Allison Transmission Holdings, Inc. (ALSN) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's First Quarter 2017 Results Conference Call. My name is Melissa, and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Allison Transmission will conduct a question-and-answer session and the 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 over to Fred Bohley, the company's Vice President of Finance. Please go ahead, sir.

Thank you, Melissa. Good morning, and thank you for joining us on our first quarter 2017 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman and Chief Executive Officer; and Dave Graziosi, Allison Transmission's President and Chief Financial Officer. As a reminder, this conference call, webcast and 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 May 4. As shown on Page 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risk, including those set forth in our first quarter 2017 results press release and our annual report on Form 10-K for the year ended December 31, 2016, and uncertainties and other factors as well as general economic conditions. Should one or more of these risk or uncertainties materialize or should underlining assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on Page 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2017 results press release. Today's call is set to end at 8:45 AM Eastern Time. In order to maximize participation opportunities on the call, we'll take one question from each analyst. Please turn to Slide 4 of the presentation for the call agenda. Now I'll turn the call over to Larry Dewey.

Thank you, Fred. Good morning, and thank all of you for joining us today. On today's call, I'll provide you with an overview of our first quarter performance, including net sales by end market. Dave Graziosi will review the first quarter financial performance. I'll wrap up the prepared comments with the 2017 guidance update prior to the Q&A. We are pleased to report that Allison's first quarter 2017 results exceeded the full year guidance ranges we provided to the market on February 6, principally driven by stronger-than-anticipated demand for North America service parts. Allison also demonstrated solid operating margins and free cash flow while executing its well-defined approach to capital structure and allocation. Please turn to Slide 5 of the presentation for the Q1 2017 performance summary. Net sales increased 8% from the same period in 2016, principally driven by higher demand in the Service Parts, Support Equipment & Other end market. Gross margin for the quarter was 50.3%, an increase of 380 basis points from a gross margin of 46.5% for the same period in 2016, principally driven by increased net sales, price increases on certain products and favorable manufacturing expense, partially offset by higher incentive compensation expense. Please turn to Slide 6 of the presentation for the Q1 2017 sales performance summary. North America On-Highway end market net sales were down 1% from the same period in 2016, principally driven by lower demand for Highway Series and Rugged Duty Series models, partially offset by higher demand in Pupil Transport/Shuttle and Transit/Other Bus models. North America Hybrid-Propulsion Systems for Transit Bus end market net sales were up 18% from the same period in 2016, principally driven by the timing of transit property orders. North America Off-Highway end market net sales were down $4 million from the same period in 2016, principally driven by the previously contemplated trailing impact of low energy prices. Defense end market net sales were up 8% from the same period in 2016, principally driven by the intra-year movement in the timing of orders. Outside North America, On-Highway end market net sales were up 3% from the same period in 2016, principally driven by higher demand in India, partially offset by lower demand in China. Outside North America, Off-Highway end market net sales were up $3 million from the same period in 2016, principally driven by higher demand in the mining and energy sectors. Service Parts, Support Equipment & Other end market net sales were up 39% from the same period in 2016, principally driven by higher demand for North America 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 Q1 2017 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 $4 million from the same period in 2016, principally driven by favorable product warranty adjustments and 2016 stockholder activism expense, partially offset by higher incentive compensation expense. Engineering, research and development expenses increased $2 million from the same period in 2016, principally driven by higher incentive compensation expense. I would like to provide some additional information regarding incentive compensation expense to ensure the first quarter year-over-year variances mentioned during this call are clear. As we have discussed in the past, Allison's incentive compensation program is subject to annual performance targets established by our Board of Directors Compensation Committee, and is therefore variable. As a result of our full year 2017 guidance update exceeding the ranges we provided to the market on February 6, our incentive compensation expense accrual is higher than the same period in 2016. Interest expense net decreased $9 million from the same period in 2016, principally driven by favorable mark-to-market adjustments for our interest rate derivatives, partially offset by interest expense for our interest rate derivatives that became effective in August 2016 and interest expense for our revolving credit facility borrowing. Income tax expense for the first quarter of 2017 was $44 million, resulting in an effective tax rate of 35% versus an effective tax rate of 37% for the same period in 2016. The decrease in the effective tax rate was principally driven by 2017 discrete activity related to the excess tax benefit from stock-based compensation. Net income for the first quarter of 2017 was $83 million compared to $48 million for the same period in 2016, principally driven by increased gross profit, decreased interest expense and decreased selling, general and administrative expense, partially offset by increased income tax expense. Adjusted EBITDA for the first quarter of 2017 was $192 million or 38.5% of net sales compared to $162 million or 35.1% of net sales for the same period in 2016. The increase was principally driven by increased net sales, price increases on certain products, favorable product warranty adjustments and favorable manufacturing expense, partially offset by higher incentive compensation expense. Please turn to Slide 8 of the presentation for the Q1 2017 cash flow performance summary. Net cash provided by operating activities decreased $7 million from the same period in 2016, principally driven by higher accounts receivable commensurate with increased net sales, higher inventories and increased compensation -- incentive compensation payments, partially offset by increased gross profit, higher accounts payable and decreased cash interest expense as a result of the intra-year timing of debt payment. Adjusted free cash flow was $103 million compared to $113 million for the same period in 2016, principally driven by increased accounts receivable commensurate with increased net sales and increased incentive compensation payments, partially offset by an increased gross profit and decreased cash interest expense. During the first quarter, Allison continued executing its well-defined approach to capital structure and allocation by settling $415 million of share repurchases and paying a dividend of $0.15 per share. Given strong leverage loan, market conditions during the quarter, we amended our senior secured credit facility to reduce the term B3 loans applicable margins by 50 basis points. Finally, we ended the quarter with a net leverage of 3.43, $120 million of cash and $187 million of revolver availability and $524 million of authorized share repurchases capacity. Now I'll turn the call back over to Larry.

Thanks, Dave. Please turn to Slide 9 of the presentation for the 2017 guidance update. Given our first quarter 2017 results and current end market conditions, we are updating our full year 2017 guidance as follows: net sales in the range of up 7.5% to 10.5% compared to 2016; adjusted EBITDA margin in the range of 34% to 36%; adjusted free cash flow in the range of $415 million to $455 million; and cash income taxes in the range of $65 million to $75 million. We continue to anticipate capital expenditures in the range of $70 million to $80 million, which includes maintenance spending of approximately $65 million to $70 million. Although we are not providing specific second quarter 2017 guidance, Allison does expect second quarter net sales to be up sequentially, principally driven by increased demand in the Global On-Highway end markets. This concludes our prepared remarks. Melissa, please open the call up for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Jamie Cook with Credit Suisse Group. Please proceed with your question.

Hi. Good morning. Nice quarter. I guess, first on the parts, showed some pretty significant improvement in the quarter. I'm just wondering where that came from and how do we think about what sort of restocking or onetime, more in nature, versus how we think about parts growth on a sustainable basis. And then maybe, David, given the incremental margins and EBITDA margins you put up in the quarter, I'm just trying to understand your EBITDA margin guide for the year. It just seems like you're -- the incremental should be better and the EBITDA margin should be better given what we saw in the first quarter.

Sure. In terms of the outperformance relative to parts in the first quarter, the majority of that was really driven by the North America Off-Highway sector, if you will. And as you know, the vast majority, if not almost all of that, is tied to hydraulic frac. So, as you saw from our fourth quarter results last year, that trend certainly continued into the first quarter. I think based on public reporting that's been out there over the last week or so, you certainly have some feedback from a number of venues as relative to expectations and actions to redeploy, if you will, reactivate equipment. But I think that's obviously been reflected in our Off-Highway parts numbers. In terms of restocking, I probably wouldn't describe it that way as much as the impact of redeploying that equipment. That being said, as you look at the balance of the year, certainly, our expectation -- and again, I would say that's reflected in other public comments by end users, some expectation of moderation as we go through the year. So, I think the ramp that we saw from -- again, starting in Q4 into Q1, we, at this point, would expect some level of moderation for the balance of the year. So...

But to put you on the spot, is that double-digit growth? Is that high single-digit growth? I'm just trying to understand the degree of moderation you're expecting.

Well, I'd say if you certainly compare our expectation on run rate, I would describe our quarterly assumptions for the balance of the year to be more consistent with that Q4 run rate that you saw from '16, in that range for the -- as you think about Q2 through Q4, right? So, I think that's the way to size it up.

One of the issues, Jamie, is the way that flows in terms of our channel is, we sell through the distributors on the parts business, and so you do get a bit of a stocking effect, where as they're doing the overhauls, they get the kits in, and some of these are kits to just overhaul. The others are as you know, we've introduced some higher-horsepower products. And so, we've got some upgrade kits that they're also utilizing at the same time. And so, they get the -- we sell the product when we sell it to the distributor, and then they have a rebuild schedule. So, you do get a bit of an upfront bow wave, but then gets digested as the overhauls and upgrades are done. So that's why you'll see some of that as well.

Okay. And then just on the EBITDA margins -- implied margins for the back half of the -- or the remaining nine months of the year?

Sure. We -- as you know, typically the way we've -- our sales volumes have stacked, there's seasonality in the business, with first half usually higher than the second half. So, we don't expect that dynamic to change. Frankly, as you think about the development of the margins now, as you know, we provide full year guidance for a reason. There are a number of things that happen during the year, whether those are shutdowns twice a year in terms of scheduling, we also have labor negotiations late this year that will be part of the schedule here. So, all of that is part of our guidance as we think about the first half, second half. And certainly, on a quarterly basis, there is some variability for a number of reasons. I think the absorption was very favorable in the first quarter, as you could tell from the sales volumes. That being said, if you think about first half, second half in terms of run rating and that seasonality, as has been our history, you'll see typically lower margins certainly in the fourth quarter because the number of workdays between holidays and everything else is typically 10 -- 5% to 10% less. So that's how we've essentially reflected the guide. I'd also tell you, as we're rolling through the year, there are a number of dynamics that we would expect to play out as we've seen stronger demand more broadly in the market, that there's certainly some raw material pressure out there, whether it's aluminum or, in some cases, the steel that we use. As we think about the balance of the year, you know that we have a number of initiatives that are rolling out on the growth side as well. So, we plan on fully funding those as well as some of our R&D efforts here. So -- and I would say as it's gotten busy fast, to put it one way, that typically may require some level of premiums along the way with the supply base as well as freight that goes with that. So, we again try to reflect that as best we can in the balance of the year. But I would say, I would focus more on the full year guide relative to margin than trying to isolate the individual quarters.

Okay. Thanks. That's helpful. I'll get back in queue.

Thank you. Our next question comes from the line of Ann Duignan with JPMorgan.

Yes. Good morning. Can you talk a little bit about the segment revenue growth expectations? Clearly, parts, you had guided up 6, and we're looking like we're going to be well above that. If you could give us some color by segment, that would be great.

Ann, this is Dave. As we think about our updated full year guide, and I would certainly think about the North America On-Highway business and call it 8% to 9% range year-over-year. Hybrid, transit, we're probably looking at close to 15% year-over-year. Our North America Off-Highway, at this point, relatively large number when you start off a low base, as we -- as you well know, but we would see that up probably over 70%, 80% year-over-year. Defense, we have up about 4% year-over-year. And again, we've seen some additional volumes coming there. I think the developments in that end market continue to improve. The team is working very hard to secure other opportunities outside of the U.S. I think that process is moving forward at a good pace. Outside North America On-Highway, we would have up slightly year-over-year. On the Outside North America, Off-Highway, we're probably looking at an almost a doubling year-over-year again off the base as you think about very low numbers. As you know, whether it's Off-Highway for North America last year, and again, Off-Highway Outside North America, which are new unit sales coming off very low basis, but seeing some improvement there. And then Parts and Support Equipment & Other, we'd have up close to 10% year-over-year.

Okay. And then just a quick clarification. In both the NAFTA and the non-NAFTA Off-Highway businesses, could you just tell us, are both of those driven by oil and gas or Off-Highway and rest of world mining and North America oil and gas? Just trying to get a sense for the mix there.

Yes, this is Larry. The North America is almost exclusively energy. The outside North America is probably more than half, less than two thirds energy, and we are starting to see a little bit of activity in mining.

Okay. I'll leave it there. Thank you for the clarification.

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

Hey. Good morning, guys.

Good morning.

Just following up on Ann's question. So, I mean, North America Off-Highway, I mean, even if you were up 70% to 80%, you're still 85% below the peak in 2014. So, is that peak in 2014 in your view even remotely relevant number anymore? And just broadly speaking, does the North America Off-Highway segment growth just become more of a kind of a 2018 story as you obviously typically see the pickup in parts first? But you're really not factoring in all that much in your guide at all for Off-Highway as far as I can tell.

No, you're correct. I would say that relative to the 2014, certainly, we don't envision with some of the changes in operating practices and the capabilities that folks have done, and then in the context of global pricing, we don't see 2014 in any kind of -- those kind of numbers in any kind of the near term. Having said that, certainly, we feel very solid that by '18, perhaps sooner, one of the things we're still in the process of trying to sift through with our customers and the industry, in general, is will that pull into '17. There's been some talk, there's been some inquiry, but, certainly, we don't have anything solid that we put in the forecast. So, we -- if you would ask, do you feel like there's headwind or tailwind, I'd say tailwind.

And just a follow-up on -- could you just talk a little bit about the new business, the TC10 business with PACCAR, and just clarify was that in your guide before? And can you help quantify at all what that would mean for the second half of this year?

Well, in terms of what we've got laid in and as much as we don't have the final production release, we're continuing to work. We've got, I think, a number of integration issues behind us. The engineering work is done. There are two sets of outstanding issues. One is the installation issues, and we're working through those. The other piece of that is, and we're in dialogue with PACCAR as to how best we can support it, is the OBD testing. They want to make sure that they're completely clear there. I think some of the recent Volkswagen situations have caused folks to want to make sure that they double dot it and double -- double dotted there Is and double crossed their Ts understandably. And so, we're working with them on that. And depending on that schedule, that will then yield the full release. And so, we're working through the timing details. Right now, since that isn't nailed down, specifically, we don't have a lot of that volume laid in. And there will be a ramp at any rate.

Got it. Thank you.

Thank you. Our next question comes from line of Rob Wertheimer with Barclays.

Hey. Good morning. I wonder if you could just take a moment to talk about your business in China as it stands and as it could be. Do you sell in straight trucks currently? Is it mostly bus? How many are you expecting to with OEMs, with CNHTC? Seems like a pretty big opportunity. What kind of time frame can we expect? And how long products take to design into trucks and roll out, et cetera?

Sure. In terms of our current business in China, we have -- for those buses that have been equipped with automatic transmissions, we worked pretty hard over the years. And we're certainly north of 85% and very often in the 90-plus percent market share. Now obviously, those that are equipped with automatic transmissions, they're a small portion of the market. There's others that are equipped with manuals, few AMTs, but mostly manuals, automatics. And then, of course, they've certainly used the number in recent years -- last couple of years, number of electric vehicles. It's rather interesting because some of the big fleets that have used electric vehicles are petitioning the government for carve-outs to purchase more conventional diesel buses. And again, with those large fleets, those have been where we've been selling automatics in the past years. So, certainly, we're going after that as well as the cities that have been using the manuals, we've had some success there converting those to automatics. The government is shifting the incentives from the purchase of electric vehicles, where they had subsidized to the point where it was below the cost of a -- significantly below the cost of a conventional vehicle. They are shifting those to operating and infrastructure, so the purchases of vehicles is not going to be as incented as it was previously the case. In terms of our business, as the bus business has evolved a bit and as our focus on truck business has grown and in the traditional vocations or end markets, specialty vehicles; airport trucks; dock spotters; refuse packers; fire trucks; construction vehicles; as that business has grown, our mix, what was years ago Off-Highway and bus exclusively, has changed a bit. And, certainly, we're still positioned for Off-Highway, albeit off a pretty low levels. And probably on a unit volume basis, I don't know, 60-40, something like that, on bus. Truck kind of split, and continuing to focus on truck. Relative to our recent announcement with the Sino truck, there is really several reasons why we find Sino truck to be a pretty interesting organization to be working with. And, of course, we do sell to them today, albeit at some relatively low volumes. First off, they are a very significant player in our addressable end markets. And specifically, some of the vocations I spoke to, they do have an experience and a history of strategic alliances with Western firms, and we can certainly examine that record and understand how they think about things. Probably most recently, their MAN engine initiatives come to mind. And then one of the other interesting areas is they are the official testing source for the Chinese government for all of the commercial vehicles. And so, by working with them, we think that will ensure that we're properly aligned relative to future regulations there in China. And there's 3 things we spoke about when we talked about with the Sino truck strategic partnership and the evaluation of what the possibilities exist. We talked about market development, and that's essentially the -- how can we go to market together in an integrated marketing and sales initiative to drive volume. The second is localization as an enabler for more market development activity. And then the third area is technology development, particularly oriented towards increasingly being called intelligent vehicles. And that's certainly an area that we have been working on over the last several years, and we think we've got some interesting ideas that we can bring to bear on the cooperation. So, we would expect over the coming months to continue to work the details and see what specifically the form of the activities will take with Sino truck. We continue to work with other OEMs, it's important to note, and, in fact, Sino truck has been very clear about that because they recognize the scale advantages and -- of transmission manufacturing. And so, they encourage us to think in terms of not only China supply but potentially global supply on products, particularly those that may be developed uniquely for the conditions there that -- in China that may apply to other places in the world as well.

That's great. Thank you. Can you give us just a sense what portion of China straight truck, heavy truck is currently automatic, if any?

Oh gosh, it's 3% maybe. You're talking low single digits. We identified -- and you can look at a lot of different analysis to say how many commercial vehicles are there. We define by our -- the way we define in terms of size and other factors in the vehicles, we define about a million a year. And then we recognizing -- you look to the million, but we start out with a term that we call the addressable markets, and that gets down to some of the chassis costs, some of the vocations where we think we've got the strongest value proposition, and that's about a quarter of million vehicles out of that million, so about 250,000. And, of course, you don't step into all of that immediately. And still -- then the plan is from where you start, how do you build towards penetrations that we see maybe in other places of the world, with North America being the highest, obviously, for us. But that's how we think about it, and that's how we go after the market.

That's great. I'll turn it over. Thanks.

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

Hi. Good morning, everyone.

Good morning.

Dave, can you bridge for us the gross profit performance in the quarter? Obviously, phenomenal incremental margins. I think volume and mix would explain roughly 2/3 of the gross profit dollar improvement. Can you just help us with the remaining $10 million to $15 million, how much was pricing, meta material cost? What were the other factors that were favorable beyond volume and mix?

For the -- with focus on gross profit, we had about $12 million, plus or minus, in price in the quarter year-over-year, about $5 million in favorable manufacturing expense. And then that was partially offset by about $3 million of increased incentive comp expense. So obviously, the balance there in terms of volume -- the benefit of volume, as you mentioned, about $22 million. So, I mean, that was very strong quarter. And as you know, and as Larry and I and others have talked before, with the way the -- we're currently running the operations, it's highly variable with this type of incremental volume. So, on the Off-Highway business, again, as you know, it's an assemble, test and ship business, so attractive margins both on units as well as parts there. So, the team is working hard to respond to the demand, and we plan on working our way through the balance of the year. And as I said earlier, in terms of guide and thinking about bridging margins, I would very much focus on the full year for the reasons as I said earlier. And I think it's early in the year for us to be declaring a broader victory at this point.

And fantastic pricing result, I think the strongest price increase for you folks since 4Q '14, if I have it right. Was that the FuelSense kicking in? Or can you just talk about what products are driving that? And anything in the comps that is particularly favorable because that's truly outstanding performance on that metric?

Yes, let me provide some additional color, if you will, on that. As the quarter developed and you think about year-over-year, as you know, some of our businesses can be driven by tenders and timing. So, I would tell you a portion of that price favorability on a year-over-year basis for first quarter was a result of some of the tender activity that we've seen, and some of that will balance the rest of the year as you think about the other portion of the portfolio here, we certainly saw price in the North America On-Highway market as well. And as you know, we take annual price action if I think about the cadence, which I think is where your question is going, for the full year, we would probably zero in on, plus or minus, about 100 basis points in terms of price improvement year-over-year overall. So, the cadence of that, I would weight that first half versus second half, again, due to some of the timing of tenders as well as, more broadly, some of the timing of volume that we have with specific end uses. So that's the way I would think about pricing developing this year.

And then lastly...

This is Larry. I want to just add just a little more detail on that, specifically if you look at some of the China business, particularly the bus tenders. Last year, it was early in the year, and those for -- given the situation with conventionals being somewhat reduced by EV, that's really heated up. And we're committed to maintaining our position there. And so, we'll get after it relative to the competitors. And so, given that was early last year, and right now the big orders are scheduled for the second half, any incentives there account as negative price, obviously, in our net-net calculations.

Okay. And lastly, I'm wondering if you could comment on orders that you're seeing in NAFTA Off-Highway. Have those picked up off of the really low levels? And have you folks been surprised that the delay between -- we've seen a couple of quarters now of really strong parts manned for you in NAFTA Off-Highway, I guess, are you surprised that hasn't translated into some pickup off the bottom yet?

Well, I think that based on the discussions we've had, probably what may have altered that dynamic or prolonged it is the ability of folks to not only overhaul their equipment that they said, that they idled, but upgrade it in the form of the higher-horsepower capability products that we've developed. One of the things we did was we developed kits to allow folks to take the older models and upgrade them. And so, with the content of those kits, it's obviously not a new transmission, but the critical components are all new for that higher horsepower. So that's probably extended that process a little bit. But again, as I indicated earlier, we're starting to get inquiries, and we're trying to work with our suppliers to see -- kind of, do some order gaining as to if those turned into solid orders, how are we going to try to respond to -- how will it affect the overall mix first, so if we get an understanding of the total demand. And then to the extent it's an increase, how will we reach out for that.

And, Jerry, I would just add with -- in terms of the public comments I mentioned earlier, by -- from some of the end users, I -- my sense is, at least reading the comments there, that there isn't a definitive, we're outbuilding new equipment position being taken at this point. So that's the push to reactivate equipment. So, I think the broader tone of the market, it appears at least to us, to be very concerned around maintaining or supporting margins. And I think flooding the market with more capacity probably isn't where we would see that going near term. But if you read the public comments, and, certainly, that's up for a more interesting '18 relative to new unit demand versus parts.

Thank you.

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

Hi great. Thank you very much. Can you just talk a little bit about ex-China international, maybe what you're seeing there or some of the opportunities? Is there anything close to happening? Or is it kind of a slow slog? And I have a follow-up.

Well, it really varies from where we're at around the world. In Europe, Middle East and Africa, some of the major OEM truck volumes, some of those are coming off just a little bit. We do have some new releases. We continue to grow volume with MAN, certainly Bell out of South Africa, but net-net-net, we'd see a little headwind there. Bus volume, we're picking up a little bit in Russia and Turkey, step -- two steps forward there and a step back from the U.K. And then probably one of the bigger drivers is the wheeled military volume. And based on the tenders we know about, at this point in time, we would see that down a little bit year-over-year. So, Europe, Middle East and Africa, although they can sometimes fill in later in the year as they did last year, so we're continuing to push there, but that one looks like a bit of a headwind. If we look at some of the Southeast Asia, China, Korea, other areas in Asiana, we do see some China truck, as we spoke of earlier, increasing. We've got the Volvo program, the 92 -- P9218 in Southeast Asia, Malaysia, there. That's some nice book of business. We talked already about China Bus. Korea is going to come off just a tinch The 2016 government fund, the allocation was pretty high for some of the municipalities, doesn't look like that's going to hold quite as strong this year. Japan domestic is down, exports are staying up. LAO looks like it's going to be up, albeit off a low base. There's some activity in Argentina, that last year was kind of down due to the prebuy in '15 to the Euro 5 standard products. We've got some new releases with Agroli and MAN. So those are driving some volume. And then India, off a very low base but, nonetheless, is coming up, primarily in bus. We do have some truck business, but it's primarily bus. There's some domestic activity in Mumbai as well as some exports to the Ivory Coast and Congo. So that's a quick kind of around the world highlights there.

Okay. And then just really quickly, can you guys remind us or maybe give us an idea of your prediction for the lag time between the increase in services related to Off-Highway and actually seeing some more OE or actual sales orders. I mean, is this a 3-month lag, 6-month lag? Has the correlation kind of changed over time?

Yes, as we have input into us at this point in time, we have strong kit sales, which would suggest more upgrades. Again, we've muddied the water a little bit here because it's not just overhauls, it's also upgrades due to the kits that we developed with the new configuration. So, we've got that going well into the latter part of '17, albeit at the levels that they've described earlier. Having said that, there has -- dialogue has started. There's no question people have shared with us their '18 plans. Some general broad-brush strokes, and so we see units without question in '18. The dialogue now is, will some of those begin earlier in '17? And we certainly have no clarity on that, but that dialogue has begun.

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. Congrats on a great quarter. I believe you talked about North American On-Highway being up 8% to 9% this year. Could you talk about what's embedded from a market share standpoint in your outlook for North America On-Highway, particularly for Class 8 straight and Class 6 and 7? And as a related follow-up, has your medium duty share outlook changed at all following a recent announcement by two other component suppliers, NR JV and automated transmission technology?

Short answer is, we have continued with the market share announcements that were embedded in our full year guidance on February 6, those haven't changed. And no, the -- we have not changed the assumptions as a result of the announcement. This -- our activity associated with that product that is attempted to being launched into the medium duty space initiated, gosh, probably the aggressive actions a year ago. And those will continue unabated and we anticipate the same outcome as what we did previously.

Okay. Thanks. I'll pass it on.

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

Yeah. Thanks. Good morning.

Good morning.

So, I'm not sure if I missed this, but did you guys disclose the amount of the benefit from lower warranty expense this quarter? I'm just trying to get a sense of all of the puts and takes on EBITDA margins.

Sure. We didn't, but I can tell you that number is about $4 million on the quarter.

Okay. Got it. And then just as a follow-up on share buybacks. So, you completed the ASR in the first quarter. I guess, what does that mean for the way you're thinking about the rest of the year from a repurchase perspective?

Well, as you know, our board authorized a new $1 billion share repurchase program in the fourth quarter last year. So, the activity that we executed in Q1 was towards that authorization and certainly our -- continues to be our intention to complete that as the board has approved by December of 2019.

Okay. Got it. Thanks. I'll pass it on.

Thank you. Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.

Hey. Good morning, guys.

Good morning.

So just quickly on the Defense business, you talked about kind of a low to mid-single-digit revenue growth this year, which was, I guess, a little bit lower than what we might have thought, given the ramp and some of the projects at one of your customers. I guess, first question is, is something rolling off that would offset some of the ramp that we're seeing in some of the other programs? And then bigger picture, this is another one of your businesses that's well below prior levels. Given kind of the current geopolitical environment, do you -- can you talk about how do you think the Defense business can ramp over the next couple of years?

Yes, look, I mean, in terms of run rate, we would see or currently expect that the balance of the year, on a quarterly basis, as implied with the guide, would be a bit higher in terms of run rate. To your question in terms of returning to the glory days of the past, understand that, that was a significant uptick there in terms of Wheeled business for activities in the Middle East that have obviously changed. As we think about the portfolio going forward, certainly, there's a number of wheeled opportunities, as you mentioned. One OEM in particular based here in the U.S. I would say more importantly though, I would think about outside North America in terms of more significant longer-term opportunities. So, the Wheeled business even as we saw out of Europe last year was higher, and that continues at a healthy clip, but I would say more broadly on the Tracked side, there's a number of opportunities out there. It's a relatively small group of competitors and a quite a bit of aged equipment out there that's going to need to be repowered. And that's what our team is really focused on. But I would say in terms of the implied number of plus/minus $120 million or so, give or take, for this year on net sales, I would, sitting here, not expect that to change dramatically relative to '18 at this point.

Yes, the opportunity -- wheeled opportunity, as you know, if you go back to -- as Dave described, you're talking about a -- gosh, close to a 90%, I'll call it 85% reduction from the peak to the more normal level for U.S. wheeled volume. And we're kind of in that space, maybe slightly above it. There is some export business, as Dave alluded to, but those are measured in the hundreds that add up to the maybe low thousand or something kind of numbers. We've done a better job of positioning ourselves, in fact, have secured some Wheeled business outside of North America. That's helpful in the near term. The tracked programs that we're pursuing and positioning ourselves, I think the team is doing a very nice job on that. But a track program, you're out 4 to 5 years, I mean, assuming every -- all the funding goes well. So, we've got a view in our 5-year plan as to what that looks like. Certainly, Dana and his team, Dana Pittard, Head of the Defense Group, is working to increase it, but you got to get into some of those bigger track programs to really see the revenues jump, and that's out towards the end of the planning period.

Great color. I appreciate it, guys. Thank you.

Okay.

Thank you. Mr. Dewey, we have come to the end of our time for questions. I'd like to turn the floor back to you for final remarks.

Well, again we very much appreciate everyone's participation and the quality of the questions and the interest in the company's results. So, we look forward to speaking with you again for the second quarter call.

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