Allison Transmission - Q4 2017
February 15, 2018
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's fourth quarter 2017 results conference call. My name is Melissa, and I will 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 call 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 would now like to turn the conference over to Mr. Fred Bohley, the company's Vice President of Finance and Treasurer. Please go ahead, sir.
Fred Bohley (VP of Finance and Treasurer)
Thank you, Melissa. Good morning, and thank you for joining us on our fourth quarter 2017 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman and Chief Executive Officer, and Dave Graziosi, Allison Transmission's President and Chief Financial Officer. As a reminder, this conference call, webcast, and presentation we are using this morning are available on the investor relations section of our website, allisontransmission.com. A replay of this call will be available through February 22. As noted on Page 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations.
These forward-looking statements are subject to known and unknown risks, including those set forth in our fourth quarter 2017 results press release and our annual report on Form 10-K for the year ended December 31, 2016, and uncertainties and other factors as well as general economic conditions. Should one or more of these uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on Page 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our fourth quarter 2017 results press release. Today's call is set to end at 8:45 A.M. Eastern Time.
In order to maximize participation opportunities on the call, we'll take one question from each analyst. Please turn to slide four of the presentation for the call agenda. Now I'll turn the call over to Larry Dewey.
Larry Dewey (Chairman and CEO)
Thank you, Fred. Good morning, and thank you everyone for joining us. During today's call, I will provide you with an overview of our fourth quarter results, including net sales by end market. Dave Graziosi will then review the fourth quarter financial performance, and I'll wrap up the prepared comments with 2018 guidance and a review of our latest technology and product announcements prior to commencing the Q&A. Before I start on the quarter, I'd like to touch on what was a noteworthy year for Allison. Full year 2017 results exceeded our initial net sales guidance ranges across all of our end markets. We achieved record levels of net sales, gross margin, and net cash provided by operating activities. In addition, Allison realized its second consecutive year of double-digit growth in our outside North America on-highway end market.
Turning to the quarter, we are pleased to report that Allison's fourth quarter 2017 results exceeded the guidance ranges we provided to the market on October 31. We also maintained our track record of solid financial performance and a well-defined approach to capital structure and allocation. During the quarter, Allison paid a dividend of $0.15 a share and settled $106 million of share repurchases. Finally, in December, we announced a new 6-year labor contract with UAW Local 933. The agreement covers approximately 1,400 hourly employees and upholds our commitment to be an employer of choice, as our skilled and dedicated workforce is a foundational enabler for the achievement of our brand promise. Please turn to Slide 5 of the presentation for the Q4 2017 performance summary.
Net sales increased 25% from the same period in 2016, principally-driven by higher demand in the North America on-highway, service parts, support equipment, and other, North America off-highway and outside North America on-highway end markets. Gross margin for the quarter was 49%, an increase of 260 basis points from a gross margin of 46.4% for the same period in 2016, principally-driven by favorable net sales and price increases on certain products, partially offset by $9 million of cost in connection with the ratification of the UAW agreement and unfavorable material costs. Please turn to slide 6 of the presentation for the Q4 2017 sales performance summary.
North America on-highway end market net sales were up 24% from the same period in 2016, principally-driven by higher demand for Rugged Duty Series models. North America electric hybrid propulsion systems for transit bus end market net sales were down $3 million from the same period in 2016, principally-driven by intra-year movement in the timing of orders. North America off-highway end market net sales were up $28 million from the same period in 2016, principally-driven by higher demand from hydraulic fracturing applications. Defense end market net sales were down $12 million from the same period in 2016, principally-driven by the timing of tracked defense shipments.
Outside North America, on-highway end market net sales were up 18% from the same period in 2016, principally-driven by higher demand in Asia, Europe, and South America. Outside North America, off-highway end market net sales were up $7 million from the same period in 2016, principally-driven by higher demand in the mining sector. Service parts, support equipment, and other end market net sales were up 29% from the same period in 2016, principally-driven by higher demand for North America off-highway service parts and global support equipment. Now, I'll turn the call over to Dave.
Dave Graziosi (President and CFO)
Thank you, Larry. Please turn to Slide 7 of the presentation for the Q4 2017 financial performance summary. Given Larry's comments, I'll focus on other income statement line items and Adjusted EBITDA. Selling, general, and administrative expenses increased $13 million from the same period in 2016, principally-driven by unfavorable product warranty adjustments and increased commercial activity spending, partially offset by lower incentive compensation expense. Engineering, research, and development expenses increased $7 million from the same period in 2016, principally-driven by increased product initiative spending, partially offset by lower incentive compensation expense. As a result of events and circumstances in the fourth quarter of 2017, we reviewed certain of the long-lived assets related to the production of the TC10 transmission and recorded an impairment charge of $32 million.
Continued weak demand conditions for this product contributed to the future cash flows of the related long-lived assets being less than the carrying value of those assets. Interest expense net increased $8 million from the same period in 2016, principally-driven by mark-to-market adjustments for our interest rate derivatives and refinancing activity. Other expense net increased $20 million from the same period in 2016, principally-driven by a $13 million increase in technology-related investment expense and unfavorable vendor settlements of $5 million. The increase in technology-related investment expense is due to the recognition of a non-cash loss for available-for-sale securities, consisting of ordinary shares of Torotrak PLC, associated with a technology license and exclusivity agreement that were suspended from trading on the London Stock Exchange in December 2017.
Prior to Torotrak's suspension from trading, the changes in the fair value of their shares were recognized in accumulated other comprehensive loss. Income tax benefit for the fourth quarter of 2017 was $131 million, compared to an income tax expense of $33 million for the same period in 2016. The change was principally-driven by a one-time income tax benefit of $155 million from a decrease in deferred tax liabilities, partially offset by an increase in tax liabilities related to our accumulated foreign earnings and profits, both as a result of the U.S. Tax Cuts and Jobs Act enacted into law in December 2017. Net income for the fourth quarter of 2017 was $215 million, compared to $61 million for the same period in 2016.
The increase was driven by the enactment of the U.S. Tax Cuts and Jobs Act, increased gross profit, and lower incentive compensation expense, partially offset by the impairment charge for certain long-lived assets related to the production of the TC10 transmission, increased technology-related investment expense, unfavorable product warranty adjustments, increased product initiative spending, increased interest expense, and increased commercial activities spending. Adjusted EBITDA for the fourth quarter of 2017 was $210 million, or 35.7% of net sales, compared to $158 million, or 33.8% of net sales for the same period in 2016. The increase in Adjusted EBITDA was principally-driven by increased gross profit and lower incentive compensation expense, partially offset by unfavorable product warranty adjustments and increased product initiative spending, as well as increased commercial activity spending.
Please turn to Slide 8 of the presentation for the Q4 2017 cash flow performance summary. Net cash provided by operating activities decreased $9 million from the same period in 2016, principally-driven by increased cash interest expense, increased cash income taxes, increased pension funding, unfavorable product warranty adjustments, increased product initiative spending, and increased commercial activity spending, partially offset by increased gross profit and lower incentive compensation expense. During the fourth quarter of 2017, Allison executed activities and transactions, including the acceleration of cash expenditures, to permanently realize certain cash income tax reductions facilitated by the enactment of the U.S. Tax Cuts and Jobs Act. Adjusted free cash flow decreased $30 million from the same period in 2016, principally-driven by decreased net cash provided by operating activities and higher capital expenditures.
As Larry mentioned, during the fourth quarter, Allison continued executing its well-defined approach to capital structure and allocation by paying a dividend of $0.15 per share and settling $106 million of share repurchases. The share repurchases during the fourth quarter bring our year-to-date repurchases to $885 million, or approximately 15% of our shares outstanding as of December 31st, 2016. Also, during the fourth quarter, Allison's board of directors approved a new authorization under the company's current stock repurchase program for the repurchase of up to an additional $500 million of our outstanding common stock. The new authorization brings the total amount authorized under the program to $1.5 billion through December 31, 2019.
Finally, we ended the quarter with net leverage of 2.74, $199 million of cash, $533 million of available revolving credit facility commitments, and $554 million of authorized share repurchase capacity. Now I'll turn the call back over to Larry.
Larry Dewey (Chairman and CEO)
Thanks, Dave. Please turn to Slide 9 of the presentation for the 2018 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 focused on value propositions that address the challenges of improved fuel economy and reduced greenhouse gases, and core addressable markets growth while delivering solid financial results to create value for our stockholders. Today, Allison remains focused on continuing to execute its strategic priorities as we find ourselves with more opportunities to drive innovation and growth than at any other time in our history. We have already undertaken several initiatives from a commercial perspective, and given our recent performance and strong financial position, Allison plans to continue to do so.
Our engineering, research, and development spending will increase in 2018 to take advantage of multiple opportunities across our products and end markets. While electrification has received a preponderance of attention lately, it has been part of our technology and product development strategy for two decades. The increase in R&D spending is attributed to initiatives for both electric hybrid and fully electric propulsion solutions, as well as targeted spending on more conventional products, such as the recently announced 9-speed transmission, targeted for production release in 2020. For 2018, Allison expects net sales to be in the range of up 3%-7% compared to 2017, reflecting continued strength in the North American on-highway end market.
Our 2018 net sales outlook also assumes increased demand in the outside North America on-highway, defense, and North America off-highway end markets, and price increases on certain products, partially offset by decreased demand in the service parts, support equipment, and other end market. Although we are not providing specific first quarter 2018 guidance, Allison does expect first quarter net sales to be up from the same period in 2017, principally-driven by increased demand in the North America on-highway and North America off-highway end markets. With that, I'd like to highlight the following end markets assumptions for the full year 2018. North America on-highway, we expect a net sales midpoint increase of 7%, principally-driven by higher Class 8 straight and Class 6-7 truck production.
North America electric hybrid propulsion systems for transit bus, Allison expects a net sales midpoint decrease of 6%, principally-driven by the timing of certain transit property orders. North America off-highway, we expect a net sales midpoint increase of 20%, principally-driven by increased demand in the energy sector. Defense, Allison expects a net sales midpoint increase of 18%, principally-driven by tracked defense increased demand and the timing of shipments. Outside North America on-highway, we expect a net sales midpoint increase of 6%, principally-driven by the increased commercial vehicle production and fully automatic penetration. Outside North America off-highway, Allison expects a net sales midpoint increase of 5%, principally-driven by increased demand in the mining sector. Service parts, support equipment, and other, we expect a net sales midpoint decrease of 3%, principally-driven by decreased demand for North America off-highway service parts.
Please turn to Slide 10 of the presentation for the 2018 guidance summary. In addition to Allison's 2018 net sales guidance range of up 3%-7% compared to 2017, we expect an Adjusted EBITDA margin in the range of 37.5%-39.5%, which includes an increase in engineering, research, and development spending of approximately 15% across our products and end markets. Adjusted free cash flow is expected to be in the range of $550 million-$600 million. Capital expenditures are expected to be in the range of $85 million-$95 million. Cash income taxes are expected to be in the range of $70 million-$80 million.
Our 2018 cash income taxes guidance reflects a fourth quarter 2017 prepayment of approximately $33 million, primarily due to the acceleration of cash expenditures to permanently realize certain cash income tax reductions, facilitated by the enactment of the U.S. Tax Cuts and Jobs Act. Before we open the Q&A session, I'd like to spend a few minutes to review some of Allison's latest technology and product announcements. Last fall, we publicly announced our first 9-speed, fully automatic transmission for medium- and heavy-duty vehicles, currently undergoing testing and demonstration vehicles and targeted for production release in 2020. Since that announcement, Allison has hosted demonstration events for several OEMs, and I'm pleased with the results and the pace of our development program. With its deep first gear ratio, industry-leading ratio coverage, and integral engine start-stop system, the Allison 9-speed transmission provides significant fuel savings.
When combined with FuelSense, our proprietary software and electronic controls packages, and Allison's other fuel-saving technologies, the 9-speed will set a new benchmark in fuel efficiency and reduced emissions. In the fourth quarter, we announced the availability of our latest fuel economy technology in Allison's 1000 and 2000 Series, fully automatic transmissions for medium-duty buses and trucks, referred to as xFE, designating extra fuel economy. These transmissions incorporate a redesigned torque converter damper coupled with FuelSense 2.0 Max. This quarter, Prevost, Nova Bus, and Gillig announced that they will offer FuelSense 2.0, featuring DynActive Shifting on their buses, beginning in March and April, respectively. Ideally suited for transit customers with value provided in heavy stop-start duty cycles, FuelSense 2.0 has already demonstrated fuel economy gains of up to 6% beyond the original FuelSense 1.0 software.
FuelSense 2.0 has taken integration to a new level, giving vehicle builders more flexibility to offer the right blend of performance and fuel economy for their specific applications. Last week, we announced that European electric vehicle OEM, EMOSS Mobile Systems, has developed an Allison transmission-equipped electric semi-truck with a range exceeding 300 mi. The EMOSS E.V.E.R. semi-truck is equipped with an Allison 4500 fully automatic transmission, rated for a gross combination weight of up to 50 metric tons and will begin testing with customers later this year. In addition to the E.V.E.R. semi-truck, EMOSS Mobile Systems is currently developing Allison transmission-equipped electric trucks for use in construction, delivery, and refuse applications. These applications include dump trucks, medium-duty straight trucks, refuse collection vehicles, and additional semi-truck configurations.
Our commitment to innovation and the optimization of commercial vehicle propulsion has led us to engage with multiple OEM partners to further accelerate the evolution of the commercial vehicle industry. Over the coming quarters, we will continue to update the market on Allison's latest technology and product developments as they relate to conventional, electric, hybrid, and fully electric propulsion solutions. This concludes our prepared remarks. Melissa, please open the call for questions.
Operator (participant)
Thank you. If you'd like to ask a question, please press star or one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you please keep to one question each. Our first question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.
Joe Vruwink (Senior Research Analyst)
Hi, good morning. This is Joe Vruwink for David.
Larry Dewey (Chairman and CEO)
Hi, Joe.
Joe Vruwink (Senior Research Analyst)
I wanted to dig in a bit to the North America on-highway guidance for next year, the 7% growth forecast. Is it possible maybe to break that apart a bit and talk about what you would expect your end markets to be growing by, if maybe any expectation for share gains, what price might contribute, particularly with FuelSense 2.0 hitting the market in the spring? Just any detail you can provide.
Larry Dewey (Chairman and CEO)
Sure. First, you know, you're correct in noting that the growth is uneven across the various applications for the product in the North America end market. Certainly, Class 8 is showing a little higher than, say, the Class 6, 7. So that's a driver for us. We have not assumed significant share increase as part of our budgeting. Obviously, we have plans to drive some activities, but consistent with our forecasting, we like to see some of the plans come to fruition and start seeing some traction in those areas before we would roll that in.
So you would see Class 8 and, you know, certainly, ACT is trying to get their arms around the total Class 8 and the split between tractor and straight truck.But that would be certainly higher than some of the other segments that we would see. Relative to the FuelSense, we actually don't include that. That's in the royalty section. So Dave, maybe you can help.
Dave Graziosi (President and CFO)
Yeah, the FuelSense is, Joe, you know, we're, we're, continuing to introduce that to the market. That will be based on a cadence of releases with various OEMs. I would not consider, we do not consider, 2018 at this point to be a, you know, recurring view. I think it's still early in that process. As we, we introduced that, I would say expectations for 2018 total Allison pricing in the range of, you know, call it 25+ basis points overall. As you think about that in terms of comparing that to prior years, we've certainly had higher results, understanding that clearly, as you see with the Q4 results from 2017, we outperformed.
So that, you know, frankly, in our baseline going forward is really the higher pricing is already in our run rates. Having said that, you know, to Larry's point, there's a number of initiatives that we plan on driving this year relative to share, as well as, you know, things like FuelSense, as you know, that we believe add a fair bit of value to end users, and we are gonna be executing as those OEMs launch later this year.
Joe Vruwink (Senior Research Analyst)
And then similar question on North America off-highway. You've had competitors and customers talk about activity, maybe escalating as 2018 wears on, with Allison generating $28 million in Q4, just taking that value and assuming flat through next year is quite a bit above current guidance. What are you seeing from those markets?
Larry Dewey (Chairman and CEO)
Well, what we've got baked in is a shift, you know. One of the things that was in our numbers was, in the parts piece, was a lot of upgrade kits. And most of the units, we're starting to see in the first half, we expect that upgrade activity will come down. That's the biggest driver in the service parts, support equipment, and other coming down. And then we see that shifting over, within apples-to-apples, net-net, to the new unit side. The second half, certainly the first half, we've got laid in fairly strong. Second half isn't quite as clear, and certainly we feel that's prudent, particularly in light of some of the recent moves on some of the crude pricing.
Joe Vruwink (Senior Research Analyst)
Okay, I'll leave it there. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Tim Thein with Citigroup. Please proceed with your question.
Tim Thein (Analyst)
Thank you, good morning. Question for Dave. Maybe you can just help square the free cash flow guidance for 2018, just based on the components that you've provided, you know, in terms of EBITDA growth and lower cash taxes and cash interest. Yeah, I don't -- or are there some other big pieces there for us to consider, Dave? And I guess it was a little unclear to me in terms of Larry's comments, if that $33 million spend related to tax was that done in 4Q, or is that expected in 2018?
Dave Graziosi (President and CFO)
Tim, good morning. It's a couple things. On the tax side, understanding of the late enactment of the U.S. legislation, we had been planning leading up to that. So we had positioned ourselves in such a way to, with the team here, to be able to realize the permanent benefit, right? So you have the reduction in the tax rate. Given the late breaking news on that, as you know, as you prepare quarterly estimates, you know, you don't have the ability to assume certain things, one of them being a change in legislation. So with our normal process, our quarterly tax estimates, we filed and paid taxes on that basis.
Having said that, you know, several weeks later in the quarter, as the legislation was enacted, we executed the initiatives that Larry and I mentioned, to accelerate, frankly, expenditures into 2017. So you have effectively a use of cash for the taxes, you know, effectively prepaying 2018, but we also secured the permanent benefit in the reduction in the rate. So as we move into 2018, that prepayment will be utilized against our 2018 cash tax obligation. So as we said, if you combine the cash tax forecast for 2018 and the prepayment from last year, you can start to use that as a base for a run rate, right, with the new legislation in place.
So I would think about it in the context of, you know, we've talked about effective rate plus or minus in the 38% level, that's now 25%, and our cash tax rate accordingly is reduced. The simple metric we would think about is, you know, anything over 500 million of EBITDA, you would apply, 25% type of cash tax rate against that for, modeling purposes. The balance of the cash flow for the year, you know, we certainly were fortunate with, favorable market conditions last year, heavy sales, as you know. The way that the quarter broke, we had a number of, cash usage in terms of, receivables, payables, et cetera.
We expect as we move into this year, as, you know, Larry provided the guidance on sales flow this year, that, you know, we're gonna make, continue to make certain investments in terms of operating working capital to be able to meet market demand. So, you know, we do and have assumed some level of working capital usage in 2018 to meet market demand conditions as they're currently laid out. You know, beyond that, and I would tell you overall, we feel pretty good about positioning relative to our broader capability to produce and meet market demand. So, you know, the midpoint of, you know, call it $575, you know, we're obviously gonna work to do better on that. But that's our, at least our starting point this year, given the visibility that we have.
Tim Thein (Analyst)
Okay, so just so I'm clear, Dave, outside of some working capital investment, no other cash impacts beyond the obvious ones to consider. Is that a fair assessment?
Dave Graziosi (President and CFO)
I would say that's a, you know, fair assessment. And again, my point about accelerating certain payments, you know, we'll have some level of benefit for that in 2018 versus 2017, related to the execution of those tax initiatives. But overall, I think the, you know, the midpoint, again, we feel good about our positioning for the year.
Tim Thein (Analyst)
All right. Thank you.
Fred Bohley (VP of Finance and Treasurer)
Tim, this is Fred. One other thing on the tax side, that's important to understand is we don't expect any limitations associated with interest deductibility going forward.
Operator (participant)
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer & Co. Please proceed with your question.
Ian Zaffino (Managing Director)
Hi, great. Thank you very much. Question in the services. I guess, services, you know, you're projecting, you know, a little softness there. Is that just, you know, what's the driver of that? And is that just because the services that typically leads the strength of, the OE business now, the parts business is actually picking up or, or the original business is picking up and services is trailing off, or is there a different driver going on there?
Larry Dewey (Chairman and CEO)
Yeah, there's probably several pieces that we can shed a little more light on, a little more granularity. There's the off-highway kits that are included in there that are used to upgrade from the older configuration of units that were fielded in past years up to the new configuration that we've introduced over the last couple, the higher horsepower variants. And that activity is, you know, coming to a close here as we move forward from the standpoint of the units that people are converting. They've got that work done largely. So that'll come down fairly significantly. Then there's the actual service parts and that for the off-highway and that would hold fairly flat because of the way that they're deploying their rigs and using those.
So and then the other piece that's, you know, noteworthy, I guess, is as support equipment with the increase in unit sales, then, then the support equipment would follow along with that. So you have, you know, one that's flat, one that's up a little bit, and one that's down fairly considerably, and the net, net is in the space that we're describing there. A little bit, we're, we're a little under on-highway, but that's not significant. The real driver is the off-highway upgrade kits.
Ian Zaffino (Managing Director)
Okay, great. And then also just, you know, margin guidance for next year is still very high, but it's relatively flat year over year at the midpoint. What are the drivers there? You talked about price increases, going forward, and just kind of wanted to see what the offsets were maybe, or how you're thinking about that. Just given the-
Larry Dewey (Chairman and CEO)
We, we-
Tim Thein (Analyst)
-might.
Larry Dewey (Chairman and CEO)
I'll let Dave pile on here in a minute, but, you know, we've increased quite substantially our R&D spend, and we do not capitalize ours. We expense it. So that's a piece of it.
Dave Graziosi (President and CFO)
Yeah, I think the balance as we've talked about, we're continuing to push a number of growth initiatives globally, so that's included in our funding assumptions for this year. The team is doing great work on efficiency out in the operations, given the high demand that we're running right now. So I think we're doing a good job there, trying to manage. At the same time, you know, there is some level of increased cost in components just because of the nature of demand right now. And I think you're seeing that across a number of companies right now. That's just the reality of what is a relatively busy market at this point.
We have a number of initiatives to try to manage and offset those, that the team has been working on from a sourcing perspective. But, you know, at the same time, you know, there's general inflation and a lot of different things that this business touches, and we're gonna continue to invest and drive our strategic imperatives. So for us, overall, I think it's, you know, a good starting point for the year, given the visibility that we have. We will adjust, as we always do, to market conditions, but we, you know, we feel good about positioning at this point for the year.
Ian Zaffino (Managing Director)
All right. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook (Managing Director)
Hi, good morning. Just a little more color, you know, on the R&D spend. I think you said it's gonna be up 15%, for year-over-year. Can you just talk about when we think about that increase, how much is on EV hybrid versus sort of traditional, type, products? And then, Dave, is that the right way to think about spend going forward, or, or will spend continue to, you know, increase sort of over the longer term? And then, yeah, I mean, I guess that's my, my first question. And then my second question, you know, just as we think about, truck, there's a lot of debate in the market, is 2018 the peak, just given the strength that we've seen and the better 2018 is, it takes away from 2019.
Just sort of your view on truck and where we are in the cycle within North America specifically? Thank you.
Dave Graziosi (President and CFO)
You're welcome. As as Larry laid out, you know, the expectations for 2018, you know, we, we essentially, if you look at our addressable market, are relatively consistent with external forecasts. So to your point about where we are in the cycle, you know, the external forecasters, at least for our addressable market, it's relative-- should be expected to be, by them, relatively stable over the next couple of years. That being said, you know, we're doing a number of things to, to increase our position globally, with the, the R&D, increase in spend. The fact is, we're investing across a number of different propulsion solutions. So whether it's, hybrid electric, full electric, or internal combustion, it's, it's an all proposition for us right now.
We see a number of initiatives, as Larry mentioned, probably more so than, you know, our modern history around opportunities there. So we are investing across next generation products, existing product improvements and enhancements. As you know, the fundamental architecture of many of our products lends themselves to increased value propositions with our end users as they continue to evolve their the ways that they use our products, and, and we will price for that value accordingly. So if you think about, you know, where autonomous and other initiatives go in terms of connectivity, again, that's something that the team is driving as well.
You know, our plan is to be, you know, as Larry said many times, be where the market is going to, and that's really been the focus of the continued evolution of our, R&D spend and our plan. But I would, you know, certainly expect over the nearer term that you'll continue to see an elevated level of spending, again, based on initiatives and opportunities that we feel appropriate for investment purposes. And we will be there to, you know, meet whatever those market demands are. But the consistent theme in all of this is driving increased value for our end users and ultimately being able to collect value for that.
Jamie Cook (Managing Director)
But to be clear, beyond 2018, given what you're seeing in the market, and technology changes, do you think the spend has to go up above 2,000, you know, 2018 levels? Or are we sort of stuck at this, you know, I don't know, I think the 15% implied $120 million or so of spend. I'm just trying to think, is spend structurally going higher, higher than where we are in 2018?
Dave Graziosi (President and CFO)
Well, I think, you know, Jamie, you have to think about in terms of what you're spending on, right? I mean, the existing products, we continue to evolve. If you look at, again, what those opportunities are, the proposition here is not everything remains the same. So I think, you know, for us, it's aligning spending with opportunities. So and I think again, we think about it, which is what are those—what's the market demand look like? Where should we be investing? We think across a number of different platforms, there's opportunity. But I would say, you know, to start bucketing those and ascribing specific activities, I don't think is consistent with our strategic, you know, needs right now in terms of communicating that to the market.
I would say, and it's very fair to say, that we are investing across a number of different solutions. So, you know, as we get into this again, you know, we are supportive of spending in appropriate areas, again, that we see as market demand driven. And we are doing and will continue to execute on that basis. And I would say, not to just focus in the on-highway, end market. You know, we're investing across all of our end markets, so that, that includes off-highway as well as the defense business. So and it's not something I think we've talked about as much in the past, but the reality is, you know, there are a number of, opportunities that we're funding across our end markets.
Jamie Cook (Managing Director)
Okay, thanks. I'll get back in queue.
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 (SVP of Finance)
Hey, good morning. Thanks, guys.
Dave Graziosi (President and CFO)
Good morning.
Ross Gilardi (SVP of Finance)
Just the, you know, the TC10 impairment, I mean, obviously TC10 has been a, you know, a big part of the story for Allison for several years. What happened specifically in the fourth quarter to trigger that impairment, and what do you do now with that product? And then you also have a $16 million technology-related investment expense as an add back to Adjusted EBITDA in 2017. What's that for? You know, why add it back, and will it be recurring?
Dave Graziosi (President and CFO)
Ross, it's Dave. The technology investment expense that represents a non-cash loss from shares that we were holding in Torotrak PLC that were delisted from trading from the London Stock Exchange in December of last year. So prior to the recognition of that non-cash loss through the income statement, the changes in fair value of those shares were recorded in accumulated other comprehensive income. So I would think of that as a reclass from equity, if you will, a component of equity into the P&L. That is not a recurring item. Relative to the TC10, as we always do, we're continuing, have a continuous process of forecasting our business and looking at demand.
The fact is, the demand conditions for the TC10 continue to have really developed to be very challenging. So what that ultimately resulted was future cash flow for those assets being less than their carrying value. So, as you know, the accounting requirements require, you know, fair value adjustments there, and that's what was recorded in the fourth quarter. I don't think there's anything per se unique about the process that we use every year to take a look at all of our long-lived assets, but it's not a unique process. It really gets back to what is the forecast for demand for the TC10 specifically.
Larry Dewey (Chairman and CEO)
Yeah, there's no question, this is Larry. There's no question the ramp has been slower and more painful, and it really gets down to the OEM release activity. We were released with Navistar and a couple of their chassis. Those chassis went away, and the development work to get re-released in the LT RH tractor for Navistar took longer than what certainly we would have liked. And, you know, we've now got line of sight on getting released there with the A26 and the X15 engines. As you know, there were some announcements here recently with PACCAR, and with the X15, and then obviously in their portfolio, the MX engines will be the next ones we focus on.
And then, within that, of course, broadening the release across platforms. But certainly the ramp has been more difficult than what we would have liked. As of August of last year, we had 119 discrete customers, 232 discrete fleets. 41 or roughly a 1/3 of those customers have repurchased in increasing quantities. In fact, there's a large beverage company that, after their first purchase, has now made six additional purchases. And as of last week, with the update I received, we have 209 discrete customers, which is a 75% increase since August. Obviously, those initial purchases are very low volume, and the repurchases tend to be higher.
There is an arithmetic progression that we have verified mathematically, in looking at this, doing the deep dive. But, it really is tied to the ramp that we've had thus far, which is tied to the releases.
Ross Gilardi (SVP of Finance)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.
Seth Weber (Managing Director)
Hey, good morning.
Larry Dewey (Chairman and CEO)
Morning.
Seth Weber (Managing Director)
I wanted to ask about the 6% anticipated growth in on-highway outside North America. Can you just give us a little bit more color on which markets are driving that growth? And, you know, longer term, how we should think about the margin implications of, you know, extending the product outside North America? Thanks.
Larry Dewey (Chairman and CEO)
Well, we continue to drive, as Dave touched on, the you know, the growth initiatives, and the process that we've put in place here to make that more rigorous and even more focused than it's been. I think you've seen some of the results of that here recently. You know, when we take a look at it, you've got you know, EMEA, Europe, Middle East, Africa, is gonna be a significant part of that. You know, China, with the work that we're doing there, we're targeting that to just under double digits.
You know, where we're showing a little, maybe a little softness or conservatism is, you know, Japan, in addition to the domestic market there, they do an awful lot of exporting to Australia with our product, and we do show that coming off a little bit. So you've got Europe probably leading the parade, China behind it, and Japan probably lagging a bit.
Seth Weber (Managing Director)
Thanks. Is there anything we should be thinking about as far as margin implications as this business grows to be a bigger part of the story?
Larry Dewey (Chairman and CEO)
Well, I think, you know, it would be fair to say, as we continue to refine our plans for China, you know, we're gonna go in there, and one of the things that as you drive operating improvements in your business, and you can see, you know, the comment was made earlier about our EBITDA forecast, you know, we take that financial strength, and then we deploy it on initiatives that will build the business for the future. And one of those certainly is gonna be market penetration into China. And you know, the R&D is another one, and there are a number of initiatives that we've talked to, that we will be deploying that financial strength in order to build the business as we go forward.
Seth Weber (Managing Director)
Makes sense. Thanks very much, guys.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder, we ask that you please keep to one question each. Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question.
Ann Duignan (Analyst)
Hi, good morning, and thank you for squeezing me in. I appreciate it. Larry, can we go back to the TC10? You know, just, when that product was introduced, the word in the industry was that it, it was too heavy and too expensive for the metro market segment. Can you just talk about, you know, where you stand today? Releases are slower than expected, uptake is slower than expected. You—what do you think went wrong there?
Larry Dewey (Chairman and CEO)
Well, I think, I think we did not have clarity on the launch plans and didn't have adequate launch plans with the OEMs. You know, certainly, PACCAR was not on board. We had the Navistar, we had the gap in the Navistar releases, really. You know, certainly in a until you experience all of the benefits and, you know, depending on the exact application of the product in terms of what the routes are, literally, you get down to a route situation, the benefits will vary somewhat. And people in this, as you know, people in this segment, you know, when you're carrying it out to four decimal places on a penny, they want to be awfully sure before they make an investment above a baseline price.
And so that, that was probably, you know, it continues to be part of the challenge. The gratifying part is, as people have repurchased, we've been able to improve the net price. You know, I mentioned the fleet that's bought several times and, you know, initially we incented them, and then that's come down and frankly, come off, since then, because they have seen the benefits. And this is a fairly sophisticated organization, and we would expect that to continue. So those would be the things that, you know, I would, I'd point to. You know, we continue to work at it, you know?
Ann Duignan (Analyst)
What about the fact that, you know, now you've got Cummins-Eaton, and you've got vertical integration of drivetrains and with AMTs. Does that make it even more difficult going forward to penetrate the metro market?
Larry Dewey (Chairman and CEO)
Well, certainly it's gonna, you know, continue the challenge. Recall that the Cummins-Eaton was cooperating before. Now, you know, obviously, one organization, I've been in combined organizations, and sometimes they're more effective, and sometimes it becomes more challenging, like families, I guess. But you know, that was there. That continues to be there, obviously, with the organizational combination, and so that's gonna be an issue we have to deal with. I would say, I feel better about some of the integration activity that we're doing, particularly with PACCAR. You know, we're doing some things with resident engineers that we've never done before, in our career, or in my career anyway. And so, you know, there's some opportunities for us to do a better job there.
The good news about integration is that, our product's a little easier to integrate. You know, the, in AMT, there's a lot of adjustment by chassis you need to do, and we're able to, once we get the engine squared around, we're able to move around in a number of different applications pretty easily.
Ann Duignan (Analyst)
Do you foresee any point in time where you would be forced to just discontinue that product, just-
Larry Dewey (Chairman and CEO)
Well-
Ann Duignan (Analyst)
Drop it and move on?
Larry Dewey (Chairman and CEO)
We're always looking at situations to say, "What's the best move going forward?" You know, you never say never, but right now, we're continuing to drive it into the market.
Ann Duignan (Analyst)
Okay, I appreciate that. I'll get back in line, take it offline. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, our final question for this morning comes from the line of Neil Frohnapple with Buckingham Research Group. Please proceed with your question.
Neil Frohnapple (Managing Director of Equity Research)
Hi, good morning, guys. Thanks for squeezing me in. The 9-speed transmission you're launching in 2020, when would you anticipate releases to occur at the OEMs, so we can look for different signposts along the way? And is there anything you've learned from the TC10 experience that could help with a faster ramp for this product launch?
Larry Dewey (Chairman and CEO)
I guess I'll answer it in, in reverse order here. Yeah, I think there's some, some lessons learned. We spent a fair amount of time here at the end of 2017 and into 2018, doing a deep dive. I know based on the work the team did, you know, I had close to now, I guess, I'm getting close to 100 different questions that, that I've dug into, with the team, so that we can better-position ourselves and, and take the lessons learned. I would say it's a little different situation, relative to the 9-speed, because that will go into many of the markets we currently serve as a, as a, an up, offering, if you will, and so there is probably better knowledge of those. That's one difference.
We certainly don't want to be lackadaisical about it, having said that. Probably the biggest thing is gonna be a clear understanding of the release plans, and timing, and that gets back to your first part of the question, and that was, you know, when we talk about 2020, that's based upon both our timing, as well as lining up with the discussions, the preliminary discussions we've had with OEMs. So you know, we are, you know, we just had a review, in fact, this week, of the 9-speed as to where we stand. We've got another deep dive to have some clarity mid-year. The guys, the folks have got it targeted. And one of the key things will be clarity on releases, OEM commitments, you know, pricing agreements, et cetera.
So that'll all be part of it, and that'll give us a level of fidelity that it would be fair to say was not as strong on the TC10.
Neil Frohnapple (Managing Director of Equity Research)
Okay. That, that's helpful, Larry. And, and so would you expect launches to occur before 2020? Because I think with TC10, you guys launched the product and then the releases came later. So just, you know, any sort of different expectations there?
Larry Dewey (Chairman and CEO)
I would say that we would much prefer to have our start of production line up with OEM's start of sales.
Neil Frohnapple (Managing Director of Equity Research)
Okay, great. Thanks very much.
Operator (participant)
Thank you. Mr. Dewey, I'll turn the floor back to you for any final comments.
Larry Dewey (Chairman and CEO)
Yeah, I'll make them brief. I know we've run over and appreciate everyone's attendance here. Obviously, strong 2017. We're setting up for another, I think another good year, for 2018. More importantly, within that good year and within the results that we're working to drive, are a number of actions, and activities and initiatives that will drive this business, not just in 2018, but beyond, to position ourselves for the kind of performance you've come to expect from Allison. And not just maintain our role in the industry, but to expand it. And so that's really what we're focused on, very aggressively here. So again, appreciate everyone's time this morning. We'll look forward to the first quarter call here in,
Dave Graziosi (President and CFO)
Late April.
Larry Dewey (Chairman and CEO)
I guess, late April. Looking at my guys to make sure we've got an idea on the date. Okay? Thanks, everyone.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
