Allison Transmission Holdings, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's fourth quarter and full year 2018 earnings conference call. My name is Melissa, and I will be your conference call operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management team from Allison Transmission will conduct a question-and-answer session, and the 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. I would now like to turn the conference over to Mr. Ray Posadas, the company's Director of Investor Relations. Please go ahead, sir.

Thank you, Melissa. Good morning, and thank you for joining us for our fourth quarter 2018 earnings conference call. With me this morning are Dave Graziosi, our President and Chief Executive Officer, and Fred Boley, our Vice President, Chief Financial Officer, and Treasurer. 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 March 5th. As noted on page two of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our fourth quarter 2018 earnings press release, and our annual report on Form 10-K for the year ended December 31, 2017, 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 expressed 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 SDC. 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 2018 earnings 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. During today's call, Dave Graziosi will provide you with an overview of our fourth quarter results. Fred Boley will then review the fourth quarter financial performance and 2019 guidance. And finally, Dave will wrap up the prepared comments prior to commencing the Q&A. Now I'll turn the call over to Dave Graziosi.

Thank you, Ray. Good morning, and thank you for joining us. Before I discuss the quarterly results, I'd like to briefly touch on what was a record year for Allison Transmission. Full year 2018 results exceeded our initial net sales guidance ranges across all of our end markets. We achieved record levels of net sales, net income, adjusted EBITDA, net cash provided by operating activities, and adjusted free cash flow. Full year net sales growth of 20% was surpassed by even stronger growth in net income, up 27%, diluted EPS up 42%, and adjusted EBITDA up 30%. Our commitment to the realization of growth initiatives across our entire business is demonstrated in our 2018 results, notably double-digit growth in the outside North America on highway end market for the third consecutive year, full-year net sales up 11%, primarily driven by increased penetration in Asia and Europe. The success of our growth initiatives is also reflected in our North America on highway core markets, led by market share gains in Class 6-7 truck with 74% share in 2018 compared to 71% in the prior year, and Class 8 straight truck with 70% share in 2018 compared to 68% in the prior year. In the past, we've discussed the secular trend of increasing automaticity in the vocational truck market, and our 2018 market share gains suggest that this transition continues. We are also excited about our position in Class 4-5 truck with the recent launches of the new Chevrolet Silverado and Navistar International CV Series medium duty commercial trucks exclusively with the Allison fully automatic transmission. This is a timely launch as demand for last mile delivery vehicles continues to increase, providing further opportunity for Allison to regain market share relinquished almost a decade ago. Finally, our established and well-defined approach to capital structure and allocation remains intact. During the quarter, Allison paid a dividend of 15 cents per share and settled $153 million of share repurchases, resulting in $609 million of total share repurchases in 2018, or approximately 10% of our shares outstanding. Please turn to slide five of the presentation for the Q4 2018 performance summary. Turning to the quarter, we are pleased to report that fourth quarter year-over-year net sales growth once again surpassed our expectations. Net sales increased 10% compared to the same period in 2017 to $647 million, principally driven by higher demand in the outside North America off-highway and North America on-highway end markets, as well as price increases on certain products and the continued execution of our growth initiatives. Gross margin for the quarter was 52.2%, an increase of 320 basis points as compared to 49% for the same period in 2017, principally driven by increased net sales, price increases on certain products, and favorable material costs. Consistent with Q3, favorable material costs continue to be driven by several multi-year cost reduction initiatives, partially offset by unfavorable raw material costs. Net income for the quarter was $147 million compared to $215 million for the same period in 2017. The decrease was principally driven by a one-time income tax benefit of $152 million in the prior year as a result of the U.S. Tax Cuts and Job Act enacted into law in December 2017. The change in net income was also driven by increased product initiative spending and increased interest expense. partially offset by increased gross profit, decreased loss associated with the impairment of long-lived assets, decreased technology-related investment expense, and decreased selling general administrative expenses. Adjusted EBITDA for the quarter was $261 million, or 40.3 percent of net sales, compared to $210 million, or 35.7 percent of net sales for the same period in 2017. The increase in adjusted EBITDA was principally driven by increased gross profit and decreased selling general administrative expenses, partially offset by increased product initiative spending. Now I'll turn the call over to Fred.

Thank you, Dave. Given Dave's comments, I'll focus on key income statement line items and cash flow. You can also find an overview of our net sales by end market on slide six of the presentation. Please turn to slide seven of the presentation for the Q4 2018 Financial Performance Summary. Selling general and administrative expenses were lowered by $7 million from the same period in 2017, principally driven by unfavorable product warranty adjustments in 2017 that did not recur in 2018. Engineering research and development expenses increased $6 million from the same period in 2017 principally driven by increased product initiative spending. As reported in the earnings press release, due to continued weak demand conditions for the TC-10, we ceased production and recorded a corresponding $4 million impairment loss. Other expense net was lower by $17 million from the same period in 2017, principally driven by lower technology-related investment expense and credits related to post-retirement benefit plan amendments. Income tax expense for the quarter was $27 million compared to a $131 million benefit for the same period in 2017. The change was principally driven by a one-time income tax benefit resulting from a decrease in deferred tax liabilities in 2017 as a result of the US Tax Cuts and Jobs Act as well as increased taxable income, partially offset by a decrease in effective tax rate, again, as a result of the US Tax Cuts and Jobs Act. Please turn to slide eight of the presentation for the Q4 2018 Cash Flow Performance Summary. Net cash provided by operating activities increased $66 million from the same period in 2017, principally driven by increased gross profit, decreased cash income taxes, and decreased cash interest expense, partially offset by increased product initiative spending. Adjusted free cash flow increased $69 million from the same period in 2017, principally due to increased net cash provided by operating activities and decreased capital expenditures. As Dave mentioned earlier, during the fourth quarter, we settled $153 million of share repurchases and paid a dividend of 15 cents per share. We ended the quarter with a net leverage ratio of 2.05, $231 million of cash, and $533 million of available revolving credit facility commitments, and $440 million of authorized share repurchase capacity. Please turn to slide nine of the presentation for the 2019 guidance in-market net sales commentary. For 2019, Allison expects net sales to be in the range of $2.58 to $2.68 billion, or a midpoint decrease of 3% compared to the record net sales achieved in 2018, reflecting lower demand in the North American off-highway and service parts, support equipment, and other in-markets, principally driven by hydraulic fracturing applications, partially offset by increased demand in the global on-highway in-markets, price increases on certain products, and the continued execution of our growth initiatives. Although we are not providing specific first quarter 2019 guidance, Allison does expect first quarter net sales to be flat with the same period in 2018, principally driven by increased demand expected in the North American on-highway end market, offset by decreased demand expected in the North American off-highway, and service parts, support equipment, and other end markets With that, I'd like to highlight the following in-market assumptions for the full year 2019. North America on-highway, Allison expects a net sales midpoint increase of 5%, principally driven by anticipated market share gains in Class 4-5 truck as a result of the recent medium-duty commercial truck launches by Chevrolet and Navistar, and higher Class 8 straight truck production. North America off-highway, we expect a net sales midpoint decrease of 78%, principally driven by lower demand for hydraulic fracturing applications. Defense, Allison expects flat net sales at the midpoint versus 2018. Outside North America on-highway, we expect a net sales midpoint increase of 3%, principally driven by increased fully automatic penetration. Outside North America off-highway, Allison expects a net sales midpoint decrease of 19%, principally driven by lower demand in the energy sector. Service parts support equipment and other, we expect a net sales midpoint decrease of 10%, principally driven by decreased demand for North America off-highway service parts. Please turn to slide 10 of the presentation for the 2019 guidance summary. In addition to Allison's 2019 net sales guidance in the expected range of 2.58 to 2.68 billion dollars, we anticipate net income in the range of 535 to 585 million dollars. Adjusted EBITDA is expected to be in the range of 1 to 1.06 billion dollars. Net cash provided by operating activities in the anticipated range of 710 to 750 million dollars. Adjusted free cash flow is expected to be in the range of $550 to $600 million, and cash income taxes in the anticipated range of $100 to $110 million. Our 2019 guidance assumes capital expenditures in the expected range of $150 to $160 million. The increase in capital expenditures will primarily fund an expansion of our engineering facilities and testing capabilities which Dave will describe in more detail momentarily. Every day at Allison, we serve a wide variety of end markets across the globe, and these investments underscore our commitment to remain a leader in the propulsion solutions across all the end markets we serve. Now I'll turn the call back over to Dave. Thanks, Fred.

Allison Transmission remains committed to its 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 all of our stakeholders. Today, as we continue our focus on these strategic priorities, we find ourselves with more opportunities to drive innovation and growth than at any other time in our history. At the core of The engineering facilities and testing capabilities expansion mentioned by Fred is a new state of the art vehicle environmental testing facility. It will be located within Allison's Indianapolis Global Headquarters campus and provide our engineers and third parties with enhanced capabilities to conduct testing under the most extreme conditions and replicate a broad range of vehicle environments and duty cycles. The vehicle environmental testing facility is scheduled for completion in 2020 and will be one of the few available for commercial use in the United States and the only one in the Midwest. In addition to new vehicle environmental testing facility, Allison is also expanding and enhancing its existing engineering and testing capabilities. These investments will include new state-of-the-art simulation and modeling capabilities, including virtual vehicle simulation and fuel efficiency, greenhouse gas and functional safety simulation capabilities, as well as software controls and electrification propulsion systems development and modeling capabilities. In combination, these new resources will support close integration with our OEM customers, significantly augment our capabilities to develop, manufacture, and quickly bring to market new propulsion solutions and fully integrated vehicle propulsion systems that will continue to meet today's and tomorrow's evolving emissions and fuel economy requirements while reinforcing Allison's ability to attract, develop, and retain the very best talent. We look forward to providing additional details regarding these investments in the coming months. One of Allison's competitive advantages rests in our ability to leverage our existing technology to make To meet the market's evolving needs and expectations, for example, last quarter we discussed the global launch of the medium-duty, fully automatic nine-speed transmission. This new product leverages the architecture and proven durability of the Allison 2000 series six-speed commercial transmissions, which have accumulated more than 100 billion miles globally. We have also continued to expand our electrification portfolio with our new enhanced electric hybrid system that includes purely electric extended range capabilities up to 15 kilometers and features zero emissions with engine off. This hybrid with extended electric range builds on one of the most dependable and efficient electric hybrid propulsion systems in the world, with over 8,000 buses using our system since 2003. Finally, in the fall, we'll be introducing an uprated variant of our well-known 3000 series transmission for the Class 8 tractor market. This is an exciting development and the latest example of our ability to leverage existing technology to meet the market's increasing demands for automaticity, fuel economy, and reduced emissions. This variant will have increased horsepower and torque ranges, enhancing the Allison value proposition for the Class 8 distribution and regional haul markets. In closing, our fourth quarter and record 2018 results demonstrate the power of Allison as we continue to execute our strategic priorities, including expansion of our global addressable market, investing in our business to facilitate growth, developing new products to meet tomorrow's challenges while delivering enhanced value propositions to our customers, and our relentless focus on execution, illustrated by the success of our ongoing cost management initiatives. We're looking forward to 2019 as another year of solid results and resolute execution of our strategic priorities. This concludes our prepared remarks. Melissa, please open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, to allow for as many questions as possible, we ask that you keep to one question each. Our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning and nice quarter. I guess my first question, Dave, just some color on your guide on North America on Highway 1. You know, I think it's the first time, as I'm thinking about you guys guiding, where you're guiding largely due to market share gains, which is an interesting story for Allison. So if you could give a little more color on what's assumed in terms of market share gain versus what you're implying for the industry, and also just your level of visibility on the Class 8 truck business, just given what the OEs are saying about extended visibility. And then my second question, just Obviously, the guide on North America off-highway down 78% tied to fracking. Any context you could provide there, what your order book looks like relative to usual is probably a little worse than people would have expected. Thanks.

Morning, Jamie. Let me just jump through that. So the North America on-highway guide, as we mentioned in prepared remarks, the team did, I think, a great job driving some market share gains in Class 4, 5, truck, as well as 6.7 and Class 8 straight truck. I would say we continue to drive those growth initiatives into 2019, as you would expect. The keys there in terms of the comments that we made relative to the Chevrolet as well as Navistar releases are important in 4.5, as you know. We had significant share in that market through 2009, so we're regaining position there, which we're very pleased with. In addition to that, we continue to make good progress incrementally in Class 8 straight truck. As I mentioned, the trend towards automaticity continues there. The performance of our technology, I think, speaks for itself in terms of the durability for those particular applications. 6.7 truck, again, as we look at the broader market there, there continues to be opportunities. Our guide for 2019 certainly assumes the progress that I mentioned with the Navistar and Chevrolet releases and some incremental gains in 6-7 trucks as well as Class H straight trucks. So it's a combination. If you compare our overall guide for North America on highway to third-party forecast, I think we're certainly a bit ahead of that, as you indicate, which implies some continued gain in share. your comments in terms of some of the issues with the OEMs on on lead times and certain the truck releases with specifically I think around class 8 you know the supply constraints that I believe impacted some of the OEMs into the fourth quarter our understanding is some of those their suppliers did work through the holidays to catch up a bit having said that there are still some issues there As we understand it, those order books are pretty firm through at least the first half of the year at this point. Having said that, I think everybody's studying much more closely the second half, and we're staying close to that as well. The off-highway guide for North America, certainly as we looked at the second half of last year, and I think we talked about this a bit, and you know, having followed us for a number of years now, very volatile end markets. The developments in the price of oil as well as some of the takeaway issues certainly continued into the second half of the Permian. We believe there's a number of cases where there's probably more equipment out there than certain people would like at this point. I believe there's been a number of public comments by some of the end users To that effect, what that means going into 19, we've certainly positioned ourselves for a soft start. We believe it'll be very much a first half, second half. I think as other public comments have been made by third parties, the takeaway issues with the Permian, the expectation is those being largely resolved. Having said that, I think the inventory of equipment that is out there and available I think the condition of it going into this particular soft patch is probably better than it was the last time around in terms of some of these mini cycles. So we're staying close to that. You would certainly argue, I think, based on other third-party comments, we may be a little bit more aggressive in terms of softness expectations in the first half. That being said, we're reflecting what we're certainly being told and what our team is managing towards. And if we're fortunate enough to have a better result, we'll be happy to provide the volume there. But at this point, it appears to be a very soft first half.

Okay, great. Thank you. I'll get back in queue.

Thank you. Our next question comes from the line of David Leiker with Robert W. Barrett. Please proceed with your question.

Good morning, this is Joe Verwink for David.

Good morning. Hi, Joe.

A question on EBITDA margin guidance. So with revenue mix skewing toward on-highway and away from off-highway parts in 2019, not so much a surprise that profitability should moderate a bit. But at the same time, when I just square up what your guidance implies for revenues from each of those verticals and compare historically... there would seem to still be an underlying, I'll call it structural margin improvement in the business. And so I'm just wondering, what are some of the things that are different in 2019 as opposed to, let's pick a year 2016 that also ran a very high mix of on-highway? And then I would imagine, let's say, you're a little conservative on some of the off-highway assumptions in 2019. It's probably fair then that the EBITDA performance is going to skew at or above the high end of guidance. Is that the way to think of it?

Joe, this is Fred. So a lot in that question. I mean, you start with the mix, and your comments are correct. I mean, the mix with... We don't report segments, but obviously we've ranked the end markets with service parts, support equipment, and other, you know, our top-ranked markets down, as well as North America and outside North America off-highway end markets down. You know, it is negative mixed. You know, really start with, you know, best-in-class gross margins, you know, 52.4% for 2018. So really any movement from an incremental, decremental, or certainly meaningful What's different in the year? From a price-cost standpoint, we're estimating about 50 basis points of favorable price with costs relatively neutral. We've got engineering R&D. We continue to fund the business and have that up in sort of a $10 million to $15 million range. We're relatively flat from an SG&A standpoint.

Great. That's all helpful. Thank you.

Thank you. Our next question comes from the line of Jerry Ravitch with Goldman Sachs. Please proceed with your question.

Hi. Good morning, everyone. This is Ben Baroudon for Jerry. Good morning. Good morning. Just wanted to touch on the off-highway business. So the last time that business troughed, it was at about a $1 million quarterly run rate. Can you just give us some more color as to the level of oversupply you're seeing at the moment? And is there any chance that we return to that quarterly trough? Or is this down 70% year over year? Is that kind of the lowest you see it going?

This is Dave. To your question, the North America off-highway business is very challenged from a volatility perspective. So the guide obviously is for the full year. As I mentioned earlier on the call, it's not linear. It's never been linear. For us, these downturns, at least we believe the current, besides the commodity pricing issue to your comment on equipment levels that are out there, You know our expectation is some of that will start to clarify by the middle of the year That's the programs that are out there. You've heard third-party comments around their capex spending Some positioning around further adjustments being possible. I think from some of those comments or at least the implication that's there the fact is I think it's it's very early to try to I Draw lines back to prior cycles because frankly, I don't think many of them are comparable So for us it really comes down to I think positioning for what you know when the market demand is there being able to Deliver and it's you know, frankly one of the things that continues to be a feature of that business for us is the inherent volatility, which is why our team works as diligently as they do to be in a position to supply on a timely basis and I think it also explains why there are challenges in many cases to meet those schedules. So we spend a lot of time on that and continue to be committed to that market. But I don't see any strong correlations I would draw to more recent cycles or mini cycles that we could point you to other than we've laid out our expectations for the year as we again see the market developing. It's very much a first half, second half story, but we've positioned it in such a way that we're confident in the guide as we sit here today.

Got it. Thank you.

Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer & Company. Please proceed with your question.

Hi, great. Thank you. You know, as far as the TC-10, can you just give us a little bit more color on that as far as, you know, as you look back in retrospect, kind of what happened there versus expectations, you know, and what you're thinking about the metro truck market going forward? Thanks.

Dean, good morning. I guess a couple things there. You know, as we've talked about the TC-10 before, it's certainly an attractive, you know, market that it targeted. The fact is that market lined up with the attributes that we believed were underlying, which was the push towards automaticity, et cetera. Having said that, I think it's safe to say as we approached that market years ago, some of the alternatives that are now being offered are certainly, we believe, at some level more competitive there than they have been in the past. That reduced the overall opportunity for the TC-10. It certainly exceeded customer expectations on performance and all of the attributes that you would expect from an Allison. That being said, it does not make economic sense for Allison to continue to supply at those run rates. So we have chosen to cease production. As I mentioned in the prepared remarks, In the fall, we'll be introducing an upgraded version of our well-known 3000 series. It is certainly intended to be a part of that Class A distribution and regional hall market. We believe that's a better overall economic proposition for Allison, given the market size and the opportunity for us versus the TC-10.

Okay, thank you very much.

Thank you. Our next question comes from line of Seth Webber with RBC Capital Markets. Please proceed with your question.

Hi, this is Brendan on for Seth. Thanks for taking my question. One, I just want to confirm I heard correctly for net pricing realization in 19, you expect that to be a positive 50 basis points, correct?

That's correct.

Okay. And then what was it in the fourth quarter?

In the total for the year for 2018, it was close to 120 basis points. Specific for the fourth quarter, it was a little higher. It was slightly above 150 basis points on a year-over-year. Okay.

All right. Thank you. And then looking at the free cash flow outlook, I mean, you do have the CapEx jump there, but Is there any other color, I guess, that you can give as to the decrease in the cash from operating activities?

Sure. As you mentioned, CapEx at a midpoint up $55 million. Within our 2019 guidance, we do have incentive comp at a target level. We are up slightly from a cash interest and a cash income tax standpoint, with those being offset by lower pension funding and some favorable working capital on a year-over-year basis. Okay, thank you.

Thank you. Our next question comes from the line of Tim Thine with Citigroup. Please proceed with your question.

Hi, good morning, guys. This is Drew Jaskowiak, I'm for Tim Thine. I just want to ask a quick one on parts of support. So how did the split between on and off-highway develop throughout the year? And what sort of mix is built into your assumption for 2019?

So this is Dave. As we, to your question for 18, the splits overall, the off-highway, North America off-highway business was heavier first half versus Second half, as we've built the 2019 guide, it's really continuing the run rate from first half into our first half 19 from second half 18 at a slightly lower level. And then again, as I mentioned earlier, with the first half, second half breakout, we'll see how the second half goes, but we would expect some level of improved volume there. Beyond highway business last year for North America, from an overall perspective, was up from 17. We're expecting that to be up slightly, 19 versus 18. All right.

Thank you.

Thank you. Our next question comes from the line of Neil Fraunhofer with Buckingham Research Group. Please proceed with your question.

Hi, thanks. A few questions have been asked for North America off-highway, but for outside North America off-highway, you're expecting a step down in 2019 relative to where the business has been operating the prior few quarters. So I'm just curious, are you experiencing deterioration in the order book to support this view? I know you called out lower energy, but to also serve mining and construction markets, just any more color there would be helpful. Thank you.

Good morning, Neil. This is Dave. A couple things there. As you know, When you look at our portfolio outside North America over the cycle, it's typically split more or less evenly between energy and mining construction as we had strong performance in 18 in both markets. As you mentioned, our guidance, we expect energy to be a bit softer in 19. Why is that? Very similar to in terms of North America where there certainly has been strong demand and some level of buildup in equipment. Commodity prices softening a bit as the second half unfolded last year. We believe that's going to create some level of softness in demand for 19. So we reflected that. That energy business in most cases is very much focused around the market in China versus any other geography. And, you know, bluntly stated, that's been our experience in the past in terms of that particular market. It's more nascent. It's still developing from a broader capability perspective. And also, I think the run rating in terms of capacity there, that's required. So we believe it'll take a bit of a breather in 19 versus 18.

Okay, David, and just a quick follow-up just on your view on construction and mining internationally. Thanks.

Obviously, the team did, I think, a great job last year delivering the volume. As you know, we had some new releases with Volvo as well as Bell. That's performed well for us. We expect that. to continue into 2019. The broader lease feedback that we have from our end users in that space would indicate, I would say, solid expectations. Again, we're staying close to the market. We're always monitoring channel inventory levels as well, but I think our commentary and expectations are certainly not inconsistent with some of the public comments from others that participate in the space.

Okay, thanks very much.

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Hey, good morning, everyone. My question is on your comments on, I guess, the confluence of market share gain and a little bit more investment in CapEx R&D and Autonomous. And I'm just wondering if you can give us any indication as to whether manuals are really starting to slide off a little faster, maybe unrelated to autonomous. And that's driving the gain or whether that's versus some of the other products. And more generally, I don't know whether you have any intent or any hope to capture a little bit more content as the potential for autonomous vehicles drives. Obviously, you're going to gain share maybe because your product is robust, etc., I don't know whether there's an opportunity as well for content as the overall vehicle content goes up.

Rob, good morning. It's Dave. In terms of answering your question there, we believe automaticity continues to gain share at a relatively accelerated rate versus expectations five years ago or ten years ago. More broadly in the market, that would imply there's certainly going to be less drivers out there that are trained in manual technology. I think it's also clear that despite the push for automaticity, certain technologies that are not fully automatic do have some limitations. It really gets down to a level of control of the vehicle and and the implied safety thereof. To your question or comment on autonomous, I would say our markets, which are typically higher shift and stop start urban applications, we believe autonomous has a fair way to go there in terms of that technology. I think the feedback from OEMs as they've talked about it, publicly would certainly align with that. I think autonomous is better suited at this point given where the technology is from an over-the-road perspective than what you would see in our core adjustable markets. Having said that, the fully automatic technology has a level of control that's extremely high. So to the extent that you would want autonomous, That would certainly imply that the level of vehicle control is best or that requirement is best met by a fully automatic solution. The market share gains that the team has achieved, as I talked about with the Class 4-5 truck in North America, we continue to drive the Allison value proposition, and that's a day-in, day-out how is the product performing and that overall value proposition. And we believe there continues to be opportunities there to grow our position. The comment that we made around the 3000 series going into Class 8 distribution and regional hall is an important development as we think about the continued leveraging of our base architecture. We believe it's well-suited, it's a proven transmission, certainly, and the opportunity there is something that we'll be talking about later this year.

Thank you. I don't know if I can sneak in one more or not, but I mean, could you give us, if so, any update on on-highway in China? Obviously, it's a huge market and big ambitions, so I just don't know if you can give any status or progress.

For the China on-highway market, recently here, the The Chinese government has come out with an updated Mandate if you will on new energy vehicles as we understand it for tier one tier two cities for domestic bus so by the end late 2020 at least the mandate is lining up with Very much a complete push if you will to the extent that's possible with for new energy vehicles so the domestic

the domestic bus market continues to see volume shifting from conventional to so-called new energy vehicles. At the same time, our team is driving growth initiatives in trucks We've seen a fair bit of success and traction there in that particular market. It's one that requires a fair bit of... Emphasis by our team as well as the OEM. This is a completely self-processed from, you know, the classic big Polish hole there. The value proposition is something we're spending a fair bit of time on in terms of trying individual vehicle releases.

Those volumes are all awaiting more clarity around their emissions changes.

All right. Thank you.

Thank you. Our next question comes from the line of Christine Kubacki with Mizuho. Please proceed with your question.

Good morning. My question is on the defense business. Can you just talk about the puts and takes there? I know you've guided to flat. And I was just wondering, you know, there's been some noise around JLTV recently with some operational deficiencies. And I was just wondering if that's just noise or if there's some potential impact there at all to you. Thank you.

Christina, it's Dave. I guess a couple things, right? So we, as you know, are on the JLTV platform. I, you know, can't speak to Oshkosh's vehicle there from the context of your comment on performance or otherwise. I will say our transmissions continue to perform as expected. That product for Oshkosh, as we understand it, continues to move towards full rate. The public comments have pushed, I think, that timing out a bit later this year, but we're certainly not aware of performance issues concerning our transmission. The guide, as we see, it's overall flat for 19 versus 18. The mix is very similar. As you know, there's really two markets that we participate in, TRACT and WIELD. I would say, again, the team here has done a nice job continuing to drive a number of different programs there. Frankly, we're focused as well on future program opportunities. A number of them we'll be able to talk about later this year, but I would say on the track side in particular, WIELD, the platform continues to perform relative to our expectations in terms of broader volumes. The global market there is supportive of the business as we see it currently, and we're certainly pleased with the progress that we continue to make versus what you saw in the 2015 through 2017 timeframe for that business.

Thank you very much. I appreciate the caller.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I turn the floor back to Mr. Graziosi for any final comments.

Thank you, Melissa. I appreciate everybody's time this morning and for joining the call and continued interest in Allison. As I said, we're going to drive our strategic priorities and execution and look forward to providing you with updates as the year progresses. Enjoy the rest of your day.

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