David Graziosi - EVP, CFO and Treasurer Lawrence Dewey - Chairman, President and CEO.

Jerry Revich - Goldman Sachs Jamie Cook - Credit Suisse Ann Duignan – JPMorgan Nicole DeBlase - Morgan Stanley David Leiker - Robert W. Baird & Company, Inc. Ian Zaffino - Oppenheimer & Co.

Ross Gilardi - BofA Merrill Lynch Tim Thein – Citigroup Vishal Shah - Deutsche Bank Ted Grace - Susquehanna Financial Group Brett Hoselton - KeyBanc Capital Markets Alex Potter - Piper Jaffray & Co..

Welcome to Allison Transmission's Second Quarter 2015 Results Conference Call. My name is Christine, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remark, the management team from Allison Transmission's will conduct a question-and-answer session.

Conference call participants will be given instructions at that time. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Dave Graziosi, the company's Executive Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you, Christine. Good morning and thank you for joining us for our second quarter 2015 results conference call. With me this morning is Larry Dewey, Allison Transmission's Chairman, President and Chief Executive Officer.

As a reminder, this conference call, webcast, and the presentation we're 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 4.

As shown 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 second quarter 2015 results press release and our annual report on Form 10-K for the year ended December 31, 2014 and uncertainties and other factors, as well as general economic conditions.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on Page 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 second quarter 2015 results press release. Today's call is set to end at 9 A.M. Eastern Time. In order to maximize participation opportunities on the call, we'll take one question from each analyst.

Now I'll turn the call over to Larry Dewey..

Thanks Dave. Good morning, and thank you all for joining us today. Our second quarter 2015 results are within the full year guidance range as we provided to the market on April 27.

The improvement in North America On-Highway net sales on a year-over-year basis for the eight consecutive quarter, was more than offset by the unfavorable impact of lower energy and commodity prices in the global Off-Highway and service part support equipment and other end markets and lower demand in the defense end market.

Despite challenging conditions in the global Off-Highway end markets, Allison continue to demonstrate strong operating margins and free cash flow while closely aligning costs and programs across our business within market conditions and opportunities consistent with us strategic priorities.

We also continue to deliver on our commitment to our well-defined capital allocation policy focused on the return of capital to shareholders while maintaining a prudent level of net leverage and lowering Allison's cost of borrowing. Please turn to Slide 4 of the presentation for the call agenda.

On today's call I'll provide you with an overview of our second quarter performance including sales by end market. Dave will review the second quarter financial performance including adjusted EBITDA and adjusted free cash flow. I'll wrap up the prepared comments with the full year 2015 guidance update priority to Q&A.

Please turn to Slide 5 of the presentation for the Q2 2015 performing summary.

Net sales decreased 5% from the same period in 2014, principally driven by lower demand in the global Off-Highway and defense end markets partially offset by the continued recovery in the North America On-Highway end market, higher demand in the outside North America On-Highway end market and price increases on certain products.

Gross margin for the quarter was 46.2%, an increase of 170 basis points from a gross margin of 44.5% for the same period in 2014, principally driven by price increases on certain products and favorable material costs.

Adjusted net income decreased 19 million from the same period in 2014 principally driven by $25 million of premiums and expenses on the tender offer and redemption of long-term debt partially offset by decreased cash interest expense. Please turn to Slide 6 of the presentation for the Q2 2015 sales performance summary.

North America On-Highway end market net sales were up 14% from the same period in 2014, principally driven by higher demand for Rugged Duty Series and highway series models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down 29% from the same period in 2014 principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives that generally require a fully automatic transmission.

North America Off-Highway end market net sales were down 57% from the same period in 2014 principally driven by lower demand from hydraulic fracturing applications.

Defense end market net sales were down 41% from the same period in 2014 principally driven by the recognition of previously deferred revenue in 2014 totaling 16 million commensurate with the shipment of certain tracks transmissions at the request of the U.S. government, and reductions in U.S.

defense spending to longer term averages experienced during periods without active conflicts. Outside North America On-Highway end market net sales were up 18% from the same period in 2014 principally driven by higher demand in Europe, Japan, and India.

Outside North America Off-Highway end market net sales were down 67% from the same period in 2014 principally driven by lower demand in the energy and mining sectors. Service Parts, Support Equipment & Other end market net sales were down 12% from the same period in 2014 principally driven by lower demand for North America service parts.

Now I'll turn the call back over to Dave Graziosi..

Thank you, Larry. Please turn to Slide 7 of the presentation for the Q2 2015 financial performance summary. Given Larry's comments I’ll focus on other income statement line items and adjusted EBITDA.

Selling, general and administrative expenses decreased $9 million from the same period in 2014 principally driven by a favorable product warranty adjustments, lower incentive and stock-based compensation expense and reduced global commercial spending activities.

Engineering research and development expenses increased $2 million from the same period in 2014 principally driven by increased product initiatives spending partially offset by lower incentive compensation expense.

Interest expense net decreased $14 million from the same period in 2014, principally driven by the August 2014 exploration of certain LIBOR swaps and the second quarter 2015 refinancing of our 7% and 8% senior notes with additional term loan B3 borrowing.

Cash interest expense decreased $4 million from the same period in 2014 principally driven by the August 2014 exploration of certain LIBOR swaps and debt repayments and refinancing.

Income tax expense for the second quarter of 2015 was $33 million resulting in effective tax rate of 37.5%, versus an effective tax rate of 39.6% for the same period in 2014. The decrease in the effective rate is principally driven by the change in discrete activity.

Adjusted EBITDA for the quarter was $186 million or 36.3% of net sales compared to $186 million or 34.7% of net sales for the same period in 2014.

The decrease in net sales and increased product initiative spending was offset by price increases on certain products, favorable material costs, favorable product warranty adjustments, lower incentive compensation, and reduced global commercial spending activities.

Please turn to Slide 8 of the presentation for the Q2 2015 cash flow performance summary. Net cash provided by operating activities increased $11 million from the same period in 2014 principally driven by price increases on certain products.

Favorable material cost, lower product warranty expense, lower incentive compensation expense, and decreased global commercial spending activities partially offset by decreased net sales, increased product initiatives spending, and lower accounts payable commensurate with decreased net sales.

CapEx increased $2 million from the same period in 2014 principally driven by the timing of 2015 productivity and replacement programs spending.

Adjusted free cash flow increased $5 million from the same period in 2014 principally driven by increased net cash provided by operating activities, partially offset by increased capital expenditures and decreased excess tax benefit from stock-based compensation.

During the same quarter, second quarter, Allison continued to be prudent and well-defined approach to capital allocation by repurchasing $85 million of its common stock, paying a dividend of $0.15 per share, repaying $54 million of debt and completing a refinancing of our 7% and 8% senior notes.

We ended the quarter with net leverage of 2.88, $217 million of cash and $456 million of revolver availability. It is also worth noting that Allison repurchased approximately $84 million of its common stock during the periods July 1, 2015 through July 27, 2015. Now I'll turn the call back over to Larry Dewey..

Please turn to Slide 9 of the presentation for the full year 2015 guidance update. During the second quarter, Allison experienced the unfavorable impact of lower energy and commodity prices in the global Off-Highway and service parts, support equipment and other end markets.

Given that these end markets continue to exhibit an elevated level of uncertainty and a dearth of near-term visibility, we are updating our full year net sales guidance to a decrease in the range of 6% to 8% year-over-year.

As we have done in other periods of meaningful uncertainty, Allison has implemented initiatives to further align costs and programs across our business with current end market conditions and opportunities consistent with our strategic priorities.

Despite Allison's heightened focus on controllable activities in this environment of exceptionally volatile global Off-Highway end markets, we remain strongly committed to product development, core addressable market's growth, and the delivery of solid financial results.

In addition to updating our net sales guidance, we are also updating the guidance for adjusted EBITDA margin to a range of 34.5% to 35.5%, and adjusted free cash flow to a range of $470 million to $500 million.

Allison is affirming the guidance for capital expenditures in the range of $60 million to $70 million, and cash income taxes in the range of $10 million to $15 million. Although we are not providing specific third quarter 2015 guidance, Allison does expect third quarter net sales to be lower than the same period in 2014.

The anticipated year-over-year decrease in third quarter net sales is expected to occur due to higher demand in the North America On-Highway end market being more than offset by lower demand in other end markets. Thank you for your time this morning, Christine, please open the call for questions..

[Operator Instructions] Thank you. Our first question comes from the line Jerry Revich with Goldman Sachs. Please proceed with your question..

Hi, good morning.

I'm wondering if you can say more about market share developments in the quarter in North America, you had some conquest customers in construction earlier this year, did you hold on to gains this quarter? And in international On-Highway you had strong sales in the quarter, versus the industry backdrop, I'm wondering how much of that is lumpiness of some tender orders versus any new platforms that were introduced, any color there, please?.

Sure. Relative to North America, we have in fact generated sales greater than the industry both in the medium duty space, transit space, as well as the Class 8 straight truck space, and the last one is tied to the construction programs that you referred to.

So we're not only seeing the results of this year's program but as we have indicated in the past, as we conquest the customer there, they are relatively cautious, they don't buy the entire orders so the past years conquest customers as they have gained experienced in operating the product and with that favorable experience are placing a greater percentage of their orders.

Relative to outside of North America, you’re exactly right in the On-Highway space, there’s some lumpiness to the orders when we take a look out to the forecast going out.

There are some challenges relative to forecast in certainly some of the political and instability in places around the world Latin America, we got Argentina and Venezuela, Brazil has got some Tsunami issues, of course the Russian thing we talked about even in Western Europe where we’re starting to firm up a bit, we’re seeing some challenges at the OEMs relative to their engineering resources and how far they’re willing to push some of the releases in terms of the timing.

So we’re taking a fairly conservative approach relative to our forecast. I think we're still holding to the outside North America forecast we provided back in April, which would imply some tapering here. But we continue to drive it, and hopefully the results will step up from where we're sitting today..

Okay. Thank you..

Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question..

I guess just back on the market share comment, you know, Navistar, last night, made an announcement that they'll be also supplying -- using the Procision Eaton sort of transmission, can you just talk about how we should think about this? Does this imply some validity to Eaton's product? Were you surprised by it? And how you're sort of factoring in what the market share shift will be over the next couple of years associated with that?.

Sure. Well, to answer the one question embedded there, no, we were not surprised, we were aware of the release. In fact we’re aware of the OEMs plans more broadly across the North American space. We've earned our business in this space and it’s targeted primarily to the medium duty.

And if you look at our shares both in school bus, as well as medium duty that’s been achieved as our customers have recognized it says as kind of certainly a reliable cost effective and increasingly fuel efficient product offering the best performance and productivity.

Certainly one of the differences in gear schemes, we design our products to fail to a range so that if anything were to happen the vehicle is able to be maneuvered perhaps not gracefully, but it can be maneuvered out of traffic and other architectures perhaps don’t offer that same capability.

We've got several million 1000, 2000, series which is in the space where the pro-session is proposing to go that are operating globally. Our look at DCTs particularly in the automotive space would suggest the reliability and durability may not be their best point there.

And then our leading cost - market leading cost of total ownership is well known and the torque converter that we use provides a superior vehicle launch and is an extremely effective and reliable starting device that DCTs they use a clutch and clutch in order to minimize the launch characteristics to make it smooth needs to slip, and slip equals wear.

I had a couple of other thoughts as we've talked about, there are three things that are going to be different, relative to the launch of pro-session versus the AMTs.

And as I was looking at the announcement I was struck one of the nice things about the Internet, is you can go back in history and there was an announcement just one there of course the number over the years, but the one I happen to pull was from the 5th of August 2008 and the wording and the announcement relative to the AMT provided by that same component supplier was virtually identical to the announcement that was made yesterday.

And of course as you follow the industry, there was some gain made with the AMT, but based on the data I’ve looked at from the major OEMs, that has subsided back to the level that it was prior to 2010 as customers have operated the product and realized that from a automation standpoint, it didn’t have the value that they were expecting.

The three things that come back that are different, first off we’re not in the same place, we’re not the same company as we were during the launch of the AMTs. Since 2010, we’ve seen a 45% improvement in our number of incidents within the warranty period, while offering 42% longer coverage's.

So a significantly more reliable from what was already an industry leading standard. So we have certainly been busy on that front. Secondly in that same space against the first point, we have made over the last two years a significant effort in the area of fuel economy, around here we call it FE square fuel economy and efficiency.

Things such as the 5th gen controls and new algorithms we have, fuel sense 1.0 and we've got 2.0 coming behind it, dynamic shifting, the XFE models so there’s been a tremendous effort to move where we’ve had. In fact we’ve probably moved more in the last two years and our fuel economy and efficiency performance and probably in the previous 20.

So, depending on what’s being analyzed I think that folks will find we’re in a very different place comparatively speaking than maybe what has been targeted. The second thing is we have been anticipating and doing our homework relative to this other offering.

And whereas on the AMT, we were probably a little slow coming to grips with the specifics of the performance and the facts associated with it that is not the case as we sit here today. And the third thing is going to be different is, we were probably overly genteel during the period of the launch of the AMT.

And where we’re going to be here is probably going to be perhaps a bit more like an M1 Abrams tank coming in and we do supply that transmission as well. So there is a number of things that we are looking forward to addressing as we go forward..

Thanks. I'll get back in queue..

Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question..

Good morning.

Can you walk us through, specifically, your guidance by segment, now that we're halfway through the year? I know you said rest of world no change, but can you walk us through line item by line item, please?.

Sure, good morning Ann. Couple of thing quickly, North America essentially flat with the April guide, but has us up 8% full year versus 2014 hybrid propulsion systems for trends that have North America that’s going to be - we expect at this point to be down roughly 25% year-over-year. So slight improvement there versus the April guide.

We've had some firming of OEM order books there. North America Off-Highway continues to be a challenge situation to Larry's earlier comment. We read some of the public reporting that’s out there recently here in terms of expectations, I would tell you we have a pretty conservative prudent view of the second half there.

So we have that market down about 43% year-over-year versus 37% was the April guide. Defense has improved slightly as we’ve had some improved OEM order books driven by increased U.S. and non-US defense wheeled programs there.

Outside North America, On-Highway no change from the April guide as Larry mentioned outside North America Off-Highway we would have down at this point about 60% year-over-year as you know that book is typically split half and half between mining and energy that mining continues to be a very challenged unfortunately situation globally as well.

Parts and support equipment we have down about 17% year-over-year at this point the key driver there in terms of some deterioration from the April guide as again for the Off-Highway business specifically energy as we continue to see spending reduction forecast for 2015 and are positioning ourselves accordingly and keeping an eye on inventory levels through our distribution channel et cetera..

And specifically, I'm sorry, can you give me Defense and NAFTA on highway specifically, we had minus 34% and flat, but that was from April..

Yeah we have 31% on defense at this point for full year down and then outside North America On-Highway flat..

Okay. Thank you.

And then can you talk a little bit about what you're seeing in some of your sub-sectors in North America On-Highway? Are you seeing any improvements in the severe service side, the construction side, or just some color on North America market, please?.

Well we’re seeing some strength in our business seeing a little mix shift within the one and twos naturally tied to some of the big delivery company orders just the matter of what size the vehicles that they’re looking at going forward. We’re seeing distribution and construction in the medium duty class six, seven.

And then in the class A straight truck we’re seeing a pickup in construction as you mentioned specifically. We’re discharge mixtures and dump trucks and we’re also seeing some increase in the smaller some call them either big 7s or small 8s for the 3000 series there the highway series. So that’s those are scenarios that stand out in North America..

Okay.

And just real quick just to clarify are you still sticking with your $500 million share repurchases by year end 2016 or have you accelerated that given your comments on the July spend?.

We’re sticking with the execution of the authorization by December of 2016..

Okay, thank you. I’ll get back in queue..

Our next question comes from the line of Nicole DeBlase with Morgan Stanley. Please proceed with your question..

Good morning guys. My first question is around the oil and gas business.

I guess, have you guys seen stabilization during the quarter, or has conditions continued to deteriorate? And how have things trended in July versus June? I guess what my real question is, is it fair to assume that revenue kind of stabilizes in 3Q versus 4Q in the Off-Highway businesses?.

Well let me give you I would have said that we were stabilizing in April kind of the April timeframe I think recent geopolitical events that even though they’re not certainly online but some of the speculation with Iran and of course the numbers that have been in flow relative to inventories and amount of pumping that’s going on.

I would say that whereas we would have said we were stabilized it’s still a little bumpy. In the mathematics theory it says that you can always put on a line you can always put two point another point between the two end points.

And I would say at this point in time that’s given where we’re at in the industry that’s getting to be pretty tight relative to that we’re almost down to irreducible minimum. So we’ve taken our forecast to that level what we’ve seen and what we think we’re hearing and kind of sort and through what we’re hearing to what we think is going to happen.

And that’s why we’ve taken it down a bit further since..

Okay. But thanks you that’s really helpful color Larry and then my second question is on the same topic.

Have you guys seen customers really push back within the Off-Highway business on pricing or is pricing still holding there?.

We executed a long-term supply agreement with our largest customer really earlier this year in the very beginning of the year. So we’ve got our pricing established and it’s as many of the long-term supply agreements are evolving to the extent that there are there’s pricing actions in there.

They have an opportunity with significant volume to earn back against those and that’s consistent. So now we have we feel good about our positioning there and continue to move forward with our key customers..

Great, thanks I’ll pass it on..

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

Good morning everyone.

So let's focus on this -- as we look at margin opportunities, and you have a lot of different levers to drive margins, I'm wondering if we can take a look beyond the end of the year to anything that might be incremental one way or the other, over the next 12, 18 months tie-in period, in terms of what you think you can be able to do in terms of pulling levers on margins?.

Sure the as we’ve talked before number of things that we continue to work on it frankly we’re positioned several years ago. The number of initiatives in our supply chain team and what they’ve been working on there I would say that certainly ramped here over the last few years.

And we feel very good about our position going forward there you are certainly familiar with some of our labor arrangements in terms of multi-tier wage and benefit that we have as well.

We talked here about pricing on this call as we’ve thought about this year and last year and positioning with long-term supply agreements and the overall market condition so we continue to sell our products for the value that they deliver to end users.

So we feel there’s certainly some opportunity there as well so from a tailwinds perspective you can lay those out I think headwind certainly as we see the market continue to evolve here some level of general inflation.

I think we in most cases have been able to mitigate a portion of that we continue to see pressure on the healthcare cost side certainly and that’s something we’re working in a number of ways with beyond that I think we’ll as we get there as we normally do and our cadence will provide the 2016 guidance early next year.

I think it’s premature for a number of reasons to start throwing out some thoughts there. Now broadly speaking we’ve talked before about the larger concepts here, which is I mean our continued push for penetration globally with the On-Highway business. I think Off-Highway for a lot of reasons is an open switch at this point.

So we’ll work against that as we push into the year.

I would say to Larry’s earlier comments we continue to push the development of additional product options fuel efficiency driven in the On-Highway side in a number of models there as well as the Off-Highway business that you are familiar with higher horsepower fracking transmission that certainly market conditions are tough now.

But we see some real opportunity for incremental growth there for the Allison product line. So pushing that agenda has become a significant issue for us as we despite the challenging market conditions continue to chase our strategic priorities. But we feel good about overall margin position at this point. .

Right then not trying to push the 2016 number at all, but it looks like it sounds like your opportunities over the next 12, 18 months are similar to what you seen the last 12 to 18 months then for margins?.

Yet I would say our approach is consistent we’re certainly looking to improve that goes without saying having said all that I think we’re we have to see how the markets developed here to the earlier comments we’re certainly not going to push where there’s an opportunity.

But we’re also going to continue to invest on what we believe are long-term meaningful profit opportunities for Allison and more importantly driving the nominal growth opportunity for the business..

Okay, great. Thank you very much..

Thanks David..

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

Great. Thank you. On the Parts and Services business, can you give us an idea of what drew out the results, was it primarily on the fracking side? Was it also On-Highway? Just give us the breakdown there.

And also, I know in the past it's sort of been a decent leading indicator to the business getting better, is it the same when things are getting, I guess, worse, in that you see that fall first and then the rest would start to fall off? Or how do you sort of think about what Parts and Services means for the rest of the business?.

Right specific to Off-Highway if you look at the second quarter results we’re down roughly $13 million versus Q2 of 2014 basically that entire variance when you boil all of it down is Off-Highway right it’s factor even for North America. So that continues to be the real dominant story for our parts business unfortunately at this point.

There’s been a number of cycles here over the last five to 10 years some of them longer than others, it really depends I guess to answer your question in terms of the leading indicator of things turning or frankly turning down.

This last cycle it was cleared out as you all know the second half of 2013 is when our parts business and the frack really started to pickup and then that led ultimately to the increase in unit sales increases that we saw in 2014.

We’ll see how this market plays out I think it’s fair to say with the amount of equipment that’s been part and taken offline. One of the questions that our number up there and but it really gets down to what’s the condition of the fleet that’s been part and frankly how hard is the fleet that’s been run currently been maintained right.

So we come out of this with I think a relatively strained equipment position out there. You can maybe assume if you would like that the parts business is going to follow that trend in terms of the leading indicator there.

I think that, we have heard anecdotally a number of situations that equipment is really been run to fail at this point, so that would indicate some pretty tough situations to manage through when the equipment needs to be backfilled.

So the spending reductions speak for themselves, so the implications there is I think there may be some opportunities coming out of this hopefully that we'll start to see a pickup in the parts business but at this point we've taken a pretty prudent deal, we believe that the second half to Larry's comments in terms of irreducible minimums and we'll see how we were positioned going into 2016..

Okay great. Thank you very much..

Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch. Please proceed with your question..

Good morning. Thank you. I just had a question on the class 6 to 7 market. I realize you guys didn't change your North America On-Highway forecast, but order trends have been surprisingly weak in 6 to 7.

I'm wondering if you're seeing that in your own order book? Is that the main reason why you're implying the weaker second half versus first half?.

Well it's certainly a factor. What we have been looking at, we've actually seen a little more of a dislocation with one of our customers in the Class 8 straight truck as a result of some of their component supply, there is a player in the medium duty space that's got some others, not Allison Transmissions, but other component supply issues.

We watched that, we follow pretty closely.

The order backlog as reported by ACT, truthfully we don't have a lot of faith in that number primarily as a result of 2006-2007, but the one we do watch pretty closely is the inventory of the retail sales, and I think you are hitting on something where we have looked at that and said, there could be if something doesn't modify, going forward we've anticipated a little bit of adjustment there going forward.

So we have taken that into account..

Okay. Thanks a lot..

Our next question comes from the line of Tim Thein with Citigroup. Please proceed with your question..

Great. Thank you. Good morning. Dave, my question is on the pricing expectations that is assumed in the EBITDA margin guidance for the back half of the year, and it looks like you have been running at, call it an $8 million to $10 million per quarter range since the second half of 2014.

But how should we think about those, kind of the year-over-year changes we lapped, some of the mid-year price increases, from last year? So basically, pricing imbedded into the second half of the year guidance? Thank you..

Sure. As you know with our pricing move, there is a number of things that happened during the year, it's not linear just because of the cadence of a number of markets that we are in contracts et cetera.

So not to your point, we're run rating some of the activities certainly from 2014 into 2015, there is also a number of initiatives that we are pushing at this point.

I would say embedded certainly in our assumptions, our guide for the second half of some increased pricing year-over-year, directionally its meaningfully similar to first half in terms of what you're seeing here so far.

So, again as we push, I will see how the second half develops from a volume perspective which of course can have some impact on that but overall we do expect to enjoy some improvement in pricing for the second half year-over-year..

Got it. Thank you..

[Operator Instructions] Our next question comes from the line of Vishal Shah with Deutsche Bank. Please proceed with your question..

Hi, thanks for taking my question. On the - I just want to maybe better understand your OpEx guidance for the rest of the year.

Do you have any additional latitude so that we could use to bring the R&D and SG&A numbers down below the [indiscernible] million run rate?.

Well at this point in time given the update and the guidance and actually the increase in the EBITDA margin, one of the things recognizing we're in some tough markets. One of the things that we're doing is to continue to fund those initiatives that we think will offer growth and profit opportunities going forward. So we are no eating our seed corn.

So things like the fuel sense activities, the FE square that I spoke off earlier, some of the work that's being done in Asia and Europe into a lesser extent but on a proportional basis in Latin America, those activities continue.

Obviously you got to be, you sharpen your focus, but we continue to drive some of that, some of the product development in the Off-Highway space, recognizing the industry particularly energy is pretty flat, we view that is an opportunity for us to finish the development of some of our higher horsepower products, and then when the market starts recovering, we'll be positioned with a broader array of products to go after that opportunity.

So that's one of the things that we hold, the product development and market development tend to be right up towards the top of the list for expense management, of course we expense of development, we don't capitalize it here.

So those get higher and some of the, I'll call the more bureaucratic initiatives get little bit less focus and less attention, really gets to be like a family budget where you decide what's important and you keep that pretty close to your heart, and the rest of it is a little more optional..

Thank you so much..

Our next question comes from the line of Ted Grace with Susquehanna. Please proceed with your question..

Hi, guys. Good morning. Dave, I was hoping you could help to square up a couple of different things. In your prepared remarks you talked about, kind of, the continued recovery of North America On-Highway, I know you talked about market share gains. And then to Ross's question on medium-duty, you kind of discounted what the ACT data value is.

What's actually more notable to us than the medium-duty is the heavy-duty order rates for class 8 straight, within the four months have gone negative 7, negative 21, negative 33, negative 33.

So my question to you is, are you seeing this in your business at the leading edge, or are you telling us that the ACT data that we all see is not valid and not directionally indicative of what you're seeing in your business in North America class 8 On-Highway?.

I'll let Dave answer, this is Larry, I’ll let Dave answer. Let me clarify. The comment I made about the ACT data, was the order backlog data and order cancellations, that can move around quite a bit. And just because they reported as an order doesn't mean materialize so. So we tend to look at that inventory to retail sales.

What we have seen in the Class 8 space straight truck is some level of softening, we have adjusted our production plans accordingly.

We have also seen in some cases some challenges relative to one of the significant players in that space, one of the OEM's who is having a significant apparently other component supply issue, and that has had an impact, this about half of the impact we've seen as a retiming from them from Q2 into the rest of the year as they anticipate getting those supply, that supply issues squared around..

Okay.

So on the plus 8% guidance for North America On-Highway this year, can you just talk about how much of that - how much of that is visible in the form of backlog you already have, and how much is kind of on the come, you need to get the orders in the back-half to actually hit the plus 8% guidance?.

Well, the reality is, you can have forecast from the OEMs out six months or a year and the line said 10 days out, so anything outside of those 10 days can be moved around a bit. So it's a fairly fluid reality at least as far as we are concerned.

As we look across the OEM, again setting aside, the 1 and the class 8 space, and the 1, that's a bit challenge in the medium duty space, we have seen a little bit of movement in terms of the their, as I look at individual OEMs, little bit of movement in terms of what they have communicated for orders that aligned, but nothing with the exception of one that they moved a couple of weeks where you would say they had 6 to 7 weeks, and now there are 4 to 5 weeks sets, so they would be looking for orders into 6 to 7 week although heavier orders stream in the past.

As we talked, one of the things that the OEMs have said, folks they think that because of their ability to deliver against what are compared to historical market levels, softer markets, that people don’t believe they need to place their orders as quickly, and so they are holding on to them.

So that reduces the visibility, at least that’s the input we've got from a couple of the large OEMs, one Midwest based and one West Coast based. So that’s an interesting thought that we need to dig into and try to understand that as we talk to end users..

Okay.

This last related question is, based on what you're seeing in Class 8 order data, you don’t think its at all indicative kind of the cycle rolling?.

No, the Class 8 stayed straight, it’s a little different. Sometimes when they get talking about, they start talking about the tractor market. Now that has some relevance to some of the 3000 series we've got going into some tractors and that has relevance to of course the TC10, and all though that’s in a ramp up phase.

So it’s not as affected by overall market size. But we watch it closely. We do think that the inventory of the retail sales ratio is higher than the traditional average, but it’s been running higher for 3 years. And so we're trying to understand if that’s the new normal I guess or whether we need to taper that a bit..

Okay. Well, that’s helpful perspective. Good luck this quarter, guys..

Our next question comes from the line of Brett Hoselton with KeyBanc. Please proceed with your question..

Good morning, Larry. Good morning, Dave. Two questions for you. First, why not accelerate the share repurchase program given the share prices at actually quite a low point.

And then the second question is, can you kind of just talk about the launch of that new transmission program and how that’s progressing, one you just mentioned of course?.

Sure. The share repurchases responded earlier, we remained committed to the $0.5 billion - executing the $0.5 billion authorization by the end of next year. Certainly we have not said one way another whether we're accelerating or not So I think the point is you've seen the second quarter results with the activity that we have.

We also mentioned $84 million of share repurchases, month to date July. So I think that’s a meaningful update at this point and again, we remain committed to executing the authorization..

And then regarding the….

Thank you..

The TC10, we know that there is going to be a ramp. We continue to pursue the ramp. As of the middle of this month, we've got 143 fleets that made purchases, 17 of which are repeat. So that’s certainly is a – given the time that the products been out there is a good repeat purchase indication. So we're pleased with that.

The feedback continues to be very positive, particularly in the area of fuel efficiency, vis-à-vis the competitive alternatives that are out there.

And so we just continue to march and continue to conquest customers and get the product in their hands and believe that the product will deliver the value they are looking for and then we'll continue to see those repeat orders and build the book..

Thank you very much, gentlemen..

Thanks..

Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question..

Yes. Very good. Thanks. I was wondering if you could comment a little bit more on the outside North America, on highway segment, you mentioned earlier it was obviously its Bumpy, there is some visibility issues, you've got some macro weakness to cope with.

But in the release you did call out that there was strength in Europe, strength in Japan, strength in India.

I was wondering if you could just give a little bit more color on what exactly that entails, where are you getting the increase order, order volume?.

Sure. In Europe, really across three different end markets they saw some notable increases. Truck sales were up little under 20%, 18%. You got the western European OEM starting to firm up a little bit. South Africa got a really more of a timing change here in the quarter. Truck sales were up even more particularly driven by Turkey.

That’s been a nice step up for us from a market penetration, maybe more from a market recovery, cyclical quarter kind of performance. The UK was strong. And then the other areas, military sales were up significantly out of the Europe. Again, Turkey and some other Middle Eastern business that we were able to get.

In Asia, we did see and it was primarily timing, bus was up. As we look forward, we would say that in China the overall bus volume is actually going to be down and that is the entire down take in the Asia Pacific region. So - but in this quarter year-over-year it was up driven primarily by Beijing, as well as a few other programs that we had in there.

Truck up a little bit, but nothing to write home about in China. In Australia and the rest of Southeast Asia it was down, so the net-net was down in Asia there. India continues to move upward. Bus based on some of the tender orders that are starting to flow, we were able to capture some of that.

Truck continues to build, albeit small step for the time, but it continues to build as we gain the releases. Japan, was up fairly significantly year-over-year.

That was driven almost exclusively by bus, relative to some of the business that we have in the Japan domestic truck rental market, as well as a little bit of business they picked up in Malaysia and South Africa.

And then Latin America, their sales were up just under 30% driven by some of the bus activity, including some new releases that we were able to get. And then truck sales were actually down a little bit based on year-over-year tender business..

Okay. Great. Thank you. That was very helpful. I guess, one last quick question, you mentioned the high horsepower transmission that you are looking to sell into the fracking market, despite the headwind that you've got there obviously. I know that historically you've spoken about China potentially wanting to adopt transmissions of that type.

Where do you see China right now in their push I guess towards replicating what we did in North America with fracking?.

They've got some different challenges relative to technologically speaking. In terms of the composition of the shale, the accessibility of the fields which both lend themselves to higher horsepower. It’s harder to get rigs in some of these areas. And so you don’t want to take 10 if you can take 8.

That give the necessary power to the drilling site - so to the fracking side there. So that’s one of the differences.

Certainly one of the interesting things we've seen with a higher horsepower variant we have introduced is even here in North America where the official rating of the engine is lower than what might be required or might be lower than what would drive you to the higher horsepower engine.

We've seen a number of our customers switch over to the higher horsepower transmission in order to provide a greater safety margin for their operating conditions. And so I would expect that we may see some of that as well.

Although the primary focus, without question, and the launch focus is China for the higher than what we've introduced to this point, horsepower transmissions..

Okay. Thanks a lot..

Thank you. We have no further questions at this time. Mr. Dewey, I would now like to turn the floor back over to you for closing comments. Lawrence Dewey Well, thanks Christine. Appreciate everyone’s time this morning, I know you are busy. We'll look forward to talking with you for the Q3 call. Enjoy your day..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day..