Allison Transmission Holdings, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Allison Transmissions' second quarter 2019 earnings conference call. My name is Shari. 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 Transmissions will conduct a question and answer session, and the 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 call over to Mr. Ray Posada, the Company's Director of Investor Relations. Please go ahead, sir.

Thank you, Sherry. Good morning, and thank you for joining us for our second quarter 2019 earnings conference call. With me this morning are Dave Graziosi, our President and Chief Executive Officer, and Fred Bowley, our Senior 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 August 8th. 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 second quarter 2019 earnings press release and our annual report on Form 10-K for the year ended December 31st, 2018, 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 FCC. 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 second quarter 2019 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 Gazziosi will provide you with an overview of our second quarter results. Fred Boley will then review the second quarter financial performance and the 2019 guidance update. Finally, Dave will conclude the prepared remarks prior to commencing the Q&A. Now I'll turn the call over to Dave Gazziosi.

Thank you, Ray. Good morning, and thank you for joining us. We are pleased to report that second quarter 2019 results exceeded our expectations and the guidance ranges provided to the market on April 23rd. Year-over-year net sales increased 4% to a quarterly record of $737 million. Second quarter net income was $181 million. Adjusted EBITDA was another quarterly record of $308 million, and diluted EPS increased 13% to $1.46 per share. We are pleased to report that Allison continues to execute its well-defined approach to capital structure and allocation, settling $235 million of share repurchases and paying a dividend of 15 cents per share during the second quarter. Additionally, in May, the Board of Directors approved a $1 billion increase in the existing stock repurchase authorization resulting in $1.16 billion of remaining authorized share repurchase capacity as of the end of the quarter. Finally, given second quarter 2019 results and current end market conditions, we are raising our full year 2019 guidance for net sales, net income, adjusted EBITDA, net cash provided by operating activities, and adjusted free cash flow. Fred will discuss the guidance update in more detail momentarily. Please turn to slide five of the presentation for the Q2 2019 performance summary. Net sales increased 4% to $737 million compared to the same period in 2018, principally driven by higher demand in the North America on-highway end market, led by the continued execution of our growth initiatives and market share gains in Class 4-5 truck. The increase in net sales is also attributed to higher demand in the outside North America off-highway end market, partially offset by lower demand in the North America off-highway and service parts, support equipment, and other end markets. Gross margin for the quarter was 52.8%, an increase of 20 basis points as compared to 52.6% for the same period in 2018, principally driven by increased net sales and price increases on certain products. Net income for the quarter was $181 million compared to $174 million for the same period in 2018. The increase was principally driven by increased gross profit, partially offset by increased product initiative spending and increased interest expense. Adjusted EBITDA for the quarter was $308 million or 41.8% of net sales compared to $297 million also 41.8% of net sales for the same period in 2018. The increase in adjusted EBITDA was principally driven by increased gross profit, 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 Q2 2019 Financial Performance Summary. Selling general and administrative expenses were flat from the same period in 2018, principally driven by lower 2019 product warranty expense and favorable 2019 product warranty adjustments, offset by increased commercial activity spending. Engineering research and development expenses increased $4 million from the same period in 2018, principally driven by increased product initiative spending. Please turn to slide eight of the presentation for the Q2 2019 cash flow performance summary. Net cash provided by operating activities increased $26 million from the same period in 2018, principally driven by increased gross profit, lower operating working capital requirements, and decreased cash interest expense, partially offset by increased cash income taxes. Adjusted free cash flow increased $20 million from the same period in 2018, principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures. As Dave mentioned earlier, during the second quarter, we settled $235 million of share repurchases, or the equivalent of 4% of shares outstanding, and paid a dividend of 15 cents per share. Additionally, in May, the Board of Directors approved a $1 billion increase to the existing stock repurchase authorization. We ended the quarter with a net leverage ratio of 2.08, $153 million of cash, $578 million of available revolving credit facility commitments, and $1.16 billion of authorized share repurchase capacity. Please turn to slide nine of the presentation for the 2019 guidance update. As a result of the outperformance during the second quarter and taking into consideration current in-market conditions, we are raising our full-year 2019 guidance as follows. Net sales are expected to be in the range of $2.635 to $2.715 billion. This is an increase from our prior expectation of net sales in the range of $2.58 to $2.68 billion. Net income is expected to be in the range of $545 to $585 million, up from our prior expectations of $525 to $575 million. Adjusted EBITDA is expected to be in the range of $1.025 to $1.075 billion, an increase from our prior expectation of $1 to $1.06 billion. Net cash provided by operating activities is expected to be in the range of $735 to $765 million, up from our prior expectation of $710 to $750 million. Adjusted free cash flow is expected to be in the range of $570 to $610 million, an increase from our prior expectations of $550 to $600 million. And cash income taxes are expected to be in the range of $105 to $115 million, compared to our prior expectation of $100 to $110 million. Allison's full-year 2019 net sales guidance reflects lower demand in the service parts, support equipment, and other in North America off-highway end markets, principally driven by lower demand from hydraulic fracturing applications, partially offset by increased demand in the North American on-highway end market, price increases on certain products, and the continued execution of our growth initiatives. Our updated 2019 guidance also assumes capital expenditures in the range of $155 to $165 million. As discussed earlier in the year, the increase in CapEx spending is principally funding the current expansion of our engineering facilities and testing capabilities These investments underscore our ongoing commitment to remain a leading innovator in commercial vehicle propulsion solutions across all the end markets we serve. Thank you, and I'll now turn the call back over to Dave.

Thanks, Fred. Among our established strategic priorities of global market leadership expansion, emerging markets penetration, and core addressable end markets growth while simultaneously delivering solid financial results and creating value for all of our stakeholders, we continue to emphasize product development initiatives and programs that focus on value propositions to address the global challenges of improved fuel economy and reduced greenhouse gases. It is with this focus in mind that we previously announced the new state-of-the-art vehicle environmental test facility that is expected to be operational in 2020. Once complete, this new facility will include two environmental chambers capable of simulating a broad range of vehicle environments and duty cycles, including temperature extremes, grades, altitudes, and other on-road vehicle conditions. Consistent with this investment and other product development initiatives and programs, in June we announced the construction of Allison's new Innovation Center, a 95,000 square foot facility that will be located within our Indianapolis campus. and is scheduled for completion in 2021. The Innovation Center will feature expanded and unique virtual and physical system simulation capabilities, including development and validation capacity to support customer, partner, and supplier relationships, regulatory compliance simulation focused on fuel efficiency and greenhouse gas emissions reduction, as well as functional safety. Center will consolidate our product engineering groups and facilitate internal as well as external collaboration on future technology and product initiatives, including electric hybrid and fully electric propulsion systems development and refinement. The concepts being generated, modeled, simulated, and tested in these state of the art facilities will significantly enhance our ability to efficiently develop, manufacture, and quickly bring to market new propulsion solutions across all of the end markets we serve. Together, these new resources and capabilities will promote closer and differentiated integration with our OEM customers, support performance improvements for vehicle optimization, and reinforce Allison's ability to attract, develop, and retain the very best talent. In closing, Allison is committed to be a global leader in commercial vehicle propulsion. Our second quarter results once again demonstrate the power of Allison to create value for all of our stakeholders while we continue to invest prudently and opportunistically to further our strategic priorities, develop innovation and fuel growth, and secure and enhance our ability to deliver compelling value propositions to our customers. This concludes our prepared remarks. Sherry, please open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would 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 2 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 key. To allow for as many questions as possible, we ask that you please keep to one question each. Our first question is from Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, good morning, everyone. Morning, Jerry. Dave, can you say more about the range of propulsion systems that you folks are working on developing from here? Do you have the key pieces in place following your recent acquisitions in terms of the key parts of architecture? Or said another way, how should we be thinking about the required capital allocation towards M&A from here to fully build out the capabilities that you're going to be looking for on a multi-year basis?

Sure. As we talked the April call with the announcements of the Axel Tech EVS and Vantage Power acquisitions, our approach is to continue our global leadership position and innovation. That requires that we're able to provide a range of solutions. What do we mean by that? From conventional, whether it's gas or diesel right through to full electric, that entire range is what we're focused on to your question in terms of cap allocation and the impact on that. You know, we would certainly view our current position, we're well positioned to deliver propulsion solutions. However, as we've said, the cadence of investment will not be linear. Frankly, we are staying very close to the market, whether that's OEMs, end users, et cetera, but looking at the actual demand from the market for solutions. That also is going to be dependent on a number of attributes we do not control. Back to system cost as well as performance, there's many variables that are involved. But again, as we think about that range of solutions, it's from conventional fuels to alternative fuels to full electric, and that also includes fuel cell electric vehicles. So we see a very complete range with our existing technologies and look forward to the markets pulling through that technology as appropriate.

And just to follow up, just appreciate that the path is not linear in terms of capital deployment, but in terms of the allocation of free cash flow that we saw this year in terms of buyback dividend versus M&A. Is that the type of placeholder we should think about for capital deployment towards these technologies going forward? Can you just give us a rough framework?

Look, our objective hasn't changed, which is to generate cash, invest for appropriate returns, and return the balance of cash to our shareholders. So as we see the environment today, as I said, we believe we're well positioned. Having said that, we will fund the various investments we've announced earlier this year, including the vehicle environmental test facility as well as the innovation facility. I think we're well positioned from a capacity perspective at this point as well, but I would tell you that I think it's very premature for us to try to define the next few years in terms of absolute allocation other than the broader objective, which is generate cash, invest for appropriate returns, and return the balance to our shareholders.

Our next question is from Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. Nice quarter. I guess two questions. One, you know, the sales in North America on a highway were better than expected. You know, obviously some of it was market, but I was impressed by the ability to sort of outgrow the market. So can you talk about, you know, where you are relative to expectations and how we think about your ability to potentially outgrow the market if 2020 is indeed a down year. And then, you know, questions on the back half of the EBITDA guidance. I think it still implies that we're going to be down versus sort of where the consensus is. So can you just provide a framework around that? Is it typical Allison conservatism? Is there something, you know, that you're seeing out there on the macro side that makes you just a little more cautious? Thank you.

Morning, Jamie. It's Dave. A couple things. I'll let Fred cover the EBITDA question in the second half. Relative to sales performance, appreciating your comments on the second quarter performance. The team continues to execute, we believe, extremely well in North America. The share gains, we're certainly pleased with, as you know, regaining a position in Class 4-5 truck through the GM Silverado platform and Navistar CV series as well have been well received by the market. Frankly, we're returning to positions we have not had access to in the better part of a decade. So we've made good progress there. The team continues to execute well in terms of Class H trade as well as Metro, the strong vocational markets, as we talked about before, have allowed us to continue to push forward our agenda and value proposition with the continued push by the market for automation. So I think we're very pleased with that. Your comment about continuing that process going forward, I think, again, we're well-placed to execute there. Prior cycles would certainly highlight the fact that our book of business, has a higher share of municipal volume in a number of sub-segments that tend to sustain themselves in softer markets. So in those cases, you know, we continue to be less volatile as a business versus some others that have over-the-road line haul type exposure. So we are planning for a number of different outcomes. As I said earlier, I think we're well-placed from a capacity perspective. while at the same time focusing on operational excellence initiatives as well. I'm proud of the team's performance here in the second quarter and very focused on the second half. I'll let Fred cover your question in terms of run rate for second half.

Sure. Jamie, primarily in the second half versus H1 is really driven by our view of the top line outlook. the off-highway new units and service parts down significantly. We do have R&D increased in the second half, consistent with what we talked about on the Q1 call. We expect engineering R&D to be up about 20 million year-over-year, with the vast majority of that increased in the second half. Commercial expenses is slightly elevated in the second half in support of our growth initiatives. and really consistent with the pricing you've seen in H1, where we've achieved approximately 50 basis points of favorable pricing. We expect that to continue for the second half.

Okay, I appreciate the caller. Thank you.

Our next question is from David Leiker with Robert W. Baird & Company. Please proceed.

Good morning. This is Erin Welsenbach on for David. So my question for you is really relative to your outlook 90 days ago. Can you maybe give us a run-through of kind of the state of the union for your end markets, maybe how your end market outlook has shifted a little bit and sort of the puts and takes to that?

Good morning, Erin. This is Dave. I guess in terms of our outlook shifting, you know, it's from the second quarter results, you can tell, as we said in our comments, outperformed there a bit. That's rolled through, as you would appreciate, the balance in terms of the full year guidance update, so to speak. But I think our positioning stands in terms of as we started the year, we talked about a number of different backdrops to the market and really focused on what the second half would pretend, tougher comps in a number of the end markets. Beyond that, I would tell you I think the broader tonality of guidance as we started the year, I wouldn't say has really shifted much. I would highlight, though, the off-highway situation for North America in particular, given the last week or so of public comments by a number of service providers as well as suppliers continues to support, I think, the view that we started the year with. Frankly, that setup as we get into the second half, the constraints around really hard rationing as we see it in terms of capital being deployed into that space, the focus there being very much currently on maintenance versus new investments, a fair bit of excess equipment as we understand it in that market is not different. I would say what is different? Is I think a focus more so on that capital rationing in the sector at this point So, you know, it's something we're staying close to as we start to think about 2020 but beyond that I think we're pleased with the team's performance through the first half and You know, obviously trying to position ourselves for continued success as we enter 2020 Great.

Thanks for taking my question

Our next question is from Joe O'Day with Vertical Research Partners. Please proceed with your question.

Hi, good morning. On the implied step-up in R&D in the back half of the year, anything in particular you would call out that that's going toward, and then is that something that we should be thinking about as a run rate moving forward?

Good morning, Joe. It's Dave. As Fred mentioned, there's a number of initiatives that we're driving across all of our end markets. Frankly, as we see the second half, as we've talked before, a number of the initiatives, frankly, many of them are not linear as well. So our activity levels are driven off of the opportunities that are there and, frankly, program timing execution. But I would not necessarily say there's anything in particular that I would point out other than the obvious, which is bringing on the e-axle effort as well as Montage Power. There's a number of initiatives that we're pursuing as part of that. As you know, that can be either done internally or externally, now being done internally. We're also working on continuing to work on delivering our next generation transmission controls and a number of other new technologies, as well as I would describe variants in terms of improvements to existing products. So, the team's very busy across all of our end markets. From a cadence standpoint, again, I think we're generally pleased with where we sit, but we'll continue to drive around those opportunities and position ourselves going into 2020.

And then on outside North America energy, is that led by China fracking? And if so, is this something that you view as kind of a temporary step up, or do you think there's a trend being established here?

The answer to your point there is the energy outside North America is largely tied to China. That market is maturing versus where it was, say, for – five years ago. They ramped up significantly in terms of investment levels for equipment. They've now, I think, digested a fair bit of that and matured as end users and, frankly, demand levels. We see that as more of a stable market going forward. That being said, energy, as you well know, is a volatile commodity market. So, we don't confuse ourselves in terms of looking at that business's level for the duration it will have its cycles, and we've structured our business in such a way that it's capital asset light from that perspective. And frankly, we carry a number of different options within our business model around inventory levels to deliver. what is typically very short lead times in that market, given the underlying volatility of end users. But the market there appears to be relatively stable.

Our next question is from Larry DiMaria with William Blair. Please proceed.

Hey guys, good morning everybody. Just curious, I know you made the comment about obviously more maintenance versus new. I believe that was in the energy patch you're talking about, which is what obviously everybody's seeing. Can you discuss where you see the idling of fleet and the cannibalization of parts and how that plays out? In other words, is there much, how would you characterize the downside following the second half run rate of declines in service parts based on excess fleet, cannibalization, et cetera, if there's no positive change, which might be fairly unlikely, obviously, going into next year.

Morning, Lars, Dave. A few things there. I think in terms of run rates, we obviously started the year out with a pretty, I would say, a pretty muted view of the market overall. I think, unfortunately, that's borne itself out. The hard rationing of capital that I mentioned earlier I think is going to continue to really suppress opportunities for spending. That being said, as a number of public comments have been made, that potentially sets itself, I think, the market up for some level of bounce back. I would say that would seem to be a steeper curve if you take the public comments as they've been made, literally. there's very little that's going on. So to your question on cannibalization, the fact is I think equipment is being stacked. Prior cycles, I would say, were probably not as, I think, informed as the market seems to be now. I would be surprised if equipment is getting stacked at such a level that it will be incapable or unable to be returned to service just given the age of some of that equipment as well and there's been a fair bit of money spent I think the positioning of the overall fleet going into this particular soft patch seems to be better than it's been that being said that's really going to be dictated by capital rationing back into the space right so investors are feel that there's real opportunity there. At some point, the funding is going to return. The question is how quickly. If it's extended, I think that has some lasting damage in terms of the overall level of fleet capability that will be available going forward. So we've assumed that the inventory that's in the broader market in terms of units as well as stacked equipment or otherwise will be leveraged as best as they can, but the fact is utilization rates are still relatively high with equipment that is fielded, so the intensity of usage has not changed. It's really a matter of the broader capacity that's been parked, but when the capacity is utilized, it's at a very high level, which pretends to ultimately require either new units at some point or that overhaul maintenance.

Thanks for that, David. With that being said, in the excess capacity that's out there now, how would you characterize the downside to service parts from the second half run rate into next year? If the end market for new doesn't change, is there much further cannibalization of those parts likely, or are they going to keep them in decent shape to bring them back to service, and we'll see more rebuilds and overhaul in parts stabilizing for you guys?

I think our expectation and guidance implies a pretty significant step down into the second half of this year. I don't, based on public comments, would not expect a different outcome going into necessarily the first half of next year. So to your point, I would expect some level of cannibalization. Also, I would certainly let you know that our channel checks would tell us there's equipment that is out there in terms of opportunities to utilize for a number of different repair scenarios. So we don't see anything at this point near term that would change that outlook from public comments that have been made.

Our next question is from Ian Cefino with Oppenheimer & Company. Please proceed with your question.

Hi, great. Thanks. Just a real quick question here. What was the actual – energy piece of the service parts line item that you have, and where should we expect that to kind of settle in, just given all your previous comments? Thanks.

Ian, good morning. It's Dave. Run rates in terms of the off-highway, specifically your question off-highway North America parts, Q2, we're in the range of call it $30 million for North America off-highway service parts.

Okay. And we should assume that goes to close to zero? Is that the way to think about it?

I would say it's certainly the expectation is a meaningful step down in the second half in terms of run rate. Zero is a bit of an extreme, but it's definitely expected to step down.

Our next question is from Seth Weber with RBC Capital Markets. Please proceed with your question.

Hey, guys. Good morning. I just wanted to ask about what you're kind of seeing in the channel. Inventory to sales ratios have been kind of ramping up here through most of the first half of the year. Just any comments and how are you feeling about inventory levels in the channel in the straight truck market? Sorry. Thanks.

Morning, Seth. I guess to your point in terms of inventory to retail sales ratio, six, seven, certainly up in terms of overall volume year over year or so and not an insignificant number. If you look at the actual retail sales ratio, it's at the higher end of what the industry views as a comfortable range, shall we say. Clearly, I think there's less pressure there necessarily on managing inventories going into the balance of the year than Class H straight, which is higher on a percentage basis year over year in terms of units. But when you look at that inventory to retail sales ratio, we'd probably mark that at a half to three quarters of a year high versus the optimal, so-called optimal range. And I would say in terms of within the channel as it's been communicated to us, certainly the level of the quality of the inventory that's out there has improved. In other words, trucks that aren't parked, waiting parts, I think that much of that has been resolved. The supply chain situation as we understand it from OEMs has improved. There are a number of spot situations that are exceptions, but broadly it's better than it's been. Certainly I think the other thing to dig into is when you look at the dealer, some of the dealer levels as well as what's sitting at bodybuilders That's really where you start to get a bit more visibility. I would say lead times seem to have come down a bit in terms of the bodybuilders, which I think is also indicative of a situation that you could interpret as there's adequate, if not heavier, inventory levels that are now available out there on the Class 8 straight truck side. That goes back to the ratio that I just mentioned. I think that as we stay close to the market going into the end of the year, will be critical, I think, for the broader industry to look to manage for a 2020 start. The orders continue to be relatively fulsome, but not as strong as they've been. I think that's another outcome in terms of how the EOEMs are going to manage into the end of the year as well. But they're reasonably, as we understand it, full for the second half, but I think the positioning has already started for 2020.

Our next question is from Courtney Yacovonis with Morgan Stanley. Please proceed with your question.

Hi, thanks for the question. Just wanted to understand the beat in North America on highway this quarter. You mentioned both the market share gains in Class 4 and 5, and then also some of your outgrowth opportunities through seven and class eight markets. Can you just help us understand, you know, how much was from class four through five versus some of your core markets? And then in outside North America, off highway, where you also be pretty considerably the supporter, I think you had last given guidance for that segment about down 19%.

Courtney, I'm sorry. Good morning. Just briefly repeat your question. You broke up a number of times there.

Oh, sorry about that. So just on the North America on highway beat, can you just disaggregate how much was from, you know, better than expected market share gains in Class 4 through 5 versus continued gains in 6 through 7 in Class 8? And then outside North America off-highway, we also beat this quarter. I think the last time you gave guidance there was for down about 20%. So given the beats you've had this quarter, what are you embedding in that segment? I appreciated some of your comments earlier that you don't have a ton of visibility there.

Hi, Courtney. This is Fred. I'll take the first part of the question on what appears to be an outperformed versus the market in Q2. Certainly, we've talked about the share gains in Class 4-5, and those are easy to quantify with the recent OEM launches. We expect that's resulting in us outgrowing the market by 3% to 4%. Certainly, we're picking up some price. We talked about 50 basis points of price year over year. The balance of the outperform would would lean towards suggesting share gains in Class 8 straight, Class 6-7. We only publish share once a year. We'll publish that in the early part of 2020. You do see production volumes get restated and such, but certainly strong performance in the second quarter. The team's driving... you know, volume out there via, you know, conquesting new fleets. They're primarily using manual transmissions. There's just a general move away from manuals to fully automatics. So, as I mentioned, Class 4-5, pretty easy to quantify. 6-7, Class 8 straight will be in a position to communicate final share in early 2020.

Corey, this is Dave. On your outside North America question there in terms of Second quarter, as we briefly mentioned in the press release, higher demand in Europe really off of truck, strong performance there. South America, I think the team's doing very well, driving a number of growth initiatives and refuse as well as agriculture. The lower demand in Asia is really focused on Japan export trucks for countries like South America, Australia, and Malaysia. As you know, Australia in 2018 was a very strong market. We're starting to see, I think as we talked about entering the year, some level of softness in that market just given the higher demands that we saw in 2018. The balance of the year in terms of those regions, Europe overall, expect reasonably strong performance in terms of truck driven by the major European OEMs. Asia, I would say a good performance expected through our India bus business, as well as some activity in terms of China exports. Truck overall in China, with the emissions changes that are that have started to be implemented, vehicle values starting to drive there, as well as the growth initiatives that we have, very targeted with the team. We're expecting some growth there. Some work that we've done more recently in terms of Korea light duty truck has been well received. That's partially offset by the Australia market that I mentioned earlier. And then South America, I would say overall for the year, a pretty strong performance in terms of bus expected, in particular out of some activity in Colombia on their BRT, as well as, frankly, some other initiatives were driving in bus. I think the one exception to that region continues to be the macroeconomic challenges for Argentina.

Our next question is from Anne Diakonen with J.P. Morgan. Please proceed with your question.

Anne Diakonen Hi, good morning. If I could just circle back to the growth in revenue in NAFTA on the highway. It says, what, $55 million. Can you just tell us how much of that $55 million was due to the Class 4-5?

Hi, Anne. This is Fred. So, of the $55 million, in the quarter, you're looking at somewhere between 10 to 15 million driven by Class 405.

Okay, that's helpful. And then, you know, most of my other questions have been answered, but again, Halliburton is a significant customer of yours in the off-highway segment, and they've called for CapEx to be done this year, but again in 2020. Is that what you were alluding to in terms of your comments on, you know, publicly traded company commentary in recent days?

Good morning, Ann. It's Dave. Yes, that's what I was alluding to amongst other end users that we have in North America FRAC, but that is certainly the tonality, as you noted, over the last week or so, pretty consistent as we understand it across the board.

We have reached the end of our question and answer session. I would like to turn the call back over to Dave Graziosi for closing remarks.

Thank you, Sherry. As we've said before, it's an exciting time to be part of Allison. We find ourselves today with more opportunities to drive innovation and growth than at any other time in our history, and we look forward to providing you with further updates in the months to come. Thank you for your continued interest in Allison and for participating on today's call. Enjoy the rest of your day.

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.