Allison Transmission Holdings Inc (ALSN) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission second quarter 2012 earnings conference call. My name is Brian, and I will be your conference operator today. At this time, all participants are in a listen only mode. After the prepared remarks, the Management from Allison Transmission will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder this conference call is being recorded. I would now like to turn the conference call over to Dave Graziosi, the Company's Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us for our second 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 afternoon are available on the investor relations section of our website www.AllisonTransmission.com. A replay of this call will be available through August 6.

As shown on page 2 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 second quarter 2012 results press release and our March 15, 2012 prospectus which was filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements.

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. 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 the presentation and to our second quarter 2012 results press release, both of which are posted on the investor relations section of our website. Today's call is set to end at 5.30 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 thank you for joining us today. Following strong first quarter results, we are pleased to report continued sound financial performance. This performance was supported by attractive year-over-year growth in our core North America On-Highway end market and in our outside North America Off-Highway end market, despite signs of slowing economic growth rates and decreased demand for transmissions used in North America energy sector hydraulic fracturing processes. During the second quarter, Allison continued to demonstrate strong operating margins and a robust level of cash flow while simultaneously investing in growth opportunities, including underserved markets and expanding manufacturing capabilities outside North America. And Allison remains committed to debt reduction and the return of capital to shareholders.

I will now move to slide 4 of the presentation. On today's call I'll provide you with an overview of our second quarter 2012 performance including sales by end market. Dave will review the second quarter 2012 financial performance including adjusted EBITDA and free cash flow. I'll then provide an overview of our end markets and wrap up the prepared comments with an updated full-year 2012 guidance prior to Q&A.

Now to slide 5 of the presentation, our Q2 2012 performance summary. Net sales increased approximately 1% from the same period in 2011, principally driven by increased demand for North America On-Highway, wheeled military, and, outside North America, Off-Highway products supported by price increases on certain products. Growth in these markets was largely offset by decreased demand in the North America Off-Highway energy sector resulting from weakness in natural gas pricing and fewer sales of North America hybrid propulsion systems for transit buses. Our outside North America On-Highway net sales were in line with the prior year due to weakness in European end markets largely offsetting growth in China and Latin America. Gross margin increased 100 basis points from the same period in 2011, principally driven by price increases on certain products and improved manufacturing performance partially offset by unfavorable sales mix. Adjusted net income increased $19 million excluding the 2011 debt retirement charge of $57 million. The net increase was principally driven by increased gross profit, decreased global commercial spending activities, net of higher 2011 technology related license expense.

Adjusted net income was also impacted by decreased cash interest expense as a result of debt repayments and purchases, partially offset by a warranty expense charge for the dual power inverter module extended coverage program, favorable 2011 product warranty expense adjustments, increased product initiative spending, and increased other expense net. Adjusted free cash flow increased approximately 18% to $80 million, principally driven by increased net cash provided by operating activities and partially offset by increased capital expenditures attributable to the continued expansion of our India facility, which is expected to be completed during the third quarter of 2012. Other factors include increased product initiative spending and investments in productivity and replacement programs. The increased capital expenditures were partially offset by the construction of our Hungary manufacturing facility in 2011.

Please turn to slide 6 of the presentation for our Q2 2012 sales performance. North America On-Highway continued its recovery with net sales up 15% from the same period in 2011. Rugged duty series and school bus models were the primary drivers of this performance followed by a smaller increase in motor home models. These increases were partially offset by reduced Highway series models. North America Hybrid-Propulsion Systems For Transit Bus net sales, were down 55% from the same period in 2011, principally due to entry year movements in the timing of orders. North America Off-Highway net sales were down 37% from the same period in 2011, principally driven by lower demand from hydraulic fracturing applications due to weakness in natural gas pricing resulting from higher than normal inventory levels during the quarter. Military net sales were up 16% from the same period in 2011 principally driven by increased wheeled military products requirements.

Outside North America On-Highway net sales were up 1% from the same period in 2011 reflecting strength in China and Latin America being offset by a weaker environment in Europe. Despite challenging economic conditions, we've continued to pursue our strategic priorities including regional marketing efforts to increase the penetration level of fully automatic transmissions and attainment of additional vehicle releases in key emerging growth markets. Outside North America Off-Highway net sales were up 43% from the same period in 2011 principally driven by continued strong demand from the mining and energy sectors and our increased penetration in those end markets. Service Parts, Support Equipment & Other net sales were up 2% from the same period in 2011, principally driven by price increases on certain products, support equipment sales, commensurate with increased transmission unit volume, and increased global On-Highway service parts sales partially offset by decreased global Off-Highway service parts sales.

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

Thank you, Larry. Please turn to slide 7 of the presentation for the Q2 2012 financial performance. Given Larry's comments, I'll focus on other income statement line items and adjusted EBITDA. Selling, General and Administrative expenses increased $12 million, or 13%, over the same period in 2011, principally driven by a $9 million warranty expense charge for the dual power inverter module extended coverage program and $5 million of favorable 2011 product warranty expense adjustments. SG&A was partially offset by decreased global commercial spending activities. The 2012 dual power inverter module warranty expense charge is attributable to design issues related to the introduction of a replacement in late 2009. Engineering - Research and Development expenses decreased $5 million, or 18%, from the same period in 2011, principally driven by $6 million of higher 2011 technology-related license expense partially offset by increased product initiatives spending.

Interest Expense net decreased $14 million, or 20%, from the same period in 2011 excluding a $20 million decrease in mark-to-market expense for our interest rate derivatives. The adjusted decrease was principally driven by debt repayments and purchases partially offset by the effectiveness of new interest rate swaps. Other expense net increased $20 million from the same period in 2011 excluding the 2011 debt retirement charge of $57 million. The adjusted increase was principally driven by an $8 million impairment of technology-related investments, a bearable vendor settlement in 2011, unfavorable foreign-exchange, a settlement charge related to the hourly defined benefit pension plan, and lower miscellaneous income net. The second quarter 2012 income tax benefit of $350 million includes a $385 million income tax benefit due to the release of our deferred tax asset valuation allowance. We determined, based on the evaluation of both objective and subjective evidence available, that a valuation allowance was no longer necessary and that it is more likely than not that the deferred tax assets are fully realizable.

Adjusted EBITDA for the quarter was $191 million, a decrease of 1% from the same period in 2011. The decrease was principally driven by a favorable 2011 product warranty expense adjustment, increased product initiative spending, and increased other expense net, partially offset by increased gross profit, decreased global commercial spending activity, and higher 2011 technology-related license expense. Adjusted EBITDA margin decreased approximately 60 basis points consistent with the underlying end markets, net sales changes, production levels, and the previously referenced adjusted EBITDA variance drivers.

Please turn to slide 8 of the presentation for the Q2 2012 cash flow performance. Given Larry's comments, I'll focus on specific cash flow activity during the second quarter and provide some third quarter 2012 guidance. Allison's strong second quarter re-occurring cash flow conversion rate was driven by its high margins, low operating working capital intensity, low maintenance capital expenditures, deleveraging, and a US income tax shield. Consistent with our commitment to debt reduction and the return of capital to our shareholders, we repaid $150 million of debt and paid our first quarterly dividend in late May. Allison ended the quarter with $112 million of cash, $372 million of revolver availability, and net leverage of 3.81. Looking forward to third quarter, we plan to pay our 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 9 of the presentation for an end market summary. I'll provide you with some of our high-level, near-term end markets views as background for my comments on the full year 2012 guidance update. North America On-Highway -- we expect continued net sales growth in the second half, though at an appreciably slower rate than what we have experienced year-to-date given diminished commercial vehicle production forecasts. North America Hybrid Propulsion Systems For Transit Bus -- we believe second half net sales will be higher relative to the level experienced in the second quarter of 2012. North America Off-Highway -- second half year-over-year comparisons will continue to be challenging due to the strong demand we experienced last year and into the first quarter of 2012. That said, we believe that second quarter net sales are more reflective of the demand level we can expect for the remainder of the year.

Military -- due to anticipated reductions in US defense spending, we continue to expect a decline in net sales for the second half of 2012 compared to the prior year. Outside North America On-Highway -- we expect second half net sales in line with the prior year level due to increases in emerging markets offset by continued weakness in European end markets. Outside North America Off-Highway -- we expect continued double-digit year-over-year growth in the second half net sales driven by continued strong demand from the mining and energy end markets. Service Parts, Support Equipment & Other -- we expect second half net sales in line with the prior year level.

Slide 10 of the presentation summarizes our full-year 2012 guidance update. Allison expects full-year 2012 net sales growth in the range of 1% to 3%. Our guidance reflects a cautious approach, given heightened market uncertainty, assuming year-over-year net sales growth in global On-Highway, Outside North America Off-Highway, and Service Parts, Support Equipment & Other end markets. This is partially offset by year-over-year net sales reductions in the North America Off-Highway, Military, and non-North America -- excuse me -- Military and North America Hybrid Propulsion Systems For Transit Bus end markets. Despite the implied second half net sales decline compared to the prior year, largely attributable to this cyclicality of the North America energy sector, Allison's core North America On-Highway end market continues to recover, while our Outside North America end markets initiatives deliver modest growth in very challenging economic conditions. We expect an adjusted EBITDA margin in the range of 33.5% to 34%, adjusted free cash flow in the range of $350 million to $375 million, capital expenditures in the range of $115 million to $130 million, and cash income taxes in the range of $10 million to $15 million. Thank you for your time this afternoon.

Operator, Brian, please open the call for questions.

Thank you.

(Operator Instructions)

Tim Thein, Citi

First question is just on North America On-Highway and maybe, Larry, your outlook for the second half of the year. I'm curious in terms of there is a lot of individual pieces within there. In terms of giving us some help in terms of where the outlook did change and ultimately how that impacts the mix in terms of EBITDA contribution. And, secondly, certainly your outlook wouldn't suggest it, but going back to the fracking piece and, specifically, in the after market, one of your larger dealers has noted recently that after essentially doing zero rebuilds in all of 2011, they are starting to see a lot more replacement refurb activity. I'm curious, if you are not seeing that, would you expect that to be more potentially a 2013 driver just in terms of driving not the OE side but parts and service segment.

Sure. Good question, thank you. Sure in terms of the North America markets, we have received, and we have comprehended some of the latest scheduled updates from the various OEMs across North America. It is certainly a term that I picked up here recently was, VUCA -- VUCA environment, volatile uncertain, complex and ambiguous. But, nonetheless, in speaking with the various OEMs at least is they are able to see the industry and as they've updated in their -- some of their Q2 calls. We have comprehended that in the numbers that I've given including some relatively recently announced downtime that they are taking in some of their facilities. And it's really across a variety of sectors. You can't argue it's confined to one area. We've seen it across our product -- across those changes across our various products. But, nonetheless, again, consistent with the guidance we have provided we comprehended those updates here that they recently provided to us. So we feel that we are well-positioned at this point in time with the latest information at least as it comes from the OEMs.

Relative to the refurbishment activity in Off-Highway, that was something we had touched on as we started talking about some of the near-term perturbations. Certainly, we have seen that. I know Halliburton is sending some refurbished rigs overseas. We've got other folks of the business that are currently focusing in some cases in at least one plant entirely on overhauls. And there's another major player that is staffing a new facility in the southwest solely for overhauls. And, while that is encouraging, I would say that, in terms of the net revenue, it still is a step down from new unit production to take an overhaul kit, because, obviously, they don't replace every part in the transmission. Nonetheless, it is a partial offset from what folks have seen as an OE downturn. Perhaps to me more significant is the fact that if people are refurbishing rigs, as we've said in some of the other discussions, this is an industry that's not shy about parking equipment. So, and I think maybe we can see some indications both in terms of the decreasing inventory as well as some of the price changes that have occurred here recently in the natural gas that they see, in fact, an opportunity in the relatively near term. And they are refurbishing the rigs, accordingly. And that is certainly consistent with what we've said going into some of this near-term perturbations.

Okay and, Larry, is the revenue opportunity roughly call it 60% of new, is that rule of thumb a good number to use?

Probably a little less than that number but obviously parts as we've indicated in the tiering of the margins are a little healthier than the global Off-Highway, so you would have a net-net calculation there.

Okay. Thank you.

Ann Duignan, JPMorgan.

I just wanted to take a step back on the parts business -- that business was down 7% sequentially. Is that related to the fracking also just shut down demand also causes a lack of orders for spare parts?

Yes.

Okay. That was easy. And then in your guidance you -- when you talked about Off-Highway, I want to make sure I interpreted what you said correctly. It's just a clarification. You said back half will be in line with Q2. I presume you meant that each quarter in the back will be in line with Q2 not the entire back half.

Yes. That would be the correct clarification.

Okay. I just wanted to make sure --

(multiple speakers)

-- something funny in my model and you guys will be yelling at me. And then on the flip side can you talk a little bit about the hybrid side? How much visibility do you have into the back half, and where do you think the demand is really going to come from in that segment?

Well, there is a number of orders that we do have visibility of that the OEMs have -- are working to line set. And they moved a little bit out of Q2, but it is still staying in 2012 and we feel pretty good about tracking the original plan. Although, we did indicate that we saw some market trends in that area, whether it was CNG coming into trans, and we said that in the original plan for 2012 and we continue to track that plan. There has been a little movement within the year, but we continue to track the plan and feel good about getting the numbers that we originally laid in.

Okay and that just brings up my final question. On the On-Highway side, have you seen any slowdown? You've had tremendous success with the automatic transmission in the CNG equipment. Can you talk little bit about what you're seeing in the CNG side from your OEM customers?

We're continuing to see a lot of activity there. A lot of interest in the CNG, obviously, the engine guys are directly involved in that activity. The engine guys in the OEMs, and we continue to be the transmission of choice for those applications and are very busy working with some of the new market entrants to help them bring that technology to market for their particular application.

But in the near-term are you seeing any slowdown in orders in that segment?

No. No. We have not.

Okay. That's great. I'll get back in line and let somebody else on.

Jamie Cook, Credit Suisse.

Sorry just another question on the North American Off-Highway follow-up to Ann's answer question. We assume Q3 and Q4 each of the quarters bring in what we did in Q2 on the top line. Can you just talk about your visibility there, and are there any favorable mix issues in terms of horsepower which allow you to stay sort of flat with the second quarter? And do you think -- is this sort of -- do you feel this is the bottom? And my follow-up question is you are forecasting a modest sales decline in the back half but still some pretty good EBITDA margin guidance which is impressive. So, just wondering what the assumptions are in the EBITDA margins. Are there any favorable mix impacts or do you get any sort of tailwind from material costs? Just your overall comfort level with the EBITDA margin guidance and what the assumptions are. Thank you.

Okay I'll take the off-highway piece, and then Dave you talk a little bit about the EBITDA here. In terms of the Off-Highway piece, we have not seen -- there should not be a significant impact of any horsepower shifts. We've got our 2500 hp product which is out in the field trials. A lot of that really occurs for the non-NAFTA -- the outside North America markets. Here in North America a lot of the equipment is constrained by the bridge laws and so you have an issue trying to add a lot of weight to the rigs due to the bridge laws. And we continue to push that for some of the overseas applications. But in the near-term we don't see a lot of impact from horsepower per se affecting the rig situation. Certainly here in North America, as I indicated, we continue to grow the business. Outside of North America, as they start following some of the trends here in terms of exploring and capturing some of their own natural resources as well as us getting penetration from new releases in equipment that was being used previously but did not have our product in there. Notably China, certainly our presence there is expanded significantly. Those of the things that are continuing to drive that business. I guess I'll turn it over to Dave here for his comments on EBITDA.

Jamie, in terms of the question on EBITDA margin guidance, just the implied never for the second half, I think it's very consistent. If you look at the way typically our numbers develop from a, I'll call it seasonality perspective, with a softer Q4 because of shutdowns and holidays. But that -- that's really not unusual for us. It's almost in line with what we did last year. There isn't anything extraordinary or unusual that assumes in the second half. The one thing certainly to point out is we do have the UAW negotiations coming up in the fourth quarter, and there will be some period costs that are attached to that. But, other than that, it's pretty much a matter of course for us.

And the way that -- just continuing on there -- the way that we have driven that is we set out our plans from the expense side, and I kind of think of things in three categories. There are the must dos. You try to understand those pretty clearly. The should dos and would-like-to-dos is, and, clearly, as we have watched the economic environment unfold here, we have looked -- made sure that we're funding the critical initiatives. But there are some things -- some initiatives that have a little bit of optionality, and we've had to make some choices there in order to make sure that we continue to drive the cash flow and the performance levels that we've committed to people.

Okay, thanks. I'll get back in queue.

Andy Kaplowitz, Barclays

So the non-North American On-Highway business looks like it's hanging in there in the context of a weaker Europe, and you talked about emerging markets actually improving in the second half. So maybe you could give us a more color on that business and maybe how much of that business improvement that you've seen or the stability that you've seen is (inaudible) continuing to take market share in some of the emerging markets that you are sort of building out into.

Well, we do talk a little bit about some of the data there for the outside North America off-highway and you can see the numbers there on the chart. I would say that we were well-positioned previously. So most of that is what I will call activity in those markets, although certainly in China, for example, there was some work being done by another player in the market there that there's been some dissatisfaction with the quality and durability of the product. And so some of those applications have come over to Allison, and we have picked up some business there. But primarily I think if I were to split it I'd say maybe 80%/20% -- 80% just the market activity and 20% some of the competitive gains we've made.

And, Larry, I think I asked you about On-Highway, but Off-Highway I could just follow up on in the sense that you haven't seen any weakening of mining or energy end markets, generally speaking. Off-Highway has generally still been strong internationally?

Yes. It has. It's not uniform, obviously, but as a general commentary yes, good strength across a variety of regions and sectors.

Got you. And then just on the non-North American On-Highway market, again, Europe has been a little weak, but you did grow. And you are still talking about a decent business in the second half of the year. So, where is the strength coming from in the business, and how much of that is market share gains versus the end markets?

Well, I would say, clearly, in a number of cases, it's share growth in that particular situation, because in the down markets -- one of the keys is you've got to look at which markets are most significantly impacted. If you're, again, you've got to sort through the data, as we've always said, to make sure you've got the equivalent of line haul. We call it line haul, here but maybe other places they call it other things. But you look at China, and you look at what we've been able to achieve getting off the ground and some of our truck in the mining releases, and you look at what we've done in the buses thus far this year. Transit buses and not only the level of business we are capturing, which in truth is consistent with our past performance level, they are very, very strong positioning in that market. But the fact there are more tenders going out for automatics versus manuals so you are seeing a technological conversion, and we are able to capture that as well. So those are all things that factor into our ability to grow our business.

Okay, thank you Larry.

David Leiker, Baird.

Larry, as we look at the North America Off-Highway, that $26 million decline in revenue, is that all energy? Is that all the fracking business?

Virtually yes. I can't think of anything significant on the mining or any other niche application we have in that business.

You finished the quarter as you look at Q2 number. I would guess there's not much energy fracking in that revenue number at all?

There is still some.

I think there is a fair amount there. But again, as we talked about it, looking at Q2 as a starting point for the second half, we believe it's certainly more reflective of our expectations. But to your point it's taken a pretty significant step down since last year. But, at these levels, it's certainly feeling a bit firmer from that standpoint.

Okay and then in the service parts business how much of that ends up being energy-related, do you think? It's probably harder to tell.

It's certainly meaningful. But we haven't -- to the earlier question -- in thinking about what's happening on the refurb side there is some -- I would say some noise in terms of how the numbers are developing as everybody is still trying to figure out what that run rate means given the equipment that's out in the field. But I think we are keeping a close eye on that, frankly, and staying close to the supply base as well to make sure that there is availability that, frankly, at the same time, understanding from customers their expectations on near-term run rates.

But, as these gas prices come back up, do you think that those rates come back into the market as quickly as they came out?

I think some of that is going to be driven off of inventory expectations, and are you seeing a pretty significant recovery in natural gas prices since the April load. That being said, as we talked many times before, it's a very volatile market. And I think people are going to be careful in terms of reacting. But to Larry's earlier comment, it is clear you have a certain element out there that is staying prepared, and you would expect them to be able to move equipment pretty quickly if that were the case.

And then just lastly -- Larry, you had talked a little bit about new business activities and things that you are seeing there, how the pace of that is today versus a quarter or two ago. Anything in particular you can shed light on there?

Make sure I understand, David, when you say new business activity, are you referring to the releases we are securing through the OEMs?

No, new contracts -- new business awards.

Okay, for us that generally correlates with the releases, because we've got the long-term supply agreements with both here and in Europe. I would say the release activity continues for the most part. You do get a little -- you do get a little bit of challenge around the edges as OEMs look at challenging economic environment, they tend to manage their spending a little bit. So we've seen a couple of programs delayed a little bit but nothing canceled, and that's all volume. If it's tied to deferred purchases, that's all volume that will come at us as things do recover.

Okay. Thank you very much.

Brett Hoselton, KeyBanc.

I was hoping you could speak to first of all the variable contribution margins on a year-over-year basis. It looks as though the back half of the year guidance suggests kind of contribution margins in the range of 40%, 45% or something along those lines. And that seems to be in the ballpark of what you were doing. Would you agree with that, Dave?

I'd say, overall, that's in the ballpark.

And, I guess, what I was a little surprised at is you had a fairly meaningful reduction in your sales guidance but really a very modest reduction in your EBITDA guidance. If I look at your sales guidance, it looks like you are reducing your sale guidance kind of in the range of $85 million to $90 million. And if I use say a 40% contribution margin, that's kind of worth about $35 million on an EBITDA basis which, for the whole year, is worth about 160 bips in terms of EBITDA margins. Yet you're kind of just trimming the top end of your EBITDA margin range by 50 basis points and leaving the bottom end intact. And I guess what I'm wondering is how do I think about that -- what I would consider someone meaningful change in sales but a very minor change in terms of the EBITDA margin expectations. How do we kind of correlate that?

We've talked before. We typically react as an organization coming from the bottom up. But I think we, as we provided guidance, certainly the ranges as we think about them, we had a very good result last year in a stronger recovering market, if you will. We have adjusted our spending at those levels. Frankly, we've taken some actions already this year with that commitment in mind. So there are many variables that go into our guidance, but, as we see it, the earlier comments -- those are commitments that we plan on meeting as best we can. And I think there was a fair bit of planning that was included in the range that was provided, and we feel very good about the guidance as it currently sit.

Fair point on sales, but I would tell you, to the earlier comment, that the magnitude of some of the adjustments that we've seen recently from some of the DOEMs is I would say reasonably meaningful versus near-term histories. So when you start thinking about that I think we have seen some pretty significant shifts in are continuing to stay close to that. But try to align ourselves as closely as we can to those second quarter production forecasts, but it's a challenging situation coming into the second half.

In terms of the profitability, again, that is something that I would term an item that we can work to influence versus the pure -- we don't control the markets. However in the context of those markets we can take defined actions to adjust our performance glide path. And, in fact, we've gone through here, gosh, going back to shortly after the first quarter call, as we continue to see the economic environment unfold, we -- I sat with my entire staff and every member of my staff and we went through a deep dive on what things -- what levers we could exercise in the context of driving financial performance. And everybody came to the party with I thought a very thoughtful set of proposals, not all of which were accepted, frankly. But many of which were such as we will maintain an improved profitability and improved -- or a solid profitability and cash flow in the context of a more challenging revenue perspective from the OEMs. And that's what we've been working on.

Thank you. And then with respect to the $9 million warranty expense, am I correct in my assumption that that is a one-time expense and not necessarily expected to carry over into the third quarter?

That's correct. Our expectation is that 's a non-recurring item.

Okay. Thank you gentlemen.

(Operator Instructions)

Rob Wertheimer, Vertical Research Partners.

I'm sorry for the follow-up on fracking. I know it's been asked three or four times. But I just wanted to ask is there new builds sort of embedded in the back half or maybe you could give a total horsepower build that you expect for full-year. There's obviously a lot of negativity out there, but I just don't know if your outlook captures a complete meltdown of the market or whether it continues to assume some new builds going on.

It assumes some new builds consistent with the level in Q2 which is, as you know, depressed from say 2011 and even the first quarter of 2012.

For sure. And, actually, I don't know what you order and build cycle would be versus the guys who are actually doing the full units. Is it a month or so lead time or is it more added to delivery of the unit.

I would guess it's going to -- it takes them a little longer than a month to get the throughput through their operation. We typically are out a couple of weeks ahead of when they want to build. They like to have the unit on the floor before they start.

Okay. That's great. Thank you. And just ask a more positive question on the -- Off-highway globally is much, much stronger. Out of curiosity, I think you guys sell directly into some of the Chinese OEMs. There have been stories of coal piling up, but it looks like your business is strong. Could you talk about whether you have seen any weakness directly in China or strength? And maybe talk a little bit about your share in the energy sector internationally whether stronger or weaker than domestic? Thank you.

In terms of the China market you've got a little bit of variation depending on which commodity you're talking about. It's interesting because the Chinese have been very adept at managing commodities worldwide and managing their need for them. And, frankly, probably doing some clever things to help them manage pricing. They -- we have seen some situations where they are probably tapering a little bit of their activity but, interestingly enough, looking to import the materials because they are exploiting some almost arbitrage kind of scenarios. That creates more activity at the ports and, of course, we are in dock spotter, so, what may soften a little bit any particular mining sector, we'll probably pick up through some of our dock spotter positioning where we've got that business. So, it's a little bit of a mixed bag but, overall, certainly continues strong in some of those markets. The second question remind me again was tied to?

Just curious about your position and your market share in energy internationally, high horsepower rate. I'm just curious.

I would say it's essentially comparable. We've got I think very solid positioning here in North America but also that's true outside of North America, particularly, with some of the things that happened in China recently. I would say that they were a minor player, but our position is very strong in general. And we've probably brought that up in China to the level that we enjoy here in North America with some recent events.

Great.

[ Operator Instructions ]

And ladies and gentlemen, that concludes today's question-and-answer session. At this time I would like to turn the conference back to Mr. Larry Dewey, Chairman, President, and CEO for any additional or closing remarks.

Well, we appreciate everyone's interest of the business and participation today. We're going to continue to drive the kind of performance that you expect from Allison despite the challenging -- again the VUCA, volatile, uncertain, complex and ambiguous environment. But that's a challenge to us is to manage through that, and thus far the team is responding, as you can see, in terms of the guidance we've provided. Now the task becomes to deliver on that. So, thanks for your interest and your support.

And ladies and gentlemen, that does concludes today's conference call. We appreciate your participation.