Q3 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to Allison transmission third quarter 2019 earnings Conference call. My name is Melissa and I will be your conference call operator today.
This time all parties how are in listen only mode. After the prepared remarks, the management team from Allison transmission will conduct a question answer session. They conference call participants will be given instructions at that time.
As a reminder, this conference is being recorded.
If anyone should require operator assistance during today's call. Please press star zero on your telephone keypad.
I would now like to turn the conference over to Mr. Rapisarda, the company's director of Investor Relations. Please go ahead Sir.
Thank you Melissa.
Good morning, and thank you for joining us for our third quarter 2019 earnings Conference call with me. This morning, our deep breath, you'll be our president and Chief Executive Officer, and Fred Foley, Our senior Vice President Chief Financial Officer and.
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 Allison transmission dock.
A replay of this call will be available through November seven.
As noted on slide 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 third 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.
If one or more of these risks or uncertainties materialize fortune underlying assumptions or estimate prove incorrect actual results may vary materially from those that we expressed today.
In addition, as noted on slide three of the presentation. Some of our remarks today contain non-GAAP financial measures as defined by the FTC.
You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation. It's worth third quarter 2019 earnings press release.
Today's cost at the end up 845 am eastern time in order to maximize participation opportunities on the call well take one question for me channels.
Please turn to slide for the presentation for the call agenda.
During today's call. They Brad guilty will provide you with an overview of our third quarter results.
I believe will then review the third quarter financial performance and the 2019 guidance update.
Finally, Dave will conclude the prepared remarks art commencing the queuing it.
Now I'll turn the call over to date gradually.
Thank you Ray good morning. Thank you for joining US we're pleased to report that Alcons third quarter 2019 results are within the full year guidance ranges provided to the market on July 31st.
And our North America on highway and market remains on track for a third consecutive record year wed by ongoing execution of our growth initiatives and market share gains in class four or five truck. Furthermore, I always think continues to demonstrate solid operating margins and free cash flow, while executing its prudent in well defined it.
Approach to capital structure and allocation during the third quarter, we settled $46 million I'm share repurchases paid a dividend of 15 cents per share and close the acquisitions of Walker die casting and CNR tool and engineering earlier. This month, we also completed an opportunistic re pricing of our.
646 million dollar term loan due March 2020, Sir.
Please turn to slide five of the presentation for the Q3 29 team performance summary.
Net sales decreased 3% to $669 million compared to the same period in 2018, principally driven by lower demand in the service parts support equipment and other.
Global off highway end markets, partially offset by higher demand in the North America on highway and market.
Gross margin for the quarter was 52% decrease of 120 basis points as compared to 53.2% for the same period and 28 came principally driven by lower net sales and higher manufacturing expenses commensurate with increased on highway volume, partially offset by pricing.
Increases on certain products and favorable material costs.
Net income for the quarter was $149 million compared to $167 million for the same period in 2018. The decrease was principally driven by lower gross profit increased product initiative spending and increased interest expense, partially offset by lower selling general and administrative.
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Adjusted EBITDA for the quarter was $269 million, 40.2% of net sales compared to $295 million for 42.6% of net sales for the same period in 2018. The decrease in adjusted EBITDA was principally driven by law.
Our gross profit increased product initiative spending partially offset by lower 2019 product warranty expense and favorable 2019 product warranty adjustments now I'll turn the call over to Chris.
Thank you did 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 Q3 2019 financial performance summary.
Selling general and administrative expenses decreased $4 million on the same period in 2018, principally driven by lower 2019 product warranty expense and favorable 2019 product warranty adjustment, partially offset by increased commercial activity spending.
Engineering research and development expense increased $6 million from the same period in 2018 prints were driven by increased product initiative spending.
Please turn to slide eight of the presentation for the Q3 2019 cash flow performance summary.
Net cash provided by operating activities decreased $27 million from the same period in 2018, principally driven by lower gross profit increased product initially spending partially offset by decreased cash income taxes.
Adjusted free cash flow decreased $51 million from the same period in 2018, principally driven by lower net cash provided by operating activities and increased capital expenditures.
As Dave mentioned earlier during the third quarter, we settled $46 million to share repurchases and pay the dividend of 15 cents per share earlier. This month, we completed an opportunistic repricing of our 646 million dollar term loan due March 29 2026 the interest.
Great reduction on our term loan will reduce annual cash interest expense by approximately $1.6 million.
This repricing transaction demonstrates Allison continued commitment to prudent balance sheet management as well defined approach to capital structure and allocation.
We ended the quarter with a net leverage ratio of 2.1 too.
$152 million of cash.
$583 million of available revolving credit facility commitments and approximately $1.1 billion authorized share repurchase capacity.
Please turn to slide nine of the presentation for the 2019 guidance update.
Our updated full year 2019 guidance includes net sales expected to be in the range of $2.65 billion to $2.7 billion net income expected to be in the range of $555 million to $575 million.
Adjusted EBITDA is expected to be in the range of $1.035 billion to $1.065 billion.
Net cash provided by operating activities is expected to be in the range from $745 million to $775 million.
Adjusted free cash flow is expected to be in the range of $570 million to $610 million.
Cash income taxes are expected to be in the range of $95 million to $105 million.
Allison full year 2019, net sales guidance reflects lower demand in the service parts support equipment, another and North American off highway end market, principally driven by lower demand for from hydraulic fracturing applications, partially offset by increased demand in North America on highway end market price increases uncertain.
Product and the continued execution of our growth initiatives.
Our implied fourth quarter adjusted free cash flow guidance includes capital expenditures for the previously announced expansion of our engineering facilities and testing capabilities.
And the payment of interest on $500 million that senior notes due June 2029.
That we issued during the first quarter 2019 term loan refinancing.
Thank you and I'll now turn the call back over to Dave Thanks, Fred.
In the past, we have emphasized thousand strategic priorities of global market leadership expansion emerging markets penetration product development and core addressable markets growth, while delivering solid financial results and creating value for all stakeholders. Today, we continue to find ourselves with more opportunities to drive innovation.
And then growth than in any other time in our history.
These opportunities where illustrated again by the third quarter acquisitions of Walker die casting and CNR tool in engineering Walker Die casting is an industry supplier in a critical source of hi, tonnage commercial and low volume aluminum die casting a niche area of manufacturing, particularly in North America.
Walker has been a supplier and trusted partner to Allison for over 20 years and their aluminum die cast components are used in all of Allison's on highway commercial products.
CNR as a leading supplier of die cast does the metal working tools, primarily for Walker and complements walkers ability to grow and support Allison.
These acquisitions presented a unique opportunity to leverage allison's manufacturing in design capabilities through vertical integration with a leading component supplier in the aluminum die casting machining industry. It enhances allison's ability to deliver attractive value propositions and secures capacity in a niche.
Three of our supply base walkers customers remain important partners and we plan to continuing grow those relationships.
Earlier this week at the North American commercial vehicle show in Atlanta, and in partnership with Freightliner truck Austin announced the launch of the New Allison Regional Hall series transmission for class a tractor market the new regional whole series, an upgraded variant of allison's proven and well known 3000.
Series transmission has been designed to meet higher engine torque requirements and provide improved efficiency, while continuing to deliver the superior reliability performance and drive ability of an Allison fully automatic transmission.
The increase rating supported growing trend for distribution and regional hall fleets to utilize their trucks and mix duty cycle often in city delivery route on one shift and regional hauled transport route during a second shift.
The regional whole series will provide fleets with 25% faster acceleration and is lighter than that competitive automated manual transmission.
In addition by leveraging Allison's Xfc technology as well as Allison Fuelsense 2.0, with dynamic to shifting technology. The regional Hall series will deliver a fuel economy improvement of up to 8%.
This product releases. The latest example of customer demand driving product innovation distribution customers in particular have expressed the need for this product.
Allison in Freightliner responded with a drop in solution for any chassis with a current Allison 3000 series option beginning in 2020, the regional Hall series will be a bell and available option on the Freightliner and to 112 and the Cascadia both paired with the Detroit.
BD 13 engine and with additional engine parents to come in the future. This 3000 series transmission variant demonstrate dolphins consistent ability to leverage existing technology, and our brand values to meet or exceed the markets increasing demand for automaticity fuel.
Economy and reduced emissions.
In closing these developments our recent examples of the power of Allison.
So future initiatives will not be linear we continue to demonstrate that we will take action where appropriate to invest prudently in our business drive innovation to fuel growth and secure and enhance our ability to deliver value propositions to our customers. Furthermore, our commitment to prudent balance sheet manner.
Determine as well as capital structure and allocation is key and facilitating allison's ability to remain resolute and opportunistic and the execution of our strategic priorities.
This concludes our prepared remarks, Melissa please open the call for questions.
Thank you at this time will be conducting a question answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation total indicate your lines in the question Q.
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To allow for as many questions as possible, we ask that you each keep to one question.
Our first question comes from line of Rob Wertheimer with release Research. Please proceed with your question.
Hey, good morning.
And obviously good results.
Quick question on service and parts, obviously slowed down in the oil field no surprise at this point the quarter can you.
Hello.
This is Rob can you hear me, we can hear you now.
[noise].
Mr. Wertheimer your line is lives.
I'm sorry, it's Robert you guys still there.
Yes.
I'm, sorry about that all what happened to call kind of dropped anyway, just trying to figure out on the service and parts for there was entirely worth over there is anything else and whether that's bottomed out. Thanks.
Rob It's Dave good morning.
A quick answer your question is the vast majority of is North America Frac.
Yep.
Perfect and then do you have a sense on its been volatile is that is that or all the rebuilds out and you're still doing regular parts and service is there any more downside there have you maybe potentially.
No point.
I would I would tell you the implied fourth quarter quarter guide.
Essentially has Q4 relatively flat with Q3.
So we continue to work with our customers and end users in terms of their constrained budgets frankly for Q4, a we've also done a fair amount of work in terms of.
Channel checks and inventory levels. So we've baked that into our assumptions as I said, which is relatively flat Q4 with Q3, but on terms of.
The new unit side of things, obviously very limited as you've heard over the last few weeks from the public comments that have been made by a number of service providers and and end users in terms that constraints.
Perfect. Okay. Thanks very much.
Thank you. Our next question comes from the line as Seth Weber with RBC capital markets. Please proceed with your question.
Hi, Good morning. This is Brian to non for Seth ought to start off I was wondering if you could talk to I guess, how you're feeling about inventory levels side and the straight truck market currently.
Sure I assume you referred referring to North America class eight straight we've we've spent a fair bit of time as we always do with end users as well as Oems given the public comments by a number of those parties over the last few weeks as well as third party.
Forecast that are available I think it's a pretty.
Clearer conclusion that inventories are heavy when I say that its inventory retail sales ratio or we've talked about that a number of times. This year as the market comes up when it comes off a bit and moderates.
The inventories tend to need to catch up I would tell you I believe that process is already underway by a number of.
Oh Oems as well as end users managing fourth quarter production rates as well as Manning I'm sure you're aware of a number of.
Public statements that have been made in that regard, but it's pretty clear to us the inventories look high.
I asked us to quantify class eight straight truck in particular in terms of inventory it would.
Implied to us the better part of a month heavy overall and I think frankly, that's reflected in the.
Third party forecast that are out there for 2020.
Okay. Thank you and then related to the weakness in fracking.
Do you think that that's just an issue of the industry needing to sort of lower inventory levels.
Do you think theres, an underlying issue that was kind of precluded from getting better next year.
Brian I think.
Number of things the industry as you saw a significant reductions as we understand it Q3 versus Q2 on.
The amount of equipment that was stacked in Q3 alone versus even the first half.
I would say the end users to be service providers are taking very aggressive steps to rightsize the amount of.
Equipment that they have fielded.
As I think we mentioned on the the Q2 called the condition of that equipment going into this particular.
Point in the market is better than we believe than the last cycle the amount of capital that was spent.
That will allow we believe that the service providers and end users ultimately to.
Carry forward for a bit of time here without doing much in terms of.
New rig construction you.
You could call a cannibalization of some of that stacked equipment, but that's our expectation because as we understand it.
Capital constraints are disciplined depending on the word you like to use.
So prevalent right now in that industry, they're under a tremendous amount of pressured to constrain spending so that I really sets up as weve implied for the fourth quarter and certainly going into 2020.
I'm very muted expectations around.
New units going into the market I think the balance of its really going to come down to a overall utilization rates when I say that in terms of how much of that stacked equipment will ultimately be available to be fielded versus cannibalized.
It's very clear.
Matt or the level of usage intensity is not going down to the industry continues to push efficiency, which is really driving the consumption of equipments. So theres a number of factors that will ultimately I think change some of the dynamics we've seen in prior cycles, but this also sets up for ultimately.
We.
A recovery into that space. It really becomes a question of when not if.
Thank you. Our next question comes from line of Ian Zaffino with Oppenheimer and company. Please proceed with your question.
Great. Thank you.
Interest square, the increasing inventory for the North American on highway with basically your sense that you're going to see increased demand.
How should we be thinking about maybe that the inventory worked down.
And now it would then hopefully to your shipments thanks.
Morning, It's Dave, but a couple of things in terms of inventory to the question earlier on class eight straight and we talk to that I would certainly covered the same question for six seven.
Trucking it as well looks heavy to us I'd, probably put that in the range of a month heavy.
I think again that Ben also reflected in third party forecast we've.
Assumed a number of different potential outcomes for Q4, and then of course positioning for 2020.
Were assuming Oems and other parties in the space are starting to make corrections as I mentioned earlier, that's already started.
That being said, we as our guide implies are not expecting.
I would say a higher market on a year over year basis in terms of Q4, it's a tough comp to begin with when you combine that with.
Some of the strikes that have taken place here recently, that's also created some displacement it's not a light switch to turn things back on so Weve also included that in our guidance. So I think that sets up for.
Inventory correction going into next year.
We'll see how that the overall industry physicians itself with the shutdown schedules late this quarter.
Great. Thank you very much.
Thank you Sir our next question comes from line and Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning, I'm, a nice quarter given the yeah. The macro out there I guess, you know fretter or Dave just a question understanding you know the sales forecasts are coming down for the fourth quarter, but I guess, the the margins came down more already implied margins or EBITDA are down more considerably even taking into account the fourth quarter, which is which is seasonally we.
Hi, there. So can you just help us understand the puts and takes I'm trying to understand the implications for 2020 I assume some of this is you adjusting edge as your customers are starting to kick off production. So maybe fourth quarter EBITDA margins are worse than what you would you as normal.
Then I guess my second question gave you guys have had some success in 2019 sort of outgrowing the market and improving your market share can you talk about the sustainability of that going into 2020, and how that could potentially offset a broader industry downturn. Thank you.
Hi, Dan is it's Brad I'll take the first portion of that question.
Our implied fourth quarter guidance as Dave mentioned takes into account a variety of potential outcomes.
Most notably the negative impacts the volume and mix.
Primarily driven by reduced demand for North American off highway new units, Sir and service part the elevated North American on highway inventory levels and the Q4 impacts of the OEM. My work stoppages. It also includes a increase R&D and SDMA expense to support our growth initiatives.
Product development and capital projects.
And includes the favorable pricing on certain products.
Jamie This is Dave on your your market share questions.
We are fortunate.
This year to be able to reenter the four or five space with the Jan Silverado and the NAV on TV series.
Those products seem to be well received by the market Thats certainly helped us recover a position that as you know dates back almost a decade at this stage. So we believe that is certainly a sustainable subject to both of.
Those platforms maintaining their position in the market if not growing.
We've also done well this year in terms of.
Class eight straight truck as well as metro our so called rugged duty.
Series as well as our highway series transmissions, it's clear that as we've talked before and you are well aware of the push for automaticity in the space and safety and reliability that that certainly plays well with our brand value.
Values as well as the execution of the overall service model for end users. So we believe that as well as a great position for the team they've worked very hard on that and continue to.
Try to grow that position with a number of different.
Programs.
I'd also tell you.
Announcement earlier this week that I mentioned that the North America.
CV show for a lot of reasons that continues to give us the opportunity to expand share as well in terms of class a metro.
No Thats space is moving.
Very.
Quickly to further automaticity, we believe it's a great value proposition and again that was really.
Market, driven we've talked before about our product lineup and what we're spending on.
It really needs to be market demand driven so.
We're happy with that outcome outside North America.
Continuing to take our value proposition and really core applications.
That being said.
The push for.
Electrification specifically in boss in China has created some headwind for us overall, weve directed or redirected some of our resources entre into.
Into the truck space more specifically.
We feel good about our positioning there as well again from a performance of the product perspective. So.
Overall that combined with other releases, we've secured as well in some of the emerging markets continue to perform well. So those are effectively penetration gains as well.
Thank you. Our next question comes your line of Larry de Maria with William Blair. Please proceed with your question.
Thanks, Good morning, everybody.
Obviously, we're hearing a lot about not just from you guys, but from other companies about softer order books and reflective in guidance, but just curious what's kind of the magnitude of last say 60 days, how orders have trended downward and have they stabilized and is there way to maybe ballpark came back to the strike did that is threeq.
And then slowly coming back in Fourq you.
Good morning, Larry It's David a couple of things we from a strike perspective, we don't get in front of our customers will let them.
Quantify what the what those impacts are we certainly felt some of that in Q3, but as you know the math is the majority of it is Q4 schedule.
We'll also let the Oems talk to their their recovery plans, if any for the balance of the year relative to those two events.
We are certainly happy to get those as they are resolved and behind us, but the fact is the inventory levels that were that were discussed earlier creates some level of buffer anyway. So from my from our perspective. It just becomes a question a timing whether it needs to it you get through the some of that.
Inventory reduction sooner rather than later relative to.
Recovery periods more broadly in the market.
That that certainly sets up a position again I think that is then reflected in third party forecast are ready for 2020.
Of course, decipher he knows into what's relevant for Allison's end markets.
Specifically as we talk about six seven.
Truck as well as class eight straight et cetera.
We'll deal with our specific thoughts on 2020 as as we normally have in the first quarter with the fourth quarter call and provide that particular level guidance, but it's a.
The Fred's earlier comments, we've assumed a number of things obviously in our fourth quarter guidance, there's there's a number of different outcomes there.
But you can imagine as we've just rattled off a number of them here. This morning.
It's a relatively active quarter, probably one of the more active quarters, we've had in several years.
With the number of these both micro as well as macro events.
Really impacting the business.
Okay. Thanks, and just real quick I think Capex was increased sorry, if I missed it but was there a reason for the increasing capex.
As we yes, there is we have a number of.
Projects that we're investing in terms of our engineering capabilities. One is a vehicle environmental test facility.
We had number of discussions and meetings around that at the North American CB show here This week.
That will allow us to do expand our both our internal capabilities as well as the ability to serve.
Third parties in that facility, so that spending as well underway.
That facility will be completed in 2020 on available for our expectation is for third party use second half next year.
The other Big project, we have four product engineering is an innovation center.
That is planned to be completed in 2021, so that's incorporated into the spending.
For our guide, which as you can do the math the implication.
As Fred mentioned in his comments around heavier amount of Capex.
Really being in the fourth quarter, Thats really scheduled driven in terms of timing and materials as well as.
The ability of third parties to execute those projects on our behalf.
Thank you. Our next question comes from the line of Tim Thein with Citigroup. Please proceed with your question.
Thank you good morning, Dave maybe just continuing on that.
Thought process there from the standpoint as.
Free cash flow.
No. We're not we're not talking about 20, but as we think about just the key levers RBC I would assume that the capex normalizes in 20.
Historically, there's there tends to be in an environment, where the topline is softening some some calendar.
Or counter cyclical.
Working capital movements, so I'm just.
Get high level is it conceivable DNA.
To the extent you do have a softer EBITDA year in 20 that that you would have.
Items that would enable the company to at least.
Hold toll free cash flow.
At a similar level in 20, thank you.
Sure Tim This is Fred on a on working cap.
Certainly the the expectation there.
And we target.
10, 11%.
Of LTM sales, though in a environment, where sales is coming down yes, so that should be a source of cash.
Dave speak too.
Capex on the.
The Capex issue projects that I, just mentioned in terms of the engineering capability investments they'll also be spending.
Next year 10, so as you start to work those out.
The vehicle environmental test facilities spending will be lighter than it is in.
In 19.
Opposite happens with the innovation centers that spending will actually be up.
Because the vast majority of the construction will occur.
Next year to your point in terms of how we manage the business from.
Softness or.
Others Theres more growth of more demand, we manage our business through the cycle. So there are a number of investments that we make you would call sustainment our maintenance those will continue to occurred can we curtailed of depending on the circumstance yes.
Having said that thats becomes more of a timing issue. Our plans for 2020 also incorporate a number of other initiatives that will will address in the first quarter. So I would.
I think it would be mistake to set the expectation necessarily.
That our capital spending would be significantly lower in 2020 versus 19, just because of the projects, where we already have underway.
But again that being said depending on market conditions Theres, a number of things that we can.
Move to defer level of spending as well and we'll see what.
What 2020 develops out, but we as we've done another.
Market cycles, and situations make appropriate adjustments, but again, we take a view of the business through the cycle.
It's important to understand what that what that means.
Thank you. Our next question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.
Yes. Good morning, just just following up on.
Since question and some of those thoughts Dave I mean, how should we think about second rental margins.
We go into a downturn this cycle relative to prior cycles may be given that.
Yes, good growth investment and you do have a greater focus on.
Alternative propulsion.
Technology.
And so forth can you kind of sustained decrementals, where you were on prior cycles or perhaps.
Ross it it obviously depends in terms of your assumptions on the overall mix of the book of business.
As we've talked about I think it reasonably safe expectation just thinking about North America off highway, which one which is an attractive margin business.
That that situation has not.
This point I would say setting up extremely well for 2020.
When you start to run through to answer your question on Decrementals are really comes back to.
The level of volume mix right Theres, a number of other things as we think about the portfolio just looking at third party forecast for North America on highway volume.
But also for tends to be.
A somewhat unfavorable mix so.
As we're pulling our our thoughts together for 20, Twond and we'll be providing knows as I said in the first quarter of next year.
We will certainly work to do our best to minimize the impact of those decrementals, but the same time.
Execute on the initiatives that are necessary to grow this business through the cycle.
And then if you havent downturn year, you think you can continue to sustain the level pricing generally get through the cycle or on an annual basis or do you generally see a pause if not a somewhat of a guess back.
Yes.
Weve typically as you know, we there's opportunity for pricing as long as we're delivering differentiated value.
We believe there is continues to be opportunity there to will do I expect it to your point would be.
The same with with a moderating market not necessarily but I do expect that we'll continue to enjoy some level of price.
Okay. Thanks.
Thank you. Our next question comes from the line and Jerry revenues from Goldman Sachs. Please proceed with your question.
Yes, hi, good morning can we just continue the discussion.
But you just said it so in your prepared remarks, you spoke about the strong product cadence and regional Hall series.
Can you folks talk about the per cent fuel economy improvement that you expect across the product lineup.
That we're going to see in 2020 and as you pointed out typically that's link to your pricing as well. So just trying to understand if we're going to get a stronger.
Product cadence in 28 compared to what we've seen over the past couple of years, which sounds like might be the case based on the prepared remarks, but I'm wondering if you could flesh that out for us.
Jerry it's Dave good morning.
Couple of things there I.
I mentioned the in the description of the 30 414 Regional Hall series product.
That has fuelsense 2.0, as you know that's a relatively recent.
Addition, in terms of our our on highway product lineup.
We continue to ramp the adoption rate of that so the reason for that to your point is that.
There is the demand higher demand for fuel efficiency in the market.
We're continuing through to drive the adoption of that so I think you'll you'll see should expect to see more of that.
Theres a number of OEM programs that we have to increase and drive that adoption as well some standard offering so.
That's that's something that's in front of us to your point I would also.
Mention that our team continues to work on a number of different variants of our existing.
Products to really improve the fuel efficiency. Some of that is handled through mechanical changes. Some of it is handled through controls changes and software. It's a combination of those.
But it's clear that there is a need in certain portions of the market not all of them.
I would certainly tell you, but a number of sub segments within on highway.
Our looking for it certainly more fuel efficiency so.
On the RHS, the Fuelsense 2.0, Theres a number of other product variance that we're working on up to and including the nine speed product that we announced.
Almost two years ago now that the team team continues to work on that being said as I mentioned earlier, we really wait and see from a market demand perspective, the pull for additional technology and that's that's a good example of where the market ultimately lands and where.
Paired to provide that technology to extent there is.
Demand for it.
Okay, and maybe just a clarification on the guidance so taking mid point of sales and EBITDA just to expand on that.
You have EBITDA in the fourth quarter down $80 million are so year over year on $100 million decline in sales and.
We haven't seen that type of decremental margins for from you folks.
In the past so it was that just a function of using midpoint French number late in the year or are there other factors at play and I. Appreciate your prior comments on this on the strike.
And but you have price cost.
Tailwind and other positive factor so can you just.
Address that point in a little bit more detailed please.
Hi, Jerry this is Fred.
As we spoke of on are really on the Q1 in Q2 earnings call. We did expect a engineering R&D to be up 20 million year over year that would imply.
That Q4, 19 would be up approximately 10 million above Q4 18.
We also expect the SGN a expense to to be elevated.
So those would be the two items to that 0.2. In addition to the comments we made around.
Volume and revenue.
Alright, thank you.
Thank you. Our next question comes from the line of Courtney.
Morgan Stanley . Please proceed with your question.
Hi, Thanks, just to follow up on that you mentioned that SGN it'll be elevated in the fourth quarter.
At the beginning of the year earlier, you had mentioned that I've seen it would be close to flat for the year. So obviously that doesnt.
Big step up in the fourth quarter is that still well, we should be using and I think most of the BNS genie over the past three quarter, it's really been attributed to favorable warranty costs relative to last year suggests when we think about.
I see any level for next year is this year and normalized warranty level or is it below or or was last year high end this year as normal. Thanks.
Sure coordinate this is Fred.
The expectation at this point based on the the favorability we've seen in policy in warranty is for as you need to be down year over year, However, still up in Q4 over.
Over prior year.
Specific to.
Yes.
Beyond 2019.
The the favorable adjustments, we've had from a product warranty.
Standpoint, so would not be expected to continue that to a quarterly process that.
We true up those accruals.
Certainly products been performing well, but thats not something that we would anticipate rolling into 2020.
Okay. Thanks, and then I think you reference that's a little bit earlier, but with the implied.
Down in sales in the fourth quarter. That's in your guidance can you just talk a little bit I think you had originally given some end market guidance at the beginning of the Eric we haven't necessarily gotten an update but you know for something like North America on highway which is obvious obviously performed in a much stronger than expected for the first three quarters of the year how much.
Hi guide down this really because the shift there versus the shift in some of your other markets.
Sure Corny I mean, one thing I guess I'd point out we we reaffirm guide narrowed the range is.
But as you as you think about full year certainly we're we're coming in quite a bit stronger North America on highway I think our initial.
Full year guide was.
Up 5% were closer to up 10%.
But you know were relatively close to the.
Initial guide.
Where we had a pretty pessimistic view of North America off highway and the associated parts. Unfortunately, those have come to fruition.
Above and beyond that I'd say things are relatively consistent with the guide that I did.
Back in February and.
And really with the Q2 guide as well.
Where we have an effect narrow the ranges and reaffirm guidance.
Thank you, ladies and gentlemen that concludes our question and answer session now turn the floor back to Mr. Graziosi for any final comments.
Thank you Melissa.
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