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Allison Transmission Holdings Inc (NYSE:ALSN)
Q4 2019 Earnings Call
Feb 20, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Allison Transmission's Fourth Quarter and Full-Year 2019 Earnings Conference Call. My name is Melissa, and I will be your conference call operator today. [Operator Instructions] I would now like to turn the call over to Ray Posadas, Company's Director of Investor Relations. Please go ahead, sir.

Raymond Posadas -- Director, Investor Relations

Thank you, Melissa. Good morning, and thank you for joining us for our fourth quarter and full-year 2019 earnings conference call. With me this morning are Dave Graziosi, our President and Chief Executive Officer; and Fred Bohley, our Senior Vice President, Chief Financial Officer and Treasurer. As a reminder, this conference call webcast and the presentation we are using this morning are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through February 27.

As noted on Slide 2 of the presentation, many of our remarks today contains 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 and our Annual Report on Form 10-K for the year ended December 31, 2018, and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today.

In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our fourth quarter 2019 earnings press release. Today's call is set to end at 8:45 A.M. Eastern Time. In order to maximize participation opportunities on the call, we will take one question from each analyst.

Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will provide you with an overview of our fourth quarter results; Fred Bohley will then review the fourth quarter financial performance and introduce full-year 2020 guidance. Finally, Dave will conclude the prepared remarks prior to commencing the Q&A.

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

David S. Graziosi -- Director, President & Chief Executive Officer

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 the North America On-Highway end market. Furthermore, both the North America and Outside North America On-Highway end markets concluded a third consecutive record revenue year, largely driven by the continued success of our growth initiatives. Our commitment to growth is most notably reflected in the North America On-Highway end market where we achieved meaningful market share gains in 2019. Market share for Class 4/5 truck more than doubled climbing to 16% compared to 7% in 2018. The substantial share gain in Class 4/5 was principally driven by the medium-duty commercial truck launches at Chevrolet and Navistar exclusively with the Allison fully automatic transmission. Class 6/7 truck grew to 76% market share in 2019 from 74% in 2018. And Class 8 straight truck achieved 74% market share in 2019, compared to 70% in 2018. Our 2019 North -- market share gains suggest that the secular trend of increasing automaticity in the vocational truck market continues to occur and the Allison remains positioned to capitalize on this transition.

Finally, I'm pleased to report that Allison's established and well-defined approach to capital structure and allocation remains intact. During the fourth quarter, we settled $62 million of share repurchases, resulting in $393 million of total share repurchases for the year or approximately 7% of our outstanding shares. Also during the quarter, we paid a dividend of $0.15 per share and completed an opportunistic repricing of our term loan due March 2026.

Please turn to Slide 5 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 & Other end markets due to ongoing weakness in hydraulic fracturing activity and partially offset by higher demand in the North America On-Highway end market.

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 is principally driven by lower net sales 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 in 2018. The decrease was principally driven by lower gross profit and increased product initiatives 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. The decrease was principally driven by lower gross profit and increased product initiatives spending.

Now, I'll turn the call over to Fred.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

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 6 of the presentation.

Please turn to Slide 7 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 initiatives spending. As reported in the earnings press release, we recorded an $8 million benefit during the fourth quarter related to a reduction of the liability for ongoing environmental remediation activity at our Indianapolis, Indiana manufacturing facility.

Please turn to Slide 8 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 initiatives 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 of share repurchases and paid a dividend of $0.15 per share. We also completed an opportunistic repricing of our term loan due March 2026 reducing the LIBOR margin from L plus 200 basis points 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, a $192 million of cash, $595 million of available revolving credit facility commitments and approximately $1.05 billion of authorized share repurchase capacity.

Our commitment to prudent balance sheet management through a low-cost flexible and prepayable 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 9 of the presentation for the 2020 guidance end market net sales commentary. For 2020, Allison expects net sales to be in the range of $2.375 billion to $2.475 billion or a midpoint decrease of 10% compared to the net sales for 2019, reflecting lower demand in the Global On-Highway and Global Off-Highway end markets, partially offset by increased demand in the Service Parts, Support Equipment & 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 market and up sequentially, driven by higher demand in the North American On-Highway end market.

With that, I'd like to highlight the following end market assumptions for the full-year 2020. North America On-Highway, Allison expects the net sales midpoint decrease of 16%, principally driven by anticipated lower Class 8 straight and Class 5 through 7 truck production. North America Off-Highway, we expect the net sales midpoint decrease of 50%, principally driven by lower demand for hydraulic fracturing applications. Defense, Allison expects the net sales midpoint increase of 13%, principally driven by increased tracked vehicle demand, partially offset by lower wheeled vehicle demand. Outside North America On-Highway, we expect the net sales midpoint decrease of 9%, principally driven by lower demand in Europe and Asia. Outside North America Off-Highway, Allison expects a net sales midpoint decrease of 24%, principally driven by lower demand in the energy sector. Service Parts, Support Equipment & Other, we expect the net sales midpoint increase of 4%, principally driven by aluminum dye 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 Allison's 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.

David S. Graziosi -- Director, President & Chief Executive Officer

Thank you, Fred. 2019 was an important year for Allison Transmission. We successfully completed three acquisitions, further expanding our business beyond the leading supplier of commercial duty fully automatic transmissions to include the production and integration of next-generation vehicle propulsion systems, including electric hybrid and fully electric solutions through the acquisitions of Vantage Power and AxleTech's electric vehicle systems division. We also secured a critical portion of our supply chain and added high tonnage aluminum dye 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 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 and defense end markets.

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 propositions 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 with the acquisitions and ongoing next-generation investments underscore our commitment to remain a leader in 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 Trucks, we announced the launch of the new Allison Regional Haul Series transmission for the Class 8 tractor market and upgraded variant of Allison's proven and well-known 3,000 Series transmission. Last week, heavy duty trucking magazine recognized the Allison Regional Haul Series by naming it a Top 20 product winner for 2020. The award highlights the most innovative, significant and useful products from the previous year, and we are honored that the Allison Regional Haul 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 in any other time in our history. Our relentless focus on balance sheet management, operational execution and disciplined investment over 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 stakeholders. 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, please open the call for our questions.

Operator

Thank you. We will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Rob Wertheimer -- Analyst

Hey, good morning everyone. My question is on commercial spend, you kind of referenced increased commercial spend. You obviously had some share gains, which is great. I just wanted to ask about the nature of it, whether it was trying to launch in 4/5 or whether it was trying to go on the offensive [Phonetic] and clean up some of the share available or whether there is a new threat and it's on the defense. If you could give any color on that. Thank you.

David S. Graziosi -- Director, President & Chief Executive Officer

Good morning, Rob. It's Dave. In terms of -- let me just make sure I'm answering your question. You talked to commercial spending initiatives. Your reference there in terms of market share gains.

Rob Wertheimer -- Analyst

Yeah, like I'm sorry if you can't hear me, but, yeah, the commercial spending initiatives always call that out. I was just curious what really that was whether trying to pick up more share or defend against loss or what that is?

David S. Graziosi -- Director, President & Chief Executive Officer

Really, our initiatives are focused on gaining share. Frankly as I roll 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 and the comparisons year-over-year, and frankly, the trend in the last several years, we continued to drive the value of that proposition.

As you know, the drive and continued transition toward automaticity plays well to our brand value proposition and frankly, the value that we're delivering to end users as well. So, we continue to support that. I'd say outside North America, we 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 changed 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 their adoption of fully automatics as well. So that's the combination that you see in there is really the growth initiatives. There is a number of other things that we're doing throughout the business as well, but it's relatively consistent with prior years.

Rob Wertheimer -- Analyst

Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Joe O'Dea with Vertical Research Partners. Please proceed with your question.

Joe O'Dea -- Analyst

Hi, good morning. On the fourth quarter with revenue down and COGS up, you've 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 felt some of the impact from that. And then just related and can you kind of frame for us the variable cost component of COGS.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

So Joe, 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 mix, our North America Off-Highway business was extremely soft as well as the associated service parts. Also year-over-year, Outside North America Off-Highway was down and then again year-over-year, you had the impact of the Walker Die Cast acquisition still running through Parts, Support Equipment & Other are the aluminum die cast components that have lower margins than the traditional Allison service parts margin profile. So, those were the primary mix drivers. You expect -- your other question, Joe related to...

Joe O'Dea -- Analyst

To COGS and just sort of framing it in general that the variable cost component of COGS.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Yeah. So think about cost of goods sold, about 70% is purchase components. So, you're looking at 30%, that is -- 30% that's conversion cost. About 6% or 7% of that is direct labor. So, you've got roughly 24% that's in there that's fixed and certainly in a down revenue quarter like we had is difficult to get after. It's, as you know, Q4, traditionally, our lowest margin quarter, fewer work days at our OEMs, Thanksgiving, Christmas holidays. So, you've definitely got more fixed costs. That's not been thin, with volume in the fourth quarter.

Joe O'Dea -- Analyst

Got it. Thanks very much.

Operator

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Jerry Revich -- Analyst

Yes. Hi, good morning everyone.

David S. Graziosi -- Director, President & Chief Executive Officer

Good morning.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Good morning.

Jerry Revich -- Analyst

You also have consistently achieved pricing, I'd say over the past decade plus every single year. Does your guidance assume pricing gains, net of material costs in '20, as we look at where your guidance shakes out for margins. It's 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 -- let's see how the year progresses and we will issue updated guidance from here.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Jerry, this is Fred. 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.

Jerry Revich -- Analyst

And, Fred, any headwinds that we should keep in mind, either from the acquired businesses or anything else that would make for the margin bridge to be less linear than it's been in the past?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Nothing I'd really call out. I mean, 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 topline down 10%. We also anticipate mix being somewhat unfavorable on a year-over-year basis, really relative to engineering, consistent with 2019 continuing to support our product in growth initiatives. SG&A is relatively flat. Clearly, you have a step-down associated with the intangible amortization coming off the books, and those are obviously called out in our financial statements. But that's about a $35 million reduction in book intangibles, but net of that should be relatively consistent year-over-year as we in a -- in an environment where the top line is obviously a little softer, we have a tremendous amount of initiatives and opportunities to grow this business that we continue to fund.

Jerry Revich -- Analyst

Okay. Thank you.

Operator

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

Ross Gilardi -- Analyst

Hey, good morning, guys

David S. Graziosi -- Director, President & Chief Executive Officer

Good morning.

Ross Gilardi -- Analyst

I just wanted to ask about the free cash flow outlook. I think the delta in your free cash flow for 2020 versus '19 seems to be almost entirely the delta in EBITDA that you're guiding to. Am I missing anything? The free cash flow seems to imply no working capital inflow, which would seem pretty unusual in a 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 be -- might not be thinking about?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Sure. On the -- this is Fred. On the free cash flow year-over-year to the guide, we call -- we called out quite a few of the items, capex down slightly at the midpoint, cash income taxes down. One thing I guess I would point you to, 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 first quarter and will be accruing at a level lower than that cash outflow.

Ross Gilardi -- Analyst

Okay. Got you. And working capital, just how -- what are you assuming for working capital within your free cash guide?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

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.

Ross Gilardi -- Analyst

Okay. Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Lawrence De Maria -- Analyst

Thanks. Good morning everybody. Just curious about how service parts play out through the year? I know it's up, but it's still mostly die cast. I'm curious mostly about energy, the energy portion when that part actually bottoms and do we comp up at all to the service parts throughout the year kind of organically. Thank you.

David S. Graziosi -- Director, President & Chief Executive Officer

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 to comments that others have made relative to the space. I think it's pretty clear the constraints around, I would call it, hard rationing on capital as well as opex. We expect it to really manifest themselves through the balance of the year. We don't see a tremendous amount of change in the market. I think despite what some others may be thinking, I would tell you we're expecting a pretty muted year overall.

So, when you look at our assumptions to your question, 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, I would expect more visibility from the end users around their cash flow constraints as we move into the year. 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 the prior years that everyone is familiar with.

Lawrence De Maria -- Analyst

And does the -- if I could just follow up then. What do you see in terms of usage hours, etc. on the fleet out there? Does that imply that '20 is most likely to bottom?

David S. Graziosi -- Director, President & Chief Executive Officer

Lot of ways to think about that. We've seen unfortunately what zero looks like as well. And I think this is one where we know the equipment is being utilized. Again, back to comments that others have made, it's obvious, the equipment is being utilized. It's being utilized at high rates. The push for efficiency is driving that, but 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 in much better shape than the last downturn a few years ago. So, as we think about it, they're better capacitized, better capability, but you're going to wind up stacking, cannibalizing and then there's been plenty of references by others to ultimately retiring hydraulic horsepower. And we believe that is in fact taking place as they're -- they need to return capital at appropriate level to their stakeholders and we do not see that dynamic changing this year.

Lawrence De Maria -- Analyst

Okay. Thanks guys.

Operator

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

Jamie Cook -- Analyst

Hi, good morning. I guess two questions. I know you noted the first quarter sales are going to be down year-over-year, but I think the trend within industrials is just how weak the first half is, in particular the first quarter. So, is there anyway you could better frame that from a sales or EBITDA perspective in terms of first half versus second half or like do you view the first quarter as the trough. And then I guess my second question, another follow-up on the market share gains, which you were obviously a very successful in 2019. Do you have market share gains embedded in your 2020 guidance? And if so, if there is anyway you could provide some color. Thank you.

David S. Graziosi -- Director, President & Chief Executive Officer

Good morning, Jamie. It's Dave. So a few comments there. So, 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 coronavirus. Our focus there has been for the safety and wellbeing of our employees as well as our customers and suppliers that the 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 collaboration has been excellent in terms of all of our partners out there.

That being said, we have no way of handicapping that. As 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 that's consistent with what you're hearing from our largest end market as you know, which is North America On-Highway. I think that's very much playing out so far as the first half, second half story. The inventory levels there are high.

I finally hearken 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 inventory. You saw some of that's starting to take place late last year in terms of preparation. So, that's 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 setup again with the caveat as I mentioned in terms of the coronavirus.

The question you had in terms of market share I think specifically to North America On-Highway. As we plan the year and 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 say, meaningful share increases on a year-over-year basis in the guidance.

Jamie Cook -- Analyst

Okay. Thank you. I appreciate the color.

Operator

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

Mark Zhang -- Analyst

Hey, good morning guys. This is Mark on for Ian. I'm just digging a little bit into the R&D item a bit. Most, I guess, your outlook for spending in 2020 and beyond and then sort of what areas of products will the spend largely be focused on? Thanks.

David S. Graziosi -- Director, President & Chief Executive Officer

Good morning, Mark. It's Dave. Couple of comments there. As we've talked before about our R&D investments really supporting, really our growth initiatives, as well as other opportunities. We like to take the view that 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 it's potential disruption from electrification, emissions, changes that are coming, all of that requires investment. So this has been a process that's been under way for a number of years. As we've said, those initiatives are also increasing the demands upon our team and our business to fund those. So when you've seen that reflected in the level of spending here, what's -- what are we thinking about post 2020.

Frankly, it's a little early for that. I'd like to get through 2020. 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 are 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 year as we continue to see some evolution in the market of a number of different technologies, we'll look to provide that post 2020 update very late this year, certainly early next year with the 2021 guidance.

Mark Zhang -- Analyst

Okay. Great. Thank you guys very much.

Operator

Thank you. Our next question comes from the line of Courtney Yakavonis with Morgan Stanley. Please proceed with your question.

Courtney Yakavonis -- Analyst

Hi, thanks for the question. Just, firstly, I just want to have a clarification. I think the response to Jerry's question, you just mentioned that SG&A would be flat ex-amortization year-over-year. So just wanted to dig a little bit more into that given the sales will be down 10% right? We wouldn't see any flexing there. And then secondly, on the North America On-Highway sales, you guys called out electric hybrid propulsion being a driver of the growth that you guys saw. If you can just give us a little bit of quantification around that side of the business? Maybe, how big it is, how fast it's growing. and anything as we think about how that will impact 2020? Thanks.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Sure. I'll take the first part. This is Fred. And let Dave handle the second. So, specifically on SG&A, we -- as I mentioned, 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 repeat. So those are the moving parts within SG&A with really net of the stepdown and the intangible amortization expense is modeled consistent with the 2019 spend.

David S. Graziosi -- Director, President & Chief Executive Officer

To your question in terms of 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 invest in that very successful platform. So, we're doing a number of things that we believe based on market demand, what end users are looking forward 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 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, etc. And 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.

Courtney Yakavonis -- Analyst

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.

Brendan Shea -- Analyst

Hi, this is Brendan on for Seth. I was wondering if there was any more color you could provide the off-highway markets, particularly as it relates to the mining and construction markets, which you had called out as being weaker this quarter.

David S. Graziosi -- Director, President & Chief Executive Officer

Sure. This is Dave. 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 does not appear to be frankly as cyclical as some prior periods. So I think it's better positioned from an inventory perspective. But overall, we've taken a pretty muted view of 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.

Brendan Shea -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Ann Duignan with JP Morgan. Please proceed with your question.

Ann Duignan -- Analyst

Hi, good morning. Just a couple of clarifying questions. And on your guidance for pricing 25 basis points and could you comment on whether that includes commercial spending to gain share and how much you expect to spend in 2020? Does it more than offset the 25 basis points?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

So, the 25 basis points is inclusive of pricing to the OEMs and any end user incentives that we might provide. There's no relationship to the SG&A spend that would be used to drive market growth initiatives.

Ann Duignan -- Analyst

Exactly. So your pricing is gross pricing. It's not mix pricing. How much have you baked in for commercial spending and SG&A for share gains?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

We would consider, and we consider our pricing net. It's the actual price that we garner for the products that we sell. From an SG&A standpoint, we continue to fund those initiatives and it's modeled consistent with the 2019 spend.

Ann Duignan -- Analyst

How much was the 2019 spend?

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

For total SG&A?

Ann Duignan -- Analyst

No, for commercial spending to gain share.

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

We haven't broken out our SG&A expense at that level, Ann.

Ann Duignan -- Analyst

Okay. Yeah. I'll follow-up afterwards, Maybe that's on R&D then also, I don't think you answered the question? Should we take the Q4 spend and annualize that, is that the way we should think about SG&A, R&D spend going forward, there's about 7.5% of sales?

David S. Graziosi -- Director, President & Chief Executive Officer

Ann, this is Dave. Q4 was -- last year was elevated. There were number of projects and you know this from your 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 to extrapolate Q4 for 2020 on a quarterly basis. As we usually run, I would expect our spending to be a bit heavier Q3, Q4 and then to -- our Q2 and to Q3 and then Q4 to tail off, which has really been more of the historical patterns. So I think, at this point, our expectations are relatively level on a quarterly basis in 2020.

Ann Duignan -- Analyst

Relatively flat for the full year versus '19 or down a little bit because Q4 was inflated?

David S. Graziosi -- Director, President & Chief Executive Officer

I would -- I think the best thing is probably to look at the Q2 and Q3 of last year. Those levels being what we would expect on a quarterly basis in 2020. If you take out the high and the low from last year, in other words, that's the way I would look at it.

Ann Duignan -- Analyst

Okay, perfect. That's good color. I appreciate that. I'll get back in line.

David S. Graziosi -- Director, President & Chief Executive Officer

You are welcome.

Operator

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.

David S. Graziosi -- Director, President & Chief Executive Officer

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 to develop the next generation of propulsion solutions that meet the challenges of tomorrow and ensure sustainable growth for our business. We're 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 and for participating on today's call. Enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 44 minutes

Call participants:

Raymond Posadas -- Director, Investor Relations

David S. Graziosi -- Director, President & Chief Executive Officer

G. Frederick Bohley -- Senior Vice President, Chief Financial Officer & Treasurer

Rob Wertheimer -- Melius Research -- Analyst

Joe O'Dea -- Vertical Research Partners -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Ross Gilardi -- Bank of America -- Analyst

Lawrence De Maria -- William Blair -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Mark Zhang -- Oppenheimer & Co. -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Brendan Shea -- RBC Capital Markets. -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

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