Oshkosh - Q1 2019
January 30, 2019
Transcript
Operator (participant)
Greetings, and welcome to the Oshkosh Corporation's Fiscal 2019 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
Patrick Davidson (SVP of Investor Relations)
Good morning, and thanks for joining us. Earlier today, we published our first 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 two 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 describe 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 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 three, and I'll turn it over to you, Wilson.
Wilson Jones (President and CEO)
Thanks, Pat. Good morning, everyone. We're pleased to announce another quarter of strong performance with $1.61 adjusted earnings per share, a 91.7% increase over the prior year quarter. A great way to start 2019, following a great year in 2018, where we achieved near-term highs in revenues, adjusted operating income, and adjusted earnings per share. Our team delivered impressive results in the quarter that reflected solid demand and strong customer metrics. Feedback from our customers regarding their businesses remains upbeat, in contrast to some of the stock market headlines and the predicted direction of the economy.
This positive customer sentiment drives our increased outlook for 2019, an outlook that is supported by our expectations for continued favorable end market demand, healthy backlogs across all four segments, and engaging in improving culture across the company that is motivating and energizing our team members. Our strong results this quarter were led by double-digit revenue gains in our Access Equipment and Fire & Emergency segments. More broadly, we delivered higher operating income and operating income margins in all four of our segments. As a result of our positive start to the year and improved outlook in our Access Equipment segment, we are raising our expectations for adjusted earnings per share for 2019 to a range of $7-$7.50. Dave will discuss our 2019 expectations in more detail in his section.
Please turn to slide four to begin a discussion for each of our business segments. I'll start it off, as I typically do, with the Access Equipment segment. Our Access Equipment team worked very hard to achieve revenue growth of more than 30% in the quarter, with sales up in all regions, led by higher telehandler sales in North America. If you recall, last year at this time, we reported orders for the first quarter of more than $1.7 billion, and throughout the year, we reminded you that we did not expect to surpass that figure in the first quarter of 2019. However, first quarter orders did exceed $1.5 billion, the second-highest quarter ever for bookings, reflecting continued strong demand for Access Equipment.
This segment has a backlog of $1.7 billion as we move into the second quarter of 2019, more than $100 million higher than last year, which we believe puts us on firm footing for the year. We continue to benefit from the strong rental market for Access Equipment in North America and most regions around the globe, as evidenced by the robust sales and orders in the quarter. Utilization rates, rental rates, and used equipment values all remain healthy, supporting the market conditions we are seeing in North America. The forecasts that we follow have broadly positive views on construction activity in 2019. We have overcome the staffing-related challenges we faced as we ramped production in 2018, and our team has made great progress as they strive to build the world's best Access Equipment.
Our workforce has stabilized, and the business has maintained the productivity gains we discussed on our last call. We are still experiencing periodic unplanned disruptions from some of our suppliers and will continue to combat those challenges. December brought the publication of new ANSI standards for aerial work platforms in the United States. The new standards will be effective for units built starting in December 2019. Many of our recently updated products are already compliant with the new ANSI standards, and we are confident that all of our products will be ready when the new standard is effective. For those of you who recall the transition to Tier 4 engine emission standards, we don't expect the costs or the market reaction to the new ANSI standards to be nearly as impactful as Tier 4 was. Finally, we are proud to be celebrating the fighting spirit innovative culture that John L. Grove started back in 1969.
When he commercialized the very first aerial work platform and really ignited a whole industry that has improved safety rates on job sites and has grown to become a multi-billion-dollar global industry. The JLG team has continued to innovate in the 50 years since the introduction of JLG Number One, and you will hear and see more examples of JLG innovation as we launch exciting new products and services over the next couple of years. Please turn to slide five for a discussion of the Defense segment. Defense team started the year off on the right foot when they received a $1.7 billion order for 6,100 JLTVs and a large number of associated kits. This order takes our JLTV backlog out to production through early 2021.
Our JLTV has been in low rate initial production, or LRIP, phase. It will stay in that mode until sometime later this spring or early summer. Previously, we expected the Joint Program Office to move the JLTV from LRIP to full rate production in our first quarter, but that has been pushed out a bit as we updated the design to address the U.S. military's request to add some content to the vehicles. We expect these changes to be finalized in the coming months and do not expect it to materially impact execution of the program. There could be some minor impact on the timing of international orders as the full rate production decision moves out, but international interest remains strong, and we don't view these modifications as negative to the long-term international opportunities for the program.
The Defense team continues to enhance productivity, with the most recent example being the opening of a fabrication facility in Jefferson City, Tennessee. This facility will eventually employ approximately 300 Oshkosh team members and supply fabrications to both our Defense and Access Equipment segments. The Tennessee facility opens up to a new labor market and can serve multiple segments. Finally, we've had a few questions regarding the recent federal government shutdown. We have not experienced any significant issues and do not anticipate any to our Defense programs. Let's turn to slide 6 to look at the Fire & Emergency segment. Fire & Emergency team delivered another quarter of year-over-year sales and margin growth as they continue their simplification efforts. As has been the case for the last several years, new products in the Ascendant class of aerials are proving to be very popular with fire departments.
Our view is that the domestic fire apparatus market remains healthy, as municipal tax receipts have continued to grow and aging fire apparatus fleets need to be addressed. There continue to be headwinds from people costs consuming a larger portion of municipal budgets, but the industry seems to have found its stride and grew at a solid pace in 2018. We are forecasting slightly higher market volumes in 2019. Please turn to slide seven, and we'll talk about our Commercial segment. Like our other segments, Commercial started the year off on a strong note and continues to put the building blocks in place for successful execution of their simplification initiatives. Their new business unit structure has been in place for about a year now, and we're seeing benefits already, but we expect even better results over time as their initiatives mature.
The refuse collection vehicle market continues to be attractive. The market for concrete mixers is not much different from last quarter, when we talked about a market that is cautious and that remains at levels below long-term averages. Multiple third-party projections for construction in 2019 support a favorable market outlook, but there's no doubt that the rising interest rates are impacting the housing market. Another factor for this segment is chassis availability. Chassis lead times have extended, and some of the chassis suppliers are experiencing problems delivering chassis on time. We don't expect it to be a material issue for the full year, but we do expect it to impact Q2. We are working closely with these suppliers to minimize the impact on the business.
Last week, at the annual World of Concrete trade show in Las Vegas, we introduced additional functionality for McNeilus concrete mixers with our innovative Flex Controls. These productivity-enhancing controls give operators additional data and greater control, so they can be more confident in the quality of the loads they are delivering, leading to higher customer satisfaction as well as improved safety. McNeilus is a leader in this category, and we continue to strengthen that leadership position with the greater support and functionality that these new tools offer. To sum it up, we continue to have opportunities in this segment. We have a team that is growing stronger, one that is hungry to drive continued improvements, that support our positive outlook for this segment for 2019. That wraps it up for our four business segments.
I'm going to turn it over to Dave to discuss our financials and outlook for 2019 in greater detail.
David Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. Please turn to slide 8. We're pleased to announce a good start to 2019. Consolidated net sales for the quarter were $1.8 billion, up 13.7% from the prior year quarter, led by a 31.6% increase in the Access Equipment segment. The sales growth in this segment reflected the continued favorable business conditions experienced by their rental fleet customers and improved production rates as the Access Equipment team was completing the move of North American telehandler production last year. Higher pricing to cover material cost increases also contributed to the higher sales.
Defense sales were down mid-single-digit percent versus the prior year, reflecting reflecting no international M-ATV sales this year, partially offset by higher JLTV sales as that program continues to ramp up production and an approximate $15 million impact from application of the new revenue recognition standard. We've added a new slide this quarter detailing the impact of applying the new revenue standard. Fire & Emergency sales increased 29% compared to the prior year. This increase included an approximate $26 million positive impact from the application of the new revenue recognition standard, and the benefits of some sales that slipped from the fourth quarter of 2018 into 2019, as noted on our last earnings call.
In Commercial segment, sales were 8% lower than the prior year due to a significantly lower mix of package units, where we sell both the third-party chassis and our body. In contrast to the lower sales dollars, unit volume was actually up versus the prior year. Consolidated operating income for the first quarter was $116.5 million, or 8.9% of sales, compared to adjusted operating income of $93.1 million, or 5.9% of sales in the prior year. Operating income margins increased 200 basis points or more in all four segments, although Defense's margin increase was due to applying the new revenue recognition standard. Access Equipment segment operating income more than doubled compared to the prior year quarter, reflecting the significantly higher sales level.
Price-cost was also slightly favorable as non-steel material inflation was less than expected in the quarter. Partially offsetting these positive items were a less favorable product mix in the prior year benefit of a bad debt reserve reversal. Defense segment operating income grew by nearly $6 million compared to the prior year, to 15.3% of sales on a 6% sales decline. Results for this segment include an approximate $19 million favorable impact related to the application of the new revenue recognition standard. We now expect the full-year operating income impact of applying the new standard to be immaterial to Defense segment earnings, implying that we expect a negative operating income impact from the new standard over the remaining three quarters of the year.
Fire & Emergency operating income and margin were up $14.6 million and 250 basis points, respectively, compared to the prior year. Higher sales volume was the main driver of the higher earnings, and application of the new revenue recognition standard favorably impacted Fire & Emergency operating income this quarter by $5.8 million. Commercial segment operating income increased to $7.9 million compared to the prior year adjusted amount, and this segment's operating income margin grew 390 basis points to 8.4%. Favorable mix, along with lower operating and warranty expenses, contributed to the higher operating income margin. Corporate expenses were $3 million lower than the prior year quarter due to lower share-based compensation costs and a decrease in post-retirement liabilities.
Adjusted earnings per share for the quarter was $1.61, compared to adjusted earnings per share of $0.84 in the prior year. Higher operating income was the largest contributor to the significantly higher results. The first quarter also benefited by $0.08 per share as a result of share repurchases completed in the last twelve months. We repurchased almost 2.6 million shares for $170 million in the quarter, or nearly half of our $350 million full-year share repurchase target. Please turn to slide 10 for a review of our updated expectations for 2019. We're pleased to be increasing our expectations for 2019 as a result of our positive start to the year and improved Access Equipment segment outlook. Expectations for the other segments remain unchanged from our last earnings call.
A reminder that our original expectations for the year, as well as these updated expectations, reflect the adoption and application of the new revenue recognition standard at the beginning of this fiscal year. Last quarter, we talked about a wider than normal estimate range for the Access Equipment segment. As we exited the quarter, we both narrowed and raised our segment sales and operating income margin estimate ranges. The new sales estimate range is $3.8 billion-$4 billion, an increase of $200 million on the low end of the range and $100 million on the high end. The new range reflects the strong order volume experienced in the quarter and the positive outlook JLG has continued to hear from its rental company customers.
The new operating income margin estimate range for the segment is 10.75%-11.25%. This represents an increase of 75 basis points from the previous low end of the range and 25 basis points from the high end. As a result of these changes, we are increasing our consolidated expectations as followed, follows: the new sales estimate range is $8.05 billion-$8.25 billion. The new operating income estimate range is $685 million-$735 million, an increase of $45 million on the low end and $25 million on the high end.
The new adjusted earnings per share estimate range is $7 to $7.50 per share, an increase of $0.50 per share on the low end and $0.25 on the high end. Our other expectations, including corporate expenses, adjusted tax rate, capital expenditures, free cash flow, and share count, remain unchanged. A few comments on the second quarter outlook. We expect modestly higher sales and flat to slightly higher earnings compared to the prior year quarter. There were several positive drivers to last year's second quarter earnings that we don't expect to repeat this year. We also expect the chassis availability issue that Wilson mentioned to impact Commercial segment second quarter results compared to the prior year. Overall, there will likely be some lumpiness in our quarters this year.
However, we are raising our full year expectations for adjusted earnings per share to be 10%-18% higher than 2018's adjusted results. Wilson, I'm going to turn it back over to you for some closing remarks.
Wilson Jones (President and CEO)
Thanks, Dave. We just announced a very strong start to 2019. We're going to continue working hard and smart to drive strong full year results for 2019 and value for our shareholders. I'm proud of our team and am 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.
Patrick Davidson (SVP of Investor Relations)
Thanks, Wilson. I'd like to remind everyone, 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, let's please begin the question-and-answer period of this call.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may redo, and those questions will be addressed, time permitting. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For those of you using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions. Thank you. Our first question comes from the line of Seth Weber with RBC. Please proceed with your question.
Seth Weber (Analyst)
Hey, guys, good morning. This is a question on Access margin. You know, coming off the strong first quarter, it looks like, you know, you're sort of suggesting that margins are gonna be flat or, you know, flat to down, you know, kind of flattish year-over-year for the balance of the year to hit the high end of your full-year target. So I'm wondering why margins wouldn't be better if you're kind of getting better price-cost and moving away from some of the manufacturing challenges that you had last year? First question. Thanks.
Wilson Jones (President and CEO)
Seth, a couple of things there. One, if you recall, last year, in the second quarter specifically, we did have several favorable adjustments. One was a customer that was on a deferral of profits, and they paid us off fully, so we recognized that as kind of a one-time item. We also had a bad debt reversal in the second quarter last year. So combined, those are probably $10 million-$12 million worth of drag year-over-year. The other thing that as we look at the outlook for the remainder of the year from a mix standpoint, we now believe we are gonna see a little heavier mix of telehandlers for the remainder of the year.
That, as you know, is a little different margin profile than the aerial work platform component.
Seth Weber (Analyst)
Okay. But I mean, I would think that the price cost is getting better here. I mean, can you just talk about where you are on price cost? Are you, you know, with the increases in the surcharges, do you feel like you're covering your higher material cost, your, you know, higher cost inflation at this point, materials, freight, things like that?
David Sagehorn (EVP and CFO)
Sure. So first quarter, we ended up a little better than we thought. And on steel specifically, we ended up right about where we thought we would. It was some of the non-steel items where we ended up a little better, and we think some of that is actually timing, and we'll see that start to come through in the second quarter. But overall, we still believe Q2 through Q4, we're gonna be largely at a cost neutral, net cost neutral between price and cost. You know, we've seen sheet steel come down or hot rolled coil come down, like everyone. But a couple items related to that.
One, there is a lag effect, so it's probably a five to six month lag before we start to see that flow through our income statement, just to the related to the way we buy. And then secondly, when we look at between sheet steel and plate, we actually use more plate than we do sheet, and plate steel has remained stubbornly high. That's as we looked at it recently, it's about 55% higher than it was as we entered into the beginning of fiscal 2018. So, if we do see some benefit and if sheet continues to stay at the levels it's at, we might see some benefit later in the year. But overall, our view is still, I would say, neutral from a cost-price standpoint in this segment.
Seth Weber (Analyst)
Okay, thanks. And then if I could just follow up with, Access revenue question. You're exiting the first quarter with backlog up, I think, about 8% year-over-year. You're only forecasting, I think, about 1% growth for the balance of the year for Access, to get to the high end of your range. So I'm just trying to tie those two numbers together. Thanks.
Wilson Jones (President and CEO)
Yeah, Seth, I'll jump in on that. You know, when we started the year, we shared that, you know, our concern about the year being flattish, possibly up a little bit. And the main reason we were cautious going into the year, as you well know, was the price-cost issue. We were coming out with one of the most significant price increases we've ever introduced into the Access market, and we knew those were gonna be tough negotiations. But I want to really let the market know how pleased we are with our teams and the good work that they've done, working closely with our rental customers and helping them understand our total cost of ownership model, and then the importance of supporting that, these costs are real.
So starting, going back to the previous call to where we are today, we're very pleased to have advanced where we are. Obviously, the $1.5 billion order quarter that was one that we weren't expecting to be that successful, but the team has done a really nice job. But where we are today, as you know, the seasonal slowdown, utilization will go down through the winter months. Just looked at our thermometer here in Oshkosh, it's -27 degrees Fahrenheit here today, so I'm guessing there's not gonna be a lot of AWPs rented in this area today. But what we're looking forward to is the upcoming ARA show as we start to see our customers preparing now for the spring construction season. That's where we'll, as you know, possibly be able to adjust our forecast going forward.
But what you're seeing today is what we know from our customers and what the expectation is for the back half. Obviously, we're gonna always work to improve that as we have in the previous years.
Seth Weber (Analyst)
Okay, no, I appreciate that, Will. It just seems like given the backlog and kind of the guide, it seems like there could be some conservatism in just the revenue outlook for Access, is all.
Wilson Jones (President and CEO)
Well, and we still have some negotiations going on. There, there's other customers that, you know, haven't come into the market yet, that are planning for the back half of the year. And as we progress with those, then, you know, the opportunity may be there. Again, hope's not a strategy, but we hope you're right, Seth, that there is some conservatism there.
Patrick Davidson (SVP of Investor Relations)
Thanks a lot, Seth.
Seth Weber (Analyst)
Thanks, Seth. Stay warm.
Operator (participant)
Our next question comes from the line of Charley Brady with SunTrust. Please proceed with your question.
Charles Brady (Managing Director)
Hey, thanks. Good morning, guys. Just on the commentary on Defense about the kind of push out to full rate production, is there any margin impact, positive margin impact from the design changes that you're having to incorporate for the DOD?
Wilson Jones (President and CEO)
No, Charley, there's no margin impact.
David Sagehorn (EVP and CFO)
So Charlie, what we'll do is we'll work with the DOD to finalize what new content they want added. That'll be a contract mod. We'll retrofit vehicles if they don't have that on currently, but we'll get paid for all that. We'll negotiate with the government what the pricing is for that content add.
Charles Brady (Managing Director)
Okay. But I guess what I'm saying is, I mean, was, were these changes anticipated or is this something new that's just coming from the DOD that wasn't in the original kind of planning when you're talking about what your margin expectation is for JLTV?
Wilson Jones (President and CEO)
Charlie, I would say this is a success you have with a Low Rate Initial Production, where the customer is testing the vehicles and really kind of really dialing in the design, tweaking it to perform best for our soldiers and marines. And so this is normal in a program to make these types of adjustments. And to Dave's point, it, it's good. We add content, and then we have retrofit opportunities also.
Charles Brady (Managing Director)
Okay, thanks. And just as a follow-up here on the, can you quantify a little bit more what the chassis impact could be on, on commercial, and if, if that pushes out beyond the second quarter impact? Thanks.
David Sagehorn (EVP and CFO)
Based on what we know now, Charlie, it's largely concentrated with one chassis OEM, and specifically on the Refuse product line. Based on what the team is telling us, in the quarter, you know, it's probably a low- to mid-single-digit million dollar impact on the quarter. We do expect to make up some of that in the later part of the year. There will be a little bit of disruption, but we do not expect it to significantly impact full year results.
Charles Brady (Managing Director)
Great. Thank you.
Patrick Davidson (SVP of Investor Relations)
Thanks, Charlie.
Operator (participant)
Our next question comes from the line of Thein Timothy with Citi. Please proceed with your question.
Timothy Thein (Analyst)
Thank you. Good morning, and we'll bet the Packers fans sitting at a table with you weren't complaining about the cold weather this morning.
Wilson Jones (President and CEO)
Somebody's got to do it, Tim.
Timothy Thein (Analyst)
Yeah, there you go. Hey, on the, just back, Dave, your comments on the implied incrementals for Access, I think the, some of the ramp-up costs last year were estimated to be, like $25 million. And back to your, you know, you mentioned earlier that the staffing-related challenges you think are largely behind you. So is that maybe didn't go to zero, but should we assume that that headwind largely reverses in, in, 2019?
David Sagehorn (EVP and CFO)
So we did call out some of those last year, Tim, and actually we moved some of those to non-GAAP because it was related to the overall restructuring program. But in general, we do not expect those to. We expect those largely to be behind us. We have continued to see, as we mentioned in the prepared remarks, a continuation of some supplier disruptions, although the magnitude and frequency of those has declined. But we do think we're going to see, continue to see a little bit of that, as we go through the remainder of the year as well.
Timothy Thein (Analyst)
Okay. And then on the free cash flow guidance, unchanged despite the $35 million increase to operating profits. Is it just a rounding or is there something offsetting that, working capital, et cetera? Or, what's weighing against that?
David Sagehorn (EVP and CFO)
More so just assumptions around the working capital timing as we exit the year.
Timothy Thein (Analyst)
Okay. Appreciate it. Thanks a lot.
Patrick Davidson (SVP of Investor Relations)
Thanks, Tim.
Operator (participant)
Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question.
Ann Duignan (Managing Director)
Hi, good morning. First question on Defense. I mean, the way that Defense contractors are going to make their money is when the government requests engineering changes. So why wouldn't you anticipate that, you know, the margin guidance is probably at the low end of where it could come out, given that the engineering changes will be on future content, but also retrofit?
David Sagehorn (EVP and CFO)
Ann, we're going to have to see how this all plays out in terms of the magnitude of the content at this time. While there are content changes, we don't expect it to be a significant quantity of changes. So when you scatter that or blend that in across the whole $6, you know, almost $7 billion-dollar program, we'll certainly look at it. But as we sit here today, we don't think it's probably going to be enough to significantly move the margin on the program.
Wilson Jones (President and CEO)
I think just to add to that, Ann, we're still working through our government customer is, you know, looking at the alternatives on some of these changes, and they're just not finalized yet at this point.
Ann Duignan (Managing Director)
Okay, I appreciate that. Then on Access, was any pull forward of deliveries on the telehandler side ahead of price increases? Then could you talk about how quickly you'll have to give up surcharges if steel prices decrease quickly to your large customers? Because your competitor increased list price as opposed to you did smaller list price plus surcharge. Just want to get a sense of how quickly you might have to give up those surcharges should steel prices regain that business come back down.
Wilson Jones (President and CEO)
Well, I'll address the pull forward, Ann. We don't believe there was a pull forward. If you remember, back in our Q1 last year, we were consolidating telehandler lines, and so we weren't in the market as well as we needed to be. So the uptick in our quarter, we believe was more related to having capacity, having availability of product. So, price increase wise, it doesn't appear there was a pull forward there. On the surcharges, I'll let Dave talk again about the lag effect we have on steel pricing and some of the other issues around materials.
David Sagehorn (EVP and CFO)
Yeah, Ann, as I mentioned earlier, and Wilson just alluded to it now, with the lag effect, it's probably five to six months before we see changes in the steel price start to pull through the P&L. And as we also mentioned, plate remains stubbornly high, and while sheet is down, it's still, I believe, about 15% above where it was when we began our fiscal 2018. So it's still elevated, although not as elevated as much as it was. And if we do see some benefit, we're probably talking fourth quarter of this year, and that's assuming that it continues to hold. And only time will tell on that. But obviously, the Access team will continue to watch where our costs are, and we'll continue to monitor that.
Ann Duignan (Managing Director)
Yeah, my question was more around how quickly you have to give up those surcharges back to your customers.
David Sagehorn (EVP and CFO)
It really depends, Ann, on where our price, where the costs end up. You know, we don't know yet, and I'm not sure that anybody knows if the sheet steel is gonna stay where it is? Is it gonna bounce back up again? It's something that the team monitors on a regular basis, and they're in contact, in discussions with their customers on a regular basis.
Wilson Jones (President and CEO)
Yeah, I would just add in there, too, Dave, that when you dial back in and our JLG team has done a nice job of explaining this and helping our customers understand. If you go back to 2015, 2016, where we had oil and gas, we had the tier changes, there's been some definite pricing erosion that we're still not caught up to that. And so from a price increase standpoint, I believe our customers understand the pricing needs to remain in place. But they will be, as steel does move, if it moves down far enough, we'll have those discussions, but at this point, it's still not down low enough to even consider from our standpoint.
Ann Duignan (Managing Director)
Okay, I appreciate the color. I'll get back to you. Thank you.
Operator (participant)
Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Stephen Volkmann (Analyst)
Great. Hi, good morning, guys. I just want to make sure I understood this right, and I think you've answered this, but all the orders that you took in this quarter had the higher price increase associated with them, correct?
Wilson Jones (President and CEO)
That is correct.
Stephen Volkmann (Analyst)
Okay, great. And then I know you said, Wilson, that it wasn't going to be nearly as big a deal, but what's your sense on what the price increase with the new ANSI regulation will be, just in rough terms?
Wilson Jones (President and CEO)
Well, what we've said, Steve, is significantly lower than the tier change. You know, the tier change was around $5,000 for emissions. And we've, again, we said significantly lower. It just varies by, if you think of a scissor, obviously, it's gonna be a higher increase on a scissor than versus an aerial work platform just because of content. But it's, it's really around safety and load sensing systems. There's some run flat tire that will go in without tipping, some stability testing that's added in. So it takes, again, we haven't put a price on it because a lot of those models we said have been introduced, and the pricing has been discussed with the customers on the ones that we have finished.
But the ones that are still in queue, those costs are still rolling out, and those discussions will go on with our customers as we complete the ANSI updates.
Stephen Volkmann (Analyst)
Okay, great. That's good color. I appreciate it. Then just finally, quickly on Fire & Emergency. As we look forward, is there going to be any impact that we should be picking up from this accounting change on the third or second, third, and fourth quarters?
David Sagehorn (EVP and CFO)
Yeah, there's a little bit, Steve. If you look at the schedule that we added to the slide deck, we show the Q1 impact and then the full year impact. So it's probably a couple million dollars yet. We think most of that will probably flow through here in the second quarter. And then after that, 606, we don't expect much of an impact at all in the Fire & Emergency segment going forward.
Stephen Volkmann (Analyst)
All right. Thank you, guys.
Patrick Davidson (SVP of Investor Relations)
Thanks, Stephen.
Operator (participant)
Our next question comes to the line of David Raso with Evercore. Please proceed with your question.
David Raso (Managing Director)
All right. Thank you. First, just a quick modeling question. The Defense business, the $18 million giveback from the accounting change for the rest of the year to get to your full-year impact total. Maybe I missed it, I apologize. What's the cadence of that, of that $18 million giveback over the next couple of quarters?
David Sagehorn (EVP and CFO)
It's gonna be more heavily weighted, David, to the fourth quarter. I think you'll see some, a little bit in the third quarter, but mostly in the fourth quarter.
David Raso (Managing Director)
All right, that's helpful. On Access, the sales guide increased $150 million midpoints. Was that largely all telehandlers, or was there other new sales, aerials?
David Sagehorn (EVP and CFO)
It was more weighted to help the telehandlers, David, but it was not exclusively telehandlers.
David Raso (Managing Director)
So was it also new sales of, of aerials, or was it?
David Sagehorn (EVP and CFO)
It was everything.
It was everything.
David Raso (Managing Director)
Just, just broad?
David Sagehorn (EVP and CFO)
Yeah.
Patrick Davidson (SVP of Investor Relations)
David, remember in the press release, we had that breakout, right? Telehandlers and aerials. So at least that should give you some indication.
David Raso (Managing Director)
But on the guide, you don't give the
Patrick Davidson (SVP of Investor Relations)
Correct.
David Raso (Managing Director)
The guidance increase. To that point, Pat, I will say, if you told me telehandlers were going to be up 100% in the quarter and aerials only at 4%, I would have guessed a lower margin. So I was kind of impressed with the margin being that high with what is, at least historically, a pretty negative mix. I know you're not going to divulge this exactly, but can you give us some sense of the run rate right now between the margin differential between teles and aerials? Because again, I thought the margins were a little higher than I would have thought with a negative mix like that.
David Sagehorn (EVP and CFO)
It's enough for us to tell you, David, that there is a difference there, and that's as far as we're going to go.
David Raso (Managing Director)
I appreciate that. Okay, thank you very much.
David Sagehorn (EVP and CFO)
Thanks, David.
Operator (participant)
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook (Managing Director)
Hi, good morning. Nice quarter. Sorry, back to Access again, you know, the strong orders that you saw in the quarter. Can you just talk about what you saw geographically in the U.S. and then sort of U.S. versus Europe, as well as sort of the customers, sort of the larger rental customers versus smaller ones? And then if you could talk about sort of lead times on teles, booms, that would be helpful. Thank you.
Wilson Jones (President and CEO)
Yeah, I would say it was a kind of a broad mix of customers, Jamie, and geographically, too. We were up in all regions around the globe. North America and Pacific Rim were up the most. But Europe was up a little bit in Latin America and up some in Australia, which was nice to see. The mix of customers, I would say, obviously, the NRCs were heavier on the order side. That's normal when we do our annual purchase agreement, but we had good activity with the IRCs also.
So, you know, going back to where we were when we started this quarter to where we are today, we're just pleased with the progress we've made, the pricing discipline that our team has been working with, and the good discussions that we've had with our rental customers. I think it's been a very productive quarter for discussions with customers, and not just North America, but around the globe, and it shows in our orders. So we're pleased with that. Second question?
Jamie Cook (Managing Director)
So sorry. So one, I was just wondering about lead times across the different product lines, how extended they are. And then my other question is, based on the conversations that you're having with customers, is there any reason to believe that, how do you see the cadence of orders for the remainder of the year? Is there any reason why normal seasonality would pull through, or are customers starting to get worried that, you know, orders in the fourth quarter, which generally are seasonally weaker, could be stronger because of concerns about lead times, et cetera? Thanks.
Wilson Jones (President and CEO)
The lead times, as you'd expect with the large telehandler order that we've been receiving, is they're out about 5-6 months on some models. The rest of our booms, our scissors, they're all within about a 30-45-day window, which is, you know, very expected in the marketplace today. So, other than telehandlers, we're in a good spot from a delivery standpoint. As far as the back half of the year and what customers are saying, we're not hearing anything at this time that's troubling. But we're certainly looking forward to the ARA show next month, and obviously, as our customers navigate through the winter, what that's going to mean coming out for spring construction.
It's, it's just early for us to call what, what Q3 or Q4 are going to be where we sit today. But we'll know, we'll know in the next call and be able to model that better for you.
Jamie Cook (Managing Director)
Okay, I appreciate the color. Thank you.
Operator (participant)
Our next question comes from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.
Chad Dillard (Analyst)
Hi, good morning, guys.
Wilson Jones (President and CEO)
Morning.
Chad Dillard (Analyst)
So, just a question for you, again. So ex-rev rec, you raised the full year by $0.10, about 2%, and beat by $0.30. Can you just kind of explain the differential? Is it the conservatism? Are you seeing maybe some incremental weakness in the second half? Any color on that would be super helpful.
David Sagehorn (EVP and CFO)
Well, I believe the best place to start, Chad, is we didn't provide a quantitative guide for our Q1.
So the beat is, I think, versus the collective Street's view. And we looked at where we were coming in for Access, how the orders came in, as Wilson said. We're pleased with how those orders came in. We looked at the mix, we looked at, you know, what else is going on in the business, and, and that just was kind of a bottoms-up approach to how we looked at adjusting the margin. We tightened it, the range for Access and raised it, and it was just, I would say, a natural evolution of how we saw the quarter play out, as well as the orders in the quarter for delivery in the remainder of the year here.
Chad Dillard (Analyst)
That's helpful. And then your Access guidance on the top line implies about 3% growth versus the previous year was flat. Can you just walk us through how much of this increase are you seeing from just better price realization versus incremental volume growth?
David Sagehorn (EVP and CFO)
Well, I think you're aware of the surcharges and price increase that we came out with. When we look at the top line overall, what that would imply is pricing is certainly a major component to that. Volume overall, underlying volume is, I would say, on the high end up a little. But certainly pricing is a component to that.
Chad Dillard (Analyst)
Thanks very much.
David Sagehorn (EVP and CFO)
Thanks.
Operator (participant)
Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.
Mircea Dobre (Analyst)
Yes, good morning, guys. Wilson, sorry to beat this dead horse. I just want to make sure that I'm, that I'm clear on this. In terms of how your pricing works in fiscal 2019, are, are the orders that, that customers are placing in, say, January of, of 2019 priced differently than the orders that were placed in November or December of 2018? Or is pricing consistent from your Q1 fiscal 2019 to your Q2 fiscal 2019 and the rest of the year?
David Sagehorn (EVP and CFO)
It's Dave. I'll take that. Pricing is all based around timing of delivery. So anything after March of last year would have had the surcharge associated, and we're talking Access segment specifically here. And then as it relates-
Mircea Dobre (Analyst)
Any order or the backlog.
David Sagehorn (EVP and CFO)
Any order, yes. And then as it relates to the permanent price increase that was effective for deliveries on January one, that was announced in, I think, September timeframe. So any orders for delivery starting January one, whether it was placed in October, November, December or January, would all be at the same pricing.
Mircea Dobre (Analyst)
That's really helpful. Thank you. Then, I also want to ask a question about this other component of your Access Equipment segment. Growth there has been quite good, especially in a quarter. Can you maybe talk a little bit about all the elements that you have in there? I know there's Jerr-Dan, you've got some aftermarket, you've got some other things that you're selling. What's going on with this portion of the business, and kind of what's embedded in the full year outlook?
David Sagehorn (EVP and CFO)
Jerr-Dan is probably the area, Mig, where we saw the biggest growth. You know, that's really been a success story for us, and we don't, you know, highlight that a lot. But the team has done a very good job there. And I wouldn't say necessarily that the weather we're experiencing was a big driver of that, but weather conditions like this certainly are conducive to continued strong demand for towing and recovery equipment. But that's probably the biggest mover year over year.
Wilson Jones (President and CEO)
Used equipment is in there as well, Mig, right? So you got aftermarket, Jerr-Dan, as Dave said, and used equipment. You know, I think you've heard from some of our customers, the used equipment market is strong.
Mircea Dobre (Analyst)
Right. And if you can humor me with one more on Jerr-Dan, can you maybe size this, this business for us? And I'm wondering, how does this business compare, rather in terms of cycle, with what we would normally see in, say, Class 8 truck orders?
David Sagehorn (EVP and CFO)
It's less than 10% of the segment revenue.
Mircea Dobre (Analyst)
Okay.
David Sagehorn (EVP and CFO)
And as it relates to the cycle, we don't see a strong correlation between demand for towing equipment and the what we see for the overall Class 8 market. You know, if you look at vehicles on the highway today, there certainly are more passenger vehicles than there are Class 8, and that's probably as big or bigger of a driver of demand for towing and recovery equipment.
Mircea Dobre (Analyst)
Understood. Thank you, guys. Appreciate it.
David Sagehorn (EVP and CFO)
Thank you, Mig.
Patrick Davidson (SVP of Investor Relations)
Thanks.
Operator (participant)
We have a question come to the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich (Analyst)
Yes. Hi, good morning, everyone. Nice quarter. I'm wondering if you could talk about your telehandler business. So last year, you folks had record sales, and it sounds like with production constraints, how much market share do you think your business for telehandlers has gained cycle over cycle? And then, I think normal seasonality is for telehandler sales to be up, you know, 35% or so, fiscal 2Q versus fiscal 1Q. And I'm wondering, is that how we should be thinking about the cadence, you know, for this year as well?
David Sagehorn (EVP and CFO)
Jerry, just in terms of to dial back to last year, you recall, we were going through the process of moving production of telehandlers in North America, and that, that did impact the output or production levels in that product line. We probably lost some share there last year. I think what you're seeing this year is a very nice rebound in terms of the teams getting back up to speed in terms of their cadence from a production standpoint. And I haven't seen market share information, but I would assume that we've had some recovery, probably back to more normalized levels from a market share standpoint.
As it relates to the cadence sequentially, you know, we don't break it out by quantitatively in terms of what we're expecting from any of the segments, or, or the product lines. But generally, as you know, the second quarter is typically a stronger quarter sequentially than the first quarters, and, and I don't expect that to be any different this year.
Jerry Revich (Analyst)
And just in terms of the really strong growth year-over-year we saw this quarter, what would you characterize that, any of that as catching up? Or were you folks effectively shipping to demand? And obviously, we'll see how 2Q and 3Q shape up. But I'm just trying to understand, were there any one-offs in terms of just catching up following the production move that really benefited the quarter?
David Sagehorn (EVP and CFO)
No, that, you know, we were impacted. That was really a year ago, and the cadence improved as we went throughout the year. So, you know, our customers wouldn't wait nine to 12 months for us to catch up and get them their units. So really, we were shipping to demand in the first quarter. Yeah.
Jerry Revich (Analyst)
Okay. Thank you. And in Fire & Emergency, you know, you folks are performing really well in a tough environment. Can you just talk about where you have prospects for share gains, over the balance of the year? How has the quoting process been? You mentioned you expected the market to be flattish up a little bit. Are you folks optimistic on the share side for you?
Wilson Jones (President and CEO)
Yeah, Jerry, I think the Fire & Emergency story is a good story. We appreciate your compliment there. The team is focused and working very close with the dealer channel. We have the best distribution channel in the fire industry by far, and they work very close together. They partner with the pricing discipline in the marketplace. So I say that to say that there are some low price competitors in the market, and we're going to make sure that when we do grow share, we grow it profitably. And we certainly have good plans around the Ascendant aerial that we've delivered, and the prospects there continue to grow. And that's what we're gonna focus on, is the total cost of ownership model and really driving profitable market share.
So we see opportunities there. Again, a lot of it's through some of the intellectual property that we have, patent-protected products that, you know, we write the spec, and that's what the customer wants, and they pay for that value of that patented product.
Jerry Revich (Analyst)
Okay, I appreciate it. Thank you.
Patrick Davidson (SVP of Investor Relations)
Thanks, Jerry.
Operator (participant)
Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch. Please proceed with your question.
Ross Gilardi (Analyst)
Thanks. Good morning. Thanks for fitting me in.
Wilson Jones (President and CEO)
Hey, Ross.
Ross Gilardi (Analyst)
Dave, I had a question on the cash flow. In the first quarter, it looked weak, and so therefore, you know, the full year seems fairly, you know, back-end loaded. Is that tied to AWP inventory build or something in the Defense segment?
David Sagehorn (EVP and CFO)
The biggest thing versus. It was a little more than we expected, and the biggest driver of that was we actually saw a slowdown in the payment cadence from our U.S. government customer in Defense. And that was a little unexpected for us, and actually saw one of the larger Defense primes yesterday call that out as well. So it seems to be something that multiple companies are experiencing. That was the biggest driver. Hopefully, that gets rectified as we get to the second and third quarters here.
Ross Gilardi (Analyst)
Do you have any color on, like, why that is the case or what's actually going on there?
David Sagehorn (EVP and CFO)
What we understand is, they're referring to increased volume of invoices to process, and I don't have any more color than that.
Wilson Jones (President and CEO)
Again, so they were working during the shutdown. They weren't. This wasn't a shutdown issue, Ross. They were working during the shutdown, so it's, they're essential. So it's not related to the government shutdown.
Ross Gilardi (Analyst)
Just when you guys think about your cash flow, you know, more in the out years, and obviously you're experiencing a very strong cash flow year this year, is there any reason to think that your cash conversion would change materially from where it is in fiscal 2019, you know, out in 2020 and 2021? Not asking for guidance, but just more like directional views on cash conversion.
David Sagehorn (EVP and CFO)
Yeah. So, Ross, what I would call our going-in view is that over the course of a cycle, we believe our cash conversion should be, call it 100%. But we do and historically have seen and likely would continue to see in the future, some lumpiness from year to year, and that's largely driven by when we get involved in some of these larger international programs, that tends to drive some swings in working capital that would be not typical for us.
Ross Gilardi (Analyst)
Okay, gotcha. And just the last thing I want to ask you, more of a kind of a housekeeping thing, but the top of your operating profit guide, it seems to imply a higher than $7.50 EPS by about 10-15 cents. I mean, is there a big other expense line item baked in your numbers? And if so, what's that for? Or, you know, is interest expense for some reason go up over the balance of the year or income from affiliates?
David Sagehorn (EVP and CFO)
We don't think so. When we ran the numbers or put the model together internally, you know, we come up to the $7.50. So maybe Pat can.
Wilson Jones (President and CEO)
Take that offline.
David Sagehorn (EVP and CFO)
Take that offline with you.
Patrick Davidson (SVP of Investor Relations)
Okay.
David Sagehorn (EVP and CFO)
Figure out what might be driving that difference.
Ross Gilardi (Analyst)
Okay, great. I'll follow up there. Thank you.
Patrick Davidson (SVP of Investor Relations)
Thanks, Ross.
Operator (participant)
Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Stanley Elliott (Analyst)
Good morning, guys. Thank you for fitting me in. Quick question on the Defense business. You know, of the 6,100 units, are you seeing anything in terms of expansion of product scope or the mission scope, like, we've talked about for additional units in the past? Or is this more what you're referring to in terms of kit or just more of minor modifications?
David Sagehorn (EVP and CFO)
What was that? Stanley, when you say kits, are you talking about the content changes that we, that we referenced?
Stanley Elliott (Analyst)
Yeah, well, I thought you said in terms of some adjustments on the kits, and I guess my guess is that's probably more on the content modifications before you get to the full rig portion.
Wilson Jones (President and CEO)
In the prepared remarks, we talked about the 6,100 units with associated kits.
No real change, Stanley, to what we've been doing with our government customer. That's the normal case. They have associated kits that come in with the orders. Where the changes will come in is if, you know, they make some adjustments here to the current specification, the content will change with additional content, and then we talked about retrofitting the units that have been delivered with that new content.
Stanley Elliott (Analyst)
Perfect. And then switching gears, you'd mentioned that cautious approach on some of the concrete placement vehicles. Do you, you know, the numbers you're seeing on kind of a year-over-year basis, is that more, seasonal what we'd expect, and we'd expect that business to pick back up, or is that reflective of the cost? Just trying to get a little more color there, if I could.
David Sagehorn (EVP and CFO)
Actually, unit volume was up a little bit in the quarter, Stanley. The sales dollars were down because of the lower package units. And just a reminder on that, a package is when we sell a third-party chassis along with our body. So we saw a mix in the quarter of more just body-only sales,
Wilson Jones (President and CEO)
Customer supplied chassis.
David Sagehorn (EVP and CFO)
Customer-supplied chassis, and that is negative from a top-line sales standpoint, but actually from a margin standpoint is a positive thing. But overall, as we said, we continue to see in general a cautious concrete mixer market, and I don't think we saw anything really in the quarter from a cadence standpoint that would lead us to conclude anything differently.
Stanley Elliott (Analyst)
Perfect. Thank you very much for the time, and, stay warm.
Patrick Davidson (SVP of Investor Relations)
Thanks.
Operator (participant)
Thank you. Our final question comes from the line of Courtney Yakavonis with Morgan Stanley. Please proceed with your question.
Speaker 16
Hey, guys, good morning. This is Dylan coming on for Courtney. Maybe just going back to your order book and Access real quick. You know, I understand your oil and gas exposure is a bit more limited, but still index on the telehandler side, and so you guys seem more positive on that piece of the segment. So anything kind of notable you guys would call out in terms of what you're seeing on the ground to suggest that maybe those markets are actually holding in a bit better despite all the oil price volatility?
Wilson Jones (President and CEO)
Yeah, rig count is up. I think it's up to approximately 1,100 now. If you dial back to May, we were down around 400. So, as far as oil and gas, it's positive. We have said in the past that oil and gas is important, but it's not a significant driver of our products. On a normal rig, you might see one telehandler and one aerial work platform. So it's not a big driver, but we do watch it because it's a metric that does play into our rental customers' outlook.
Speaker 16
Okay, that's helpful. And then, maybe just sitting on the margin side there, thinking about your kind of labor and manufacturing capacity plans in that segment, you know, if we kind of end up seeing Access sales at the high end or even above your guidance range, you know, how much slack are you kind of seeing in the supply chain? And how much flexibility do you think you have in terms of, you know, both manufacturing capacity and maybe putting in some extra shifts if you have to?
Wilson Jones (President and CEO)
Well, we have capacity. Both plants are running two shifts, some three, but we have capacity to run up. What's helped increase our capacity this year, Dylan, and through the last year, was getting our 600 team members up to speed that was brought on in the ramp-up early last year. So that's obviously increased capacity for us, too. Another add was opening up a facility in Jefferson City, Tennessee, recently. That's going to add fab and weld capacity to labor markets. It's a good labor market with skilled labor, and that's going to support both Access and Defense. So capacity is not an issue for us.
The supplier question that you asked there, that there's always concern when we're ramping up a supplier, and our supplier quality teams are discouraged and working closely with suppliers to help them with the ramp. The key there, just like for us, for them, too, Access to skilled labor. And labor, the labor market's very tight around the country. Another reason we've spread out a little bit in Tennessee. There is labor available there, and I would anticipate some of our bigger suppliers will be doing some of the same things, and actually some of them already have. So, key as you do ramp up, obviously, is to make sure your suppliers can ramp up with you, and we've certainly got a strategy around that.
Speaker 16
Great. Appreciate the time, guys.
Wilson Jones (President and CEO)
Thank you.
Operator (participant)
Thank you. We have reached the end of the question and answer session. I would now turn the floor back over to management for closing comments.
Wilson Jones (President and CEO)
Thank you, operator. Thanks to all for joining us today. 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 great day.
Operator (participant)
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.