Allison Transmission Holdings Inc (ALSN) 2015 Q2 法說會逐字稿

Welcome to Allison Transmission's second-quarter 2015 results conference call. My name is Christine, and I will be your conference operator today.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference call over to Dave Graziosi, the Company's Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Thank you, Christine.

Good morning and thank you for joining us for our second-quarter 2015 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman, President, and Chief Executive Officer. As a reminder this conference call, webcast and the presentation we are using this morning are available on the Investor Relations section of our website, AllisonTransmission.com. A replay of this call will be available through August 4.

As shown on page 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our second-quarter 2015 results press release and our annual report on Form 10-K, for year ended December 31, 2014, and uncertainties and other factors, as well as general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today.

In addition, as noted on page 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our second-quarter 2015 results press release.

Today's call is set to end at 9.00 AM Eastern Time. In order to maximize participation opportunities on the call, we will take one question from each analyst.

Now I will turn the call over to Larry Dewey.

Thanks, Dave.

Good morning and thank you all for joining us today.

Our second-quarter 2015 results are within the full-year guidance ranges we provided to the market on April 27, 2015. The improvement in North America on highway net sales on a year-over-year basis for the eighth consecutive quarter was more than offset by the unfavorable impact of lower energy and commodity prices and the global Off-Highway and Service Parts support equipment and other end markets, and lower demand in the Defense end market.

Despite challenging conditions in the global Off-Highway end markets, Allison continued to demonstrate strong operating margins and free cash flow, while closely aligning costs and programs across our Business, within market conditions and opportunities consistent with our strategic priorities. We also continued to deliver on our commitment to a well-defined capital allocation policy, focused on the return of capital to shareholders, while maintaining a prudent level of net leverage and lowering Allison's cost of borrowing.

Please turn to slide 4 of the presentation for the call agenda.

On today's call, I will provide you with an overview of our second-quarter performance, including sales by end market. Dave will review the second quarter financial performance, including adjusted EBITDA and adjusted free cash flow. I will wrap up the prepared comments with the full-year 2015 guidance update prior to Q&A.

Please turn to slide 5 of the presentation, for the Q2 2015 performance summary.

Net sales decreased 5% from the same period in 2014. Principally driven by lower demand in the global Off-Highway and Defense end markets, partially offset by the continued recovery in the North America On-Highway end market; higher demand in the Outside North America On-Highway end market; and price increases on certain products.

Gross margin for the quarter was 46.2%, an increase of 170 basis points from a gross margin of 44.5% for the same period in 2014, principally driven by price increases on certain products and favorable material costs. Adjusted net income decreased $19 million from the same period in 2014, principally driven by $25 million of premiums and expenses on the tender offer and redemption of long-term debt, partially offset by decreased cash interest expense.

Please turn to slide 6 of the presentation for the Q2 2015 sales performance summary.

North America On-Highway end market net sales were up 14% from the same period in 2014, principally driven by higher demand for Rugged Duty Series and Highway Series models. North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 29% from the same period in 2014, principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully automatic transmission. North America Off-Highway end market net sales were down 57% from the same period in 2014, principally driven by lower demand from hydraulic fracturing applications.

Defense end market net sales were down 41% from the same period in 2014, principally driven by the recognition of previously-deferred revenue in 2014, totaling $16 million, commensurate with the shipment of certain tracked transmissions at the request of the US government, and reductions in US defense spending to longer term averages experienced during periods without active conflicts.

Outside North America On-Highway end market net sales were up 18% from the same period in 2014, principally driven by higher demand in Europe, Japan, and India. Outside North America, Off-Highway end market net sales were down 67% from the same period in 2014, principally driven by lower demand in the energy and mining sectors. Service Parts, Support Equipment and Other end market net sales were down 12% from the same period in 2014, principally driven by lower demand for North America service parts.

Now I will turn the call back over to Dave Graziosi.

Thank you, Larry.

Please turn to slide 7 of the presentation for the Q2 2015 financial performance summary.

Given Larry's comments, I will focus on other income statement line items and adjusted EBITDA. Selling, General and Administrative Expenses decreased $9 million from the same period in 2014, principally driven by favorable product warranty adjustments, lower incentives and stock-based compensation expense, and reduced global commercial spending activities. Engineering Research and Development expenses increased $2 million from the same period in 2014, principally driven by increased product initiative spending, partially offset by lower incentive compensation expense.

Interest Expense Net decreased $14 million from the same period in 2014, principally driven by the August 2014 expiration of certain LIBOR swaps. And the second quarter 2015 refinancing of our 7 1/8% senior notes, with additional term loan B3 borrowing. Cash interest expense decreased $4 million from the same period in 2014, principally driven by the August 2014 expiration of certain LIBOR swaps and debt repayments and refinancing.

Income Tax Expense for the second quarter of 2015 was $33 million, resulting in effective tax rate of 37.5%, versus an effective tax rate of 39.6% for the same period in 2014. The decrease in the effective rate is principally driven by the change in discrete activity.

Adjusted EBITDA for the quarter was $186 million, or 36.3% of net sales, compared to $186 million, or 34.7% of net sales, for the same period in 2014. The decrease in net sales and the increased product initiative spending was offset by price increases on certain products; favorable material costs; favorable product warranty adjustments; lower incentive compensation; and reduced global commercial spending activities.

Please turn to slide 8 of the presentation for the 2015 Q2 cash flow performance summary.

Net Cash Provided By Operating Activities increased $11 million from the same period in 2014, principally driven by price increases on certain products; favorable material costs; lower product warranty expense; lower incentive compensation expense; and decreased global commercial spending activities, partially offset by decreased net sales; increased product initiative spending; and lower accounts payable commensurate with decreased net sales.

CapEx increased $2 million from the same period in 2014, principally driven by the timing of 2015 productivity and replacement programs spending. Adjusted Free Cash Flow increased $5 million from the same period in 2014, principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures and decreased excess tax benefit from stock-based compensation.

During the same quarter, the second quarter, Allison continued its prudent and well-defined approach to capital allocation by repurchasing 85 million of its common stock; paying a dividend of $0.15 per share; repaying $54 million of debt; and completing a refinancing of our 7 1/8% senior notes. We ended the quarter with net leverage of 2.88, $217 million of cash, and $456 million of a revolver availability.

It is also worth noting that Allison repurchased approximately $84 million of its common stock during the period July 1, 2015, through July 27, 2015.

Now I will turn the call back over to Larry Dewey.

Please turn to Slide 9 of the presentation for the full-year 2015 guidance update.

During the second quarter, Allison experienced the unfavorable impact of lower energy and commodity prices in the global Off-Highway and Service Parts, Support Equipment, and other end markets. Given that these end markets continue to exhibit an elevated level of uncertainty, and a dearth of near-term visibility, we are updating our full-year net sales guidance to a decrease in the range of 6% to 8% year over year.

As we've done in other periods of meaningful uncertainty, Allison has implemented initiatives to further align costs and programs across our Business, with current end market conditions and opportunities consistent with our strategic priorities. Despite Allison's heightened focus on controllable activities in this environment of exceptionally volatile global Off-Highway end markets, we remain strongly committed to product development, core addressable markets growth, and the delivery of solid financial results.

In addition to updating our Net Sales guidance, we're also updating the guidance for Adjusted EBITDA Margin to a range of 34.75% to 35.75%, and Adjusted Free Cash Flow to a range of $470 million to $500 million. Allison is affirming the guidance for Capital Expenditures in the range of $60 million to $70 million, and Cash Income Taxes in the range of $10 million to $15 million.

Although we are not providing specific third-quarter 2015 guidance, Allison does expect third-quarter net sales to be lower than the same period in 2014. The anticipated year-over-year decrease in third-quarter Net Sales is expected to occur due to higher demand in the North America On-Highway end market being more than offset by lower demand in other end markets.

Thank you for your time this morning.

Christine, please open the call for questions.

(Operator Instructions)

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

Hi, good morning.

Good morning.

I'm wondering if you can say more about market share developments in the quarter in North America, you had some conquest customers in construction earlier this year, did you hold on to gains this quarter? And in international On-Highway you had strong sales in the quarter, versus the industry backdrop, I'm wondering how much of that is lumpiness of some tender orders versus any new platforms that were introduced; any color there, please?

Sure. Relative to North America, we have in fact generated sales greater than the industry, both in the medium duty space, transit space, as well as the class A straight truck space, and the last one is tied to the construction programs that you referred to. So we're not only seeing the results of this year's program, but, as we've indicated in the past, as we conquest a customer, they're relatively cautious, they don't buy the entire order, so the past year's conquest customers, as they have gained experience in operating the product, then with that favorable experience, are placing a greater percentage of their orders, so we continue to build on that, build on that success. Relative to outside of North America, are you exactly right in the On-Highway space, there is some lumpiness to the orders. When we take a look out to the forecast going out, you know, there are some challenges relative to forecasting. Certainly some of the political and instability in places around the world, Latin America, we've got Argentina and Venezuela, Brazil's got some tsunami issues, and of course, the Russian thing we talked about. Even in Western Europe, where we're starting to firm up a bit, we're seeing some challenges at the OEMs relative to their engineering resources and how far they're willing to push some of the releases in terms of the timing. So, we're taking a fairly conservative approach relative to our forecast. I think we're still holding to the outside North America forecast we provided back in April, which would imply some tapering here, but we continue to drive it, and hopefully the results will step up from where we are sitting today.

Thank you.

Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning.

Good morning.

I guess just back on the market share comment, you know, Navistar, last night, made an announcement that they'll be also supplying -- using the Procision Eaton sort of transmission, can you just talk about how we should think about this? Does this imply some validity to Eaton's product? Were you surprised by it? And how you're sort of factoring in what the market share shift will be over the next couple of years associated with that? Thanks.

Sure. Well, to answer the one question imbedded there, no we were not surprised, we were aware of the release, in fact we're aware of the OEM's plans more broadly across the North American space. We've earned our business in this space, and it's targeted primarily to the medium-duty. You know, by -- and if you look at our shares, both in school bus, as well as medium-duty, you know, that's been achieved as our customers have recognized this as kind of, certainly, a reliable cost effective and increasingly fuel efficient product offering the best performance and productivity. Certainly, one of the differences in gear schemes, we design our products to fail to a range, so that if anything were to happen, the vehicle is able to be maneuvered, perhaps not gracefully, but it can be maneuvered out of traffic, and other architectures perhaps don't offer that same capability.

We've got several million 1000, 2000 series, which is in the space where the Procision is proposing to go, that are operating globally. Our look at DCTs, particularly in the automotive space, would suggest that the reliability and durability may not be their best point there. And then our leading cost, market leading cost of total ownership is well-known. And the torque converter that we use provides a superior vehicle launch and is an extremely effective and reliable starting device. The DCTs, they use a clutch, and clutch in order to minimize the launch characteristics to make it smooth, needs to slip, and slip equals wear.

I had a couple of other thoughts as we've talked about this, there are three things that are going to be different, relative to the launch of the Procision versus the AMTs and as I was looking at the announcements, I was struck. One of the nice things about the internet is you can go back in history, and there was an announcement, just one, there were of course a number over the years, but the one I happened to pull was from August 5, 2008. And the wording in the announcement relative to the AMT provided by that same component supplier was virtually identical to the announcement that was made yesterday. And of course, as you followed the industry, there was some gain made with the AMT, but based on the data I've looked at from the major OEM's, that has subsided back to the level that it was prior to 2010, as customers have operated the product and realized that, from an automaticity standpoint, it didn't have the value that they were expecting.

The three things that come back, that are different, first off, we're not in the same place and we're not the same company as we were during the launch of the AMTs. Since 2010, we've seen a 45% improvement in our number of incidents within the warranty period while offering 42% longer coverages. So a significantly more reliable, from what was already an industry-leading standard. So we have certainly been busy on that front.

Secondly, in that same space, against the first point, we have made, over the last two years, a significant effort in the area of fuel economy, around here we call it FE squared, fuel economy and efficiency. Things such as the fifth gen controls, the new algorithms we have, FuelSense 1.0, and we've got 2.0 coming behind it, Dynamic shifting, the XFE models. So there has been a tremendous effort to move where we've at. In fact, we've probably moved more in the last two years in our fuel economy and efficiency performance than probably in the previous 20.

So depending on what is being analyzed, I think that folks will find we're in a very different place, comparatively speaking, than maybe what has been targeted. The second thing is, we have been anticipating and doing our homework relative to this other offering, and where as on the AMT, we were probably a little slow coming to grips with the specifics of the performance and the facts associated with it. That is not the case as we sit here today.

And the third thing that's going to be different is we were probably overly genteel during the period of the launch of the AMT, and where we're going to be here is probably going to be perhaps a bit more like an M1 Abrams tank coming in, and we do supply that transmission as well. So there's a number of things that we are looking forward to addressing as we go forward.

All right. Thanks. I will get back in queue.

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

Good morning. Can you walk us through, specifically, your guidance by segment, now that we're halfway through the year? I know you said rest of world no change, but can you walk us through line item by line item, please?

Sure. Good morning, Ann. Couple of things, quickly, North America essentially flat with the April guide, but has us up 8% full year, versus 2014. Hybrid-Propulsion Systems for trends that of North America, that's going to be, we expect at this point, to be down, roughly 25% year over year, so slight improvement there versus the April guide, we've had some firming of OEM order books there. North America Off-Highway continues to be a challenge situation, to Larry's earlier comment, we read some of the public reporting that's out there. Recently here, in terms of expectations, I would tell you we have a pretty conservative prudent view of the second half there. So we have that market down about 43% year-over-year, versus 37% was the April guide. Defense has improved slightly, as we've had some improved OEM order books driven by increased US and non-US defense wheeled programs there. Outside North America On-Highway, no change from the April guide, as Larry mentioned. Outside North America Off-Highway, we would have down, at this point, about 60% year over year, as you know that book is typically split half-and-half between mining and energy; that mining continues to be a very challenged, unfortunately, situation globally as well. Parts and Support Equipment we have down about 17% year over year at this point. The key driver there, in terms of some deterioration from the April guide is, again, for the Off-Highway business, specifically energy, as we continue to see spending reductions forecast for 2015 and are positioning ourselves accordingly and keeping an eye on inventory levels through distribution channel, et cetera.

And specifically, I'm sorry, can you give me Defense and NAFTA on highway specifically, we had minus 34% and flat, but that was from April.

Yes, we have 31% on Defense at this point for full year, down. And then outside North America On-Highway, flat.

Okay. Thank you. And then can you talk a little bit about what you're seeing in some of your sub-sectors in North America On-Highway? Are you seeing any improvements in the severe service side, the construction side, or just some color on North America market, please?

Well, where we're seeing some strength in our business, we're seeing a little mix shift within the 1 and 2s, and that's really tied to some of the big delivery company orders. It's just a matter of what size of vehicles that they're looking at, going forward. We're seeing distribution and construction in the medium duty class 6-7, and then in the class 8 straight truck, we are seeing a pickup in construction as you mentioned, specifically, rear discharge mixtures and dump trucks. And we're also seeing some increase in the smaller, some call them the either big 7s or small 8s, for the 3,000 series there, the highway series, so that's -- those are some areas that stand out in North America.

Okay. And just real quick, just to clarify, are you still sticking with your 500 million share repurchases by year-end 2016, or have you accelerated that given your comments on the July spend?

We are sticking with the execution of the authorization by December of 2016.

Okay. Thank you. I will get back in queue.

Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed with your question.

Yes, good morning, guys.

Good morning.

My first question is around the oil and gas business. I guess, have you guys seen stabilization during the quarter, or has conditions continued to deteriorate? And how have things trended in July versus June? I guess what my real question is, is it fair to assume that revenue kind of stabilizes in 3Q versus 4Q in the Off-Highway businesses?

Well, let me give you -- I would have said that we were stabilizing in April, kind of the April time frame. I think recent geopolitical events, even though they're not certainly online, but some of the speculation with Iran, and of course, the numbers ebb and flow relative to inventories and amount of pumping that's going on. You know, I would say that where as we would have said we were stabilized, it's still a little bumpy. And you know, in the mathematics theory, it says that you can always put, on a line, you can always put another point between the two end points and I would say, at this point in time, that is getting, given where we are at in the industry, that's getting to be pretty tight relative to that. We're almost down to an irreducible minimum here. So we've taken our forecast to that level, what we've seen, and what we think we're hearing, and kind of sorting through what we're hearing to what we think is going to happen, and that's why we've taken it down a bit further.

Thank you. That's really helpful color, Larry. And my second question is on the same topic. Have you guys seen customers really push back within the Off-Highway business on pricing, or is pricing still holding there?

We executed a long-term supply agreement with our largest customer really earlier this year, in the very beginning of the year, so we've got our pricing established and it is -- as many of the long-term supply agreements are evolving to, to the extent that there's pricing actions in there, they have an opportunity, with significant volume, to earn back against those, and that's consistent. So no, we feel good about our positioning there and continue to move forward with our key customers.

Great, thanks. I will pass it on.

Our next question comes from the line of David Leiker with Robert W Baird. Please proceed with your questions.

Good morning, everyone.

Good morning, David.

So, let's focus on this -- as we look at margin opportunities, and you have a lot of different levers to drive margins. I'm wondering if we can take a look beyond the end of the year to anything that might be incremental one way or the other, over the next 12, 18 months tie-in period, in terms of what you think you can be able to do in terms of pulling levers on margins?

Sure, as we've talked before, a number of things that we continue to work on, and frankly, were positioned several years ago. A number of initiatives in our supply chain team and what they've been working on there, I would say that's certainly ramped here over the last few years, we feel very good about our position going forward there. You're certainly familiar with some of our labor arrangements in terms of multi-tier wage and benefits that we have as well. We talked here about pricing on this call, as we've thought about this year and last year, and positioning with long-term supply agreements, and the overall market conditions, so we continue to sell our products for the value that they deliver to end users. So we feel there's certainly some opportunity there as well. So from a tail winds perspective, and you can lay those out, I think headwinds certainly, as we see the market continue to evolve here, some level of general inflation, I think we, in most cases, have been able to mitigate a portion of that.

We continue to see pressure on the health care cost side, certainly, and that's something we are working in a number of ways with. Beyond that, I think we'll, as we get there, as we normally do, in our cadence, we'll provide the 2016 guidance early next year. I think it is premature, for a number of reasons, to start throwing out some thoughts there. Broadly speaking, we've talked before about the larger concepts here, which is our continued push for penetration globally with the On-Highway business. I think Off-Highway, for a lot of reasons, is an open switch at this point, so we'll work against that as we push into the year. I would say to Larry's earlier comments, we continue to push the development of additional product options, fuel efficiency driven in the On-Highway side, in a number of models there; as well as the Off-Highway business that you're familiar with, with higher horsepower, fracking transmissions that certainly market conditions are tough now, but we see some real opportunity for incremental growth there for the Allison product line. So pushing that agenda has become a significant issue for us, as we, despite the challenging market conditions, continue to chase our strategic priorities, but we feel good about overall margin position at this point.

And not that I'm trying to push the 2016 number at all, but it looks like, it sounds like your opportunities over the next 12-18 months are similar to what you have seen the last 12-18 months then for margins?

Yes, I would say our approach is consistent. We're certainly looking to improve, that goes without saying. But you know, having said all of that, I think we are -- we have to see how the markets develop here. To the earlier comments we are certainly not going to push where there is an opportunity, but we're also going to continue to invest in what we believe are long term meaningful profit opportunities for Allison and more importantly, driving the nominal growth opportunity for the business.

Okay. Great. Thank you very much.

Thanks, David.

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

Great. Thank you. On the Parts and Services business, can you give us an idea of what drew out the results, was it primarily on the fracking side? Was it also On-Highway? Just give us the breakdown there. And also, I know in the past it's sort of been a decent leading indicator to the business getting better, is it the same when things are getting, I guess, worse? In that, you see that fall first and then the rest would start to fall off? Or how do you sort of think about what Parts and Services means for the rest of the business?

Well, specific to Off-Highway, if you look at the second quarter results, we are down roughly $13 million versus Q2 of 2014. Basically that entire variance, when you boil all of it down, is Off-Highway right, it is frac driven for North America, so that continues to be the real dominant story for our parts business. Unfortunately, at this point, there's been a number of cycles here over the last 5-10 years, some have been longer than other. It really depends, I guess, the answer to your question, in terms of the leading indicator of things turning, or frankly turning down, this last cycle it was cleared up; as you well know, the second half of 2013 is when our Parts business in the frac side really started to pick up, and then that led, ultimately, to the increase in unit sales increases that we saw in 2014. You know, we'll see how this market plays out.

I think it's fair to say, with the amount of equipment that's been parked and taken offline, one of the questions that, or a number of them, but it really gets down to what's the condition of the fleet that's being parked? And, frankly, how hard is the fleet that's being run currently, being maintained, right? So if we come out of this with, I think, a relatively strained equipment position out there, you can maybe assume if you would like, that the parts business is going to follow that trend in terms of the leading indicator there.

I think we've heard anecdotally a number of situations that equipment is really being run to fail at this point, so that would indicate some pretty tough situations to manage through when the equipment needs to be back-filled. So the spending reductions speak for themselves. So the implication there is, I think there may be some opportunities coming out of this, hopefully, that we'll start to see a pickup in the Parts business. But at this point, we've taken a pretty prudent view, we believe, of the second half, to Larry's comments, in terms of some irreducible minimums, and we'll see how we're positioned going into 2016.

Okay, great. Thank you very much.

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

Good morning. Thank you. I just had a question on the class 6 to 7 market. I realize you guys didn't change your North America On-Highway forecast, but order trends have been surprisingly weak in 6 to 7. I'm wondering if you're seeing that in your own order book? Is that the main reason why you're implying the weaker second half versus first half?

Well, it's certainly a factor. What we've been looking at, we've actually seen a little more of a dislocation with one of our customers in the class 8 straight truck, as a result of some of their components supply. There is a player in the medium-duty space that's got some others, not Allison Transmissions, but other components supply issues. We watch that, we follow pretty closely. You know, the backlog, or the order backlog as reported by ACT, truthfully, we don't have a lot of faith in that number primarily as a result of 2006, 2007. But the one that we do watch pretty closely is the inventory to retail sales, and I think you're hitting on something where we've looked at that and said, there could be if something doesn't modify, going forward, we've anticipated a little bit of adjustment there going forward. So we have taken that into account.

Okay. Thanks a lot.

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

Great. Thank you. Good morning. Dave, my question is on the pricing expectations that is assumed in the EBITDA margin guidance for the back half of the year, and it looks like you have been running at, call it an $8 million to $10 million per quarter range since the second half of 2014. But how should we think about those, kind of the year-over-year changes we lapped, some of the mid-year price increases from last year? So basically, pricing imbedded into the second half of the year guidance? Thank you.

Sure. As you know, with our pricing moves there's a number of things that happened during the year, it is not linear, just because of the cadence of the number of markets that we're in and contracts, et cetera. So, to your point, we're run-rating some of the activities certainly from 2014 into 2015. There's also a number of initiatives that we're pushing at this point, so I would say imbedded certainly in our assumptions, our guide for the second half is some increased pricing year over year. I would -- directionally, it's meaningfully similar to first half in terms of what you have seen here so far. So again, as we push, we'll see how the second half develops from a volume perspective, which, of course, can have some impact on that. But overall we do expect to enjoy some improvement in pricing for the second half year over year.

Got it. Thank you.

(Operator Instructions)

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

Hi, thanks for taking my question. On the -- I just want to maybe better understand your OpEx guidance for the rest of the year. Do you have any additional latitude so that we could use to bring the R&D (inaudible) numbers down below the (inaudible) run rate?

At this point in time, you know, given the update in guidance and actually the increase in the EBITDA margin, one of the things that, recognizing we're in some tough markets, one of the things that we're doing is to continue to fund those initiatives that we think will offer growth and profit opportunities going forward. So we are not eating our seed corn. So things like the fuel sense activities, the FE squared that I spoke of earlier, some of the work that's being done in Asia and Europe, and to a lesser extent, but on a proportional basis, in Latin America, those activities continue. Obviously, you got to be -- you sharpen your focus, but we continue to drive some of that.

Some of product development in the Off-Highway space, recognizing the industry is, particularly energy, is pretty flat. We view that as an opportunity for us to finish the development of some of our higher horsepower products, and then when the market starts recovering, we'll be positioned with a broader array of products to go after that opportunity. So that's one of the things that we hold, that product development, and market development tend to be right up towards the top of the list for expense management. Of course we expense our product development, we don't capitalize it here.

So those get higher and then some of the, I will call them more bureaucratic initiatives, get a little bit less focus and less attention. It really gets to be like a family budget, where you decide what's important and you keep that pretty close to your heart, and the rest of it is a little more optional.

Thank you so much.

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

Hi, guys. Good morning.

Good morning.

Dave, I was hoping you could help to square up a couple of different things. In your prepared remarks you talked about, kind of, the continued recovery of North America On-Highway, I know you talked about market share gains. And then to Ross's question on medium-duty, you kind of discounted what the ACT data value is. What's actually more notable to us than the medium-duty is the heavy-duty order rates for class 8 straight, within the four months have gone negative 7, negative 21, negative 33, negative 33. So my question to you is, are you seeing this in your business at the leading edge, or are you telling us that the ACT data that we all see is not valid and not directionally indicative of what you're seeing in your business in North America class 8 On-Highway?

I will let Dave answer -- will this is Larry. I will let Dave answer. Let me clarify. The comment I made about the ACT data was the order backlog data and order cancellations, because that can move around quite a bit. And just because they reported as an order doesn't mean it materializes. So we tend to look at that inventory to retail sales. What we've seen in the class 8 space straight truck is some level of softening. We've adjusted our production plans accordingly. We have also seen, in some cases, some challenges relative to one of the significant players, in that space, one of the OEMs, who's having a significant, apparently, other component supply issue, and that has had an impact. That's about half of the impact we've seen, is the re-timing from them from Q2 into the rest of year as they anticipate getting those supply -- that supply issue or issues squared around.

Okay. So on the plus 8% guidance for North America On-Highway this year, can you just talk about how much of that -- how much of that is visible in the form of backlog you already have, and how much is kind of on the come, you need to get the orders in the back-half to actually hit the plus 8[%] guidance?

Well, the reality is, I mean you can have forecasts from the OEMs out 6 months or a year, and you know, they line us at 10 days out, so anything outside of that 10 days can be moved around a bit. So it is a fairly fluid reality, at least as far as we are concerned. You know, as we look across the OEMs, again, setting aside the one in the class 8 space and the one that's a bit challenged in the medium-duty space, we've seen a little bit of movement in terms of their, as I look at the individual OEMs, a little bit of movement in terms of what they have communicated for orders that are line set. But nothing that, with the exception of one that they moved a couple of weeks, where you would say they had 6 to 7 weeks and now they are 4 to 5 weeks set, so they would be looking for orders in that 6th and 7th week, a little heavier order stream than the past. As we talk to them, one of the things that the OEMs have said, is folks have -- they think that because of their ability to deliver, against what are compared to historical market levels, softer markets, that people don't believe they need to place their orders as quickly, and so they're holding on to them, so that reduces the visibility. At least that's the input we've gotten from a couple of the large OEMs, one Midwest based and one West Coast based. So that is an interesting thought that we need to dig into and try to understand that as we talk to end users.

Okay. So this last related question is based on what you are seeing in class 8 order data, you don't think it is at all indicative of kind of the cycle rolling?

No, the class 8 straight is a little different. Sometimes when they get talking about it, they start talking about the tractor market. Now that has some relevance to some of the 3000 series we've got going into some tractors, and it has relevance to, of course, to the TC10 although that's in a ramp-up phase, so it's not as affected by overall market size. But we watch it closely. We do think that the inventory to retail sales ratio is higher than the traditional average, but it's been running higher for three years. And so we are trying to understand if that is the new normal, I guess, or whether we need to taper that a bit.

Okay. Well, that's super helpful perspective. Good luck this quarter, guys.

Thanks.

Our next question comes from the line of Brett Hoselton with KeyBanc. Please proceed with your question.

Good morning, Larry. Good morning, Dave.

Good morning.

Two questions for you. First, why not accelerate the share repurchase program given the share prices at actually quite a low point? And then the second question is, can you kind of just talk about the launch of that new transmission program, and how that's progressing, the one you just mentioned, of course?

Sure. The share repurchase, as responded earlier, we remain committed to the half a billion, executing the $500 million authorization by the end of next year, certainly we have not said one way or another whether we're accelerating or not. So I think the point is, you've seen the second quarter results with the activity that we have. We also mentioned $84 million of share repurchases, month-to-date July, so I think that's a meaningful update at this point, and again, we remain committed to executing the authorization.

And regarding the --

Thank you.

The TC-10, we know that there's going to be a ramp, we continue to pursue the ramp. As of the middle of this month, we've got 143 fleets have made purchases, 17 of which are repeats. So that certainly is a, given the time that the product has been out there, is a good repeat purchase indication, so we're pleased with that. The feedback continues to be very positive, particularly in the area of fuel efficiency, vis-a-vis the competitive alternatives that are out there, and so we just continue to march and continue to conquest customers and get the product in their hands and believe that the product will deliver the value they're looking for, and then we'll continue to see those repeat orders and build the book.

Thank you very much, gentlemen.

Thanks.

Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question.

Very good, thanks. Was wondering if you could comment a little bit more on the outside North America On-Highway segment? You mentioned earlier it was obviously bumpy, there was some visibility issues, you've got some macro weakness to cope with. But in the release, you did call out that there was strength in Europe, strength in Japan, strength in India. Was wondering if you could just give a little bit more color on what exactly that entails, where are you getting the increased order volume?

Sure, in Europe, really across three different end markets they saw some notable increases. Truck sales were up a little under 20%, 18%. You got the Western European OEMs starting to firm up a little bit. South Africa got a really more of a timing change here in the quarter. Bus sales were up even more particularly driven by Turkey. That's been a nice step-up for us, from market penetration, maybe more from a market recovery cyclical of quarter kind of performance; the UK was strong. And then the other areas, military sales were up significantly out of Europe. Again, Turkey, and some other Middle Eastern business that we were able to get. In Asia, we did see, and it was primarily timing, bus was up. As we look forward, we would say that in China the overall bus volume is actually going to be down and that is the entire down take in the Asia-Pacific region. But in this quarter, year over year, it was up, driven primarily by Beijing as well as a few other programs that we had in there. Truck up a little bit, but nothing to write home about, in China.

In Australia and the rest of Southeast Asia was down, so the net-net was down in Asia there. India continues to move upward. Bus, based on some of the tender orders that are starting to flow, we're able to capture some of that. Truck continues to build, albeit it a small step at a time, but it continues to build, as we gain the releases. Japan was up fairly significantly year over year, and that was driven almost exclusively by bus, relative to some of the business that we have in the Japan domestic truck rental market, as well as a little built of business they picked up in Malaysia and South Africa. And then Latin America, their sales were up just under 30% driven by some of the bus activity, including some new releases that we were able to get, and then truck sales were actually down a little bit, based on year-over-year tender business.

Okay, great. Thank you. That was very helpful. I guess one last quick question. You mentioned the high horsepower transmission that are you looking to sell into the fracking market, despite the head winds that you've got there, obviously. I know that historically you've spoken about China potentially wanting to adopt transmissions of that type. Where do you see China right now, in their push, I guess, towards replicating what we did in North America with fracking?

Well, they've got some different challenges relative to technologically speaking, in terms of the composition of the shale, the accessibility of the fields, which both lend themselves to higher horsepower. It's harder to get rigs in some of these areas, and so you don't want to take 10 if you can take eight, to get the necessary power to the drilling site, so -- to the fracking site there. So that's one of the differences. Certainly, one of the interesting things we've seen with the higher horsepower variant we have introduced, is that even here in North America, where the official rating of the engine is lower than what might be required, or might be lower than what would drive you to the higher horsepower engine; we've seen a number of our customers switch over to the higher horsepower transmission, in order to provide a greater safety margin for their operating conditions. So I would expect that we may see some of that, as well. Although the primary focus, without question, and the launch focus, is China for the higher than what we have introduced to this point, horsepower transmissions.

Okay. Thanks a lot.

Thank you. We have no further questions at this time. Mr. Dewey, I would now like to turn the floor back over to you for closing comments.

Well, thanks, Christine. I appreciate everyone's time this morning. I know you are busy. We'll look forward to talking with you for the Q3 call. Enjoy your day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.