Oshkosh - Q2 2019

Transcript

Operator (participant)

Good evening, 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.

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad 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.

Patrick Davidson (SVP of Investor Relations)

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 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 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 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 (Former President and CEO)

Thank you, 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 a 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 deliver 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-$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 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 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 America 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 technologies 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, namely 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 five for a discussion of the Defense segment.

Our Defense team continued 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-requested 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 will still put cumulative awards at over 15,000 vehicles and the Future Years 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 variant at the winter AUSA event. The ambulance provides the best combination of protection and extreme off-road mobility and is able to get medics to and through challenging environments faster and safer than any other tactical wheeled vehicle.

Defense team continues to be very busy discussing the industry-leading capabilities of the 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 provide additional opportunities for us as a premier supplier for tactical wheeled vehicles to the U.S. Army and Marine Corps.

In fact, we're continuing our development work on the FMTV A2, which is a 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 six to the Fire and Emergency segment.

It was another solid quarter Fire and 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.

Elevated people costs, consuming a larger portion of municipal budgets, remains a challenge to accelerated 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 Stadium, is our new partnership with Fotokite.

The new Pierce Situational Awareness System by Fotokite is an actively tethered aerial device that greatly enhances management and command of a fire scene. This system is deployable from any fire apparatus and can be retrofitted onto apparatus currently in service.

This tool is the industry's only aerial situational awareness system that tethers to the fire apparatus and hardwires into the vehicle system, so there's no need for a pilot license or 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 seven, and we'll talk about our Commercial segment.

Like our other segments, Commercial started the year off on a strong note, building on their successes in 2018, driving an outlook that called for higher operating income on flat revenues. Unfortunately, Mother Nature beat up much of 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 late February, excessive snow and high winds during the blizzard combined to create 10- to 12-foot snow drifts, which caused a portion of a roof to collapse.

Unfortunately, there were no injuries, but part of the building was impacted and some manufacturing equipment was damaged, causing the facility to be shut down 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 is 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're 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. We will continue working closely with them in an effort to minimize the business 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 unexpected weather during what's been termed a polar vortex, but our team rallied and has grown stronger.

They 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.

David Sagehorn (Former CFO)

Thanks, Wilson, and good morning, everyone. Please turn to slide eight. 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 nine of the presentation.

Consolidated operating income, 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 ASC 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've previously discussed.

Fire and 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.

Fire and 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. The 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-$7.80 from our most recent estimate range of $7-$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-$4 billion, to a range of $3.95 billion-$4.05 billion, reflecting the continued historically strong backlog and positive outlooks that we are hearing from our Access equipment customers. We are also raising this segment's operating income margin estimates from a range of 10.75%-11.25%, to a range of 11.75%-12%.

The increase reflects the higher expected sales, a more favorable mix, and an improved cost profile. We are Fire and Emergency sales and operating income margin ranges to reflect expected additional sales volume in the year. 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 will 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.

We are refining the tax rate estimate to approximately 21%, increasing estimated capital expenditures by $10 million-$175 million, and reducing the assumed share count by 500,000-71 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 on sales growth in all segments except Commercial. I'll turn it back over to Wilson now for some closing comments.

Wilson Jones (Former President and CEO)

Thanks, Dave. Another strong quarter, and we're 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.

Patrick Davidson (SVP of Investor Relations)

Thanks, Wilson. I'd like to remind everybody, please limit your questions to 1+ 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 (participant)

Certainly. If you'd like to ask a question at this time, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue, and you may press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Again, that is star one to ask a question at this time. Our first question is from the line of Stephen Volkmann with Jefferies.

Stephen Volkmann (Senior Equity Analyst)

Hi, good morning, guys.

Wilson Jones (Former President and CEO)

Hey, Steve.

Stephen Volkmann (Senior Equity Analyst)

I'm wondering, a couple things, but, Dave, can we talk a little bit about just the cadence of the Defense margins? Obviously, the implied second half is, 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 high single digits when you get another order or is high single digits sort of the, the core run rate that you'd, encourage us to think about going forward?

David Sagehorn (Former CFO)

Yeah, so 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. As we made a comment on the prepared remarks, Steve, 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.

Stephen Volkmann (Senior Equity Analyst)

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

David Sagehorn (Former CFO)

One, you've got a little bit higher CapEx that we called out, guidance there, that's about $10 million of it. The rest is really just an assumption around the timing of the raise and how it's gonna flow through from a working capital standpoint, transition from sales to receivables and ultimately into cash.

As the quarter and the rest of... 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 to cash, but nothing other than, I would say, a timing assumption.

Stephen Volkmann (Senior Equity Analyst)

Great. I appreciate it.

David Sagehorn (Former CFO)

Thanks, Steve.

Wilson Jones (Former President and CEO)

Thanks, Steve.

Operator (participant)

Our next questions are from the line of Ann Duignan with J.P. Morgan.

Ann Duignan (Former Managing Director)

Hi, good morning.

Wilson Jones (Former President and CEO)

Hey, Ann.

David Sagehorn (Former CFO)

Hi, Ann.

Ann Duignan (Former Managing Director)

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

David Sagehorn (Former CFO)

Yeah, and the three main things there, so we, and we talked about them on the, in 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 than telehandlers.

So that's gonna be a little bit of a heavier benefit there. Then on the cost profile, 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-

Wilson Jones (Former President and CEO)

Less interruptions from our suppliers.

David Sagehorn (Former CFO)

Exactly. That has a pretty meaningful impact as well. So when I think about the three drivers, none really stands out as being overweighted versus the other three.

Ann Duignan (Former Managing Director)

I think, last quarter, you had called out, a negative mix for the year, towards telehandlers. Is that, is that correct and what changed, do you think, during the quarter?

David Sagehorn (Former CFO)

I think it's still gonna 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 gonna be more heavily weighted to the aerial work platforms.

Ann Duignan (Former Managing Director)

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

David Sagehorn (Former CFO)

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. Plate 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 moderation there late in the year.

Ann Duignan (Former Managing Director)

Okay. So everything's been equal, that should be a favorable impact for fiscal 2020?

Wilson Jones (Former President and CEO)

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

Ann Duignan (Former Managing Director)

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

Wilson Jones (Former President and CEO)

Thanks, Ann.

Operator (participant)

Our next questions are from the line of Mig Dobre with Robert W. Baird.

Mig Dobre (Senior Research Analyst)

Thank you, and good morning, guys. I want to go-

Wilson Jones (Former President and CEO)

Good.

Mig Dobre (Senior Research Analyst)

Hello, I want to go back to follow up on that telehandler comment. Maybe you can remind us what some of the drivers of telehandler demand, as far as you can tell, have been year-to-date. Obviously, aerials have not grown as much. How are you thinking about this business based on the visibility that you currently have?

Wilson Jones (Former President and CEO)

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, it jumped quicker than we thought.

So we were behind the curve, 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. So we got behind a little bit on telehandlers.

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 one of 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.

Mig Dobre (Senior Research Analyst)

Excellent, and on aerials?

Wilson Jones (Former President and CEO)

Well, I think Dave just mentioned, in working closely with our customers, what the communication has been up to this point is a little heavier aerial second half than first half. I think the outlook, you know, 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 I think it's important that we all understand that this time last year, there was a lot of stress and anxiety in the marketplace. You know, we were talking surcharges, which was, you know, price increases. We were talking 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. So the angst of pre-ordering and making sure that they have deliveries, I think the JLG team has done a nice job of really working with the customers on having that equipment available on a timely delivery basis.

Mig Dobre (Senior Research Analyst)

Excellent. 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? Then also, can you give us some perspective on international? You sounded a little bit better about that portion of the business.

Wilson Jones (Former President and CEO)

Fire and Emergency really had a record quarter for orders. A lot of good work has gone into that. Obviously, good team executing well, really selling the innovations that are proprietary to them. I think that's helping them gain new customers, some 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.

To our point, the market, we don't see it growing significantly, but it's at a good place and a place where, again, with their innovations, they're going to continue to do well. The question about ARFF, Aircraft 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 Aircraft Rescue Firefighting, that I think, again, will help them further themselves in the market. 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. You know, the higher technology-type trucks are having plays in places around the globe, again, because we do lead in technology. I think that's gonna bode well for Pierce and the ARFF truck in the future.

Mig Dobre (Senior Research Analyst)

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

Wilson Jones (Former President and CEO)

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

Mig Dobre (Senior Research Analyst)

Great. Very helpful. Thank you.

Wilson Jones (Former President and CEO)

Thanks, Mig.

Operator (participant)

Our next questions are from the line of Jamie Cook with Credit Suisse.

Jamie Cook (Former Managing Director)

Hi, good morning. I guess, a couple questions. One, some other industrial companies that have reported so far sort of noted a weak start to the year and then trends improving, you know, in March and April. 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.

Then my second question, you know, understanding, the Commercial segment had some, you know, 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 and sort of the simplification efforts, as well as, you know, hiring a new COO. I'm wondering if 2020 could be more of the breakout year for Commercial. Thank you.

Wilson Jones (Former President and CEO)

Okay, Jamie, I'll jump in on your question around 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 that 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 margin?

David Sagehorn (Former CFO)

Sure. So Jamie, as it relates to the weather impact on the Commercial segment, you know, we're looking at that really as kind of a one-time compartmentalized event. I know the Commercial team is energized about bouncing back in fiscal 2020. So, we do expect that will occur. In terms of the longer-term outlook with simplification, you know, they were on a good, I think, trend in terms of making progress there.

If you compare Fire and Emergency, you know, Fire and Emergency a number of years to really get going on that and in regards to whether that's whether 2020 is the breakout year, you know, we're just getting into our planning for fiscal 2020. We'll continue through that the 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, you know, we'll work on what that means for 2020 over the coming months.

Wilson Jones (Former President and CEO)

Then on the COO question, Jamie, just to... 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 gain that alignment before we put that position in.

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 gonna get faster.

With our focus on the mega trends, you know, 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. That's basically the move we're making there and I think it will help us again divide and conquer some things more that we really need to get after.

Jamie Cook (Former Managing Director)

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

Wilson Jones (Former President and CEO)

Thanks, Jamie.

Operator (participant)

Our next questions are from the line of Jerry Revich with Goldman Sachs.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Yes, hi, good morning, everyone, and nice quarter. I'm wondering if you could talk about the aerial work platform product line specifically. So the sales were down 5% year-over-year this quarter. 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?

David Sagehorn (Former CFO)

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?

Jerry Revich (Managing Director and Senior Equity Research Analyst)

The product line. Yeah, so the aerial work platform product line within the segment.

David Sagehorn (Former CFO)

Yeah, we do expect to see a healthier mix of aerial work platforms in the second half of the year, as we said. 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 why I think part of what you're seeing with telehandlers. As it relates to aerial work platforms, you know, 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 top line up, we do expect that we're gonna see that little healthier second half of the year from an aerial work platform standpoint.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

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, you know, would be in line with normal seasonality?

David Sagehorn (Former CFO)

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 gonna be a little bit of a, we believe, a little healthier mix. So it kind of takes the seasonality out of it.

Patrick Davidson (SVP of Investor Relations)

Jerry, it's a move a little more towards the normal, kind of 2/3, 1/3, right? Aerials versus telehandlers. It's been richer towards telehandlers the last couple of quarters. So you know, Dave's talking about is you know, kind of getting more towards that normal, normal ratio.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Okay. Thank you for the color. 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.

Wilson Jones (Former President and CEO)

Well, Jerry, we want to be careful in touting market share. You know, that, that kind of ebbs and flows in, in different quarters based on, you know, there may be a big order, and they're keeping in mind that that's not a, a really large, market in terms of units. But, we're, we're pleased with the progress.

You know, when we look at growing, all of our companies, we really think about where are the, 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. They're focused on the segments, where they can add that, that value, that, technology that our, our firefighters are looking for, and they're... That's how they've been growing some of the Conquest accounts is adding that.

You know, the Fotokite that they introduced at FDIC, the first situational awareness program that's in the fire service, has been well received. 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 being done by their distribution channel, which is the best distribution channel in the industry, for the quarter.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Our next questions are from the line of Steven Fisher with UBS.

Steven Fisher (Wall Street Analyst)

Thanks. Good morning.

Wilson Jones (Former President and CEO)

Steven.

Steven Fisher (Wall Street Analyst)

You guys, you guys mentioned that 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 of the year in the Access segment?

Wilson Jones (Former President and CEO)

Well, if you look back before 2018, the normal order pattern was around 55%-58% in the first half and the remainder in the second half. So 45 or so. 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. It got back to that cadence in 2016, 2017, and then 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.

You know, we're working closely with them on forecasting and looking into where they can get units and plan around all that. So it's allowed us to really increase our relationships with our customers. 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.

Steven Fisher (Wall Street Analyst)

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

Wilson Jones (Former President and CEO)

Well, I mean, we forecasted where we think they're going to be. Again, that's from our customers and their, you know, 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.

When that group is robust, then that leads, you know, to 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 and getting better understanding of. But today, if you look at our forecast, that's coming straight from our customer base and what they plan on ordering over the next 4-5 months.

Steven Fisher (Wall Street Analyst)

Got it. Just quickly on Defense, I'm 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? Is that, you know, thinking of second half of 2020 when you get back to those double-digit margins?

David Sagehorn (Former CFO)

Steven, it's really a function more so of what I would say mix and, you know, historically, we've done well internationally, so that certainly does play a component of that. The teams are continuing to work on the execution of the legacy programs domestically as well.

There are opportunities there. But, you know, we're, we're looking at a number of things, and they're always trying to drive better margins in the segment. So, you know, we'll provide guidance on 2020 later this fiscal year.

Steven Fisher (Wall Street Analyst)

Thank you very much.

David Sagehorn (Former CFO)

Thanks.

Operator (participant)

Our next questions are from the line of Chad Dillard with Deutsche Bank.

Chad Dillard (Former Director of Equity Research)

Hi, good morning, everyone.

Wilson Jones (Former President and CEO)

Morning, Chad.

David Sagehorn (Former CFO)

Morning.

Chad Dillard (Former Director of Equity Research)

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

David Sagehorn (Former CFO)

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 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.

Chad Dillard (Former Director of Equity Research)

Got it. 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, you know, just given, you know, that you might have to, you know, spread a little more development costs, or across, fewer units? Is there any way to kind of, you know, help us with, that potential sensitivity?

Wilson Jones (Former President and CEO)

Well, let me just clarify a few things here, Chad. You know, the Army has not reduced its acquisition objective. It's still 49,000 units. Actually, the Marine Corps has raised their objective from 5,500-9,000. So, let's set that in place. 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 look at the other data point, the FYDP, there's 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.