Allison Transmission - Q4 2013
February 13, 2014
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's fourth quarter and year-end 2013 earnings conference call. My name is Manny, and I'll be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from Allison Transmission will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference call over to Mr. Dave Graziosi, the company's Executive Vice President and Chief Financial Officer. Please go ahead, sir.
David S. Graziosi (EVP and CFO)
Thank you, Manny. Good afternoon, and thank you for joining us for our fourth quarter 2013 results conference call. With me this afternoon is Larry Dewey, Allison Transmission's Chairman, President, and Chief Executive Officer. As a reminder, this conference call webcast and the presentation we are using this afternoon are available on the investor relations section of our website, allisontransmission.com. A replay of this call will be available through February 20. As shown 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 fourth quarter 2013 results press release, in our annual report on Form 10-K for the year ended December 31, 2012, 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 three 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 fourth quarter 2013 results press release, both of which are posted on the investor relations section of our website. Today's call is set to end at 5:30 P.M. Eastern Time. In order to maximize participation opportunities on the call, please limit your questions to one with one follow-up question. Now I'll turn the call over to Larry Dewey.
Larry Dewey (Chairman, President, and CEO)
Thanks, Dave. Good afternoon, and thank you for joining us today. Our fourth quarter 2013 results are within the guidance ranges we provided to the market last October 28th. Net sales stabilized in the fourth quarter on a year-over-year basis, an improvement relative to the sales declines experienced through the first three quarters of the year. We are encouraged by growth in the North American on-highway end market and improved demand conditions in the outside North America on-highway end market. Allison continued to demonstrate strong operating margins and cash flow during the fourth quarter by executing initiatives designed to align costs and programs across our business with end markets' demand conditions, while continuing to invest in growth opportunities.
Maintaining our prudent approach to capital allocation, we opportunistically refinanced $650 million of our Senior Secured Credit Facility Term B-2 loan, due in 2017, extended the maturity of our Revolving Credit Facility to 2019, repaid $53 million of debt, and paid a quarterly dividend of $0.12 per share. Please turn to slide 4 of the presentation for the call agenda. On today's call, I'll provide you with an overview of our fourth quarter performance, including sales by end market. Dave will review the fourth quarter financial performance, including Adjusted EBITDA and Adjusted Free Cash Flow. I'll wrap up the prepared comments with 2014 guidance prior to the question-and-answer period. Please turn to slide 5 of the presentation for the Q4 2013 performance summary.
Net sales increased approximately 1% from the same period in 2012, principally driven by higher demand in the service parts, support equipment and other end market, continued recovery in the North America on-highway end market, our largest, and improved demand conditions in the outside North America on-highway end market, largely offset by previously contemplated reductions in US defense spending and weakness in the outside North America off-highway end market. Gross margin for the quarter was 43.1%, an increase of 320 basis points from a gross margin of 39.9% for the same period in 2012.
The increase in gross profit from the same period in 2012 was principally driven by $7 million of costs and $8 million of charges to conclude a new five-year labor agreement in 2012. Adjusted net income increased $32 million from the same period in 2012, principally driven by increased adjusted EBITDA, with $9 million attributable to non-recurring charges to conclude the new five-year labor agreement in 2012. Adjusted free cash flow increased $23 million from the same period in 2012, principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures. The increase in capital expenditures was principally driven by increased investments in productivity and replacement programs, partially offset by lower product investment initiative spending.
Please turn to slide 6 of the presentation for the Q4 2013 sales performance summary.... North America on-highway end market net sales were up 12% from the same period in 2012, principally driven by higher demand for Rugged Duty Series, Highway Series, and Bus Series models, and essentially flat on a sequential basis, principally driven by higher demand for Bus Series models, offset by lower demand for Pupil Transport/Shuttle Series and Rugged Duty Series models. North America hybrid propulsion systems for transit bus end market net sales were flat with the same period in 2012, and up 113% on a sequential basis, principally driven by intra-year movement in the timing of orders, as discussed in prior calls.
North America off-highway end market net sales were down 18% from the same period in 2012, principally driven by lower demand from hydraulic fracturing applications, and up 56% on a sequential basis, the first sequential increase since the first quarter of 2012, principally driven by higher demand from hydraulic fracturing applications. Defense end market net sales were down 53% from the same period in 2012, and 33% sequentially, principally driven by previously contemplated reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts.
Outside North America, end market net sales were up 18% from the same period in 2012, reflecting strength in China bus and Europe truck end markets, partially offset by weakness in J-, Japan truck, and up 23% on a sequential basis, principally driven by China bus tenders timing. Outside North America, off-highway end market net sales were down 53% from the same period in 2012, principally driven by weakness in the mining and energy sectors, and down 13% on a sequential basis, principally driven by weakness in the energy sector.
Service parts, support equipment, and other end market net sales were up 37% from the same period in 2012, principally driven by higher demand for North America service parts and global on-highway support equipment, commensurate with increased transmission unit volumes, and up 9% on a sequential basis, principally driven by higher demand for global service parts and support equipment. Now I'll turn the call over to Dave Graziosi.
David S. Graziosi (EVP and CFO)
Thank you, Larry. Please turn to Slide seven of the presentation for the Q4 2013 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and Adjusted EBITDA. Selling general administrative expenses decreased $25 million from the same period in 2012, principally driven by $12 million of lower intangible asset amortization, a $9 million product warranty charge for specific product issues in 2012, and a $1 million charge to conclude a five-year labor agreement in 2012. Engineering, research, and development expenses decreased $4 million from the same period in 2012, principally driven by reduced product initiative spending. Interest expense net decreased $7 million from the same period in 2012, principally driven by lower interest expense as a result of debt repayments, the maturity of certain interest rate swaps, and lower rates on our senior secured credit facility.
Other expense net increased $6 million from the same period in 2012, principally driven by decreased grant program income and the impairment of technology-related investments. Income tax expense for the fourth quarter of 2013 was $25 million, resulting in an effective tax rate of 36.4% versus an effective tax rate of 46.9% for the same period in 2012. The decrease in the effective tax rate was principally driven by a reduction in foreign taxable income. Adjusted EBITDA for the quarter was $153 million, or 31.1% of net sales, compared to $132 million, or 27.1% of net sales for the same period in 2012.
The increase was principally driven by $7 million of costs to conclude the 5-year labor agreement in 2012, a $9 million product warranty charge for specific product issues in 2012, and reduced product initiative spending. Please turn to Slide eight of the presentation for the Q4 2013 cash flow performance summary. In view of Larry's comments, I'll focus on specific cash flow activity during the fourth quarter. Allison continued to demonstrate solid free cash flow conversion and operating working capital management through consistent operating margin performance and pragmatic production planning, commensurate with near-term end market conditions and growth opportunities.
In addition, the remaining 2017 maturity of $424 million and the extension of our revolving credit facility from 2016 to 2019, resulting from our refinancing transaction, provide Allison with ample capital allocation flexibility while maintaining our commitment to prudent capital structure management. Finally, Allison ended the quarter with $185 million of cash, $395 million of revolver availability, and net leverage of 3.94. Now I'll turn the call over to Larry Dewey.
Larry Dewey (Chairman, President, and CEO)
Please turn to Slide nine of the presentation for the 2014 guidance end markets commentary. Allison serves a wide variety of end markets in various geographies. We have consistently articulated a strategy of maintaining our strong, fully automatic transmission market position in developed markets, while gaining market position in developing markets by demonstrating the fully automatic transmission value proposition. As we enter 2014, nothing about our long-term strategy or approach has fundamentally changed. We continue the march. Allison expects 2014 net sales to increase in the range of 3%-6%. Although we are not providing specific first quarter 2014 guidance, Allison does expect first quarter net sales to be higher than the same period in 2013.
The anticipated year-over-year increases in first quarter net sales is principally driven by higher demand in the global on-highway end markets and the service parts, support equipment, and other end market, partially offset by previously considered reductions in defense net sales and lower demand for North America hybrid propulsion systems for transit bus. With that, I'd like to highlight the following end markets assumptions for the full year, 2014. For North America on-highway, we expect a net sales midpoint growth of 11%, principally driven by a continued market recovery. Our net sales forecast anticipates year-over-year quarterly increases with stronger growth rates in the first half. North America hybrid propulsion systems for transit bus, Allison expects a net sales midpoint reduction of 23%, principally driven by engine emissions improvements and economically viable non-hybrid alternatives, such as powertrains fueled by natural gas.
Such non-hybrid alternative technologies generally utilize a fully automatic transmission. A majority of the net sales reduction guidance is anticipated to occur in the first and fourth quarters. North America off-highway, we expect a net sales midpoint growth of 31%, or $12 million, principally driven by a slowly emerging improvement in demand from the energy sector's hydraulic fracturing market. Our net sales growth guidance assumes quarterly net sales levels consistent with the fourth quarter of 2013. Despite the net sales midpoint growth of 31%, the implied 2014 full-year net sales of $51 million is 31% below the most recent peak quarterly level in the first quarter of 2012.
Defense, Allison expects a net sales midpoint reduction of 33%, principally driven by previously considered reductions in U.S. defense spending to levels that are consistent with longer-term averages experienced during periods without active conflicts. Outside North America on highway, we expect a net sales midpoint growth of 10%, principally driven by increases in key developing markets through continued growth and fully automatic transmission penetration and realization of vehicle releases. Our net sales forecast anticipates a slight improvement in European end markets after a weak first quarter, partly attributed to Euro VI pre-buy activity in the fourth quarter of 2013. Outside North America off-highway, Allison expects a net sales midpoint growth of 30%, principally driven by moderately improved year-over-year second half demand conditions.
We're closely monitoring developments in the mining and energy sectors to ensure Allison will benefit from recent vehicle releases and any improved market conditions. Service parts, support equipment, and other, we expect a net sales midpoint growth of 5%, principally driven by improved global on-highway and off-highway service parts demand and increased support equipment sales commensurate with higher transmission unit volumes. Please turn to slide 10 of the presentation for the 2014 guidance summary. In addition to our 2014 net sales guidance of an increase in the range of 3%-6%, we expect an adjusted EBITDA margin in the range of 32%-34% and an adjusted free cash flow in the range of $375 million-$425 million, or $2-$2.25 per diluted share.
Allison also expects capital expenditures in the range of $60 million-$70 million and cash income taxes in the range of $10 million-$15 million. On behalf of everyone at Allison Transmission, I thank you for your time this afternoon. Manny, please open the call for questions.
Operator (participant)
Thank you. Just 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. When you press star two before pressing the star keys. Our first question is from Jerry Revich at Goldman Sachs. Please go ahead.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Hi, good afternoon.
Larry Dewey (Chairman, President, and CEO)
Good afternoon, Jerry.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Larry, Dave, can you talk about some of the margin headwinds that you're expecting in 2014, looking at the margin guidance of 32%-34% compared to the 33% last year, and in the context of some of your higher margin businesses picking up? Just wondering if you could just provide more context on, you know, what would get you to the lower end of the range?
David S. Graziosi (EVP and CFO)
Jerry, it's Dave. As we think about margins and, and we ran the same process with our 2013 guidance, as you'll recall, the midpoint is really what I would focus on there, and, and frankly, the consistency to how we performed in 2013. Having said that, you know that there's a number of different outcomes relative to volume. We try to frankly, tighten the range as we go throughout the year.
... we believe that's prudent, given where we are, frankly, in the various markets that we participate in. As Larry went through the guidance by end markets, you know, there's a number of things that from a momentum standpoint, we obviously feel very good about. You know, there's others that as always, at this point in the year, we'd like a bit more visibility too. But overall, I think the tonality that you should be sensing is, I think, stronger footing, frankly, as we enter 2014 versus 2013. Having said that, we still try to manage off of a broader range at this point in the year, and we'll tighten accordingly as we get further into the year.
Jerry Revich (Managing Director and Senior Equity Research Analyst)
Okay, thanks. And, and Dave, out of the $400 million free cash flow target at the midpoint this year, can you talk about what proportion we should look for, for debt paydown versus cash return to shareholders? Obviously, in 2013, you were roughly half and half. How should we think about 2014?
David S. Graziosi (EVP and CFO)
Yeah, I think it's certainly a bit early for us to make those allocation decisions, if you like. As I mentioned, you know, the flexibility that we have, we are certainly gonna take advantage of. Having said that, we are committed, as you know, to the quarterly dividend, that's, you know, plus or minus $90 million. So, if you took the cash flow midpoint guidance there, that implies there's $300 million that's available for debt and other returns to shareholders potentially. The debt remaining, the tower in 2017 of $424 million, even if you straighten or amortize that over the next three years, as a starting point, I think you can get to the math pretty quickly.
As you know, our medium-term target that we focused on is 3x-3.5x. Given that we ended the year certainly just under 4, half the turn there, lines up directionally with that 2017 tower. So we will certainly address that as we move into the year, but remain very opportunistic about utilizing our cash flow.
Operator (participant)
Thank you. The next question is from David Leiker of Robert W. Baird. Please go ahead.
David Leiker (Equity Research Analyst)
Good afternoon.
Larry Dewey (Chairman, President, and CEO)
Good afternoon, David.
David Leiker (Equity Research Analyst)
Two things in particular. I want to start with the aftermarket, the service business. If you could talk about any particular areas that you're seeing strength, whether it's better utilization or some catch-up there. And then the carryover on that is, with the strength in that revenue number, you expect that to drive some upside on margin, and it doesn't, you know, it's hard to see where that is.
Larry Dewey (Chairman, President, and CEO)
Well, a couple of statements to that. In terms of, in that space, there's really three components in that, service parts, support equipment and other. One is the support equipment, and that certainly isn't as high as the service parts in terms of margin, but still profitable, of course. We are seeing some pickup in on-highway, and perhaps most encouragingly for the view towards the off-highway energy sector, new unit build, we're seeing pickup in the service parts there. And we've said and anticipated that there'd be people getting equipment back to work, before they'd be buying new equipment, given the amount that's idle, and we certainly have seen that here, in recent months. You know, certainly there is opportunity there for margin enrichment.
I would say that, from where we sit, the other piece of that, and we've talked about the cascading of the different margins, there's a lot of work being done to expand in North America on that entry-level activity, that then we ratchet up over time through the use of those ladders, those pricing ladders that we've discussed. And as we enter those markets and gain that penetration, we're typically on the lower rungs, and we move up over time as they go through the emissions. So the more successful we are in the outside North America, you know, we do fund that with the increases in the other spaces, and that's why you see the range in kind of a similar place. And as Dave pointed out, you know, we continue to manage that.
I think we have a track record that would demonstrate that, we're not shy about trying to drive that number up.
David Leiker (Equity Research Analyst)
Okay, great. And then just one last item here. If we look at the North America on-highway business, and some of the strength that you see there, can you give us any details in terms of particular locations, where you're seeing particular strength or where you're still seeing some weakness?
Larry Dewey (Chairman, President, and CEO)
Well, I would say that, you know, the year-over-year trends certainly continue to improve, as you know, up in Q4. You know, we're up 12%. You know, quoting activity was up, dealer sentiment based on some of the anecdotal stuff that we've gone out and gathered. You know, dealers do believe there's a pent-up need for new trucks. However, it would be fair to say some of the fleet budgets remain tight. You know, we're just starting to see a little more activity in the municipalities. You know, it's gotten better than the trough, but it kind of improved and then didn't really move much beyond that. You know, people are talking about, not unlike the off-highway space, talking about improving their utilization of their vehicles.
You know, that would appear to be kind of reaching its natural limit from some of the feedback that we have. They've done certainly some of that. You know, we would view that from the standpoint of the industry and our positioning in the industry, particularly with some of the conquesting that we've done with a heavy focus on the Class 8 straight truck. A bit like sailing, where, you know, what we've done is we've tightened all the rigging, and, you know, when the wind picks up, the boat's gonna jump a little quicker than what it might normally have done, both in terms of our some of the penetration work we've done, as well as some of the efficiency gains that the fleets have made.
You know, we are seeing some movement in municipals a little bit. We are seeing some movement in construction. Certainly, we feel good about the level of activity in the lease rental space and our positioning there that we've improved over the last couple years. So, you know, those would be some of the areas. Transit bus is another one, not the hybrid, say, the conventional, where we feel good about how we have performed vis-a-vis some of the other players in the market relative to share here. So there are several things where we would say we feel good. There's others that, you know, they haven't come on as strong as we all know. We've been predicting, folks have been predicting a stronger recovery in that North America on-highway space.
We've tended to be a little more conservative and have been, you know, a little closer to winning the office pool number in those situations.
Operator (participant)
Thank you. The next question is from Ross Gilardi of Bank of America. Please go ahead.
Ross Gilardi (Managing Director)
Yes, thanks, guys. Just a couple of questions. Just on, on service, just given what you were saying before, you seem to be forecasting a real deceleration versus where you were on in the you know, in the second half of the year. Is that just conservatism, or is there you actually seeing anything in terms of trends, which makes you think this trend is not sustainable?
Larry Dewey (Chairman, President, and CEO)
Well, I think, you know, we know that people had a lot of equipment that they weren't, you know, utilizing, you know, so look at the off-highway space. There's, you know, how many rigs, how many are idle, and how many are idle and need of repair? And as folks get those back to work, you know, that'll be, you know, there'll be a surge, and then it'll taper off to the more normal levels. And, you know, the good news is, using the off-highway for a moment, a little bit longer, they're running the rigs harder, they're running them more hours per day, and that says that then the amount of days between, you know, months, weeks, whatever, between overhauls are gonna shorten up because it really is a matter of hours.
And if you're using them more hours per day, it's fewer days between overhauls, and long term, you know, they do get thousands of hours out of these. But nonetheless, that, you know, if you go from 2000 to 4000 hours utilization, you've cut the time in half between overhauls, and that's another reason why we're optimistic about that space.
Ross Gilardi (Managing Director)
You would expect some of the demand to transfer essentially from the service business into the OE side on North American off-highway. So is that kind of what you're saying?
Larry Dewey (Chairman, President, and CEO)
Yes. They have to, they have to digest the rigs that they've got. They've got to get those running, and that'll take some overhaul. We have certainly seen that in the fourth quarter of 2013, as we described, and that has. It would be fair to say, we haven't seen anything that has changed that trend here thus far in 2014.
Operator (participant)
Thank you. The next question is from Jamie Cook of Credit Suisse. Please go ahead.
Jamie Cook (Managing Director)
Hey, guys. This is Andrew Buscaglia on behalf of Jamie. Just a quick question on your SG&A and your R&D. That ticked up a little bit sequentially. Just looking into 2014, is this your estimates for the, you know, the SG&A to exit the year at this rate? Or, how do you see that growing throughout the year, and same with R&D?
David S. Graziosi (EVP and CFO)
SG&A, I would say, you know, expectations are, you know, flat to slightly up a bit. As we talked through last year, certainly deferred a few items and actions, where we are in the market and our view of things right now, from a momentum standpoint, we plan on moving forward with those this year, so that's reflected in our guidance there. From an engineering standpoint, as we talked last year, we expect that number to be a bit lower this year. We're continuing to pursue the initiatives. We've spent a significant amount of time talking about already, in terms of new products, the TC10 coming to market, some other initiatives that we have that you'll be hearing about, as the year progresses.
From a rate standpoint, certainly would expect that to be down a bit year-over-year.
Jamie Cook (Managing Director)
Got it. Just on switching over to your, your guide, it sounds like fracking ticked up sequentially, and according to your guidance, up 31% for your North America off-highway. Do you perceive this as, you know, a major turning point there? What else is in that 31% year-over-year increase in off-highway that you're so, you're bullish?
David S. Graziosi (EVP and CFO)
The majority of that so-called turn, if you will, I wouldn't define that as major, given that when you look at the full year guide for that, you know, that end market for us, it's still, you know, I think at a run rate about two-thirds of the first quarter of 2012, right? So as you start to digest that a bit and think about that, I wouldn't define where we're at from, define that as major. I think, you know, we're certainly seeing the market improve, as Larry mentioned, with the utilization rates of equipment, and frankly, I think the industry working through some of the idled items that are out there.
If you think about that going forward, we certainly expect some improvement, but I, I don't frankly define what we've thought about for this year as a significant turn. I think it, you know, we're gonna have to get a little bit further into the year to draw a full opinion on where we are from that perspective in terms of the cycle. So but certainly from a calendar perspective, you would expect, we expect more in the second half of the year from that angle.
Larry Dewey (Chairman, President, and CEO)
Yeah, I'd just add a little bit to that. You know, there's no question there's been a turn. You know, we talked about last year a couple of times where, you know, you're almost down to the irreducible minimum, and you know, clearly that has turned. Having said that, you know, we do remain very bullish because even with this increase, as Dave points out, there's still a lot of upside. And it's gonna. You know, if you look at what's been happening with some of the gas prices, if you look what's happening in terms of rig utilization, if you look what's happening in terms of the number of rigs being put, you know, back into service, you know, it's. We think we're at the beginning of that.
Certainly, it's not an outrageous increase relative to historical, which would just suggest there's more runway. That's the way, that's the way we're looking at it, and it fits very nicely with some of the things that, you know, we're gonna be doing in that space.
Operator (participant)
Thank you. The next question is from Andrew Kaplowitz of Barclays Capital. Please go ahead.
Andrew Kaplowitz (Director)
Good afternoon, Larry.
Larry Dewey (Chairman, President, and CEO)
Good afternoon.
Andrew Kaplowitz (Director)
Larry or Dave, can you give us a little more color on your 10% guidance, growth for non-North American on-highway? We know you've targeted double-digit growth in those markets, but, you know, if you look at 2013, you were, you know, relatively flat. It's just up a little bit. I know you had a good fourth quarter, but you've told us before that it's a pretty lumpy business, especially in places like China. So how do we look at 2014? How much visibility do you have in those emerging markets like China and Russia, where you're usually pretty good?
Larry Dewey (Chairman, President, and CEO)
Well, in terms of the visibility, you know, we in most cases, even here in North America, we obviously get the OEM schedules, subject to change, of course. Maybe a little background here to start. If we think about, you know, just to give you a flavor for kind of the splits here, going back to 2013 for the outside North America on-highway, just a touch over half, about 51% is Europe. China's next at about 30%, Japan's 12%, much of which ends up, by the way, in Australia. Latin America's about 6%, and India, because of the, we're just getting started on some of the truck activity and the bus activity, with the government situation has been at a standstill, about 1% is all.
So, you know, it kind of gives you a flavor of the geographic split in those areas. You know, we're certainly seeing some growth in some of the key developing markets. We're starting to get some transmission penetration. Again, that tends to be an arithmetic progression. You know, after we get through the first quarter in Europe, we do see some slight improvement. We're not projecting a robust recovery there. You know, certainly, we see some opportunities for buses in Europe, primarily in Turkey and the United Kingdom. You know, the truck, that's where the Euro VI pre-buy activity came into play. We've got some activity going into South Africa there. Terminal tractors, we think, are gonna be big. You know, continuing around the world, China bus, we think we're well positioned there.
If you look at some of the share numbers, we've actually improved, primarily at the expense of Voith, if you look at the numbers in the market there. China truck, continue to expand ourselves. Again, terminal tractors and fire, and we're developing segments in crane mining. Some of the work we're doing with some of the big players there, you know, we feel pretty solid about that. And then probably some of the other areas, you know, if I looked at India trucks, some of the new releases there, particularly some of the military programs that are coming into play. Latin America, you know, moving into front-engine city buses, new locations and mixture and emergency in trucks, and refuse and mining. Refuse, we got the releases.
We're starting to see some nice volume there, and you know, the challenge there is you get your pilot fleets, and then you continue to expand to others that look to them for guidance on what they should be spec-ing in their vehicles. So, you know, a number of things around the world that you know, we're working on. You know, economic conditions come into play a little bit. You know, Europe hasn't exactly been real strong, been some challenges there. China, you know, we had some retiming. Some of the stuff got pushed in there later in the year, and but we were still able to capture that.
Mining in China, you know, we got some releases there, and the bottom kind of fell out, and we're starting to see that recover a little bit, although frankly, it's not gonna be great shakes in 2014. So there's still some runway ahead in some of the markets where we've well positioned, and as those markets recovery, we would expect that we'd even do better than some of the numbers that we've quoted.
Andrew Kaplowitz (Director)
All right. So that's helpful. Maybe a related question around non-North America off-highway, then. You know, you're forecasting pretty significant growth, back half loaded, for the year. Your energy business fell off, you know, in the fourth quarter. Again, I know it's lumpy, so maybe that's just all it is. But energy's been up pretty big, while mining's been down. You know, how do you look at the two interchanged as you go into 2014? How do we think about each piece? What are you expecting in that 30% growth?
Larry Dewey (Chairman, President, and CEO)
Well, certainly, a lot of it's tied to the energy. And what's going on there in the energy is a couple of things. Number one, release positioning with our product. We feel good about where we sit there, some of the releases we've gained vis-à-vis maybe some there. More folks in that space that are using our product than a year ago and two years ago. You know, what happened in China and very often happens in a lot of places in the world is when you start into something, there's a fairly significant purchase in the beginning, and in this case, they probably overbought a little bit in the first half of the year. And then they get the equipment running, and then they want to see how it runs.
We talked about them, you know, digesting it. We talked about a pause in the market penetration, and that's exactly what happened in Q4 in China. Now, we do see that, you know, picking back up. You know, they got, like I say, they fulfilled those initial orders. They're doing the early assessments and, you know, some of their training and getting operating experience. You know, we feel pretty good that that's gonna, you know, as they get through that, that'll pick up again. Mining? You know, we have ended up in a lot of places where they tend to be more private sector, and because they think maybe more aggressively about the value of the product in terms of earning versus employment, frankly.
And so the mining in China, there was a little bit of divergence between the private mines, which struggled more than the government-controlled mines. And so that's something that, you know, we're working to try to change that by demonstrating how much more capable the private mines are. We do a lot of seminars with mining fleets, and we bring them into folks, and we show what the product is capable of. But that's gonna be a little slower coming back, the mining. I think there's other folks in the space that have talked about that at length, so I won't repeat some of their observations. You know, we can talk about timing, and there may be variation between players thinking when the timing's gonna turn, but I think everybody would agree, it's gonna be a little bit further down the road.
Operator (participant)
Thank you. The next question is from Rob Wertheimer of Vertical Research Partners. Please go ahead.
Rob Wertheimer (Lead Machinery Analyst)
Hi, good afternoon, everybody. So just to get definitionally, if I understand right, the off-highway segment, when fracking comes back there, is that only new builds, or could that be a major overhaul, you know, as opposed to the service side?
Larry Dewey (Chairman, President, and CEO)
There aren't a lot of complete units, so the overhauls would be in the service parts, typically.
Rob Wertheimer (Lead Machinery Analyst)
Yeah.
Larry Dewey (Chairman, President, and CEO)
We sell, you know, for example, a couple different kits. One goes for, you know, you're talking about $40,000 for 1 kit and $70,000 for a major overhaul kit versus, you know, new units, you know, 4 times or 2 times the numbers respectively. So, but overhauls, generally... Now, there are some refitments that are done, where they're, you know, pulling the unit and refitting, but that's typically very long in the tooth, and we wouldn't expect a lot of that.
Rob Wertheimer (Lead Machinery Analyst)
But just in terms of definitionally, the midpoint growth of 31% of hydraulic fracturing in that segment, that's, that's new fracking units?
Larry Dewey (Chairman, President, and CEO)
Yes, that's new units.
Operator (participant)
Thank you. As a reminder, ladies and gentlemen, it is star one if you would like to ask a question. The next question is from Ann Duignan of JPMorgan. Please go ahead.
Ann Duignan (Managing Director)
Hi, good afternoon.
Larry Dewey (Chairman, President, and CEO)
Good afternoon, Ann.
Ann Duignan (Managing Director)
Hi, just you talked about OEM bill schedules. Can you talk a little bit about what your OEM customers in North America are saying about the very strong orders we've seen in the last two months? Are you having any discussions with them about increasing daily bills or increasing orders, or, you know, or has everybody kind of taken a wait and see attitude on that?
Larry Dewey (Chairman, President, and CEO)
Well, it's really kind of a mixed bag. I think, you know, there's certainly some wait and see. I would tell you, we've had, it would be fair to say a number of folks come in relatively inside of any kind of normal forecasting, seeking more units in response to those orders. You know, we were taking a look at some data, the other day, and I'm sure you guys see all the same data, but we were looking at, you know, inventory to retail sales.
Now, you usually see a low point coming out of the end of the year, but if you look at Class 6-7 truck inventory on the retail inventory to retail sales, you know, you're at a point, you know, you had some bump ups because of the low level of sales in, particularly in November and September. You kind of had a little bit of a sawtooth action as we closed out the year. But if you take a look at the December sales, a short month, you know, you haven't seen a number like that since March of 2012. Now, you know, you can get some spikiness, but clearly, in one month, that's not a trend to make.
But there's a fair amount of activity, particularly in the low end of 6-7. If you look at Class 8 straight truck, that inventory to retail sales ratio is the lowest it's been since, you know, the end of 2011. And you've really seen kind of a not a significant improvement in terms of a dramatic one, but certainly a sustained one, going back to from where they were at the end of 2012 through 2013. Again, maybe still a little higher than what, you know, some of the pundits would say from a target standpoint, but it's come down quite a bit. In fact, it blew right through the high end of what's a normal kind of a number there, to the low end at the end of the year.
So, you know, we're obviously watching demand in some of the key spaces, municipalities, watching the refuse guys and talking to them and talking to some of the construction guys. You know, we feel, you know, pretty good about construction. We're starting to see some activity there, as we mentioned, and that activity has continued.
Ann Duignan (Managing Director)
Good. That's good color. Thank you. You know, we talked a lot about natural gas prices driving maybe an increase in rig counts and fracking, but on the offset then, are you seeing any postponement or any decline in orders for natural gas trucks?
Larry Dewey (Chairman, President, and CEO)
Haven't seen that yet. I expect that there will be some tapering. You know, I think people were probably, you know, pretty juiced when they saw $1.95 a million BTUs and, you know, it's kind of bumped up. But I think, you know, some of the other operating issues, you know, whether it's perceived as greener, et cetera, you know, I don't think you're gonna see a complete about face, but, you know, you'll see some people looking at some operating cost issues, and they'll try to, you know, they'll try to take a look at what makes sense.
You know, they're generally trying to look out a year or so, or maybe longer, as you know, because you can't look at spot prices and say, that's how I'm going to run my vehicles, because once you've made that choice, you're locked in.
Operator (participant)
Thank you. The next question is from Ian Zaffino of Oppenheimer. Please go ahead.
Tom Narayan (Equity Research Analyst)
Hi, it's actually Tom Narayan for Ian. I know you kind of talked about this already, but the international on-highway growth rate you guys have, the 10% growth rate. And I know you mentioned that 50% of that is Europe. Does that mean that the majority of this growth is coming from China? Is that what you also saw in, you know, in the fourth quarter with that 18% growth?
David S. Graziosi (EVP and CFO)
A couple things. As Larry went through that, his reference in terms of the breakdown geographically, the 2013 net sales, Europe, about 51%. So that's the reference. If you look at the growth rate, certainly have some expectations around better performance, Europe, after the first quarter, as we mentioned in the materials that were sent out before the call, simply because of some of the pre-buy activity in Q4 of last year. The balance of the growth in terms of focus is really around, frankly, Asia, and some of the continuing initiatives that we have there that Larry went through. So, as we said, we do not expect a significant change per se in Europe.
Certainly, some slight improvement in those conditions, but not significantly better on a year-over-year basis. So the balance was really focused on Europe, although we have planning on some growth in Latin America as well. It's still a relatively small portion of the total sales that we have outside of North America and on-highway.
Tom Narayan (Equity Research Analyst)
Okay. And, last question on the—what is the tax rate you guys are expecting for 2014?
David S. Graziosi (EVP and CFO)
In terms of book tax rate, it'll, you know, close to the statutory rate, so ±38%. Cash tax is $10 million-$15 million.
Operator (participant)
Thank you. The next question is from Neil Frohnapfel of Longbow Research. Please go ahead.
Neil Frohnapfel (Equity Research Analyst)
Hi, guys. Good afternoon.
Larry Dewey (Chairman, President, and CEO)
Hey, Neil.
Neil Frohnapfel (Equity Research Analyst)
Our channel checks indicate that there's strong initial interest from fleets for the new TC10. I understand it's early days, but are you guys seeing similar trends? And you- can you just speak to how initial orders with the Navistar have compared to your initial expectations?
Larry Dewey (Chairman, President, and CEO)
Well, you know, certainly we've stayed close to Navistar, and they've been, you know, they've got their release processes. We were down—we had a whole team down in their plant there in Mexico for some of their tryout stuff to make sure everything went smoothly. It did. They've given it the full go-ahead, and so now the production orders are being slotted. They needed to cross that wicket. There is a lot of interest in it.
You know, I think we're spending some time, frankly, even this week, we've got some folks in from the Navistar National Accounts group, teaching them about the TC10 and what it, because we, we know that they're going to be talking to those same customers, and they need to be equipped with the data that we have, the actual customer test fleet data that we have in terms of what people actually saw when they ran that vehicle, in terms of improvements in fuel economy and fuel efficiency, and what the attributes of the product are. And so, you know, I would say that, we've done a nice job getting the product exposed, and now we need to translate that into orders.
We do have some orders, and it'll be, as we've said, you know, especially with the new product, people are going to buy some, they're going to try some, and assuming it works well, they'll buy some more. And we're right in that front-end part of the process.
Neil Frohnapfel (Equity Research Analyst)
Great, thank you. And there's been some mixed signals on U.S. non-resi construction recovering, and you mentioned that you're feeling pretty good on construction activity. So is that more on the resi side, or are you starting to see a recovery in non-resi? And then, is the pickup more on OE or aftermarket? If you just speak to that, that'd be great.
Larry Dewey (Chairman, President, and CEO)
You know, the pickup, I would say, you know, we're certainly seeing some on-highway parts pickup, as I indicated. The real driver there in that space, in the aftermarket space, has been the off-highway, no question. But you know, from our standpoint, it would be the OE side. You know, construction, it really varies here in North America, almost by region in the country. You know, there's some areas where the blend between commercial—I think everywhere there's a little bit of commercial activity going on. The residential is a little spottier.
Operator (participant)
Thank you. The next question is from Alex Potter of Piper Jaffray. Please go ahead.
Alex Potter (Managing Director and Senior Research Analyst)
Hi, guys. I just had, I guess, a very high-level question for you here, and I've asked you this before a couple times in the past. But, China, in theory, has as large or more shale gas resource than we have in North America. So obviously, it could be a big, kind of, game-changing event if they're able to actually start successfully fracking it. Obviously, they're trying. I'm just wondering if, in your discussions with the folks over there who are buying your equipment, if you've picked up on a sense that they feel like they're succeeding, does it seem like China could replicate what we did here in North America, or does that still seem like kind of a pipe dream? I know that they had a number of institutional roadblocks and also some geographic problems, technical issues.
Just sort of wondering what your, I guess, philosophical take on that market is?
Larry Dewey (Chairman, President, and CEO)
Well, I think as you think about the, you know, let's go really high level here. If you think about the geopolitical situation, as I talk to our people here, and it's why we have had a tremendous focus on fuel efficiency and fuel economy in our on-highway products. I personally believe that, you know, there's going to be a couple of pinch points in this world as we move forward. It's gonna be energy, and it's gonna be and it may not even be the availability, it's the economics of it, which allows you to be competitive in global manufacturing and industrial capability. And then the other is water. I won't bore us with the second one, 'cause we're not involved in that thus far.
But, you know, from the energy side of things, China is not gonna sit still. They do have the geographic challenges. Many of, One of the things that we've learned is that while there are not the road restrictions or bridge restrictions, or the focus on that, as there is here in North America, weight is important because of some of the relatively remote areas they need to get these products into, just from the sheer difficulty of maneuvering vehicles. It's not necessarily laws, it's the laws of physics, I might say. So that's, you know, been probably one of their biggest challenges. From the standpoint of intent, there's no question, if you look at what the government has done, that there's gonna be support for that.
So, you know, we think it will maybe move a little slower. Let's not forget that many of the companies that were involved here in North America have been doing this for decades. And so the notion of responding quickly, and they're fairly refined in their rig design, et cetera, so they were able to move very quickly when the opportunity presented itself. And I think that some of the key players in China are maybe just a little further behind on that learning curve. The other thing is access in some of these places to water, which is a challenge as well. Whereas here in the States, while there's a lot of discussion on that and all of the issues surrounding that, access to it really wasn't a problem.
Alex Potter (Managing Director and Senior Research Analyst)
Okay, I appreciate it. Thanks, guys.
Larry Dewey (Chairman, President, and CEO)
Thank you. Well-
Operator (participant)
Thank you. If there are no further questions, thank you at this time. I would like to turn the floor back over to Mr. Dewey for any closing remarks.
Larry Dewey (Chairman, President, and CEO)
Well, appreciate everyone's interest, and we'll look forward to speaking to you with the first quarter 2014 results. Have a good evening.
Operator (participant)
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
