Allison Transmission - Q1 2018
May 1, 2018
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's first quarter 2018 results conference call. My name is Melissa, and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Allison Transmission will conduct a question-and-answer session, and conference call participants will be given instructions at that time. As a reminder, this conference call is being recorded. If at any time you should need operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Fred Bohley, the company's Vice President of Finance and Treasurer. Please go ahead, sir.
Fred Bohley (SVP, CFO and Treasurer)
Thank you, Melissa. Good morning, and thank you for joining us on our first quarter 2018 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 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 May 8. As noted on page two 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 first quarter 2018 results press release and our annual report on Form 10-K for the year ended December 31, 2017, and other 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 first quarter 2018 results press release.
Today's call is set to end at 8:45 A.M. Eastern Time. In order to maximize participation opportunities on the call, we'll take one question from each analyst. Please turn to slide four of the presentation for the call agenda. Now I'll turn the call over to Larry Dewey.
Thanks, Fred. Good morning, and thank you for joining us. During today's call, I will provide you with an overview of our first quarter results, including net sales by end market. Dave Graziosi will then review the first quarter financial performance and the 2018 guidance update. I'll wrap up the prepared comments prior to commencing the Q&A. We are pleased to report that Allison's first quarter 2018 results exceeded the full-year guidance ranges we provided to the market on February 14. Allison's first quarter net sales increased 33% from the same period in 2017, and net sales growth once again occurred across all our end markets. Furthermore, our established track record of solid financial performance and a well-defined approach to capital structure and allocation continued into 2018.
Please turn to slide 5 of the presentation for the Q1 2018 performance summary. As I just stated, net sales increased 33% from the same period in 2017, principally driven by higher demand in the global on-highway, service parts, support equipment, and other, and global off-highway end markets. Gross margin for the quarter was 51.6%, an increase of 130 basis points from a gross margin of 50.3% for the same period in 2017, principally driven by favorable net sales and price increases on certain products, partially offset by expenses related to a retirement incentive program for certain UAW Local 933 employees and unfavorable material costs. Please turn to slide 6 of the presentation for the Q1 2018 sales performance summary.
North America on-highway end-market net sales were up 24% from the same period in 2017, principally driven by higher demand for Rugged Duty Series models. North America electric hybrid propulsion systems for transit bus end-market net sales were up $4 million from the same period in 2017, principally driven by the timing of certain transit property orders. North America off-highway end-market net sales were up $32 million from the same period in 2017, principally driven by higher demand from hydraulic fracturing applications. Defense end-market net sales were up $10 million from the same period in 2017, principally driven by higher tracked and wheeled demand. Outside North America on-highway end-market net sales were up 26% from the same period in 2017, principally driven by higher demand in Europe, Asia, and South America.
Outside North America off-highway end-market net sales were up $6 million from the same period in 2017, principally driven by improved demand in the mining and construction sectors. Service parts, support equipment, and other end-market net sales were up 28% from the same period in 2017, principally driven by higher demand for North America off-highway service parts and global support equipment. Now, I'll turn the call over to Dave.
David Graziosi (President and CFO)
... Thank you, Larry. Please turn to Slide 7 of the presentation for the Q1 2018 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and adjusted EBITDA. Selling general and administrative expenses increased $13 million from the same period in 2017, principally driven by unfavorable product warranty adjustments and higher warranty expense commensurate with increased net sales, partially offset by lower incentive compensation expense. Engineering, research, and development expenses increased $5 million from the same period in 2017, principally driven by increased product initiatives spending. Interest expense net increased $5 million from the same period in 2017, principally driven by the interest expense associated with our 4.75% Senior Notes due October 2027.
Other expense net increased $4 million from the same period in 2017, principally driven by unfavorable changes in foreign exchange on intercompany financing, partially offset by net periodic benefit credits related to post-retirement benefit plan amendments. Income tax expense for the first quarter of 2018 was $40 million, resulting in an effective tax rate of 21% versus $44 million of income tax expense and an effective tax rate of 35% for the same period in 2017. The decrease in effective tax rate was principally driven by the US Tax Cuts and Jobs Act, enacted into law in December 2017. Net income for the first quarter of 2018 was $151 million, compared to $83 million for the same period in 2017.
The increase was principally driven by increased gross profit and decreased income tax expense, partially offset by increased selling, general, and administrative expenses, increased product initiative spending, and increased interest expense. Adjusted EBITDA for the first quarter of 2018 was $275 million, or 41.5% of net sales, compared to $292 million, or 38.5% of net sales for the same period in 2017. The increase in adjusted EBITDA was principally driven by increased net sales and price increases on certain propulsion products, partially offset by increased selling, general, and administrative expenses, increased manufacturing expense commensurate with increased net sales, increased product initiative spending, and unfavorable material cost. Please turn to Slide 8 of the presentation for the Q1 2018 cash flow performance summary.
Net cash provided by operating activities increased $42 million from the same period in 2017, principally driven by increased gross profit, higher accounts payable, decreased cash interest expense, and decreased cash income taxes, partially offset by higher accounts receivable, increased incentive compensation payments, and increased product initiative spending. Adjusted free cash flow increased $40 million from the same period in 2017 due to increased net cash provided by operating activities, partially offset by increased capital expenditures. Allison continued executing its well-defined approach to capital structure and allocation by paying a dividend of $0.15 per share, settling $125 million of share repurchases, and repricing our term loan due September 2022, reducing the LIBOR margin from L + 200 to L + 175.
Finally, we ended the quarter with net leverage of 2.5, $195 million of cash, $533 million of available revolving credit facility commitments, and $428 million of authorized share repurchase capacity. Please turn to Slide 8 of the presentation for the 2018 guidance update. Given the first quarter 2018 results and current end market conditions, we are updating our full year 2018 guidance as follows: Net sales up in the range of 10-14%, adjusted EBITDA in the range of $975 million-$1,025 million, capital expenditures in the range of $85 million-$95 million, adjusted free cash flow in the range of $625 million-$675 million, and cash income taxes in the range of $80 million-$90 million.
We are introducing full year 2018 guidance for net income in the range of $515 million-$550 million, and net cash provided by operating activities in the range of $720 million-$760 million. Allison's full year 2018 net sales guidance reflects stronger demand for global on-highway and global off-highway products and assumes price increases on certain products. Although we are not providing specific second quarter 2018 guidance, Allison does expect second quarter net sales to be up from the same period in 2017, principally driven by increased demand for global on-highway and global off-highway products. Now I'll turn the call back over to Larry.
Larry Dewey (Chairman and CEO)
Thanks, Dave. Before we open the question and answer session, I'd like to take a few moments to comment on the forthcoming leadership transition here at Allison. As we have previously announced, I will be retiring on May 31st, and Dave Graziosi will succeed me as CEO. Accordingly, this is my last quarterly results conference call, and I would like to thank you for your interest in Allison and the courtesies extended to our team. It's been a privilege to work with the talented men and women here at Allison Transmission for the past 29 years, and an honor to lead them since July of 2000, nearly 18 years. Since our divestiture from General Motors in 2007, and our IPO in 2012, we've continuously made strides in pursuing Allison's vision, delivering our brand promise, and living our values.
Today, Allison is in its second century as a well-balanced commercial, defense, and engineering-based propulsion solutions provider. The power of Allison is derived from our proven ability to utilize our most valuable assets, our people. Allison people create our technologies, manufacture our high-quality products, and drive our unrelenting focus on creating value for our customers. I believe Dave Graziosi and the entire Allison team is well positioned and prepared to continue to deliver the kind of performance that our customers, investors, and all stakeholders have come to expect. This concludes our prepared remarks. Melissa, please open the call for questions.
Operator (participant)
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, to allow for as many questions as possible, we ask that you keep to one question each. Our first question comes from the line of Tim Thein with Citigroup. Please proceed with your question.
Timothy Thein (Analyst)
Thanks, and, the best of luck to you, Larry. It's been quite a run for you. It maybe, Dave, just to, if you can, put a little bit more color around the change to the full year revenue outlook, giving just highlights in terms of what drove the -- or what's accounting for the, you know, larger parts of the change in the outlook. And then as part of that, does your assumption on pricing, has that changed just given the increase to the overall volume outlook? Thank you.
David Graziosi (President and CFO)
Sure. Sure. Good morning. Couple things. So in terms of sales outlook changes, obviously with the strong first quarter results across all of our end markets, if you start to focus on the larger drivers there in terms of North America on-highway, clearly the market has a larger, brighter outlook, frankly, than we expected this year. That's borne out by third-party forecasts, as you're well aware. If you look at our North America on-highway business, the key focus there in terms of 6-7 truck as well as Class 8 straight continue to perform above our expectations. So, that's certainly been reflected in our guide.
I think it's worth noting, in terms of feedback that I'm sure you have from other public reporting and comments, that the market at this point appears to be more constrained by supply issues than demand. And I think we're, you know, continuing to expect that for the balance of this year. If you look at the other end markets in terms of off-highway, North America frack, certainly has been a stronger market than we expected. We see that continuing, and as we've talked about, the transition from the increase in parts to units over the year is playing itself out as we expected, except at a higher level.
Again, I'm sure you're well aware of some of the constraints in that broader market in terms of, increasing capacity and the challenges going forward. So and our team has, I believe, done a, good job managing that, and we'll continue to work on that for the balance of the year. Outside North America, in terms of on-highway, continuing to see, I would say, stable to solid demand in Europe. A number of initiatives there that the team has been driving, but overall, pretty stable conditions in Europe. Asia, Japan continues to have a strong year. Much of that is export-driven, but they've done a nice job in terms of medium truck there as well.
China, we have a slew of initiatives, I would say, this year, that the team is chasing, mostly focused on truck, and some of the work that we continue to do with the larger OEMs in that market. But overall, I think it's shaping up to be a, you know, a pretty strong year. That being said, you know, as we always talk about, a lot more visibility near term versus the second half, but what we've laid in so far, we feel good about. Off-highway outside of North America, really focused in terms of strength around construction and mining. That cycle, as you know, continues to turn, and we're following that.
And again, I think the comments from others around what's really constraining that market from further growth or higher levels of growth at this point is really on the supply chain more than anything else. So we're staying close to that as well. Finishing up the parts and support equipment, obviously, as we talked before, support equipment will follow unit volumes, so you do see some lift there. The off-highway North America, as I mentioned earlier, we see that, you know, in terms of run rating coming off a bit in the second half, again, as the amount of units that we're requiring upgrades in terms of the kits starts to decrease and be fulfilled, and then we're moving to more new unit supply.
Again, we'll be following that very closely as the market evolves. From a pricing standpoint, I think we originally guided towards roughly 25 basis points for this year. We had a very strong first quarter. I would not necessarily extrapolate that and build off of that. I would say that, you know, if you set expectations in terms of our guide, we're closer to 50 basis points for the full year, as we see that playing out, and again, some of the opportunities that I mentioned earlier will certainly have an impact, potentially there. But we feel good about the overall positioning on pricing for this year.
Timothy Thein (Analyst)
Got it. Thank you, Dave.
Operator (participant)
Thank you. Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.
Joe Lorbert (Investment Analyst)
Hi, this is Joe Irving for David.
David Graziosi (President and CFO)
Hi, Joe.
Morning.
Joe Lorbert (Investment Analyst)
I wanted to focus on the on-highway business. So Dave, you kind of addressed why the international business grew, by our math, probably double the rate of growth underlying volumes on Q1. But the same comment applies to the North America on-highway business as well, that 24% growth is about 2x what the underlying markets did in the quarter. So I'm wondering, the obvious answer would be either market share, some level of price, which you cited, but, I'd be interested in a little more color of how you're managing to outgrow, the markets in North America.
David Graziosi (President and CFO)
Well, I think to your, you know, point in terms of, yes, we did pick up some pricing in the, in the first quarter. I would also say, as, as you know, from prior, calls, you know, one quarter is, is tough to extrapolate from a market share perspective. You know, you really need a run rate on that. You know, so I would not run, too fast on that particular point. But I think to your comment, certainly Class 8 Straight is benefiting from a very strong vocational market this year, and, and whether that's, construction or even some of the municipal side, fleets continue to spend, and we're certainly seeing the benefits of that. But I think it's, it's early to, declare a broad-based victory around significant, market share, gains.
I would say, as we've mentioned before, there's a number of very focused initiatives we have for that market around growing our market share. And we continue to be very targeted, if you will, in that process. But I think that the team has certainly executed well in terms of supplying what is a pretty tight market and being responsive to very high levels of demand. We're gonna continue to support our OEMs and end users. But beyond that, I think it's, you know, the broader, broadly speaking, the markets have turned out to be certainly larger in terms of improvement this year than third parties had forecast. And, you know, again, we'll stay close to that as we look into the second half.
Joe Lorbert (Investment Analyst)
Okay, great. Larry, best of luck.
David Graziosi (President and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer and Company. Please proceed with your question.
Ian Zaffino (Managing Director and Senior Analyst)
Hi, great. Thank you very much. Just kind of wanted to drill down on guidance a little bit, and I know you mentioned that the outside North America off-highway is going to be a driver. Is there a reason why you didn't include North American off-highway in there as well? Or do you expect that to kind of flatten where, you know, outside the U.S. will continue to ramp and maybe some of the drivers there? Thanks.
David Graziosi (President and CFO)
Sure. Yeah, in terms of North America off-highway, again, with the focus here, as you know, the majority of our business is in hydraulic frack. As we've talked about the fleet and from external comments here very recently, horsepower continues to be added. Having said that, as we see the market playing out here, and I think we've pointed to this before, you know, there's only so much capacity that can be added. And I think the idea of trying to supply it in a timely basis with rational costs is important, and we're supporting our customers, I think, as best we can in a relatively constrained market.
That being said, as we start to think about the second half in terms of overall visibility, it's safe to say that the—what we've seen in parts at elevated levels, frankly, record numbers last year, as we've talked about before, will start to come off in terms of run rates. So then it's how quick do you move from parts to units? Again, a lot of the same component suppliers overall, but the idea is that, you know, the upgrades will come to some level of completion, and then you focus on new units. So we've reflected that, you know, again, in the guide for the second half. So from an expectation standpoint, relatively level, and also understanding, you know, we're running into tougher comps on a second half year-over-year basis as well.
Outside North America, off-highway, to your point, that market has not, you know, seen a pickup certainly as quickly as North America did on the energy side. That being said, you know, the momentum there is pretty strong. We've also supporting some new releases with several customers in that space. I think the acceptance of those products has been strong, and you know, we're certainly happy to be able to support the OEMs and their efforts. So we're seeing some benefit of that as well. But we think it's from a, you know, cycle perspective, not quite that early, but it's moving towards more of a midpoint there in terms of run rating.
And again, it will come down to some level of expectation around how much inventory is gonna be carried in the channel going forward. As you know, when the market turned down back in the second half of 2012, there was a fairly large hangover for a number of years. And, you know, we're staying close to the channel and understanding what that means going forward, to manage our inventories and frankly throughout Allison's channel.
Ian Zaffino (Managing Director and Senior Analyst)
All right. Thank you very much. Good quarter.
Operator (participant)
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook (Managing Director and Equity Research)
Hi, good morning, and congratulations, Larry, on a great run. I guess a couple questions. One, just as we're talking about a transition, Dave, and you, you know, take over, you know, how do we think about any subtle changes to your strategy or approach going forward? You know, if any sort of balancing margins, you know, versus growth opportunities outside of your core markets, I guess, would be my first question. And then, just on sort of the EV front, you guys had made some announcements earlier in the year. Can you just talk to whether or not we should be expecting additional announcements coming out of Allison, or how you're thinking if there's any change in your view on how quickly EV develops? Thanks.
David Graziosi (President and CFO)
Sure. The terms of priorities, I mean, our strategic priorities are not gonna change. This business is well positioned, as Larry said, as you know, from our perspective, continuing to drive the vision, the brand promise, and frankly, our values, we're not gonna change the way we do business. I think it's fair to say that the market is changing constantly. This business has to evolve with the market. The pace of change is accelerating. I think our team is well equipped and very talented to handle that. You know, I'm certainly privileged, as Larry's been, to be with this business for many years. I'm as well privileged to going forward, to lead it as well.
I would tell you that, for us, I think the opportunities are out there. I would also tell you the amount of initiatives that we're pursuing at this point versus, you know, 10 plus years ago, when I joined the business, is dramatically different. So, from my scorekeeping perspective, it's really around executing to those strategic priorities, bringing to completion, frankly, those initiatives, but also adding others in terms of what the voice of the customer and the market is demanding. I think to your point on the EV side, it continues to be, you know, a market that's evolving like the rest of our business. And, you know, we've pursued that and continue to pursue that.
We've done that for decades, so we feel good again about the positioning there and the number of initiatives we're pursuing. I think there's been some, you know, recent developments, as you mentioned, as well as some that are continuing to be worked from a planning perspective. But I would say overall, you know, our going-in position as we've looked at our spend to support technology development, et cetera, is up this year, as we talked about in the original guide. It's not solely focused on EV. It goes across all of our solutions. And again, we think about as a range of solutions.
You know, we compete in a complex and fragmented space, so one size doesn't fit all, and we plan on, you know, being able to support a range of propulsion solutions with, you know, from conventional to hybrid to fully electric. And that's an important point because, as you read about announcements, et cetera, you really need to take that back to, what portion of the market does that refer to, and, and again, how does Allison play in that space? I think we're a logical player in this space, certainly, given our capabilities.
Jamie Cook (Managing Director and Equity Research)
Okay. Thank you.
Larry Dewey (Chairman and CEO)
Yeah, I would just tag on a little bit to that. You know, Dave, I think has kind of captured all the key points, but a couple I want to emphasize is, you know, we've been engaged with the OEMs for some time regarding electrification. You know, Dave talked about decades, and it literally goes back to the late 1990s that we've been involved. So we understand the technology, we understand what it takes to integrate electrification into a vehicle. We understand the capabilities, and frankly, we understand the limitations. And you know, those are the things that we focused on. You know, we want to deliver products that provide value to customers and applications as they use them in the real world.
Not a science fair project, but something that they can use in their revenue service. And, you know, those products, in addition to providing value to customers, need to provide returns to shareholders, jobs for our employees, and business for our suppliers. And so, you know, we're focused on those things, the fundamentals, not necessarily headlines for executives or photo ops. And so that's really been our focus, and it will continue to be our focus.
Jamie Cook (Managing Director and Equity Research)
Okay. Appreciate the color, as always, and congratulations again.
Larry Dewey (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich (Senior investment leader,head of US Machinery, Infrastructure, Sustainable Tech franchise)
Hi, good morning, everyone, and Larry and Dave, congratulations. Larry, quite, quite the quarter to leave on as well.
Larry Dewey (Chairman and CEO)
Thank you.
David Graziosi (President and CFO)
I'm wondering if you could talk about price cost. Dave, you had mentioned you had tweaked up your pricing expectations by 25 basis points for the year. Does that really cover the material cost inflation? Can you talk about how you expect that to shape up over the course of the year? You know, looking at the guidance for the year, typically, your margins land more or less in line with your first quarter margin performance based on normal seasonality for the full year, and looks like you're giving yourself some room to execute, or maybe you expect the price cost to be less advantageous, et cetera.
Can you just step us through price, cost and other drivers of your margin expectations in coming quarters compared to what we just saw in the first quarter? Sure. In terms of price, cost, you know, our original guide assumed increases for steel and aluminum, so we've continued to track that. Our revised guide has some increase incrementally for both of those as well. So we think we've reflected what's out there from a forecast perspective. I would say on the price side, you know, again, we don't price for cost, we price for value. So, you know, our ability to execute there is gonna be derived from the value that we deliver.
And I think the team continues to push that agenda and, and sell what we can do and how we benefit end users as well as OEMs for that matter. So I think the overall guide, moving that up to 50 basis points, certainly I believe more than covers what we see from a commodity cost perspective. I do think it's fair to say, you know, we're also seeing, as you've heard others report, some level of cost creep in other areas, whether it's, to a degree, supplemental charges to fill in from a components perspective. I think there's a fair bit of labor tightness out there throughout the supply chain that's being addressed. Freight is up as well.
So, you know, we, we've reflected that, as well, and as, you know, some other initiatives in our guide. We started the year out, the team has, with, creating some tailwind for us in terms of resourcing as well, and have continued to execute on that front. That being said, given, how busy the market is, those things become that much more challenging to, to execute, but we feel good about the overall, guide in terms of components and driving, the pieces there. In terms of the, the guidance for the year, when you look at the, quarters, understand with, as we talked about with, with selling general administrative, there is some seasonality to our spend, from a marketing, sales, and service perspective.
So, at this point, I would assume, you know, relatively flat to slightly higher levels on a quarter-to-quarter basis, Q3 and two versus one. I think the engineering side, we're continuing to ramp, as you know I mentioned to an earlier question in terms of initiatives. We expect spending to elevate into the year as initiatives are ramped, so you'll see some increases there. Overall, from a Gross Margin perspective, typically we perform, frankly, I think the best historically in quarters one and three. I'm not sure I would see those playing out that much differently at this point this year. And then Q4 typically is weaker because of the reduction in days in terms of operating there and sales for that matter.
So, I think we're being prudent in terms of approach on cost. You know, again, we resource this business over the cycle perspective. So, you know, we're trying to manage that very closely relative to opportunities, and some of the initial commercial initiatives that I mentioned earlier, you know, we certainly plan on supporting through the second half.
Jerry Revich (Senior investment leader,head of US Machinery, Infrastructure, Sustainable Tech franchise)
And Dave? Yes.
Fred Bohley (SVP, CFO and Treasurer)
Jerry, this is Fred. Specifically on, on commodities, you know, in the, in the 10-K, we disclosed, you know, that of our, cost of goods sold, about 70% is, is purchase components, and of that 70, about 11% is exposed to raw material. And then we have a sensitivity laid out in there that, you know, a 10% increase in, aluminum and steel is gonna drive about a $2.5 million per year, increase in our cost. You know, that doesn't include any offsets we get from pass-throughs through our OEMs, via the material surcharges that we have in place. You know, those typically do lag. We'll see the raw material come in in the quarter and the, the pass-throughs will, to the OEMs, will lag about 6 months.
Jerry Revich (Senior investment leader,head of US Machinery, Infrastructure, Sustainable Tech franchise)
Okay, thank you. And just a clarification, Dave, you had mentioned labor tightness and freight costs. Are things incrementally escalating from first quarter levels, or are you seeing greater inflation over the course of the year as you look at your plans? Or does that comment reflect the escalation that we saw in the first quarter?
Really the escalation in the first quarter in terms of run rating, Jerry, and again, I think the team is certainly making an effort there to try to manage that closely. I think frankly, also sanity check. You know, when you get into these types of markets, it's well worth your time to dig into requests and ask for support if they're coming through on incrementals and how you think about that. We certainly know from, you know, the structure of our business, there's a fairly high level of operating leverage at these volumes, while we typically expect others that we deal with to have some of those similar economics. So I think there's always some balance that you have to have there.
That being said, you know, the urgency to supply and be able to support our customers is obviously key to us, and, you know, we're committed to continue to do that and have made those investments both with our business as well as within our supply chain. And we expect to execute, but at the same time, there needs to be a rational approach there in terms of cost, because what you, I believe, do not want to do is create, you know, that negative annuity, so to speak, going forward without the, the support for it. So, we'll stay close to that, and, and as I said, continue to work with our partners on that front, as well as resourcing efforts globally.
Okay. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.
Larry De Maria (Head, Global and Industrial Infrastructure)
... Hi, thanks. Good morning, and best of luck, Larry. I was just wondering if you could just update us on two things. First of all, just anything on FuelSense 2.0 and the impact we might see in your pricing assumptions up 50 basis points this year. And secondly, and maybe more importantly, there's been a lot of articles and discussion about AMT being used in more applications. Can you discuss what you're seeing and where those lines are being blurred? And, you know, just what's going on overall from your perspective, so we can kind of rebase our expectations since, you know, you see a lot of articles about this stuff, but, want to hear what you guys have to say. Thank you very much.
Yeah, this is Larry. The relative, I'll answer the second part, and then Dave can jump on the Fuel Sense piece. Relative to the AMTs, they have made some inroads, primarily in areas where manuals had historically been. In fact, as we look at the data, and I think Dave's earlier comments are right on, you don't look at one quarter's worth of data and say, "Okay, that's how it's gonna play out over the full year, seasonality." Having said that, it would be fair to say we feel pretty good about what we're seeing relative to those growth initiatives that we have been pursuing relative to driving our market share around the world in the on-highway space.
And so to the extent there are more AMTs being sold, we have not, you know, really seen that in our market share numbers year over year. You know, first quarter, obviously, you guys have done the math. Again, we caution against just extrapolating that for the year. Having said that, it certainly would suggest that we're in very solid shape relative to continuing to drive our market share. So it's typically in applications, tractors, and even there, we're up a little bit, although we're still a small player, but we're up there, as well. But it's primarily in those tractor applications over the road, if you will, that we're using manual transmissions.
On the FuelSense question, you know, as we talked about, I believe, on the fourth quarter call and the guide for 2018, the initial guide, that FuelSense 2.0 is being introduced into the market. It's gonna follow OEM releases, so, you know, Allison does not dictate timing there, the OEMs do in terms of their releases, and those will be staged throughout the year. I would say that the benefit of FuelSense currently is reflected in our parts support equipment and other end markets, so it's not in the pricing comments that I mentioned earlier. So to be clear, we're tracking that separately, and we'll continue to assess the opportunities.
I would say that at least the feedback from end users has been very positive concerning their experience with FuelSense. But again, you know, we're gonna follow what the OEM timing is there. But I would say from where we sit today versus our expectations coming into the year, we feel, you know, well positioned there to see some level of pickup relative to, you know, second half versus first half there, and more importantly, how we're positioning FuelSense for 2019.
Great. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Ann Duignan with J.P. Morgan. Please proceed with your question.
Ann Duignan (Managing Director, Equity Research Analyst US Machinery)
Hi, good morning, and, same for me, Larry. Wish you the best.
Thanks.
Maybe you could talk a little bit about off-highway, and the supply chain issues. Is there any risk that your customers will turn to other suppliers, whether they be, you know, well fits or remanufactured products or international products? Is there any risk that you lose market share because you just cannot keep up with demand?
Larry Dewey (Chairman and CEO)
At this point, I think, you know, there's always a challenge there, and we're pedaling the bicycle as fast as we can. One of the things that we have done, and Dave touched on this in his earlier remarks, and I'll put a little sharper point on it. One of the areas where we have taken some cost increases is in the off-highway space, component supply, relative to securing additional validated sources that we can use, to make sure that we are covering the needs of our customers. And while it's nip and tuck every month, and literally there are daily updates on, particularly in that space, I mean, it's across all of our end markets are strong, but particularly in the off-highway space.
David Graziosi (President and CFO)
So at this point in time, I think that's a pretty manageable risk and one that we think we're in good shape on. Obviously, we're in dialogue with our OEMs, our customers, and you know, we feel certainly a lot better than we did 60 or 90 days ago. And you know, we're clearly keeping up, and you know, we don't have any cushion, but we're keeping up.
Ann Duignan (Managing Director, Equity Research Analyst US Machinery)
Can you expand on the supply chain issues where you've had to validate incremental suppliers? What specific components are those?
Larry Dewey (Chairman and CEO)
Well, obviously, the -- in terms of some of the specific components, we probably wouldn't get into that level of detail, Ann. But, certainly, it's, you know, it's, they're complex. You know, our transmissions are complex, and so we've engaged with suppliers, in some cases, previous suppliers that we've been able to reactivate at a cost, and secure some incremental volume from them. Again, our focus is making sure that, you know, while the urgency to supply is strong, it's important that we maintain the quality focus that our reputation is based on.
Ann Duignan (Managing Director, Equity Research Analyst US Machinery)
And I appreciate that. So, good luck and best wishes.
David Graziosi (President and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.
Seth Weber (Analyst)
Hey, good morning.
Morning.
Just a couple quick ones. I'm sorry if I missed this, but is there any color around the 7% sequential decline in Asia that you called out in the press release? Is that all China, or is there anything you could expand on that with?
David Graziosi (President and CFO)
In terms of Asia, you know, we talked about this before in terms of some of the end markets, specifically around applications. For instance, China bus typically is gonna be relatively lumpy from a tender standpoint, so that plays itself out. You saw that we had a very strong fourth quarter last year versus first quarter this year. That scenario continues to play itself out. I don't, you know, we don't have any expectations that market's gonna change. I would say overall with Asia, the big performers this year in terms of strength, you know, is really focused more so on Japan and China truck. And that's where we have the team really driving a number of initiatives this year.
Japan, again, more so from an export standpoint. As you know, they have very strong position into, Australia, really on the medium side and other markets. But they, they certainly have seen some strength this year. But I would say overall for Asia, you know, India continues to be a bit of a challenge from a market standpoint. It's been slower to develop, but overall, it really gets down to some of the tender timing on a year-over-year basis, how we manage that.
Seth Weber (Analyst)
Okay. Thanks, Dave. That's helpful. And then just, on the SG&A, you called out, you continued to call out this unfavorable, product warranty adjustment. Is that, is that the same as we've been seeing in prior quarters, and is it getting bigger or smaller? Is there any way that we should kind of handicap that going forward?
David Graziosi (President and CFO)
Look, I mean, we've, as we've talked about, it's not necessarily linear, right? There's some, it has obviously driven by volume to a degree, but it's also experience with the products. And we're, you know, continually evolving, and so are our customers in terms of how they use that. So, we have on a consistent and constant basis, always looking at warranty, and there is adjustments up and down, but that's really the nature of the beast in terms of what's there. You know, I would say with the level of usage that we're seeing in end markets, you know, the products are being used. And that's, you know, that's evident in some of the experience that we have.
We also have what we believe is the most liberal warranty policy in the industry. So, that's one of the things that, you receive as part of a, you know, a premier industrial, product like ours. You're gonna get that experience, and we stand by that, and we'll continue to drive that as one of our core, competitive advantages. But I would say it's, you know, it's not necessarily, something that's a continuing issue as much as it is a continuing, result of constantly refining and looking at our experience.
Seth Weber (Analyst)
That makes sense. I appreciate the color, guys. Thanks.
Operator (participant)
Thank you. Ladies and gentlemen, that does conclude the time we have allowed for questions. I'd like to turn the floor back to Mr. Graziosi for any final comments.
David Graziosi (President and CFO)
I'd like to again thank everybody for joining us on the call this morning and look forward to our next quarterly call. Thank you.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
