Allison Transmission Holdings Inc (ALSN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Allison Transmission First Quarter of 2012 Results Conference Call. During today's presentation our parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, April 23, 2012. I'd now like to turn the conference over to Mr. David Graziosi, Chief Financial Office of Allison Transmission. Please go ahead, sir.

Thank you, Kelly. Good afternoon, and thank you for joining us for our First Quarter 2012 Results Conference Call. With me this afternoon is Larry Dewey, Allison Transmission's Chairman, President, and Chief Executive Officer.

As a reminder, this conference call, webcast, and the presentation we are using this evening are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through May 1. As shown on page two of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe, or similar indications of future expectations.

Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks 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. Additionally, let me refer you to our first quarter 2012 results press release and our March 15, 2012 prospectus, which were filed with the SEC, where you will find factors that could actual results to differ materially from those forward-looking statements.

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. The presentation of this additional information is not meant to be considered in isolation or as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP, and should not be considered as an alternative to the GAAP measures.

You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to this afternoon's presentation, and to our first quarter 2012 results press release, both of which are posted on the Investor Relations section of our website.

30 Eastern Time. In order to maximize participation opportunities on the call, please limit your questions to one with one follow-up question.

Now, I'll turn the call over to Larry Dewey.

Thank you, Dave. Good afternoon, and thanks, everyone, for joining us today. After a successful IPO and pricing on March 15, we continue to build on that momentum with stronger than expected financial results for the first quarter. Please turn to slide four of the presentation.

On today's call, I'll provide you with an overview of our first quarter 2012 performance, including sales by end market. Dave will review the first quarter 2012 financial performance, including adjusted EBITDA, and free cash flow. I'll then provide an overview of our end markets, and a strategic priorities update. We'll wrap up with the prepared comments with full year 2012 guidance prior to Q&A.

Please turn to slide five of the presentation which displays our Q1 2012 performance summary. Net sales for the quarter increased 16% over the same period in 2011. The increase was principally driven by higher demand for global on-highway and off-highway commercial, and wheeled military products, partially offset by lower demand for tracked military products, and North America hybrid-propulsion systems for transit buses.

Gross margin for the quarter increased to 47.2% from 44.5% for the same period in 2011. The increase was principally driven by increased net sales and the resulting operating leverage, favorable sales mix, and price increases on certain products.

Adjusted EBITDA for the quarter increased 32% over the same period in 2011. The increase was principally driven by increased gross profit, and holding selling, general, and administrative expenses flat, while continuing investments in engineering, research and development expenses for product initiatives.

Adjusted EBITDA margin for the quarter increased to 37% from 32.7% for the same period in 2011. The increase was principally driven by increased net sales, favorable sales mix, price increases on certain products, and a continued focus on cost management.

Adjusted free cash flow increased 22% over the same period in 2011. The increase was principally driven by increased earnings and higher accounts payable, partially offset by increased capital spending and a reduction in other liabilities. Adjusted free cash flow increased 47% excluding the year-over-year increase in capital spending for new facilities and product-development programs.

Please turn to slide six of the presentation. North America on-highway end market continued its recovery with net sales up 34% from the same period in 2011, exceeding our expectations. Our rugged duty service and highway service models were the primary drivers, followed by smaller increases in school bus, and transit and other bus models, but partially offset by reductions in motor homes models. The year-over-year increase is amplified by the lower level of first quarter 2011 net sales as a percentage of the 2011 full-year net sales.

North America hybrid-propulsion systems for transmit bus end market net sales were down 10% for the same period in 2011, due to lower demand resulting from municipal subsidy and spending constraints. North America off-highway end market net sales were up 16% from the same period in 2011, exceeding our expectations. The increase was principally driven by continued strong demand for natural gas fracturing applications, and other energy-sector requirements.

Military end market net sales were down 8% from the same period in 2011 due to a reduction in tracked military products demand, resulting from a return of US Defense spending to historical averages, partially offset by increased wheeled military product requirements.

Outside North America on-highway end market net sales were up 16% from the same period in 2011, reflecting increases in all regions other than South America and India. Higher net sales in Europe were principally driven by increased demand from construction and mining, long-term customer supply agreements, and United Kingdom market strength.

Lower South America volume is principally driven by the timing of bus tenders and demand volatility in several regional end markets. The India end market continues to struggle with depressed bus demand attributed to governmental procurement and acquisition difficulties that have hindered the market since last year.

Outside North America, off-highway end market net sales were up 39% from the same period in 2011, principally driven by increased mining and energy sector activities in response to global economic growth.

Service parts, support equipment, and other end market net sales were up 15% for the same period in 2011, principally driven by price increases on certain products, higher global demand for on-highway and off-highway service parts, and support equipment sales commensurate with increased transmission unit volume.

Now, I'll turn the call back over the Dave Graziosi.

Thank you, Larry. Please turn to slide seven of the presentation. Given Larry's comments on net sales and gross margin, I'll focus on other income statement line items, adjusted EBITDA, and specific cash flow activity.

Despite higher sales, we held selling, general, and administrative expenses flat quarter-over-quarter, reflecting our continuing commitment to cost control, while supporting global commercial initiatives to drive increased market penetration.

Engineering, research and development expenses were down $2 million quarter-over-quarter, principally due to lower technology related license expense, partially offset by higher product initiative spending. Our new technologies and product development spending continues to be focused on expanding our addressable market, and advanced fuel economy and efficiency programs.

Interest expense was down $9 million quarter-over-quarter, reflecting our continuing commitment to debt reduction, opportunistic credit market transactions, and prudent interest rate hedging. As further evidence of Allison's commitment to debt reduction, we announced on April 20 the notice to redeem the remaining balance of our 11% Senior Cash Pay Notes due November 2015.

Other expense increased $37 million quarter-over-quarter, principally due to $22 million of IPO cost and $14 million of premiums and expenses related to the February 2012 redemption of $200 million of aggregate principal amount of Allison's 11% Senior Cash Pay Notes.

Our effective income tax rate for the quarter was 30.3% down 250 basis points quarter-over-quarter. The rate decrease was principally driven by the increase in income before tax, the difference in book -- the difference in tax and book treatment of certain indefinite life intangibles, and our continuing policy of recording a full valuation allowance against our net deferred tax assets.

Net income for the quarter was $58 million, an increase of 57% quarter-over-quarter. The increase was principally driven by increased gross profit, and lower interest expense, partially offset by increased other expense and higher income tax expense.

As Larry mentioned, adjusted EBITDA for the quarter increased 32%, while the adjusted EBITDA margin increased to 37% from 32.7%.

The net sales increase resulted in a margin consistent with the underlying markets. Net sales changes including increases in global on-highway, global off-highway, and wheeled military products, partially offset by a reduction in tracked military products, which are principally cost-plus military contracts, and North American hybrid-propulsion systems for transit buses, a largely assembled product with high-cost externally sourced electrical components.

Operating leverage realization, price increases on certain products, and a continued focus on cost control, also contributed to the 430 basis-points increase in adjusted EBITDA margin.

Please turn to slide eight of the presentation. Given Larry's comments on adjusted free cash flow, I'll focus on specific cash flow activity during the first quarter, and provide some second quarter 2012 guidance. Allison's strong first quarter reoccurring free cash flow conversion rate was driven by high margins, low operating working capital intensity, low maintenance capital expenditures, 2011 deleveraging, and significant US income tax shield, we ended the quarter with $193 million of cash, net leverage of 3.89 and $372 million of revolver availability.

Looking forward to the second quarter, we'll redeem the remaining outstanding balance of our 11% Senior Cash Pay Notes on May 1, and still plan to pay our first quarterly dividend of $0.06 per common share. We will announce the record date and payment date of the dividend by press release once determined.

Now, I'll turn the call back over to Larry.

Thank you, Dave. Please turn to slide nine of the presentation. I'd like to provide your with some of our high-level, near-term end markets views as background to my comments on strategic priorities in full-year 2012 guidance.

For North America on-highway, we expect improved North America economic conditions will support a continued recovery in Allison's core addressable on-highway market. Exceptions to the broader market recovery continue to be school bus, due to municipal spending constraints, and motor homes, given the correlation to consumer net worth and home equity. We expect a slower, yet strong year-over-year growth rate in the balance of 2012.

For North America hybrid-propulsion systems for transit bus due to municipal subsidy and spending constraints, US Environmental Protection Agency 2010 engine emissions improvements, and redundancy by alternative -- excuse me, by alternate technologies, we expect a measured decline in net sales of North America hybrid-propulsion systems for transit buses for the full year 2012 below the 2011 level.

For North America off-highway, majority of demand is from natural gas fracturing applications. We believe the strong first quarter performance will not persist given recent customer forecast adjustments related to current natural gas pricing. This is an area of our business we are watching very closely.

Although our first quarter wheeled military products net sales were above the 2011 level, we expect a measured decline in net sales for the balance of 2012 below the 2011 level due to reductions in US Defense spending. We also expect these spending reductions to result in lower year-over-year net sales of tracked military products.

Outside North America on-highway, we expect improved global economic conditions will support a continued recovery in Allison's core on-highway regional end markets. Our commercial initiatives, including end-user focused marketing activities, OEM long-term supply agreements, and vehicle release programs are also expected to drive net sales growth.

Despite favorable economic conditions in most regions, we expect continued headwinds in South America, given demand volatility in regional markets, and delayed resolution of governmental procurement and acquisition difficulties in India. Net sales to South America and India were approximately 1.5% of our total 2011 net sales. Outside North America off-highway, we expect global economic growth will continue to support increased demand for the mining and energy sectors.

Service parts, support equipment, and other -- our service parts, support equipment, and other end market is expected to largely follow global economic conditions, and changes in transmission unit volume.

Please turn to slide 10 of the presentation. For our strategic priorities, they continue as follows; expanding global market leadership, capitalizing on the continued recovery in on-highway end markets to expand our market presence and OEM relationships. During the first quarter Allison participated in several, new, vocationally focused outside North America regional trade shows, and continued to work towards expanding our vehicle releases in key emerging growth markets by leveraging our technology leadership, value proposition, and extensive product portfolio.

Allison is on schedule to complete the second phase of our India production facility in the third quarter of 2012. For emerging markets penetration, we're exploiting our vocational pricing ladder strategy to secure vehicle releases with a defined path to higher-value models, utilizing Allison's existing bus presence as an entry point for incremental market penetration, and focusing on vocational applications for end users that are well-funded, and fully value Allison's brand attributes.

We're continuing our focus on new technologies and product development. Product development programs such as the TC10 Class 8 metro transmission, and the H3000 Hybrid commercial vehicle transmission are intended to expand our core addressable markets. We're also pursuing advanced fuel economy and efficiency mechanical and hybrid technologies.

Delivering strong financial results, we're pleased with our first quarter performance, which highlighted the benefits of operating leverage, a significant US income tax shield, and further deleveraging. With a continued focus on margin enhancement opportunities, our net leverage goal is sub-3.5 within 12 months.

Please turn to slide 11 of the presentation for full-year 2012 guidance. Allison expects 2012 net sales growth in the range of 5% to 7%. Our net sales guidance assumes year-over-year growth in global on-highway, and outside North America off-highway end markets, partially offset by year-over-year reductions in the North America off-highway tracked military, and North America hybrid-propulsion systems for transit bus end markets.

Allison expects an adjusted EBITDA margin in the range of 33.5% to 34.5%. Capital expenditures are expected to be in the range of $110 million to $130 million, subject to timely completion of development and sourcing milestones for new facilities and product programs. We also expect cash income taxes to be in the range of $10 million to $15 million due to our US income tax shield and net operating loss utilization.

In closing the prepared comments portion of the conference call I want to acknowledge and express my gratitude to our employees and shareholders for their support in completing a successful IPO. While we look forward to the challenges of being a public company, Allison's strategy and performance-driven culture will not change.

We continue to aggressively pursue the expansion of our business in a wide range of applications around the world by leveraging our application engineering and vehicle system integration knowledge, and providing a wide range of product variance in a cost-effective manner, in order to provide vehicle buyers with products that provide them with a superior value proposition versus their alternatives. I'm also confident that by remaining focused and determined in executing our plans, we will continue to be a leader in our industry for years to come.

Thank you for your time this afternoon. Operator, please open the call for questions.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session.

(Operator Instructions)

Our first question comes from Ann Duignan with JPMorgan. Please go ahead.

Hi, guys. It's Ann Duignan.

Hi, Ann.

How are you doing?

Good.

My first question is around your guidance for EBITDA margin. Given the strength of Q1 and the continued headwinds from the lower margin products, they hybrids and the RVs, your guidance for full year looks a bit conservative. Can you just talk to that a little bit? What's you have baked in there, what you haven't, or is it just being conservative, just in case, or is there something specific we should know about?

Sure. Obviously, a very strong performance in the first quarter. We're happy with that. That being said, as we look at the balance of the year, we certainly have some issues that we're focused on. Larry mentioned NAFTA off-highway, for instance. If you look over the full year -- I think you know our numbers quarter-to-quarter in terms of how we run through the full-year EBITDA margin. As we think about, typically, Allison's numbers historically, Q4 has been one of our weaker quarters. We have -- certainly, some shut down activity planned at the end of Q2 into Q3.

If you look at the overall volume assumptions for the balance of the year, putting that together with the impact on operating leverage, that's really where the guidance comes from is at that mid-point. We're certainly not changing our guidance at this stage, but also don't want to get ahead of ourselves in this market.

Okay. And that brings me to my follow-up question, although I have several. I have to choose which one to ask. If we look at natural gas rig counts, they're down 188 for rigs odd year-to-date, but all but 44 have been absorbed into oil plays. Why would you be so concerned, surely your equipment is used in both natural gas and onshore drilling for oil?

It is, although the ratio of equipment is a little bit different. Natural gas, because of the shell formation typically requires more rigs to the hole than does, say, an oil -- a usual oil application as we've come to understand it with some of our customers. So, that would allow the redeployment of a greater number of rigs, which then -- we're watching the production build requirements very closely as we go forward here, as they kind of rationalize their activities in the field.

What kind of lead times do you have in that business, I mean, how far out can you see? How much visibility are they giving? Are they canceling orders? If you could just help us a little bit more in terms of the conservative outlook in that segment.

We have not seen a cancellation of orders. What we have -- what we're watching very closely is, will the rest of the orders be placed at the same rate that we had anticipated? And that's what we're watching very closely here as I indicated earlier.

And, again, we just don't want to get out ahead of ourselves. We see the same thing you see relative to some of the natural gas pricing, and the inventories, and recognizing there is equipment being moved to the oil sector. We are looking at what impact there could be on production -- forthcoming production schedules.

Thank you. Our next question comes from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

Yes, good afternoon. Can you hear me?

Yes, we can hear you.

There's been a lot of noise about sort of on-highway North American production, and I guess I'm just referring to Class 8. Can you share with us what are you guys hearing sort of production from your customers, and how has your outlook for production has changed over the past several months?

Relative to -- I'll speak to the Class 8 and offer a little color a little more broadly. Relative to the Class 8, we have not seen the impact, and recall that we are in the Class 8 straight trucks --

Absolutely.

And in our sector, thus far, we have not seen a lot of schedule volatility, -- the normal bouncing around a little bit. But nothing really that I would say stands out, not like the headlines, I believe, of late last week.

Now I would say, relative to some of the other sectors, there's the normal schedule volatility. Different OEMs will come in and say they're going to add some line rate, others will say, well we're going to hold off adding line rate. We don't really see anything consistent across sectors. We do, however, see some variation between plans between OEMs, and some of that might just be their plant utilization strategies.

But, fundamentally as I indicated in my remarks, we think it was a strong first quarter. We do see growth in North America for the rest of the year, although we are, as Dave said, not getting out in front of ourselves, watching several market factors closely.

Obviously, a very strong quarter, but could you just comment on the margin what were the biggest positive and negative surprises in the quarter?

Certainly, the positive, Andrew, is, as you know this business performs very well with volume, and you look at the throughput for us, frankly, in the first quarter was very high. As Larry mentioned, it exceeded our expectations, and we can throw those types of margins with the right volumes, as we've mentioned many times. The business in terms of a headcount and structuring standpoint on the operating side is really geared, if you will, for volume.

So, a lot of the changes that we made, frankly, back in 2008 and 2009 on rationalizing and right-sizing headcount has certainly positioned us to perform with those type of operating leverage numbers falling through with the right volume.

So, that's really the biggest story on the quarter, frankly. If you look at the rest of P&L as both Larry and my comments as well, not many changes there, and keeping the fixed cost side in terms of SG&A as well as engineering, more or less, flat continues to contribute there as well.

Thank you. Our next question comes from Tim Thein with Citigroup. Please go ahead.

Great, thank you. Good afternoon. Just two questions. First was on the non-NAFTA on-highway, if you could -- Larry you had touched on some of the emerging markets and what you saw there. I'm curious if you could give us some color on what you saw in the quarter, and importantly, what you're assuming for Europe as we move through the year.

And then, secondly, just coming back to the domestic energy market, some of the oil field services companies recently have flagged. They're just starting to see pricing pressure and anticipating some margin weakness as we move through the year, given that -- the horsepower over-capacity.

Does your -- can you just remind us in terms of your pricing in that market? And, secondarily, if your forecast assumes any change in that pricing as you move through the year? Again, understanding that this is a highly fluid situation, but just curious if you can comment on that. Thank you.

Sure. Let me take them in reverse order. Relative to the situation in off-highway, obviously, there's a lot of volatility. That's been touched on by a couple of folks, us, and a folks who have questions on the call. Relative to our pricing and -- we feel very confident, we've got pricing in place.

Our historical practice has been to be more moderate in our pricing, and accordingly then, we hold it through periods of upturn and downturn as we have committed to annual pricing to people. We've got that in place, and would expect that would continue. Their pricing for their services is really a separate kind of equation there, and doesn't -- and I would not anticipate that impacting us relative to our pricing.

As far as Europe, we are starting to see some better than anticipated performance in some of the sectors. Construction and mining has been a pleasant surprise in Europe. Certainly, some of the areas continue to be a little slow with the Euro crisis, and that tends to come and go in waves. Everybody, I think, was feeling pretty good at one point with Greece, and now with some of the developments last week in Spain, I'm sure there will be some additional questions.

But we feel pretty solid, a large part of which is because we're growing our penetration in a lot of sectors that we haven't been in previously in areas that are under that what we call Europe. It's really Europe, Middle East, and Africa, including Russia. And, for example, Turkey has had a very positive development for us in terms of volume. We're getting some business in Africa, as well that we haven't had historically.

So, in addition to just Western Europe, which is what everybody tends to focus on, we're picking up a lot of business in other parts of that region as we have it organized at Allison.

Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Good afternoon.

Good afternoon.

Dave, your SG&A you mentioned was flat on 15% higher sales this quarter. Was it an easy comparison period, any headwinds in the year ago quarter? And just step us through how we should be thinking about SG&A leverage over the balance of the year, please?

Sure, the terms of the year-over-year comparisons pretty clean. As we think about the year spread out as we've talked about, the guidance typically you'll see in a performance as we've had in the first quarter, there's certainly some higher expenses that are attached to that around things like our incentive compensation program, for instance. Beyond that, that's pretty typical for us.

I would also mention, as we think about the year, we had more marketing sales and service activities really built up and focused around Q2 and Q3 for various reasons, because of weather and another attributes. We had more functions going on in terms of activity. So, typically, you'll see a bit of an elevation there with those two groups in Q2, Q3 as well. Q4 we tend to tail off because of holidays and that kind of thing with some of that spending and getting into year end. But overall, I think we're pretty happy with where -- the run rate on SG&A at this stage.

Okay. And can you comment on the CapEx projects you have on new facilities and new product programs? I think your CapEx this year is a touch lower than what we were looking for. Is that a function of reduced budget, or has some of the plan shifted into 2013?

We continue to move around as, obviously, business requirements develop. I would say on the new facility Larry mentioned the expectation around India here coming on line -- phase two of that, at least, in the third quarter of this year, so that's baked into the numbers. Hungary, as you know, we completed last year in terms of that facility.

New product programs is really going to be subject to timing on development and sourcing milestones, and that's -- we're a little early in the year to put finality around that. So, that by far, is probably the biggest piece in terms of potential variability for full-year numbers.

But the maintenance numbers should be pretty solid at this stage. If there's opportunities to move things around that advantage the business from a run rate standpoint, as we're moving volumes, we'll certainly take a look at that, but overall we're pretty confident in these numbers.

Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please go ahead.

Hi, good evening, and congratulations. Just two quick questions -- pretty clean quarter. One, also the parts service revenues were quite a bit better than what we had thought. How should we think about the run rate for the back half -- for the remaining nine months? Was there anything unusual? And then last, you called out the one-time specific [items] in the other line, just how we should think about that for the remainder of the year, if there's been any changes?

Sure. In terms of part sales and the service piece there, clearly as we mentioned in the on-highway volume assumptions in terms of run rate for the balance of the year, that the growth rate will be lower, as you compare -- certainly first quarter, last year was a lower quarter than this year. So, certainly, that moderates over the year.

There's a fair bit of alignment that you should see between support equipment and new unit sales. The service side you can definitely see some variability there. Frankly, as we mentioned, some of the things that we saw in off-highway NAFTA first quarter, when you think about the level of activity there, and potentially some of that coming off, that could have an impact, certainly, on the service side.

But I would say, the balance of it in terms of service for the on-highway business, we're not -- not be assuming a significant amount of variability there for the balance of the year.

In terms of other income, other expense, really called out the significant non-reoccurring items around the IPO cost. The balance of that is some noise around hedges, as we do not do hedge accounting, frankly. We take that to the P&L, and there's variability in that in terms of the way the commodities are moving around and some of the other hedges that we have. So, I wouldn't consider that or expect that to be very material for the full year.

Okay. So nothing unusual in the remaining nine months.

No. The grant -- the other thing that flows through there, as we disclosed, that there are other income, other expense. We have grant income which is related to the Department of Energy grant for the H3000, H4000 products that there is some alignment there between run rates that you'll see in engineering -- in product development, but it's not significant for the full year.

Thank you. And our next question comes from Andy Kaplowitz with Barclays. Please go ahead.

Good afternoon, guys.

Good afternoon.

Good afternoon.

Larry, if I could follow up on outside North America on-highway. You had 16% growth in the quarter, and you talked about market penetration in all these other countries. Is it fair to say that a lot of that growth, maybe the majority of that growth, was market penetration, and market share gain?

Yes, I would say so. I was just trying to think how much would be market recovery in absolute numbers versus gains in share, because at our share level, if you move a few points, that's probably got -- has more leverage on our total volumes given our relatively low penetration outside of North America.

Obviously, it varies by vocation. Refuse in Europe, for example, is anywhere from 50% to 70%, so that's pretty solid. But in other markets we're, obviously, in the single-to-low double digits. So, I would say penetration gains would be the majority of that.

Okay. That's helpful. If I could just ask a different sort of question. In the past, or at the show -- at the truck show, people were talking about natural gas engines. And I always think that fits well with Allison Transmission over time. How should we look at the penetration of the Allison Transmission as you look at things like compressed natural gas over time?

Well, we're well positioned vis-a-vis natural gas because one of the characteristics of natural gas engines, specifically in terms of the nature of the spark ignited engines, which is the majority. They're working on compression ignition, which could help one of the characteristics of a natural gas engine, and that is, it tends to lag -- it's got a bit of a lag, or a feeling of low power. And we're really well positioned, because with an automatic, we are capable of accelerating faster than a manual or an AMT.

And so, what that allows us to do is to take a natural gas engine -- I'm sorry, is anyone else picking up that voice?

Thank you. Our next question comes from --

I'm sorry -- excuse me. Something happened there where it was cut off. Is he still --?

Sir, please continue.

Okay. Anyway, so we're well positioned with natural gas. Our product helps that engine perform better in a vehicle application, and so when it goes natural gas it tends to favor Allison.

Thank you, sir. Our next question comes from David Leiker with Baird. Please go ahead.

Good afternoon.

Good afternoon.

Good afternoon.

If you look at the North America on-highway market and the strong performance that you had there, really, some of it is a comparison versus last year. You look at that market and you compare it to where you're seeing strength, you had highlighted some weakness. But are there any particular areas in the vocational market that are showing strength and you think this is replacement demand that's starting to kick in, or something else?

Well, I think there's no question it's going to be driven by replacement demand initially given the age of the equipment. I was just trying to think across which sectors we've seen some of the strongest numbers. I think, certainly, in the one-way, in the commercial rental, we're seeing, certainly, Allison volumes higher than in the past in those segments.

Class medium duty, those volumes are starting to pick back up. That certainly helps us. I would say those are probably the two that stand out kind of broad based. There's no real one that jumps out at you other than if you looked on a percentage basis, probably our volumes in consumer and one-way rentals, some of the leasing activity are probably up as much as anything in our business.

And then in your comment about the market going forward, you talked about slower growth rate. My sense is that has more to do with the comparison you have as opposed to those markets slowing down for you. Is that fair?

That's probably a fair description.

Thank you. Our next question comes from Brett Hoselton with KeyBanc. Please go ahead.

Good afternoon, Larry, and Dave.

Good afternoon.

In speaking about your revenue expectations for the year, first quarter certainly outperformed our expectations. The full year seems to imply, or at least based on what we were expecting, a little bit weaker second, third, and fourth quarter. And my question would be, as you think about your expectations today versus two or three months ago, what would be the maybe top one or two drivers for maybe lower expectations through the remaining three quarters? What particular regions or parts of your business?

Certainly, NAFTA off-highway, as we talked about. I think that dynamics changed a bit, and I think that's relatively new news as you've seen the gas prices go where they are. The balance of the story for us, as Larry indicated, we've certainly seen some pockets of strength.

But I would say, thinking about the way we laid out the year, as we mentioned, certainly a strong first quarter. But we don't want to get out in front of ourselves, and I think it's a prudent position to be in, and I think, you'll find that from this management team, that we take that approach to our guidance.

And, Dave, would it be fair to assume that the bulk of it, virtually all of it, the change might be in the NAFTA off-highway or is it just the majority of it?

I would say, certainly, that's the key driver in terms of what's really changed.

Thank you. Our next question comes from Rob Wertheimer with Vertical Research Partners. Please go ahead.

Thanks. Good evening, guys. Just one quick question on the penetration -- and I know you've covered it a little bit -- but the penetration outside North America on-highway. Was there any sort of step function with a new model year, or has it been more steady? It was a better number than we would have thought -- it was solid.

It tends to be more steady because you really don't have, in terms of our process of gaining the release -- securing the release, and then selling that release with the OEM, there aren't really fixed model years. It really gets down to the cadence of the engineering programs, and those, of course, are our diverse as the OEMs themselves.

So, there is no real step function that accounts for a significant jump. Of course, every time you get a release, theoretically, there's a step function in that you're now selling in a chassis you weren't in, but even that tends to be a gradual -- a gradual process. End users try a few particular where it's a new product for them. They don't even convert their whole initial buy to an Allison. So, it tends to be more gradual.

Perfect, thanks. And then second question would be just on the fracking market. Is there anything you can talk about market share shifts if material, and then mix of the business between new and rebuilds, if there's a certain level where it won't drop below just given fracking activity continues? Thank you.

There's been no significant share shifts that we've seen. I would say that there clearly has -- some equipment is being culled from gas, some of it's being moved to the oil as was described earlier.

And certainly, we're aware of situations where our distributors who are heavily involved in this activity are being solicited by customers to overhaul their equipment, and we're in the process of trying to understand the impact of that as a potential net against what we're watching from the standpoint of the original equipment production schedule.

So, there is some rebuilding in this time period, which, again, we take as a good sign to say that they anticipate that they'll be putting that equipment back to use. It's just a question of what's the near-term perturbations in that market.

Thank you. Our next question comes from Brian Sponheimer with Gabelli & Company. Please go ahead.

Not to belabor the nat gas market, but just a question on order rate as to whether there was any particular price in nat gas where you began to see some sort of shift in buying patterns in your customer base.

I would say that in the period once it started coming there wasn't much discussion until prices dropped below the $2.50. Then there was a lot of dialogue. Again, we've not seen order cancellations. However, we've got orders for the next few months, and we're in dialogue with our customers to understand how their ordering patterns are either going hold up or modify timing wise through the year. So, that's what's we're really engaged in trying to understand as they sort through their plans.

So, it came down below that, of course, we all saw the recent data there below $2.00. But I would say in the -- when it started getting into the $2.30 range, we started having a lot more dialogue with people saying, hey, we've got to see what -- how we're going to build out the rest of the year.

Great. That's very helpful. And if I could just ask one on capital allocation. Clearly, you have a debt load that you're addressing, but you're also doing a great job by putting out a dividend. Could you just talk about how you plan on budgeting the dividend versus debt pay down -- say, looking to the end of 2013?

Sure, as Larry mentioned, certainly the target within the next 12 months for net leverage is to be at or below three and a half. We see a longer-term target of investment grade credit metrics in the two to two and a half times.

When you bounce that up against the investments, alternatives that we have around new products, and our expansion requirements, which at this point have been fulfilled from a capacity standpoint, that's really going to be the focus, right. And that is the debt reduction with that two to two and a half times target, and then the balance being pushed towards shareholder distribution.

So, certainly, taking care of this last slug of the 2015 11% notes is helpful for a lot of obvious reasons, and I think we're certainly very much focused on the Term Loan B at this point, and the balance will be in the form of shareholder distributions.

Thank you. One moment, please, for our next question. Our next question comes from Ann Duignan with JPMorgan. Please go ahead.

Yes, I just have a couple of follow ups. Just to take a step back, and forgive me if you answered this already, but on the on-highway NAFTA segment, are you anticipating a sequential slowdown in build in Q2, and then a re-acceleration in the back half? Or, are you anticipating sequential increases in each of the three quarters coming up?

Certainly, if you -- run rates from -- looking at it versus last year, the growth rate we're expecting to slow, as we talked about. And then, when you think about the way we typically lay out the year from a volume perspective, fourth quarter is typically one of our lowest ones because of the OEM schedule. So, run rates and expectations around volume levels, I think they're meaningfully similar between if you look at Q2, Q3. And then, obviously, we would expect Q4, as I mentioned, to be the lighter of the year.

And meaningfully similar to Q1?

I would say that's a fair statement.

Okay. I just wanted to make sure we got that right. I think that was it -- just on the modeling again, on the other income expense line you talked a lot about what was in there that was one off. But could you give us any guidance as to what absolute level we should be looking at for the rest of the year, similar to last year, is that how to think about it, or --?

I think if you isolate the pieces, which is important, I mentioned the grant income from the Department of Energy, H3000, H4000 product. If you take what we recognized in Q1, and just extrapolate that for the balance of the year, that's a pretty good starting point for that item. Frankly, the balance of what's in there, excluding the non-reoccurring items, obviously, you're going to have some movement around hedges. I don't expect that to be very material, so the big focal point would be the grant income assumption.

Thank you. Our next question comes from Kirk Ludtke with CRT Capital Group. Please go ahead, sir.

Good afternoon. Kirk Ludtke from CRT. Can you hear me?

Yes, good afternoon, sorry.

Congratulations.

Thank you.

Thank you for the additional disclosure. You mentioned in the presentation that you -- you're expecting military spending to retreat to more normalized levels, and could you give us some perspective on what you view as normalized levels, and how long it will take to get there?

On the tracked side, I think we're getting to the more, I'll say, recent normalized levels, recent meaning prior to the involvement in Iraq and Afghanistan. So, on the tracked side I think we're in that ball park.

The wheeled side continues to come down, and we show that coming down to the more normalized levels in the 4,000 to 6,000 units a year range over the next couple of years. By the end of 2013 we should -- we anticipate, at least our planning has it at that level at that point in time. Others might be more optimistic, but we think that it will be in that level by the time we get through 2013.

Great. Thank you. And as a percentage of your current run rate, where would we be in -- at the end of 2013?

Frankly, I think it's -- that's a bit tough to throw out there at this point. We really want to see what the second half rolls up to be, and frankly, the budget discussions which are all over the place. So then rather than put a stake in the ground on that, we'll let the budget process move its way through, and react to that in our normal planning process.

Thank you. Our next question comes from Brian Rayle with Northcoast Research. Please go ahead, sir.

Hi, good afternoon. Most --

Good afternoon.

Most of my questions have been answered. I guess, just qualitatively, you guys had a very impressive operating margin here, north of 25% -- obviously, I know that your EBITDA guidance, Can we kind of run rate that into 2013, or do you -- how do you feel about that incrementally there?

I think it's a little early for us to talk about 2013, but I would just point you to our historic run rates, and certainly, the discussion we've had here so far, but we're not prepared to have any post-2012 guidance discussions at this stage.

And then I guess, I don't know if you'd be willing to do this, but of the 5% to 7%, if you would break down that revenue guidance by the different segments.

No, we're -- I would tell you at this point, we're happy to provide that by global view, if you will, of our business, but not prepared to start diving into end market views at this stage.

Thank you. We have a follow up question from David Leiker with Baird. Please go ahead.

Yes, Dave, just two quick number questions. I know the first one's a little volatile, but where do you think your GAAP reported tax rate is going to be, and then also the share count?

Sure. The GAAP tax rate, again, as we move through the process, you'll see some discussion in the press release about the valuation allowance coming off, potentially, in Q2. Post that point, I would assume that we'll be at a statutory run rate of, call it, 38% for book purposes.

Cash tax, which is really more of our near-term focus. Frankly, we've talked about that number a fair bit, but again, run rate as we're utilizing the NOL, I would still look to post-2013 into 2014 that you'll start seeing some level of elevation in the cash tax rates. So, I would not, certainly, extrapolate what you see for this year much further beyond 2013 into 2014. I think that's a critical point for us.

And then where do you think -- just to follow up on that tax rate item first. If we look at some of these items that -- the IPO cost, the fee terminations, things like that, what kind of tax rate would that have flowed through in the quarter, and then, also, what do you think the share count is going forward:

Just to finish up in terms of the tax impact, right now we've not taken a tax impact at all for the IPO costs. We're still studying that given the secondary flow through on that. So, that's an issue we're working through.

Share count, frankly, the numbers that we have in there, I think, are pretty clear in terms of the 181 base and then the dilution factor that we added in there. So, I don't have anything new on that front at this stage.

Thank you. And there are no further questions in the queue. I'd now like to turn the conference over to management for any closing remarks.

I'd like to thank everyone for their time this afternoon. Hopefully, the materials that were presented were clear enough that you're able to use them as part of your reviews and evaluations. We appreciate the support and interest. You know we're pleased. We think it was a great first quarter.

We're still tracking the plan that we put in place, and it really gets back to what we said in the beginning, making sure that we're not getting out in front of ourselves, particularly, as we watch several market factors fairly closely. I think we've indicated that the North America off-highway is probably number one on that list that we're watching extremely closely, and then the various perturbations in all of the various markets -- on-highway, off-highway that we serve around the world.

So, you can count on us to continue to manage and drive the business. Thank you. Have a good evening.

Ladies and gentlemen, that concludes the Allison Transmission First Quarter of 2012 Results Conference Call. We would like to thank you for your participation. You may now disconnect.