Q4 2020 Allison Transmission Holdings Inc Earnings Call
And we're working with at this point I think we're certainly confident and what.
What those efforts for tend to be on.
Ultimately again focused on where we are from a <unk> perspective, I would say, what's continuing to evolve.
And a number of discussions with Oems and evaluations is.
A focused effort around what is today and I think this is important when you think about what exists today with conventional theres, a fairly teen level of desire and focus around proliferation and other words, the lack thereof, and as we look at the space.
As you see it evolving the EV space today for commercial vehicle.
There are a lot of difference.
Discussion components and systems being evaluated.
The industry it really doesn't lend itself to that level of proliferation. So I think the way we are considering this space is ultimately having a.
Foundational design or frankly.
Base model, if you will that's capable of covering a wide range.
Different duty cycles and vehicle sizes and ratings. So that's really what the focus is currently is.
On providing that type of solution that ultimately addresses the proliferation.
Question at the same time delivers what I would define as at or better.
And then conventional performance today.
In fact as end users Oems are we all are really come accustomed to a high level of uptime and.
Reliability and cost.
Definition and ultimately certainty.
And that's going to be required over time to be successful and thats really what our focus is but the audience that we're targeting continues to be.
The same I would say what is what has changed and is evolving for US is this broader.
Objective about a full range covered by essentially a base based architecture.
With some variation, but very limited from from that perspective.
And that's a fascinating and answer I know I'm supposed to do one.
And yet focused on that proliferation issue that you mentioned and I understand it well and your point there and then do you have enough data or knowledge of where the industry is going to know that your product is right within the band of what people are walking and I will stop. Thank you so much north.
Because the.
A couple of things.
The proliferation issue.
Again.
And you get so close to things, sometimes you need a lower perspective, and Thats, where we are with conventional unit. We're so close to what we're used to it.
Personally do not believe that the industry has fully come to grips with what that means and what that ultimately leads to and.
There's a lot of things I would not focus on necessarily whats first is ultimately what is the mature objective and thats. The way, we think about it and short answer to your question is I'm not sure the proliferation issues really Ben.
Fully captured.
But ultimately I would say based on the amount of inquiries and interest that we're receiving the signal there that I think they're starting to be some some sense a broader sense of what that mature view is and again, it's evolving and it will continue to change, but I would not describe the voice of customer at this point is.
Highly matured to a level that you could I think made very firm decisions ultimately a range.
And that that addresses proliferation and has performance that is at or better than conventional experience.
Thank you.
Thank you. Our next question comes from the line and Larry de Maria with William Blair. Please proceed with your question.
Thanks, Good morning, everybody.
Can you talk a little bit that market share Inc.
'twenty.
Obviously, I think you've done this and protocols.
I'm, sorry, 'twenty 'twenty, one 'twenty curious how you did and then also if you.
And you think about over the next three to five years, because I know you've been gaining share last few years, how do you think about attrition.
Okay.
Over the next few years compared to what you have now just trying to understand how you think you might lose a little bit over the next few years. Thank you.
Hey, Larry it's Dave.
And let me, let me start and I'll, let Fred finish.
Your question on shares and that's really focused on the on highway business as we think about.
What what occurred in 2020 were on certainly very proud and pleased of what our team accomplished despite the conditions that everybody is dealing with but I would say from a share perspective overall good outcome for us is.
Largely maintained or I would argue improved and certain cases.
To your question on what what that means relative to potential EV nutrition.
There's a number of forecasts by various parties that are that are out there.
I would offer that we view.
On the November 2020 U S election result is providing potentially the opportunity to accelerate the pace at which end markets evolve to what we are.
And what everybody is looking forward to answer your question, which is sustainable demand.
Giving given what we believe is that the governing impact on consequential commitments by all parties that are involved in other words and as I.
Mentioned earlier when you look at what's being proposed by a number of.
Oems on potential ranges of programs et cetera.
Our experience would say.
At least to date Theyre very wide ranges of volume, which probably tells you something.
Theres also timing that in many cases.
Certainly set out to be I think.
Everybody wants to do but ultimately.
It is getting and in many cases delayed for a number of valid reasons point being is that all of that is going to impact.
The answer to the question that you asked which is attrition and I think my our view is a lot more needs to be understood about ultimately the cost of these systems and when they are economically viable within the addressable spaces that we participate in.
With and without any type of.
And on subsidies and the fact is again I think theres a lot of optimism around what the elections last November could mean.
But you still need to address.
All of the issues that Youre everybody is familiar with in terms of performance cost infrastructure et cetera. So.
The answer is I think as we look at it many of the.
The ranges that we've seen tie out to.
Say 2025 post 2025 in terms of any.
I'd say level of volume that's discernible within the spaces that we see and even then they seem.
Relatively.
Small in comparison to the broader space, which creates its own challenges as you know.
With that I'll turn it over to Fred in terms of the market share point share.
Larry It really relative to 2020 and we've.
And on multi year gaining share.
The biggest share jumped their breath with class eight straight.
<unk> up from 2019 level, 75% penetration of.
And I'll transmissions.
Total share and class eight straight up to that 80.
And thinking about 2021.
Our assumptions and the guide.
And is basically neutral on share gain and no loss no gain.
Okay. That's great. Thank you for all that would you guys host an analyst meeting to go through all this long term strategy and EV at some point and I'll leave it there thanks very much guidance.
Certainly.
And that's in the mix, we have a tremendous amount going on from a technology standpoint.
That we'd like to lay out.
And to the investment community.
Thanks, and good luck guys.
Thank you. Our next question comes from the line of Courtney <unk> with Morgan Stanley. Please proceed with your question.
Alright, thanks, guys.
Maybe just a follow up to that I know you mentioned that the class eight straight share but.
And you could talk a little bit about.
School bus.
And I think that's a place where you've been losing share it seems where that is where a lot of the electrification.
Okay.
And adoption might be happening a little bit sooner. So if you could just.
Reference what youre expectations for sure there are and 2021, and then going back to your R&D increase of about 30%.
Let's take and share guidance for 2021, I think that's correct.
Okay. Your R&D.
<unk>, 5% sales based on your sales guidance and with.
And is significantly higher than we've seen historically and obviously understandable given the investment that you're doing and the gem platform, but as we look longer term is that the right level that we should be thinking about or should that be kind of cash.
And to increase at this double digit rate.
For the next couple of years.
So just trying to frame where R&D should be in the medium term.
Sure coordinated as Fred I'll take the first part relative to our expectations on on school bus share.
And we haven't basically neutral and 21 from 2020 new levels and.
David Miller and respond to the.
R&D questions.
Coordinate morning.
Couple of things with R&D as we've.
I mentioned before it's very much tied to market opportunities right and this goes beyond the EV off.
Frankly, all of our end markets and on.
And certainly again, recognizing our teams efforts to drive growth and Thats really the outcome is what you see as the investments.
In R&D and the increases there is a combination of electrification as well as <unk>.
Other initiatives and are and.
Broader end markets and markets portfolio that being said.
And I wouldn't assume.
On to your point in terms of I would not really look at it as a percentage of sales. Although I can appreciate the fact that it does facilitate some level of.
Modeling and such but the way I would think about that is that's ultimately market driven and if you break down what's happening in 2021 and.
And then off of that off of that.
The expectation is I think over time, it'll it'll moderate off.
Ultimately at the same time, we're also doing a fair amount of investment have done.
And a fair amount of investment and capital investments around our technical capabilities and I would.
And again see that very much moderating.
After this year the balance will come to us with.
With market demand frankly, and those investment analyses will be made and will make appropriate decisions, but it is clear from.
Our comments and our actions that we are investing and growth opportunities across the entire portfolio and and to the extent that there's more opportunities there were and appropriate returns will fund accordingly, but.
And I can certainly assure you the.
The investments are there the team is very much engaged and.
And we look forward to bringing these things these programs to ultimately.
To market and looking beyond those in terms of what's next.
Great. Thank you.
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.
Mr. Zaffino your line is live.
Yeah.
Alright. Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning, and congratulations Dave and I.
Yes, two questions one first on the implied incremental margins on your guidance I think are ranging from 20 to you now.
40% and understanding R&D as part of that but is there anything else you can point to whether it's COVID-19 challenges or supply chain, you know and I guess, how conservative that guidance and then my second question and.
You've talked a lot about the organic growth initiatives I'm, just wondering how youre thinking about inorganic opportunities and opportunity and <unk> in terms of M&A and whether there's an opportunity for you get into to get into adjacent products, whether its power electronics battery packs and just try and understand how you could somewhat brought in.
Your product offering if there's if there's an appetite to thanks.
And Jamie off this is Fred I'll take the first part of that question relative to the.
And the implied incrementals and at the midpoint.
And to 32% incremental on a drop through.
Realizing that we've got.
Engineering R&D up 30%.
Absent that increase and R&D the drop through would be about close to 50%. So certainly a fairly attractive.
Performance from a from a gross margin standpoint, and where we're funding the business.
On a year over year basis.
And you're really looking at the the additional spend on on R&D.
You've really got at this point you have a par pay out on incentive comp rolling through.
That is that is really somewhat offset by the unfavorable.
Policy and warranty adjustments and in 2020.
We do anticipate getting price and a 50 to 75 basis points, but.
You know theres a lot of cost pressures.
With the supply chain challenges so we're typically.
Price cost positive.
This year, and we're anticipating being close closer to neutral certainly the prices there but.
The expedited freight.
The commodity pressures.
We definitely will attempt to mitigate that.
On the other thing you have rolling through just from.
And when you think about.
2020, just a lot of spend and just couldnt happen.
So there's a little pressure upward on SG&A as you're the economy opens up and you're able to began travel.
And Jamie Thank you and good morning.
In terms of your question on the organic growth.
And supplementing that and I guess through potentially M&A and across whether it's easy or.
Conventional adjacencies to your point, we are actively engaged and.
Assessing external investment opportunities and further enhance.
Our position on electrification as well expanding our addressable market, but I think to your point, whether it's electrification, which we obviously have done a few things.
And 2019 and continued to be very engaged on I would.
Note four.
Sure as you think about electrification to the comp and our prepared comments at this point about collaboration is important because.
And I don't know as to the answer necessarily is absolutely control everything I think that that's challenging to do especially when you think about.
Relatively immature voice of customer and a number of other.
And frankly attributes that need to be addressed and ultimately answer to we believe.
Ultimately there is a collaboration that will be required that that could take the form of a number of different.
Partnerships arrangements et cetera, so it's not only from an M&A perspective, as we're approaching the market is volatile from a collaborative perspective and.
I think at some level leveraging investments that have already been made and.
And trying to do that and and from our view of capital efficiency and ultimately.
The most appropriate application of existing technology or other opportunities that being said the adjacencies.
On a point that you raised.
And as we've thought about that and continue to look at the market opportunities. We believe they are there.
Whether those are and ultimately conventional or I would say on the conventional side.
As you think about what's happened even over the last year on year plus there is a number of.
Issues that have been raised relative to supply chain and more broadly.
The sustainability of that supply chain going forward, just given the amount of demand that was there and then the pandemic and and recovering from the pandemic. So we believe there's opportunity there as well to look at the market and edition or.
Our relationships over the years in certain.
Jason fees are proving to be attractive as well in terms of potential opportunities. So as we think about it it's broad.
And I think we should be open minded, but as part of our capital allocation priorities M&A is certainly at.
At the forefront to.
To ultimately support growth.
That would be through organic initiatives that are underway are ultimately.
Broadening our adjacencies.
Okay. Thank you.
Thank you. Our next question comes from the line of Felix <unk> with Raymond James. Please proceed with your question.
Hey, good morning, everybody.
Good morning, Good morning, Hey.
Hey, I was hoping you could maybe give us your thoughts around international opportunities on and on one hand, you have tightening emission standards from places like China, I would assume that would be a positive from you all all equal, but obviously electrification is accelerating quickly that also and you see.
We'll see some incremental opportunities on a shift toward automatic transmissions or just more EV effectively cannibalize that and if you could just help us think through your approach and.
Thoughts there'll be there'll be super helpful.
Phil Good morning, it's Dave So to your question it really.
There are we believe on significant opportunities out and emerging market for ultimately fully automatic solutions.
There those markets have many of the same demographic attributes and challenges that you would argue more established developed markets do whether that's U S or Europe or others. At this point. So there is going to be demand there because of a lack of.
And skilled drivers for manuals and that's the <unk>.
And ultimately for fully.
<unk> solutions and I think your point on emissions is well taken and if you think about all the work that we've done.
And in and partnership and collaboration with the entire powertrain.
It's going to be required to meet a number of tightening.
Situations globally, and I think we obviously have experience with that and we'll continue to drive that but.
To your point, certainly EV and China for instance is very very heavy and bus.
On truck has proven to be I think much more challenging for a number of reasons.
And they're moving around some subsidies there, but the fact is it will be.
A bit of a reach we believe in terms of total cost of ownership, especially when you think about the challenges of Av.
Addressing the need for automation and those same vehicles today and the cost challenges. So I think the long answer to your question is we still I believe there is significant opportunity for growth and those market.
Thanks.
Yeah.
Thank you. Our next question comes from the line of Ann Duignan with Jpmorgan. Please proceed with your question.
Yeah, Hi, good morning, and just back to them and base business from London to and for you on that.
Highway and North American business and can you just talk about the cadence of sales that you are anticipating do you expect all quarters will be up here over here and then within new and new core markets and on highway and could you just touched on maybe the differences or similarities in terms and with the growth rates that youre expecting.
And thank you.
And as Dave.
To your question as we think about the quarters.
Scribing and looking at them on a year over year basis.
For North America.
On highway and I would expect.
Q1 to ultimately be.
A bit lower than last year on a quarter over quarter basis.
We expect Q2 and three.
<unk> to be better on a year over year basis and then.
Q4 <unk>.
Slightly positive again to your point on cadence, though everything I, just said with the caveat of.
On the various supply chain issues, and Im sure Youre, well, probably too well versed and at this point and to what we.
Commented, including.
Detailed commentary there.
And open switch frankly, and Thats one net.
Is taking a tremendous amount of time from our team to ultimately.
Look to address I will also offer relative to the supply chain issue.
That potentially has impact throughout a number of different end markets, because we're seeing lead times be impacted and spa.
Pacifically around the availability of certain raw materials et cetera. So.
The caveat caveats apply but.
To your question there that's the way we would see ultimately the.
The year breaking off from North America on highway.
Tier I think second part of your question as we think about the individual and <unk>.
Components of North America on highway.
Medium duty as you know continues to be strong given the lack of inventory, whether new or used and the strong order boards and backlogs.
And on.
I think frankly setup for a reasonably positive 2022 interestingly enough at this point.
Lease and rental key segment for us.
We believe those fleets at this point are either right or undersized and and they're continuing to experience high utilization rates Muni is mix.
But I would say overall youre continuing to see strength and residential refuse.
Kris bus utilization tax revenues depends on regions, obviously in terms of how they responded to the pandemic.
I think this weather that we're experiencing in many parts of the U S. Right now is consuming budgets at an alarming rate for some of these municipalities. So that'll be an issue as to how they look at their budgets for.
The balance of this year in terms of both maintenance and equipment oil and gas is an interesting one because we're certainly starting to see utilization rates go up.
And the impact of that starting to flow through with.
Higher energy prices dealers are certainly concerned around the deficiencies that they are experiencing and struggling to maintain a manageable level of stock inventory bodybuilder lead times are out there.
They're really extending now at this point, but I would say overall the positive momentum carried from from certainly Q1 into our Q4 into Q1, but does the supply chain issues that I mentioned earlier are really going to have.
A number of us are working extremely hard to try to manage from at least into I think the first half of the year.
Okay, and just as a quick follow up you didn't mentioned school buses could you go back Friday, you didn't tell us what your school bus market share and was in 2020, you just said flat and 'twenty 'twenty one and.
And then do you expect school bus and be up flat or down in 2021. Thank you.
Sure sure and are.
Our 2020 school bus penetrations.
84%.
We have school bus.
Think it's somewhat of a wildcard how it's going to play out, but we have school bus and our.
Model.
Slightly down in 2021.
Okay. Thank you appreciate it.
Thank you. Our next question comes from the line of Brett Linzey with vertical Research partners. Please proceed with your question.
Hi, good morning, everyone.
Morning.
I wanted to come back to the E axle initiative and the electrified powertrain understanding you're building off a base architecture, but could you just talk about your technology.
Where do you think you'd differentiate versus peers and that category and then is there anything you can share along the lines of the number of customers engaged or pilot programs underway to help frame that progress.
Sure.
This is Dave and again in terms of.
And the technology.
As I think we covered and some of the prepared remarks, the level of integration and that the power.
And power ultimately offers as we believe at a level of performance that is unique in the marketplace. Currently so what do I mean by that.
And again, if you think about conventional experienced today when we talk about great ability and performance. Those are all attributes that are taken for granted.
Bear with very few exceptions right now at least in terms of what what is available that meets those requirements and and I use the word on compromising our prepared remarks for a reason because thats what everybody is used to.
We are taking again, the ultimate focus and objective is meeting or exceeding.
Conventional experience and Thats really has been the focus of the EJ and power.
<unk> program so to your question in terms of.
A number of parties, we're working with et cetera beyond the.
The point mentioned about.
That 70% or so of our North America on highway revenue I would also tell you theres parties outside of North America that we're talking to as well and considering.
And those development programs again back to what I mentioned earlier, which is really focused and probable engagements meaning.
The ranges that are being provided whether those be volume or timing become relevant as to where anybody is going to spend their time at this point and I think without more certainty. There is going to continue to be a fairly high level of variability around what you hear and over what period of time, we're focused on on what we.
Really probable outcomes and Thats important because every one of these whether you have one unit running on 1000 is a significant undertaking in terms of the <unk>.
Time by both parties, but the more important thing is customers are not interested in.
Explain why things don't work to the expectations that they have.
And we are certainly intending on.
Meeting or exceeding current performance that they are experiencing with our brand and conventional and that that is really on compromising so as we focus on it is the right parties ultimately.
With probable outcomes and.
And frankly, I think the market will sort of through that as I think as everybody knows the market doesn't like chaos and this is one that I think will bear itself out over time is really a focused approach to probable outcomes that deliver our brand promise and I think thats, probably the most concise way to describe it.
And a helpful color and.
I appreciate the thoughts on the M&A strategy and on different pockets of opportunity, but as you think about balancing capital deployment is there room to do both share repo in deals or is M&A. The priority and you target a repo if discussions are progressing just trying to understand and how much stock you could maybe by this year and the next couple of.
And while you're doing things and pursuing inorganic opportunities.
Yes, Brett this is Fred.
In the middle of a global pandemic.
2020, we.
We generated over $450 million and free cash flow.
So.
And we've laid out our capital allocation policies, and we were fortunate and that we generate so much cash and we're in a position to fund all of those priorities.
Yes.
And Youre seeing it we've funded with funded organically.
Organically for revenue and growth and we're funding per product.
Development and technology and Dave mentioned.
Pursuant and strategic opportunity, we're returning capital to shareholders and on the last four years, we've repurchased over a third of our shares we just raised our dividend.
By 12% and O&M.
The balance sheet, and we're really great shape and again, we're always focused on and maintaining that low cost flexible prepared pre payable debt structure. So we are positioned on a go forward basis to fund all of our capital allocation priorities.
Absolutely okay, great. Thanks, I appreciate the color.
Yeah.
Thank you, ladies and gentlemen that concludes our question and answer session and I will turn the floor back to Mr. Brad GSE for any final comments.
Thank you Melissa and <unk>.
And thank everybody for their continued interest and Allison and for participating in today's call and enjoy the rest of your day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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Good morning, ladies and gentlemen, and thank you for standing by and welcome to Allison transmission fourth quarter and full year 2020 earnings Conference call. My name is Melissa and I will be your conference call operator today.
At this time all participants are in a listen only mode. After the prepared remarks, the management team from Allison transmission will conduct a question and answer session and the conference call participants will be given instructions at that time.
As a reminder, this conference is being recorded.
And if any what you deemed operator assistance during the conference. Please press star zero on your telephone keypad.
I'd now like to turn the conference over to Mr. Ray Posadas, the company's managing director of Investor Relations. Please go ahead.
Thank you Melissa good morning, and thank you for joining us for our fourth quarter and full year 2020 earnings Conference call with me. This morning are <unk>, our president and Chief Executive Officer, and Fred Bully, Our senior Vice President and Chief Financial Officer and Treasurer.
As a reminder, this conference call webcast and this morning's presentation are available on the Investor Relations section of our website Allison transmission Dot com.
A replay of this call will be available through February 25.
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 and our fourth quarter and full year 2020 earnings press release, our annual report on form 10-K for the year ended December 31.
2019, and our quarterly reports on form 10-Q for the quarters ended March 31, 2020 June 32020, and September 32012, and.
Uncertainties related to the COVID-19, pandemic and related responses by governments customers and suppliers and other factors as well as general economic conditions.
Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect actual results may vary materially from those that we express 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 SEC you.
You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our fourth quarter and full year 2020 earnings press release todays.
Today's call is set to and at 845, a M eastern time and order to maximize participation opportunities on the call. We'll take one question from each analyst.
Please turn to slide four of the presentation for the call agenda.
On today's call Dave gradually we will provide you with a brief operations update.
Volume will then review our fourth quarter financial performance and introduce full year 2021 guidance.
Finally day will conclude the prepared remarks prior to commencing the Q&A now.
And now I'll turn the call over to day Brad.
Thank you Ray good morning, and thank you for joining us before I begin the operational update I would like to mention that our announcement earlier. This week, Larry Dewey has notified Allison's board of directors on his decision to not stand for reelection at our 2021 annual meeting of stockholders on behalf of the board of directors and the entire Allison.
Organization, we are extremely grateful for and for Larry's leadership and dedication to the company I would also like to personally thank Larry for his mentoring and guidance as I've transitioned into the CEO position.
And recognition of Larry's many years from service to the board of directors has named him to the honorary position of term Chairman Emeritus of the board. Following the 2021 annual meeting of stockholders on now.
And I'll move on to the operational update as we continue to navigate this critical period, our top priority remains the health and wellbeing of Allison extended family safety measures and precautions that have been implemented throughout the pandemic remain in place today and Allison is now providing on site COVID-19 testing to our employees and Indianapolis.
So much progress has been made on addressing the effects of the pandemic and there is good reason to be optimistic the risk to our extended families and communities.
And we encourage everyone to remain vigilant follow on.
All recommended guidelines and look out from one another.
We are pleased to report that Allison and fourth quarter and second half results reflected the ongoing global economic recovery.
'twenty was obviously an unprecedented year.
And there are disruptions to our global economy as a result of the pandemic led to substantial volatility and demand and considerable labor and supply chain constraints.
Spite these challenges Allison was able to maintain the uninterrupted delivery of our products and the generation of earnings and positive cash flow. Once again, thanks to the unrelenting commitment dedication and resilience of allison's employees customers suppliers and communities.
Also during 2020, Allison and so the total of $225 million of share repurchases or over 5% of our outstanding shares and completed and opportunistic refinancing of our long term debt, resulting in an anticipated annual savings of $30 million and cash interest expense with the earliest maturity due and.
2020.
Consistent with our capital allocation priorities last week the board of directors approved a 12% increase of our quarterly dividend from <unk> 17 to 19 per share.
Aggressive cost management effort throughout the year, while continuing to fund significant investments and engineering research and development and capital expenditures have positioned <unk> to capitalize on growth opportunities across all of our end markets for years to come.
Thank you and I'll now turn the call over to Fred.
Thank you Dave following Daves comments I will discuss the Q4 2020 performance summary.
Key income statement line items and cash flow I will then introduce full year 2021 guidance before turning the call back over to Dave.
Please turn to slide five and the presentation for the Q4 2020 performance summary.
Net sales decreased 13% to $535 million compared.
Compared to the same period and 2019, principally driven by the continued effect of the pandemic on the global economy. However, net sales increased $3 million on a sequential basis as the recovery and customer demand and the global economy that began in the third quarter continued through the end of the year.
Gross margins for the quarter was 47, 3% a decrease of 100 basis points compared to 48, 3% for the same period and 2019.
The decrease was principally driven by lower net sales.
Net income for the quarter was $60 million compared to $107 million for the same period in 2019. The decrease was principally driven by lower net sales 19, 19 million and expenses related to the long term debt refinancing and November 2020, and $8 million favorable 2009.
<unk> environmental remediation adjustment that did not reoccur in 2020, partially offset by lower selling general and administrative expenses and the intra year timing of product initiatives spending.
Adjusted EBITDA for the quarter was $186 million or 34, 8% and net sales compared to $260 million or 35% of net sales for the same period in 2019. The decrease was principally driven by lower gross profit, partially offset by lower commercial activity and spending and the <unk>.
Timing of product initiatives spending.
A detailed overview of our net sales by end market can be found on slide six of the presentation.
Please turn to slide seven of the presentation for the Q4 2020 financial performance summary.
Selling general and administrative expenses decreased $14 million or 15% from the same period, and 2019, principally driven by lower commercial activity spending and lower intangible amortization expense.
Engineering and research and development expenses decreased $7 million from the same period and 2019, principally driven by the intra year timing of product initiatives spending.
Please turn to slide eight of the presentation for the Q4 2020 cash flow performance summary.
Adjusted free cash flow for the quarter was $128 million compared to $121 million from the same period and 2019.
The increase was principally driven by lower capital expenditures lower commercial activity spending and the intra year timing of product initiatives spending partially offset by lower gross profit higher operating working capital requirements and increased cash income taxes.
We ended the quarter with a net leverage ratio of three times $310 million of cash and $645 million of available revolving credit facility commitments.
We continue to maintain a flexible long dated and covenant light debt structure with the earliest maturity due in March.
2026.
During the fourth quarter, we settled $29 million and share repurchases and paid a dividend of <unk> 17 per share.
And we ended the quarter with approximately $827 million of authorized share repurchase capacity.
Our long standing commitment to prudent balance sheet management ample liquidity profitable operations and purposeful investments continues to position Allison well to navigate the current environment and realize future opportunities.
Please turn to slide 10 of the presentation for the 2021 guidance.
Despite the positive momentum and the economic recovery supply chains across the globe continue to be strained current challenges include labor constraints and shortages component materials as global demand surpasses capacity recovery increased transport demand has created logistic issues for both ocean container and.
Airfreight, adding the freight delays across all industries and certain electronic components and set the semiconductors or chips are also constrained across all industries.
Our procurement and global supply chain teams continue to work closely with our suppliers at every level to understand and mitigate constraints our suppliers understand the importance of Allison as an essential critical infrastructure manufacturers.
And the impact both the commercial vehicle and defense industries have and the global pandemic recovery.
Continued coordination with our suppliers customers and industry participants from order to delivery will be required as we work collaboratively to mitigate the ongoing and unprecedented risk caused by the global pandemic.
With this and mine, we expect net sales for 2021 to be and the range of two to 65 to 2.415 billion.
Our midpoint increase of 12% compared to net sales for 2020, reflecting higher demand and global on highway and service parts support equipment and other end markets as a result of the ongoing global recovery.
Continued improvement and customer demand and price increases on certain products.
Our full year 2021 guidance assumes the continuation of the supply chain challenges for this foreseeable future and.
In addition to our 2021 net sales guidance, we anticipate net income and the range of $375 million to $445 million adjusted EBITDA and the range of $770 to $860 million.
Net cash provided by operating activities and the range of $560 million to $630 million and.
Adjusted free cash flow and the range of $390 million to $450 million.
And capital expenditures and the range of $170 million to $180 million, including approximately $60 million for sustainment and over 100 million for growth initiatives.
Finally, our 2021 guidance reflects a 30% increase and engineering research and development expense.
Assistant and investments in R&D through the pandemic, along with planned increases to Capex and R&D in 2021, and we'll continue to fund product development initiatives and support of our long term growth across all of our end markets. These initiatives include the advancement of the most efficient and innovative electrified propulsion and internal combustion solutions.
For the global on highway and markets more durable and higher weighted off highway applications, new and more capable cross drive transmissions for global defense.
Next generation controls technology that can be leveraged across all of our end markets.
And the state of the art and proprietary and vehicle testing and product development facilities to virtually and physically optimize performance and accelerate time to market.
We remain steadfast and our commitment to fund initiatives that will drive growth and expand our end markets, while consistently delivering strong financial results.
Thank you and I'll now turn the call back over to Dave.
Thank you Fred and the past I've mentioned net Allison has more opportunities to invest for growth and net.
Other time and its history earlier I noted that we are positioned to capitalize on growth opportunities across all of our end markets and further discuss our consistent investments through the pandemic along with planned increases in 'twenty and 'twenty. One we will continue to fund product development initiatives and supportive long term growth.
One of the key areas, where Alex and has been investing extensively for decades and electrified propulsion and last three years alone Allison has made approximately $250 million and direct investments to advance electrified propulsion technology. We are fully funded state of the art and proprietary manufacturing and development.
<unk> infrastructure and in place and.
Including our recently completed electric axle development and manufacturing facility and our Auburn Hills, Michigan, and our recently unveiled vehicle Environmental Test center here in Indianapolis.
These investments and capabilities combined with our decades of experience with vehicle propulsion and extensive knowledge on vehicle controls technology, our vocational and duty cycle expertise and our customer relationships, our brand promise and our service network, our formidable differentiators and emerging industry.
Attempting to serve uncompromising and users.
These differentiators and why multiple major Oems representing over 70% of the North America or North America on highway revenue have already chosen to integrate Allison each and power electric axles into their electric and hydrogen fuel cell truck development and validation program.
There are also why we are consistently engaged and senior level discussions with many more new and established Oems that have expressed interest and Allison electric propulsion solution collectively these opportunities span a broad range of markets and duty cycle.
Including the class eight line haul market, where allison's EJ and power is ideally suited to meet the demands of heavy duty class eight tractors, while expanding allison's addressable market.
Allison EJ and power 100 D electric axle unveiled late last year during Hino trucks project Z path to zero emissions initiative is one of the most powerful and fully integrated electric axles systems and the world and features multiple electric motors and a two speed transmission.
Integrated into the central housing facilitating a high starting great ability increased top speed and superior efficiency.
And power 100 D is a highly engineered and fully integrated solution that eliminates many of the inefficiencies of competitive electric axles.
These performance and efficiency advantages translate directly to wide ranging duty cycles and increase range capability or a reduction and battery pack size for the electric truck and optimizing the economic value delivered to the end user.
The economies are on electric trucks remain one of the most significant obstacles.
That needs to be overcome and order to achieve broad adoption of evs and the commercial space.
Ultimately no single component will solve this equation by itself and we'll take a collaborative effort across the entire powertrain to sufficiently reduce the total cost of ownership of an electric truck.
Allison EJ and power 100 day is designed and developed for wide ranging performance efficiency and durability, reducing the total cost of ownership and contributing to the economic viability of the electric truck.
In addition to the opportunities presented by electrified propulsion Allison is exceedingly well positioned to capture and capitalize on the long runway of conventional growth opportunity that lies ahead, we continue to make significant investments to advance innovative and more fuel efficient conventional propulsion solutions for the.
Global on highway and markets for example, our upcoming nine speed transmission will provide reduced emissions and improved fuel economy and advanced stop start capability drivers will enjoy improved acceleration, which could lead directly to increase productivity and when combined with Allison fuel and ex us.
These technology benign speed will set a new benchmark and fuel efficiency and reduced emissions and helping our customers meet increasingly rigorous environmental regulations and supporting the expansion and increased penetration of our addressable market.
Investments and increasingly more capable and higher rated product will help our pressure pumping and hydraulic fracturing customers meet the demands for greater efficiency.
All our footprints and shorter times, the depth and increased productivity. Despite the state of the global energy markets throughout the majority of 2020, Allison and remain committed to its global off highway customers and is ready to support ready to support them with solutions that deliver the Allison promise for years to come.
Our investment and advanced Cross drive transmission solutions for the global track defense and market offer exceptional growth opportunities for Allison as Allison partners with the United States Department of defense, and our peers and allies to develop new track applications with autonomous and electrified features.
To increase soldiers survivability and maintain battlefield dominance for decades to come opportunities to equip the latest track defense platform and development include the Army's new mobile protected firepower firepower program, which could lead to the procurement of up to 500 vehicles over 10 years.
And the upgraded M 88, <unk> III Hercules prototype designed to modernize the army's existing M 88 platform. The Army currently has a fleet of more than 988 vehicles and the potential revenue opportunity for Allison could represent approximately half of <unk>.
Over two decades of the entire fleet is modernized.
And lastly on defense investments and Allison next generation electrified cross drive transmission propulsion system.
And with autonomous and electric propulsion and capabilities to reduce detection and electric hybrid and ex portable power features is being developed to meet the unique armored vehicle requirements of tomorrow optionally manned fighting vehicle program and can ultimately replaced nearly 3800 Bradley infant.
III fighting vehicles.
We're also investing and next generation vehicle controls technology, featuring enhanced security and functional safety and over the road program and capabilities. Our vehicle controls technology will also be leveraged across multiple platforms and all of our end market and.
And finally, our previously announced innovation center will be completed in 2021 and feature expanded and unique virtual and physical systems simulation capabilities, including development and validation functional safety and regulatory compliance focused on fuel efficiency and greenhouse gas emissions.
<unk>.
Once complete the innovation center combined with our vehicle Environmental Test center will significantly enhance Allison proprietary product development and vehicle testing capabilities.
The market leadership that Allison and enjoys today was not achieved by channel.
Allison has always been at the forefront of innovation and this has never been more true than it is today.
We will continue to invest appropriately to drive growth.
And our market leadership and further position Allison is a preferred and long term partner.
There's a great deal of excitement and innovation, taking place across the entire industry at the moment and Allison and thrive in this environment. We look forward to providing you with more product development and collaboration updates and the coming months and quarters.
This concludes our prepared remarks, Melissa please open the call for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
And to allow for as many questions as possible. We ask that you keep to one question each.
Our first question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone and.
And then.
And Dave Congratulations on.
The new responsibilities.
And I'm wondering if you gentlemen can talk about your market position and as I suppose.
And on supplier too.
The new startup companies.
So on which had listened some which are on their way to being listed.
And what proportion of them are you working with sort.
And sort of similar total of 75% number Dave that you shared in your prepared remarks, and I'm wondering if you could touch on what sort of electric powertrain contribution does your 'twenty one revenue guidance on that.
Sure.
Jerry and thank you, it's Dave a couple of things.
As we've indicated on from the.
And our calls and our team is engaged.
Engage broadly across the industry, whether that be with established Oems or some of the new.
Oems shall we say.
I would tell you that that engagement is broad based.
But very much focused on.
VJ and power lineup at this point so having.
Having said that we've had a number of discussions around.
Volume and timing to be blunt.
What we found is frankly, whether it's established Oems and some of the new.
New <unk>.
There's a wide range on volumes there is off to a wide range on timing. So we need to do more work from.
And frankly and response to your question there about ultimately what does that mean from a.
Near term perspective, as well as what I would define as the more mature market outlook in terms of share and what those vehicle lineups. Ultimately are I think it's fair to say there is.
On a lot of good intentions and statements that have been made about.
What could be.
But we're very much focused on probable outcomes at this point and that requires a very focused approach so thats, where our team is spending.
Spending the majority of their time, but I would ultimately expect that we will have share with a number of different OEM.
Oems, but those will be I think very focused and consistent with our.
Goals, which is a mature view and I think frankly.
Production.
Level vehicle.
Vehicle releases ultimately because these are very complex systems and don't lend themselves to.
What I would what I would define as prototypes ultimately a regular production transition those get ex very.
Very complicated very costly and timely to ultimately implement.
Okay. Thank you.
Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.
Hey, good morning, all items and it's actually a similar question that Jerry is to the extent you can can you talk about what is the scope of opportunity for you within new powertrains.
Obviously, you've made a big push.
And then could you im sorry, maybe I missed the context around the 75%, but could you just kind of define.
And I know you just touched on this with Jerry just what that comment was and then just maybe any more color on how many competitors, you're facing and what youre doing and how you look like you stack up now thank you.
Good morning, Ralph Thank you.
Look I think the the comments made on our.
And is very similar to what we talked about with the Q3 call in terms of.
And who we're working with at this point I think we're certainly confident and what.
And what those efforts for tend to be.
And ultimately again focused on where we are from ONEOK flow perspective, I would say, what's continuing to evolve.
And a number of discussions with Oems and evaluation is.
A focused effort around what is today and I think this is important when you think about what exists today with conventional.
There is a fairly team.
Level of desire and focus around proliferation and other work for the lack thereof, and as we look at the space.
As you see it evolving VEB space today for commercial vehicle it's.
There are a lot of difference.
Discussions components and systems being evaluated but the industry. It really doesn't lend itself to that level of proliferation. So I think the way we are considering this space is ultimately having a.
Foundational.
And frankly a.
Based model, if you will thats capable of covering a wide range.
Current duty cycles and vehicle sizes and ratings. So that's really what the focus and is currently is.
And providing that type of solution that ultimately addresses the proliferation.
Question at the same time delivers what I would define as at or better.
Than conventional performance today.
Fact is and users Oems are we all are.
Really come accustomed to a high level of uptime and <unk>.
Reliability and cost.
Definition and ultimately certainty.
That's going to be required over time to be successful and thats really what our focus is but the audience that we're targeting continues to be.
At the same I would say what is what has changed and is evolving for US is this broader.
Objective about a full range covered by essentially a base based architecture.
With some variation, but very limited from from that perspective.
And that's the faster and the answer on how I'm supposed to do one.
And yet focused on that proliferation issue that you mentioned and I understand it well and your point there and then do you have enough data or knowledge of where the industry is going to know that your product is right within the band of what people are walking and I will stop. Thank you so much north.
Because the.
A couple of things.
And the proliferation issue.
Again.
You get so close to things, sometimes you need a lower perspective, and Thats, where we are with conventional unit or so close to what we're used to it.
Personally do not believe that the industry has fully come to grips with what that means and what that ultimately leads to and.
There's a lot of things I would not focus on necessarily whats first is ultimately what is the mature objective and thats. The way we think about it short answer to your question is im not sure the proliferation issues really Ben.
Fully captured.
But ultimately I would say based on the amount of inquiries and interest that we're receiving theres. The signal there that I think they're starting to be some some sense a broader sense of what that mature view is and again, it's evolving and it will <unk>.
<unk> to change, but I would not describe the voice of customer at this point is highly mature and to a level that you could I think made very firm decisions ultimately arranged.
That addresses proliferation and has performance that is at or better than conventional experience.
Thank you.
Thank you. Our next question comes from the line and Larry de Maria with William Blair. Please proceed with your question.
Thanks, Good morning, everybody.
Can you talk a little bit that market share and <unk> 20.
Obviously, I think you've done this and protocols.
I'm, sorry, 2021 of 20 Im curious how you did and then also if you think about over the next three to five years, because I know you've been gaining share last few years, how do you think about attrition.
Over the next few years compared to what you have now just trying to understand how you think you might lose a little bit over the next few years. Thank you.
Hey, Larry it's Dave.
And let me, let me start and I'll, let Fred.
Finished.
Your question on shares and that's really focused on the on highway business as we think about.
What what occurred in 2020, we're certainly very proud and pleased of what our team accomplished despite the conditions that everybody is dealing with but I would say from a share perspective overall good outcome for us as we largely.
Maintained or I would argue improved and certain cases.
To your question on what what that means relative to potential EV nutrition.
There's a number of forecasts by various parties that are that are out there.
I would offer that we view.
On the November 2020 U S election result is providing potentially the opportunity to accelerate the pace at which end markets evolve to what we are.
And what everybody is looking forward to answer your question, which is sustainable demand.
Giving given what we believe is the governing impact on consequential commitments by all parties that are involved in other words and as I.
Mentioned earlier when you look at what's being proposed by a number of.
Oems on potential ranges on programs et cetera.
And our experience would say.
And at least to date Theyre very wide ranges of volume, which probably tells you something.
Theres also timing that in many cases.
Certainly set out to be I think.
Everybody wants to do but ultimately.
It is getting and in many cases delayed for a number of valid reasons point being is that all of that is going to impact the <unk>.
Answer to the question that you asked which is attrition and I think my our view is a lot more needs to be understood about ultimately the cost of these systems and when they they are economically viable within the addressable spaces that we participate in.
And with and without any type of.
And on subsidies and the fact is again I think theres a lot of optimism around what the election last November could mean.
But you still need to address.
All the issues that everybody is familiar with in terms of performance cost infrastructure et cetera. So.
The answer is I think as we look at it many of the.
The ranges that we've seen tie out to.
Say 2025 post 2025 in terms of any I would say level of volume thats discernible within the spaces that we see and even then they seem.
Relatively.
Small in comparison to the broader space, which creates its own challenges as you know.
With that I'll turn it over to Fred in terms of the market share point share.
Larry really relative to 2020.
And on multi year gaining share.
The biggest share jumped aircrafts was class eight straight.
Up from 2019 level, 75% penetration of.
And all transmissions.
Total share and class eight straight up to about 80.
Thinking about 2021.
Our assumptions and the guide.
And is basically neutral and on share gain and no loss no gain.
Okay. That's great. Thank you for all that would you guys hosted an analyst meeting to go through all this long term strategy and EV at some point and I'll leave it there thanks very much guidance.
Certainly.
That's in the mix, we have a tremendous amount going on from a technology standpoint.
That we'd like to lay out.
To the investment community.
Thanks, and good luck.
Thank you. Our next question comes from the line of Courtney on <unk> with Morgan Stanley. Please proceed with your question.
Alright, thanks, guys.
Maybe just a follow up to that I know you mentioned that the class eight straight share but.
And you could talk a little bit about.
School bus.
I think that's a place where you've been losing share it seems where that is where a lot of the electrification.
Okay.
At adoption might be happening a little bit sooner. So if you could just.
Reference what youre expectations for sure there are and 2021, and then going back to your R&D increase of about 30%.
Let's take into your guidance for 2021, I think that's correct.
Okay. Your R&D.
And in percentage of sales based on your sales guidance.
And to significantly higher than we've seen historically and obviously understandable given the investment that you're doing and the gem platform, but as we look longer term is that the right level that we should be thinking about or should that be kind of.
And to increase at this double digit rate for the next couple of years.
So just trying to frame, where R&D and the medium term.
Sure coordinators as Fred I'll take the first part relative to our expectations on on school bus share.
And we haven't basically neutral and 21 from 2020 new levels.
David Miller and respond to the R&D.
R&D questions.
And then coordinate morning.
A couple of things with R&D.
I mentioned before it's very much tied to market opportunities and this goes beyond the EV so off.
Frankly, all of our end markets and on.
And certainly again, recognizing our teams efforts to drive growth and Thats really the outcome of what you see as the investments.
And R&D and the increases there is a combination of electrification as well.
Other initiatives and our and our <unk>.
Broader and markets and markets portfolio that being said.
I Wouldnt assume.
To your point in terms of I would not really look at it as a percentage of sales. Although I can appreciate the fact that day.
Facilitate some level of.
Modeling and such but the way I would think about that is that's ultimately market driven and if you break down what's happening in 2021 and name off of that off of that.
The expectation is and I think over time it will moderate.
Ultimately at the same time, we're also doing a fair amount of investment have done.
And a fair amount of investment and capital investments around our technical capabilities and I would.
And again see that very much moderating.
After this year the balance will come to us with market demand frankly, and those investment analyses will be made and will make appropriate decisions, but it is clear.
From our comments and our actions that we are investing and growth opportunities across the entire portfolio and then to the extent that there's more opportunities there were and appropriate returns will fund accordingly, but.
And I can certainly assure you the.
The investments are there the team is very much engaged.
And we look forward to bringing these things these programs, but ultimately.
To market and looking beyond those in terms of what's next.
Great. Thank you.
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.
Mr. <unk> your line is live.
Alright. Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning, and congratulations Dave.
I guess two questions one first.
Incremental margins on your guidance I think are ranging from 20 to.
40% and understanding R&D as part of that but is there anything else you can point to whether it's COVID-19 challenges our supply chain.
And I guess, how conservative that guidance and then my second question.
You talked a lot about the organic growth initiatives I'm, just wondering how youre thinking about inorganic opportunities and opportunity and <unk> in terms of M&A.
And whether there is an opportunity for you get and key to get into adjacent products, whether its power electronics battery packs and just trying to understand how you could somewhat broadening your product offering if there is if there is an appetite too. Thanks.
At Jamie off this is Fred I'll take the first part of that question relative to the.
And the implied incrementals and at the midpoint.
To 32% incremental on a drop through.
Realizing that we've got.
And engineering R&D up 30%.
Absent that increase and R&D the drop through would be about close to 50%. So certainly a fairly attractive.
Performance from a from a gross margin standpoint, and where we're funding the business.
And year over year basis.
And you're really looking at the the additional spend on on R&D.
You've really got at this point you have a par payout on incentive comp rolling through.
That is that is really somewhat offset by the unfavorable.
Policy and warranty adjustments and 2020.
We do anticipate getting price and a 50 to 75 basis points.
But.
There's a lot of cost pressures.
With the supply chain challenges so we're typically.
Price cost positive.
This year, and we're anticipating being close closer to neutral certainly the price there but.
The expedited freight.
The commodity pressures.
We definitely and we'll attempt to mitigate that.
The other thing you have rolling through and when you think about.
2020, just a lot of spend and just couldnt happen.
So there is little pressure upward on SG&A as the economy opens up and Youre able to began travel.
Yes.
And Jamie Thank you and good morning.
In terms of your question on organic growth.
Supplementing that and I guess through potentially M&A and across whether it's easy or.
Conventional adjacencies to your point we.
Our actively engaged and.
And assessing external investment opportunities and further enhance.
Our position on electrification as well expanding our addressable market, but I think to your point, whether it's electrification, which we obviously have done a few things.
And 2019 and continued to be very engaged I would.
Note.
And as you think about electrification to the comp and our prepared comments at this point about collaboration is important because I.
And I don't know the answer necessarily is absolutely control everything I think that's challenging to do especially when you think about.
Relatively immature voice of customer and a number of other.
And frankly attributes that need to be addressed and ultimately answered too we believe.
Ultimately there is a collaboration that will be required that that could take the form of a number of difference.
Partnerships arrangements et cetera, so it's not only from an M&A perspective, as we're approaching the market and also from a collaborative perspective.
I think at some level leveraging investments that have already been made and.
And trying to do that and from our view of capital efficiency and ultimately.
The most appropriate application of existing technology or other opportunities that being said the adjacencies.
Point that you raised.
And as we've thought about that and continue to look at the market opportunities. We believe they are there.
Whether those are and ultimately conventional or I would say on the conventional side.
As you think about what's happened even over the last year on year plus there is a number of.
Issues that have been raised relative to supply chain and more broadly.
The sustainability of that supply chain going forward, just given the amount of demand that was there and then the pandemic and and recovering from the pandemic. So we believe there is opportunity there as well to look at the market and.
In addition, our.
Our relationships over the years in certain.
Jason to use are proving to be attractive as well in terms of potential opportunities. So as we think about it as broad as.
I think we should be open minded, but as part of our capital allocation priorities M&A is certainly at.
At the forefront to.
To ultimately support growth.
And there that'd be through organic initiatives that are underway are ultimately.
Broadening our adjacencies.
Okay. Thank you.
Thank you. Our next question comes from the line of Felix <unk> with Raymond James. Please proceed with your question.
Hey, good morning, everybody.
Good morning, Good morning, Hey.
And I was hoping you can maybe give us your thoughts around international opportunities on and on one hand, you have tightening emission standards and places like China.
I would assume that would be a positive for you all all else equal, but obviously electrification is accelerating quickly. There also and you still see some incremental opportunities on the shift toward automatic transmission or just more EV effectively cannibalize that and if you could just help us think through your approach and.
<unk> there'll be super helpful.
Phil Good morning, it's Dave So to your question it's really.
There are we believe on significant opportunities out and emerging markets for ultimately fully automatic solutions.
Those markets have many of the same demographic attributes and challenges that you would argue more established developed markets do whether that's the U S or Europe or others. At this point. So there is going to be demand there because of a lack of.
And skilled drivers for from manuals.
And ultimately from fully.
<unk> solutions. So I think your point on emissions is well taken and if you think about all the work that we've done.
And and partnership and collaboration with the entire powertrain.
That's going to be required to meet a number of tightening.
Situations globally, and I think we obviously have experienced without and will continue to drive that but.
To your point, certainly EV and China for instance is very very heavy and bus.
And on truck has proven to be I think much more challenging for a number of reasons. They are moving around some subsidies there, but the fact is it will be.
A bit of a reach we believe in terms of total cost of ownership first and when you think about the challenges of Av.
Addressing the need for automation and those same vehicles today and the cost challenges. So I think the long answer to your question is we still.
And I believe there is significant opportunity for growth and those market.
Thanks.
Yes.
Thank you. Our next question comes from the line of Ann Duignan with Jpmorgan. Please proceed with your question.
Yes, hi, good morning, and just back to them and base business from limited to and sorry.
On the highway in North America.
And can you just talk about the cadence.
Sales that you are anticipating do you expect all quarters will be up year over year and then within <unk>.
And new core markets and on highway and could you just and maybe the differences and similarities in terms on the growth rates that youre expecting Darren Thank you.
Morning, and Dave.
To your question as we think about the quarters.
Describing looking at them on a year over year basis.
For North America on highway.
And would expect.
Q1 to ultimately be.
A bit lower than last year on a.
Quarter over quarter basis.
We expect Q2 and Q3.
<unk> to be better on a year over year basis and then.
Q4 <unk>.
Slightly positive again to your point on cadence so everything I, just said with the caveat of the.
And the various supply chain issues and Im sure Youre, well, probably too well versed and at this point and to what we.
Commented, including Fred.
Detailed commentary there.
And open switch frankly, and Thats one net.
Is taking a tremendous amount of time from our team to ultimately.
Look to address I will also offer relative to the supply chain issue.
That potentially has impact throughout a number of different end markets, because we're seeing lead times be impacted.
Pacifically around the availability of certain raw materials et cetera. So.
The caveat caveats apply but.
To your question there.
We would see ultimately the.
The year breaking out from North America on highway.
Tier I think second part of your question as we think about the individual.
Components of North America on highway.
Medium duty as you know continues to be strong given the lack of inventory, whether new or used and the strong order boards and backlogs and.
I think frankly setup for a reasonably positive 2022 interestingly enough at this point.
Lease and rental key segment for us.
We believe those fleets at this point are either right or undersized and they are continuing to experience high utilization rates Muni is mix.
But I would say overall youre continuing to see strength and residential revenue.
Kris bus utilization tax revenues depends on regions, obviously in terms of how they responded to the pandemic.
I think this weather that we're experiencing in many parts of the U S. Right now is consuming budgets at an alarming rate for some of these municipalities. So that'll be an issue as to how they look at their budgets for.
The balance of this year in terms of both maintenance on equipment oil and gas is an interesting one because we're certainly starting to see utilization rates go up.
And the impact of that starting to flow through with.
Higher energy prices dealers are certainly concerned around the deficiencies that they are experiencing and struggling to maintain a manageable level of stock inventory bodybuilder lead times are out there.
And they're really extending now at this point, but I would say overall the positive momentum carried from from certainly Q1 into our Q4 into Q1, but the supply chain issues that I mentioned earlier are really going to have.
And number of us working extremely hard to try to manage from at least into I think the first half of the year.
Okay, and just as a quick follow up you didn't mentioned school buses could you go back Fred that you didn't tell us what your school bus market share and was in 2020, just said flat and 'twenty 'twenty. One and then do you expect school bus and be up flat or down in 2021. Thank you.
Sure sure and <unk>.
And our 2020 school bus penetrations.
84%.
We have school bus.
I think it's somewhat of a wildcard how it's going to play out, but we have school bus.
And on our model.
Slightly down in 2021.
Okay. Thank you and I appreciate that.
Thank you. Our next question comes from the line of Brett Linzey with vertical Research partners. Please proceed with your question.
Hi, good morning, everyone.
Good morning, I wanted to come back to the E axle initiative and the electrified powertrain understanding you are building off a base architecture, but could you just talk about your technology, where you think you'd differentiate versus peers and that category and then is there anything you can share along the lines of the number of customers engaged or <unk>.
Pilot programs underway to help frame that progress.
Sure.
And this is Dave and again in terms of.
On the technology.
As I think we covered and some of the prepared remarks, the level of integration and that the power.
Asia and power ultimately offers as we believe at a level of performance that is unique in the marketplace. Currently so what do I mean by that.
And again, if you think about conventional experienced today when we talk about great ability and performance. Those are all attributes that are taken for granted.
Bear with very few exceptions right now at least in terms of what is available that meets those requirements and I used the word on compromising our prepared remarks for a reason because thats what everybody is used to.
We are taking again, the ultimate focus and objective is meeting or exceeding.
Conventional experience and Thats really has been the focus of the EJ and power.
Development program. So to your question in terms of.
A number of parties and we're working with et cetera beyond the.
<unk> mentioned about.
The 70% or so of our North America on highway revenue I would also tell you theres parties outside of North America that we're talking to as well and considering.
Those development programs again back to what I mentioned earlier, which is really focused and probable engagements meaning the.
And the ranges that are being provided whether those be volume or timing become relevant as to where anybody is going to spend their time at this point and I think without more certainty. There is going to continue to be a fairly high level of variability around what you hear and over what period of time, we're focused on on what we.
Early probable outcomes and Thats important because every one of these whether you have one unit running on 1000 is a.
Difficult undertaking in terms of the time by both parties, but the more important thing is customers are not interested in.
Explain why things don't work to the expectations that they have we are certainly intending on.
Meeting or exceeding current performance that day.
They are experiencing with our brand and conventional and that is really on compromising so as we focus on it at the right parties ultimately.
With probable outcomes and.
Frankly, I think the market will sort through that as I think as everybody knows the market doesn't like chaos and this is one that I think will bear itself out over time is really a focused approach to probable outcomes that deliver our brand promise and I think thats, probably the most concise way to describe it.
And a helpful color and.
And I appreciate the thoughts on the M&A strategy on different pockets of opportunity, but as you think about balancing capital deployment is there room to do both share repo in deals or is M&A. The priority and you toggle to repo. If discussions are progressing just trying to understand how much stock you could maybe by this year and the next couple of.
While you are doing things and pursuing inorganic opportunities.
Yes, Brett this is Fred.
In the middle of a global pandemic.
2020.
We generated over $450 million and free cash flow.
And so.
And we've laid out our capital allocation policies and we.
We were fortunate and that we generate so much cash were and are positioned to fund all of those priorities.
Yes.
And Youre seeing it we funded with funded.
Organically for revenue and growth and we're funding per product.
Development and technology and Dave mentioned.
On pursuing strategic opportunities, we're returning capital to shareholders and in the last four years, we've repurchased over a third of our shares we just raised our dividend.
By 12% and O&M.
We've got the balance sheet, and we're really great shape and again, we're always focused on and maintaining that low cost flexible prepared pre payable debt structure. So we are positioned on a go forward basis to fund all of our capital allocation priorities.
Absolutely okay, great. Thanks appreciate the color.
Thank you, ladies and gentlemen that concludes our question and answer session and I will turn the floor back to Mr. Brad Joseph for any final comments.
Thank you Melissa and.
And thank everybody for their continued interest and Allison and for participating in today's call and enjoy the rest of your day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.