Allison Transmission Holdings Inc (ALSN) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's Third Quarter 2017 Results Conference Call. My name is Melissa, and I'll be your conference call operator today. (Operator Instructions) As a reminder, this conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Mr. Fred Bohley, the company's Vice President of Finance and Treasurer. Please go ahead, sir.

Thank you, Melissa. Good morning, and thank you for joining us on our Third Quarter 2017 Results Conference Call. With me this morning is Larry Dewey, Allison Transmission's Chairman and Chief Executive Officer; and Dave Graziosi, Allison Transmission's President and Chief Financial Officer.

As a reminder, this conference call, webcast and 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 November 7.

As shown on Page 2 of the presentation, many of the 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 third quarter 2017 results press release and our annual report on Form 10-K for the year ended December 31, 2016, and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlining 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 the 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 appendix to the presentation and to our third quarter 2017 results press release.

Today's call is set to end at 8:45 a.m. Eastern Time. (Operator Instructions) Please turn to Slide 4 of the presentation for the call agenda.

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

Thank you, Fred. Good morning, and thank you for joining us today. On today's call, I'll provide you with an overview of our third quarter performance, including net sales by end market. Dave Graziosi will review the third quarter financial performance. I'll wrap up the prepared comments with the 2017 guidance update and our recent product technology announcements prior to Q&A.

We're pleased to report Allison's third quarter 2017 results exceeded the guidance ranges we provided to the market on July 31, principally driven by stronger-than-anticipated demand for North America Service Parts and North America Off-Highway products. Our trend of solid margins and net cash, provided by operating activities through the first half of the year, continued in the third quarter, approaching all-time highs.

Please turn to Slide 5 of the presentation for the Q3 2017 performance summary. Net sales increased 37% from the same period in 2016, principally driven by higher demand in the North America On-Highway; Service Parts, Support Equipment & Other; and Global Off-Highway end markets. Gross margin for the quarter was 50.8%, an increase of 380 basis points from the gross margin of 47% for the same period in 2016, principally driven by increased net sales and price increases on certain products, partially offset by unfavorable material costs and higher incentive compensation expense.

Please turn to Slide 6 of the presentation for the Q3 2017 sales performance summary. North America On-Highway end market net sales were up 26% from the same period in 2016, principally driven by higher demand for Rugged Duty Series and Highway Series models. North America Electric Hybrid-Propulsion Systems for Transit Bus end market net sales were up $11 million from the same period in 2016, principally driven by the timing of certain transit property orders. North America Off-Highway end market net sales were up $16 million from the same period in 2016, principally driven by higher demand from hydraulic fracturing applications. Defense end market net sales were up $10 million from the same period in 2016, principally driven by higher demand. Outside North America On-Highway end market net sales were up 14% from the same period in 2016, principally driven by higher demand in Asia and Europe. Outside North America Off-Highway end market net sales were up $12 million from the same period in 2016, principally driven by improved demand in the mining and energy sectors. Service Parts, Support Equipment & Other end market net sales were up 45% from the same period in 2016, principally driven by higher demand for North America Off-Highway service parts and Global On-Highway service parts and global support equipment.

Now I'll turn the call over to Dave.

Thank you, Larry. Please turn to Slide 7 of the presentation for the Q3 2017 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and adjusted EBITDA.

Selling, general and administrative expenses decreased $1 million from the same period in 2016, principally driven by favorable product warranty adjustments, partially offset by increased commercial activity spending and higher incentive compensation expense. Engineering, research and development expenses increased $5 million from the same period in 2016, principally driven by increased product initiatives spending.

Interest expense net increased $4 million from the same period in 2016, principally driven by refinancing transactions and revolving credit facility borrowings. Income tax expense for the third quarter of 2017 was $59 million, resulting in an effective tax rate of 35% versus an effective tax rate of 37% for the same period in 2016. The decrease in the effective tax rate was principally driven by increased U.S. income tax deductions and discrete activity related to the excess tax benefit from stock-based compensation.

Net income for the third quarter of 2017 was $111 million compared to $45 million for the same period in 2016. The increase was principally driven by increased gross profit, 2016 expense for previously recorded deferred financing costs as a result of the long-term debt refinancing and favorable product warranty adjustments, partially offset by increases in income tax expense, incentive compensation expense, interest expense and product initiatives and commercial activity spending.

Adjusted EBITDA for the third quarter of 2017 was $241 million or 40.5% of net sales compared to $151 million or 34.7% of net sales for the same period in 2016. The increase in adjusted EBITDA was principally driven by increased gross profit and favorable product warranty adjustments, partially offset by increases in incentive compensation expense and product initiatives and commercial activity spending.

Please turn to Slide 8 of the presentation for the Q3 2017 cash flow performance summary. Net cash provided by operating activities increased $87 million from the same period in 2016, principally driven by increases in gross profit, accounts payable and deferred revenue and decreased cash interest expense, partially offset by increased cash income taxes. Adjusted free cash flow increased $80 million from the same period in 2016 principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures.

During the third quarter, Allison continued executing its well-defined approach to capital structure and allocation by settling $239 million of share repurchases, paying a dividend of $0.15 per share, completing an offering of $400 million in senior notes due in 2027 and increasing our revolving credit facility commitments by $100 million to $550 million. The share repurchase settled during the third quarter bring our year-to-date settlements to $778 million or approximately 13% of our shares outstanding as of December 31, 2016. We ended the quarter with net leverage of 2.9, $210 million of cash, $533 million of revolving credit facility commitments, availability and $160 million of authorized share repurchases capacity.

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

Thanks, Dave. Please turn to Slide 9 of the presentation for the 2017 guidance update. Given third quarter 2017 results and current end markets' conditions, we are updating our full year 2017 guidance as follows: net sales up in the range of 21% to 22%; adjusted EBITDA margin in the range of 37.75% to 38.75%; adjusted free cash flow in the range of $510 million to $530 million; capital expenditures in the range of $90 million to $95 million, which includes maintenance spending of approximately $85 million; and cash income taxes in the range of $105 million to $115 million.

Allison's full year 2017 net sales guidance reflects stronger demand for North America Off-Highway service parts, Global On-Highway products and Global Off-Highway products and assumes price increases on certain products. Although we're not providing specific fourth quarter 2017 guidance, Allison does expect fourth quarter net sales to be up from the same period in 2016 and down sequentially.

Before we open the question-and-answer session, I'd like to spend a few minutes to review Allison's post Q2 earnings conference call product technology announcements, address further the topic of electrification and provide a few comments relative to autonomous vehicles.

Last week, we announced that MAN Latin America is using an Allison Transmission in its Volkswagen e-delivery truck, the first fully electric truck developed in Brazil. The e-delivery application is targeted for urban delivery with an Allison 2100 Series transmission and an electric motor. The e-delivery fully electric truck is the latest example of an electrification initiative featuring an Allison transmission.

Our work on the e-delivery in Latin America is predated by the development of a prototype fully electric bus, also in Brazil, in 2015, equipped with an Allison 4000 Series transmission. This fully electric bus began operating earlier this year on the streets in São Paulo.

In Europe, the Terberg fully electric terminal tractor, equipped with an Allison 3000 Series, continues to operate throughout Germany and has been since 2015. In addition to the Terberg tractor, we have been working with several European OEMs to integrate Allison transmissions into fully electric vehicle applications, including distribution, refuse, transit and pickup and delivery.

To date, Allison Transmissions have been successfully integrated into fully electric vehicle applications around the world, demonstrating our ability and commitment to meeting end user demands while investing for the future. Electrification technology will continue to evolve, and Allison is actively anticipating and participating in that evolution. Today, our second-generation electric hybrid propulsion system for transit buses features full electric capabilities.

For applications of our electric hybrid systems, Allison continues to be the lead electrification and system integrator controlling the entire powertrain, including the engine. We believe our experience in system integration is a key differentiator and explains why Allison have sold more electric hybrid systems for commercial vehicles than any other company.

System integration is also critical when applied to autonomous vehicle development, which some believe might be closer to widespread adoption than fully electric vehicles. The complexity of autonomous applications, combined with the reduced margin for error, enhances the need for seamless integration by an experienced integrator. With the advanced electronic controls, driven- and hardware-enabled advantages of our fully automatic transmissions and our expertise born of decades of powertrain and vehicular integration experience, we believe Allison is well-positioned in this space.

In summary, these product technology announcements and developments underscore our electrification experience and expertise, vocational knowledge and product planning discipline. I believe these factors uniquely position Allison to have the right products for the right customers at the right time. Accordingly, we will continue to invest in value propositions that address the global challenges of improved fuel economy and reduce greenhouse gases in the end markets and locations Allison serves while generating attractive returns for our shareholders.

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

(Operator Instructions) Our first question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

Larry, maybe if you can just talk a little bit more about the VW partnership, how it came to be, why Brazil. And most importantly, do you see opportunities for other e-truck collaborations with VW across MAN, Scania, and Navistar? And just to be clear, is this an off-the-shelf Allison product that is going into the VW e-delivery truck? And did it require significant additional R&D or modifications to work in that powertrain? If you just elaborate there a little bit too.

Sure. A lot of questions in there or a lot of aspects to the question, I guess. First off, it is an off-the-shelf piece of hardware. The controls, of course, are optimized for the specific application, as is the case in any of our applications. As we have talked to MAN and improved our relationship in Europe and around the world with them, this is one -- as a global company, they often have regional initiatives, and this was a regional initiative out of their Latin America group. It has, in fact, gotten some attention globally within MAN, and I would tell you that as of an email I got yesterday, it's also captured the attention of a rather large European-based OEM, who also has operations in Latin America. And so they've inquired as they're working on some programs as well.

Our next question comes from the line of Jamie Cook with Crédit Suisse.

Just to follow up on EV. Specifically, can we expect any announcements more focused on the U.S. markets, which tend to be your bread and butter markets? And then just given the -- just given how much this has weighed on your stock more recently, in terms of the concerns on EV and Allison's positioning, can you talk about, over the next couple of years, how we think about spend dedicated to EV and how you're thinking about share repurchase? And -- just because again your stock has unperformed until more recently based on EV concerns.

Well, there's a number of different views, as captured by analysts, relative to the EV situation, and I'll leave that to you all to sort that out. I would tell you that relative to announcements, our historical process has been we do not get out ahead of our OEM partners. So as we continue to work with them, until they're prepared to announce it publicly, we do not -- in fact, even the MAN/VW announcement, they reviewed the press release. So we tend to take a more understated, as I mentioned last time in the call, approach and announce when it is soup, I guess, is how I would say it rather than, hey, we got something that we're tinkering with here. So I would expect that you will see more of it. And certainly, we have a focus on a number of technologies. You'll note that in late September, we publicly announced our first 9-speed fully automatic transmission for the medium and heavy-duty vehicles, which is undergoing testing in demo vehicles and targeted for production release in 2020. And again, it's the fact that there have been some OEMs that have indicated an interest in that and we have vehicles out in the market. So that it is in the public space that we made that announcement, in fact, I rode in one the demo vehicles earlier this month. So we generally wait until something is imminent and coordinate with our OEMs. We -- you will hear in the fourth quarter call, as we talk about the plan for 2018, we'll be talking at that point in time about some of the R&D work that we'll be doing without the specifics. Clearly, our financial results give us the capability to make investments in the business of a variety of types, whether it be capital or product developments, and you'll see that as we talk about the plans going forward.

And sorry, just capital allocation. You've made very good progress on your share repurchase, in particular, EVs-weighed. I mean, do we continue to expect capital allocation priorities to be dividend and repo?

Jamie, this is Dave. The answer to that is we start with a prudent capital structure, as you know, with our targets, and we'll continue to execute with the share authorization that was authorized by the board about a year ago. So our intention is to continue our policy in that direction.

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

We'll keep going on EVs here. But I guess, Larry, the question on the e-delivery truck, there's obviously been some discussion around the notion that, commercially, EVs may only require a simple 2-speed transmission or none at all. So I'm curious what benefits you think your OE customer hopes to realize by, including a multispeed transmission within its delivery truck, albeit smaller motor side, et cetera, and then may be what sort of feedback you're hearing from other OE customers related to this.

I'll answer those in reverse order. First off, again, we generally don't share plans unless the OEM is prepared to announce. We are in discussions as an industry leader and have been involved in electrification, again, going back to 2003 with our first electric hybrids. We do spend a fair amount of time with OEMs to understand their thinking. It's very interesting to us because they tend to be, I'll say, far more realistic in their technical discussions with us than maybe what gets publicly printed. But at any rate, we work with a variety of OEMs. Again, we serve 250. And while I won't say that we're in electrification discussions with all 250, certainly, all the major players we have dialogue with. Interestingly enough, when we talk about the gearing for -- as it is used in an electric vehicle, our current products can be set up anywhere between 4 and 6 speeds. And interestingly enough, the most recent one, the MAN Volkswagen is set up as a 5-speed. And I think what -- and again, I don't pretend to speak for the OEM engineering departments. But our view on that is, as you think about an electrification system, if you will, you look at the entire system, and that includes the battery capabilities, charging technology. It includes the motors and any mechanical advantage that you may introduce via a gearbox. And when you look at the performance cost trade-offs in that space, someone like a MAN Volkswagen, one of the largest vehicle producers in the world, sees value in having a more than 2-speed gearbox. Again, if there was an issue of trying to minimize the number of speeds, they could've set it up as a 4-speed. They did not. It is set up as a 5-speed.

(Operator Instructions) Our next question comes from the line of Ann Duignan with JPMorgan.

Yes. Maybe a non-EV questions to begin with. Larry, can you talk about Q3 by segment and whether it's appropriate for us to think of Q3 revenues and margins as kind of the run rates going forward? Or is -- was there anything specific, like a one-off order, that we should take into consideration?

No, Ann. There were no one-off orders. I do think, and I'll just touch on it a little bit here, we're starting to see some transition in the Off-Highway. And by transition, we've always said that parts tend to lead new units. We've been very strong in the parts now in addition to that because we have introduced a number of new products. We have upgrade kits. So we've not only seen some repair. We've seen some upgrading to the newer technology that we have. And as people complete -- build out those fleets with the upgrades, we would expect that to taper. And we'll talk about that in the 2018 plan here in the next call as we finalize the view with our customers on what that would look like. But we have seen already an increase in the number of new units, and again, that would be the expectation you would see, a movement from parts to new units. And we have seen some of that. The key for '18 will be how does that look, what does that -- what do each of those pieces of our business look like and how do they blend together for '18. And we're obviously spending a lot of time in that space.

Okay, that's helpful color. And then on the Allison 2100 Series on the e-delivery truck, back to electric again, can you talk about whether your part of the drivetrain -- in the Cummins electric drivetrain that they're developing for the North America bus?

At this current time, based on the announcement they made, we're not part of that one.

Okay. So is it -- I think what other analysts were trying to get at is it seems like a 4 converter is an expensive way to go in an electric drive system. Is that fair for us to think about it that way?

Depends on how you look at the total system, and that's a piece where we're spending our time on. Because if you can increase the mechanical advantage, and clearly, the automatic gives you an opportunity to do that to, I think, a greater degree, and we still have the automatic versus the AMT argument that we could have, but certainly, we feel that that's an excellent way to go. And then that ties into, as I mentioned earlier, what is the current level of battery capability and charging technology status and motor capabilities and pricing, and so you say, "How do I maximize the performance of the electrical system and optimize the cost of the system?" And when you think about motor costs and battery packs, et cetera, and the cost of those even with -- at the current level where they've come down and you say, if I can save a battery pack or I can save a differential in the motor for a few thousand dollars on a transmission, it's relatively -- it's an option in the total system.

So it's all about R&D at this point and testing and seeing what the optimized drivetrain is going to look like, given -- for any given application. Is that the right way to think about it?

That's the way we think about it, and we've got a wide -- a fairly wide set of options that we continue to work so that we line up with the OEMs and the end users. And as the technology starts through, we intend to be positioned and are working towards that.

Our next question comes from the line of David Leiker with Robert W. Baird.

This is Joe Vruwink for David. One question on profitability. So gross margins have been above 50% each quarter this year. Is it possible to maybe give some guidance if all of your segments and end markets had grown at similar rates this year, so you didn't get booming aftermarket volume and a recovery in Off-Highway, maybe what a mix constant gross margin for this year might've been? Just trying to think about next year. And obviously, you've had really rich mix this year. What may be a normalized gross margin could be into 2018?

Joe, this is Dave. I appreciate that relatively easy question there. Obviously, a lot in there in terms of trying to unpack your question. As we've said, mix has an impact. Having said that, if you rate our margins from highest to lowest, what you've seen, certainly, this year and we've talked about this before, is the margins being very attractive in terms of aftermarket and, really, our top contribution margin end market. And then you sequence for the next level, which is North America On-Highway, the Global Off-Highway business wield, Defense as well. So you just think about, to your question, what's happened this year and you say what's the normal going forward, so to speak, recurring, as Larry said, we'll be guiding into the 2018 guidance with the Q4 results call in first quarter of next year. But as we said, to Larry's point, certainly, the Off-Highway continues to evolve in terms of North America, consistent with our prior comments around aftermarket leading that end market out and then ultimately getting to new rig builds. If you take external forecasts around On-Highway globally for '18 again, not Allison forecast but third parties, that would certainly set you up for some expectation around pretty high level of stability, at least initially. Beyond that, again, we'll get into more detail as Q -- with the call in Q1. The other thing, I would say is relative to margins, understand that we had some headwinds this year in terms of raw materials, and you've seen that in our MDA disclosures around steel and aluminum. We have picked up, certainly, some selling price. As we look forward again, we'll take all of that into account. A point to be thinking about, though, is one of Larry's comments in terms of spending expectations, we certainly have a number of initiatives underway. We will be certainly looking to meet end user demands relative to technology in a pretty wide footprint there in terms of outcomes. But again, it gets back to an appropriate return for our shareholders, and that will all be in the mix for next year, so yes. And we look forward to the Q4 call and be providing that 2018 guidance at that point.

Okay. And if I can follow up on an EV question. I think one thing that maybe is being missed in this equation from a performance standpoint, a standalone electric motor does not have great torque performance at higher and higher speeds, which would seem to be kind of mission-critical for a commercial vehicle application. And so I'm just wondering, it seems the view out there is that you can do commercial-duty cycles without transmission. That just doesn't seem to be technically correct. Am I missing something?

I would tell you that, certainly, there's a lot of people working in a lot of different directions. Having said that, there's -- we would look and ask some of the same questions you're asking. And certainly, I think the fact that folks are using a gearbox in some of their applications for a variety of reasons, but also to address the very one you've described.

Our next question comes from the line of Seth Weber with RBC Capital Markets.

I think, first, just a clarification, if you could. Just could you tell us, David, how much the warranty adjustment was favorable in the quarter? Just -- I didn't see that in the release, sorry. And then my follow-up question is -- I think the implied free cash flow number for the fourth quarter is down year-over-year. Is there anything that you would call out that's pressuring free cash flow here in the fourth quarter from a working capital perspective or anything that we should be thinking about?

You're welcome. Certainly, working capital, I guess there's good news, bad news. Good news is strong sales are going to drive some of our working capital, as we've talked about it, our operating working capital, as a percent of sales on an LTM basis, should be in that, call it, 10% to 12% range depending on mix. So you'll see an aspect of that. To your point in terms of free cash flow, you'll note with the CapEx guide, it's very heavy in Q4. It's something we're going to work on going forward as a business in terms of trying to level more of that out, but there's a fairly high level of activity of CapEx in the fourth quarter as well. So that will certainly have an impact. Part of the -- the other part of the good news in terms of results is the bad news around paying cash income taxes. So that's baked in there as well, which we didn't have last year, so a number of uses of cash in Q4 year-over-year. To your warranty question in terms of the flow-through on SG&A, there's about $3 million of favorable product warranty adjustments and another $3 million of favorable dual power inverter module adjustments. So then you know with our adjusted EBITDA reconciliation to GAAP results, the DPIM adjustment is an add-back.

Right. Okay, I saw that disclosure in the slide deck. But so the $3 million and -- so that -- is that done at this point? I mean, I guess how should we think about that second one going forward?

It continues to evolve, so to speak, with experience, with the system itself. I would say we're on a -- we'll expect to be on the tail end, if you just look at the age of the systems and our experience in the block change that we've made several years ago. So that's not to say there won't be adjustments. But I would say, certainly, the amount of adjustments in terms of nominal value should be lower over time.

Our next question comes from the line of Ian Zaffino with Oppenheimer & Co.

I just kind of want to get an understanding maybe about, again, the flow-through services into actual sales of parts. Services is up, I think, $43 million. But if you add up the, I guess, changes in the Off-Highway businesses, both domestic and international, you don't really get to that number yet. Is it typically a 1:1 if you do a, let's just say, $1 of increased services, parts this quarter, maybe in 2 quarters from now, you'll see that $1. Is it less? Is it more? Maybe just give us some type of direction there.

Yes, Dave. When you talk about parts and flow-through, a couple things, right. Aftermarket on the, what we call, service parts, right, that's just the parts. We don't obviously do the service. So the flow-through there is when we sell the actual components for whatever repairs are being made. That's reflected in the end market that you see there. The other thing that's included in that end market is support equipment, which are components that are used in new transmission installations. So the flow-through there, clearly, is connectivity between unit sales, new unit sales and support equipment. The bigger variable, at least this year, on a year-over-year basis in terms of aftermarket has really been driven by the Off-Highway, the North America Off-Highway space, as Larry mentioned.

Our next question comes from the line of Larry De Maria with William Blair & Company.

Obviously, price has been a big driver. Can you discuss maybe how much further you think you can drive it and what the impact of FuelSense 2.0 might be into next year, the best you can? And then related to that, when you think about your EV solutions and you think about margins and price, do we think about that as neutral, negative or positive to your overall pricing outlooks?

I'll take the last part, the first here in terms of the EV. One of the -- I saw something recently that speculated on the margin on the product that we used with the MAN VW. And as we've, I think, indicated over the years, we've talked about the tiering of the various levels of products, and the analysis that I saw was light, I guess I would say, on the gross margin estimate. In fact, that's -- those products that are going in there are sold on, what I'll call, normal routine kind of scope of business depending on the terms that we have. Relative to pricing going forward, as you know, we have long-term supply agreements with many of our customers, not all. But a significant portion of our revenues are covered by those, and they have defined terms and conditions, opportunities for OEMs to reduce the amount of the price increase, based upon certain commitments they make to us. But there are -- if you were to look across the horizon of those agreements, there is pricing, net-plus-up pricing built into those. It's just a question of where that ends up on the plus scale, based upon the execution of the terms of the agreement.

Okay. And then with regards to FuelSense 2.0, can you discuss how much traction you think you're going to gain there, what kind of impact that could be whether it's meaningful or not?

Well, I would say that for '18, we would not consider it meaningful in a large scope compared to our longer-term vision for that product. We do have a number of folks who are starting to transition to the FuelSense 2.0. There are 3 different packages, as you know, basic, plus and max, with varying pricing, and that is just entering into the market. And end-users are beginning to see the value of that as fleets are testing it, and so I would expect that to pick up momentum. But to be meaningful, I would say you're looking beyond the 2018 kind of time frame, for sure. We did announce that, that is -- the FuelSense is being combined with that 9-speed that we spoke of. And then we also have -- we announced the xFE models, which, previously, we had predominantly focused on our 3000 Series. In October, we announced the availability of the 1000 and 2000 Series xFE for medium-duty buses and trucks, and those transmissions do incorporate -- in addition to a redesigned torque converter damper, we also have the FuelSense 2.0 Max, our proprietary software. And as you know, that provides the infinitely variable combination of shift points using a learning algorithm to find the ideal balance of fuel economy and performance. So again, we'll be expanding that FuelSense 2.0 off of some of the other -- the changes we're introducing in the products.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

Larry, you've mentioned in your opening remarks that you thought autonomous might be closer to moving towards market penetration than electric. I'm wondering if you just flesh out for us how you see the Allison product shaping up versus the AMT product in autonomous application, I guess, and over-the-road application where autonomous is discussed in those. AMT has been the prevalent product historically. And I'm just wondering, based on what you alluded to, how do you see that involving, what's opportunity set from your standpoint?.

I guess the first thing I would say is just a minor point, but there are a number of folks who think it may be closer, depends on which point of autonomous vehicles. The -- I think I've seen charts talked about 6 stages. And the fact is that some of the more modest stages, you're already seeing some of that, some of the lane technology, et cetera. The way we think about autonomous is it's about control. And so you have the vehicular control, that the requirements will be significantly greater. And so with that, what is the product in a -- and again, you got to look at what role electrification will or won't play. But what products offer you the greatest control? And so there's 2 things we think about. Number one, the fact that we have continuous power technology, and so we have a very highly refined level of control of our product. Our control space has always been very sophisticated, going back decades. There are things that we can do with our transmission and things we have had to manage in the overall powertrain. And so we have knowledge and capabilities that we think we can bring to bear in support of the OEMs as they focus on automation. So those are the 2 things, both product attributes, which include the controls, and then integration capabilities that we have resident in our organization.

Okay. And then wondering if you could talk about in Off-Highway, you have a rough sense of what incoming order share you folks are receiving in North America as we start some level of replacement cycle. How do expect your market share to stack up in this coming cycle compared to past, based on the inquiries that you're seeing so far?

I think it's probably consistent with recent years. Obviously, there's been some broader shifts in the market over the -- from, say, a decade ago. But I think it's consistent. Certainly, we have worked with some folks that have been in and out of the Allison products with some of our new products. Clearly, it'll really get down to who's buying the equipment and then what our positioning is relative to those folks.

Our next question comes from the line of Joe O'Dea with Vertical Research Partners.

Just thinking about the considerable step-up in EBITDA margin that you're expecting from earlier in the year, clearly, a component of high revenue along with that. But just trying to think about moving forward and moving pieces and where we should be calibrated, because it seems like there are actually some headwinds this year on incentive comp, maybe labor agreement and just trying to think about mix and other factors that we might be missing when we try to think about what's a decent starting point for EBITDA margin.

Joe, it's Dave. The -- a number of things in there. We -- again, as we think about it and I think, as you know, on following us, you mentioned a couple of things there. So relative to labor, you know the demographics of our workforce, both salaried and hourly. We're in the process of negotiating a new contract with the UAW as well. So there's a number of moving pieces when you think about the nonlabor costs in our operations. We continue to drive efficiency and throughput with the operations team. At the same time. Working more closely with our suppliers. So it's a multi-faceted process here when it starts from the selling price and selling our -- or pricing our products to the value that they deliver, as Larry mentioned, and the continued investment in the products, to ultimately managing our cost structure diligently. And I think the prudence of that has proved out over the years. Having said that, going forward, as I mentioned, certainly, there's a number of initiatives that we are currently pursuing. Look, we see some real opportunity there from a commercial perspective. And we'll be able to provide, any more insight on that for you as we do the Q4 call in the first quarter relative to 2018 guidance as you start to then understand a bit more about some of our spending plans. But relative (inaudible), it wasn't that long ago. We're always asked, "How could you go higher?" And I think the business, the team has worked very hard to drive our results. Having said that, we've invested, we believe, prudently over the years, and we'll continue to take that approach. Having said that, we expect that the customers, end users are going to drive the demand. And so for us, it really comes down to what's commercially viable and generates an appropriate return for all of our stakeholders. And that's there the key point in terms of the plans that we'll put forth and the discussions we'll have in the first quarter of next year.

Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back to Mr. Dewey for any final remarks.

Again, we appreciate the interest. We look forward to finishing strong here in 2017 and getting out of the blocks hard and fast for '18, and we'll be talking about that in the fourth quarter call after the first of the year.

Thanks, again, for your participation.

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