Oshkosh Corp (OSK) 2020 Q1 法說會逐字稿

Greetings, and welcome to the Oshkosh Corporation Fiscal 2020 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our first quarter 2020 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website.

The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation.

Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to our fiscal quarter or fiscal year, unless stated otherwise.

Our presenters today include Wilson Jones, President and Chief Executive Officer; John Pfeifer, Executive Vice President and Chief Operating Officer; and Dave Sagehorn, Executive Vice President and Chief Financial Officer.

Please turn to Slide 3, and I'll turn it over to you, Wilson.

Thank you, Pat. Good morning, everyone. I'm going to start by welcoming Mike Pack, who will soon be joining our executive leadership team. As you are aware, Dave Sagehorn, our long-standing CFO and my partner on earnings calls and investor meetings, will be retiring this spring.

We're fortunate to have somebody of Mike's caliber stepping into this important position. Mike has been in Oshkosh since 2006, and for the last 8 years, has been the Vice President of Finance of our Fire & Emergency segment, where he has been a major contributor to the success and record operating income margins that, that segment has achieved.

We all look forward to Mike assuming the bigger leadership role in the coming months. I'll share some comments on my friend, Dave, later in this call.

We are pleased to announce a solid first quarter and a good start to the year as we kick off 2020. First quarter earnings per share of $1.10 was in line with our expectations and supportive of our full year outlook, but down compared to last year's first quarter.

Our team members were focused on executing and delivering on our commitments in light of tough comps in the Defense segment and expected moderation of demand in our Access Equipment segment. I'm proud of the efforts of all Oshkosh team members and our people-first culture in helping deliver these results.

It's still early in the year, but there are a number of positive items that give us confidence in reaffirming our full year earnings per share estimate range of $7.30 to $8.10 that Dave will talk about in more detail in a few minutes.

Some of those items include the first quarter results that were in line with our expectations, as I noted. This provides a stable start to the year. Our access equipment team successfully concluded negotiations with most of their key rental company customers. John will talk more about that. Three of our segments had backlog levels of at least $1 billion as we exited the quarter, providing good visibility into the upcoming quarters.

And finally, we have seen signs of stabilization in macroeconomic data, and it appears that many economists are lowering their odds of a recession happening in the U.S. in 2020. These examples illustrate why we consider Oshkosh to be a different, integrated global industrial.

All in, we're pleased with how the year has started and continue to believe that 2020 will be another good year for the Oshkosh Corporation.

Please turn to Slide 4 to begin the discussion for each of our business segments. I'll start it off with Defense. Our Defense segment highlights for the quarter are led by the continued ramp-up of JLTV production as we deliver these high-tech, next-generation defense vehicles to our U.S. government customer. We are on track to produce 4,000 to 4,500 JLTVs in 2020 as both the U.S. Army and Marine Corps continued to integrate these units into their forces. During the quarter, we received a JLTV order for just over $800 million that included a small number of units for the country of Montenegro. This is important because it represents the first order we've received for international JLTVs.

There are a number of other potential JLTV international orders in various stages of progress that we expect will be finalized in the coming quarters. It's a very exciting time for the JLTV team, and they're working hard to successfully execute this important program.

Government testing continues on the FMTV A2 program, and we are pleased with the improvements that the vehicle is demonstrating. We are still producing the current A1 P2 version and expect to do so into 2021, before we begin the transition to the next generation version, the A2.

In December, President Trump signed the fiscal 2020 budget, which included favorable funding for Oshkosh defense programs. Both the FMTV and FHTV programs were funded higher levels than the original FY '20 President's budget request.

These additional funds, approximately $66 million and $100 million, respectively, will benefit our defense business, primarily in 2021 and beyond.

Let's turn to Slide 5, and I'll pass it to John to discuss our nondefense segments.

Thanks, Wilson, and good morning, everyone. Our access equipment team delivered impressive results for the quarter despite lower sales. The team did a great job of effectively managing the lower demand level, achieving higher operating income and higher operating income margin.

Sales were lower year-over-year in North America, Europe, Africa and Middle East regions, but in line with expectations. We are seeing more moderation of orders than we originally expected in Europe, and we'll continue to monitor that region.

The Asia Pacific region, led by China, continued to be a bright spot with strong sales growth again this quarter. The catalyst in China remains product adoption, which is driven by safety and productivity improvements provided by these products. We are expanding our production capacity in China, which we expect to be completed in the next year to support this vibrant and growing market.

We concluded annual negotiations with most of our key rental company customers during the quarter. The negotiations went largely as expected, with demand requirements supportive of our outlook for the year. We booked orders of more than $1.3 billion this quarter, the third highest quarter-quarter in this segment's history and exited the quarter with backlog of slightly more than $1 billion. While both Q1 orders and ending backlog are down from last year, there has been moderation in the rate of decline. Additionally, we continue to believe the market is reverting to a more normal order pattern after several years of unusually large orders early in the fiscal year.

The team at JLG is busy building new machines that are ANSI 92.20 compliant, although the effective date of the new requirements is now March instead of the previously planned December 2019. There have been several pushouts for the safety standard, and we remain hopeful that the compliance date will not move again.

Another key event takes place in March, with once every 3 years construction equipment trade show, ConExpo. We will be introducing new innovative products and services at this show as we host customers and other visitors from around the world. We look forward to seeing you in Las Vegas, if you plan to travel to the show. It will be a very special and worthwhile event.

Please turn to Slide 6 for a discussion of the Fire & Emergency segment. Our fire & emergency team posted a solid quarter characterized by strong order growth and an all-time high backlog. But they also dealt with some challenges caused by a supplier issue during the quarter, one of Pierce's suppliers was not able to meet delivery commitments, which led Pierce to modify its production schedules. The team was able to adjust production to best serve our fire department customers, but this led to lower-than-expected sales as well as production inefficiencies.

Fortunately, this supplier challenge is now behind us, and we do not expect it to impact full year results. As I just mentioned, both orders and backlog were very strong this quarter, year-over-year orders were higher by more than 70%, leading to a record backlog of just over $1.1 billion at the end of the quarter. These figures are even more impressive when taken in context against the current sluggish international order environment, particularly in countries where trade dynamics have slowed demand for U.S. firetrucks. When these trade issues get sorted out, we expect improved international order rates as well.

Looking to the remainder of 2020, we continue to expect flattish to slight growth in the fire truck market in North America and maintain our positive long-term outlook for the business.

Please turn to Slide 7, and we'll talk about our Commercial segment. Our commercial team is off to a good start in 2020 as they continue their simplification journey to strengthen operating income margins. The concrete mixer team launched a new flagship front discharge mixer. Our S-Series 2.0 in 2019 and is ramping up production from pilot phase. The new model builds on the rich legacy of the product, but also brings measurable improvements in visibility, maneuverability, payload and serviceability to name just a few of the key features. Orders have been strong, and the team will be displaying the vehicle to customers at the upcoming World of Concrete and ConExpo shows in Las Vegas.

RCV orders were up in the quarter, evidencing a continued solid RCV market. Concrete mixer orders were down, but we attribute that to our simplification strategy and timing as several large customers placed orders for the upcoming construction season in January this year versus December in fiscal 2019. We continue to expect the RCV and concrete mixer markets in 2020 to be similar to 2019, at levels even with or slightly above the long-term average for RCVs and below the long-term average for concrete mixers, accompanied by some continued choppiness.

This wraps it up for our business segments. I'm going to turn it over to Dave to discuss our first quarter results and outlook for 2020 in greater detail.

Thanks, John, and good morning, everyone. Please turn to Slide 8. As Wilson noted, first quarter results were in line with our expectations. We commented on our last earnings call that we expected first quarter results to be meaningfully lower than last year. Importantly, however, these results support our unchanged earnings per share outlook for the full year that I'll discuss in a few minutes.

Consolidated net sales for the quarter were $1.7 billion, down 6% from the prior year quarter. Lower access equipment sales were the primary driver of the lower consolidated sales. Access equipment sales reflected rental company customers in North America slowing down their capital expenditures for fleet growth.

Sales in the EMEA region were also down from the prior year, while the segment experienced continued strong sales growth in the Asia Pacific region. Defense sales growth in the quarter reflected the continued JLTV production ramp, partially offset by lower FHTV sales. Fire & emergency sales were lower due to favorable sales timing in the prior year and commercial segment sales were slightly higher than the prior year, driven by a higher mix of packaged sales, partially offset by lower concrete mixer sales.

Consolidated operating income for the first quarter was $109.1 million or 6.4% of sales compared to $160.5 million or 8.9% of sales in the prior year quarter. Access equipment was a standout from an earnings perspective as they delivered $2.6 million higher operating income and 160 basis points higher operating income margin on a 13% decline in sales. Favorable price cost, favorable product mix and improved operational efficiencies more than offset the negative impact of lower sales.

As we expected, defense operating income declined significantly compared to the prior year. The decline was more about last year when defense received a very large order for JLTVs. Upon receipt of that order, the defense team recorded a cumulative catch-up adjustment to the program margin to reflect the near doubling of the number of units on contract. The defense team received a JLTV order again in the first quarter of this year, but the quantity of units ordered was not as large as last year and the impact of the cumulative adjustment to the program margin was not as large.

For comparison, the order this year increased the quantity of units ordered life-to-date of the program by slightly more than 25% compared to a doubling of the quantity ordered life-to-date when the order was received last year.

Additional drivers of the lower year-over-year results for this segment include a higher mix of JLTVs, as that program continues to ramp production, a favorable resolution of contract compliance matters in the prior year that didn't repeat this year and higher new product development spending. Now there were quite a few drivers for the year-over-year change in defense results this quarter, but the important thing to keep in mind, however, is our full year outlook for this segment has not changed.

Fire & Emergency first quarter operating income declined compared to last year due to the lower sales volume, along with higher SG&A costs and adverse sales mix and inefficiencies related to the previously discussed supplier issue. These were partially offset by positive pricing.

Commercial segment first quarter operating income compared to the prior year reflects an adverse product mix, higher new product development spend and a prior year favorable warranty reserve adjustment that did not repeat, partially offset by improved price cost.

Earnings per share for the quarter was $1.10 compared to adjusted earnings per share of $1.61 in the first quarter of 2019. Lower earnings per share was driven largely by the lower sales and the impact of the large JLTV order received in the prior year.

First quarter results benefited by $0.06 per share from share repurchases completed in the prior 12 months.

Please turn to Slide 9 for a review of our updated expectations for fiscal 2020.

As noted earlier, we are maintaining our full year earnings per share estimate range of $7.30 to $8.10. First quarter results that were in line with our expectations support the unchanged full year earnings per share estimate range. Additionally, access equipment orders in the quarter were also in line with what we are expecting. However, we are slightly reducing the high end of the access equipment estimate -- sales estimate range by $50 million to $3.75 billion to reflect lower expected sales in the EMEA region versus our previous expectations. At the same time, we are increasing the high end of the operating income margin estimate range by 25 basis points to 12.5% as we believe the segment can deliver the previous implied operating income on the slightly lower sales.

We believe backlog in our other segments also support our full year outlook for the individual segments and overall. We're reaffirming the estimated tax rate of 21.25% to 21.5%, although we currently believe the rate will be near the high end of the range. Our estimated capital expenditures of $150 million remain unchanged as does our free cash flow estimate of $450 million.

We repurchased a small amount of shares in the first quarter and continue to expect that we will return half of our free cash flow this year to shareholders in the form of dividends and opportunistic share repurchases.

Turning to the outlook for the second quarter, we expect flattish sales compared to the prior year as defense sales growth should offset lower access equipment segment sales. We expect earnings will be modestly lower compared to the prior year, reflecting the mix impact of higher defense sales and lower access equipment sales.

I'll turn it back over to Wilson now for some closing comments.

Thanks, Dave. Another solid quarter, driven by our team's execution. We reaffirmed our outlook for 2020, which includes expectations for solid earnings per share in the year when demand in our largest segment will be down. We have the right strategy with MOVE and believe we can manage our businesses to deliver solid sales and earnings performance despite the lower demand in our Access Equipment segment.

And we believe we are investing in the right places to best position Oshkosh to take advantage when conditions improve in that market. Also, we'll take this opportunity to thank Dave. This will be his last quarterly earnings call, and we're going to miss him. He has helped lead our company through numerous economic and industry challenges, and he partnered with all of our leadership at Oshkosh to make Oshkosh, the great company it is today. We appreciate all of his many contributions and the support he will provide even after he begins this next chapter. We are truly grateful for the hard work, dedication to task and commitment to integrity and teamwork that Dave has demonstrated in his 20 years with our company. Thank you, Dave.

I'll turn it back over to Pat to get the Q&A started.

Thanks, Wilson. (Operator Instructions) Operator, please begin the question-and-answer period of this call.

(Operator Instructions) Our first question comes from the line of Stephen Volkmann with Jefferies.

Can you hear me, sorry about that. I was on mute. And Dave, congrats, all the best, and Mike, welcome.

Thanks, Steve. Appreciate it.

And Dave, before you go, maybe I can get you to explain something to me. I'm trying to figure out how this defense accounting works. Because, I guess, I was assuming that having an order this quarter would have bumped your margins slightly above sort of full year guidance because you'd have that catch up, albeit lower than last year. But obviously, your guidance kind of assumes that the defense margin increases going forward sequentially. So I guess, I'm just trying to figure out how that works, a and b? Is it stable from here over the next 3 quarters? Or does it continue to bounce around, assuming no more orders?

Yes. Unfortunately, as we've talked about previously, the whole revenue recognition standard, ASC 606, has introduced a new level of volatility into the Defense segment for us. And what we've been very consistent about when talking about this segment since that new standard was implemented is, think about the full year guidance, there's going to be things from quarter-to-quarter that we've seen in the past, seen this quarter and you're likely going to see in future quarters that just on the surface may make you scratch your head a little bit, but in context of the full year, everything still holds together. We've got a great backlog. We're about 90%, I think 98% booked for the year. So we know what's coming at us. The wildcards typically are the timing of orders. When we got the JLTV order in the first quarter, we did note in that release that we are expecting additional JLTV orders later in the quarter. That's still the case. The [precedent] -- the fiscal '20 budget was finalized in the first quarter. So we'll expect additional orders from our other programs as well. Some of the things we talked about in the prepared remarks, the higher NPV in the quarter. So that certainly was a drag. Last year, we had the favorable resolution of a contract compliance matter. There's a number -- just a number of moving pieces in there. But as we look at the remainder of the year, given the visibility that we have, we feel really good about the year. It is going to be continue to be lumpy from a quarter-to-quarter basis because we know the orders are going to come in. We don't necessarily know are they going to be the second quarter, the third quarter. But on a full year basis, we feel good.

Okay. And again, I guess, assuming we get an order, all things being equal, that would bump the margin up relative to not getting an order.

All things being equal, that is the case. But if you think about going forward, Steve, another thing that is going to help us from a margin standpoint, this was the lowest sales quarter in the year for defense. When you look at the implied guidance for the remainder of the year, that would say, just if you spread it out equally that, on average, remaining quarters are going to be up about 15% above where the first quarter was from a sales standpoint. So we'll benefit from improved absorption in those quarters as well. And then the NPV impact probably shouldn't be as pronounced as we saw on margins in the first quarter and the upcoming quarters.

Okay. So in Q2, is there anything we should keep in mind relative to defense margin?

Well, we will look at timing of orders. And again, we're not in control of when the government places those orders. We're confident that we will get those during the year. But what we can't say definitively is whether they're going to start coming in, in the second quarter or the third quarter.

Our next question comes from the line of Stanley Elliott with Stifel.

Dave, first off, best wishes. And Mike, welcome aboard.

Thanks, Stanley.

I was hoping you guys could start, nice performance here on the margin side within the access business. Is there a way to parse out how much of that was mix versus maybe favorable steel? And then with a lot of the restructuring that you've done over the past several years, could you remind us again on what sort of a decremental margin would look like kind of on a go-forward basis under kind of the current framework?

Okay. If I missed some of those Stanley, please just remind me. So first quarter performance, as we called out on the prepared materials, price cost, favorable mix, operational efficiencies, all helped us offset the impact of the lower sales. From a price cost standpoint, last year, at this time, we were still -- in the first quarter, still working through the remainder of some of that price-protected backlog that we had in place when the surcharges were implemented. So that was a little bit of a tailwind for us in the quarter. We won't benefit from that going forward, obviously, as we will have worked through all of that year-over-year change. But the big thing that, I think, kind of sticks out versus what we've seen in the last couple of quarters is really that mix. It was certainly a more favorable mix weighting towards aerial work platforms. If you recall last year, we were very strong in telehandlers, and part of that was due to kind of a recovery after we had made the movement in production of telehandlers the prior year. So when I look at -- versus the fourth quarter or the third quarter of fiscal '19, that one kind of really sticks out at me is as something that was a nice contributor for us.

In terms of the decremental margins going forward, part of that's going to depend on product, customer, region mix, which you would expect. But kind of a rule of thumb that we've talked about, is a good place to start is maybe that low- to mid-20% decremental margin, and then we adjust it from what we're seeing in the other areas around that and then any impact of operational issues or -- I'm sorry, initiatives that we've been working on. When I look at the upcoming quarters, the decremental margins, I would say, are still pretty good in the remainder of the year. So I think the access equipment team is doing a good job of really managing the overall business, be it from the price cost standpoint. They're continuing to execute on a lot of those initiatives. We're going to continue to see benefits from those going forward. We will lap later this fiscal year, some of the operational -- benefits from the operational initiatives that we put in place for in fiscal '19. So that's why you -- the implied decrementals aren't going to look quite as good as we saw in the first quarter or that's one of the reasons why they won't look quite as good. But there's still, I would say, on a relative scale, implied healthy decrementals in Q2 through Q4.

Our next question comes from the line of Jamie Cook with Crédit Suisse.

And congratulations, Dave. I wish you the best of luck.

Thank you very much.

And welcome, Mike. But I guess my question just in terms of the commentary you guys have talked about on the access equipment side in North America, in particular, telling you, you have a pretty good feel for how your customers are thinking about the year. I mean is all of that number sort of reflected in backlog? Or are they sort of -- can you talk more broadly, how they're thinking about CapEx in 2020, in particular, with ConExpo coming up, I would assume that'd be a favorable event for you guys in terms of potential orders? And then just the weakness that you sort of noted in Europe. Can you just talk to sort of the order trends that you saw in Europe in the quarter. And then last, on Fire & Emergency, you noted you had the inefficiency associated with the supplier. If you could just provide any color on how much of that impacted the quarter? And do we catch up for that in the second quarter?

So this is John Pfeifer. I will attempt to answer that. So if I missed something, I'll try to come back to it. So let me start on Access. If we look at the outlook for Access, Q2 through Q4, we think we have a very responsible outlook, and Dave just talked about the favorable decrementals in this business. Let me tell, our customer negotiations are largely complete. We booked $1.3 billion in orders and our backlog is over $1 billion. We feel good about that. Let me kind of give you the underlying -- what's underneath that. First of all, economically, we feel that economic indicators have shifted a little bit in our favor. Economic forecast is pretty good. Forecast for nonresidential construction has moved favorable. We saw the really good residential construction stats come out just recently. The Dodge Momentum Index has improved. So all that's good. From a customer perspective, rental rates, we have very strong relationships with our customers; they're positive. Rental rates are healthy. Utilization is healthy. So we're pleased with the annual negotiations.

When you talk about CapEx for this year, CapEx is probably a little bit focused more around replacement CapEx than it is around growth CapEx, but we knew that. That's not a surprise to us. That's what we had expected. And then, again, another thing that we look at a lot is used pricing. We know the used market well because we participate in it. And we feel that used market pricing is fine right now. So that all underpins why we believe we've got a strong or a responsible outlook, I should say, for the access market.

Now we took our -- the top end of our sales guidance down by $50 million because of Europe. Just a couple of comments about Europe. We have a very robust SIOP process, which is underpinned by our forecasting capability in Europe, great relationships with our customers. We got a lot of data points and we felt some weakness in Q1 on the order rates going forward that caused us to take down the top end of the guidance a little bit. Now you see what's happening in Europe, probably the reasons for the uncertainty with our customers is Brexit causes uncertainty, sociopolitical challenges in the region caused a little bit of uncertainty, and I think that's probably the main factor there that's causing a little bit of that weakness in our expected order rates for the rest of the year.

I think your final point was about F&E. F&E is doing just fine. The full year is just fine. We had a supplier issue in Q1, which caused us to shift our mix around a little bit. So our mix became less healthy than we normally would expect. It caused our sales to be a little bit lower than we expected and it caused some operational inefficiencies. Those have been worked through, we are fine for the full year. That's behind us. So we feel very, very good about the F&E business and where it sits today.

Our next question comes from the line of David Raso with Evercore.

Quick question about the access revenue guide. I mean, the last 2 years, the backlog was sort of abnormally high after the fiscal first quarter. But outside of those last 2 years, the current backlog you have as a percent of your sales guide, it's the highest you've had in 10 to 12 years. So it was a little bit higher backlog than I would have thought. But then to still take the top end of the revenue guide down, and you just explained it was Europe-centric. But is it also because where orders pulled forward a little bit, maybe due to the ANSI pushback, just trying to understand the strength of the backlog to the revenue guide, but you still chose to take it down. Was there a pull forward in orders in some degree?

David, no, not from what we we're expecting. As we said in the prepared remarks, we're pleased with the orders. Things played out largely as we expected. If anything, probably attributing it a little bit, too; it's still early. We did see, as John mentioned, some things and heard some things in the quarter out of Europe that led us to think things might be a little weaker there. But overall, no, the quarter played out, as we've said, largely as expected.

Okay. And just the backlog is pretty healthy relative to the guide. On the first quarter access margins, you mentioned all the issues, price, cost mix. But for the full year, aerials are still supposed to grow or be down less, I should say, than telehandlers. Is that still correctly, the mix will stay positive for the full year?

Yes, a little positive. Not as positive as we saw in the first quarter.

Right, right. Yes, the down 9% versus the down 25%, it won't be that wide again. But for the full year, it should still be slightly positive.

Yes.

Okay. All right. It's really all I had. I'll follow-up with Pat. And again, congratulations, Dave.

Thanks, David.

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

Just following up on David's question. With the orders so strong in the quarter in Access, can you talk a little bit about what your lead times are today versus what they might have been a year ago? And when would you have to see orders reaccelerate in order to make your full year revenue guide?

This is John. And I'll take that question. So lead times, generally, lead times have come down from their highs of 9 to 12 months ago. Most machines today have lead times from 2 weeks to a few months, but you could probably say average of about 30 days, which, again, is better than it was a year ago. So that really supports our view that order rates have returned to a more normal pattern versus recently when we've had these gigantic orders coming in, in the very first part of the year. So we think the order timing has shifted out a little bit, partly because of our lead time situation.

And can you tell me what the lead times were a year ago, roughly? Is it more like 60, 90 days? Or is it that extreme?

It depends on the product category, and in some cases, yes, it was that extreme.

If you'll recall, Ann, we had shifted our telehandler production, consolidated it and telehandler lead times have pushed out quite a bit for us, which is all normalized now.

Okay. And secondly, just a follow-up on the commercial side. Can you just expand on some of your comments on the mix in that business in the quarter?

I'm sorry, can you repeat that, Ann?

Can you just expand a little bit on the mix of products that you called out in the quarter for Commercial?

Sure. As we said, we saw a little bit of an adverse mix. There was the higher mix of what we call package sales. And that's where we sell both our body as well as a third-party chassis. And we make our money largely on our bodies, not so much on the third-party chassis. So that's a little bit of a drag. RCVs were up year-over-year and then concrete mixers were down year-over-year, and that's largely due to timing. We had a couple -- when you look at the order pattern in mixers, there are a couple of customers that were conspicuously not in with their orders in the first quarter. They have since come in, in January, and we're off to a good start for orders here in the second quarter for mixer. So a lot of -- we attribute a lot of that to just the timing.

Another factor in commercial in Q1, which is -- which I think is a positive thing as we were -- we had higher new product development spending in the quarter. We're launching a new S-Series 2.0, a front discharge mixer, which is going to be a great product. It will be at ConExpo. And we -- as we ramp that, we had higher R&D costs in the quarter. We think those are good costs because they're really an investment in the future of that product line.

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

Dave, good luck. Mike, welcome aboard. So just wanted to dig in on just the cash flow, which came in a little bit lighter than typically normal for season -- for the season. Can you just talk about the drivers of that? And more specifically, just talk about the quarter-over-quarter inventory build? And what segments drove that?

Sure. So if you look at the fiscal year, typically, absent any large defense international contracts and cash flows associated with those, the first fiscal quarter is going to be our weakest cash flow quarter of the year, and this year was no different. Inventories are up year-over-year, and that's largely in Access and Defense. A couple of things going on there: one, we -- our defense -- Access is carrying a modest amount of what we call pre-ANSI inventory as they go into the transition to the new ANSI models coming up because we know just in terms of response to customer feedback in terms of interest in that product yet. So that's one thing there. They're also -- as you can imagine, given the labor environment today, they're carefully managing for production cadence along with their workforce levels. We are going to see production down in that segment. We've known that. We've talked about that. So we think, overall, we're in good shape there. Defense, it's really more about what's to come yet this fiscal year. If you look at the upcoming quarters, we are going to see sales increase, as I talked about in response to an earlier question. So that's largely just inventory build to support the sales levels that we expect in the coming quarters.

That's helpful. And second question is just on some of the puts and takes during the quarter. So for example, in Access, how much of the JLG amortization was with a tailwind there? And then on the Fire & Emergency, just some of the supplier issues, you talked about some revenue pushouts, margin impact. Can you quantify that? And to what extent will that actually be a tailwind in 2Q?

So on JLG, the amortization, it was a small benefit in the first quarter. We'll see a larger benefit in each of the subsequent quarters and remainder of the year. In Fire & Emergency, John talked about the adverse mix. We aren't going to quantify what the impact is, but it will be a favorable mix impact to us going forward in the quarter because we did had to move things around in the first quarter. It did end up being a little bit of an adverse mix versus what we were expecting. And then, as John also mentioned, just the efficiencies -- or inefficiencies associated with that supplier issue. Those will be behind us and will be relative to the first quarter, a tailwind in the coming quarters.

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

And Dave and Mike, congratulations.

Thanks.

And just a quick note, Dave, I think the earnings power of the business was about $3 or less when you took on the CFO role. So big congratulations to it. Big things done over your tenure as CFO.

It takes a village, Jerry.

Can we talk about an axle equipment, I was pleasantly surprised by the bookings this quarter, as you heard from others on the call. Do you think you're gaining share? Can you give us a bit more context? Also, looks like you had really good performance out of, it looks like, Jerr-Dan products based on disclosures in the quarter. Can you just expand on those 2 items, if you wouldn't mind?

Yes, Jerry, first of all, I appreciate your comments about Dave. As I said, we're going to miss Dave. He's been kind of our rock. But as also mentioned, we got another good rock coming in, in Mike, and he's been under Dave's mentoring for several years. So I think the transition has been well played out and planned. And so -- and again, Dave is going to be behind this journey forward and still help us some, too. So -- but again, thanks for that comment. Dave, well-deserved retirement.

As far as share market, Jerry, we don't -- as you know, we don't get into details about that. What I would tell you is, we like the way the JLG team is performing in the marketplace. You can see they've been very disciplined in pricing and really just taking care of all the things that they can control. We talked last year that we lost a little share in telehandlers due to that consolidation move we made. We believe we're back in good shape with telehandlers now. And this off to ConExpo, which all of you will come and see us out there. We've got some exciting new things to introduce, which innovation has been one way that JLG has grown share over the years. So all in all, we like our share position. There's always some deals that we don't get, but sometimes those deals are not the right deals to get from a price cost standpoint.

And Jerr-Dan is a good story there. That's -- if you go back 4, 5 years, that was one of our business units that was really struggling to make money. And through good leadership, good insight, operational excellence, it's been, again, guided by JLG, that's part of JLG, they're back on track now, performing like most of our other business units. So good story there. They're in a tough marketplace. But we do believe they have gained some share over the last couple of years.

Okay. And in terms of staying with Access, the outlook for heading into the second quarter here, normal seasonality is for your sales and production to be up about 30% from first quarter levels. Can you just talk about any puts and takes we should keep in mind given the flows in the backlog compared to that normal seasonality? And if you could comment specifically on what you're seeing in your China business given the unfortunate situation there, that would be helpful.

I'll start, Jerry, and maybe John or Wilson want add in as well. We do expect to see a seasonal uptick like we normally would. I think we are hearing a few things about Q3 may actually be a little bit stronger than Q2. And that's normal, again, from a seasonality standpoint, but it almost sounds like we're starting to hear that it might be a little bit more stronger than Q2 than we've seen in the past few years. But overall, I'm not aware of any significant gives and takes. And I don't know if John or Wilson, if you want to add anything about the China coronavirus.

So on the China situation, we're paying attention to it day by day, maybe even hour by hour. All of our people are fine. Our manufacturing plants are fine. They're planned to come back from Chinese New Year as scheduled. So we will probably have some people working at home in Shanghai until they reopen Shanghai. But let me just go back to -- our thoughts are with everybody that are dealing with this situation. We actually think they're dealing with it appropriately. But let me just go back to China. It's a great long-term story for us. It's a big market. It's going to continue to get bigger. We love the adoption rate trends in China towards our product, away from the old methods of construction and working at height. So long term, we feel great about China. Short term, it's a day-by-day situation. But to this point in time, we have not been impacted.

And not to be insensitive to the issue going on there, but total consolidated, less than 5% of our revenue. So if it does become a more significant issue, just -- so you have the scale, it's less than 5% of our revenue.

Our next question comes from the line of Tim Thein with Citigroup.

Dave, enjoy retirement man.

Thank you.

Yes, the first question, just to follow back up on Access margins in terms of the -- for the full year guidance and based on what you have in, in backlog today, what is the expectation for price cost that's assumed? I think from memory, in FY '19, the pricing was fully offset by material costs. So just curious what that full year expectation is currently?

Overall, I would say there's an alignment between price/cost expectations for the year. And we did -- I did mention earlier, in Q1, about last year, some of the -- working through the remainder of the price-protected backlog. So that's probably a little bit of a benefit. But we've tried to look at this holistically from a standpoint of where all of our costs are going, not just steel. There's a lot of other components that go into that. We've got labor costs. And where we are and so it's -- we try to be responsible with that pricing. And I think we are, and I think that responsible outlook is baked into the forecast guidance that we've provided for the year.

Okay. All right. And then just on Defense and maybe a bit longer term, but you gave some help -- some good color earlier in terms of the implication to the FY '20 DoD budget. Any early read in terms of what the team is expecting around the '21 budget request to be released, I guess, in a few weeks from now?

No. I wish we had that much insight, but they hold that pretty close to the vest until they drop that on to Congress. I think that's targeted for sometime in February.

I think, John, keep in mind, too, that we have FHTV contract deliveries into 2022. We have contracted JLTV deliveries into 2024. And then the FMTV contracted into 2026. So we're positioned well with our programs. But to Dave's point, we don't know until that information is released for next year.

Our next question comes from the line of Seth Weber with RBC.

And Dave, congrats, again.

Thank you.

Enjoy it. Well deserved. So maybe just on the Defense business. You got the 30 -- the order for the 30 JLTVs internationally. Can you just, Wilson, handicap your confidence level that 2021 could see some additional JLTV awards internationally? How are you -- I know you're not guiding to '21 yet, but if you were trying to handicap this, do you think it's more likely than not that you'll have something in addition to the 30?

Yes, Seth. We expect to actually have some international orders later this year, some more. We know Slovenia and Lithuania are both working through the FMS process. That process takes some time, but we know they are in. I think we've talked before about the U.K. MoD that's approved for roughly 2,700 vehicles. They have 2 that they're testing right now, and we expect they may make some adjustments to the variant, but we'd expect them to come in at some point. Probably, even better news is our JLTV defense team was just over in London at an Armored Vehicle conference, and they had 16 different Ministries of Defense, all doing trials and demonstrations on JLTV. So obviously, we're very excited about the opportunities in Europe and the Middle East for the JLTV. So to answer your question, yes, we expect orders in '20 and in '21 from international standpoint.

Excellent. And then maybe just on the Fire business. You talked about -- you called out the international being affected by the trade policy and such. I mean, how big of a tailwind do you think that could be if we get some resolution? Can you just remind us how big the international is as a portion of that business? And where could that go, I guess, from here? Could it be a significant tailwind in, say, FY '21?

Well, this is John. So let's kind of keep in mind that most of our business is North American business and most of it's U.S. business. Having said that, our business internationally is a material contributor to our business performance. We have been -- we feel really good about our business in that we've been able to keep a really, really strong order book, in fact, a record backlog, because the business in the U.S. is so strong. So when we see international business pickup again, sure, it's going to be an added benefit, but it's not impacting this year whatsoever due to the healthy level of our U.S. market right now.

Okay. Just maybe to be a little bit more specific that John is spot on with what he said. But in the past, it's been roughly about 10% of the F&E revenue, Fire & Emergency revenue. So if that helps you set, just to use about 10%.

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

Dave, thanks for all the help over the years. Best of luck to you going forward.

Thanks, Mig.

So I too want to go back to Access Equipment. And you mentioned that the seasonality of orders is looking a little bit different, and I think, like everybody else, I do agree that the orders in Q1 were better than what I expected. But given that seasonality comment and the way your comparisons on orders were for the rest of the year, is it fair for all of us to expect year-over-year growth in orders in Access?

When you look at the implied sales for the full year, that would say that Q2 through Q4, cumulative orders will be up year-over-year. Let me add a little context to that. Last year, in 2019, we did see orders start to moderate. And I think you pointed that out to us last year. And if you go back and just actually run the numbers, cumulative Q2 through Q4 orders in fiscal '19 compared to fiscal '18 were down, I think, around 23% to 25%, somewhere in that range. So what we're looking at, it does imply this year that orders will be higher. But if you go back even farther to fiscal '18, sales in fiscal '18 were right about the high end of our full year guide for fiscal '20, and the implied orders that we need yet for this year to hit the high end of the range, which is what we always target. I would say that we need a little less orders over that cumulative 3-quarter period than we experienced in '18. So we've looked at it a couple of different ways. On the surface, yes, you can say, they need to be up. But I think in the context of a multiyear view to that, it makes sense, and we believe they're achievable.

Right, because that was going to be my question, given the fact that you're done with your negotiations with your main customers, I'm presuming that there is a level of visibility that you have now that you might not have had 3 months ago when we were having this discussion. So given that, that's embedded in the outlook, how confident are you in that, presuming pretty confident, otherwise you wouldn't have issued the outlook, but still?

Yes, you're absolutely correct. We have better confidence now, and we think that our outlook is very responsible, and there's a lot of data points that go into it, and we feel good about it.

Last question for me is, if I'm looking at the low end of the guidance, the $3.5 billion, recognizing your comment that you're seeing less fleet growth and more replacement demand, how much of that $3.5 billion would you guess is replacement demand?

That's hard to pin down, Mig. I mean, when we get an order in from a customer, it's not -- here's a growth order, here's a replacement order. I think we've been pretty consistent that we believe our customers are going to pull back on their growth CapEx this year. So we certainly expect that a meaningful portion of that will be replacement. But for us to get any more specific than that, it's really hard.

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

And congrats again, Dave.

Thank you.

Just wanting to echo what everyone mentioned. Not to belabor Access, but just wanted to make sure I fully understood the guidance change versus what you had previously guided to last quarter. I think you suggested that North America would be down 15% to 20%, and then Europe would be down double digits. So with most of this decline coming from Europe, I just wanted to -- and your order is only down about 14% year-over-year, is it safe to say that you are trending towards the low end of your North America expectations or even trending a little bit better than that? And then how should we think about the magnitude of Europe being down relative to what you had previously expected?

Yes. It's too early for us to really change our expectation on the U.S. market. We feel fine about where we are with the U.S. market. So I wouldn't say that we feel like we're trending to the low end. I would not say that at all. We just felt a little bit more weakness than we had expected in EMEA, which is why we took it down by $50 million. And we feel like it's too early to say we expect it to be offset by stronger orders in North America. So that's really what it is.

Okay. And I think you had also suggested that APAC would be up double digits, and I appreciate some of the comments about how small China is as a percentage of your sales. But is that still the expectation in APAC or has that shifted at all as well?

Yes, that's still the expectation. And when we say that it's up by double digits, we're not talking 10% or 20%. It is a strong, strong growth market, and we expect it to be for several years to come.

Okay. And I think you said it was up over 40% last quarter. Is it similar this quarter?

Yes.

Okay, got you. And then just on inventory levels, I think you also suggested that those were in a relatively good shape exiting the year. Is that a safe comment at this point in the year as well?

Yes. Yes. We -- I'm sorry, go ahead.

No, no, no. Go ahead.

We did get a question earlier on the call about inventory levels. So they are up a little bit, but we think the reasons why they are up a little bit are very valid and for the right reasons.

Okay. And then just lastly, on price cost, I think a couple of people mentioned this as well earlier, but I just -- you obviously said it was positive this quarter, but just wanted to understand, for the remaining 3 quarters, do you still expect price/cost to be positive even with the roll-off in the surcharge from the backlog?

And -- overall, I would say the -- our price/cost is fairly in alignment when we look at Q2 through Q4, it's not going to be as favorable as we saw in Q1.

Okay, but it won't be negative for the remainder of the year, offsetting positive...

We do not expected to be -- on a full year basis to be negative. No.

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

And best wishes, guys. Just starting off on the defense margins coming back to follow-up on Steve Volkmann's question. I know you said it was going to be lumpy. But is the margin base case that the Q2 was going to be something like the full year overall margin guide of 9%? Or is there some of the reason why the margin might be more back-end weighted other than just the timing of orders?

Timing of orders are going to be the big driver, Steve. I'm not trying to be evasive here. It's just we don't control the timing of when those are released. As we sit here today, we think we're going to see a continued improvement in margins as we go through the year. Again, as I talked about, Q1 is the lowest sales quarter of the year. So certainly, we expect to see some absorption benefits. Everything that from the production side and the MPD spend side, all of that is in alignment with supporting higher margins as we go through the year. It's just the -- volatility from quarter-to-quarter is really going to be dependent upon the timing of the receipt of those orders that we're confident that we will get in the fiscal year.

Okay. That's helpful. And then just on Access, you mentioned that your order discussions with the key customers are largely complete, and maybe this is really just my being too picky on the wording, but how unusual is it for those to not all be resolved at this point? And maybe what's unique about customers that haven't fully finalized yet?

This is John. It's not really unusual at all. When I say it's largely complete, it's because we still have some negotiations to wrap up and some orders to come in Q2 from those negotiations. But let's say it's 90% to 95% done.

Our next question comes from the line of Mike Shlisky with Dougherty & Company.

And again, Dave, best wishes.

Thank you.

So guys, it has not been made 100% clear, thus far in the call in Access Equipment. At this point, do you still feel good about 2021 being possibly a better year than this year due to ongoing replacement and just a little more color there. Could you maybe give us any kind of feel for how -- if I look between the mix between telehandlers and aerials?

I'll jump in on the '21 question, Mike, and then I'll let Dave talk mix. But it's January of 2020. And we're just getting into the first quarter of our -- or most of our customers. I think you know we're on an October through September year. So we always come into the year, working hard to get the next forecast in place. But what we would say about '21 of what we know today is, if you think about the normal replacements on aerial work platform there were some really big years back there in '13 and '14, which would add up that '21 should be a fairly large replacement year. We've heard commentary from some of the rental companies that's consistent with this thinking. So we look at '21 as a good year coming out from what we know. But again, you know this, we're not going to call '21 as we're just getting started in our customers' fiscal 2020.

Mike, this is Dave. I would echo Wilson's comments, you look back historically, and that's a pretty good indicator. When you start looking at the fleet ages of when they needed to be -- need to be replaced. And ideally, when they should be replacing in that 7 to 9 years seems to be the sweet spot. You see maintenance costs tick up, you see used equipment values. That's kind of the sweet spot as well. In terms of mix for 2021, yes, it's still way too early to be thinking about what that might look like. That's going to be largely dependent on what each of those customers is seeing and the timing of sequencing of how they want to think about replacing that used equipment.

Okay, great. I also want to ask secondly about the large defense order that came in, in December, which you've been talking here on the call about. Perhaps I'm looking at this too much, but in your past orders from the government and your past written comments, there's always been an order that has been for the army and the marines, and the wording of this order entered in the Navy and the Air Force. Now of course, those folks, they fly out more airplanes, they buy boats, but they do definitely drive people around as well. Is there an opportunity for those 2 branches over time? Or at this point have your orders already included all 4 of those branches?

No, they haven't. And there are opportunities there, Mike. So we're continuing to work that out. Our JLTV team is busy domestically. And as I mentioned earlier, they're very busy on the international front, too.

And Mike, if you look at -- go back to that press release, we did make a comment in there that we expected additional JLTV orders yet this fiscal year. And once those come in, we'll get a better idea of what branches of the service, those incremental volumes are for.

So just to kind of clarify at this point then, what you -- until this order, all your other orders were just for 2 branches only and not for all 4?

Largely. There may have been a smattering in there for the Air Force and the Navy.

Yes.

Mike, the army, as there is -- these guys are saying the army and the marines are the prime users. There are some Air Force and Navy requirements, though.

Our next question comes from the line of Steve Barger with KeyBanc.

Congratulations, Dave. I'm sure, Charlie Szews is excited to have a new fishing buddy. You probably have to screen your calls. This is going to be the first revenue decline in 4 or 5 years, but it looks pretty modest. And obviously, the balance sheet is in great shape, should be a good free cash flow year. Are you using this time to get more aggressive about trying to source deals or look at pitches?

Steve, we've always talked about our always on list. The theme for us is opportunistic. We're generating good cash. We'll generate more cash this year. What we want to do is if we do make a move, make sure it's the right move, a move that you would say, "Oh, that makes sense. So we're not going to go just buy something to buy it. So we look at that up to this point, capital allocation, I think, has been displayed well from our company. The balance sheet, as you mentioned, is in good shape. And so we'll continue to review the share repurchase opportunity, the possible raising of the dividend. And then looking -- it's not just a deal, there could be some partnerships, potential JVs. There's a lot of conversation going on in the market today with companies working more together than in the past. So we're certainly eyes wide open and looking at -- it's about everything out there that could possibly help us grow and add value to our shareholders.

Our final question will come from the line of Ross Gilardi with Bank of America Merrill Lynch.

Great. And congrats Dave as well.

Thanks, Ross.

I can't think of any other questions, possibly. The only thing I was curious about was your implied Commercial and Fire & Emergency orders. If I'm doing the math right, I mean, I think your Commercial orders are up like 13% year-on-year. And fire is up like 50%. And I'm trying to understand that in the context of the Class VIII truck orders that we get and the VI, VII truck orders that we get that are all still squarely down. Are these just the only few end markets in the whole market that are still growing? Or are there any like unique share issues or timing issues that are influencing your implied order growth? I'm just trying to understand that sustainability really of that.

Ross, I think, one thing, if you're looking at kind of the Class VIII comparing with that. We're vocational truck builders here. And as I've -- and we've looked at some of the [commentary] out of the truck OEMs, I think they've all been pretty consistent that their vocational market continued to remain quite healthy and their outlook for their vocational markets continue to remain quite healthy. It's a little bit different than over the road outlook. Know that. But I think what we're seeing is fairly consistent with what we're hearing from the truck guys.

I think just to add to that, the 2 big markets that you're seeing move there, the refuse collection vehicles and fire municipal spending. And municipal spending has held pretty well and you've got some pretty old fleets that are in need of replacement. And so that's where you're seeing some of the pickup in fire and refuse.

I'll even add to that, Ross, that in the F&E market, we have really, really good dealers, and they're getting better. We've also got new products that have been helping a lot in aerials and other parts of our product line. So all those parts that we're gaining share in the F&E environment.

Yes, I agree that the truck OEMs have been a bit more upbeat, and I realize you're not included in over-the-road order numbers, but even the class VIII straight, vocational numbers seem to be down. So it does seem like you guys are really outperforming in that respect, which is great.

I would now like to turn the floor back over to management for closing comments.

Well, I'm going to start off. And again, thanks, Dave, David Sagehorn for 20 years of just great work here in our company in helping us get to levels that quite honestly, I don't know if we ever thought we would get to. And obviously, he's challenging us to keep going, and Mike will carry that torch forward for us. I want to thank everyone on the call today for your interest in the Oshkosh Corporation. We certainly look forward to speaking with you at a conference or on our next earnings call. Have a good day, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.