Oshkosh - Q3 2019

Transcript

Operator (participant)

Greetings, and welcome to Oshkosh Corporation Reports Fiscal 2019 Third Quarter Results. At this time, all participants are on a listen-only mode. A 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, Patrick 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 third 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 a year are to a 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)

Thank you, Pat. Good morning, everyone. Before we get started, I want to point out our new Oshkosh logo. You're seeing it on our slides and now available on our website. We made the update to a more current logo that reflects strength, advancement, and the commitment to success that customers, team members, and shareholders have come to expect from the Oshkosh Corporation. Along with this, we're pleased to announce strong third quarter results, highlighted by revenue growth of 10%, adjusted operating income growth of 12%, and adjusted earnings per share growth of nearly 24% compared to the prior year. I'm proud of the overall execution by our Oshkosh team members, which allowed us to report these strong results today. It's clear that the benefits of our people-first culture, MOVE strategy, and simplification initiatives have contributed to our success and will continue to do so going forward.

Looking more broadly, we see some mixed economic signals. The economy is still growing, but U.S. PMI and industrial production are below previous levels. And although residential construction is down, non-residential construction, which is a more important business driver for us, has remained solid. We continue to have a positive long-term outlook for our businesses, and we are staying close to our customers to understand how they are thinking about their businesses and outlook for capital expenditures in 2020. Strong backlogs and stable outlooks for our Fire and Emergency and Defense segments continue to provide stability to our consolidated outlook. As a result of our strong execution and improved margin expectations, we are raising our adjusted earnings per share outlook for 2019 to a range of $7.90-$8.10.

Dave will discuss our updated 2019 expectations in more detail. Please turn to slide four to begin a discussion for each of our business segments. I'll start off, as I typically do, with the Access Equipment segment. Our Access Equipment team delivered strong results this quarter, with record quarterly sales led by growth in North America and Asia-Pacific. As we've been talking about for a while now, the Asia-Pacific Access Equipment market has continued to grow at a robust double-digit pace. Product adoption, driven by both increased safety requirements and demonstrated productivity enhancements, has driven increased demand for this equipment. Last quarter, we talked about supply chain stabilization as well as ongoing improvements in operational efficiency. We saw further improvements in this area this quarter. Our supply chain partners continued to increase their on-time deliveries, resulting in less expedited freight and smoother production flow.

These improvements enabled the Access Equipment segment to deliver the strong results we are reporting this morning and put us in a stronger position operationally as we head into the final quarter of the year. We did see some order moderation in this segment during the quarter, mostly in the U.S. and Europe. The order rate in the Asia-Pacific region remains strong. We believe weather played a role in our order volume this quarter, as many regions of the U.S. experienced record rainfall and flooding. Overall, we believe our rental company customers in the U.S. and Europe remain upbeat about their businesses, and the global access equipment market is at record levels. After generally growing their fleets over the last several years, we believe these customers may not be as aggressive with their equipment purchases in the near term.

We aren't providing a formal outlook for 2020 today, but we believe the Access Equipment markets in North America and Europe could be down modestly in 2020 before seeing increased replacement demand in 2021. Please turn to slide five for a discussion of the Defense segment. Our Defense team remains busy with three primary programs of record: the JLTV, FHTV, and FMTV. The team received some great news late in the quarter when the Army announced that it was moving the JLTV from low rate initial production to full rate production. This was expected but still very gratifying for our team as we move into the next phase of the program. Configuration changes developed during the testing phase of the program will be phased into production over the next few months.

JLTVs are being fielded with Army and Marine units, and the feedback our Defense team continues to receive from the users is exceedingly positive. They are consistently impressed at how much more capable the JLTV is compared to their current tactical wheeled vehicles. Work on the FMTV A2 program also continued during the quarter. The current FMTV program will be winding down over the next two years, and we are working on ramping up the successor program, FMTV A2. The A2 program will deliver FMTV variants that are superior to the current offerings. We expect to build and deliver production quantities of the new FMTVs from 2021 through 2026. Over the last decade or so, most U.S. federal government budget deliberations have been contentious and have taken a lengthy amount of time to be signed into law.

This year has been no different, as a continuing resolution was looking very likely until the agreement on a two-year budget deal was announced last week. We are encouraged by the amounts included in the agreement for the DoD budget. If this agreement does not translate to a finalized budget by September 30, and a continuing resolution is enacted, we will still be in a solid position for 2020 due to the extensive backlog that we already have in place. Let's turn to slide six to discuss the Fire and Emergency segment. The story in our Fire and Emergency segment is similar to the prior quarter: strong execution and strong financial results. The team delivered another record quarter as they executed their strategy, including continuing their simplification activities. Sales were up across the board, with increases in both domestic and international deliveries.

The administrative bottlenecks experienced early in the year with international sales appear to be behind us. International sales in the quarter were paced by multiple deliveries of Pierce fire trucks to China and airport rescue firefighting vehicles to Egypt. Orders were down modestly in the quarter, but remain up year to date, and the backlog is strong. We continue to expect the fire truck market in North America to be up slightly in 2019. Our long-term view continues to be positive, with expected modest growth as fire truck fleet ages remain elevated. I'd like to take a moment to thank our Fire and Emergency dealers this quarter. Most of you know they are an important part of our success. We believe we have the strongest dealer network in the industry and have seen them continue to invest in their businesses.

Over the past 18 months, we've seen 12 dealers either add to or begin constructing new service facilities, reflecting their confidence in their businesses, the Pierce brand, and the fire apparatus market. Please turn to slide seven, and we'll talk about our Commercial segment. The team at Commercial continued to recover this quarter from a partial roof collapse in a factory due to extreme weather during the second quarter. Damaged equipment has been replaced, and permanent repairs to the structure will begin soon. They are not back to where they were from a production standpoint, but they are making good progress. Orders and backlog in the segment this quarter were lower than last year, but they remain in line with or above longer-term averages. Backlog for refuse collection vehicles and IMT product lines remain near all-time highs.

The commercial team is focused on the segments of their markets that best align to their simplification and pricing strategies. We are excited for the upcoming market launch of the newly redesigned Oshkosh S-Series Front Discharge Mixer. In June, we hosted a select group of customers to showcase the updated version of this model. The new S-Series will deliver meaningful performance upgrades in critical areas and will include our industry-leading FLEX Control system, which was previously only available on our rear discharge mixers. Initial customer feedback has been very positive. We are running demos of the new design and are beginning to take orders, with production scheduled to begin later this calendar year. 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.

Dave Sagehorn (EVP and CFO)

Thanks, Wilson, and good morning, everyone. Please turn to slide eight. Overall, the team delivered strong results again this quarter. Consolidated net sales for the third quarter were $2.39 billion, a 10% increase over the prior year, with sales up in all segments. The new re- new recognition standard, ASC 606, positively impacted sales by approximately $26 million compared to the prior year. We've again included an updated rev rec standard chart on slide nine of the presentation. Consolidated operating income for the third quarter was $257.8 million, or 10.8% of sales, compared to adjusted operating income of $230.1 million, or 10.6% of sales in the prior year.

Operating income margin increases of 170 and 200 basis points at Access Equipment and Fire and Emergency more than offset the expected margin decline in Defense and lower margin in Commercial. Excluding the impact of ASC 606, operating income and operating income margin in the third quarter of this year would have been $270 million and 11.4%. Similar to last quarter, the biggest driver of the positive results at Access Equipment were the impact of the higher sales volume. Improved manufacturing performance and price cost also contributed to the better results. Due to the timing lag of steel price changes flowing through the income statement, Access Equipment did not benefit significantly in the quarter from the recent lower steel prices.

The two largest drivers of lower Defense segment earnings were the switch in accounting to the new revenue recognition standard and a higher mix of JLTVs as volumes under that program continue to ramp up. As we noted on the last call, we expected lower operating income margins in the second half of the year, largely due to the quarter-to-quarter volatility introduced by ASC 606. Excluding the impact of ASC 606, Defense operating margin in the quarter would have been 9.1%. We continue to expect full year margins in this segment to be in the high single-digit percentage and encourage investors to focus on the full year margin expectations instead of results for an individual quarter. Fire and Emergency operating income margin of 14.9% was a quarterly record for this segment.

Compared to the prior-year quarter, results benefited from higher sales and improved price cost. Excluding the impact of ASC 606, the operating income margin in this segment would have been 14.8%. We continue to be very encouraged by the performance of the Fire and Emergency team. Commercial results compared to the prior year were negatively impacted by approximately $6 million of lost production and operating inefficiencies associated with the partial roof collapse in the second quarter. In addition, current-year results were negatively impacted by a warranty campaign and higher R&D spending. Had the lost production and operating inefficiencies related to the partial roof collapse not happened, operating income margin in this segment would have been more than 9%. We continue to believe the full-year impact of the partial roof collapse will be approximately $15 million on a pre-tax basis.

Earnings per share for the quarter were $2.72, compared to adjusted earnings per share of $2.20 in the prior year, a 23.6% increase. Higher Access Equipment and Fire and Emergency segment operating results were the largest driver of the higher EPS. The third quarter also benefited by $0.18 per share as a result of share repurchases completed in the last 12 months. We repurchased $89 million of Oshkosh shares in the quarter, bringing our year-to-date repurchases to $284 million. During the quarter, our board approved a resolution to increase the number of shares available for repurchase to 10 million, and we remain on track to complete the previously announced target of $350 million of share repurchases in this fiscal year.

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 $7.90-$8.10 from our most recent estimate range of $7.50-$7.80. Changes versus our previous estimate range include the following: consolidated sales are now expected to be approximately $8.3 billion, the high end of our previous range. Consolidated operating income is now expected to be $760 million-$775 million, compared to the previous estimate range of $725 million-$755 million. We are adjusting Access Equipment's sales expectation to approximately $4.05 billion, the high end of the previous estimate range.

We're also increasing this segment's operating margin expectation to a range of 12%-12.25%, a 25 basis point increase compared to the previous range. The increase in the operating margin estimate range reflects the expectation of continued strong operational performance in the fourth quarter. We are increasing Fire and Emergency's sales expectation by $25 million to $1.25 billion, an increase and increasing their operating margin expectation to approximately 14% from a range of 13.5%-13.75%. The increased sales estimate is largely driven by the expected timing of international sales. The higher operating margin expectation is a result of expected higher sales and continued improved operational performance. We are increasing the estimated tax rate by 50 basis points to 21.5%.

Finally, we are adjusting the share count assumption down by 400,000 to 70.6 million. All other assumptions, including capital expenditures and free cash flow, remain unchanged from last quarter. With these changes, implied fourth quarter expected results reflect higher sales, operating income, and earnings per share compared to the prior year. I'll turn it back over to Wilson now for some closing comments.

Wilson Jones (President and CEO)

Thanks, Dave. We're pleased to announce another strong quarter and the ability to raise our expectations for the year as a result of the team's overall strong execution. We're going to stay close to our customers to ensure we're in the best position to stay aligned with market conditions. We'll also continue to execute our MOVE strategy 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 one plus a follow-up. After that 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)

Thank you. At this time, we will be conducting a question-and-answer session. 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 participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Stanley Elliott (Managing Director)

Hey, good morning, Wilson, Dave, Pat. Thank you for the time. Congratulations. Wilson, starting off, could you expand a little bit more on your comments around the customer expectations on the access side into 2020? I mean, do you think that what we're seeing here is maybe more discipline in the rental channel, or, you know, is there something in the tea leaves that maybe leaves them a little more cautious? And then kind of as a follow-on to that, within the framework that you provided, I'm assuming that the APAC adoption is going to remain pretty strong.

Wilson Jones (President and CEO)

Yeah, Stanley, that. I'll answer that one. That's a quick one, is Asia-Pacific continues to look very promising as we're growing, as we mentioned, double digits year-over-year. I think we see more positive signs there with rental company growth and leading to, you know, again, more adoption of our products. So exciting times there in Asia-Pacific. From a customer expectation, what I would share is while we're saying we don't believe our customers are going to be as aggressive with their CapEx, some of the orders we know were affected due to weather. They weren't able to get some of their equipment into service, and so that either delayed or maybe stalled some of the orders in the quarter.

But more importantly, if you look at the last couple of years, Stanley, pretty significant fleet expansion in this market. And so I think there's a little bit of taking a breath and getting that—all those machines into service. I think when you look at some of the macroeconomic indicators out there, there are some changes there, residential construction, a few others that are showing some downward motion. And then you add in some of the trade policy uncertainties. I think it's just going to lead to not near the aggressive expansion that we've seen. Now, I'll say that, Stanley, and I'll also say we have to keep in mind this market is at a level it's never been before.

And so if it does moderate a little bit, and we're not calling 2020 yet, but we believe this is going to be the case as we work through this next quarter. But if it moderates a little bit, it's still a good neighborhood. And as you've probably heard, the rental company's commentary, business conditions are good. It's a healthy market. So we believe their business will be good in 2020, and we do see the need for some replacement in 2020. We think the bigger year will be 2021 with replacement, but if you go back to 2012, that's when expansion started, kind of coming out of the recession, significant expansion. 2013 was bigger, and then 2014 was, you know, previous peak.

But if you add that up, coming into 2020, 2021, those machines should be in the replacement cycle. So, we believe that's going to be some opportunity for us, to help 2020, but, probably a little more significant in 2021.

Stanley Elliott (Managing Director)

Perfect. And then switching gears to the Fire and Emergency business, you know, that's been a fantastic transformation over the past couple of years. How much of this is mix, regional product? How much is price cost? I know the restructure and simplification has had a big impact, but it would seem to be that the improvements that we've seen thus far would suggest these are more structural changes than we're just operating at a new and higher baseline.

Wilson Jones (President and CEO)

Well, I think that's a pretty good call, Stanley. I have to say this, too. Thanks for asking a question about our Fire and Emergency business. We like to talk about it, and what a great story, you know? Market that used to be 5,500 trucks, it's now 4,500. That team hasn't, you know, settled in and let market conditions determine where they go. Great playbook with platform teams, simplification, really good disciplined pricing, great distribution channel. Structure of that business is different today than it was five years ago, and a real credit to Jim Johnson and his team. Really, the playbook that they have there works well. You're seeing it kick in at Commercial.

Had we not had the roof collapse, Dave mentioned that would have been a 9% quarter for Commercial. Same thing going on at JLG, look at their margins. So, really good story and it's nice to see our Fire and Emergency team get the credit for that.

Stanley Elliott (Managing Director)

Perfect. Thank you, guys. Appreciate it.

Wilson Jones (President and CEO)

Thanks, Stanley.

Operator (participant)

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

Jamie Cook (Managing Director of Equity Research)

Hi, good morning, and nice quarter. You know, I was impressed in the quarter by the aerial margins, as I'm sure everyone else is. So, you know, I guess, Wilson, assuming, let's say, the market's sort of flat next year, you know, versus growth, are there opportunities for you to still improve your margin? Or in a assuming a modest sales decline, how do we think about the decremental margins, given some of the improvements we've seen, just in the operating cost structure of that business? And then my second question, could you just comment on your comfort level with some, you know, inventories or where you are producing relative to retail demand and just channel inventory as well? Thank you.

Wilson Jones (President and CEO)

Sure. And thanks, Jamie, for the compliment. We appreciate that. Aerial margins, you know, we're pleased with what JLG has done. Good internal and external execution there, and obviously, it shows in their margins. What you do know is that we had some pricing erosion over the years with emissions, with the oil and gas contagion, and then most recently, with the material increases in steel. So those are the headwinds that we're still clawing back to get back to some of those previous peak margins. The JLG team would tell you that there's still a lot of internal opportunities on our optimizing cost and capital, initiatives around our MOVE strategy.

So we believe with some of the structural things that they've done in the business and going forward, much like Fire and Emergency, that they do have margin enhancement opportunities. Obviously, we've got to execute those initiatives, but we're not going to rest on where we are. We'll continue to work on that and move forward. A lot of it will depend on, you know, what the market does, which at this point, we don't see a big dip in the market or a big change there. So we think we've got opportunities to continue to improve those margins over the cycle, I would say. With regard to your inventory, we're very comfortable. You know, I think the JLG team called it properly in terms of their inventory. It's on a good pace.

We believe it fits with the current market structure. Obviously, you always watch your inventory and guard it, but where they are today is a place where I would say myself and Dave are very comfortable.

Jamie Cook (Managing Director of Equity Research)

Okay, thanks. I'll let someone else ask a question.

Wilson Jones (President and CEO)

Thanks, Jamie.

Dave Sagehorn (EVP and CFO)

Thanks.

Operator (participant)

Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.

Steve Volkmann (Managing Director)

Hi, good morning, guys. I'm just gonna tag team with Jamie here a little bit and, drill in a little more, if we could. And I guess what I'm trying to think about on the Access margin is... you know, how much of what they're doing is kind of, you know, in process improvement, et cetera? In other words, you know, could we have a flat or even slightly improved margin despite a slightly, lower revenue line in 2020?

Dave Sagehorn (EVP and CFO)

Steve, good morning, it's Dave. So I think a lot of what you saw in the third quarter, year-over-year out of access, really is a reflection of where we were last year, and I think Wilson touched on this. And we were ramping up, bringing new team members, getting them assimilated. We're continuing to have supply chain challenges. We see, or what we saw this year, is a supply chain that was in a much better position in terms of on-time deliveries. You know, less expedited freight, less disruptions to the production line. So you know, we like where we are from that standpoint.

As you think about going into next year, I think the team is always challenged to look for ways to, you know, improve their operations, improve efficiencies, improve margins. If I think about a flat environment next year from a top line, I think you gotta look at, you know, what incrementally we can do there. I'm not gonna—we're not here today to give you what 2020 looks like, but we're certainly gonna strive to improve those efficiencies and margins in the segment.

On a downside, if we do end up in a little bit of a down environment next year, what we always talk about is, are we, you know, we strive to be in a better place from an overall execution and margin standpoint, than we were the last time we were at this given level, whatever that would be. So, we'll continue to strive, but, we're not here today to give you, you know, full out guidance for 2020 yet.

Wilson Jones (President and CEO)

I think what I would add to that, Steve, is you know, where we are today from, say, a couple of years ago, we're much stronger operationally across all four of our segments. We're in a good position operationally to handle things. And what we'll continue to handle are the things we can control. With regards to your question, you know, type of mix that's available to us in the market will be an issue that we'll, you know, be working around. But the simplification that we're putting into these businesses, the teams are doing a nice job on this platform team concept that's driving end-to-end accountability. So I think that all the things that we can control, you're gonna see continued good performance there.

And then we've got to just determine what the market's gonna be and what's available to us. That will certainly play into this, too. But we like our position, really, with all four segments and where they are operationally.

Steve Volkmann (Managing Director)

Great, okay. And just for my follow-up, Wilson, since you kind of made some comments about access into 2020. What are you hearing from your customers in the other segments relative... I mean, in Fire and Emergency, you should probably have some pretty decent visibility, maybe not so much in commercial and defense, probably locked in. I don't know, any sort of qualitative thoughts around the other three segments as we go into 2020? And I'll leave it there. Thanks.

Wilson Jones (President and CEO)

Yeah, Steve, I have to say that's a great question, because we really, if you look, you hear us talk a lot about being a different integrated global industrial. And, obviously, we talk a lot about access, and we should. It's a really big component, an important component of our business. But when you look at our portfolio today, Fire and Emergency, really strong backlog, good market outlook, you know, not growing great, but positive on the municipal side. And then look at their margin performance. You look at refuse collection vehicles, basically an all-time high backlog there in our Commercial segment. A lot of that's municipal spending, should bode well for us into the future. Same for Defense.

You see our, our runway there, not only domestically, but now with the JLTV, international defense opportunities. So you know, we're positive about long-term outlook here. We know we've got to work through some of the questions around access into 2020, but we think because of the balance we have with these other three segments, we're, we are in a really good spot.

Steve Volkmann (Managing Director)

Thank you.

Wilson Jones (President and CEO)

Good.

Operator (participant)

Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.

Mig Dobre (Senior Research Analyst)

Good morning, gentlemen, and

Wilson Jones (President and CEO)

Hi, Mig.

Mig Dobre (Senior Research Analyst)

Congratulations. Yes, congrats on very, very good margins on what looks to me to be relatively weak mix in your Access Equipment segment. So well done there. I'm just trying to clarify something based on your comments, Wilson. So if I look at your orders in Access Equipment year to date, right? We're seeing that these orders were down maybe about 11%. And you're talking about 2020 potentially the market, right? Your customer demand being down versus your fiscal 2019. So I'm kind of trying to triangulate what your market outlook would actually imply for your own revenues, right? Because as I understand it, you're expecting orders to potentially be a little bit weaker in 2020 than they've been in 2019.

Can you maybe help us, at a high level, understand what that would mean for, for your business?

Wilson Jones (President and CEO)

Well, I'll go down this path, Mig, and Dave can jump in with me. I think, you know, obviously, we're not calling 20 today, but what we're sharing with you is the information that we have available to us. When you look at the backlog, I think you you'd made a comment about concern about our backlog. If you look at where we are today from a backlog, take out last year, the outlier with all those large forward orders in there, this would be our largest backlog amount this quarter in 10 years. So we have a healthy backlog in Access.

I think what I'd also share with you is, last quarter, I talked a little bit about how the order patterns were changing, that we didn't expect to see these big forward orders like we did last year, coming into focus here in the near future. That's what we're seeing. I think the order patterns are gonna go back. If you remember, a couple of years ago, with capacity available, most of our customers would order a product and take delivery sometimes in the same quarter. So I think that's a little bit of what's going on here. I think, you know, we're gonna come out with more detailed information after we get into discussions with our rental companies in the fall and Q4 2020. But again, if you listen to their comments, good environment, good fundamentals.

So I expect their business to be in a good place next year, and we do know there is some replacement needed next year, probably not as significant as 2021. So it's we probably got used to a little bit false sense of security here with this big backlog and all those forward orders. If you look through the history, that trend chart, you can see that was really an anomaly. And what it does, it causes this kind of conversation with you on some real tough comps.

Mig Dobre (Senior Research Analyst)

Right. And just for the record, I misspoke earlier vis-à-vis the orders being down 11. They're actually down more than that. And I am sort of wondering here, if this order dynamic that I'm describing is accurate into fiscal 2020, given where your current production volumes are and revenue recognition is, right? That does create a headwind. Is it not fair for us to expect some kind of restructuring program as you're managing your production volumes going forward? At what point in time should we be thinking about that? And I'm done. Thank you.

Wilson Jones (President and CEO)

Well, yeah, and you're probably thinking a little more severe than we are, Mig. Right now, with our conversations and where we are, we adjust production weekly, and it's real-time. We know cyclical businesses. We've been in this for a long time, we have to be nimble, and so we manage those production levels as we go. And with our current backlog there, we're in a good spot. Now, we have to see how this plays out this quarter and into the first quarter from an order standpoint, but we're not seeing that panic button at this point.

Now, you probably know us well enough that we always plan different scenarios, and we do plan deeper scenarios, but at this stage, we don't see that that's gonna come into play, at least in the near future.

Mig Dobre (Senior Research Analyst)

All right. Thank you, Wilson.

Wilson Jones (President and CEO)

Thanks, Mig.

Operator (participant)

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

Jerry Revich (Goldman Sachs GoldmSenior Investment Leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

Yes. Hi, good morning, everyone.

Wilson Jones (President and CEO)

Hi, Jerry.

Dave Sagehorn (EVP and CFO)

Good morning.

Jerry Revich (Goldman Sachs GoldmSenior Investment Leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

I'm wondering if you could talk about the level of interest for foreign JLTV orders now. Can you give us an update of how many countries are looking at the product and what the anticipated timing and magnitude could be if we're sitting here, you know, two years from now? How big could the international JLTV program be compared to what we're shipping domestically?

Wilson Jones (President and CEO)

Yeah, Jerry. You know, we haven't really sized that as far as, you know, total dollars or total units. Where we are today, Slovenia has got a letter of agreement in now with the FMS case, with our government for 38 JLTVs. We mentioned, I think in the past, we've talked about Lithuania is in working on an FMS case. We talked about the U.K. and a potential req just south of 3,000 units. They've had two units now that they have out in test. Those are the three countries that we can talk about. We've talked in the past, though, of several others that we've done trials with, that we expect some success with, but we haven't called the timing of that.

I think you know, international orders, especially going through FMS cases, can take some time, and it's kinda hard to call exactly when you're gonna get the orders, delivery dates, et cetera. So where we stand today, I would expect that we're all gonna continue to see some of these orders come in into 2020. Don't know if we'll be able to get them built and delivered in 2020. It may be early 2021 or into 2021, but we still are very positive about our opportunities with the JLTV on the international front. And I should add now that the Middle East is. We've got some customers there that are showing some heavy interest in the JLTV, too.

Dave Sagehorn (EVP and CFO)

Jerry, I'll just add, I know your question is about international, but domestically, just a reminder that our JLTV production for the U.S. Department of Defense is gonna continue to increase over the next several years as that program continues to ramp as well.

Jerry Revich (Goldman Sachs GoldmSenior Investment Leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

Sure, sure. That's clear. Then in Fire and Emergency, really interesting comments about the growing location count. Can you just ballpark that for us in terms of the percentage location growth that we're looking for in 2019 versus 2018 or 2020 versus 2018? However you want to frame that for your dealer network, just so we can understand the magnitude of opportunity from a share standpoint.

Wilson Jones (President and CEO)

Well, if you think about, I'm not gonna put a share target on it for you, Jerry, but if you think about the Fire and Emergency segment, the Fire and Emergency business, a big part of it is service after the sale. And our distribution channel really gets that, and they focus on that total cost of ownership model. So if you think about 36 dealers or so around the U.S., and a third of them are expanding, I think that tells you that their footprint is gonna be more significant and give them more opportunities to service. And again, service usually leads to selling the second, third, and fourth fire trucks.

Jerry Revich (Goldman Sachs GoldmSenior Investment Leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

Yeah, we'll put the share target on for you, but in terms of-

Wilson Jones (President and CEO)

I figured you would. That's, that's your job.

Jerry Revich (Goldman Sachs GoldmSenior Investment Leader and Head of US Machinery, Infrastructure, Sustainable Tech Franchise)

I appreciate it. Thank you.

Wilson Jones (President and CEO)

Take care, Jerry.

Dave Sagehorn (EVP and CFO)

Thanks.

Operator (participant)

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

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Hey, guys, good morning.

Dave Sagehorn (EVP and CFO)

Hey, Seth.

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Hey, I wanted to ask about the Defense margin. I think the implied margin here for the fourth quarter is something like 7.5 or so to kind of get to your midpoint of the guide, which, you know, is still kind of well below where you were running last year and then the first half of this year. So, are there still some kind of transitory issues here from ramp-up costs or, you know, mix issue or something that's weighing that's gonna continue to weigh on the fourth quarter Defense margin? And, you know, how should we think about 2020-ish kind of run rate? Thanks.

Dave Sagehorn (EVP and CFO)

Seth, good morning, it's Dave. So I'm gonna, I'll say, continue to beat the drum here, that we would encourage investors to look at the full year, margin guide for Defense. As we've talked about for a few quarters now, excuse me, the adoption of the new revenue recognition standard has introduced a lot of accounting volatility-

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Right

Dave Sagehorn (EVP and CFO)

... into our Defense results. It's not- we're not thrilled with that. In our opinion, we were better off under the old accounting standard as it relates to Defense. But what you're seeing is really just the timing of recognition of largely non-truck production contract costs from one quarter to another. And why that gets magnified under the new revenue recognition standard is, you may recall, we're only allowed to project the margin for a given program out over the quantities of orders that we actually have in hand. So for example, the JLTV, you know, the overall contract was for about 17,000 vehicles. We have orders on hand for 11,000. We can only project those costs over that smaller quantity, which drives variability from a quarter to quarter.

So, I'm kind of droning on here, but really want to emphasize, full year, we expect, the high single digit margin. Our outlook for the segment is unchanged. We did expect to see lower margins in the third and fourth quarter. It's not surprising that we see third quarter being lower than fourth or fourth quarter being lower than third under this new revenue recognition standard. And as it relates to our outlook for the future years, I think we're still comfortable saying that, we view this business as a high single-digit operating income margin business.

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Okay. That, that's helpful, Dave, thanks. And then, maybe if I could just take another whack at the Access margin outlook. You know, it looks like you're guiding to margin kind of flat in the fourth quarter, year-over-year for Access, even though revenue is going to be down, which, which is great. And, and I think you said you're really not seeing the steel price decline tailwinds yet. And, and I guess, you know, is it possible, maybe, you know, Wilson, I mean, do you think that the mix, the customer mix gets a little better next year, maybe more of the IRCs versus the nationals? Is there, you know, anything that you're seeing there from a kind of just a customer perspective, did the nationals kind of go bigger this year?

Or, you know, just trying to continue to think through the margin on Access, kind of going forward. Thanks.

Dave Sagehorn (EVP and CFO)

Seth, I'll take this one. You know, as it relates from a, from a customer mix, actually, what we're seeing, have largely seen throughout all of fiscal 2019 is a higher than traditional mix of independent rental companies versus the nationals. And, you know, there, there's probably a number of reasons for that, but it's still early for fiscal 2020. We've got our rental customers are largely focused on finishing out their fiscal 2019. Our team at Access, they'll get heavily engaged with them about 2020 in the coming months. So it's probably premature to predict what the customer mix is gonna look like in 2020 versus what we saw in 2019.

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Okay. But just, steel, does that start to help you in the fourth quarter, or is that more of a 2020 issue?

Dave Sagehorn (EVP and CFO)

We should see incrementally versus the third quarter a little bit of positive impact from that. But I guess I just wanna on the whole topic of steel and pricing on that, you know, we referenced improved cost or price cost in the quarter. And the emphasis there is on an improved. If you look at our non-defense segments overall, you know, we are in the third quarter we are barely covering the cost increases that we had experienced. So, you know, there's been a lot of inflation out there that we've absorbed continue to absorb. Yes, steel has gone down. We do expect to see some of that come through, but we're also hearing about steel mills out there putting out price increases.

We'll have to see if it sticks, but they're trying to get the price back up. You've got the executive order requiring 95% U.S. steel content on all federal infrastructure projects. So it's probably gonna be a little bit of a impetus to potentially higher steel prices as we go forward. So while we think we're gonna see a little bit of a benefit in fiscal Q4 from what we've seen over the last number of months, I think we have to continue to watch that market and the steel environment and really other material cost environment over the next quarter or two to see how we think that really is going to impact us in fiscal 2020.

Wilson Jones (President and CEO)

I think you've got another moving piece there with the ANSI costs.

Dave Sagehorn (EVP and CFO)

Yeah.

Wilson Jones (President and CEO)

The ANSI standard is going to drive some costs-

Dave Sagehorn (EVP and CFO)

Yeah

Wilson Jones (President and CEO)

in there, too, Seth. So all this will, will be corralled up in talking with our customers during the fall and sharing all that information with the, with the normal pricing discussions. And then, obviously, we'll talk to them first and then be announcing really where we're going on the, on the price side for next year.

Seth Weber (Equity Research Analyst in Industrials and Machinery)

Okay, guys. I appreciate it. Thank you.

Wilson Jones (President and CEO)

Thanks, Seth.

Operator (participant)

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

Courtney Yakavonis (Analyst)

Hi, thanks for the question. Just wanted to follow up a little bit on the pricing discussion, and steel. I think you guys had previously talked about having a surcharge that you were expecting to roll off. So is it the case that that's not expected to roll off anytime soon, just given some of the pricing pressures that you're talking about? And then secondly, given the strength that we have seen in telehandlers versus AWP, you know, how is the mix for that in the backlog right now? And, you know, when you talked about some moderation in 2020, does that apply to both AWP and telehandlers? Thanks.

Dave Sagehorn (EVP and CFO)

I'll start off, Courtney, and if Wilson wants to-

Wilson Jones (President and CEO)

Sure

Dave Sagehorn (EVP and CFO)

to chime in, he's certainly welcome. But just, we'll go through our annual pricing discussions with our customers through the course of the fall here. So we'll follow the same process we always do. As we just mentioned on the last question, there's a number of factors that we take into consideration with that. But there certainly will be a lot of focus and attention placed on that as we determine where the right place to land for our pricing guide for 2020 is. And, you know, that'll involve, obviously, a lot of discussions with our customers as well.

In terms of mix, as we look at the fourth quarter, I think we're gonna see a little bit of a heavier telehandler mix again, compared to the fourth quarter of 2018. And also a little bit heavier telehandler mix than we saw in the third quarter. Third quarter, we actually saw AWP mix tick up versus what we'd seen the last few quarters, but we think we're gonna see a little bit of reversion back to a little heavier telehandler in the fourth quarter.

Courtney Yakavonis (Analyst)

So is it fair to say that in the fourth quarter, given that your sales are implied to be down, it's predominantly in AWP?

Dave Sagehorn (EVP and CFO)

Uh.

Courtney Yakavonis (Analyst)

Telehandlers would still be up.

Dave Sagehorn (EVP and CFO)

I haven't looked at it that way, but I think in general, that, that makes sense. And if we see something different, we'll let you know.

Wilson Jones (President and CEO)

Yeah.

Dave Sagehorn (EVP and CFO)

Yeah.

Wilson Jones (President and CEO)

I believe that's the mix assembly.

Courtney Yakavonis (Analyst)

And then just more generally, why do you think that we're seeing this divergence between the two product categories?

Wilson Jones (President and CEO)

Well, for us, Courtney, if you go back to last year, we'd made the decision to consolidate our telehandler business. We were in two facilities to consolidate to one. About the time we did that, the market jumped. Jumped with all that forward ordering that we've mentioned, and we were bringing on 600 new people. So, we definitely lost some momentum with our telehandler business last year, and what we're seeing this year is a good news story, is we've been able to catch that back up and rebound. Our JLG telehandlers and SkyTrak brands are well received and very popular in the construction industry. And so that's what you're seeing there, is a little rebound of that business and getting back to our original share, share position.

Courtney Yakavonis (Analyst)

Okay, thanks.

Wilson Jones (President and CEO)

Thanks, Courtney.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.

Kevin Uherek (VP of Equity Research)

Hi, this is, Kevin Uherek on for Chad.

Wilson Jones (President and CEO)

Morning.

Kevin Uherek (VP of Equity Research)

I just had a quick question on when did you start to see orders in access weaken? Was it evenly spread throughout the quarter or more back-end loaded?

Wilson Jones (President and CEO)

We haven't seen any kind of, what I would say, out of the ordinary, order pattern, Kevin. I think it's, it's just been kind of, moderating at a, at, I would say, more of an even pace. Nothing really that, that I would call out of the ordinary.

Kevin Uherek (VP of Equity Research)

Okay, perfect. That was it. Thanks, guys.

Wilson Jones (President and CEO)

Thanks, Kevin.

Operator (participant)

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Steve Barger (Managing Director of Equity Research)

Hey, good morning, guys.

Wilson Jones (President and CEO)

Good morning, Steve.

Dave Sagehorn (EVP and CFO)

Morning, Steve.

Steve Barger (Managing Director of Equity Research)

You're talking about AWP maybe flattening or rolling a bit. At the same time, you have really good free cash flow visibility, a lot of balance sheet capacity. So are you spending more time on M&A conversations at this point?

Wilson Jones (President and CEO)

I would say, Steve, we've probably talked to you in the past. We keep an always-on list. That's something that, you know, we want to be balanced with our capital allocation strategy. I think that list is similar to what it would be you'd have seen a year ago. Conversations are continuing. You know this, as we do, is where we are from a valuation standpoint. Today, we look at ourselves as a better buy. But, obviously, if there was something strategic that came along that was that good fit with our core value proposition, we're gonna take a look. And to your point, our balance sheet's in probably the best shape it's been, at least in my 14 years with the company.

So we certainly have opportunities there to be opportunistic. That's the word that Dave uses a lot. We want to be opportunistic and make sure, you know, we make the right moves, not just to move to buy something. But it is something that we are vigilant about, we take a look at. We're there are certain things we're studying, but nothing that I would say is imminent to talk to you about today.

Steve Barger (Managing Director of Equity Research)

Just philosophically, is there a comfort zone for deal size that you kind of limit yourself to or think about?

Wilson Jones (President and CEO)

Well, what we've said in the past, Steve, is probably nothing transformational. You know, remember back, JLG, that was pretty transformational for us. And, the leverage that we had to work through there was not a lot of fun. Thank goodness we worked through it and look at where we are today with JLG. But, I don't think you'll see us looking at anything transformational.

Steve Barger (Managing Director of Equity Research)

Okay. And just one more quick one. You know, with AWP kind of at peak revenue here, can you tell us where you are on capacity utilization, how many shifts you're running? And have you done anything to proactively adjust production levels at this point, relative to how you're thinking about the next few quarters?

Wilson Jones (President and CEO)

Yeah, you know, we, Dave mentioned it, we always work internally to make sure that we can deliver better results compared to prior cycles when we do have some ups and downs in the market. And, so we're constantly adjusting production rates. I can tell you today, we've got capacity available to us if we needed to ramp up at JLG. Most of their plants are running two shifts. If you look around our company, you'd see a lot of two-shift operations. We have a couple of fab operations that are running three shifts. But, all in all, we're comfortable with where we are from a capacity standpoint. And then we've also been working on some outsource opportunities in case, you know, markets were to jump even further.

We could have some opportunities there to outsource some work. But today, I would tell you we're in a really good place from a capacity standpoint. And as I commented, all four segments have really been focused on operational efficiencies, and it's showing in their performance.

Steve Barger (Managing Director of Equity Research)

Got it. Thank you.

Wilson Jones (President and CEO)

Thanks, Steve.

Patrick Davidson (SVP of Investor Relations)

Thanks, Steve.

Operator (participant)

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Wilson Jones for closing remarks.

Wilson Jones (President and CEO)

Thank you, operator, and thank you all for joining us today. I look back at the last three quarters, and I can't say enough how pleased I am with this team's performance. You're seeing a team manage very well the things they control, with good, disciplined execution, both internally and externally. Again, we appreciate your interest in the Oshkosh Corporation and look forward to speaking with you at a conference or on our next earnings call. Have a good day, everyone.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.