Allison Transmission - Q4 2014
February 10, 2015
Transcript
Operator (participant)
At this time, all participants are in a listen-only mode. After the prepared remarks, the management team from Allison Transmission will conduct a question-and-answer session. Conference call participants will be given instructions at that time. As a reminder, this conference is being recorded. If anyone should need operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference call over to Dave Graziosi, the company's Executive Vice President and Chief Financial Officer. Please go ahead, sir.
Dave Graziosi (EVP and CFO)
Thank you, Melissa. Good morning, and thank you for joining us for our fourth quarter 2014 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman, President, and Chief Executive Officer. As a reminder, this conference call webcast and the presentation we are using this morning are available on the investor relations section of our website, allisontransmission.com. A replay of this call will be available through February 17th. 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 2014 results press release and our Annual Report on Form 10-K for the year ended December 31st, 2013, 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 that 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 2014 results press release, both of which are posted on the investor relations section of our website. Today's call is set to end at 9:00 A.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)
Thank you, Dave. Good morning, and thanks to everyone on the call for joining us today. We're pleased to report Allison's fourth quarter 2014 results exceed the guidance ranges we provided to the market on October 27th. Net sales improved on a year-over-year basis for the fifth consecutive quarter, led by the continued recoveries in the North America on-highway and off-highway end markets, and higher demand in the service parts, support equipment, and other end market, partially offset by lower demand in the outside North America on-highway and North America hybrid propulsion systems for transit bus end markets. Adjusted EBITDA and adjusted free cash flow also meaningfully outperformed our expectations. Please turn to slide four 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 the 2015 guidance prior to Q&A. Please turn to slide five of the presentation for the Q4 2014 performance summary. Q4 net sales increased 11% from the same period in 2013. Gross margin for the quarter was 47%, an increase of 390 basis points from a gross margin of 43.1% for the same period in 2013. The increase in gross profit from the same period in 2013 was principally driven by increased net sales and price increases on certain products. Adjusted net income increased $39 million from the same period in 2013, principally driven by increased adjusted EBITDA and decreased cash interest expense.
Adjusted free cash flow increased $20 million from the same period in 2013, principally driven by increased net cash provided by operating activities, decreased capital expenditures, increased excess tax benefit from stock-based compensation, and a $3-million increase in technology-related license expenses. Please turn to slide six of the presentation for the Q4 2014 sales performance summary. North America on-highway end-market net sales were up 22% from the same period in 2013, principally driven by higher demand for Rugged Duty Series models. North America hybrid propulsion systems for transit bus end-market net sales were down 47% from the same period in 2013, principally driven by intra-year movement in the timing of orders and lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully automatic transmission.
North America off-highway end-market net sales were up 157% from the same period in 2013, principally driven by higher demand from hydraulic fracturing applications. Defense end-market net sales were up 9% from the same period in 2013, principally driven by revenue deferred in the prior year period for certain tracked transmissions that were not shipped at the request of the U.S. government, partially offset by previously considered reductions in U.S. defense spending to longer-term averages experienced during periods without active conflicts. Outside North America, on-highway end-market net sales were down 24% from the same period in 2013, reflecting weakness in China bus and Europe truck.
Outside North America, off-highway end-market net sales were up 36% from the same period in 2013, principally driven by improved demand in the China energy sector, partially offset by lower demand in the global mining sector. Service parts, support equipment, and other end market net sales were up 13% from the same period in 2013, principally driven by higher demand for North America off-highway service parts. Now, I'll turn the call over to Dave Graziosi.
Dave Graziosi (EVP and CFO)
Thank you, Larry. Please turn to slide seven of the presentation for the Q4 2014 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 $2 million from the same period in 2013, principally driven by increased global commercial spending activities, partially offset by favorable product warranty expense adjustments. Engineering, research, and development expenses for the quarter increased $10 million from the same period in 2013, principally driven by increased product initiative spending and 2014 technology-related license expenses of $3 million to expand our position in transmission technologies.
As a result of market events and conditions during the fourth quarter of 2014, Allison reviewed certain of its long-lived assets related to the production of the H3000 and H4000 hybrid propulsion systems, resulting in a $15-million impairment loss for the fourth quarter of 2014. The loss included approximately $2 million of accrued expenses related to the impairment of long-lived assets. Deteriorating market conditions for hybrid propulsion vehicles significantly contributed to future cash flows of the related assets being less than the carrying value of those assets. Interest expense net increased $9 million from the same period in 2013, principally driven by $19 million of less favorable mark-to-market adjustments for LIBOR swaps, partially offset by the expiration of certain LIBOR swaps, lower amortization of deferred financing charges, and debt repayments.
Income tax expense for the fourth quarter of 2014 was $27 million, resulting in an effective tax rate of 35% versus an effective tax rate of 36% in the fourth quarter of 2013. Adjusted EBITDA, excluding technology-related license expenses for the quarter, was $188 million, or 34.6% of net sales, compared to $153 million, or 31.1% of net sales for the same period in 2013. The increase was principally driven by increased net sales, price increases on certain products, and favorable product warranty expense adjustments, partially offset by increased global commercial spending activities and product initiative spending. Please turn to slide eight of the presentation for the Q4 2014 cash flow performance summary.
During the fourth quarter, we continued to demonstrate strong operating margins and free cash flow conversion while investing in growth opportunities, despite challenging conditions in the outside North America end markets. In addition, highlighting Allison's commitments to cash flow generation and the return of capital to shareholders, our board of directors authorized a stock repurchase program for up to $500 million of common stock and approved an increase in the quarterly cash dividend from $0.12 to $0.15 per share. Finally, we maintain our prudent approach to capital allocation by repaying $69 million of debt and ended the quarter with $263 million of cash, $455 million of revolver availability, and net leverage of 3.03. Now I'll turn the call back over to Larry.
Larry Dewey (Chairman, President, and CEO)
Please turn to slide nine of the presentation for the 2015 guidance end markets net sales commentary. Allison serves a wide variety of end markets in various geographies. We have consistently articulated our strategic priorities of global market leadership expansion, emerging markets penetration, product development, core addressable markets growth, and delivery of solid financial results, with emphasis on generating strong cash flow. Despite a cautious approach to 2015, given headwinds and uncertainty in the global off-highway end markets, combined with heightened geopolitical volatility, Allison will continue to pursue its strategic priorities. Further, as we've done during other periods of meaningful uncertainty, Allison will proactively implement initiatives to align costs and programs across our business with actual end-market conditions and opportunities.
Allison expects 2015 net sales to be in the range of flat to down 5% compared to 2014. Although we are not providing specific first quarter 2015 guidance, Allison does expect first quarter net sales to be higher than the same period in 2014. The anticipated year-over-year increase in first quarter net sales is principally driven by higher demand in the North America on-highway and off-highway end markets, partially offset by previously considered reductions in defense net sales and lower demand in the North America hybrid propulsion systems for transit bus end market. With that, I'd like to highlight the following end-markets assumptions for the full year 2015. North America on-highway, we expect a net sales midpoint growth of 8%, principally driven by continued market recovery.
North America hybrid propulsion systems for transit bus, Allison expects a net sales midpoint reduction of 13%, principally driven by engine emissions improvements and non-hybrid alternative technologies that generally require a fully automatic transmission. North America off-highway, we expect a net sales midpoint reduction of 30%, principally driven by decreased demand from hydraulic fracturing applications. Defense, Allison expects a net sales midpoint reduction of 34%, principally driven by continued reductions in U.S. defense spending to longer term averages experienced during periods without active conflicts. Outside North America on-highway, we expect a net sales midpoint of flat, principally driven by increased fully automatic penetration, offset by continued challenging market demand conditions. Outside North America off-highway, Allison expects a net sales midpoint reduction of 20%, principally driven by continued weakness in the energy and mining sectors.
Service parts, support equipment, and other, we expect a net sales midpoint reduction of 5%, principally driven by decreased demand for North America off-highway service parts. Please turn to slide 10 of the presentation for the 2015 guidance summary. In addition to our 2015 net sales guidance range of flat to down 5% compared to 2014, we expect an adjusted EBITDA margin in the range of 34%-35.5%, with an adjusted free cash flow in the range of $475 million-$525 million, or $2.60-$2.90 per diluted share. Allison expects capital expenditures in the range of $60 million-$70 million, and cash income taxes in the range of $10 million-$15 million.
A discussion of our 2015 outlook would be incomplete without noting that Allison will be celebrating its centennial throughout the year with a variety of special events and activities. Both our company and its founder have incredibly rich and storied histories. Allison was founded on the values of innovation, quality, and reliability, and I'm very proud to say those remain our driving values today with products and services that improve the way the world works. We look forward to sharing our heritage on a global scale this year with employees, business partners, and the communities in which we conduct business. Thank you for your time this morning. Melissa, please open the call for questions.
Operator (participant)
Thank you. If you would 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 would 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, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook (Managing Director of Equity Research)
Hi, good morning. I guess just a couple questions. First, you know, given the decline in crude prices we've seen, I know your fourth quarter still reflected some pretty good growth, but can you talk about sort of what you've seen in your order book across the different product lines, and the impact you've seen from, from energy, which obviously, is the reason why some of your, you know, the significant declines you're seeing in some of your off-highway businesses? And then I guess my second question is, on the North American on-highway side, you're still expecting, 8% top line growth. Can you talk about your comfort level there? Do you expect any indirect headwinds from the energy side, and sort of just generally what you're hearing from, from OEs? Thanks.
Larry Dewey (Chairman, President, and CEO)
Sure. Let's talk about the off-highway, and of course, North America is primarily energy, outside of North America is got certainly an energy component, but also the mining. Let's deal with the mining and just say that we continue to see that as continuing in a fairly depressed state. Relative to energy, we have seen some of the indications of the downtake that we have described out of China. First quarter, North America off-highway energy is actually holding up. Our forecast, however, takes a fairly conservative view of the remainder of the year, and that's where we have taken the numbers out.
We've seen a few orders pushed around a little bit, but frankly, the first quarter appears to be holding up fairly well. It's really the out quarters for 2015, where we've addressed the downtake here in North America of a total of 30% year-over-year, as I indicated in my comments. Relative to North America, on-highway, certainly we think that our numbers are directionally in line with a lot of the industry forecasts for the vehicle build. The other thing is we have seen some share increase as we have been targeting, you know, a handful of percent here and there.
So, in addition to what you're seeing in the industry numbers, we're certainly continuing to drive to add to our market share. Relative to the space for energy specifically, we do for that piece of it, it's difficult because that ends up in our Rugged Duty Series, which goes to a number of different vocations, construction, refuse, and then also energy in many cases. So, you know, peeling those out once it gets beyond the OEM is a little more difficult, but certainly we have tempered our overall numbers based on some expectation of a little bit of moderation there in that one piece.
Jamie Cook (Managing Director of Equity Research)
I guess just one follow. Can you just what is your visibility in North America on-highway versus as we were sitting here last year, and then I'll let someone else ask a question?
Larry Dewey (Chairman, President, and CEO)
.You know, I would say, not to be flip, but we've got the order boards from the OEMs, it's about the same visibility. You know, the reality of life is, you know, they give us, in many cases, a 10-day line set with a six-month forecast, maybe a three-month forecast. So those do bounce around, depending on conditions. We've seen, you know, it swings both ways. We'll see upfront increases, depending if someone gets a big order, like a one-way rental order or something. You know, we're working pretty hard in our 1,000-2,000 plant based on some of the orders that have been captured in that space. But, you know, I would say it's pretty comparable.
Jamie Cook (Managing Director of Equity Research)
Okay, great. I'll get back in queue. Thank you.
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 and Head of US Machinery Engineering and Construction Franchise)
Good morning.
Larry Dewey (Chairman, President, and CEO)
Morning, Jerry.
Jerry Revich (Senior Investment Leader and Head of US Machinery Engineering and Construction Franchise)
I'm wondering if you can just talk about the guidance for roughly similar EBITDA margins in 2015 on lower sales, maybe step us through the drivers of how much of a tailwind is pricing, and what are your plans for SG&A and R&D, 2015 versus 2014?
Dave Graziosi (EVP and CFO)
Sure. You know, we certainly saw some progress on pricing in 2014, probably more so in the second half than the first half. You can certainly run rate some of those increases, and that's been baked into our guidance. We continue to make, I think, very good progress from an operating standpoint in terms of operating leverage realization. We've taken a very conservative view in terms of manning. As you know, we take a pretty prudent view there, just given that the legacy costs when you take people on. So we have, despite, you know, relatively strong order boards, continued to conservatively man the operation. So we'll typically do that through overtime, but more or less one shift globally.
Supply chain initiatives continue and making good progress there as well. You know, beyond that, if you look at the balance of the P&L, SG&A overall, expectation right now is it will be down slightly there. And then on the engineering and research side of things, we expect to be down slightly there. The starting point, of course, is to take out the license exclusivity agreement charges that we took last year. So, overall, that'll provide us with some tailwind. As Larry mentioned, you know, we've seen some of these soft spots in market conditions before. It's not new to the business or this team. And we certainly have taken steps already but are prepared to take other steps, depending on how market conditions are realized.
We feel good about our position from a margin perspective and the guide as we start the year.
Jerry Revich (Senior Investment Leader and Head of US Machinery Engineering and Construction Franchise)
Okay. And then, on the product side, I'm wondering if you just update us on, on the FuelSense rollout. By when do you think the full set of options will be available across the OEMs? And, Larry, you mentioned there have been a few pockets of share gains. Can you just flesh that out and just quantify that in the context of, you know, the Ford business or part of the Ford business that will be a headwind in the back half of the year?
Larry Dewey (Chairman, President, and CEO)
Sure. You know, relative to FuelSense, as part of that program, in order to achieve the full benefits of that, the OEMs have some programming to work. Obviously, there are some that have been able to get it on some portion of their product lineup. We continue to work. I would expect you'll see that continue to roll out here, this year and even into early next. We're also working on the future generations of FuelSense, you know, 2.0, as it's called internally. So, you know, there's some neat things that are going on there. And so I would expect this to be kind of a continued drumbeat as we move forward, as we continue to improve the efficiency attributes of our products.
Relative to the share gains, you know, if you look at Class 6-7, looks like we're up a couple of points there, driven by some of the package delivery one-way business that we've been able to pick up better share in some of those segments. Also, I think some of the general pickup and delivery in that space. Class 8 straight truck, relative to the construction work that we've done, municipalities work, we've been running some conquest programs over the last couple of years in the spring every year, and we're starting to get some of the repeat purchases on those.
They start out very small quantities, but then, as the customers have the experience with the product, they, they do come back in for bigger and bigger buys. It's that arithmetic progression that we've discussed. And so it would appear that we're doing a little better there for share. Relative to the, the, Ford announcement, clearly, there's a piece there, and I think we've scoped that out, in, in previous calls. I would tell you that, we've got a full court press on, relative to working with other OEMs, and in fact, are starting to get some orders converted, in advance, really, to the, the, lack of availability in the Ford chassis, for people that want to stay with the Allison.
I wouldn't pretend to say that it will have zero impact, but I think, we will, we will manage that, as we go forward. We certainly have that comprehended in our plans.
Jerry Revich (Senior Investment Leader and Head of US Machinery Engineering and Construction Franchise)
Okay. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Andrew Kaplowitz with Barclays. Please proceed with your question.
Andrew Kaplowitz (Director)
Hey, guys. Good morning.
Larry Dewey (Chairman, President, and CEO)
Morning.
Andrew Kaplowitz (Director)
Larry or Dave, can you talk about your service and parts business guidance? It seems like you're guiding to something like a 20% decline in your energy-related parts business, you know, assuming flattish truck transmission service. Overall, you know, if you go back and look at 2011-2013, you know, which is the last energy downturn for you guys, parts grew even though energy was down something like 85%. So I'm just trying to figure out if my math is wrong, or are you just being relatively conservative in parts, you know, after you're up 13% in 4Q?
Dave Graziosi (EVP and CFO)
Yeah, what we've assumed in the guidance, given Larry's comments and certainly the current expectations around oil pricing is our North America off-highway aftermarket business to be down, you know, roughly 30%, year-over-year. So, you know, depending on your view of things, that's, you know, could be conservative or not. As, you know, we'll see what happens there. But I would tell you, the way that that market developed, if you think back to the middle of 2013, really, the second half of 2013, we started to build, certainly quarter-over-quarter and some pretty strong results last year.
That being said, we felt some of that was a function of some level of pent-up demand in terms of the new rigs that were getting in and then ultimately requiring overhauls and work, and that getting done. Having said that, the feedback that we're getting from our channel would indicate a certain, I would say, a pretty significant level of reduced activity as we forecast. So as we think about that, again, the way we weight the year and the timing, certainly, you know, Q1 would be an expectation to be down certainly sequentially, to keep that in mind, and then, with, you know, the first half being higher and then ultimately followed by second half being down year-over-year.
The waiting is, I think, similar in many ways to the way that we're thinking about the new transmission sales as well.
Larry Dewey (Chairman, President, and CEO)
Yeah, and just to add on to that, the couple other little pieces there. If you think about when the OE build was down and the parts sales were up, that's when everyone was bringing their rigs back online. You saw a significant decrease in the amount of idled horsepower during that period, and now we're kind of—it's going the other way. It's, you know, people are idling their rigs, and so they tend to you know, not buy the parts and do some of the work that maybe they would otherwise. So as they start bringing those rigs back online, at whatever point it starts recovering, we would expect a similar thing to what we saw.
The other opportunity we have, and I'd be remiss if I didn't point it out, is we've new products with higher horsepower. And along with that, higher horsepower capabilities, along with that, we've introduced a number of kits that allow folks with existing products to upgrade them. And those kits, you know, they... One of the less content kits, about $40,000, and the higher content kits, about $70,000 a pop, the one that we'll be introducing here very shortly, discussed it yesterday with the team. So there is an opportunity against the current fielded units to pick up a little bit of revenue there by giving them the capability, and we'll see how that plays out. That could help us a little bit in this space.
Andrew Kaplowitz (Director)
Okay, that's helpful, guys. And then just shifting gears, I think you guys said as recently as December to expect some growth in non-North American on-highway markets. You know, you said it's some China weakness here in the fourth quarter. So just can you talk about what changed in the last couple months and months, and how much has currency impacted, if at all, your guidance?
Larry Dewey (Chairman, President, and CEO)
I think some of the drivers in Europe, we had a number of releases that were scheduled that we had anticipated would be happening. And one of the things that's going on between you know, the geopolitical situation with Ukraine and then frankly some of the economic challenges, including you know, the. We're gonna see it continue in 2015 with some of the maneuvering around Greece. But there just seems to be a malaise that we're struggling with relative to the OEMs completing their engineering work. You know, they're managing their budgets, and as a result, some of those releases that we would've anticipated and then allowing us to sell some product did not materialize. I wouldn't pretend to say that's the whole issue for 2014.
Frankly, there was more of a pre-buy than we had understood in 2013. And you know, we got to do a better job of staying close to that. And then there were some products that we were in that were good volume drivers for us, that the OEMs canceled during the course of the year. So, you know, from a Europe standpoint, that was certainly some of the challenge. China, you know, you really add some of the bus tenders, that was a big volume differential. We've made gains on the truck side, but I would say that, frankly, we're not where we want to be, and we've got more work to do there, in China truck.
Andrew Kaplowitz (Director)
Okay, guys. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch. Please proceed with your question.
Ross Gilardi (Equity Research Analyst)
Good morning. Thank you.
Larry Dewey (Chairman, President, and CEO)
Morning.
Ross Gilardi (Equity Research Analyst)
I just had a couple questions. First, back on the North America on-highway guidance for +8%. Just hoping you can break that down between what you're expecting for Class 8 straight versus medium duty. I mean, one of the other major truck suppliers was only forecasting 1% revenue growth in medium-duty truck and bus last week, and if you use a similar assumption for your business, it wouldn't seem to imply you're forecasting north of, you know, 15% growth in Class 8 straight. So, you know, familiar with the external forecast, hoping to hear it directly from you on what you're assuming in that +8%.
Dave Graziosi (EVP and CFO)
Ross, as you know, you know, I'm sure the forecast that you're looking at externally, we look at the same ones. Things to keep in mind, as you know, our business in terms of addressable market for North America has certain components to it, if you will, or subsegments, that when you think about the guidance overall, and frankly, our performance in 2014, we outperformed the market, I think, as you know. So as you start to fast forward to 2015, with the number of programs that Larry mentioned, frankly, and the traction that we're getting in those areas, as well as the underlying advantages of our addressable market versus others, it's, and I would say it lines up, we think, very well in terms of overall view.
I would tell you, as we talked about order boards before, the strength of those are up slightly year-over-year, for this time period. The messages that we're getting back in terms of feedback line up very well with our forecasting. As you know, we also make adjustments to forecasts that we receive, to, I would say, line those, I think, better with some of our prior experience. But, you know, I would say, whether it's Class 6-7 truck or the Class 8 straight truck that Larry referred to, you know, we feel very good about our positioning for the year, given the feedback that we have.
So, relative to others' guidance, as you know, they think about that, I think there's a number of drivers there that they're addressing versus where we're at, as well. So I think we, you know, as you would expect, keep those in mind and analyze those at the same time. But I would say, overall, our book of business, we feel very good about for 2015.
Larry Dewey (Chairman, President, and CEO)
The thing I'd add to that is, of course, as a vehicle OEM, they would talk in terms of their vehicle sales. We're obviously, eventually, you get connected to that, but the reality is we're tied to vehicle build. And where we look, one of the other key things we look at is the inventories. Certainly, Class 6-7, you know, continues to make progress in terms of moving towards what ACT would normally describe as kind of the low end of or low point of, you know, normal, for whatever that means in these times, normal inventory levels.
Class 8, while it's still Class 8 straight truck, now I'm referring to our addressable market, is frankly a little high, but it has actually come down quite a bit over the past couple years. So while it is higher than what we would might have in the past said was where we want to be, on the other hand, they've been operating at higher levels, and in fact, it's been brought down. So that's another factor in us feeling fairly solid on our forecast.
Ross Gilardi (Equity Research Analyst)
Great. Thank you. And then, Larry, I have a follow-up. It's more of a strategic question, but, you know, certainly outside of North America on-highway, from a growth perspective, I mean, you've painted a pretty bleak picture for 2015 in your other businesses. Granted, you're not, certainly not the only one in the industry, but, you know, Allison gets, deservedly, a lot of positive recognition for being very lean. You've got great free cash flow. You're very frugal. But do you feel at all like you need to step up investment in, in R&D and sales and marketing, product development, outside of North America on-highway? Because outside of North America on-highway, we're looking at mostly double-digit declines.
You know, appreciate the market outlook is tough, but do you also feel like you need to, you know, step up investment to further diversify the company and add another leg to the stool?
Larry Dewey (Chairman, President, and CEO)
Well, what we've focused on, and the investments that we've put in place have been directed, in many cases, towards the outside North America activity. You know, the products we develop, we develop them with a global perspective, so it's really worldwide. It would include North America. There really aren't, you know, unique -- there are certain unique features that we've developed, ground-driven PTO, et cetera, that makes the product maybe more desirable in places that have legislation that require such things. But where we've really made the investment is in efforts to try to create the market. And while we have made some modest gains in that space, you're correct in identifying that, you know, frankly, we've got more work to do there.
And so we have put a lot of money, in fact, more money outside North America in many respects than the North American space, because we do recognize it's market creation. So that's the types of investments, whether it's personnel, whether it's penetration pricing programs, whether it's engineering funds to assist OEMs to try to get the releases into the products. You know, those are all things that free hardware, et cetera, are all things that we have been pushing on to just drive those numbers. Again, we've seen some wins, but frankly, anytime you get a win, it's typically small numbers in the beginning, and then the arithmetic progression starts.
We haven't been able to outpace some of the headwinds that have occurred in places like China or Europe, as well as some of the OEM slowdown in some of their engineering work.
Ross Gilardi (Equity Research Analyst)
Great. Okay. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.
David Leiker (Analyst)
Good morning, everyone.
Larry Dewey (Chairman, President, and CEO)
Morning, David.
David Leiker (Analyst)
I wanted to focus on the impact of price increases. We've got a couple of quarters that, you know, in 2014, we'll have some carryover in 2015. Are those normal contractual price increases, or are those actions that you've gone out to try and take advantage of some opportunities?
Dave Graziosi (EVP and CFO)
It's really a combination of both. And I would tell you, it's really across our various end markets, so it's not, you know, one in particular. I would say, and we've talked about this before, that we price the product for the value that it delivers. So, from our perspective, we continue to drive that idea, frankly, and the technology with significant investment, whether it's FuelSense or some of the other things that Larry talked about. So, we feel that the product is becoming more valuable, and frankly, from a return-on-investment standpoint, end users, accordingly, there's more value there to be had. So we're going to price at that level.
I would tell you that, you know, some of the progress I mentioned that we made in 2014 is certainly run-rate to a degree into 2015 as well. But from a positioning standpoint, we feel solid about that. I would also say it's not as if we're not investing some of that incremental improvement in some growth initiatives. To Larry's earlier comments, outside North America, we continue to support those regions with, you know, significant amounts of investment in people and otherwise. So, you know, if you look at our headcount and progress that we've made there in terms of staffing, the issue is we don't lack things to sell and we don't lack the resources to sell.
So, we feel good about, you know, again, pursuing those initiatives and, and continuing to drive that process forward, and feel very good about, where we're at from a, from a selling price value perspective.
David Leiker (Analyst)
And then the other item here is the impairment on some of your hybrid assets. Can you talk about what you impaired there, and the thought process behind that?
Dave Graziosi (EVP and CFO)
Sure. I mean, look, the, as you know, you know, we can fondly recall years ago, some, some, well-known consultants telling us how many thousands and thousands of units of hybrids would be sold, in North America today. And, as you well know, that hasn't exactly panned out. The advent of alternative fuels, ex. NG, as well as other technologies, and frankly, fuel, fuel cost overall, have continued to, to drive, that investment case in the wrong direction for North America. I would say there, there continue to be, opportunities in areas where you don't have access to alternative fuels, and certainly something we're looking at.
The reality is, as we sit today, given the combination of the reduced hybrid market overall outlook, as well as fuel cost, alternative technologies, frankly, the lack of end user enthusiasm for those platforms, you know, resulted in, the impairment charge that we recognized, so.
David Leiker (Analyst)
Great. Thank you much.
Operator (participant)
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer & Co. Inc. Please proceed with your question.
Ian Zaffino (Research Analyst)
Hi, great. Thank you. Just wanted to get a sense of your, the outside North America on-highway business. How much of, like, the baseline demand is, let's just say, up or down, you know, your current production sales compared to, you know, the new releases or new launches that you're expecting?
Larry Dewey (Chairman, President, and CEO)
Make sure I understand the question. You want to know when you say baseline demand, some of those releases are in the space that I would normally describe as somewhat baseline, whether it's construction or refuse, in the case of some of the folks, you know, certainly some of the bus tenders can be a bit lumpy. You know, we got the work we've done in Russia, of course, as you might imagine, is kind of on hold for the most part. Turkey, which had been coming along nicely in out of the Europe, Middle East, and Africa region, you know, certainly in 2014, due to some of the political challenges they had internally, dried up, although we feel very good about that for 2015.
You know, but fundamentally, you know, some of the base construction still isn't robust in Europe. Pickup and delivery tied to economic activity, you know, nothing to write home about. So, you know, I would say that from where we sit, the malaise, as I described it earlier, is inhibiting some of the what we would like to see as a little stronger recovery. And then some of the new initiatives that we had in places like South Africa and Russia, Eastern Europe, in some cases, although truthfully, those were a little smaller, really have just kind of been put on hold as a result of some of the larger macro developments.
Ian Zaffino (Research Analyst)
Okay. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Neil Frohnapple with Longbow Research. Please proceed with your question.
Neil Frohnapple (VP and Senior Research Analyst)
Hi, good morning, guys. I think you mentioned in your prepared remarks that you could potentially implement actions to offset slowdown in global off-highway weakness. Any more color you could provide here or, you know, timing?
Dave Graziosi (EVP and CFO)
Sure. I mean, certainly in prior cycles, as we mentioned, you know, we have experience with this. We can certainly throttle back a number of different areas in terms of spending, relative to opportunities. We're continuing to fund a number of those. Having said that, if market conditions are, you know, deteriorate further, we can certainly make some changes there in terms of launch timing, et cetera. So I think there's a number of things that are available to us, to be able to pull those levers and be responsive to market conditions, and again, not something that's new to this business or this team.
Neil Frohnapple (VP and Senior Research Analyst)
Great. And then military revenue at the midpoint is expected to be just north of $100 million, I believe, in 2015. Would this level be at the longer term averages experienced during periods without active conflicts, or would there be further declines in 2016, you know, excluding any sort of tailwind from the JLTV program?
Dave Graziosi (EVP and CFO)
So we don't, for a number of reasons, have a tremendous amount of visibility, shocking as that may seem, given the lack of clarity out of Washington on spending in a number of instances. Frankly, recently, over the last several weeks, a number of changes that have, that you've seen in terms of the 2015 budget, and then some of the proposals very recently around tracked, for FY 2016 are interesting, potentially.
So, I would say our visibility at this point, post 2015, isn't very significant other than, you know, some of what we've seen already in terms of the tracked side. But again, that seems to be in a level of flux right now, given the recent announcement by the Army that they may be pursuing a pull forward of ECP on the Abrams. So there's a number of things that we're gonna have to look at. I would also tell you some of the adjustments that have been made to the wheeled side of things with the Army in terms of continuing to keep certain OEMs busy is also helpful for us as we start to build the post-2014 book of business.
Larry Dewey (Chairman, President, and CEO)
Yeah, I think it's premature to count anything, you know, that may be talked about is in the bank. Having said that, I think it'd be fair to say that some of the recent developments and some of the recent discussions cause us to feel a little better about this business in the near term than maybe we did a year ago.
Neil Frohnapple (VP and Senior Research Analyst)
All right. Thank you very much.
Larry Dewey (Chairman, President, and CEO)
Yep.
Operator (participant)
Thank you. Our next question comes from the line of Vishal Shah with Deutsche Bank. Please proceed with your question.
Vishal Shah (AVP of Markets Electronic Trading and GT Production)
Yeah, hi. Thanks for taking my question. I guess, on the hybrid business, just longer term, I just wanted to maybe get a sense from you on your longer-term strategy with that business. I mean, is it profitable on its own, and have you considered options, any other options for that business? You know, instead of winding it down or paying it off.
Larry Dewey (Chairman, President, and CEO)
Well, you know, certainly the volumes and the demand is relatively focused, I guess one could say. As it sits here today, a couple of thoughts on that. Number 1, many of the technologies that we use in hybrid, particularly in the control space, we can use as we continue to think about our portfolio and improving the energy efficiency of our on-highway products, whether it be the current products, because frankly, we've taken some of the control schemes that we were using on hybrid and have brought them back across to the current products, some of which made their way into FuelSense, which improves the value, which we will, you know, certainly try to capture and the economics on that.
It could result in economically intelligent ways to try to combine a number of opportunities that people are playing with that are relatively niche. I'm speaking specifically of plug-in hybrids and electric vehicles. If you can control a vehicle where you are blending the power from an internal combustion engine with power pulled from the batteries, it would seem to me, and it occurs to us, that handling it from batteries only is an even simpler task, because you're managing all of those same variables from a hybrid.
Now, having said that, if the batteries are not sufficient for the duty cycle, in a hybrid, and you need the regen, or you need the, in addition to the regen, you need the internal combustion engine, it's hard to understand the physics, how they might get through the duty cycle with batteries only. So we think that certainly battery technology is gonna have to come a ways. Having said that, we're positioned, and I, I, while fuel prices are low, I'm not sure how many of us are willing to bet as to what they're gonna look like for five or 10 years from now. And Allison is certainly, positioning, against a broad array of potential outcomes with our technology development.
We're not going to stop that, because we think as an industry leader, that's the smart play for us.
Vishal Shah (AVP of Markets Electronic Trading and GT Production)
That's helpful. Thank you. And then just one question on the guidance. Now, can you maybe talk about the level of year-over-year price increase that's baked into your 2015 guidance? And also considering the strong free cash generation that in 2015, you know, maybe talk about thoughts on the share buyback cadence, you know, for the year. Thank you.
Dave Graziosi (EVP and CFO)
Sure. On the price increase impact that's baked into, you know, our guide for this year on a year-over-year basis, it's if you take, you know, roughly half of what we saw for 2014 versus 2013, a bit more in some areas, but that's the starting point in terms of the guide. You know, as we will see in terms of progress as the year rolls out, but we feel, you know, again, very good about the pricing outlook overall.
Vishal Shah (AVP of Markets Electronic Trading and GT Production)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Rob Wertheimer with Vertical Research Partners. Please proceed with your question.
Rob Wertheimer (Analyst)
Hi, good morning, guys. Can you hear me?
Larry Dewey (Chairman, President, and CEO)
Yeah, now we can.
Rob Wertheimer (Analyst)
Yeah, sorry about that.
I wonder if you could give us a quick update on tax. I don't know whether you have NOLs left. Your tax rate forecast, I think, or cash tax, rather, is still low next year. Maybe you can discuss the drivers of that lowness and how long it would last into the future, if you don't mind.
Dave Graziosi (EVP and CFO)
Sure. We do, we will have NOL remaining, had at the end of 2014, our current view relative to our guide and a number of other assumptions, which, you know, can vary depending on actual performance, we have an expectation that, we'll have fully utilized our NOL by the, call it, the first quarter of 2016 at this stage.
Rob Wertheimer (Analyst)
2016. Okay. And then would you, would you hazard a guess as to the tax rate that normalizes to and, you know, right after that?
Dave Graziosi (EVP and CFO)
What we've told everyone is more or less, you know, starting with a 10% of adjusted EBITDA-type of number for cash income taxes post the NOL.
Rob Wertheimer (Analyst)
Okay, perfect. And then one small clarification, the share gain that you've had, you know, in North America, is that largely coming from manual, or have you pushed back on AMTs and, you know, especially in medium duty?
Larry Dewey (Chairman, President, and CEO)
In medium duty, I would say it's primarily pushed back on AMTs. I think folks have tried them and had some experience with them, and we've been able to recapture many of those customers.
Rob Wertheimer (Analyst)
Sure, interesting to hear. Okay, great. Thank you much.
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 (Group Head of Global Industrial Infrastructure)
Hi, thanks. Good morning. Curious, I think it was asked, but I'm not sure we got the answer yet. But the case for the buyback, and to confirm, it looks like there's no impact embedded into the guidance for the buyback. I'm not sure what the reason for that would be, but, you know, how do we think about the cadence? And also, can we think about being more aggressive on buybacks, especially now that we have the reset out of the way? Or is that obviously more of a, just a, you know, course of the year type of allocation? So more color on the buyback, please.
Dave Graziosi (EVP and CFO)
Sure. We, you know, as we talked about, last year, late last year with the board's announcement and approval of the authorization of the share repurchase, we take a number of valuation views into mind as well as internal, external alternative uses. It's long-term, valuation driven, and we really have no sense of urgency, hence the authorization running through the end of next year. That being said, you know, we certainly have a view of value, and we'll be pursuing that accordingly, relative to market conditions. So from a, you know, what's baked into the guidance or not, we've not assumed anything into the guidance, as frankly, we don't have that level of visibility per se.
That being said, you know, certainly our expectation that, market conditions dependent, we, you know, will be certainly executing that authorization.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Okay. Then you guys talked for a moment, obviously, about market share gains, you know, pockets of them, you know, in different aspects, such as medium duty. Are you thinking about this as small incremental gains that happen here and there, and you pick up share on different platforms and things like that? Or is this part of a larger, longer-term outperformer story that could last for a long time? Curious about how long of a tail you think it can outgrow your end market space and market share gains.
Larry Dewey (Chairman, President, and CEO)
Well, certainly within our three and five-year plans, we have gains baked in, and you're—here in North America, they are targeted because when you're, you know, at some fairly significant levels already, you know, adding to that, you're reaching some diminishing pockets of opportunity. And that's why so much of the focus is on outside North America, where we've got to start driving even more traction than that which we've achieved to date.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Okay. Is it FuelSense that's really driving the gains, or is it just overall productivity and obviously duty cycle, start, stop, et cetera?
Larry Dewey (Chairman, President, and CEO)
It's FuelSense really hasn't had an impact yet to this point in time, and certainly we're looking at how we take FuelSense into the market, how much of that drives unit volume gains, and then frankly, how much of that is a revenue enhancer for the FuelSense capability itself, and that's something that the organization is working on.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Okay, thank you.
Larry Dewey (Chairman, President, and CEO)
Welcome.
Operator (participant)
Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question.
Alex Potter (Senior Research Analyst)
Hi, guys. Just touching on that increased penetration in global on-highway. In the PowerPoint, you talked about the weak global demand, which we've touched on multiple times here, but you also said that it would be offset by some increased penetration. Was wondering where you think the specific opportunities are in 2015 outside North America on-highway?
Larry Dewey (Chairman, President, and CEO)
Yeah, and obviously, we wait for them to make the official announcements, but there's a large, southern Germanic OEM that we have, up to this point in time, not had much business with, and we have our first releases set for later this year, with them. I think we're continuing to see in Japan, for example, growth in some of the domestic truck rental. We're seeing some recovery in Australia, where, the Japanese OEMs using the Allison are pretty strong. You know, India, you know, looks like the bus business is coming back. We continue to work on the trucks, but the bus will be the big volume driver there. As I mentioned earlier, I think, it's gonna be a nice year, in our Turkey business.
So, you know, there's a number of areas, you know, China trucks going to continue to grow. I think we're gonna see a few more orders on the bus side in China, as well. You know, we continue to chase the Bangkok tender, that pops up and slide sideways here and there, but sooner or later, you know, we're gonna get the rest of that. They've started out years ago with 2,000, and they've been letting it out in 200-400 unit increments, and I think we're down to the last 400, and we've done pretty well against that. So that'll be a another piece we'll be chasing. So there's a number of areas.
Latin America, we're starting to get some traction with some of the European OEMs down there and some of the truck locations. You know, Venezuela and, and Argentina, it's gonna be tough, due to the economic conditions. We know that, but there's some opportunities in other parts of, that region, particularly on the truck side, to be additive to where we're at, to try to offset some of that.
Alex Potter (Senior Research Analyst)
Okay, very good. That's helpful. And then I guess lastly, just a quick comment on the TC10 progress toward getting into some new OEMs there. Thanks a lot.
Larry Dewey (Chairman, President, and CEO)
Continue to work with them. I think the biggest thing we can do is continue to have end users buying the product as we are, more and more larger orders being placed, repeat orders being placed with some very large beverage fleets. And as they get confident in the product, they're going to, and assuming they use different OEMs, they're certainly going to ask for that product to be available at those OEMs. Obviously, we engage in dialogue directly with the OEMs. We've got proposals, including engineering funds, to assist them in that. But the real key is gonna be the success of the product in the market, and we've been very pleased to date.
The customers who have been using it are seeing every bit of what we've told them they're gonna see relative to fuel efficiency and have been pleased, and as I said, we've received from some major players some repeat orders, and that bodes very well.
Alex Potter (Senior Research Analyst)
Okay, great. Thanks a lot.
Operator (participant)
Thank you. Our next question comes from the line of Ann Duignan with JPMorgan Chase. Please proceed with your question.
Ann Duignan (Managing Director and Equity Research Analyst US Machinery)
Hi, good morning. Most of my questions have been answered by now, so, I just wanted to circle back on defense. With the JLTV contract in play, there are three competitors. Are you positioned on all three competitors, or are you, you know, are you on one of the three, two of the three, or all three?
Larry Dewey (Chairman, President, and CEO)
We're on all three.
Ann Duignan (Managing Director and Equity Research Analyst US Machinery)
Okay, so you're agnostic.
Larry Dewey (Chairman, President, and CEO)
Yes.
Ann Duignan (Managing Director and Equity Research Analyst US Machinery)
Then, just a minor detail, but can you give us your year-ending diluted share count?
Dave Graziosi (EVP and CFO)
The year-ending, I think, was roughly 181 million shares.
Ann Duignan (Managing Director and Equity Research Analyst US Machinery)
Okay, that's great. That's all I had. I think, the rest of my questions have been answered. Thanks.
Larry Dewey (Chairman, President, and CEO)
Thank you.
Dave Graziosi (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.
Tim Thein (Analyst)
Great, thank you. Look, a lot of ground covered here, but maybe I'll just ask a two-part question on the service parts and support. First, just on North America on-highway, just there was a reference earlier made with respect to parts relative to truck production. Can you maybe just help us in terms of just thinking about underlying parts consumption in light of the fact that you've taken share now for, what, four or five years in Class 8 straight, which presumably is a much bigger parts consumer, and obviously, we look at pretty tight utilization rates. Obviously, that's for the Class 8 fleet overall, but just help us think about the underlying assumptions for North America on-highway.
Then, second, on the energy business, Larry, just curious what the tone of discussions on price today with your energy customers, how that compares to what you saw in the middle part of 2012? Thank you.
Larry Dewey (Chairman, President, and CEO)
Sure. Let me start with the price. Clearly, when an industry is under pressure, you know, it's a lot tougher to get price. And, you know, there's discussion about how folks can work together to kinda get through a tough patch, and it would be fair to say that there's been some of that dialogue. You know, we certainly have, in the near term here, worked to maintain our position in two ways. Number one, long-term supply agreements, where the pricing is defined. And it would be fair to say that, in the current environment, moderation is probably the key versus, you know, capturing a lot of the upside.
Having said that, one of the things that we have done with our higher horsepower and greater capability products is we have positioned them on a pricing scale, a ladder, if I may use that term, versus the horsepower, the power and torque that those products are able to to carry. With a greater capability, you would position it in a little different position, another rung up the ladder. We've been very pleased to see that much of the market, particularly here in North America and in China, have placed a lot of orders for the higher power and torque products, which carry an appropriate price for that greater power.
So while there is probably not a lot of SKU pricing opportunity at the current time, we are able to, by virtue of our product expansion, capture per rig a better revenue and profit picture. So that's been a good piece of work. Relative to the parts business?
Dave Graziosi (EVP and CFO)
So, to your comments in terms of on-highway expectations, in terms of our guidance for 2015, we would see the, the North American on-highway service piece being, you know, roughly flat to slightly up. You know, one of, one of the things that's interesting about our business as we've evolved, continuing to improve the product and the quality and, and the performance of it, and you can see that in our warranty experience, we're, we're sort of a victim of our own success relative to aftermarket parts. So, one of the things to keep in mind is we are certainly growing the, the population of Allisons fielded at the same time.
When you look at the amount of service parts that are being required over the life of those vehicles, again, vocationally dependent, but the reality is, that's not necessarily going up, right? It's, in many cases, going in the other direction, given the products, which is why, as we've talked before, it's important to us to maximize the value of the sale, the initial sale of the unit. So, having said that, you know, we'll continue to keep an eye on opportunities there. There are a number of things that we're working on in that space, as well as-
... you know, our ReTran business, frankly, there's a number of initiatives that we've launched there to, to expand our position a bit. So, you know, overall, I think that you could say the same about outside North America in terms of aftermarket for on-highway as well. So, the other piece of the story there, as you know, for that end market, is support equipment, and that's directly tied to current, volume of new units. So-- and you could, you could see that line up as, as, you know, we've provided the guidance.
Tim Thein (Analyst)
Great, thank you.
Larry Dewey (Chairman, President, and CEO)
Thank you.
Dave Graziosi (EVP and CFO)
That's it.
Operator (participant)
Thank you. Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed with your question.
Nicole DeBlase (Executive Director)
Yeah, thanks for taking my question, guys. So I just have one last because most of mine have been answered as well. But I'm just curious about the amount of conservatism that you've built into the North America off-highway outlook. So how much of that sharp second half drop-off that you're embedding is underwritten by, you know, actual customer conversations and their plans for spending? And how much of it is just you guys being cautious, and you don't wanna, you know, miss your guidance?
Larry Dewey (Chairman, President, and CEO)
Well, I would say, Nicole, that, you know, the customers... It's interesting because in the order stream, you don't necessarily see everything that they have disclosed in terms of their forward capital plan. So, you know, we, I would say that, we have probably reached ahead to where we think they're gonna end up, in some cases, because they've indicated, "Here's where we're at the first half of the year. Second half, we're not so sure." So then we look at what are the capital spending plans, and, you know, we've seen a range, and different people have different numbers, but I think we've guided to the 30% down.
While if you were to take the midpoint of all of their guidance, that's maybe a little bit towards the higher side, certainly I've seen some in the 30 to low 30s%. So we think that, you know, we're out in front of what we think their order stream will ultimately evolve to be, even if they haven't described that to us, in concrete terms as we sit here.
Nicole DeBlase (Executive Director)
Okay, that's helpful. Thank you. I'll pass it on.
Larry Dewey (Chairman, President, and CEO)
Okay.
Operator (participant)
Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I'd like to turn the floor back over to Mr. Dewey for any closing comments.
Larry Dewey (Chairman, President, and CEO)
Well, again, we appreciate everyone's time this morning, and we'll look forward to the first quarter call here in 2015. Enjoy your day.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
