but are prepared to take other steps depending on how market conditions are realized. But we feel good about our position from a margin perspective and the guide as we start the year.

Okay. And then on the product side, I'm wondering if you could just update us on the FuelSense rollout by when do you think the full set of options will be available across the OEMs and, Larry, you mentioned there have been a few pockets of share gains. Can you just flush that out and just quantify that in the context of the Ford business, or part of the Ford business, that will be headwind in the back half of the year?

Sure. Relative to FuelSense, as part of that program, in order to achieve the full benefits of that the OEMs have some programming to work. Obviously there are some that have been able to get it on some portion their product lineup. We continue to work, I would expect you'll see that continue to rollout here this year and even in the early next. We're also working on the future generations of FuelSense 2.0 as it’s called internally. So there is some neat things that are going on there. And so I would expect this to be kind of a continue drum beat as we move forward, as we continue to improve the efficiency attributes of our products. Relative to the share gains, if you look at Class, 6, 7, it looks like we're up couple of points there, driven by some of the package delivery. One way business that we've been able to pick up, better share in some of those segments , also I think some of the general pick up in delivery in that space. Class 8 straight truck, relative to the – relative to the – some of construction, work that we've done, municipalities work. We've been running some conquest programs over the last couple of years in the spring every year and we're starting to get some of the repeat purchases on those. They start out very small quantities, but then as the customers have the experience with the product they do come back in for bigger and bigger buys inside that – is a progression that we've discussed. And so, it would appear that we're doing a little better there per share. Relative to the Ford announcement, clearly there is piece there and I think we've scoped that out in previous calls. I would tell that we've got a full court press on relative to working with other OEMs and in fact are starting to get some orders converted in advance really to the lack of availability in the Ford chassis for people that want to stay with the Allison. I wouldn’t pretend to say that it will have zero impact, but I think we will manage that. As we go forward, we certainly have that comprehended in our plans.

Thank you very much.

Thank you. Our next question comes from the line of Andrew Kaplowitz with Barclays. Please proceed with your question.

Hey, guys. Good morning.

Morning.

Larry or Dave, can you talk about your Service and Parts business guide and it seems like you're guiding to something like a 20% decline in your Energy Related Parts business, assuming flattish truck transmission service. Overall, if you go back and look at 2011 to 2013, this was the last energy downturn for you guys, parts grew even though energy was down, something like 85%. So I'm just turn to figure out if my math is wrong or are you just being relatively conservative in parts after up 13% in 4Q?

What we've assumed in the guidance, given Larry's comments and certainly the current expectations around oil pricing is, our North America Off-Highway aftermarket business to be down roughly 30% year-over-year. So, depending on your view of things, that could be conservative or not, we'll see what happens there. But I would tell you the way that that market developed, if you think back to the middle of 2013, really the second half of 2013 we started to build certainly quarter-over-quarter and some pretty strong results last year. That being said, we felt some of that was a function of some level of pent-up demand in terms of the new rigs that we're getting in and then ultimately requiring overhauls and work and that getting done. Having said that, the feedback that we're getting from our channel would indicate a certain, I would say, a pretty significant level of reduced activity as we forecast. So, as we think about that, again, the way we weight the year and the timing, certainly Q1 would be an expectation to be down certainly sequentially to keep that in mind and then with the first half being higher and then ultimately followed by second half been down year-over-year. So the weighting is, I think similar in many ways to the way that we're thinking about the new transmission sales as well.

And just to add on to that, the couple other little pieces there. If you think about when the OE build was down and the parts sales were up, that’s when everyone was bringing their rigs back online. You saw a significant decrease in the amount of idle horsepower during that period. And now we're kind of – its going the other way. Its – people are idling their rigs and so they tend to – not buy the parts and do some of the work that maybe they would otherwise. So, as they start bringing those rigs back online at whatever point it starts recovering we would expect a similar thing to what we saw. The other opportunity we have, and I'd be remiss if I didn't pointed it out, is we've [Technical Difficulty] new products with higher horsepower. And along with that a higher horsepower capabilities, along with that we've introduced a number of kits that allow folks with existing products to operate them. And those kits, they – one of the less contented kits is about $40,000 in the higher contented kit about $70,000 a pop. The one that we'll be introducing here very shortly, discussed it yesterday with the team. So, there is an opportunity against the current fielded units to pick up a little bit of revenue there by giving them the capability. And we'll see how that plays out. That could help us a little bit in this space.

Okay, that's helpful, guys. And then just shifting gears, I think you guys said as recently as December to expect some growth in non-North American On-Highway markets. You said there was some China weakness here in the fourth quarter, so just can you talk about what changed in the last couple of months and how much has currency impacted, if at all, your guidance?

I think some of the drivers in Europe we had a number of releases that were scheduled that we had anticipated would be happening. And one of the things that’s its going on between the geopolitical situation with Ukraine and then, frankly, some of the economic challenges, including – we're going to see it continuing 2015 with some of the maneuvering around Greece. But there just seems to be a malaise that we're struggling with, relative to the OEMs completing their engineering work. They are managing their budgets and as a result some of those releases that we would have anticipated and then allowing us to sell some product did not materialize. I wouldn't pretend to say that’s the whole issue for 2014. Frankly, there was more of a pre-buy then we had understood in 2013 and we've got to do a better job of staying close to that. And then there was some products that we were in, that were good volume drivers for us that the OEMs canceled during the course of the year. So, from a Europe standpoint that was certainly some of the challenge. China, you really add some of the bus tenders, that was a big volume differential. We've made gains on the truck side. But I would say that frankly we're not where we want to be and we've got more work to do there in China Truck.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch. Please proceed with your question.

Good morning. Thank you.

Okay.

I just had a couple of questions. First, back on the North America On-Highway guidance for plus-8%. Just hoping you can break that down between what you're expecting for Class 8 straight versus medium duty? One of other major truck suppliers was only forecasting 1% revenue growth in medium duty truck and bus last week and if you use a similar assumption for your business, it would seem to imply a forecasting north of 15% growth in Class 8 straight. So familiar with the external forecast, hoping to hear directly from you on what you're assuming in plus 8?.

Ross, as you know, I'm sure the forecast that you're looking at externally, we look at the same ones. Things to keep in mind, as you know, our business in terms of addressable market for North America has certain components to it if you will, or sub-segments that when you think about the guidance overall and frankly our performance in 2014, we outperformed the market. I think as you know, so as you start to fast-forward to 2015 with a number programs that Larry mentioned, frankly, and the traction that we're getting in those areas, as well as the underlying advantages of our addressable market versus others, its – I would say it lines up we think very well in terms of overall view. I would tell you as we talked about order boards before the strength of those are up slightly year-over-year for this time period. The messages that we're getting back in terms of feedback lineup very well with our forecasting. As you know, we also make adjustments to forecast that we receive to – I would say line those, I think better with some of our prior experience. But I would say whether it’s Class 6, 7 Truck or the Class 8 straight truck that Larry referred to, we feel very good about our positioning for the year given the feedback that we have. So, relative to others guidance as they think about that I think there is a number of drivers there that they are addressing versus where we're at as well. So I think we – as you would expect keep those in mind and analyze those at the same time. But I would say overall our book of business, we feel very good about for 2015.

The thing I'd add to that is, of course, is a vehicle OEM they were talking in terms of their vehicle sales. We're obviously, eventually you get connected to that, but the reality is we're tied to vehicle build. And where we look, one of the other key things we look at is the inventories and certainly Class 6, 7 continues to make progress in terms of moving towards what ACT would normally describe as kind of the low-end of or low point of normal for whatever that means in these times, normal inventory levels. Class 8, while it is still Class 8 straight truck now I am now referring to, our addressable market is frankly a little high, but it is actually come down quite a bit over the past couple of years. So while it is higher than what we would, might have in the past said was where we want to be. On the other hand, they've been operating at higher levels and in fact it’s been brought down. So, that’s another factor and us feeling fairly solid on our forecast.

Thank you. And then, Larry, I have a follow-up. It's more of a strategic question, but there's certainly outside of North America On-Highway from a growth perspective, you have painted a pretty bleak picture for 2015 in your other businesses. Granted you're not, certainly not the only one in the industry. But Allison gets deservedly a lot of positive recognition for being very lean. You've got great free cash flow. You're very frugal. But do you feel at all like you need to step up investment in R&D and sales and marketing, product developments outside of North America On-Highway because outside of North America On-Highway, we're looking at mostly double-digit declines. Appreciate the market outlook is tough. But do you also feel like you need to step up investment to further diversify the company and add another leg to this stool?

Well, we've focused on in the investments that we've put in place have been directed in many cases towards the outside North America activity. The products we develop, we develop them with a global perspective. So it’s really worldwide. It would include North America. They really aren't unique. There are certain unique features that we've developed ground driven PTO et cetera that makes the product maybe more desirable in places that have legislation that requires such things. But where we really made the investment is in efforts to try to create the market and while we have made some modest gains in that space, you are correct in identifying that frankly we've got more work to do there. And so we have put a lot of money, in fact, more money in the outside North America in many respects than the North American space because we do recognize its market creation. So, that’s the types of investments, whether its personnel, whether its penetration pricing programs, whether it's engineering funds to assist OEMs to try to get the releases into the products, those are all things that free hardware, et cetera , are all things that we have been pushing on to drive those numbers. Again, we've seen some wins but, frankly, anytime you get a win its typically small numbers in the beginning and then the arithmetic progression starts. And we haven't been able to outpace some of the headwinds that have occurred in places like China or Europe, as well as some of the OEM slowdown in some of their engineering work.

Great. Okay. Thank you.

Thank you. Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.

Hello. Good morning, everyone.

Morning, David.

Good morning.

I wanted to focus on the impact of price increases. We've got a couple of quarters in 2014 that will have some carryover in 2015. Are those normal contractual price increases or are those actions that you've gone out to try and take advantage of some opportunities?

It’s really a combination of both. And I would tell you its really across our various end markets, so it's not one in particular. I would say, and we've talked about this before, that we price the product for the value that it delivers. So from our perspective, we continue to drive that idea, frankly, and the technology with significant investment, whether it is FuelSense some of the other things that Larry talked about. So, we feel that the product is becoming more valuable and frankly from a return on investment standpoint end users accordingly there is more value there to be had. So we're going to price at that level. I would tell you that some of the progress I mentioned that we made in 2014 is certainly run rated to a degree into 2015 as well. But from a positioning standpoint we feel solid about that. I would also say it's not as if we're not investing some of that incremental improvement in some growth initiatives to Larry's early comments outside North America we continue to support those regions with significant amounts of investment in people and otherwise. So, if you look at our headcount and progress that we've made there in terms of staffing the issue is we don't lack things to sell. We don't lack the resources to sell. So, we feel good about, again, pursuing those initiatives and continuing to drive that process forward and feel very good about where we're at from a selling price value perspective.

And then the other item here is the impairment on some of your hybrid assets. Can you talk about what you impaired there and the thought process behind that?

Sure. I mean, look, as you know, we can finally recall years ago some well-known consultants telling us how many thousands and thousands of units of hybrids would be sold in North America today. And as you well know, that hasn't exactly panned out. The advent of alternative fuels, XNG, as well as other technologies, and frankly, fuel cost overall had continue to drive that investment case in the wrong direction for North America. I would say there continue to be opportunities in areas where you don't have access to alternative fuels and certainly something we're looking at. The reality is as we sit today given the combination of reduced hybrid market overall outlook, as well as fuel costs alternative technologies, and frankly, the lack of end user enthusiasm for those platforms resulted in the impairment charge that we recognized, so.

Great. Thank you much.

Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer & Company. Please proceed with your question.

Hi, great. Thank you. Trying to get a sense of your -- the outside North America On-Highway business. How much of like the baseline demand is, let's just say, up or down? Your current production sales compared to the new releases or new launches that you're expecting?

To make sure I understand the question, you want to know when you say baseline demand some of those releases are in the space that I would normally describe as somewhat baseline, whether it's construction or refuse in the case of some of the folks, certainly some of the bus tenders can be a bit lumpy. We got – the work we've done in Russia, of course, as you might imagine, is kind of on hold for the most part. Turkey which have been coming along nicely in the Europe, Middle East and Africa region, certainly in 2014 due to some of the political challenges they had internally dried-up, although we feel very good about that for 2015. But fundamentally some of the base construction still isn't robust in Europe. Pickup and delivery type economic activity, nothing to write home about. So I would say that from where we sit the malaise, as I described it earlier, is inhibiting some of the – some of the, what we would like to see as a little stronger recovery. And then some of the new initiatives that we had in places like South Africa and Russia, Eastern Europe in some cases although truthfully those were a little smaller, really have just kind of been put on hold as a result of some of the larger macro developments.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Neil Frohnapple with Longbow Research. Please proceed with your question.

Hi. Good morning, guys.

Good morning.

I think you mentioned in your prepared remarks that you could potentially implement actions to offset slowdown in global Off-Highway weakness. Any more color you can provide here or timing?

Certainly in prior cycles as we mentioned we have experience with this. We can certainly throttle back a number of different areas in terms of spending. Relative to opportunities, we're continuing to fund a number of those. Having said that, if market conditions are deteriorate further we can certainly make some changes there in terms of lunch timing, et cetera. So I think there is a number of things that are available to us to be able to pull those levers and be responsive to market conditions. And again, not something that’s new to this business or this team.

Great. And then Military revenue at the midpoint is expected to be just north of $100 million, I believe in 2015. Would this level be at the longer-term averages experienced during periods without active conflicts or would there be further declines in 2016, excluding any sort of tailwind from the JLTV program?

We don't for a number of reasons have a tremendous amount of visibility. Shocking as that may seem given the lack of clarity out of Washington on spending in a number of instances. Frankly recently over the last several weeks, a number of changes that has – that you've seen in terms of the 2015 budget and then some of the proposals very recently around track for FY 2016 are interesting potentially. So, I would say our visibility at this point post-2014 isn’t very significant. Other than some of what we've seen already in terms of the tracked side, but, again, that seems to be in the level of flux right now given the recent announcement by the Army that they may be pursuing a pull forward of ECP on the Abrams. So there is a number of things that we're going to have to look at. I would also tell you the – some of the adjustments that have been made to the wheeled side of things with the Army in terms of continuing to keep certain OEMs busy is also helpful for us. As we start to build the post 2014 book of business.

Yes. I think it's premature to count anything that maybe talked about as in the bank having said that, I think would be fair to say that some of the recent developments in, some of the recent discussions cause us to feel a little better about this business in the near term the maybe we did a year ago.

All right. Thank you very much.

Thank you. Our next question comes from the line of Vishal Shah with Deutsche Bank. Please proceed with your question.

Hi, thanks for taking my question. I guess on the Hybrid business, just longer-term, I just wanted to maybe get a sense from you on your longer-term strategy with that business. I mean, is it profitable on its own and have you considered options, any other options for that business such as winding it down or spinning it off?

Well, certainly, the volumes and the demand is relatively focused. I guess one could say. As it sits here today, a couple thoughts on that, number one, many of the technologies that we use in hybrid particularly in the controlled space, we can use as we continue to think about our portfolio and improving the energy efficiency of our On-Highway products, whether it be the current products because frankly we've taken some of the control schemes that were using on hybrid and have brought them back across to the current products some of which may go way into FuelSense which improves the value which we will certainly try to capture the economics on that. And, it could result in economically intelligent ways to try to combine a number of opportunities that people are playing with that are relatively niche. And I am speaking specifically of plug-in hybrids and electric vehicles. If you can control a vehicle where you are blending the power from an internal combustion engine with power pulled from the batteries it would seem to me and it occurs to us that handling it from batteries only is an even simpler task, because you are managing all of those same variables from a hybrid. Now, having said that, if the batteries are not sufficient for the duty cycles in a hybrid and you need to region or in addition to the region you need the internal combustion engine it's hard to understand the physics, how they might get through the duty cycle of batteries only. So we think that certainly battery technology is going to have to come away. Having said that, we're positioned, and I – while fuel prices are low, I'm not sure how many of us are willing to bet as to what they're going to look like for 5 or 10 years from now. And Allison is certainly positioning against a broad array of potential outcomes with our technology development. We're not going to stop that. Because we think it's an industry leader. That’s the smart play for us.

That's helpful. Thank you. And then just one question on the guidance. Can you talk about the level of year-over-year price increase that's baked into your 2015 guidance? Also considering the strong free cash flow rates in 2015, maybe talk about partly on the share buyback cadence for the year? Thank you.

Sure, on the price increase impact, that’s baked into our guide for this year on a year-over-year basis. Its - if you take roughly half of what we saw for 2014 versus 2013, a bit more in some areas, but that’s the starting point in terms of the guide. As we continue to pursue those opportunities we will see in terms of progress as the year rolls out, but we feel again very good about the pricing outlook overall.

Thank you.

Thank you. Our next question comes from the line of Rob Wertheimer with Vertical Research Partners. Please proceed with your question.

Hi. Good morning, gentlemen. Can you hear me?

Yes. Now we can. Hi, Larry.

So I wondered if you could give us a quick update on tax. I don't know whether you have NOLs left. Your tax rate forecast, I think your cash tax rather, is still low next year. Maybe you can discuss the drivers of that lowness and how long it would last into the future, if you don't mind?

Sure. We do – we will have NOL remaining, had at the end of 2014. Our current view relative to our guide and the number of other assumptions which you know can vary depending on actual performance. We have an expectation that we'll have fully utilized our NOL by the call of the first quarter of 2016 at this stage.

2016. Okay. And then would you hazard a guess as to the tax rate that normalizes to and right after that?

What we've told everyone is more or less starting with 10% of adjusted EBITDA type of number for cash income taxes post the NOL.

Okay, perfect. And then one small clarification. The share gain that you had in North America, is that largely coming from manual or have you pushed back on AMTs and especially in medium duty?

In medium duty I would say is primarily pushed back on AMTs. I think folks have tried them and had some experience with them and we've been able to recapture many of those customers.

Interesting to hear. Okay. Great. Thank you very much.

Thank you. Our next question comes from the line of Larry DeMaria with William Blair. Please proceed with your question.

Thanks. Good morning. I'm curious, I think it was asked but I'm not sure that we got the answer yet, but the cadence of the buyback and to confirm, it looks like there's no impact embedded into the guidance for the buyback. I'm not sure what the reason for that would be but how do we think about the cadence? And also, can we think about being more aggressive on buybacks especially now that we have the reset out of the way or is that obviously more of a, just a course of the year type of allocation? So more color on the buyback please.

Sure. We – as we talked about last year, late last year, with the board's announcement and approval of the authorization of those share repurchase, we take a number of valuation views into mind as well as internal, external alternative uses. Its long-term valuation driven and we really have no sense of urgency hence the authorization running through the end of next year. That being said, we certainly have a view of value and we'll be pursuing that accordingly relative to market condition. So from a – what's baked into the guidance or not we have not assumed anything into the guidance is frankly we don't have that level of visibility per se. That being said, certainly our expectation that market conditions dependent, we'll be certainly executing that authorization.

Okay. And then, you guys talked for a minute obviously about share gains, pockets of them and different aspects such as medium duty. Are you thinking about this as small incremental gains that happen here and there and you pick up share in different platforms and things like that or is this part of a larger, longer-term out-performance story that will last for a long time. I'm curious about how long of a tail you think you can grow your end market space and market share gains.

Well, certainly within our three and five year plans, we have gains baked in. And here in North America they are targeted because when you're, at some fairly significant levels already adding to that you are reaching some diminishing pockets of opportunity. That’s why so much of the focus is on outside North America where we've got to start driving even more traction than that which we've achieved to date.

Okay. Is it FuelSense that's really driving the gains or is it just overall productivity and obviously duty cycle start-stop, et cetera?

FuelSense really hasn't had an impact yet to this point in time. And certainly we're looking at how we take FuelSense into the market. How much of that drives unit volume gains and then frankly how much of that is a revenue enhancer for the FuelSense capability itself. That’s something the organization is working on.

Okay. Thank you.

Welcome.

Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question.

Hi, guys. Just touching on that increased penetration in global On-Highway. In the PowerPoint, you talked about the week global demand which we've touched on multiple times here but you also said it would be offset by some increased penetration. I was wondering where you think the specific opportunities are in 2015 outside North America On-Highway?

Yes. There is a – and obviously we wait for them to make the official announcements that there is a large southern dramatic OEM that we have up to this point in time not had much business with and we have our first releases set for later this year. With them I think we're continuing to see in Japan for example a growth in some of the domestic truck rental. We're seeing some recovery in Australia where the Japanese OEMs using the Allison are pretty strong. India looks like the bus business is coming back. We continue to work on the trucks, but the bus will be big volume driver there. As I mentioned earlier, I think it's going to be a nice year in our Turkey business. So, there is a number of areas. China Trucks is going to continue to grow. I think we're going to see a few more orders on the bus side in China as well. We continue to chase the Bangkok tender, that pops up and slides sideways here and there, but sooner or later we're going to get the rest of that. They have started out years ago with 2000 and they've been letting it out in 200 to 400 unit increments. I think we're down to the last 400 and we've done pretty well against that. So that will be another piece we'll be chasing. So there is number of areas. Latin America, we're starting to get some traction with some of the European OEMs down there and some of the truck locations. Venezuela and Argentina is going to be tough due to the economic conditions. We know that. But there is some opportunities in other parts of that region, particularly on the truck side to be additive to where we're to try to offset some of that.

Okay. Very good. That’s helpful. And the I guess lastly, just a quick comments on the TC10 progress toward getting into some new OEMs there? Thanks a lot.

Continue to work with them. I think the biggest thing we can do is continue to have end-users buying the product as we are more and more, larger orders been placed. Repeat orders being placed with some very large beverage fleets. And as they get confident in the product they are going to, and assuming they use different OEMs, they're certainly going to ask for that product to be available at those OEMs. Obviously we engage in dialogue directly with the OEMs. We've got proposals, including engineering firms to assist them in that. But the real key is going to be the success of product in the market and we've been very pleased to date. The customers who have been using it are seeing every bit of what we've told them they're going to see relative to fuel efficiency and have been pleased. And as I said we've received from the major players some repeat orders and that bodes very well.

Okay. Great. Thanks a lot.

Thank you. Our next question comes from the line of Ann Duignan with JPMorgan Chase. Please proceed with your question.

Hi, good morning. Most of my questions have been answered by now. I just wanted to circle back on defense. With the JLTV contract in play; there are three competitors. Are you positioned on all three competitors or are you on one of the three, two of the three, or all three?

We're on all three.

Okay. So you are agnostic. And then just a minor detail, but can you give us your ending diluted share count?

The year ending I think was roughly 181 million shares.

Okay. That's great. That's all I have. I think the rest of my questions have been answered. Thanks.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.

Great, thank you. A lot of ground is covered here, but maybe I'll just ask a two-part question on the Service Parts & Support. First, just on North America On-Highway, just -- and there was a reference earlier made with respect to parts relative to truck production. Can you maybe just help us in terms of, just thinking about underlying parts consumption in light of the fact that you've taken share and held for, what, four or five years in Class 8 straight which originally is a much bigger parts consumer. And obviously, we look at pretty tight utilization rates. Obviously, that is for the Class 8 fleet overall but just help us think about underlying assumptions for North America On-Highway. And then second, on the Energy business, Larry, just curious what the tone of discussions on price today with your energy customers, how that compares to what you saw in the middle part of 2012? Thank you.

Sure. Let me start with the price, clearly when an industry is under pressure you know, its about tougher get price, and there is discussion about how folks can work together to kind of get through a tough patch would be fair to say that there is been some of that dialogue. We certainly have in the near term here work to maintain our position in two ways, number one, long-term supply agreements where the pricing is defined and it would be fair to say that in the current environment moderation is probably the key versus capturing a lot of the upside and we said that. One of the things that we have done with our higher horsepower, and greater capability products is we have positioned them on a pricing scale or latter if I may use that term versus the horsepower, the power in torque that those products are able to carry. So, with a greater capability you would position in a little different position in another rung up to ladder and we've been very pleased to see that much of the market particularly here in North America and China have placed a lot of orders for the higher power and torque products which carry an appropriate price for that greater power. So, while there is probably not a lot of SKUs skew pricing opportunity at the current time, we are able to by virtue of our product expansion capture per rig a better revenue and profit picture, so that’s been a good piece of work. Relative to the parts business?

So the to you comments in terms of On-Highway expectations in terms of our guidance for 2015, we would see the North American On-Highway service piece being roughly flat to slightly up. One of the things that’s interesting about our business as we've evolved continue to improve the product and the quality and the performance so there and you can see that in our warranty experience we're sort of a victim of our own success relative to aftermarket parts. So, one of the things to keep in mind is we are certainly growing the population of Allison's fielded, at the same time when you look at the amount of service parts that are being required over the life of those vehicles, again, occasionally dependent but the reality is that’s not necessarily going up, in many cases going in the other direction given the products which is why as we talked before, its important to us to maximize the value of the sale, the initial sale of the unit. So, having said that, we'll continue to keep an eye on opportunities there. There are number of things that we're working on in that space, as well as our re-trend business frankly there is a number of initiatives that we've been watch there to expand our position a bit. So, overall I think that you could say the same about outside North America in terms of aftermarket from On-Highway as well. So, the piece of the story is there as you know for that end market is support equipment and that’s directly tied to current volume of new units. So and you could see that line up as we've provided the guidance.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed with your question.

Yes. Thanks for taking my question, guys. So I just have one last because most of mine have been answered as well, but I'm just curious about the amount of conservatism that you built into the North American Off-Highway outlook. So how much of that sharp -- like a half drop off that you're embedding is underwritten by actual customer conversations and their plans for spending and how much of it is just you guys being cautious and you don't want to miss your guidance?

Well, I would say Nicole, that the customers, its interesting because in the order stream you don’t necessarily see everything that they have disclosed in terms of their forward capital plan. So, we – I would say that we have probably reached ahead to where we think they're going to end up in some cases, because they've indicated here is where we're at the first half of the year, second half we're not sure, so then we look at what are the capital spending plans and we've seen a range and different people have different numbers. But I think we've guided to the 30% down and while if you would have take the mid point of all of their guidance that may be a little bit towards the higher side. Certainly I've seen some in the 30% to low30%. So we think that we're out in front of what we think their order stream will ultimately evolve to be even if they haven’t described that to us in concrete terms as we sit here.

Okay. That’s helpful. Thank you. I'll pass it on.

Okay.

Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I'd like to turn the floor back over the Mr. Dewey for any closing comments.

Well, again, we appreciate everyone's time this morning. And we look forward to the first quarter call here in 2015. Enjoy your day.

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