Q4 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to Allison transmissions fourth quarter and full year 2019 earnings Conference call. My name is Melissa and I will be your conference call operator today.
At this time all participants are in listen only mode. After their prepared remarks management team from Allison transmission will conduct a question and answer session at a 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 the call. Please press star zero on your telephone keypad.
I would now like to turn the call over to Mr. Rapisarda companies director of Investor Relations. Please go ahead Sir.
Thank you Melissa.
Good morning, and thanks for joining us for our fourth quarter full year 2019 earnings conference call.
With me this morning, our Dave Graziosi, our President and Chief Executive Officer, and Fred Foley, Our senior Vice President Chief Financial Officer <unk>.
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 February 27.
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 fourth quarter 2019 earnings press release in our annual report on form 10-K for the year ended December 31st 2008.
C.
And uncertainties and other factors as well general economic conditions.
At one or more of these risks or uncertainties materialize worship underlying assumptions prove.
Prove incorrect actual results may vary materially from those 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 yet.
You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix do the presentation into our fourth quarter 2019 earnings press release.
Today's call it at the end the 845 am eastern time in order to maximize participation opportunities on the call well take one question for me channel.
Please turn to slide for the presentation for the call agenda.
During today's call Dave gradually will provide you with an overview of our fourth quarter results.
I believe will then review the fourth quarter financial performance and introduce full year 2025.
Finally, Dave will conclude the prepared remarks prior to commencing with you and <unk>.
Now I'll turn the call over to Dave.
Thank you Ray good morning, and thank you for joining us I'm pleased to report that full year 2019 results exceeded our guidance due in large part to stronger than anticipated performance in North America on highway end market. Furthermore, both in North America and outside North America on Highway end markets concluded a third can.
Thank you to record revenue year, largely driven by the continued success of our growth initiatives.
Our commitment to growth its most notably reflected in the North America on highway end market, where we achieved meaningful market share gains in 2019.
Market share for class four or five truck more than doubled climbing to 16% compared to 7% in 2018, the substantial share gain in class four or five was principally driven by the medium duty commercial truck launches at Chevrolet and Navistar exclusively with the Allison fully automatic transmission.
Class six seven truck grew to 76% market share in 2019 from 74% in 2018 and class eight straight truck achieved 74% marketshare and 2019 compared to 70% in 28 to our 2019 north.
Our market share gains suggests that the secular trend of increasing automaticity into vocational truck market continues to occur and Yeltsin remains positioned to capitalize on this transition finally I'm pleased to report that Albertsons established and well defined approach to capital structure in allocation remains and.
Hi.
During the fourth quarter, we settled $62 million from share repurchases.
Resulting in $393 million, a total share repurchases for the year or approximately 7% of our outstanding shares also during the quarter. We paid a dividend of 15 cents per share and completed an opportunistic repricing of our term loan due March 2026.
Please turn to slide five of the presentation for the Q4 2019 performance summary.
Net sales decreased 5% to $617 million compared to the same period in 2018, principally driven by lower demand in the global off highway and service parts support equipment and other end markets due to ongoing weakness in hydraulic fracturing activity and partially offset by higher demand in that.
North America on highway end market growth.
Gross margin for the quarter was 48.3% a decrease of 390 basis points as compared to 52.2% for the same period in 2018. The decrease was principally driven by lower net styles and unfavorable mix, partially offset by price increases on certain products and favorable material costs.
Net income for the quarter was $107 million compared to $147 million for the same period and 2018. The decrease was principally driven by lower gross profit increased product initiative spending partially offset by an environmental remediation benefit.
Adjusted EBITDA for the quarter was $216 million or 35% of net sales compared to $261 million or 40.3% of net sales for the same period. In 2018 decrease was principally driven by lower gross profit an increased product initiative spending now I'll turn the call.
All over to Fred.
Thank you, Dave given Dave's comments I'll focus on key income statement line items and cash flow.
You can also find an overview of our net sales by end market on slide six of the presentation. Please turn to slide seven of the presentation for the Q4 2019 financial performance summary.
Selling general and administrative expenses increased $2 million from the same period in 2018, principally driven by increased commercial activity spending partially offset by lower 2019 product warranty expense.
Engineering research and development expense increased $10 million from the same period in 2018, principally driven by increased product initiative spending.
As reported in the earnings press release, we recorded an 8 million dollar benefit during the fourth quarter related to a reduction of the liability for ongoing environmental remediation activity at or Indianapolis, Indiana manufacturing facility.
Please turn to slide eight of the presentation for the Q4 2019 cash flow performance summary.
Net cash provided by operating activities decreased $30 million from the same period in 2018, principally driven by lower gross profit increased cash interest expense and increased product initiative spending partially offset by lower operating working capital requirements and decreased cash income taxes.
Adjusted free cash flow decreased $63 million from the same period in 2018, principally driven by increased capital expenditures and lower net cash provided by operating activities.
As Dave mentioned earlier during the fourth quarter, we settled $62 million a share repurchases and paid a dividend at 15 cents per share. We also completed an opportunistic repricing of our term loan due March 2026, reducing the LIBOR margin from L. Plus 200 to L plus 175 basis points.
We ended the quarter with a net leverage ratio of 2.17 within our target range of below 3.5, net debt to EBITDA $192 million, a cash $595 million of available revolving credit facility commitments and approximately $1.05 billion off.
The rice share repurchase capacity.
Our commitment to prudent balance sheet management through a low cost flexible on pre payable debt structure with long dated maturities, while simultaneously investing in our business and returning capital to shareholders was demonstrated once again in 2019.
Please turn to slide nine of the presentation for the 2020 guidance.
In market net sales commentary.
For 2020, Allison expects net sales to be in the range of $2.375 billion to $2.475 billion, our midpoint decrease of 10% compared to the net sales for 2019.
Reflecting lower demand in the global on highway and global off Highway end market, partially offset by increased demand in the service parts support equipment and other and defense end markets as well as price increases on certain products.
Although we're not providing specific first quarter 2020 guidance Allison does expect first quarter net sales to be down from the same period in 2019, principally driven by lower demand in the global on highway end markets and up sequentially driven by higher demand in the North American on highway in market.
With that I'd like to highlight the following end market assumptions for the full year.
2020.
North America on highway Allison expects, a net sales mid point decrease of 16% principally driven by anticipated lower class eight straight and class five through seven truck production.
North America off highway we expect the net sales mid point decrease of 50% principally driven by lower demand for hydraulic fracturing applications.
Defense.
Allison expects the net sales mid point increase of 13% principally driven by increased track vehicle demand, partially offset by lower wheeled vehicle demand.
Outside North America on highway we expect the net sales midpoint decreased 9%, principally driven by lower demand in Europe and Asia.
Outside North America off Highway Allison expects net sales mid point decrease of 24% principally driven by lower demand in the energy sector.
Service parts support equipment. Another we expect a net sales mid point increase of 4% principally driven by aluminum die casting component volume associated with the Walker die casting acquisition, partially offset by decreased demand for North America off Highway service parts.
Please turn to slide 10 of the presentation for the 2020 guidance.
In addition to al since 2020 net sales guidance in the expected range of $2.375 billion to $2.475 billion. We anticipate net income in the range of $425 million to $475 million.
Adjusted EBITDA in the range of $855 million to $915 million.
Net cash provided by operating activities in the range of $600 million to $640 million.
Adjusted free cash flow in the range of $430 million to $480 million and cash income taxes in the range of $60 million to $70 million.
Finally, our 2020 guidance assumes capital expenditures in the range of $160 million to $170 million.
Thank you and now I'll turn the call back over to Dave.
Thank you Fred 29 team was an important year for Allison transmission, we successfully completed three acquisitions further expanding our business beyond the leading supplier commercial duty fully automatic transmissions to include the production and integration of next generation vehicle propulsion systems, including electric high.
For it and fully electric solutions through the acquisitions Avantas power, an actual tax electric vehicle systems Division. We also secured a critical portion of our supply chain and added high tonnage aluminum die casting component to reach our product portfolio through the acquisition of Walker die casting.
In 2019, we also broke ground on two state of the art technology facilities at our Indianapolis Global headquarters our soon to be completed vehicle Environmental Test Center will open later this year and our new embark innovation center is scheduled for completion in early 2021 once operational these facilities will.
Support tighter integration with our OEM customers and strategic partners and enhance our capabilities to develop manufacture and quickly bring to market. The latest propulsion innovations and next generation propulsion solutions for the global commercial vehicle in defense end market.
As we've discussed on prior earnings calls our current capital investments continue to fund the ongoing expansion of our technology capabilities as well as product development focused on value proposition that address the challenges of improved fuel economy and reduced greenhouse gases. These initiatives along with the various financial.
Operational and strategic milestones that we've achieved over the last several years demonstrate the power of Allison to capitalize on market opportunities to drive innovation and growth and create value for all of our stakeholders.
Today as our industry continues to evolve the acquisitions and ongoing next generation investments underscore our commitment to remain a leader and propulsion solutions across all of the end markets. We serve they are instrumental in ensuring the sustainability of our business today and driving future growth for tomorrow finally.
Last October at the North America commercial vehicle show in Atlanta, and in partnership with Freightliner truck, we announced the launch of the New Allison Regional Hall series transmission for the class a tractor market and operated variants of our since proven and well known 3000 series transmission last.
We heavy duty trucking magazine recognized the Allison Regional Hall series by naming a top 20 product winner for 2020. The award highlights the most innovative significant and useful products from the previous year and we're honored that the Allison Regional Hall series is already winning accolades from industry professionals.
As we look ahead and as I've noted several times in the past today, we find ourselves with more opportunities to drive innovation and growth and more optionality to pursue those opportunities than any other time in our history, our relentless focus on balance sheet management operational execution and disciplined investment over.
In the years has facilitated the resolute and opportunistic pursuit of our strategic priorities. These priorities include global market leadership expansion emerging markets penetration product development and core addressable markets growth, while delivering solid financial results and creating value for all of our stake.
Others going forward, we will continue to invest prudently and take action where appropriate to execute these priorities and meet the challenges of tomorrow.
This concludes our prepared remarks, Melissa pre so please open the call for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Kim.
You May proceed start to if you'd like to remove your question from the Q for participants you think speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
Allow for as many questions. This possible today, please keep to one question each.
First question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.
Hey, good morning, everyone.
My questions on commercial space can you referenced increased commercial Stan you, obviously had some share gains which is great. I just wanted to ask about nature of our weather was trying to launch for five or whether it was trying to go on the often seen cleanup some some of the.
Sure available or whether there's a new treatment somebody given color. Thank you.
Good morning, Rob It's Dave in terms of let me just make sure I'm answering your question you talked to commercial an is spending initiatives are you referenced there in terms of market share gains.
Yes, like I'm, sorry, if you can hear me, but yes, the commercial spending initiatives unum always called that out I was just curious what really that was.
They are trying to pick up more share defend against loss or what that.
I really our initiatives are focused on gaining share frankly, as our as our rolled through the team in North America has done a great job continuing to build out.
Our franchise frankly, I think that we continue to gain.
Position incrementally.
As you can see from the results in the comparisons year over year and frankly the trend. The last several years, we continue to drive the value that proposition as you know.
The drive and continued transition towards automaticity plays well to our.
Brand value proposition and frankly, the value that where we are delivering to end users as well so were.
Continue to support that I'd say outside North America, where have a number of initiatives that we've talked about in the past in terms of specifically around emerging markets.
We continue to resource those areas and drive very specific growth initiatives with the team we change that process over the last few years to be more focused.
For a number of obvious reasons. We're also reacting and continue to take advantage of bare adoption of fully automatics as well. So that's the combination that you see in there is really the growth initiatives.
Theres a number of other things that we're doing throughout the business as well, but it's relatively consistent with prior years.
Okay. Thank you.
Thank you. Our next question comes from the line of Joe.
Search partners. Please proceed with your question.
Hi, good morning.
On the fourth quarter with with revenue down in Cogs up you called out mix as a headwind can you parse that out a little bit more and then talk to any impacts during the quarter. I think there were some production disruptions in the industry and whether or not you sell some of the impact from that.
And then just related and can you kind of frame for us the variable cost component of Cogs.
So Jeff this is Fred.
Q4.
Year over year, and 19 to 18.
From.
Certainly we were down from a volume standpoint, but relative to the question on on mix.
Our North America off highway business was was extremely soft as well as the associated.
Service part.
Also year over year outside North America off highway was down.
And then again year over year, you had the impact of the.
The Walker die cast acquisition, so running through.
Parts support equipment and other are the illumined die cast components that.
Yes, I have lower margins than the traditional.
No.
Allison service parts margin profile. So those were the primary mixed drivers you respect your your other question Joe related to.
To to Cogs, and just sort of framing it in general the variable cost component of Cogs.
So.
I think of our cost of goods sold.
About 70% as purchase components so.
You are looking at 30 that is 30% that's conversion costs.
That's six or 7% of that is is direct labor.
So we've got roughly 24% that's in there that.
That's fixed.
And certainly in a.
And then down revenue quarter like we had is difficult to get after its as you note Q4.
Traditionally our lowest margin quarter fewer work days at or Oems Thanksgiving Christmas holidays.
The definitely got more fixed cost that that's not being then with volume in the fourth quarter.
Got it thanks very much.
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Good morning, good morning.
You folks have consistently achieved.
Pricing.
Decade, plus it every single year does your guidance assume pricing gains net of material costs.
20.
As we look at where your guidance shakes out for margins.
Certainly below what consensus was but at the same time I'm mindful of the fact that you folks have beaten your initial margin expectations literally every single year as a public company. So just frame for us if there is truly a headwind that we're all missing this year or is it just a function of we'll let let's see other year progresses and.
We'll issue updated guidance from here.
Jerry This is Fred our our guidance does assume price increases year over year something in the 25 basis point range.
And also we expect.
Raw material to be down both steel and aluminum.
Both of those are factored into the 2020 guidance.
Yes, and Fred any headwinds that we should keep in mind, either from the acquired businesses or anything else that would make for.
Margin bridge to be less linear than it's been in the past.
Nothing I really call out I mean, you're you as you mentioned it somewhat of a high class problem, but.
The Decrementals and Incrementals to this business are both extremely high we've got the total in our topline down.
10%.
We also anticipate mix being.
Somewhat unfavorable on a year over year basis.
No really relative to engineering.
Consistent with 2019, continuing to support our product and growth initiatives.
As DNA.
You know is relatively flat clearly you you have a step down.
Associated with the intangible amortization coming off the books and those are obviously called out.
And our financial statements, but.
That's about a 35 million dollar reduction in.
Booking tangible but none of that should be.
Relatively consistent year over years we.
In an environment, where the topline is is obviously a little softer we have a tremendous amount of initiatives and opportunities to grow this business that we continue to fund.
Okay. Thank you.
Thank you. Our next question comes from the line of Roth Clardy with Bank of America. Please proceed with your question.
Hey, good morning, guys.
Morning.
I just want to ask about the free cash flow outlook I think that delta in your free cash flow for 2020 versus 19 seems to be almost entirely that the delta in and.
Don.
You are guiding two am I missing anything.
Free cash flow seems to imply no working capital inflow.
Which would seem pretty unusual and when it down production year. So I'm trying to get a sense of how much of this is similar to Jerry's question, but on the free cash flow instead of the margin how much of this is conservatism versus.
Other factors that we might that might not be thinking about.
Sure on the this is Fred on the on the free cash flow a year over year to the guide.
We call it we called out quite a few of the items.
Capex.
Add down slightly at the midpoint.
Cash income taxes down.
One thing I guess I would point point you too.
We we accrued incentive comp in 2019 at a above par level and in 2020.
Obviously have that in guide at a par level. So you've got to pay out that will take place in the.
In the first quarter and will be accruing at.
A level lower than that cash out outflow.
Okay, Gotcha and work working capital just ouch or what are you assuming for working capital within your your free cash guide.
Yes, we came in.
Quite favorable at the end of 2019 from a working cap standpoint.
That's something we're going to continue to focus on but it's not a.
Significant driver in the year over year numbers.
Okay got it thank you.
Thank you. Our next question comes from the line of Larry de Maria with William Blair. Please proceed with your question.
Hi, Thanks, good morning, everybody.
Just curious about how service parts play out through the year I know, it's up that's due mostly to die cast and curious mostly rice energy does of course, and then when that probably ask bottoms.
We top up at all to the service parts throughout the year kind of organically. Thank you.
Hi, Good morning, Larry It's Dave I appreciate the really easy question I'm predicting off highway service parts is notoriously volatile as you know.
First of all I would point everyone too.
Comments, but others have made relative to the space.
I think it's pretty clear.
The constraints around I would call at hard rationing on capital as well as Opex.
We expect to to really manifest themselves through the balance of the year, we don't see a tremendous around a change in the market.
I think despite what some others, maybe thinking yes, I would tell you we're expecting a pretty.
Muted year overall, so when you look at our AR.
Our assumptions to your question.
We expect we really don't expect a tremendous change from first quarter through fourth quarter I would say some level of elevation potentially on a sequential basis.
Q2, Q3, and then back down in Q4 simply because the.
Level of constraints coming into the year are pretty high having said that.
We expect.
More visibility from the end users around their cash flow.
Constraints as we as we move into the are of course that assumes that the molecules maintain a pricing level that's attractive from a return on investment perspective, but overall, we expect a muted year.
Versus 19, and certainly some of their prior years that everyone is familiar with.
Does the if I could just follow up on does what you see in terms of usage always et cetera, honestly that does that imply that that 20 years, most likely the bottom.
I have a lot of ways to think about that.
We've seen unfortunately was zero looks like as well and I think this is one where.
We know the equipments being utilized again back to comments that others have made is obviously equipments being utilized it's being utilized at high rates.
The push for efficiency is driving that.
We also know that that's not sustainable without some level of continued investment.
So to your point it really comes down to ultimately the condition of fleets I think as we mentioned on the October call.
We felt the fleet coming into this particular.
Downturn was was in much better shape than the last downturn a few years ago says, we think about it they are better capacitized better capability, but you're going to wind up stacking cannibalizing and then there has been plenty of references by others to ultimately retiring.
Hydraulic horsepower and we believe that is in fact, taking place as there they need to return capital.
At an appropriate level to their stakeholders and we do not see that dynamic changing this year.
Okay goals both.
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good morning, I guess two questions. I know you noted the first quarter sales were going to be down year over year, but I think the trend, but in industrials is just how weak first half as in particular, the first quarter. So is there any way you could better frame that from a sales or EBITDA perspective in terms of first half versus second half or like TV. The first quarter's the trough.
And then I guess my second question.
Another follow up on the market share gains, which you are obviously a very successful in 2019.
Do you have market share gains embedded in your 2020 guide incentive so if there's any way you could provide some color. Thank you.
Good morning, Jamie, it's Dave sort of few.
Comments there in terms of the way we currently see the year playing out and I would also tell you the context of the guidance that we're providing with the unfortunate situation with the Corona virus.
Our focus there has been.
For the safety and well being of our employees as well as our customers and suppliers the that.
Assumptions, we've made around that are based on obviously, what we've been told to date and working that issue on a.
Consistent basis with monitoring I think the collaborations Ben.
Excellent in terms of all of our partners out there that being said we have no way of handicapping that says we've laid out the quarter. We've assumed that what we're being told is actually going to take place.
In the quarter in terms of the layout, having said that as we look at the year, we certainly view.
Q1.
A bit higher than I would say the other quarters sequentially. When you think about why that is I think thats consistent with what you're hearing from our largest end market. As you know, which is North America on highway I think thats very much playing out so far as a first half second half story the inventory levels there.
Our our high.
Finally, harken back to our October call, we talked about inventories in our opinion being a month.
Heavy I would certainly look at the numbers now and probably tell you that's closer to a month and half. So we believe this the situation as it plays out for North America first half second half is going to reflect.
Those adjustments for for inventory, you're you're saw some of that's starting to take place late.
Last year in terms of preparation so.
Thats the current view the balance I would tell you in terms of the overall.
Portfolio with the end markets.
We feel pretty good about the set up again.
The caveat as I mentioned in terms of.
The current a virus. The question you had in terms of market share I think specifically to North America on highway as we.
Plan B year in our expectations are really to maintain the positions from 19 going into 20 that being said as Fred mentioned and I did as well we do have a number of growth initiatives that we're continuing to drive with the team so, but we have not taken a view that.
There is I would see meaningful share increases on a year over year basis in the guidance.
Okay. Thank you I appreciate the color.
Thank you. Our next question comes from line.
With Oppenheimer and company. Please proceed with your question.
Hey, Good morning, guys. This is mark on for Ian just taking a little bit into the R&D item a bit almost I guess your outlook for spending in $2020 and beyond that for what areas are products for the spend largely be focused on thanks.
Good morning markets, Dave couple of comments, there as we've talked before about.
Our R&D investments really supporting real our growth initiatives as well as other opportunities.
We like to take the view that are our spending needs are really market driven.
So I can assure you what the team is working on diligently.
Is what the market is demanding of our business right now so having said that we're also.
Frankly trying to keep up with a number of changes that are occurring within the market whether its potential disruption from electrification.
Emissions changes that are coming all of that requires investments. So this has been a process thats been underway for a number of years.
As we've said those initiatives are also increasing the demands upon our team and our business to to fund those so and you've seen that reflected.
In the level of spending to your what's what's.
What are we thinking about post 2020, frankly, it's a little early for that I'd like to to get through 2020, and but I would tell you that.
The initiatives that we are pursuing if you look at the opportunities that they support our long term we believe.
Revenue annuities for this business and the team so again market driven it's tied to what we believe our.
Growth initiatives that will deliver results for our business and ultimately our shareholders with appropriate returns and again that has always been.
The benchmark for our business so.
I think beyond that as we get further into the year and frankly later in the years. We've we continue to see some evolution in the market of a number of different technologies will look to provide that post 2020 update very late this year are certainly early next year with the 2021 guidance.
Okay, great. Thank you guys very much.
Thank you. Our next question comes from the line of Courtney Gravanis with Morgan Stanley. Please proceed with your question.
Hi, Thanks for your question.
Just.
Firstly, just wanted to have a clarification I think.
In response to Jerry's question, you just mentioned that Shannay would be flat ex amortization year over year. So just wanted to take a little bit more into that given that sales to be down 10%.
Let's see.
Any flexing there.
Then secondly on the North America on highway sales you guys called out electric hybrid propulsion.
Being a driver if the growth that you guys saw if you can just give us a little bit of quantification around that side of the business any how how big it is how fast it's growing.
Than anything.
Think about how that'll impact 2020. Thanks.
Sure I'll I'll take the first part this is Fred let Dave handle the second so.
Specifically on SDMA.
We as I mentioned near there will be lower intangible.
Amortization expense.
Roughly 35 million.
We do anticipate lower incentive compensation accruals.
Product warranty will be down slightly with the volume reductions.
We also had a significant number of favorable product warranty adjustments in 2019 that aren't.
Anticipated to to repeat so those are the the moving parts within SGN a.
I would really net of the step down in the intangible amortization expense.
His model consistent with the.
2019 spend.
To your question in terms of.
The electric hybrid and the process there.
That business is typically tied to transit tenders.
So the timing can move year to year I would tell you as we mentioned earlier.
Number of initiatives that we're working on we continue to.
Just in that very successful platform so were.
Doing a number of things that we believe based on market demand what end users are looking for to build.
Additional value into what is again, a very successful system. So.
Our guidance there both the results from 2019 as well as what we're expecting for 2020.
Does it reflect a lot of hard work that the team is really applied to that particular market, which as you know.
Continues to look for ways to reduce emissions et cetera.
A decade and a half of history now has proven that that system continues to deliver a tremendous amount of value to end users and that's something that we're supporting going forward.
Great. Thanks.
Thank you. Our next question comes from Seth Weber with RBC capital markets. Please proceed with your question.
Hi, this is trying to non for Seth.
I was wondering if there was any more color you could provide on the off highway markets, particularly as it relates to the mining and construction markets that you had called out as being weaker this quarter.
Sure. This is Dave B.
Couple of things we.
Continue to look at the market from a channel position perspective.
Understanding the comments from others in terms of the public space.
Not tremendous expectations for mining certainly this year, but it's it does not appear to be frankly, a cyclical as some prior.
From prior periods I think it's better position from an inventory perspective, but overall, we've we've taken a pretty muted view.
Mining and construction coming into.
This year for those reasons. So these things tend to build quickly.
And then level off so we've taken that into account as we look at the cadence of activity for 2020.
Okay. Thank you.
Thank you. Our next question comes from the line.
And with JP Morgan. Please proceed with your question.
Hi, Good morning, just a couple of clarifying questions.
Guidance for pricing 25 basis points and could you comment on whether that include commercial spending to gain share and how much you expect to spending 2020 does it.
More than offset the 25 basis points.
So the.
The 25 basis points.
Is inclusive of.
Pricing to the Oems than any end user incentives that we we might provide.
There is no relationship to.
Yes, gionee been that would be used to drive market growth initiatives.
Exactly how your pricing is gross pricing, it's not net pricing how much have you baked in for commercial spending NSG M&A our share gains.
We would consider and we'd consider our pricing net.
It's the actual price that.
That we garner for the product that we sell.
From a from an SDMA standpoint.
We continue to fund those initiatives than.
In its model consistent with the 2019 spend.
How much was that 2019 spend.
For for total Esh DNA.
Our commercial.
Spending to gain share.
Well, we haven't broken out or SG may expense at that level in.
Okay, Yes, I'll follow up athletes maybe.
R&D, then also and I don't think gap you answered. The question should we take the Q4 spend an annualize that is that we should think about us DNA R&D spend going forward that 7.5% up sales.
And this is David Q4 was last year was.
Elevated there were number of projects and you know this from her extensive experience with the industry, but the programs are not linear.
Frankly, I think we struggle at times, just given how busy the industry is trying to accomplish things. So I would say overall I would not look extrapolate Q4.
For.
2020 on a quarterly basis side, I guess as we usually Ron.
I would expect our our spending to be a bit heavier Q3, Q4, and then so.
Our Q2 into Q3, and then Q4 to tail off which has really been more of the historical pattern. So I.
I think at this point our expectations are.
Relatively level on a quarterly basis in 2020.
But relatively flat for the full year, Texas 19 are dying to look at that because Q4 was on slate I would I.
I think the best thing is probably to look at.
Q2 in Q3 of last year those levels being what we would expect on a quarterly basis in 2020.
If you take out the high in the low from last year in other words, that's why I would look at it.
Okay perfect that fact, good color I appreciate that I'll get back in line.
Welcome.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Graziosi for any final comments.
Thank you Melissa and thank you once again.
Our 2019 results demonstrate the power of Allison as we continue to make strides forward and to work develop the next generation of propulsion solutions that meet the challenges of tomorrow and ensure sustainable growth for our business. We are excited for what lies ahead and look forward to providing you with further updates in the future.
Thank you for your continued interest in Allison in for participating on today's call enjoy the rest of your day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.