Allison Transmission Holdings Inc (ALSN) 2015 Q4 法說會逐字稿

Good morning. Thank you for standing by. Welcome to Allison Transmission's fourth-quarter 2015 results conference call. My name is Melissa, and I will be your conference operator today.

(Operator Instructions)

As a reminder, this call is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Dave Graziosi, the Company's President and Chief Financial Officer. Please go ahead, sir.

Thank you, Melissa. Good morning, and thank you for joining us for our fourth-quarter 2015 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman 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 February 16.

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 fourth-quarter 2015 results press release and our annual report on Form 10-K for the 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 in our fourth-quarter 2015 results press release.

(Operator Instructions)

Please turn to the slide 4 of the presentation for the call, Agenda. Now, I will turn the call over to Larry Dewey.

Thank you, Dave. Good morning, and thank you for joining us today.

On today's call I will provide you with an overview of our fourth-quarter performance including net sales by end market. Dave will review the fourth-quarter financial performance including adjusted EBITDA and adjusted free cash flow. I will wrap up the prepared comments with the 2016 guidance prior to Q&A.

We're pleased to report that Allison finished 2015 with another quarter of solid execution, despite increasingly challenging conditions in certain of our end markets. The fourth-quarter results were within the full-year guidance ranges we provided to the market on July 27 and affirmed on October 26, 2015, notwithstanding these headwinds.

The year-over-year reductions in the Global Off-Highway and service parts support equipment and other end markets net sales are consistent with the previously contemplated impact of lower energy and commodity prices. Furthermore, the year-over-year decrease in Defense end market net sales is commensurate with continued reductions in US Defense spending to longer-term averages experienced during periods without active conflicts.

During the fourth quarter Allison also generated solid operating margins and free cash flow while maintaining a prudent and well defined approach to capital structure and allocation. As the world's largest manufacturer of fully automatic transmissions for medium- and heavy-duty commercial vehicles, Allison remains well positioned to continue driving value for stockholders despite challenging headwinds in certain of our end market by continuing to deliver strong operating margins and free cash flow, and returning value directly to stockholders through dividends and share repurchases.

In 2015 Allison repurchased approximately $306 million in shares, or 10.3 million shares, 5.7% of its total issued and outstanding shares. Since its initial public offering in 2012 Allison has returned $960 million in capital directly to stockholders through share repurchases and dividends.

Please turn to slide 5 of the presentation for the Q4 2015 performance summary. Net sales decreased by 12% from the same period in 2014, principally driven by lower demand in the global Off-Highway and Defense end markets partially offset by price increases on certain products. Gross margin for the quarter was 46.5%, a decrease of 50 basis points from a gross margin of 47% for the same period in 2014, principally driven by decreased sales volume partially offset by price increases on certain products, favorable material costs and lower incentive compensation expense.

Adjusted net income increased $6 million from the same period in 2014, principally driven by decreased cash interest expense, price increases on certain products, favorable material costs, lower incentive compensation expense, reduced global commercial activities and product initiatives spending, a favorable vendor settlement, and 2014 foreign exchange losses on inter-Company financing partially offset by decreased sales volume.

Please turn to slide 6 of the presentation for the Q4 2015 sales performance summary. North America On-Highway end market and sales were down 2% from the same period in 2014, principally driven by lower demand for pupil transport shuttles series models. North America Hybrid Propulsion Systems for Transit Bus end market net sales were up 35% from the same period in 2014, principally driven by intra-year movement in the timing of orders.

North America Off-Highway end market net sales were down 69% from the same period in 2014, principally driven by lower demand from hydraulic fracturing applications. Defense end market net sales were down 34% from the same period in 2014, principally driven by 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 flat with the same period in 2014, principally driven by higher demand in Europe and Japan offset by lower demand in China and South America. Outside North America Off-Highway end market net sales were down 63% from the same period in 2014, principally driven by lower demand in the energy sector. Service, Parts, Support Equipment and Other end market net sales were down 16% from the same period in 2014, principally driven by lower demand for North America Off-Highway service parts partially offset by higher demand for global On-Highway service parts.

Before turning the call over to Dave I will also highlight the progress we have continued to make in our process to strengthen the overall composition of our Board and insure that we of the right mix of experience and capabilities for the challenges and opportunities before us. As Allison announce on January 25, we are pleased welcome Alvaro Garcia-Tunon as a member of our Board. Marsha Mishler has resigned for personal reasons, and Greg Ledford will retire when his current term expires at the upcoming 2016 annual meeting of stockholders. We thank Marsha and Greg for their service and commitment to Allison and wish them all the best.

The Board's Nominating and Corporate Governance Committee, with the assistance of a leading executive search firm, is continuing its work to finalize selection of a new Independent Director Candidate with industrial operational expertise and executive experience to succeed Mr. Ledford. Now I'll turn the call over to Dave.

Thank you, Larry.

Please turn to slide 7 of the presentation for the Q4 2015 financial performance summary. Given Larry's comments, I focus other income statement line items and adjusted EBITDA. Selling, general, administrative expenses decreased $7 million from the same period in 2014 principally driven by reduced global commercial activity spending and lower incentive compensation expense. Engineering, research and development expense decreased $7 million from the same period in 2014 after excluding the 2014 technology-related license expenses of $3 million to expand our position transmission technologies. The decrease was principally driven by reduced product initiative spending and lower incentive compensation expense.

During the fourth quarter of 2015 we recorded a trade name impairment charge of $80 million as a result of lower forecasted net sales for certain of our end markets. Interest expense net decreased $17 million from the same period in 2014 principally driven by $11 million of favorable mark-to-market adjustments for our interest rate derivatives and debt repayments and refinancing. Cash interest expense decreased $15 million from the same period in 2014 principally driven by debt repayments and refinancing.

Income tax expense for the fourth quarter 2015 was $7 million, resulting in an effective tax rate of 34% versus an effective tax rate of 35% for the same period in 2014. The decrease in effective tax rate is principally driven by lower pretax income.

Diluted earnings per share for the quarter was $0.37 excluding the after-tax impact of the trade name impairment charge, mark-to-market adjustments for our interest rate derivatives, increased diluted earnings per share for the quarter by $0.01. Adjusted EBITDA for the quarter was $170 million, or 35.6% of net sales, compared to $188 million, or 34.6% of net sales for the same period in 2014. The decrease in adjusted EBITDA was principally driven by decreased sales volume and unfavorable product warrantee adjustments, partially offset by price increases on certain products, favorable material cost, lower incentive compensation expense, and reduced global commercial activities and product initiatives spending.

Please turn to slide 8 of the presentation for the Q4 2015 cash flow performance summary. Net cash provided by operating activities increased $33 million from the same period in 2014 principally driven by lower excess tax benefit from stock-based compensation, reduce operating working capital, price increases on certain products, favorable material costs, lower global commercial activities and product initiatives spending, reduce technology-related license expenses, and a favorable vendor settlement, partially offset by decreased sales volume and unfavorable product warrantee adjustments. Adjusted free cash flow increased $17 million from the same period in 2014 principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures.

During the fourth quarter, Allison continued its prudent and well-defined approach to capital structure and allocation by refinancing all debt maturing in 2017 to 2019, settling $10 million of share repurchases, paying a dividend of $0.15 per share and repaying $6 million of debt. We ended the quarter with a net leverage of 3, $252 million of cash, $461 million of revolver availability and $194 million of authorized share repurchases capacity. Now I'll turn the call back over to Larry.

Please turn to slide 9 of the presentation for the 2016 guidance end markets net sales commentary.

Allison serves a wide variety of end markets in various geographies. We have consistently articulated our strategic priorities of global market leadership expansion, emerging markets penetration, product development, and core addressable markets' growth while delivering solid financial results to drive value for our stockholders. We remain focused on continuing to execute our strategy and responding to market conditions by aggressively managing what we can control.

Allison is taking a guarded approach to 2016, given the challenging macroeconomic environment, expectations for tempered demand in the North America On-Highway end market, and no meaningful relief from the challenges in the global Off-Highway end markets. As we have done during other periods of meaningful uncertainty, Allison will continue to pursue its strategic priorities while proactively implementing initiatives to aligning costs and programs across our business with actual end market conditions and growth initiatives.

Allison expects 2016 net sales to be in the range of down 6.5% to 9.5% compared to 2015. Although we're not providing specific first-quarter 2016 guidance, Allison does expect first-quarter net sales to be lower than the first and fourth quarters of 2015. The anticipated year-over-year decrease in first-quarter net sales is expected to occur principally due to lower demand in the North America On-Highway and global Off-Highway end markets.

With that, I would like to highlight the following end market assumptions for the full year 2016. North America On-Highway. We expect a net sales midpoint reduction of 7% principally driven by persistently high commercial vehicle retail inventory levels and lower Class 8 straight truck production.

North America Hybrid Propulsion Systems for Transit Bus. Allison expense a net sales midpoint reduction of 16% principally driven by engine emissions improvements and non-hybrid alternative technologies that generally require a fully automatic transmission. North America Off-Highway. We expect a net sales midpoint reduction of 80% to $11 million, principally driven by decreased demand from hydraulic fracturing applications.

Defense. Allison expects a net sales midpoint reduction of 1% principally driven by lower tracked demand, partially offset by higher wheeled demand. Outside North America On-Highway. We expect a net sales midpoint increase of 2% principally driven by increased fully automatic penetration, partially offset by continued challenging market demand conditions.

Outside North America Off-Highway. Allison expects a net sales midpoint reduction of 34% to $23 million, principally driven by continuing weakness in the energy and mining sectors. Service, Parts, Support Equipment and Other. We expect a net sales midpoint reduction of 6% principally driven by decreased demand for global Off-Highway service parts.

Please turn to slide 10 of the presentation for the 2016 guidance summary. In addition to our 2016 net sales guidance range of down 6.5% to 9.5% compared to 2015, we expect an adjusted EBITDA margin in the range of 32.5% to 34% and an adjusted free cash flow in the range of $400 million to $450 million, or $2.30 to $2.60 per diluted share. Allison expects capital expenditures in the range of $65 million to $75 million and cash income taxes in the range of $10 million to $15 million.

This concludes our prepared remarks. Melissa, please open the call for questions.

(Operator Instructions)

Jerry Revich, Goldman Sachs.

Hi, Good morning. Dave, I'm wondering if you could flesh out for us how much of a benefit you expect from pricing and material costs in 2016, and maybe bridge your margin guidance for us? I think normal volume leverage, you've spoken about in the past, is 50%-type incremental or decremental margins. And with pricing tailwind, I guess I'm wondering how you get to the 70% decremental margin targets for the year.

The price, we have certainly some price opportunities for 2016. I would say broadly if you think back to 2015, we are in excess of 2020, $5 million for the year. I would expect a lower rate this year as we do run rate some of the activity from 2015 into 2016.

Also worth noting, as you know, with our long-term supply agreements with certain customers, the commodity side as aluminum and steel have come down. There's a pass-through provision on that. So that will offset, frankly, some of the other pricing opportunities that we have built into 2016. As we think about 2016, I would think about pricing there up, in the $5 million to $10 million range for full-year.

The margins, as you referred to them, understand, and we've talked about this before, with our seven end markets as we've ranked them from higher to lower. Unfortunately if you look at the guide for this year and where we're seeing the year-over-year reductions, they are, in fact, in really our highest margin end markets. If you think about Parts, which is largely driven by the Off-Highway weakness in energy and commodities, if you think about North America On-Highway, those are really going to be the key drivers in terms of the margin decrementals. As we talk before, reflects our operations in terms of manning to capacity, understanding is, as we have talked through the last few years, we're running roughly one shift globally.

The fact we are taking down some volumes, there's a limited amount of, I would say, flexibility at this point at these rates to change that. We are managing that through overtime, ultimately reducing overtime. And then we'll see how the year rolls out from an attrition standpoint. We're constraining that.

I would also note beyond the contribution margins in terms of the sales changes there, we do have a number of, I would say, inflation-type issues that are hitting us on the benefits site. We continue to work on those programs related to healthcare, for instance, but that in fact is hitting us from a rates perspective. It's something we're paying a lot of attention to. But as you know, anything that we do in the near term there typically does not have a near-term benefit, but it's certainly something that's receiving a lot more attention from us.

I would also note with the 2015 results, one thing to remember is that incentive compensation is tied to the achievement of targets. Unfortunately we did not do that with 2015. The other side of that, as you know, is reduced incentive compensation expense.

Our 2016 guide has built in achieving target. Incentive compensation is up year over year in our guidance. So beyond that, we will continue to focus on costs, as you know.

In these types of environments, and we've seen this before, unfortunately we're going to have to pay a lot of attention to costs this year and cadence in terms of our activity levels, but as well supporting the opportunities. We're going to continue to drive forward in terms of product development, as well as new product. At the same time looking at opportunities to increase penetration. But the fact is, costs will be a key issue for us this year.

Jamie Cook, Credit Suisse.

This is actually Themis Davris on for Jamie Cook. Just a question on North America On-Highway. You guys are expecting sales down 7%. How do you think about medium-duty versus Class 8? Any differences between the two?

And how would you characterize production throughout the year from a cadence perspective?

Without revealing any specific OEM plans, certainly we have a pretty clear view of the next several months of OEMs' plan relative to their line rates. On the plus side it would appear line rates and down days -- it would appear that they are addressing what has been a growing inventory situation, both in medium-duty and relatively more pronounced in the Class 8 straight truck.

If we take a look across the various pieces, certainly Class 8 straight truck is forecast to be down fairly substantially year over year. We do expect that we will be increasing our penetration in that space, but certainly not enough to offset the relatively significant decreases. The same thing can be said with the Class 8 tractors. We continue to penetrate with our highway series as well as our TC10, but again that market is expected to be down considerably.

Medium-duty is more stable, without question, but still some signs of softness there. School bus market is expected to decline 3% year over year. Motorhome market, without any shifts between gas and premium diesel where we are very strong in the premium diesel, even at that the overall market is -- we're looking at as down 5%.

The other bus, transit, et cetera, we see that as fairly stable. It's really the big areas are in the Class 8.

Got it. This is very helpful. Thank you.

Robert Wertheimer, Barclays.

Just to follow on your answer, Larry, on the Class 8 side. I guess, inventories obviously got high. The fleet, at least in our estimate, in Class 8 straight, anyway, is old. So I'm wondering if you feel like the market is currently undergoing an inventory correction [within the] OEMs pushing out orders to sort of balance inventory, or whether there's really fundamental weakness there? Not terrible weakness, but weakness showing up in the order of the real run rate.

I think the -- our view has been whenever you are in a period of economic uncertainty, people hesitate to make significant capital investments. In our industry that is buying new vehicles. I think as people continue to react to the ongoing drumbeat of less than positive news, I think there is clearly some order-stream impact.

Having said that, I'll give the OEMs credit. They appear to be reacting to the growth in inventory. If you go back several years, we carried a significantly larger than typical level of inventory in the industry for the better part of two years -- and, it was being brought down.

We look at the inventory to retail sales ratio. We don't look at back-orders because we don't think that those are committed orders necessarily. They're indicative, but they're not committed orders.

We look at inventory to retail sales. That has gone the wrong direction. We have seen the OEMs with their forward plans, what appears to us, addressing it in a fairly aggressive, from a historical perspective, manner.

Obviously that impacts us because we sell when they build. That is the issue. That said, within the overall market, and the reason we think that we're going to pick up some shares.

We have some penetration programs. We continue to drive into construction with the programs we have. Paydirt, we call a a program that -- where we tap into the seasonal purchasing in that space.

The other thing, as the municipalities have started buying in greater quantities, we are well represented in that space. Within that down market, we do see some opportunities and are targeting some share gains.

Nicole DeBlase, Morgan Stanley.

My question is around the Service business. I was hoping you guys could parse out trends within the Service this quarter between Off-Highway and everything else. And then within your outlook for a 6% decline in 2016, if that is predominantly being driven by Off-Highway or if On-Highway Parts are also expected to decline?

On-Highway after-market sales are flat to down 2%, I think we've got in the plan. North America, we see that as pretty steady.

Outside North America had a pretty strong 2015. Very strong, particularly in Asia. It would appear that the channel has gotten themselves out in a pretty aggressive stocking position. We do take that back a little bit.

Europe looks pretty strong. We feel good about that.

It is really driven by Off-Highway. We are forecasting that to be down almost 30% from 2015, from where we were. So that is really driving it.

Okay. Thank you.

Ian Zaffino, Oppenheimer.

As far as uses of cash flow, I guess your cash was still very, very strong. You dealt with some of your maturities. Market is still sort of uncertain, but your stock price is lower. How do you put that altogether and synthesize that into what you're going to do with your cash flow?

We've talked before in terms of the debt side and the book. We did take the final step here in terms of maturities in fourth quarter and refinanced the remaining term loan B-2 into the B-3s.

If you look at the remaining debt structure, it's all B-3. It matures in August 2019. It is pretty payable. It is flexible.

It is low-cost. We are very comfortable with that structure. When you think about the cash flow usage, as we've talked before our focus on capital allocation is prudent capital structuring and getting returns back to shareholders in the form of dividends and share repurchases.

As we have looked at 2016, we had the quarterly dividend of $0.15 a share. And frankly the balance, as you know, we have $194 million remaining under the existing share repurchase authorization. That is Board-authorized through the end of this year. Our capital allocation policy has not changed. And ultimately our net leverage target in that 3 to 3.5 times range is still, in our minds, prudent.

This type of market certainly highlights differentiation when it really comes down to cash flow. To your point, as we look at our run rates and our yield this year, it's certainly something from a business perspective we are very focused on. But ultimately it's getting that capital back to shareholders. That will be, and continues to be, the focus for us.

This is Larry. I just want to add on there. As a team here from the Management side, Dave has said this to us from the day he walked in the door. Our job is to drive the numbers so that you've got the optionality with the results, and clearly driving the cash flow. Then it is to the Board in consult with our owners -- with the shareholders, to set a -- set what the capital allocation policy will be.

And that's a subject that we do take up with every Board session. Management provides the outlook as to what we are driving in terms of the results.

Then the Board, as they did when they set up the original share repurchase and dividend policy, that is something, like I say, we revisit. And take action on in terms of what makes sense based on the numbers and the resources and the results that we are able to put in front of them.

All right, great. Thank you very much.

David Leiker, Robert W Baird.

This is Joe Vruwink for David. Is there a way to think about the progression of EBITDA margin as we work through the year? So in other words, if the bulk of the NAFTA On-Highway inventory destocking does happen to take place in Q1, does that mean the lowest margins of the year should occur in Q1 and we might see sequential improvement as the year goes on?

Certainly we would expect, to Larry's comment, some progress on the inventory side of things. Having said that, as you know, typically the seasonality with our business as you think about Q4 run rates, typically it's the lowest sales of the year for us. So you need to take that into account.

Accordingly, we would expect that to be reflected in the EBITDA run rate for the quarter. If you look at the quarters one through three, I would say expectations certainly are a fair bit of similarity in terms of EBITDA margin there over those three quarters. So, that is way we are currently thinking about that.

Again, the cadence of when some of the volume comes in, as you also know, typically with some of the On-Highway business, and to a degree with the Defense business, there is a fair ability of -- or a potential for movement simply because of tenders being executed and ultimately delivered. But that's where we are at for the year in terms of view by quarter.

Michael Feniger, Bank of America Merrill Lynch.

On top of that question, you guys kind of provided some guidance on the first quarter. I was hoping you could flesh out a little bit on how we should think, I guess, the North America On-Highway and the Parts with the guidance, how is that supposed to go through the year? Are we assuming by back end of 2016 that these businesses are going to be flat to up?

I would say, if you take the individual pieces there, North America On-Highway, we would expect the first half to be bit higher than second half. There are a number reasons for that.

Seasonality with our business, typically you see the highest sales usually in the second quarter of the year anyway. So I think if you look at trend, that is the way we see first half/second half playing out.

On the Parts side, as Larry said before, the key driver there, when you look at it on a year-over-year basis from a change perspective is really Off-Highway-driven, so to speak. Our current expectations, if we think about the way the year is playing out for North America Off-Highway Parts, roughly flat as we've taken a pretty significant step down, as you know, over the last couple of years. The outside North America Off-Highway rates again, in terms of run, would be relatively flat.

So if you think about it on a year-over-year basis, just given the cadence of development of last year's North America Off-Highway Parts, you know that it was interesting. You had a strong first quarter and a strong third quarter, and then you had obviously weak Q2 and Q4. We would currently expect that to be a little more flat in terms of run rate this year.

We've obviously reflected that in the guidance in terms of run rates. But again, with the lack of new unit activity, certainly more focus around overhauls. Having said that, as you well know, end users in the energy space have dramatically reduced their numbers once again year over year in terms of spending commitments.

Just to clarify, to make sure we are clear. We obviously are taking particularly Off-Highway space down. By flat we mean flat throughout the year at a fairly quite reduced level as we've indicated. We don't see this yo-yo effect, just because of the -- as far as we look through 2016, we don't see a significant recovery in that space.

Ann Duignan, JPMorgan.

Could you give us a little bit of color on your rest of world On-Highway outlook? Europe versus Asia versus South America?

We had a fairly significant bounce-back in Europe last year. We do see Europe continuing with some strength. We are showing them up for the year about 6%.

That's both in truck -- driven primarily by truck, buses flat to down 1%. It is really based on some of the big tenders that we had in 2015 that's not repeating, although it is backfilled. We are starting to see a little bit of business in Russia, and exports to North America coming out of Europe. We see that pick it up a little bit.

Even in that increase that we're seeing in Europe in total, they have digested a pretty significant down-take in the military business that they have, the wheeled military. And that is really due to the tenders having being completed. There's some backfilling, but certainly not at the level that we saw in 2015.

Asia-Pacific, we are showing them down about 6%, 7%. You've got China, we are starting to see some increases in certain programs. But some of the bus, as they continue to go towards Chinese-built, what they call new energy vehicles or pure electric -- although we are starting to see some indications, as we have talked about where the duty cycle performance and the battery life are maybe not what they thought it would be. So we're positioning to come back into that business, primarily on that back of CNG where we have been previously.

Truck sales in that area is up in China. But Korea had a pretty solid year, and some of those tenders aren't going to repeat.

And then Latin America is about flat. We are showing up slightly where bus is down and truck is up. And the net/net is about flat there.

So that is how we're seeing it around the world, Ann.

Great. Could you just expand on the comments that you made about exports coming out of Europe to the US?

I'm sorry -- it is in the bus, it's in the coaches. You've got people like Van Hool, you've got people like EvoBus and then you have -- and this is for the coach market here. And then you even have [Tempsys] starting to come into that space where they are exporting vehicles here into the states. That is what we're referring to there, Ann.

Okay, great. Thank you.

Tim Thein, Citigroup.

Larry, maybe we can hit the Off-Highway Service Parts business just one more time. Obviously, it's a pretty tough backdrop now. And I understand that's probably not an easy market forecast.

But I'm just curious, one of the big distributors had recently noted that they were starting to see some pick-up in quoting activity for repair work and gave the impression that they thought, at least, there was the potential for some form of a pick-up later in the year, as just the underlying parts cannibalization runs its course. You're not [assuming] that, but maybe you can just contrast those two outlooks.

Sure, I would tell you that probably up until six, eight weeks ago we probably would've seen it the same way. Maybe we were too optimistic or whatever, but as things continue to struggle, let's just say that, in that industry, we're seeing a move where people are cannibalizing, parking, swapping out, whatever term you want to use. We don't think that's going to turn.

We would agree that the parts sales are going to lead rig build. We would agree with that. But as we look at it, we don't see meaningful recovery in 2016.

As we get through 2016, of course we will be looking for that. Whether it is in 2016 or 2017 is what we will be certainly focused on. Now, it's certainly not going break our hearts if it does start coming back a little sooner.

But as we sit here, we don't think from our planning standpoint it is prudent to count on that, because we don't see things that would indicate that. There are some programs that have been kicked around. But certainly nothing that has firmed up to the point where we would say it is appropriate to put in the forecast.

Tim, I would add, the other component to this as you think about inventory levels and run rates, distributors, I think, have probably been slower to adjust to these run rates. I think part of the issue now is they maybe seeing increased activity levels to a certain degree. But then you ask yourself, how is that going to fulfilled? Is that out of inventory or is that actually going to being placing orders for a components? I would say that globally, as we have thought about and continue to focus on the Off-Highway side, taking a much deeper look at these distributor positions on inventory as the market continues to be soft, have distributors been fast -- or quick enough to adjust to these lower run rates?

We've tried to account for that as best we know it in our 2016 guide.

Appreciate it. Thank you.

Ted Grace, Susquehanna Financial Group.

Dave, could you dive into some of the dynamics on SG&A and costs a little more granularly, and maybe quantify some of the dynamics? In terms of just maybe specific expectations on SG&A, R&D, the incentive comp dynamics, can you quantify what that headwind is and frame what the 2016 targeted comp is versus -- I know 2015 was zero. But 2013 and 2014, so we can get some arms around that tension dynamics.

What the healthcare inflation is exactly, and how we should think about salaries? I think people are trying to get a little more granularity on all the dynamics that are going to be puts and takes across both margins and incrementals/decrementals.

Sure, a few questions in there. Let me try to run through those. Incentive comp, if you look at our program for 2015 and contrast that to 2016, you're looking at a delta year over year in the range of about $7 million, give or take. That is certainly a headwind.

My comment on healthcare, and frankly pension as well as post-retirement healthcare, you're looking at probably another in the range of $7 million for that as well. You think about SG&A spending for the year, rolling everything up we are probably looking at flattish year over year.

The engineering spend, as we again rolled up the year, we've talked before about the fact we are coming to the end of certain programs in terms of development and cadence of spending there. But we would see engineering down probably in the range of, call it $5 million-ish year over year.

The cadence of spending, I would expect SG&A to be more or less flat first half/second half. Engineering, typically we're going to be running slightly higher first half versus second half. Again, some of that will be tied to program timing and execution as well.

So I would say broadly, we think about year, again as we said earlier, a tremendous amount of focus on costs this year. I'd view as earing into the year. In other words, we will see how performance goes.

We can always scale to a certain degree based on opportunities as well. But we remain prepared to deliver when we receive the orders at the same time, making sure that we are executing on strategic objectives that we do have, and broadly much more focus from our team this year in terms of growth opportunity execution.

We have process -- this is Larry. The process we go through when we set up the plan is we have what we call planning charters. It is a very explicit process where we evaluate the opportunities, the cost/benefits, and then against the revenue picture we have a ranking.

And then we strike the line as to which ones are above the line and below the line. We are very explicit about that. So that we've got focus, so that we bring to bear the resources on the highest value ones so that we continue to drive the business forward, but in a prudent context relative to the environment that we are operating in.

So when Dave talks about us earning our way in through the year, we continue. I mean, literally multi times a month, but certainly formally once a month we go through the update and we make explicit decisions relative to, okay, we are tracking these programs. Now as we earn our way in, we say, now we can bring something else up above the line and let's get after it.

That is a very explicit process that we've used here for several years. It's how we drive the results and how we work to drive the business forward.

Larry, that is helpful. Along those lines, if you think about the EBITDA guidance range, 32.5% to 34%, the biggest variables would get you from low end to the high end. Is that likely to be mix, is it volume? Just so people can get sensitized as to what are the likely dynamics that get you where in the range?

Because you guys very deservedly have a great reputation for delivering on the cost side consistently. So I think there's some question as to how much conservatism is expressed in this range. If you could help us understand what drives high to low, at least in own thinking, that would be helpful. And I will jump back in queue.

Certainly, I think revenue. When you've got the ship strung pretty tight, you get a little revenue in your sails and you [jump] in the water. That is -- certainly that would be a plus.

There's a number of initiatives we are working on. We've engaged with Treacy and Company relative to their methodology to help us drive growth. Until we have those plans baked, we don't like to talk about things until we have the by-what method.

There's a lot of effort going into that process, and I would expect as we go forward we will talking about those things. From a 2016 standpoint, we think there's limited impact there. Certainly from a cost standpoint as we look at quality improvements, and as those reduce our cost of warranty, there's another avenue.

Certainly there is a ton of work going on in the purchasing space. They've got some good things that they are working on. As that becomes soup, we'll bring that forward as well.

Those would be probably the biggest levers.

Okay. That's really helpful. Best of luck this quarter. Best of luck this year, guys.

Vishal Shah, Deutsche Bank.

This is [Rekha Hassan] for Vishal Shah. I was wondering if you could touch upon the market share points. What was the market share in North America exiting in 2015, and how should we think about this figure for this year? And do you see some opportunities to outpace the market?

We picked up, and obviously the numbers got to be finalized, we're fairly soon after year, as we get the final ACT and we segment that into the way that we define the addressable market. But certainly in the medium-duty we feel we picked up a few points there.

We picked up a few points in the Class 8 straight truck. We're picking up a little share in the tractor market in the short-haul piece. So those are the areas where we would see some share.

We got a little bit of headwind in the medium-duty with the Ford decision to use their transmission in some of their vehicles. Obviously we are working with other folks to try to make sure that those customers can get the Allisons that they'd preferred to buy in the past in other vehicles. We do see a little headwind there.

We think that in the 3000 series, there's still a little opportunity. Net/net/net we do show a little gain from a -- compared to the market in that medium-duty space. Same thing in the Class 8 straight truck where we do see some share opportunity there to grow.

We have a slight step back from what, frankly, is record share in the medium-duty space, but higher than where we were a couple years ago. We've picked up from the high 60%s into the mid to high 70%s, and we step back a point or two this first year as we absorb some of the Ford changeover.

And then we get back on the growth path with the plans that we have. Those would be some of the areas that -- how we would see that shaking out across the market.

That's very helpful. Thank you.

Neil Frohnapple, Longbow Research.

Good morning. Larry, can you elaborate on the signs of softness you're seeing in medium-duty? Does it feel more temporary, or do you think we are entering a cyclical decline for that market?

No, I don't think we're entering a cyclical decline. I think we just got out ahead of ourselves a little bit. And, you've seen in the inventory levels creep up. They frankly weren't as bad as the Class 8 straight truck market -- haven't been, but they have adjusted up a little bit.

If we take a look at the numbers, really going back to -- you would have to go back probably six months you would start seeing the trend where it would start -- the build started outpacing the sales. I think people were expecting a more robust economic.

If you think about the headlines six months ago, they were certainly different than what you're seeing today. I think ultimately it will sort out.

But certainly for the first part of the year we are taking a fairly cautious approach. And it appears that OEMs are doing the same.

Outside of the inventory issues, though, you would expect maybe modest growth for the medium-duty market over the next couple years within North America? Is that still your belief at this point?

Yes.

Okay. Thank you.

You're welcome.

Joe O'Dea, Vertical Research Partners.

You've talked about OEMs taking maybe a little bit of a sharper reaction here with build cuts than what you've seen historically. Also noted Allison's guarded approach to an outlook for 2016. So just trying to get a sense of whether or not your outlook is even more conservative than what you're hearing from OEMs on their build plans right now, or whether it is more or less in line with what you see there?

I would say it is in line with the near term. What hasn't -- the shoe that hasn't dropped is against the backdrop of what we think will be ultimately the market move here in 2016 if you just took -- downtime takes a chunk of inventory out of the system.

But then if you are still running at a line rate that is higher than what the market is, then you either need to take more downtime or you're going to build more inventory. You need to adjust your line rate. What we have done is looked at the market, looked at what was done to do the one-time inventory adjustment. And then try to triangulate into what we think their build rates would to be in the context of a balanced scenario against the market demand.

Now having said that, if the OEMs collectively choose to out-build the sales demand and build inventory, obviously that's going to mean sales for us in the out-months of the year that ultimately comes back in the form of a hangover, much smaller than what the 2006 pre-build hangover was, but certainly it took us some time to work us out of that situation. We're not suggesting anything like that, but that is the same phenomena.

We are presuming the OEMs are addressing the inventory, based on what we've seen. And then they will line up with the underlying market demand to maintain a target inventory levels. That is baked into our assumptions.

When do expect within 2016 that they get inventory to a more comfortable level and then you get production in line with retail?

With what they are doing in the near term, I think they are making a large step there. First half of the year, you would say. The issue is, what are their line rates -- well first off, what is the underlying sales demand rate, and that gets back to which direction is the economy going and how strong is it going to grow?

And then the second piece is, do they have their line rates in sync with that? And if they do, then I think we will be in pretty good shape by the second half to be in balance. But that really gets back to their individual and collective line rate decisions.

That's really helpful. Thank you.

Thank you, ladies and gentlemen. This concludes our question-and-answer session. Mr. Dewey, I'd like to turn the floor back to you for any final concluding remarks.

We appreciate the interest. Certainly as we've outlined, we've got some headwinds but we are continuing to manage those things that we can control.

I think we have demonstrated a track record of, even in some tough environments, being able to generate solid results, good cash flow, and then we utilize that for return of capital to shareholders. We would expect that to continue in 2016.

We'll look forward to talking to you on the Q1 2016 call. Thank you.

Thank you. Thank you, ladies and gentlemen.

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