Allison Transmission Holdings, Inc. (ALSN) Q1 2020 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission’s First Quarter 2020 Earnings Conference Call. My name is Shamali 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 team from Allison Transmission will conduct a question-and-answer session and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. [Operator Instructions]I would now like to turn the conference call over to Mr. Ray Posadas, the company’s Director of Investor Relations. Please go ahead, sir.

Thank you, Shamali. Good evening and thank you for joining us for our first quarter 2020 earnings conference call. With me this evening are Dave Graziosi, our President, Chief Executive Officer; and Fred Bohley, our Senior Vice President, Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast and the presentation we are using this evening are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through May 11.As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our first quarter 2020 earnings press release and our annual report on Form 10-K for the year ended December 31, 2019, and uncertainties related to the COVID-19 pandemic and related responses like government, customers and suppliers, 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 that we express today. In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC.You can find a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our first quarter 2020 earnings press release. Today’s call is set to end at 5:45 PM 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. During today’s call Dave Graziosi will provide you with an operational update. Fred Bohley will then review our first quarter results and financial performance. Fred will also provide an update on Allison’s liquidity and full year 2020 capital spending plan. Finally, Dave will conclude the prepared remarks, prior to commencing the Q&A.Now, I’ll turn the call over to Dave Graziosi.

Thank you, Ray. Good evening and thank you for joining us. I would like to start out by thanking all of Allison’s employees, customers and suppliers for their dedication and resilience during this unprecedented time. The COVID-19 pandemic has had a devastating impact on governments, communities, individuals and businesses around the world.Allison Transmission has not been spared from the consequences both on an individual and organizational level. Our employees, customers and suppliers have done an extraordinary job to keep our operations moving forward, even against significant obstacles. The health and well-being of Allison’s extended family remains our top priority, and we will continue to take the actions necessary to ensure the safety of our people and our communities.The last time we address the market during our earnings call in February, the outlook facing the industry was very different. At that time, we were actively monitoring a number of COVID-19-related developments around the globe, while preparing and refining contingency plans for a variety of potential outcomes. Since then, we’ve implemented a number of proactive measures to better position our business and team as we navigate through this demanding period, inspired by generations of Allison employees that overcame countless challenges to realize the enterprise we’re all privileged to be a part of.These measures included the development of a cross-functional task force to apply COVID-19-related expert guidance, monitor developments, establish and implement protocols to ensure the safety of our employees, communities, customers and suppliers, and develop plans for a measured resumption of normal operation in the weeks and months ahead. The Allison team is also working to proactively align operations, programs and spending across our entire business with current end-markets’ conditions, while ensuring our ability to meet the needs of our customers.In March, we announced temporary production suspensions at select manufacturing facilities due to changes in customer demand, global supply chain disruptions and a weaker global outlook. Unfortunately, current end-markets’ conditions have also resulted in furloughs of a portion of our workforce.We also have restricted employee hiring, significantly reduced overtime, introduced telecommuting where possible and allowed for flexible working policies. The timing and cadence of various capital investments, and commercial and product development initiatives are undergoing reoccurring assessments in support of our alignment activities as well. These are difficult decisions that will significantly impact our employees, their families and our communities. And we do not take them without due consideration.Throughout its 105 year history, Allison has experienced many cycles, downturns and extraordinary events. Today, Allison is an agile company with a seasoned management team that has experience navigating challenging environments. Barely a year following the divestiture from General Motors in 2007, we were faced with the effects of the 2008 financial crisis, while rightsizing and managing a newly independent enterprise.Lessons learned during that time have been applied over the past decade. And today, Allison is better positioned than ever before to manage through this unprecedented period. Not only is Allison better capitalized and significantly less levered today, but the experience of our team, the flexibility of our operating structure, and the relationships we have cultivated over the years facilitate our organization’s ability to accomplish its objectives and deliver its commitments under extremely difficult circumstances.Our Indianapolis manufacturing plants have run continuously throughout 2020. And currently, all of our global plants are producing components and transmission. Volumes and shipping are based on demand. And Allison is designated as critical infrastructure by the U.S. Department of Homeland Security.However, our ability to produce is the direct result of the tremendous efforts and collaboration taking place behind the scenes amongst our employees, communities, customers and suppliers. These efforts are taking place both domestically and globally, and we are grateful to all of our employees and partners for their unwavering commitment and support.Turning to our supply chain, the management of our supplier network has always been a priority for Allison. Our ability to continuously produce transmissions over the past month, despite a relatively high percentage of purchased components, approximately 69% of our cost of sales, is attributed to our team’s abilities and relationships to effectively manage our supply base.I’m exceedingly proud of the work of our team and our partners have done over the years to identify and comprehend inherent risks and opportunities, and to secure a strong and enduring supply chain. Finally, Allison continues to operate from a position of strength. In addition to our long-standing commitment to prudent balance sheet management, we also maintain ample liquidity, profitable operations and fully-funded defined benefit pension plans.As of March 31, 2020, the company had $114 million of cash, $595 million of available revolving credit facility commitments, and a flexible and long-dated debt structure with the earliest debt maturity due in September 2024.A history of robust cash flow generation, combined with our strong financial position has also enabled the company to settle $180 million of share repurchases and increase the quarterly dividend to $0.17 per share during the first quarter.Thank you. And I’ll now turn the call over to Fred.

Thank you, Dave. Following Dave’s comments, I’ll discuss the Q1 2020 performance summary, key income statement line items and cash flow. I will also review Allison’s liquidity and full year 2020 capital spending plans before turning the call back over to Dave.Please turn to Slide 5 of the presentation for the Q1 2020 performance summary. Despite the ongoing COVID-19-related disruptions to customer demand and global supply chains, as well as the withdrawal of our initial 2020 guidance in March, first quarter results were largely in line with our expectations.Net sales decreased 6% to $637 million compared with the same period in 2019 consistent with our expectations coming into the year, the decline in net sales was principally driven by lower demand in the global On-Highway end market, partially offset by higher demand in the Defense end market, which met our initial outlook, and the Service Parts, Support Equipment and Other end market due to aluminum die casting component volume associated with the acquisition of Walker Die Casting in September 2019.Gross margin for the quarter was 51.2%, a decrease of 200 basis points compared with the 53.2% for the same period in 2019. The decrease was principally driven by lower net sales and unfavorable mix partially offset by favorable material costs. Net income for the quarter was $139 million compared to $167 million for the same period in 2019. The decrease was principally driven by lower gross profit and increased product initiatives spending, partially offset by lower selling, general and administrative expenses and lower interest expense.Adjusted EBITDA up for the quarter was $257 million or 40.3% of net sales, compared to $290 million or 43.0% of net sales for the same period in 2019. The decrease was principally driven by lower gross profit and increased product initiatives spending partially offset by lower selling, general and administrative expenses. A more detailed overview of our net sales by end market can be found on Slide 6 of the presentation.Please turn to Slide 7 of the presentation for the Q1 2020 financial performance summary. Selling, general and administrative expenses decreased $9 million from the same period in 2019, principally driven by lower incentive compensation expense, and lower intangible amortization expense. Engineering research and development expenses increased $5 million from the same period in 2019, principally driven by increased product initiatives spending due to the timing of certain programs.Please turn to Slide 8 of the presentation for the Q1 2020 cash flow performance summary. Adjusted free cash flow decreased $48 million from the same period in 2019, principally driven by lower gross profit, increased product initiatives spending and increased capital expenditures, partially offset by lower cash interest expense.Please turn to Slide 9 of the presentation for the liquidity profile and Q1 2020 capital allocation update. We ended the quarter with a net leverage ratio of 2.31, $114 million of cash and $595 million of available revolving credit facility commitments. We maintain a flexible, long-dated and covenant light debt structure, with the earliest maturity due in September 2024.Financial covenants on Allison’s outstanding debt point to the first lien net leverage ratio based on the amount of indebtedness associated with Allison’s senior secured credit facility term loan due 2026 and the revolving credit facility expiring in September 2024. As of March 31, 2020, the amount due under the senior secured credit facility term loan was $643 million and the revolving credit facility was undrawn.The first lien net leverage ratio excludes $1.9 billion in senior notes due between 2024 and 2029. As of March 31 2020, Allison’s first lien net leverage ratio was 0.5, well below the maximum ratio specified by the senior secured credit facility of 5.5 first lien net debt-to-EBITDA.We often reference our commitment to prudent balance sheet management through a low cost and flexible debt structure with long-dated maturities. Today, this unwavering commitment to our capital structure can be credited with helping Allison successfully manage this demanding period, while maintaining the optionality to pursue growth and to capitalize on opportunities that are consistent with our strategic priorities.During the first quarter, we settled $180 million of share repurchases at an average price of $35.31 and increased our quarterly dividend to $0.17 per share. We also ended the quarter with approximately $870 million of authorized share repurchase capacity. We remain committed to our capital allocation priorities including the return of capital to shareholders.While the effects of COVID-19 on Allison’s business did not materialize until later in the first quarter, we anticipate continued disruptions for the foreseeable future. Given these recent developments, the uncertain duration of the pandemic as well as the continuously evolving customer demand and supply chain readiness, we cannot conclusively provide a full year 2020 revenue, earnings or cash flow outlook at this time. However, as Dave mentioned earlier, the Allison team is proactively aligning operations, programs and spending across our business to meet the needs of our customers.While growth initiatives remain a priority for Allison, the timing and cadence of various growth commercial and product development initiatives are undergoing recurring assessments in support of our alignment activities. Allison is revising its full year 2020 capital expenditure target to a level of approximately 35% below 2019 capital expenditures and we will continue to monitor end market conditions and adjust our plans accordingly.Thank you. And I’ll now turn the call back over to Dave.

Thank you, Fred. Never before has the power of Allison been more apparent than it has been during the recent months. However, the company’s financial strength and liquidity only tell part of the story. The resiliency of Allison’s business is inherent in its strong market position in wide ranging end markets. Allison’s diverse revenue sources provide a meaningful hedge against cyclicality and disruptions.Last week, Allison was awarded a 2-year approximately $162 million contract to supply the U.S. Army with the X1100 cross-drive transmission for the sustainment of the Abrams Main Battle Tank fleet. The contract includes transmission production, upgrades, sustainment kits and service support. Deliveries began in March and will continue through December of 2021.The X1100 cross-drive transmission first produced in 1979 is designed for heavy tracked combat vehicles weighing 50 tons to more than 70 tons, including the Abrams tank. Since that time, the Abrams tank has been the cornerstone of American armored brigades. Enhancements and upgrades to this battle-tested design are anticipated to support army needs for the decades to come. The defense end market is acting as a partial offset to a slowing global demand environment and demonstrating the resiliency of Allison’s diverse end markets. In addition to the X1100 transmission contract, we continue to pursue numerous wheeled and tracked opportunities around the world and are actively working with our defense end market partners to develop new cross-drive transmissions and transmission variance for tracked defense applications.In March, we announced the expansion of collaborative efforts with Caterpillar Defense on powertrain development. Allison and Cat have been working together on defense applications for more than 40 years, and this updated structure will allow both companies to focus on their core strengths. The expanded relationship will accelerate our ability to design and bring to market deeply integrated and optimized powertrain solutions for the global defense markets. When successful defense programs such as these provide multiyear annuities due to the long lifecycles of defense platforms, Allison remains committed to its long-term growth initiatives and will continue to invest prudently and appropriately to drive growth across all of our end markets.Additional examples include our first 9-speed transmission, a variant of Allison’s proven 2000 Series transmission, designed for the global On-Highway end markets to help OEMs meet the increasingly strict emissions reduction standards that they will face in the coming years. Continued enhancements to our electric hybrid propulsion solution for transit buses will allow vehicles to operate in electric-only mode up to 10 miles facilitating its use in municipalities that adopt zero emission zones. And we continue our work developing electrified axles and other fully electric architectures to meet the needs of an evolving industry.In North America, upgrades to our existing On-Highway transmissions, such as the new Regional Haul Series will facilitate penetration into underserved markets. Incremental releases, such as the new Isuzu gasoline-powered N-Series, exclusively with the Allison fully automatic will further support penetration into underserved Class A – sorry, Class 4 Or 5 market. And upcoming launches such as the all-new Mack MD series, also exclusive with the Allison fully automatic transmission will promote increased penetration in our core medium-duty market.We are also committed to our Off-Highway end markets, including the shale industry here in North America. As hydraulic fracturing fleets and operators move towards higher horsepower, smaller footprints and shorter times to depth in search of efficiency and profitability, Allison intends to remain a partner of choice and will continue to invest and develop valuable and differentiated solutions for our Off-Highway customers.Thanks to proactive investments and structural operating enhancements we’ve made over the last decade, our plants are well capitalized and able to function effectively even at today’s lower volumes. We maintain the flexibility to diverse spending, leverage our workforce and ramp up and down to promptly meet demand. Over the years, we have invested to position Allison as a preferred partner for our OEM customers. Initiatives such as the new vehicle environmental test facility will support tighter integration with our OEM customers and strategic partners. These tools will enhance our capabilities as well as those of our partners to develop, manufacture and quickly bring to market the latest propulsion innovation and next generation propulsion solutions for the global commercial vehicle and defense end markets.Today, OEMs are faced with an ever expanding list of capital and investment demand. Combined with the uncertainty of today’s environment and constrained cash flows. The right partnerships will become even more critical for the products and solutions development process. Allison’s product development expertise with a focus on improved fuel economy and reduced greenhouse gases combined with our financial strength, robust cash flow generation, strong margin profile, variable cost structure and asset-light business model not only facilitates the continued pursuit of internal initiatives, but also enhances Allison’s position as a preferred and long-term partner.2020 has brought a number of unforeseen challenges and disruptions to our end-markets and to our lives. Allison will continue to take necessary precautions to protect our employees, communities, customers and suppliers. We are prepared and committed to meet the needs of our customers as the current environment evolves.And Allison will continue to pursue its strategic priorities, including global market leadership expansion, emerging markets penetration, core addressable end-markets’ growth and product development, while creating value for all of our stakeholders. As the generations of Allison employees that have preceded us, we expect to emerge from these challenging conditions in a stronger position to accomplish our objectives and deliver our commitments. This concludes our prepared remarks. Shamali please open the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jamie Cook from Credit Suisse. Please proceed with your question.

Hi, good evening and glad to hear you guys are doing okay in this environment. I guess, my first question, you guys talked about some of the cost-cutting initiatives that you’ve executed, related to COVID. Can you just talk about sort of potential savings in the second and the third quarter associated with some of these actions, when demand is probably most challenged? Then, I guess, if this thing persists longer, any longer-term type restructuring or actions you’re contemplating? Thank you.

Jamie, good afternoon. I’d say, briefly, given our inability to broadly guide, to answer your question, we are taking an approach relative to the cost structure to make meaningful long-term change versus what I would call more temporary changes. So to your point about how the quarters may play out Q2, Q3 into 2021, we are taking actions to really reduce our reoccurring cost.So our expectations as we sit today, from a number of different spending points, whether that’d be manufacturing, SG&A or the product engineering team, we are certainly targeting below, where we sat for 2019 and beyond that. So as we sit, that work is well underway. But again, the approach is long-term cost reduction.So as we think about opportunities going forward, because I’m sure that question comes up is how can you make those reductions and still support initiatives, as we said, we do have the ability, frankly, to defer and match initiatives to market timing. As we’ve discussed many times, our development work is really market driven. So I would expect and I think the industry has already spoken to this with the number of calls, the idea of certain initiatives getting pushed off, getting retimed. I think that’s preliminary feedback.Our sense is, just given the idea of taking several months out of activity schedules and expecting that initiatives are going to happen. And the funding, of course, will be there, I think is very optimistic at this point. So we are, again, long-term focus in terms of market activity and then spending accordingly.

Thank you. I appreciate your insights.

Our next question is from Jerry Revich from Goldman Sachs. Please proceed with your question.

Yes, hi, good afternoon and good evening, everyone. I’m glad you’re all doing well. I’m wondering if you could talk about your capital deployment program for from here, what signs of stabilization would you need to see for your markets to more aggressively return to the buyback program given that consistency with which you bought back stock as a public company? Thanks.

Hi, Jerry. This is Fred. Obviously, we highlighted the activities we did in the first quarter. At this point, with really the difficulty in modeling the top line, down through earnings to cash generation, we’re not in a position to comment about forward looking plans. We will, as we always have been, we’ll continue to be opportunistic, with our capital allocation priorities.We’re going to fund the business as needed and we’ll return the excess cash to shareholders. We’ve got the dividend in place that $0.17 per share. And certainly repurchases are a part of our capital allocation strategy.

And, Fred, can you just give a bit more context on what you would need to see to return to the market? Is it lower credit spreads? Is it stabilizing order book, just any more context on the key signpost as we think about the long-term capital deployment cadence?

Yeah, we’re certainly – we’re very focused on top-line. And seeing how we come out of this, realizing where everybody is in the supply chain at different points and you need every part to build a transmission and every part to build a truck. So what does that ramp up going to be? And our expectation is it’s going to be choppy.And then, after that, what is what is it going to look like when you get to something that’s more recurring in nature? And those are the things that we’re monitoring, and as Dave mentioned earlier, attempting to size our cost structure for those conditions.

Okay, thank you.

And our next question is from Larry De Maria from William Blair. Please proceed with your question.

Hi, thanks. Good afternoon, everybody, and glad you guys are okay. I was curious about, along lines of the first question, can you discuss the programs? Maybe they’re being pushed out versus ones that are critical now. Just trying to understand how you can maintain your competitiveness given the timing of some of these push-outs and what specifically is critical, what’s not critical, and just how you’re overall balancing that especially with obviously electrification sooner on the horizon than it was a year ago. Thanks.

Larry, it’s Dave. Couple of things, we again match our investments against market-driven demand and market opportunities. As I said earlier, our sense and what we’ve heard from a number of discussions, although preliminary, I think they’re preliminary in the context of probably pretending to be not as bad as this will be.But our sense is there are going to be a number of initiatives in terms of releases or otherwise, that are going to get pushed. And we are matching our cadence of spending to what we believe is will be the cadence of a number of different initiatives, whether those are more preliminary in terms of IR&D versus larger scale releases, but the fact is, you’re going to see activity get pushed. I will tell you to Fred’s comments, you need all the components to make a transmission. You’ll need all the components to do a lot of different things.You can get a sense of the amount of difficulty when you look at a map of the U.S. even and see the differential in states and status and who’s operating and who isn’t. As an example, how many times have the automotive manufacturers with assembly plants moved, I think I lost count at 4 or 5 already. That’s not a negative. The reality is they’re only going based on what they know. Well, if you take that through the entire supply chain, the fact that people are working significantly different than they’ve had in the past, we, by experience, know that certain things need to happen in person.And I think that is another dynamic that will work itself out. So whether it’s the availability to have things fabricated, get them integrated, get them out on the road, a number of different initiatives, it will be extremely challenging this year. So we’ve taken that into account. Frankly, we’ve assumed a number of things already going into 2021. Having said that, as we’ve talked before, we have a record amount of initiatives, so with some of the retiming that we’ve done, we still have a record amount of activity that’s underway. So it’s not as if we’ve backed off of things.We’ve reprioritized taken the most mission critical that are near-term, both timing and business critical and we’re continuing to support those. But – and we have the ability to adjust, if there are opportunities there, as I said, from market perspective, we’ll, in fact, engage the team is very flexible in terms of how we approach things. They’ve shown a tremendous amount of work to date and creativity to keep what we have going. So I have all the respect in the world for our team and our partners to continue to do that. But it’s not without its effort in cost. And we’ll see as OEMs get back to work, what they can tell us. But my sense is things continue to be very uncertain, and we’re planning accordingly.

So it’s more of a function, in other words, of your customers pushing out things than it is about you guys make a decision to conserve cash in the near-term, it sounds like. And, thank you.

It’s a combination of customers, it’s suppliers, it’s other partners. It’s – I’m not aware of anybody that’s operating more or less normally of any real size at this point. I think that, our ability to have run continuously for the Indianapolis facilities, again, says a lot about us when I compare that to others. We are part of in a critical infrastructure. We take that very seriously and plan on complying with whatever requirements are there and stand ready to meet demand requirements and support what everybody needs. You take for granted, when these events happen, the ability to support first responders, and otherwise we’re there. We have – we’ve continuously been out there in terms of being able to supply aftermarket new units, et cetera, to the defense end market as well. So we’ll continue to support those with whatever we need to. But I can tell you, it’s a very challenging time for everybody that’s involved in this industry.

Okay. Thank you. Good luck.

Our next question is from Joe O’Dea from Vertical Research Partners. Please proceed with your question. Joseph O’Dea: Hi, good evening, everyone. The last comment about the Indianapolis plants continuously running. Can you give any sense as to how much production levels were down in April, whether that’s from a Q1 build rate or whether that’s year-over-year, and whether you have visibility to that being the low point given that you were able to operate – well, some of your OEM customers were shutdown. I don’t know if you were building inventory, because that was the most efficient way to run or not. So just sort of general comments around that.

Joe, I appreciate the question. So first of all, again, not to say it too many times, but to give our team credit to be able to run. We are running, to be clear, as we said in the comments, to demand. So we’re running and shipping to demand. That being said, the amount of effort that it’s taken, our team and our partners, both at the customer and supplier level to do that is absolutely extraordinary. So I know, because we’re involved with the team on a daily basis. They are doing things 24/7. I’ve been with this business for 12 years, and I will tell you, back 2008 and 2009, it – that looks like an absolute walk in a park compared to what this team and everybody else in the industry is doing right now. So that is no small effort. But again, it’s not – when you say it’s more efficient to run or not, we are running to demand.We are also using the flexibility that we’ve invested in over the years, both on the equipment side as well as the labor side to be able to react to that demand in the most efficient way we can. Having said that, this is not the most efficient level of operations for Allison nor isn’t anybody else, to be clear. But we are taking advantage of the investments that we’ve made over the last decade to produce as best we can to meet critical demand.Having said that, I would tell you, we’re certainly happy with our performance to date, despite the market conditions in terms of being able to operate, I don’t necessarily interpret April as a significant indicator of the balance of the quarter. Why? Because we have a number of players in the industry that are still very uncertain in terms of timing, right. To even restart operations, the more recent example I can note for you, and I’m sure most are aware of it, is the directives that came out of Mexico here recently in the last couple weeks have really created a lot of challenges for both the automotive and commercial vehicles sector, which everybody is scrambling trying to figure out how to address. That’s no small task. It’s you know, plus or minus 30%, as we understand it of the CV component side.So you can imagine what that looks like, and yet we’re continuing to try to meet demand and work with our customers as best as we can. So again, April doesn’t tell us as far as I’m concerned anything at this point. I will wait and see when OEMs ultimately restart, start to solidify whatever the ramp-up plans are. And then when they actually – part of those ramp-up plans applies back to Fred’s comments, do they have all the components they need to produce vehicles. So there’s a lot more questions than there are answers right now, and we’ll continue to do the best we can to meet demand and our commitments. Thank you. Joseph O’Dea: Thank you.

And our next question is from Rob Wertheimer from Melius Research. Please proceed with your question.

Thank you, and good evening, everyone. Not to ask a similar question to Joe, but obviously production is disrupted, and as you said, not a great indicator. Is there any indicator yet from orders as to how – this is probably the worst case we can kind of picture. Is there any indication there on the bottom? And then really the second question is just be, you guys are kind of doing some heroic stuff to get through a crisis. Do you yet know on social distancing, on spacing, on everything else, whether factory setup has to be materially changed to get to productive operations across the next year as opposed to what you have to be doing for the next – for the first few weeks? Thank you.

Rob, it’s Dave. It’s a few things there. From a feedback, orders or otherwise, again, I don’t – I would not interpret those as particularly informative wise, because I think there’s a number of cases within the industry right now that were used to running on a relatively automated basis with accurate information flow. In other words, it’s updated, it’s regular. The right people are involved, and they have good information on their side. It’s very much the opposite situation right now. So if you’re trying to interpret even orders at this point, that’s predicated on a number of very uncertain assumptions and potential outcomes. So I would tell you in terms of probably North America On-Highway is the closest to us, obviously, our largest end market.But if you think about and consider some of the more recent feedback that’s out there, it’s clear, as we talked on the February call about inventory levels. The focus right now is burning down dealer stock and the excess overhang that’s out there. There’s obviously still excess overhang if you use the retail sales rates right now. But the fact is, there’s a real focus on selling out of inventories. I think you’re going to see a number of cases, where there’s a constraint from a capital perspective to order more stock. So we’re keeping close to that. Another thing to look for is what’s happening with incentives and financing plans in terms of whether that’s motivating activity out of dealers.The regional issues, what regions are working, what aren’t work – what are not yet working and have more strict guidelines on returning to work, different sectors, whether it’s construction versus food distribution even within food, is it going to grocery versus restaurants. So a lot of different bifurcation and different differentiation amongst the segments, but – and that’s evolved, too, over the last 3 or 4 weeks, interestingly enough, and we continue to try to understand what that means.But the bottom line, as I said, is you cannot, I believe, at this point, get a clean read on much of that. The other thing is what you’re hearing from fleets in terms of planning. Are they deferring? Are they delaying taking orders or otherwise? It’s a mixed bag again, depending on segment.So, fortunately, I can’t give you an informed answer to your question on the orders. But I think that’s about the best that we know right now. On the guidelines, our team, as I mentioned in the prepared remarks with cross functional task force have been working in great detail through guidelines from experts. So we have implemented and continue to implement those guidelines.They have not required us to change our manufacturing layouts in terms of moving equipment I think is what your question implies. Is it – does it create some inherent inefficiencies? Obviously, yes. Having said that, safety, there is – from our perspective that is and continues to be and always will be the number one priority here. So we’ll accept that. We’ll comply with the guidelines. We’ll operate in a safe way and keep our people healthy.So that’s the focus, but I do not expect that to – those guidelines to change how our layouts are currently structured.

Okay, thanks, Dave.

Our next question is from Ian Zaffino from Oppenheimer. Please proceed with your questions.

Hey, good afternoon, guys. This is Mark on for Ian. Thanks for taking our questions. So, just a bit of a more of a clarification, and also, in regards to the lowering of the CapEx spend for you guys, would that be more temporary or more permanent as well? And then, can you speak to which areas of capital expenditures you guys are looking to, I guess, like see savings coming from? And does that change anything material to your strategies going forward? Thanks.

Mark, it’s Dave. To answer your question, the changes that we’ve made are really focused around really to 2 areas, reoccurring operations which really gets down to what we refer to as sustainment. Given the amount of investment that we have employed or deployed throughout the last probably 3 to 5 years, we’re very well positioned from a maintenance sustainment point.The team has done a great job implementing those programs, so we’re well capitalized. So that’s allowed us to defer some level of sustain, if you will, does not jeopardize the operations or we are staying close to our equipment suppliers in terms of lead time, et cetera. And the team’s done a very good job aligning that. So the answer on that portion of the change was deferred. If you will, relatively short, I would expect that to roll through 2021 at this point or a good portion of it.The balance of it is program driven, really focused around a number of initiatives that, when we look at the timing, and frankly, market conditions, we’re really in a unique position to defer some of that spending activities. So the balance is really focused on some new, what I would call new initiatives, new programs. The one thing I would point out in terms of one of the larger deferrals is retiming some of the investments that we’re making.Our Technology Innovation Center here in Indianapolis, so that will be spread over several years, will complete the significant phase one and then defer some of that activity. And then, the balance of it, again, is really back to initiatives, should those initiatives require some level of acceleration, the team is positioned to do that. But I don’t see any of the deferrals that we’ve implemented, really creating an issue for us from a market or customer perspective.

Okay. Thank you, guys, very much.

Next question is from Ross Gilardi from Bank of America. Please proceed with your question.

Hey, good afternoon, guys. Thanks for squeezing me in.

Good afternoon.

You’re welcome.

Hey, I just had a question. Free cash flow as a percentage of sales has been running 25% to 30% for the last 6 years pretty consistently. And we can all make our own assumption on the top-line, but any reason you can’t sustain that ratio this year? And then just a follow-up question, can you help us at all on your underlying decremental EBITDA margin ex-Walker-Die-Casting, be a – providing like what the revenue and contribution was or anything else that will help us think about that for the rest of the year? Thanks.

Ross, this is Fred. The cash flow at this point, very difficult to model with the uncertainty on the top line. So we’re unfortunately not in the position to provide any direction there. Relative to Walker-Die-Casting, certainly it’s diluted to the margins. If you look at us from a gross profit standpoint, for the quarter, if you had excluded the Walker business, we’d have been about 150 – 125, 150 basis points higher from a gross profit standpoint.

Than what you were or year-on-year?

If you’d excluded the business, the gross profit would have been – it would have been higher by – came in at 50.2. It would have been something like 51.4 or something in that area.

Okay, got it. That’s helpful. All right, thanks guys. Stay well.

Thanks.

Thanks. You too.

And, unfortunately, due to time constraints, we have reached the end of the question-and-answer session. And I will now turn the call over to Dave Graziosi for closing remarks.

Thank you for your continued interest in Allison and for participating on today’s call. On behalf of the entire Allison family, we wish all of you, your families and colleagues, good health and safety during this unprecedented time. We look forward to providing you with further updates in the future. Enjoy the rest of your evening.

And this concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.