Allison Transmission Holdings, Inc. (ALSN) Q1 2015 Earnings Report, Transcript and Summary

Welcome to Allison Transmission's First Quarter 2015 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 remark, 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. 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. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Thank you, operator. Good morning, and thank you for joining us for our first quarter 2015 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're using this morning are available on our Investor Relations website, allisontransmission.com. A replay of this call will be available through May 5. As shown on page two of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our first quarter 2015 results press release and our annual report on Form 10-K for the year ended December 31, 2014 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 three of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2015 results press release. Today's call is set to end at 9 a.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take one question from each analyst. Now I'll turn the call over to Larry Dewey. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Thank you, Dave. Good morning, and thanks to everyone for joining us today. We're pleased to report that Allison's first quarter 2015 results are within the full-year guidance ranges we provided to the market in February. Net sales improved on a year-over-year basis for the sixth consecutive quarter, led by the continued recovery in the North America On-Highway end market, higher demand in the North America Off-Highway end market, and price increases on certain products, partially offset by lower demand in other end markets. Please turn to slide four of the presentation for the call agenda. On today's call, I'll provide you with an overview of our first quarter performance, including sales by end market. Dave will review the first quarter financial performance, including adjusted EBITDA and adjusted free cash flow. I'll wrap up the prepared comments with the full-year 2015 guidance update, prior to Q&A. Please turn to slide five of the presentations for the Q1 2015 performance summary. Net sales increased 2% from the same period in 2014. Gross margin for the quarter was 47.5%, an increase of 240 basis points from a gross margin of 45.1% from the same period in 2014. The increase in gross profit from the same period in 2014 was principally driven by price increases on certain products and increased net sales. Adjusted net income increased $42 million from the same period in 2014, principally driven by increased adjusted EBITDA and decreased cash interest expense. Please turn to slide six of the presentation for the Q1 2015 sales performance summary. North America On-Highway end market net sales were up 15% from the same period in 2014, principally driven by higher demand for Rugged Duty Series models. North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 25% from the same period in 2014, principally driven by 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 83% from the same period in 2014, principally driven by higher demand from hydraulic fracturing applications. Defense end market net sales were down 26% from the same period in 2014, principally driven by 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 11% from the same period in 2014, principally driven by weakness in China. Outside North America, Off-Highway end market net sales were down 24% from the same period in 2014, principally driven by lower demand in the mining sector. Service Parts, Support Equipment, & Other end market net sales were down 8% from the same period in 2014, principally driven by lower demand for North America service parts. Now, I'll turn the call back over to Dave Graziosi. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Thank you, Larry. Please turn to slide seven of the presentation for the Q1 2015 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 $10 million from the same period in 2014, principally driven by lower product warranty expense, a warranty expense reduction for our dual power inverter module extended coverage program, and decreased global commercial spending activities. Engineering, research and development expenses for the quarter decreased $2 million from the same period in 2014, principally driven by $3 million of 2014 technology-related license expenses to expand our position in transmission technologies, partially offset by increased product initiative spending. During the first quarter of 2015, Allison's continued review of certain of its long-lived assets related to the production of the H3000 and H4000 Hybrid-Propulsion Systems resulted in recognition of a $1.3 million impairment loss. Interest expense net increased $2 million from the same period in 2014, principally driven by unfavorable mark-to-market adjustments for LIBOR swaps, partially offset by the August 2014 expiration of certain LIBOR swaps and debt repayments. Cash interest expense decreased $11 million from the same period in 2014, principally driven by the August 2014 expiration of LIBOR swaps and debt repayments. Income tax expense for the first quarter of 2015 was $40 million, resulting in an effective tax rate of 37%, versus an effective tax rate of 34% in the first quarter of 2014. The change in the effective rate is principally driven by discrete activity recorded in the first quarter of 2014 resulting in a favorable tax benefit. Adjusted EBITDA, excluding technology-related license expenses for the quarter, was $190 million, or 37.7% of net sales, compared to $166 million, or 33.6% of net sales, for the same period in 2014. Excluding $3 million of technology-related license expenses, adjusted EBITDA for the first quarter of 2014 was $169 million, or 34.3% of net sales. The increase in adjusted EBITDA from the same period in 2014 was principally driven by price increases on certain products, increased net sales, lower product warranty expense, $3 million of 2014 technology-related license expenses, and decreased global commercial spending activities, partially offset by increased product initiative spending. Please turn to slide eight of the presentation for the Q1 2015 cash flow performance summary. Net cash provided by operating activities decreased $19 million from the same period in 2014, principally driven by reductions in incentive compensation accruals of $14 million, deferred revenue of $9 million, and miscellaneous other current liabilities of $10 million, partially offset by increased net sales, price increases on certain products, and decreased SG&A and Engineering spending. CapEx decreased $10 million from the same period in 2014, principally driven by the timing of certain 2015 productivity and replacement programs spending. Adjusted free cash flow decreased $9 million from the same period in 2014, principally driven by decreased net cash provided by operating activities and $3 million of 2014 technology-related license expenses, partially offset by decreased capital expenditures and increased excess tax benefit from stock-based compensation. During the quarter, Allison continued to demonstrate its commitment to a well-defined capital allocation policy focused on the return of capital to shareholders while maintaining a prudent level of net leverage. We settled $35 million of share repurchases, paid a dividend of $0.15 per share, repaid $52 million of debt, and commenced a refinancing of Allison's Senior Notes due 2019 that we expect to complete by May 2015. Allison ended the quarter with net leverage of 2.89, $265 million of cash, and $455 million of revolver availability. Now, I'll turn the call back over to Larry Dewey. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Please turn to slide nine of the presentation for the full-year 2015 guidance update. During the first quarter of 2015, Allison started to experience the unfavorable impact of lower energy prices in the global Off-Highway, and Service Parts, Support Equipment and other end markets. Despite our cautious approach to 2015, given economic and geopolitical volatility and particularly the headwinds and uncertainty in the global Off-Highway end markets, the variability and frequency of recent demand forecast revisions in response to exceptional energy and commodity price weakness, has prompted us to update our full-year net sales guidance to a decrease in the range of 4% to 8% year-over-year. As we've done during other periods of meaningful uncertainty, Allison is implementing initiatives to further align costs and programs across our business with end market conditions and opportunities consistent with our strategic priorities. Although we're obviously disappointed with the overall direction of our net sales guidance revision, we believe it is prudent and commensurate with current market demand projections. Despite Allison's heightened focus on controllable activities in this volatile global off-highway end markets environment, we remain intensely committed to product development, core addressable markets growth, and delivery of solid financial results. In addition to updating net sales, we're also updating the 2015 guidance for adjusted EBITDA margin to a range of 34.5% to 35.5%, and adjusted free cash flow to a range of $460 million to $510 million. Allison is affirming the 2015 guidance for capital expenditures in the range of $60 million to $70 million, and cash income taxes in the range of $10 million to $15 million. Although we are not providing specific second quarter 2015 guidance, Allison does expect second quarter net sales to be lower than the same period in 2014, and essentially flat sequentially. The anticipated year-over-year decrease in the second quarter net sales is expected to occur due to higher demand in the global On-Highway end markets being more than offset by lower demand in other end-markets. Thank you for your time this morning. Melissa, please open the call for questions.

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

Hey, good morning, guys. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Good morning. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Good morning.

So, when we look at your guide change to negative 4% to negative 8% from zero to negative 5%, trying to figure out how much of the change was your Energy business versus your non-North American On-Highway business. You guys had guided to 30% down in North American Off-Highway, and in the Putney Energy section of the Parts business. What do those numbers look like now? And then could you talk about your non-North American On-Highway business, what did you change there? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: For the – I would say out of the guidance change midpoint, about three-quarters of it is tied to Energy, whether that be new units or aftermarket, Andy. So we're certainly focused on that, as Larry said in the prepared comments. The lack of visibility and uncertainty, given the amount of changes that we've seen in demand forecasts and, frankly, the frequency of them has led us down that path. That's the latest view that we have. The balance of the guide changes are, frankly, some refinement around a number of developments that we saw through the first quarter, including the timing of some of the Hybrid-Transit Bus system sales. And frankly, the balance of the book, the changes are relatively small, but the key focus for the guide revision is the energy space.

And Dave, are you still thinking around flattish for your non-North American On-Highway business? Do you expect that 1Q would be a trough in that business? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: I'd say overall, in terms of the guide for the year, we expect that more or less flat number, as we talked about in the original 2015 guide. I would say the timing expectation around sales as we see it develop for the balance of the year, Outside North America On-Highway, I would expect Q2 and Q3, given seasonality and a number of factors, to be the higher quarters out of the year, and a similar result, given what we see today, between Q1 and Q4.

Thanks, guys.

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question. Jerry David Revich - Goldman Sachs & Co.: Good morning. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Morning. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Morning. Jerry David Revich - Goldman Sachs & Co.: Dave, can you talk about how – why the pricing actions that you've taken have been, in terms of the range of products, any mix impact that we should think about of Energy coming down, is that where you had been pushing pricing more aggressively? And then, maybe more color on the North America Parts decline, is that Energy or is that Truck? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Your questions there, the pricing moves that we certainly, frankly have been taking right along. We talked about some of this in the second half of last year and it would run rate into this year, but the majority of the selling price benefit that we saw in Q1 year-over-year is really tied to North America. A significant portion of that is in the On-Highway product portfolio and then, a number of other changes with the balance of products, but really focused around North America. In terms of aftermarket levels and thinking about what we see there, certainly the majority, if you look at the overall first quarter results, it was a little bit surprising to us, as we entered into 2015, as we got through more or less the second month of the quarter. You started thinking about some of the run rates that we were seeing in the Off-Highway business, frankly, were pretty significant in terms of drop-offs, or at least the demand numbers or the forecast that we were seeing. So if you look at the overall focus for the quarter year-over-year, majority – probably more than half of the overall number really focused around the Off-Highway business. And then, we did see some softness in On-Highway. We think some of that was, frankly, seasonality around some distributor moves in terms of inventories, but that's not that unusual, given where the market's evolved, and frankly, the ramp rates that we've seen. But I would say overall, a combination of Off-Highway as well as On-Highway for the quarter. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Just to, a little detail – this is Larry – just a little detail on that distributor inventory , we've got a couple of major rebuilders in our channel and, as part of our streamlining the process, we ended up taking those folks direct, so the inventory there, the couple of distributors had rather sizeable, they have run down, it's a one-time adjustment, but it certainly impacted us, as Dave has described here. Jerry David Revich - Goldman Sachs & Co.: Okay. Thank you. And then maybe longer term, Larry, which end market outgrowth opportunities are you most optimistic on on 2015? And are you optimistic there'll be another entrant in Class 4 to Class 5 commercial truck to give you another platform there? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Well, in terms of where we're looking at the opportunities, certainly I would say, probably some of the North America share gains that we've been able to pick up on the edge, given the size of that market and the health of that market, in addition to the cyclical recovery. We have seen some penetration gains, Class 8 straight truck construction, certainly some of the medium duty numbers look like we've been able to pick up share per our programs. Certainly, we continue to work Outside in North America in the On-Highway space to gain releases. The headwinds there, whether it's some of the economic uncertainties out of China or Europe, have certainly blunted some of that. We've got more work to do there to outpace that. Again Russia, we had good positioning there, and of course that's just completely scrubbed relative to the economic situations by virtue of the sanctions placed on Russia by the U.S. and EU. So those plans are certainly on hold until those situations get resolved. Off-Highway, Energy, and Mining, we don't see anything there in 2015 that looks real upside there, so really focused on the North America and continue to drive some of the Outside North America activity in the On-Highway space. Jerry David Revich - Goldman Sachs & Co.: Okay. Thank you. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah.

Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Hi. Good morning. I guess two questions. One, you mentioned in your press release, initiatives to cut cost in programs. If you could just provide a little more color on what actions that you're taking to be proactive and what's implied in margins as it relates to cost savings? And then I guess my second question is, you mentioned Energy is a big headwind, in particular on the fracking or Off-Highway side. Are you concerned or are you seeing any Energy headwinds – I guess, indirect Energy headwinds? Are you seeing any of that, are you concerned any of that could hit your North American On-Highway business, which has been fairly resilient? Thanks. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Let me answer the second one and then come back to the first. On the Off-Highway piece, there is some On-Highway product that goes into support activity. We think we've got a reasonable view of that through the forecast that we have coming in from the On-Highway OEMs. PACCAR, for example, says less than 10% of their business. So it becomes a net out against the overall business. I don't think we've – I think the net numbers we're looking at in the North America RDS space, it is up, as we indicated in the first quarter. Certainly, probably down for the oil field activity, but up in other spaces. So I think we feel pretty good about that. The OEMs do move their forecast around, of course. But we feel, I think, pretty good about that. I'm sorry, the first question again was? ... Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Sorry, just one more question related to that, the second question was just color on the cost initiative side, but... Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Sure. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Just in terms of what you were seeing from OEMs throughout the quarter, did you see the weakness early in the quarter, or as each month progressed – you know what I mean, February was worst than January, March was worst than February, and is April getting worse – within the Energy side? I'm just trying to get a handle on when you started to see the weakness. And then the second question was just, can you give us some color on the cost cutting initiatives that you have going on, and what's implied in terms of benefit to the margins that you're holding? Thanks. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Relative to the forecast, we had undercut the beginning year forecast that folks had. We didn't undercut it enough. And then we had a little bit of timing issue in the first quarter. One of our largest Off-Highway rig builders, Halliburton, actually ordered a fair number of units in the first quarter because we're transitioning our product line, as we've indicated. And so they actually bought ahead a little bit, which brought some of that – that's why you see the first quarter year-over-year looks pretty good in North America Off-Highway. And we obviously factored that in to the rest of the year, knowing that they'll be consuming that product through the rest of the year. So they did bring it down, it has stabilized over the last month or so at the levels that we think that we've got built in to our forecast. We – like I say, we've been out of ahead of them, but not far enough out ahead, as they brought their numbers down, so. So that's the Off-Highway piece. Relative to the cost piece, as we put together our budgets, we do it based on – we kind of roll up all of the activities and the initiatives and, through the original budget process, we rank them. And so you have the highest returning ones all the way down to the lower – still positive, of course – but the lower returning ones. So when we get in a situation like this, we can pivot relatively quickly, and hopefully adroitly, to identify those things that are lowest on the priority list and see what we can do about those. The other thing is that, as we get into it, this is an organization that likes to put one foot in front of the other. So as we get into it, folks have found ways to, even within the original scope that we've identified, to save money. And so, the incentive there is, it allows us to do more things. So in a case like this, we simply hold the scope then, and take the savings into the budgetary forecast. We don't redeploy and we have to take it to the bottom line to offset the revenue impact. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): All righty. Thanks. I'll get back in queue. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah.

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

Yeah. Hi. Good morning guys. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Good morning. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Good morning.

Can you give us the specific revised guidance that you're giving us for Off-Highway North America and Parts? You were guiding NAFTA Off-Highway down 30%, what are you guiding now? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: For the North America Off-Highway, we expect the 2015 net sales, midpoint reduction of about 37%; that compared to the 30% that we were talking earlier.

And in Parts, you were guiding down 5%, what are you guiding now? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Closer, with the Off-Highway change to down about, midpoint, in the 12% range. And the important point, Ann, there is, in terms of timing, when you think about it year-over-year, that's more of an impact in the second half of the year, as you know. With the aftermarket ramp last year, the way it built was much heavier in the second half of last year. So obviously, much tougher comps as we get into the second half of this year.

Great. Thank you, that's very helpful. And then, just on the non-operating items, we seem to be fairly wrong on our interest expense. How should we think about some of those non-operating line items, both interest expense and cash interest expense, going forward? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Well I guess the good news is, we continue to simplify our debt structure. So, with the refinancing of the 2019 notes, which we expect to be completed by the middle of May, we're only left with the two tranches of the terminal in the B2 and the B3. So that really comes down to taking some view on 30-day LIBOR, if you will, on the B2 tranche; the B3 has a 1% LIBOR floor, so – and it's 1% amortization annually. So I think hopefully, that's much easier for everybody to take a look at and try to model, from both an expense and cash side. As you know, with our hedge accounting, we do not apply per se hedge accounting to the LIBOR swap, so that's going to roll through on a mark-to-market basis quarter-to-quarter and, frankly, the only way to model that is to, again, take a view on LIBOR. But, I think you've seen, from a mark-to-market perspective, unless there's a much more drawn-out view of yield curves at this point, there shouldn't be that many changes, frankly, on the mark-to-market side. But again, we'll see how that rolls through the second half. But interest guide, as we think about cash interest expense this year, roughly $100 million is the way we're thinking about that for 2015.

Okay, very helpful. Thank you. And just, more big picture question on the TC10. That product, to the best of our knowledge, has only been released with Navistar. How is that new product being accepted by other OEMs? Do you expect to be in the list book this year, next year, if you could just give us some color on the rollout of that product? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Well, I don't consider a fish caught until it's filleted and cooking on the grill, so any comments on discussions we're having with OEMs is probably a bit premature. I would say we are obviously in dialogue, and you're aware, Ann, I'm sure with your knowledge in the industry, that there's actually another OEM who's not released it yet, but it's part of their demo fleet, so they're showing it to customers. We've had, I want to say, over 300 customer fleets now that have purchased, and a number of them have made repeat purchases. They're in that small numbers, that arithmetic progression. It would be fair to say, it's been a slower slog than what we have intended, but we continue to get positive reviews. The fuel economy numbers are extremely strong, that people are reporting in actual use, not just test data, and so that's a big plus in terms of the customer reaction. We've had good performance of the product relative to uptime. That's been good. In fact, I'm only aware of one situation, and we've got a couple of folks up there trying to understand why that one? They had a couple vehicles that operated a little differently, we think it's the vehicle setup and we'll get that squared around, but other than that, it's been beautiful in terms of the performance in uptime across the 300-and-some fleets. Yeah. I think it's actually 136 discrete customers are running it in terms of purchase and prior to that and continuing, of course, we've had about 130 fleet tests. So again, very positive experience with the product, both in terms of the performance as well as the fuel economy results.

Okay. Thank you, guys. I'll get back in line.

Thank you. Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed with your question. Nicole DeBlase - Morgan Stanley & Co. LLC: Yeah. Good morning, guys. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Morning. Nicole DeBlase - Morgan Stanley & Co. LLC: So my first question is on the oil and gas business. You guys mentioned that you saw a significant drop-off towards the end of the quarter and into 2Q. So I'm curious, have you seen stabilization at all, or does deterioration continue so far? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: I think what we've got forecast in to our numbers, based on what we've seen here in the last month, is we think it's kind of stabilized, albeit at a fairly low level. And until they sort through the economics of the oil pricing and stabilize the overall system, we think that's where we're going to be at. So we haven't yet predicted the upturn. Nicole DeBlase - Morgan Stanley & Co. LLC: Okay, okay. Got it. That makes sense. And I apologize if I missed this, it's been a busy morning. But your SG&A came in a lot lower this quarter, you guys talked about a positive warranty impact. Is that sustainable into the second quarter, or would you say that SG&A is artificially low in 1Q versus the rest of the year? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: We had, as you mentioned, a number of things with the first quarter. Warranty expense was in fact favorable, if you adjusted for the dual power inverter module extended coverage reduction. Again, I would think about SG&A for the balance of the year in, call it, the $80 million range per quarter. Nicole DeBlase - Morgan Stanley & Co. LLC: Okay. Perfect. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: That's reasonably flat. And frankly, I think the other piece of the story with Engineering, if you adjust – think about the first quarter of 2014 with the technology license, I would expect, at this point, Engineering to run in the, call it, $24 million range per quarter for the balance of the year as well. Nicole DeBlase - Morgan Stanley & Co. LLC: Thanks. That's helpful. I'll pass it on.

Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer & Company. Please proceed with your question. Ian A. Zaffino - Oppenheimer & Co., Inc. (Broker): Hi. Good morning. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Good morning. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Good morning. Ian A. Zaffino - Oppenheimer & Co., Inc. (Broker): On the defense side, the outlook, is that $100 million run rate for the year the right number to be looking at, or how do we think about the defense piece of it? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: As you know, the largest program for the wheeled side – again, two sectors within our defense business. The wheeled side is the FMTV program with Oshkosh, that is coming to some level of an end, per se. That's certainly something we start to think about for post-2015. As you know as well, the JLTV is rumored to be up for award in the third quarter of this year if they hold to schedules and assuming no protest, et cetera. So, I think the long answer on the wheeled side is we would expect transitioning from 2015 into 2016, overall units to be down, I think, slightly, depending again on the run rate on the JLTV and if there's any adjustments in the end of the FMTV contract. The track side is still largely tied to the Abrams. There is discussion with the Abrams around the engineering change proposal timing, which originally had been set up for FY 2019, that they're, I guess, looking at now moving that to FY 2017. So I think that's on our, certainly, view of things. But I would say it's a little bit premature to start talking about anything post 2015 at this point, just given the lack of contract letting that's taken place. Ian A. Zaffino - Oppenheimer & Co., Inc. (Broker): Okay. And then, on the tax bracket, the lower end you increased slightly, is that related to mix shift, international versus domestic? Are you seeing maybe more strength domestically versus internationally, so is international coming off more, how do you think about that? What's driving it, yeah. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: We typically start the year with a view on margins. We like to adjust as we get further in the year. I think frankly this year, we've done that a little bit faster as we had some experience with last year. I would say, overall, we continue to look for opportunities to expand it. Having said that, we've also talked about investing some of the improvement in some growth opportunities, and Larry talked about some of those earlier. And frankly, I think we feel good about where we sit this year from an overall mix perspective, but I would say it really has a minimal amount to do with mix. It's more around the continued development in terms of selling price execution and, frankly, I think, the operating leverage that we've talked about many times in terms of the On-Highway products. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah, this is Larry. You're correct in the sense that with the added growth in North America, that obviously helps the mix situation. On the other hand, with the decrease in the Off-Highway, that certainly is a significant headwind. So by the time you net those out, it really gets back to the fundamentals that Dave described. Ian A. Zaffino - Oppenheimer & Co., Inc. (Broker): Okay, great. Thank you very much.

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

Yeah. Good morning. Thank you. I apologize if any of these have been asked already. Just got cut off a little bit there, but did you cut your outlook for North America On-Highway this year? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: No, no.

You didn't. Okay. And then, just the pricing gains that favorably impacted your gross margin. So you got some pricing in North America On-Highway, but are you having to give it back in the rest of your portfolio, particularly in oil and gas? My question, are you seeing pricing pressure in Energy-related markets or any of your other markets? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: We – certainly there's been a lot of dialogue, and I've seen some of the articles out there. What we've done is, as we've worked to enter long-term supply agreements, we've focused on growth and providing incentives for growth. So against the base volumes, no. Against incremental volumes, we would provide a level of incentive and encouragement against the higher volumes.

Got it. Thanks. And then Larry, just wanted to get your general thoughts. I mean outside of North America On-Highway, you just don't have any growth in the portfolio. I mean obviously, the end markets right now are very, very tough. But anything particular Allison is doing to stimulate growth, or just to support prior demand levels, that you'd like to talk about, or do you feel like outside of North America, it's just a matter of cost-cutting, continuing to right-size the business? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Well, we're certainly not striking the colors in terms of the growth, let's be clear on that. We are being very clear-eyed relative to what we're spending the money on, to make sure that it's going to items that should yield results. The classic example is Russia, where we're in a much better position with the releases in that we had, and of course the geopolitical situation evolved as it has; that's very disappointing. And I would say that I would give our guys positive marks there. I think we're starting to see some traction in China truck, got a long way to go, but we're starting to see some – I think, some upside there. China bus is going to be challenging as we work to maintain our share, and you've seen some of the share statistics, and we've quoted them in the past. Very strong positioning there. But with the change in the euro, it's going to – if we're going to maintain that share, we're going to go head-to-head with folks, and that's going to be a little bit of price there. But we're not backing off any, in terms of the opportunity there. India is another example where, it's been some tough slogging, but now that some of that's freed up, you can start seeing some of the results that the team there is starting to generate, albeit lower volumes, but growing. So I think the fundamentals are there. We need to do a better job of executing and we need to go faster and harder. And so that, that certainly is our focus. There's – the sales leadership team is – come together, in terms of what our best practice is. I've been part of some of that review. Mike Headly, our Senior Vice President, has been leading that, along with each of the managing directors, and it's really a question of execution, faster and better.

Got it. Thank you.

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

Great. Thank you and, Dave, valiant effort there on the one question. But yeah, just on actually, Larry, on the back of that comment about Europe – or Europe competitors. Within the On-Highway business, obviously Europe being the largest, can you just update us in terms of one, I guess, being the competitive dynamics, i.e., just given ZF being a European-based competitor, how it's transitioning there in terms of the competitive landscape? But also, I guess related to that, there's been a bit more positive commentary from some of the truck and bus makers in core Western Europe. How is that – has your outlook changed within that segment overall, in terms of just Europe directly? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah. I think that, overall in Europe, we've got some uptake on the truck side primarily – bus side. And that's where, really where ZF and Voith also, another German transmission supplier, automatic supplier. They operate almost exclusively on the bus side, and it's a matter of, where are the releases, where they have the releases, they sell when they sell those buses, and where we have the releases, we sell in those buses. The horse we've been riding, with some success, has been Turkey. We've had some good domestic sales there, picking up here in the first quarter, and a strong year forecast there. Those OEMs are also coming in to Western Europe, because they provide, from their perspective, a quality product at a lower price point. So that – we have seen some success in that space, but it's primarily Europe – I mean, primarily truck in Europe, that we would be seeing the opportunities. And as those prospects have improved somewhat, although, every time somebody says the word Greece, everybody gets all nervous. But, as those prospects have improved, so have our sales forecasts for the applications, where we're well accepted.

Okay, and – got it. And, Larry, just on the – you mentioned in passing earlier that, related to Energy in North America, that I guess you – the distributor working down inventory, and you wanting to go direct. I'm curious, is that related – I guess one, what's the motivation for that, and is that at all related – you had mentioned earlier that, in terms of the transition of your product line – is some of that kind of interrelated, in terms of maybe the older product line, or maybe just a little bit more background, to the extent... Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah. Sure. I think I've got – I got apples and oranges crossed here. So, the product line that we've described in the Off-Highway space, there has been no change in our channels relative to the Off-Highway. The situation I described with the inventory – the one-time inventory reduction at distributors, as we have established direct relationships, have been for North America On-Highway transmission rebuilders. There's a couple of large ones and it was better, from a customer perspective, including our connectivity with that market, to establish them as essentially direct dealers, which is a mechanism we have within our overall channel strategy, and we went from a dealer underneath a distributor to direct to Allison, but that was for On-Highway.

Okay. Thank you for clearing that up. Thank you.

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

Hi. This is Chad Dillard on for Vishal. Just wanted to go back to your comments last quarter about the Off-Highway Parts business being down 30%, just given the weakened expected momentum in Energy, how do you think about that number now? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Well, we've taken the North America Off-Highway aftermarket from – I think we had guided down about 28% going into the year. We've taken that down now, for that sub-segment of the aftermarket, down 39%. So clearly, we feel even less positive than we did at the beginning of the year as we watch what people are doing with the equipment. Obviously, with the reduction in activity, very logical thing on their part. If something needs repair, you pull the one that's idle out and put in place and save your money until such time as you need all of the equipment back to work. So, that will set up a situation similar to what we saw some time ago, where you start seeing the Parts business pick up just prior to the New Unit business picking up.

And then, just back to your comment on the Hybrid-Propulsion potentially being weaker than expected, how should we think about that segment throughout the rest of the year? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Well, I think that's one where we talked about at the beginning of the year. We had talked about 13% net sales point reduction year-over-year, and I think we've taken that midpoint's reduction up to 29% year-over-year. And again, that's – as folks have looked at their funding, they look at the emissions, the capabilities of the new engines, and frankly, some of the things that we've done with our current products, whether it's some of the FuelSense activities we've done. We've got our first sales of our new xFE models, the variants of our current On-Highway products that offer significantly improved – it's a new gearing configuration that we've come up with that offers significant fuel economy benefits. So, as folks look at the value trade-offs, they've decided that, rather than go Hybrid, they'll go another direction, whether it's CNG or conventional diesel with the improved calibrations or the improved product configuration, the xFE. We get the sale, but it's not in the Hybrid space.

Okay. That's helpful. Thank you. I'll jump back in queue.

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

Hi, good morning. I hope I didn't miss it, but do you quantify the currency impact on revenue and profit in both the quarter and in the outlook, and specifically also, just on outside North America On-Highway? Thanks. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: The FX for first quarter year-over-year on sales was roughly $2 million, so really not much there, and with our assumption for the balance of the year, again, it's – I would say, relatively de minimis in the grand scheme of things. As we've talked before, we pursue a natural hedge position, so we're actually slightly short euros for the full year in the handful of millions range, and we're also short, interestingly enough, in Japanese yen. So I think we're positioned there. I think the broader issue for foreign exchange this year, relative to the euro, is as Larry mentioned, some of our European-based competition, but the full year impact from just a translation perspective, it's relatively de minimis.

Perfect. Thanks.

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question. Larry T. De Maria - William Blair & Co. LLC: Okay. Thanks. Good morning. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Good morning. Larry T. De Maria - William Blair & Co. LLC: Just – hey. First capital allocation goes – hopefully I didn't miss this, but couple quick things. The 2019 debt refi that you're working on for May, what kind of impact can that have, I guess, in the post-2015 world, positive or negative? And secondly, the share buyback, starting off relatively slow. While – where do we get more aggressive, is it a price you're looking at, $30 or lower, something like that, or should we just consider you guys starting off slow, dipping your toe in, and we should be more aggressive as the year goes on? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: On the 2019 notes refinanced, which we expect again to complete by the middle of next month. If you assume just flat, no change in LIBOR, which happens to be a 1% floor on term-loan B3, which we use to refinance the notes, that annualizes to about a $17 million reduction in cash interest expense. So, the guide that I talked about earlier, in terms of roughly $100 million, incorporates the completion of the refinancing, again, by the middle of next month. On the share repurchase, as you know, we have a $0.5 billion authorization from the board. The board has certainly a view on valuation, and we're executing against that authorization. Larry T. De Maria - William Blair & Co. LLC: So is essentially, at a certain price, you step in more, as opposed to – if the price is at $32, $33 for example, should we consider you guys buying a lot less stock, and if it's lower, you buying a lot more? Is that the way we should interpret it? David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: I would interpret it as, that we have a $0.5 billion authorization that we have every intention of completing by the end of next year. Larry T. De Maria - William Blair & Co. LLC: You will. Okay, thank you.

Thank you. Our next question comes from the line of Ted Grace with Susquehanna. Please proceed with your question.

Hey, gentlemen. David S. Graziosi - Executive Vice President, Chief Financial Officer & Treasurer: Good morning. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Hey.

Larry, I was wondering if you could just take a step back, pull out your crystal ball, and give us your longer-term outlook for the markets? And you've talked – you've obviously updated 2015, you've given us some pieces of 2016. But if we were to look a little beyond that, where do you see the North America cycle? How do you think oil and gas progresses over the next few years? Do you see it coming back, do you see it staying depressed for a while? How do you think about Europe On-Highway? Just – it would be great to get a longer-term framework for you, an update on that end. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Sure. North America On-Highway, I think we're – there have been some folks that have predicted the peak, I think they're talking about Class 8 line-haul. Certainly, if you look at the longer-term averages in our relevant markets, end markets, the Class 8 Straight Truck, the Class 5 through 7 Medium-Duty Truck and Bus, there's clearly some runway left. Not huge spikes in terms of the year-over-year, if you look at some of the ACT numbers, but good, solid sustained growth. And when you layer on top of that some of the share gains that we have been getting, certainly in some markets – school bus, fire truck – it's going to be tough to improve share there, given where we're at, essentially the whole of those vocations. But when you look at what we've done in construction and across Medium-Duty, some of the other things we've got going, I think that gives us some good runway there. Outside North America, we really have to drive the truck piece in China. And so there is an intense focus on that, to build that business out. India needs to continue some of the good work they're doing. They've got three legs of their stool they can work on. Bus, we're well-positioned there. Starting to see some of the tenders come. Truck, again similar to China, got to go hard there. And then, in India, we're also seeing interest, which we had anticipated at the time that we located our plant there, we're starting to see interest from the military. And so that's a third leg of the stool that we've got there. Europe, you'd asked about, I think that one there, we've got to continue to broaden the release package to complement the automatic applications for the vertically integrated OEMs. They've got manuals and AMTs, but they don't have automatics, and certainly we want to be their automatic partner, and then we can take to the market and see what the customers chose vis-à-vis the level of automaticity at the value point. So I think we've got some opportunity there. Russia, who knows how that'll sort out, but if/when it does, we're well positioned there. Off-Highway, I think it's probably – we don't see, certainly, a recovery in 2015. I think it would be unlikely that it's going to be early 2016. We'll have to see how things play out. That's just my feel. I think people are so busy trying to figure out 2015 that it's – as they say in the movie Ghostbusters, it's beyond the capacity for rational thought to figure out where 2016 is going to be. But I think we'll be looking at 2016 awful hard later this year to see if there is an inflection point. If so, when and how much. Outside North America, you have a similar thing. You got China with energy affected by a lot of the same things. They've shut down because they are buying the cheap oil on the world markets and storing it. So, they are taking advantage of the low price point to save their own resources. And then mining is the Outside North America, Europe and also China. And mining is down and, again, we'll take a look at that later this year to see if we see an inflection in 2016. So that's kind of around the world on the various markets.

Okay. And then the other thing I was hoping to ask, and I want to ask this very respectfully. The insider sales, it would just be helpful, I think, to a lot of investors if you could just walk through what's been driving that? I think we all appreciate the company's history as a private company, and even the last three years where they've been very restrained. But could you just give us somewhat of a framework, how to think about share sales and what the key factors there have been, just so we can appreciate those numbers? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Sure. Yeah. I think you've touched on a couple of things. If you look at the timing and the runway of the initial grants, and they were a one-time grant that had a 10-year horizon. We are now closing in on eight years of that 10-year horizon. So, one would anticipate that rather than wait until the very end, and everyone's free to make their own choices, that folks are going to – they're going to be in a fairly – especially since it was not public until nearly five years in. And then, if you just look at the timing of the secondary's folks, we're pretty much tied up. I think most of the trades I'm aware of occurred on 10b5-1 plans that were filed some time ago. I would also say, and I know this will get a bit philosophical, but let me try it on anyway. When you think about the organization, most of the leadership – and I guess I'll just speak for myself, I won't speak for others. We started, and it's hard to know from a personal standpoint what folks motivations are, but it comes down to values, and it comes down to what drives you. And speaking for myself, certainly, the leadership and responsibilities to the organization, this is the job that I hoped someday to have. I asked to come to Allison in 1989 and was fortunate enough to have that opportunity and to be in a number of roles. But leadership carries with it certain responsibilities to the organization. And certainly that is something that, as a result of seeing my father's company close, as a result of seeing my younger brother's plant in General Motors close, there's a tremendous obligation to the organization and an obligation that isn't tied to incentives. It's tied to values. And, if you think about it, when I was named president of Allison Transmission in 1990, there were no stock options for Allison. I made $260,000 a year. And that's where we started the process of building this business that had the worth such that, and if you believe the financial markets, in 2007, when we were sold for $5.7 billion, there were points of time during the sale process where if General Motors stock was $20, that would say that Allison was worth the entire rest of General Motors Corporation. But that wasn't done based on stock options, that was done based on a commitment to the organization. And so, in a weird twisted, perhaps hard-to-understand sort of a way, the commitment to excellence is not tied to what the numerical stake is in the company, it's tied to the obligation of leadership. And so, speaking for myself, I can only say that we are – I am actively engaged, and probably there's more, still, on the table than – certainly I ever expected when I took on the job, in 2000, of heading up Allison Transmission. So, hopefully that provides a little perspective. The other thing I would say, from a numerical standpoint, we did have the comp committee, as we became public, set up stock ownership guidelines. Those were set at, for the CEO, six times annual salary, which I think is a pretty solid requirement, a lot of them are five times, but we're at six times. And based on the last report that I saw, my personal holdings are roughly twice that level, times my base salary, and the holdings are approximately 18% above the median of the other comps that we use for all of the other comparison. So there would be some data to provide a little perspective to the inquiry.

Okay. That is super helpful. I really appreciate the elaboration. So would it be fair to say this is just, personal financial diversification is the driving factor behind your actions? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yes.

Okay. That's great. Best of luck this quarter, guys. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Thanks.

Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question. Alexander Eugene Potter - Piper Jaffray & Co (Broker): Hi, guys. Was wondering if you could talk a little bit about the dual-clutch transmissions that are making their way into the market, into the On-Highway market recently. Just wondering if you can comment on where you see them gaining traction, if anywhere, and in those segments where they seem to be targeted, what Allison's primary pitch or response is? Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Yeah, we actually have changed our style a little bit. We used to kind of sit back and let people make their claims and, as my dad used to say, let water find its own level. We have, as we've looked at it, and we've been able to get our hands on a DCT equipped vehicle and do a little testing of it for a period of time. And we've been able to identify perhaps some gaps in some of the claims, and so we had prepared – and it was available at the NTEA, and then also the Mid-America Truck Show, just kind of a summary of all of the various attributes. I think it would be fair to say, certainly, as an unproven product, there's some things. And as they go forward, they'll have some track record there. The fuel economy claims are rather interesting because, as we tested it against SAE-type cycles, we actually found that it did not achieve fuel savings. In fact, actually, it was kind of the opposite, and it would appear the only way we can figure it out, how they might have gotten their numbers, was using a 2005 Allison calibration, which of course we've moved on – well beyond here in 2015, with significantly more fuel-efficient calibrations and improved hardware, to go along with those calibrations to reduce the parasitic losses. So we've been able to identify a number of issues. I think they're working to try to get some releases. We think that there may be one fleet that's interested in trying some. So of course, we're staying close to that. I would say that, as a result of maybe some of the AMT history, both in terms of reliability and then, the non-fulfillment of fuel economy claims, that there are probably some challenges towards making some of the same claims with a new product from the same organization. So I think that's probably a headwind that they're trying to face. If you look at it, at one point in time in Medium Duty, the AMT picked up, from the manuals primarily, about 12% market share, and that's down to 3% now. So clearly, the experience with that product has not been as favorable, shall we say, as what I'm sure was intended. So, that's kind of where we're at. We are certainly intent on retaining, and indeed adding to our market share, so we certainly look forward to seeing that in the market. Alexander Eugene Potter - Piper Jaffray & Co (Broker): Okay. Thanks. Lawrence E. Dewey - Chairman, President & Chief Executive Officer: Okay. I think we're a couple minutes over. So, I appreciate everyone's time this morning. I know it's a busy day, lot of calls going on. So, appreciate your time and attendance here this morning. Thank you very much.

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