Oshkosh Corporation (OSK) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Oshkosh Corporation Fiscal 2019 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I'd now like to turn the conference over to Pat Davidson, Senior VP of Investor Relations for Oshkosh Corporation. Thank you. Please go ahead.

Good morning and thanks for joining us. Earlier today we published our second quarter 2019 results. A copy of the release is available on our website at oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide 2 of that presentation. Our remarks that follow including answers to your questions contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to our fiscal quarter or fiscal year unless stated otherwise. Our presenters today include Wilson Jones, President and Chief Executive Officer; and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide 3 and I'll turn it over to you Wilson.

Thanks, Pat. Good morning, everyone. We're pleased to announce strong second quarter results with revenue, operating income and earnings per share all up over the prior year. This is the great way to follow up our strong first quarter as we move into the second half of the fiscal year. This quarter is a great example of why Oshkosh is a different integrated global industrial. Like many companies, we are dealing with challenges related to uncertain trade policies and tariffs, labor challenges, weather and other macro factors that impact each of our segments differently. Yet we were able to deliver 18% earnings per share growth over the prior year quarter. The diversity of our end markets, along with our integrated operations and supply chain, allowed us to overcome challenges we faced in parts of our company and still delivered strong results. As a result of our continued strong execution, healthy backlogs and solid outlook for our markets, we are raising our expectations for adjusted earnings per share for 2019 to a range of $7.50 to $7.80. Dave will discuss our updated 2019 expectations in more detail. Before I talk about each of our segments, I wanted to mention that we are looking forward to having John Pfeifer join our team this week as our Chief Operating Officer. Many of you know John and he brings strong operations experience with him and will be a key leader as we continue to strengthen our people-first culture and execute our MOVE Strategy. Please turn to slide 4 to begin the discussion for each of our business segments. I'll start off as I typically do with the Access Equipment segment. Our Access Equipment team delivered a strong quarter with sales up in all regions, notably the largest percentage sales increase was in the Pac Rim region. There was a lot of talk about the direction of the Chinese economy but the Chinese Access Equipment market continues to grow at a very strong double-digit percent year-after-year. The Access Equipment market in China is still very much an adoption story with a long runway for growth. It's still a small market but if it continues to grow at this pace it won't be long before it begins to rival the size of some of the more established international markets. In response to this growth, we are continuing to invest and build out our team there. In other parts of the world, it's show season. The JLG North American team hosted discussions and demonstrations with many customers large and small during the ARA Rental show. Attendance was good and attendee feedback was positive about their outlook for 2019. Our European team is energized by the recent success of the world's largest construction equipment trade show BAUMA. The once every three-years event takes place in Munich and was attended by more than 600,000 visitors from across the globe. Similar to the ARA show, attendance was good and attendee feedback was positive. The optimism expressed by many attendees seemed to conflict with some of the macro headlines about Europe that we're reading. We launched a number of new products at BAUMA with electrification as a core theme and showed technology that are being integrated into our product lineup. As we projected orders in the quarter were lower year-over-year but we have a strong backlog and customers remain confident about their businesses. If you recall last year customers were facing higher prices due to the significant jump in steel prices and the possibility of delivery challenges, which likely pushed them to order earlier than usual. We believe what we're experiencing this year is a return to a more normal order pattern. The key metrics that we track with our rental company customers in North America mainly utilization rates, rental rates and used equipment, all remain healthy. These measures combined with the confident views being expressed by our customers and generally positive views on construction activity in 2019 gave us the confidence to raise our full year sales guidance for this segment. Finally, we're really pleased with the improved operating performance we saw this quarter in the segment. Operating efficiency levels are up significantly compared to a year ago and they saw a dramatic reduction in supplier disruptions this quarter. I'm pleased with the team's performance and they are really focused and driven to maintain that performance level. Please turn to slide 5 for a discussion of the Defense segment. Our Defense team continue to work on operational excellence for existing programs including the continued ramp-up of the JLTV program. Last quarter we told you that the U.S. Army was pushing the JLTV Full Rate Production milestone decision into the spring to accommodate several user requests of modifications to the vehicle design. These modifications are currently being evaluated by our customer and we expect the Full Rate Production decision to come sometime in the next couple of months. The President's FY 2020 budget request was released in March and lowered the quantity of JLTVs the DoD expects to order over the next four years compared to the rest of last year. The current budget request would still put cumulative awards at over 15,000 vehicles and the future year's Defense program or FYDP quantity at over 25,000 through 2023. This is important for everybody to understand regarding our opportunity with this program. In late March, we announced our newest tactical wheeled vehicle offering, an ambulance brand at the winter AUSA event. The ambulance provides the best combination of protection and extreme off-road mobility and is able to get medics too and from challenging environments faster and safer than any other tactical wheeled vehicle. Defense team continues to be very busy discussing industry-leading capabilities of JLTV and its outstanding fit for military allies across the globe. We remain confident in our ability to capture meaningful international sales with the JLTV and believe international deliveries could begin sometime in late 2020. I'd like to remind everybody that we have two other major programs of record in the FHTV and FMTV that provides additional opportunities for us as a premier supplier for tactical wheeled vehicles to the U.S. Army and Marine Corp. In fact, we are continuing our development work on FMTV A2, which is the future, upgraded and improved version of the FMTV that we've been supplying since 2010. That's what's happening in our Defense business. Let's turn to slide 6 to discuss the Fire & Emergency segment. It was another solid quarter for the Fire & Emergency and I want to congratulate the team as they had record quarterly orders, leading to a record backlog of nearly $1.1 billion. We remain confident in the North American market for fire trucks as municipal tax receipts have continued to grow and aged fleets provide an incentive for replacement. Although people costs consuming a larger portion of municipal budgets remains a challenge to accelerate market growth, but the industry still provides attractive opportunities for the market leader Pierce. The annual FDIC trade show was held in Indianapolis a few weeks ago and, once again, Pierce used the occasion to launch innovative new features and programs. Pierce's highlight from the show besides the always impressive and comprehensive lineup of fire trucks they displayed in the Lucas Oil football stadium is our new partnership with Fotokite. The new Pierce Situational Awareness System by Fotokite is an actively aerial device that greatly enhances management and command of a fire scene. This system is deployable for many fire apparatus and could be retrofitted on the apparatus currently in service. This tool is the industry's only aerial situational awareness system that tethers to the fire apparatus and hardwires into vehicle system so there's no need for a pilot license or a certificate of authorization. On the international front, sales the past few quarters have been impacted by some administrative bottlenecks. I'm happy to say that we've recently seen progress on this front and expect the bottlenecks to clear up in the coming two quarters. Please turn to slide 7 and we'll talk about our Commercial segment. Like our other segments, Commercial started the year off on a strong note, building on our successes in 2018, driving an outlook that called for higher operating income on flat revenues. Unfortunately mother nature would be up much in the U.S. this winter including the Midwest. February was particularly harsh with record snowfall, extreme cold and blizzard conditions. Mcneilus' Dodge Center Minnesota facility was closed several days due to roads being deemed impassable by local authorities. In the late February, excessive snow and high winds during a blizzard combined to create 10 to 12 foot snowdrifts, which caused a portion of a roof to collapse. Fortunately, there were no injuries, but part of the building was impacted and some manufacturing equipment was damaged, causing the facility to be shutdown for a number of days. Construction is underway to rebuild the affected areas and the damaged equipment is being replaced. We are temporarily sourcing parts from outside vendors and other Oshkosh segments to reduce the business impact of the incident. The recovery and business continuity efforts that the team at McNeilus has undertaken have been executed incredibly well. If there was a silver lining it's the way our people have rallied to recover from this event. We are working to catch up, but unfortunately we were forced to reduce the 2019 financial outlook for the Commercial segment due to the impact of this event. Last quarter we talked about expected chassis availability issues in the second quarter. The Commercial team has been working with the supplier to perform according to a catch-up plan. The team was also able to mitigate some of the impact by sourcing chassis from other OEMs and building additional stock units. The supplier has generally been executing to the plan and we will continue working closely with them in an effort to minimize this impact. The annual Waste Expo show is next week and the McNeilus team will be well represented. This show provides an opportunity for us to strengthen existing relationships and start new ones. We expect it to be a positive show, as funding for both private and municipal waste haulers remains supportive for our 2019 expectations. To sum it up, we got hit by an unexpected weather during what's been termed a polar vortex, but our team rallied and has grown stronger. We will work through this and plan to be back on track in 2020. That wraps it up for our business segments. I'm going to turn it over to Dave to discuss our financials and outlook for 2019 in greater detail.

Thanks, Wilson, and good morning, everyone. Please turn to slide 8. We're pleased to announce another quarter of strong results. Consolidated net sales for the second quarter were $1.99 billion, a 5.5% increase over the prior year. Sales were up in all segments except Commercial, reflecting the benefits of our diverse business portfolio. Commercial segment sales were negatively affected by the unexpected weather impact on production and to a lesser extent the third-party chassis availability constraint. The new revenue recognition standard positively impacted sales by $15 million compared to the prior year quarter. And we've included an updated rev rec standard chart on slide 9 of the presentation. Consolidated operating income for the second quarter was $175.6 million or 8.8% of sales compared to an adjusted operating income of $163.4 million or 8.7% of sales in the prior year. A 100 basis point improvement in Access Equipment adjusted operating income margin drove the slightly higher consolidated operating income margin compared to the prior year. In addition to the impact of higher sales volume, Access Equipment results benefited compared to the prior year from significantly improved operating efficiencies. The Access Equipment team has made great progress stabilizing production in their supply base and the results are evident in the second quarter performance. Price cost was also favorable in the quarter. We saw more non-steel cost escalation this quarter as expected, but that escalation was offset by a price increase that was effective January 1. Higher Defense segment operating income was driven by the impact of the new rev rec standard and higher sales volumes, partially offset by an adverse product mix. The new rev rec standard favorably impacted operating income by $7.4 million. Defense segment results were stronger than we previously expected due to the receipt of orders for FHTVs in the quarter that we were expecting in the third quarter. Recall that under the new 606 rev rec standard, the timing of when orders are received impacts earnings from quarter-to-quarter. We expect lower Defense operating income margins in the second half of the year as the majority of orders we expect to receive this year were received in the first half of the year. We still expect full year operating income margins in the segment to be in the high single digit percent, which is what we would encourage investors to focus on but there will be more volatility from quarter-to-quarter due to the adoption of the new revenue recognition standard as we previously discussed. Fire & Emergency delivered strong operating income margin of 12.9% in the quarter, as improved pricing offset higher material costs. Excluding the impact of the new rev rec standard, their operating income margin would have been 13.3%, slightly higher than the prior year quarter. The Fire & Emergency team continues to execute well and is on track to deliver record results for this segment. Commercial segment operating income declined $10.4 million compared to the prior year quarter. Approximately $9 million of the decline is attributable to the weather-related impact as the segment was not able to produce and sell as many units in the quarter as previously expected. Manufacturing efficiencies were also negatively impacted as a result of the need to change the production layout in the factory temporarily until repairs are completed. Restricted chassis availability negatively impacted results by an estimated $1 million, which is less than our previous estimate. Earnings per share for the quarter were $1.82 compared to adjusted earnings per share of $1.54 in the prior year, an 18% increase. Improved Access Equipment operating results were the largest driver of the higher earnings per share, more than overcoming the impact of lower Commercial segment results. Second quarter also benefited by $0.12 per share as a result of share repurchases completed in the last 12 months. We repurchased $25 million of shares in the quarter, bringing our year-to-date repurchases to $195 million, which is approximately 55% of our full year target of $350 million. Our intent is to seek board approval during the third quarter to increase the share repurchase authorization to allow us to complete our targeted share repurchases for the year and for future years. Please turn to slide 10 for a review of our updated expectations for 2019. We are raising our full year adjusted earnings per share expectations to a range of $7.50 to $7.80 from our most recent estimate range of $7 to $7.50. The following segment changes are incorporated in the higher EPS estimate range. We are narrowing and raising the Access Equipment sales range from $3.8 billion to $4 billion to a range of $3.95 billion to $4.05 billion, reflecting the continued historically strong backlog and positive outlooks that we are hearing from our Access Equipment customers. We're also raising this segment's operating income margin estimates from a range of 10.75% to 11.25% to a range of 11.75% to 12%. The increase reflects the higher expected sales, a more favorable mix and an improved cost profile. We're slightly increasing Fire & Emergency sales and operating margin ranges to reflect expected additional sales volume in the year. And we are lowering the Commercial segment sales and operating income margin ranges to reflect the expected impact of the facility damage on their results. On a full year basis, we estimate the impact would be approximately $15 million lower operating income compared to our previous estimates. We expect insurance will cover much of this, but we don't expect to record a business interruption insurance recovery in this year. We're also increasing the corporate expense estimate range by $5 million, largely to reflect expected higher incentive compensation expense. And we are refining the tax rate estimate to approximately 21%, increasing estimated capital expenditures by $10 million to $175 million and reducing the assumed share count by 500,000 to 71 million. All other assumptions remain unchanged from the last quarter. We expect higher earnings per share compared to the prior year in the third quarter and sales growth in all segments except Commercial. I'll turn it back over to Wilson now for some closing comments.

Thanks, Dave. Another strong quarter and we are going to continue working hard and smart to drive strong full year results for 2019. I'm proud of our team and confident that we will continue to execute on our strategic priorities to drive value for all stakeholders. I'll turn it back over to Pat to get the Q&A started.

Thanks, Wilson. I’d like to remind everybody please limit your questions to one plus a follow-up. After the follow-up, we ask that you get back in queue if you’d like to ask additional questions. Operator, please begin the question-and-answer period of this call.

[Operator Instructions] Our first question is up from the line of Steve Volkmann with Jefferies.

Hi. Good morning, guys.

Hi, Steve.

I'm wondering a couple of things, but Dave, can we talk a little bit about just the cadence of the Defense margins. Obviously the implied second half is quite a bit lower. And I'm just trying to understand, does that mean that without any orders the underlying business is sort of running at mid-single digits and then you get to higher single digits when you get another order, or is higher single digits sort of the core run rate that you'd encourage us to think about going forward?

Yeah. So I would – what I would think there is 605 is actually unfortunately I think a better indicator of how we think about things. And if you look on a 605 basis it's pretty consistent across the board in that high single-digit range. And as we made a comment on the prepared remarks Steve that that's how we would encourage you guys to think about it. It gets lumpy, due to the timing of the orders and we talked about it last quarter and we talked about it again this quarter. But on an overall basis, a high single digits is the appropriate way to think about it. You do get a little seasonality in terms of spend on shows and vehicle trials that are a little heavier during the summer period. But other than that I think it's – again, if you go back to the 605 basis it's pretty consistent at the high single-digit level.

All right. Okay. Thank you. And then just a quick follow-up on the free cash flow you raised your guidance for the business but the free cash flow is kind of still unchanged. What are the offsets there?

One you've got a little bit higher CapEx that we called out guidance so that's about $10 million of it. The rest is really just an assumption around the timing of the raise and how it's going to flow through from a working capital standpoint transition from sales to receivables, and ultimately into cash. As the quarter and the rest – I'm sorry, not the quarter, the second half plays out we'll see what the timing actual timing of those sales are and how they are converting into cash, but nothing other than I would say a timing assumption.

Great. I appreciate it.

Thank you, Steve.

Thanks, Steve.

Our next question is up from the line of Ann Duignan with JPMorgan.

Good morning.

Hi, Ann.

Hi, Ann.

Maybe you could walk us through in a bit more detail on your operating margin guidance for access please the raise there. You mentioned a few things, but if you could just give us a bit more color I'd appreciate it.

Yeah. Ann, the – three main things there so we – and we talked about them on the prepared remarks volume, mix and cost profile. Volume I think is pretty self-explanatory. We do expect a little heavier mix with the sales rise to aerial work platforms. And as you know that's a little richer margin from – than telehandler so that's going to be a little bit of a heavier benefit there. And then on the cost profile, well that's really I would say a combination of a number of things. It's not just material, we're talking labor overhead with the improved efficiencies that we've seen in the business. The…

Less interruptions from our suppliers.

Exactly that has a pretty meaningful impact as well. So when I think about the three drivers none really stands out as being over-weighted versus the other three.

But I think last quarter you have called out a negative mix for the year towards telehandler, is that correct? And what changed do you think during the quarter?

I think it's still going to be the case on a full year basis Ann, I think just incrementally versus what we saw last year with the raise in the sales outlook for the remainder of the year. We think that component is going to be more heavily weighted to the aerial work platforms.

Okay. And just to clarify the lower cost is more labor overhead not necessarily lower steel prices beginning to show up?

We are incorporating in a little bit of steel favorability versus what we thought last quarter as we have continued to see sheet steel moderate a little bit, but that's more so a fourth quarter play continues to remain stubbornly high. I looked last week and it's still up 40-some percent over where it was when we began our fiscal 2018. So we still have a significant steel component there, but we are from the sheet side of the house baking in a little bit of a moderation there late in the year.

Okay. And so all things being equal that should be a favorable impact for fiscal 2020?

If this continues for the remainder of this fiscal year yes that should be a benefit for us in fiscal 2020.

Okay. I'll leave it there in the interest of time. Thank you.

Thanks, Ann.

Our next question is up from the line of Mig Dobre with Robert W. Baird.

Thank you and good morning, guys. I want to go back to follow-up on that telehandler comment. If you can remind us, what some of the drivers of telehandler demand as far as you can tell have been year-to-date? And obviously, aerials have not grown as much how are you thinking about this business based on the visibility that you currently have?

Well I'll start with the telehandler question Mig. If you recall this time last year, we had consolidated our telehandler lines at a time where the market jumped, jumped quicker than we thought. So we were behind the curse so to speak in getting telehandlers produced and delivered to our customers. I think at the same time, we were assimilating around 600 new people on our lines which caused some major inefficiencies and so we got behind a little bit on telehandlers. And what you're seeing now the first half of this year, we have our cadence back, our efficiencies are there, our supply chain disruptions are well in hand. And now we're starting to catch up a little bit. I think you know the industry well. We've always been the more preferred telehandlers in the marketplace. And what we're doing now is really catching up some of the I believe lost share that we had last fall.

Excellent. And on aerials?

Well, I think, Dave, just mentioned in working closely with our customers what the communications has been up to this point is a little heavier aerial second half than first half. I think the outlook what you're seeing in the market today Mig is a little bit more normal behavior. Again I hate to go back to it but we -- I think it's important that we all understand this time last year there was a lot of stress and anxiety in the marketplace. We were talking surcharges, which was pricing increases. We were taking delivery issues, we were talking all the supplier issues. A lot of angst and anxiety. That's gone now that's all behind us. And so you're seeing a more stable market where we can get back in our cadence and deliver with pretty good lead times. And so the angst of pre-ordering and making sure that they had deliveries I think we the JLG team has done a nice job of really working with the customers on having those -- that equipment available on timely delivery basis.

Excellent. And then my follow-up on Fire, really impressive orders this quarter. Maybe a little bit more color as to sort of what's driving that? I gather your comment on state and local being in better shape. What are you seeing on the ARFF side? And then also can you give us some perspective on international? You sounded a little bit better about that portion of your business?

Sure the Fire & Emergency really had a record quarter for orders. A lot of good work has gone into that. Obviously good team executing well really selling innovations that are proprietary to them. I think that's helping them gain new customers and conquest accounts, so that was part of the order intake. That's our normal price increase, so there was part of it related to that. And if you look back in Q1, they were down a little bit on orders. So there was some catch up in Q2 there. So all in all just a well executed quarter from an order standpoint. And to our point the market we don't see it growing significantly, but it's at a good place in a place where again with their innovation we're going to continue to do well. The question about ARFF, airport rescue firefighting, we still see a lot of activity internationally with our ARFF trucks. There's a lot of new airports being built. We have the normal domestic opportunities. Business is in a good place and certainly poised to continue. We've got some innovations that we're going to be talking about with our airport rescue firefighting. I think again will help them further themselves in the market. And then you wanted to talk a little bit about international. The comment we made was about some bottlenecks that we had through some administrative issues getting in some trucks into China. And we believe all those roadblocks have been cleared and so it's roughly about $40 million of shipments that we expect to get delivered over the next two quarters. So this all should complete by the year-end. And just from an international standpoint for Pierce and for the ARFF truck lots of opportunities with our technology. The higher technology type trucks are having place in places around the globe, again because we do lead in technology and I think that's going to bode well for Pierce and the ARFF truck in the future.

That's great. Just to clarify Wilson the $40 million to China are those additional orders to come? Or is this stuff in the backlog that now you're going to be able to ship?

Yes, they're in the backlog they're built and they're working through these administrative bottlenecks. And like I said, we have cleared majority of those and believe those will be delivered over the next two quarters.

Great, very helpful. Thank you.

Thanks, Mig.

Our next question is from the line of Jamie Cook with Credit Suisse.

Hi, good morning. I guess a couple of questions. One, some other industrial companies that have reported so far noted a weak start to the year, and then trends improving in March and April. And I'm just wondering if you're seeing that in any of your businesses in particular with some of the weather issues that people had? And then my second question, understanding the Commercial segment had some issues in the quarter that were outside of your control, but I'm just trying to think about how we think about those margins longer term and the ability to get to the targeted range just given where you are in the simplification efforts as well as hiring a new COO I'm wondering if 2020 could be more of the breakout year for Commercial? Thank you.

Okay, Jamie I'll jump in on your question on weak start, and then I'll probably toss the Commercial margins to Dave. And then I'll circle back with you on the COO comment. From a weak start standpoint, we did see a little bit of that and really it was in those heavy weather areas. I think it affected both shipments and some of the orders. I wouldn't say it was anything significant for us, but there are some pockets where we had expected some orders, the shipment availability had to change again because of those inclement weather but I wouldn't say it was anything significant for us in the quarter. Dave you want to jump in on the Commercial part?

Sure. So, Jamie as it relates to the weather impact on the Commercial segment, we're looking at that really as a one-time compartmentalized event. I know the Commercial team is energized about bouncing back in fiscal 2020. So we do expect that that will occur. In terms of the longer term outlook for simplification, they were on a good I think trend in terms of making progress there. If you compare them to Fire & Emergency, it look Fire & Emergency a number of years to really get going on that. And in regards to whether that's the -- whether 2020s is the breakout year we're just getting into our planning for fiscal 2020. We'll continue through that through rest of the summer really. I know they have high aspirations for advancing that business. They've seen what can be done with simplification. I think they have lofty goals. But in terms of the cadence of that, we'll work on what that means for 2020 over the coming months.

And then on the COO question, Jamie just I know there’s been a few questions that Pat has fielded over that. If you go back to when I was promoted to the CEO role, I didn't replace myself. I wanted to spend that time to get to know the rest of the team in a good way and getting that alignment before we put that position in. And then when you take a step back and you look at where we are we've got a really good performing team here. And when you think about today, the speed of change is just going to get faster. And with our focus on the mega trends when you think about electrification, autonomy, Internet of Things, shared economy it's always good when you can add another really good brain I'll call it to the table. And that's what we've done here, John Pfeifer has done a lot of work around the mega trends. He’s been very successful in his previous roles, and so that's really about adding another really good strategic team member to a really good performing team. And that's basically the move we're making there. And it -- I think it will help us again divide and concur some things more that we really need to get after.

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

Thanks, Jamie.

Our next question is up from the line of Jerry Revich with Goldman Sachs.

Yes, hi, good morning, everyone, and nice quarter. I'm wondering if you could talk about the aerial work platform product line specifically, so sales were down 5% year-over-year this quarter. Dave, can you just talk about how you expect the cadence of production and deliveries to shape out over the course of the year? You mentioned lead times are still pretty attractive, but it sounds like the mix shift that you spoke about shifting to telehandlers is also a function of what looks like weaker demand in aerial. So can you just address that?

Yeah, sure Jerry. Just to confirm, are you asking specifically about the aerial work platforms within the Access Equipment segment or are you talking about the segment overall?

The product line, yeah, so the aerial work platform product line within the segment?

Yes, we do expect to see a healthier mix of aerial work platforms in the second half of the year as we said. And again I'll go back a little bit to what Wilson was talking about with telehandlers. Some of it relates to the strength you're seeing there year-over-year is what we were going through last year. Telehandler market is strong this year, but again, we were in the process of transitioning. The team has really responded to that well and executed well on that and that's a big part of what you're seeing with telehandlers. As it relates to the aerial work platforms, it's -- we're still hearing very positive things from our customers out there. I think they're being disciplined in terms of as they're looking at their fleets. But with the recent intake or information that we've heard from them in taking the topline up, we do expect that we're going to see that a little healthier second half of the year from an aerial work platforms standpoint.

And Dave is that a comment on a year-over-year basis? So, you're expecting year-over-year growth in the aerial work platform product line in the back half of the year? Or was that a sequential comment which would be in line with normal seasonality?

Well, it's more compared to what we saw in the first half and it's not necessarily normal seasonality-driven. It's -- if you look at the percentage of sales in the second half that are aerial work platforms versus the percentage of sales in the first half that were aerial work platforms, we're saying it's going to be a little bit of a -- we believe a little healthier mix. So, it kind of takes the seasonality out of it.

Jerry it's a move a little more towards the normal kind of two-thirds, one-third break aerials versus telehandlers. It's been richer towards telehandlers in the last couple of quarters. So, Dave is talking about is kind of getting more towards that normal ratio.

Okay. Thank you for the color. And in Pierce, you folks have performed extremely well. I'm wondering if you could talk about where your market share stands today and what's the incremental opportunity for you folks from here? Obviously you're executing well in what's a tougher market for some.

Well, Jerry, we want to be careful in tallying market share that kind of ebbs and flows in different quarters based on -- there may be a big order and keeping in mind that that's not a really large market in terms of units, but we're pleased with the progress. When we look at growing all of our companies, we really think about what are the best market segments that we can grow in where we can create the most value for the company. And that's what Pierce is doing. And they're focused on the segments where they can add that value that technology that our firefighters are looking for and they're that's how they've been growing some of the conquest accounts is adding that. The Fotokite that they introduced at FDIC the first situational awareness program that's in the fire service has been well received. And again another thing that we're doing in all of our companies is really looking at the ecosystem and how we can better support our customers with more than just a truck. So, they're on a good path. I'll stay away from the specific market share numbers, but you can see the order quarter they had and very healthy orders and again good work was done by their distribution channel which is the best distribution channel in the industry for the quarter.

Okay. Thank you.

Our next question is up from the line of Steven Fisher with UBS.

Thanks, good morning.

Steven.

You guys mentioned you expect a return to a more normal pattern of orders in access compared to some of the -- I guess accelerated ordering last year which is causing some of the decline in the order rate. So, I guess how should we think about what that means for the year-over-year orders in the balance here in the access segment?

Well, if you look back before 2018, the normal order pattern was around 55% to 58% in the first half and the remainder in the second half. So, 45% or so -- that was the normal cadence back in I'd say 2013, 2014, 2015 was a little different because we had the oil and gas got back to that it's 2016, 2017, and 2018 really an outlier where you had over 60% in the first half. So, that's what we're talking about. It appears that our customers are feeling more confident in our delivery times in our capabilities with the cadence we have now from an efficiency standpoint with the lack of supplier disruptions it's just a better place, less anxiety. And we're working closely with them on forecasting and looking into where they can get units and plan around all that. And so, it's allowed us to really increase our relationships with our customers. And again, it's working well now and the anxiety, majority of it, without the surcharge conversations, it's out of the equation now. So it's in a good spot. A normal spot is much better than that anxious spot that we were in last year.

So do you think that means, sort of, moderating declines in orders in the second half? Or do you think they could actually be up?

Well, I mean, we've forecasted where we think they're going to be. And again, that's from our customers and their hundreds of locations around the U.S. and what they're rolling up from their forecast standpoint. What we'll know in the next three months is how well the construction season is going. And when that group is robust and that leads into the high utilization rates on the aerials, which leads to the debate about more replacement needed. So I think the next three months will really help us understand how big it can be, especially going into 2020. I know that's a big question and one we're anxious to start working on it and getting better understanding of. But today, if you look at our -- whatever our forecast is, that's coming straight from our customer base and what they plan on ordering over the next four to five months.

Got it. And just quickly on Defense, just curious how quickly you think that margin could ramp back up to double-digit levels? Do you need to see some of those international orders in there or just the U.S. orders drive that? And is that thinking of second half of 2020 when you get back to those, the double-digit margins?

Steven, it's really a function more so of, what I would say, mix and historically we've done well internationally. So that certainly does play a component of that. We're -- the teams are continuing to work on the execution of the legacy programs domestically as well. There are opportunities there. But we're looking at a number of things and they're always trying to drive better margins in the segment. So we'll provide guidance on 2020 later this fiscal year.

Thank you very much.

Thanks.

Our next question is from the line of Chad Dillard with Deutsche Bank.

Hi. Good morning, everyone.

Good morning, Chad.

So I was hoping you could give a little more color on how access customers are phasing their order deliveries? I guess what I'm trying to understand is, how much of the excess backlog you have right now will be delivered in 2019 versus 2020 compared to the same time last year?

Chad I don't have the numbers broken out by quarter in front of me, but I would say the majority of the backlog that we currently have or had at the end of the March is for sales in -- yet, in this fiscal year, fiscal 2019. I know we did have some backlog in March already for fiscal 2020. I believe it was a little bit lower year-over-year than where it was last year at the end of March, but it didn't stick out as being meaningfully different.

Got it. And then, just switching over to Defense. So if the JLTV program cuts play out in line with kind of what the Presidential budget requests are, how should we think about the unit cost impact of this decision, just given that you might have to spend a little more development costs across fewer units? Is there any way to kind of help us with that potential sensitivity?

Well, let me just clarify a few things here Chad. And the Army has not reduced its acquisition objective, it's still 49,000 units. Actually the Marine Corp has raised their objective from 5,500 to 9,000. So let's put that in place and then if you look at what's happened is, they're mostly pushing some deliveries to the right in the FY 2020 budget. Keep in mind; we received an order for 6,100 JLTVs in November of 2018, which takes our JLTV backlog out to fiscal year 2021. So then if you put the other data point the FYDP, they're still close to 25,000 JLTVs in that FYDP through FY 2023. So there's a little bit of misunderstanding that this was a significant move and really in terms of units it's not very significant. The units remain in place, there's some that are flattening out there in 2021 but nothing imminent. So I know when we hear some of this information coming out of Washington D.C. we tend to grab it and so there's always a little bit better story than what you dig in and understand where we are and what the facts are. So I think from our perspective good program of record we're starting to fill the units. We're hearing good customer feedback. They are adding some modifications, but at this time that's really the only cost consideration going forward is that the three mods that they're making and pricing those into the new basically the new JLTV.

Got it. Thank you. That's helpful.

Thanks, Chad.

And our next question is up from the line of Ross Gilardi with Bank of America.

Hey, good morning, guys.

Hey, Ross.

I know there have been a lot questions on access, but I just want to understand a little bit better. I think your full year revenue guide implies that the second half is flat to down. And I'm just trying to reconcile that with the positive commentary coming out of the rental market the metrics and the market being reasonably tight? And then just along with that what do you think we are in the Access Equipment cycle right now?

So I'll start Ross, so you're right in terms of what it implies but I'll go back to what Wilson said a few minutes ago about we'll see where the next few months ago. Typically, this is a time of year as we go through the May, June, July time period where the rental companies if they're going to free up anymore of the incremental CapEx that's when we would expect to see it. I think we would acknowledge that based on the commentary could there be upside to these numbers? There could be. But I think we also want to just get through the next few months to see how everything plays out. And –

Yeah. And on the cycle Ross, we know us we're not big about coloring the next year, but I would tell you our long-term view hasn't changed. This is a good market and one that we believe is going to continue to grow. There maybe some ebbs and flows to it, but if you just look at the fundamentals non-res construction growing ISH forecast, The Dodge Momentum Index, the ABC Construction backlog. And then you plug-in what our customers are saying and our customer's – I mentioned it earlier on the call some of them have over thousand locations around North America. So I think they've got a pretty good pulse of what's going on. We like how things are going currently in Europe and then we noted that Asia Pacific is really adopting well our aerial work platforms. So we really like this business going forward. I think to call on the economy next year, we'll wait and hear more on that as we go here, but there's a lot to like here. And I talked to some people the other day and they were saying well it's got to slow down some in 2020. And actually – well, I'm not willing to agree with you yet, but if it does slow down a little bit look at where we are. I mean, this is a good place this market has never been where it is today. So if it does slow a little bit again, we're not saying it's going to, but if it did, it's still not a bad place to hang out. And then, if it grows going again. So that's kind of where we are in the cycle.

All right. And then just to one to ask on Defense. I couldn't tell from your comments if you were trying to temper expectations on the timing for Full Rate Production over the summer or if you feel like that's more likely to be pushed out. And then I think when you initially laid out the time line of JLT deliveries a couple of years ago the number was something like 3000 deliveries in 2019 going up to like 4,500 deliveries in 2020. Can you give us any sense as to whether or not those are still the right ballpark numbers or is the 2020 number likely to come in lower?

Yes, Ross the Full Rate Production we're optimistic about that and we believe that's going to happen in the next few months. Really what delayed it was the modifications that our customer decided to add, which are good mods. But as I mentioned too the fielding is going really well. We're getting these out with the Marines and with the Army and the feedback has been very positive. So it's – we're optimistic about the Full Rate Production here in the next few months. In terms of JLT deliveries I would say that, you're still on track the 3,000 to 4,500. What maybe adjusted a little bit in 2021 is it may stay at 4,500. Again there's still some discussions going on will that be 4,500 or 5,000. But that's where we are today on the delivery front.

Got it. Thanks, Wilson.

[Operator Instructions] Your next question is up from the line of Seth Weber with RBC.

Hey, good morning, guys.

Hey, good morning.

First question, I guess for Dave, the share buyback you kept it $350 million for this year. I mean, you're going to end the year pretty close to net debt neutral. Can you just talk about why you're not getting more aggressive with the buyback here? Are you saving some powder for acquisitions? Or is it just -- more just kind a mechanics you're waiting for the board meeting or something? Thanks.

Yes. So we put the $350 million target out there at the beginning of the year when we were projecting free cash flow of $450 million. At this time, we're sticking with that $450 million free cash flow number. So the way we looked at it is it's still in alignment with where we were as we entered the year. We'll certainly take a look at that as we develop our plans for fiscal 2020 later this summer. But at this time, I would still expect that $350 million is the target number for us for this year.

Would you say that you're increasing your -- the time that you're spending on M&A or that's not accurate?

No, this is -- I mean, it's not meant to be a statement as to how we are thinking about our overall capital allocation strategy. We're continuing to execute on that strategy as we always have. We talk about being opportunistic, whether it's returning cash to shareholders, whether it's looking at external opportunities. So I'd say, it's -- we're just kind of running the same as we always have and there is no secret messages hidden within that.

No, board meetings we're waiting on Seth.

Okay. Thanks. And then maybe just – sorry, going back to the -- some of your comments about the non-U.S. access markets, sound pretty good frankly. So I guess, can you give us any color on what you're seeing in -- any better color on what you're seeing in Europe? And is there anything that we should be cognizant of as far as margins by region U.S. versus international? Thanks.

I'll give you a little color on the markets, and I'll let Dave talk about the margins. When we say Europe is stable, it is stable, but we're always invoice forecasting large growth opportunities in Europe. I think we have pockets of opportunity with new customers, new products. So we like the market, it's been a foundational market for us over the years, and we'll continue to focus on that. Where we have really big opportunities, Seth, is Asia-Pacific. And where China, the business has been doubling basically year-over-year over the last few years and adoption curve is in full swing. It reminds me back to about 15 years ago, when escalators really got it going and hit the adoption curve with escalators and had a really nice run there for several years and that's what it's building up to now in China. And as we do well in China, it's opening up other opportunities in that region. And so we'll be pursuing those. Latin America was up, but again, it's coming up from a very small base, and we're not banking on a ton of growth in Latin America, but to increase a little bit year-over-year is a good step, and we'll continue to focus on those markets too.

And then Seth.

Okay. And…

Oh, I'm sorry, go ahead.

Yes, and I was just going to Dave, is there anything we should be thinking about as far as margin profile by region if it's just U.S. versus some of these other markets? Thanks.

Not significantly. I mean, obviously, we're able to leverage a little bit more of the infrastructure in the U.S. given the scale and the percentage of sales in that segment here. But otherwise now from a pricing standpoint, not a lot of difference from region-to-region.

Super. Okay. Thank you very much guys.

Thanks Seth.

Thank you. This concludes our question-and-answer session. I would like to turn the floor back to management for closing comments.

Thank you, operator. Thanks for joining us today everyone. We appreciate your interest in the Oshkosh Corporation, and look forward to speaking with you at a conference or on our next earnings call. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.