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Edited Transcript of OSK earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q4 2019 Oshkosh Corp Earnings Call

OshKosh Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Oshkosh Corp earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Sagehorn

Oshkosh Corporation - Executive VP & CFO

* John C. Pfeifer

Oshkosh Corporation - Executive VP & COO

* Patrick N. Davidson

Oshkosh Corporation - SVP of IR

* Wilson R. Jones

Oshkosh Corporation - President, CEO & Director

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Conference Call Participants

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* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Courtney Yakavonis

Morgan Stanley, Research Division - Research Associate

* David Michael Raso

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Michael Shlisky

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Neil Andrew Frohnapple

The Buckingham Research Group Incorporated - Analyst

* Ross Paul Gilardi

BofA Merrill Lynch, Research Division - Director

* Seth Robert Weber

RBC Capital Markets, Research Division - Analyst

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Timothy Thein

Citigroup Inc, Research Division - Director and U.S. Machinery Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2019 Fourth Quarter and Full Year Results. (Operator Instructions) Please note, this conference is being recorded.

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

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Patrick N. Davidson, Oshkosh Corporation - SVP of IR [2]

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Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 2019 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 year are to our fiscal quarter or fiscal year, unless stated otherwise.

Our presenters today include Wilson Jones, President and Chief Executive Officer; Dave Sagehorn, Executive Vice President and Chief Financial Officer, both of whom you have come to expect from us. Also joining us for the first time on a quarterly earnings call is John Pfeifer, our recently hired Chief Operating Officer.

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

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [3]

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Thank you, Pat. Good morning, everyone. And to follow up on Pat's comments, I'm happy to welcome John Pfeifer to the call. John brings a lot of expertise to the table, and you'll hear from him in a few minutes.

Today, we're pleased to announce strong fourth quarter and full year results. Fourth quarter earnings per share of $2.17 was up 20.6% compared to the prior year's adjusted earnings per share, and full year adjusted earnings per share of $8.31 was up 30.7% versus 2018. We've delivered 38% adjusted earnings per share CAGR since 2016. I'll say that again, we've delivered 38% adjusted earnings per share CAGR since 2016. That's pretty good performance, and I'm proud of the efforts of all the Oshkosh team members and our people-first culture in posting such strong results.

I'm also very proud to announce that last month, we were named to the Dow Jones Sustainability World Index, recognizing Oshkosh's ongoing commitment to sustainable business practices. We've been recognized by many different organizations for strong corporate governance and sustainability over the last several years, but the Dow Jones Sustainability Index is the gold standard, and we're proud to be listed among this group of global leaders.

Last quarter, we talked about mixed economic signals. That trend has continued and is reflected in our initial outlook for 2020. Today, we are announcing our 2020 earnings per share estimates with a range of $7.30 to $8.10, which will be the third highest earnings year in our company's history. Dave will discuss our 2020 expectations in more detail.

As I mentioned earlier, our team has been performing at a high level, and our execution and operations are performing better than ever as a result of our MOVE Strategy and simplification efforts, which should allow us to deliver strong results in 2020 while also continuing to invest in the business. Additionally, the benefits of being a different integrated global industrial provide us with a stable foundation based on solid outlooks for our fire & emergency, defense and commercial segments.

Please turn to Slide 4 and let's talk about the full year.

I would characterize our performance in 2019 as strong execution and results in an uncertain environment. We successfully navigated the impacts of volatile trade policy and tariffs, along with talk of an impending recession. We posted double-digit percentage sales increases in our fire & emergency and defense segments and record sales of more than $4 billion in access equipment. Additionally, all 3 of the segments I just mentioned delivered full year operating income margins of 10% or more. That's outstanding performance. The commercial team was on track for solid improvement in 2019 as well until production was disrupted by partial roof collapse in February. We continued our track record of disciplined capital allocation, returning more than $425 million of cash to shareholders for the repurchase of 4.9 million shares and ongoing quarterly dividends. We announced this morning that we are raising our quarterly cash dividend by 11% to $0.30 per share. This will be the sixth consecutive year that we've raised the dividend rate by double-digit percentage.

Please turn to Slide 5 to begin a discussion for each of our business segments. I'll start it off with defense and then turn it over to John, who will discuss our nondefense segments.

Last quarter, our defense team received word that the JLTV was moving to Full Rate Production status, and we've been building off of that success over the past several months. The team is working through operational excellence programs as they ramp JLTV production, including incorporating the configuration changes we discussed earlier this year. The program is in great shape, and the team is being recognized for it. In fact, we just hosted senior Navy officials, including Secretary of the Navy, Richard Spencer, who presented Oshkosh Defense with a Bravo Zulu award for delivering JLTVs to the Navy and Marine Corps ahead of schedule and on budget. On time, on budget and exceeding performance are all hallmarks of our defense programs, and we're going to keep performing to those standards.

The JLTV continues to derive strong interest from the international defense community, with multiple countries planning to purchase this amazing vehicle. We participated recently in 2 important defense trade shows, DSEI in Europe and AUSA just 2 weeks ago in Washington, D.C. Our defense team reported strong activity and engagement at the shows. At AUSA, we displayed 2 new JLTV variant concepts that showcased our strength as a tactical wheeled vehicle leader. We continue to be confident that we will book JLTV international orders in 2020 for shipment to foreign allies beginning in 2021.

We've previously talked about the 2-year U.S. government budget deal that was hot off the presses in July. We also mentioned that a continuing resolution could still happen, and that is in fact what did happen as President Trump signed a CR in late September, keeping the government funded until November 2021. The timing of finalizing the government's 2020 budget will not, I repeat, will not have a significant impact on our 2020 outlook due to the extensive backlog we already have in place.

Let's turn to Slide 6, and I'll pass it to John to discuss our nondefense segments.

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [4]

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Thanks, Wilson, and good morning, everybody. I'm proud to be part of the Oshkosh team and happy to be speaking with all of you today on the call.

Our access equipment team delivered strong results this quarter with sales of just over $1 billion, contributing to the annual record sales that Wilson just mentioned. Full year sales were powered by North America and Asia Pacific, which were both up double-digit percentages over the prior year.

The catalyst for increased demand for access equipment in the Asia Pacific region is product adoption, which is driven by safety and productivity improvements on the job site versus previous work methods. The strong growth we've experienced in this region over the last several years and positive outlook for continued growth have led us to expand our operations in China. The team is expanding production capacity on its current campus, which we expect to be completed in the next year.

Last quarter, we talked about a moderation in access equipment demand in North America and Europe. That slowing continued this quarter, and we expect it to continue into 2020. Orders and backlog for the quarter were down significantly due to the lower market demand and timing of order placement. We are generally hearing that customers plan to place their orders this year more closely to when they expect to need the equipment. This means we'll likely experience timing differences throughout the year when comparing orders and backlog to 2019. The annual negotiations with the national rental companies are underway, but it's early, and we'll have more insight into demand levels and order patterns for 2020 on our next earnings call.

We continue to believe the long-term prospects for our rental customers and the access equipment market remain healthy. With that said, we expect lower but still historically high sales in the segment in 2020. And as the industry leader, we also expect to deliver solid financial results.

Looking out beyond 2020, we know there is a lot of equipment that is coming up on 7, 8 and 9 years of age that will need to be replaced. We believe this fleet demographic will translate into strong replacement demand in North America, putting us on a solid path for 2021. We also believe we will continue to benefit from a rapidly growing Asia market through 2021 and beyond.

Please turn to Slide 7 for a discussion of the fire & emergency segment.

Once again, fire & emergency led by example, as they delivered sales and operating income growth for both the quarter and the full year. In fact, they set new full year records for sales, operating income and operating income margin. We've talked a lot over the past several years about the hard-working fire & emergency team and their dedication to simplifying operations, sales order management and the entire business process. The results are impressive and provide a great road map across the company for yielding positive results. Under Jim Johnson's leadership, the fire & emergency team has been able to increase their operating income margins by nearly 1,100 basis points since 2013.

In addition to the domestic municipal fire truck customer base, this segment benefited from increased U.S. Air Force activity as well as international shipment timing in 2019. We expect the Air Force business to be a driver of strong performance again in 2020. Orders were up solidly in the quarter, rebounding from a slight decline in the third quarter. For the full year, orders were up 10%, keeping the backlog at a high level. In fact, Pierce booked more orders in 2019 than they have in any of the last 10 years. Fire & emergency has experienced a slowdown in international orders recently due to the impact of uncertain trade policy. Fortunately, higher domestic activity has helped offset the lower international order volume.

Looking ahead to 2020, we expect flat to slight growth in the fire truck market in North America. We maintain a very positive long-term outlook for this business.

Please turn to Slide 8, and we'll talk about our commercial segment.

Our commercial team showed their resiliency as they continue to bounce back from some weather-related adversity that impacted production earlier in the year and finished 2019 on a high note with sales up nearly 5% in the quarter, led by our refuse collection vehicle business. Operations are back to normal, and the segment continues to focus on driving improvements through simplification initiatives. It takes time for the simplification benefits to be visible, and they've had to overcome some unexpected challenges that we've previously discussed. But I'm confident that they are regaining the momentum they've built from 2018 into early 2019. We expect 2020 and 2021 to be key years in the further transformation of this business.

We expect the refuse collection vehicle and concrete mixer markets in 2020 to be similar to 2019 at levels even with or slightly above long-term average for refuse collection vehicles and below long-term average for concrete mixers. We expect some choppiness within the year, however, as customers continue to monitor macroeconomic indicators, looking for clues to where the economy may be headed.

That wraps it up for our business segments. I'm going to turn it over to Dave to discuss our 2019 results and outlook for 2020 in greater detail.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [5]

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Thanks, John, and good morning, everyone. Please turn to Page 9.

We're pleased with the team's strong finish in 2019. Consolidated net sales for the fourth quarter were $2.2 billion, a 6.7% increase over the prior year, led by greater than 20% increases in defense, as the JLTV production ramp continued, and fire & emergency with both higher airport products and fire truck sales. Access equipment sales were down low single-digit percent, as expected. And commercial sales were up modestly, driven by higher RCV sales.

We've included an updated rev rec standard chart in the slide deck again this quarter. This will be the last quarter that we include this slide, though, as next year we'll be reporting year-over-year results on a comparable ASC 606 basis.

Consolidated operating income for the fourth quarter was $203.1 million, or 9.2% of sales, compared to adjusted operating income of $180.6 million or 8.8% of sales in the prior year. We're pleased that the access equipment team was able to offset almost all the impact of the lower volume to deliver operating income at nearly the level of last year and higher operating income margin. Favorable regional mix and lower freight costs, offset in part by higher marketing spending, were the primary drivers of the positive margin performance.

Defense operating income in the quarter benefited from the higher sales noted earlier. And while operating income margin was down compared to the prior year, due largely to the continued shift to a higher weighting of JLTV sales, fourth quarter operating margin was stronger than we expected, leading to a 10% full year operating margin.

Fire & emergency delivered another quarter of operating income and operating margin growth, overcoming headwinds compared to the prior year quarter. And the commercial segment continued to rebound nicely from the partial roof collapse earlier in the year, delivering a second consecutive quarter of operating income margin above 7%. Favorable mix with a higher percentage of RCVs was a primary contributor to higher operating income margin versus the prior year.

Earnings per share for the quarter was $2.17 compared to adjusted earnings per share of $1.80 in the prior year, a 20.6% increase. Higher operating income in the defense, fire & emergency and commercial segments, along with lower corporate expenses and lower share count, accounted for the higher earnings per share.

The fourth quarter benefited $0.15 per share as a result of share repurchases completed in the last 12 months. And we repurchased $66 million of Oshkosh shares in the quarter, achieving our full year target of $350 million of share repurchases. And we generated more than $400 million of free cash flow during the year. Overall, we're pleased with our fourth quarter and full year performance.

Please turn to Slide 10 for a review of our initial expectations for 2020.

We expect to deliver solid results again in 2020, even with the market for our largest segment, access equipment, projected to be down compared to 2019. The benefits of our end market diversity and operational leverage are reflected in this outlook. Our expectations for 2020 assume that we continue to execute our MOVE Strategy, including increasing our investment in new product development, or NPD, and expanding access equipment production capacity in China, which has been that segment's fastest-growing market.

On a consolidated basis, we're estimating sales of $7.9 billion to $8.2 billion compared to $8.38 billion in 2019. We're also estimating operating income of $690 million to $765 million compared to $797 million and earnings per share of $7.30 to $8.10 compared to adjusted earnings per share of $8.31. At the segment level, we're estimating access equipment sales of $3.5 billion to $3.8 billion, a 7% to 14% decline compared to 2019. This range is some sales declines in North America, driven by a pause in fleet growth by rental companies compared to the last 2 years, and the EMEA region, partially offset by continued strong sales growth in the Pac Rim, reflecting expected continued product adoption in that region. We're estimating operating margin in this segment will be 11.25% to 12.25%. We expect lower amortization expense and the positive impact of operational initiatives to partially offset the impact of the lower volume, less favorable regional mix and higher new product development investment.

Turning to defense. We're estimating 2020 sales of approximately $2.2 billion, an 8.25% increase compared to 2019. The estimate reflects additional JLTV production and modestly lower FHTV and FMTV sales. Backlog for 2020 was nearly $2.1 billion at September 30, so defense is largely booked for the year. We estimate that contracts for international JLTV sales that are currently in the works with other countries will not be signed in time to recognize sales in 2020, providing opportunities for 2021. We're estimating operating margin in this segment will be approximately 9%, consistent with our comments over the past several years of high single-digit percent margins. Compared to 2019, the expected margin in this segment reflects a continued mix shift to a higher percentage of JLTVs and increased NPD spending.

We expect fire & emergency segment sales will be approximately $1.2 billion, roughly $65 million lower than 2019. The lower expected sales are mostly a reflection of what happened in 2019. There were $40 million of sales that moved from the fourth quarter of 2018 into the first quarter of 2019, and we did not see a similar shift at the end of 2019. We expect a continued flat-to-slow growth fire truck market in North America in 2020 and slower international activity, especially in Asia if the trade war drags on.

We expect operating margin in the fire & emergency segment to increase to 14.5% to 15%, offsetting the negative impact of lower sales and operating income. The fire & emergency team has continued to effectively execute its simplification strategy and expects to realize additional benefits that will allow them to achieve the targeted margin range for 2020.

We're estimating sales of approximately $1.05 billion in the commercial segment, up slightly from 2019 and consistent with what John described. And we're expecting a rebound in operating margin for this segment to a range of 7% to 7.25% after 2019 margins were negatively impacted by the partial roof collapse last winter.

We estimate corporate expenses will be $150 million to $155 million, roughly equivalent to 2019. Below their operating income line, we estimate the tax rate for 2020 will be 21.25% to 21.5%, similar to 2019, and we're estimating an average share count of 69 million, which reflects the full year impact of 2019 share repurchases and an expectation that we will return 50% of free cash flow to shareholders in the form of dividends and share repurchases consistent with our long-term target.

For the full year, we are estimating free cash flow of approximately $450 million, reflecting another year of strong cash generation. We also estimate capital expenditures would be approximately $150 million. This level of CapEx reflects continued investment in initiatives designed to drive long-term earnings growth and shareholder returns.

Looking at the first quarter, we expect sales to be down mid-single digit percent compared to 2019 of lower access equipment and fire and emergency sales more than offsetting higher defense segment sales. We expect commercial sales to be down modestly, reflecting some of the choppiness we expect on a quarter-to-quarter basis this year in this segment. We expect earnings to be down meaningfully more than sales on a percentage basis, due in large part to the impact in the prior year quarter of the receipt of a large JLTV order in the defense segment, which essentially doubled the units under contract, resulting in a large cumulative adjustment to margins on that program under ASC 606 and segment operating margin of more than 15%. The defense segment expects another large JLTV order in the first quarter of 2020, but they don't expect the cumulative adjustment impact to be as large as last year.

Defense is also expecting higher R&D spend in the quarter. We expect commercial operating income margin will also be down a larger percent than their sales decline due to several favorable adjustments in the first quarter of 2019 that we don't expect to repeat again in 2020.

I'm going to turn it back to Wilson now for some closing comments.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [6]

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Thanks, Dave. Another strong quarter and outstanding year driven by our team's execution. We've initiated our outlook for 2020, which includes expectations for solid results, as I mentioned earlier, would be the third highest earnings year in the company's history. We have the right strategy with MOVE and believe we can manage these businesses to deliver impressive sales and earnings performance. And we believe we are investing in the right places to best position the Oshkosh Corporation for the future.

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

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Patrick N. Davidson, Oshkosh Corporation - SVP of IR [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Neil Frohnapple with Buckingham Research Group.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [2]

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Congrats on the nice quarter. Starting with the access equipment segment, it appears the implied decremental margin for FY '20 at the midpoint of mid- to high-teens is considerably better than how you performed in the last downturn. So could you walk through some of the drivers underpinning the margin outlook, customer mix, regional mix. I think Dave mentioned product mix would be negative, price cost, et cetera, just so we can get comfortable with the profit outlook for '20.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [3]

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Sure, Neil. So overall, I would say not only in access, but really with the whole company overall. I think we're in a much better place than we were in 2016 when you referenced it. You look at the strength really in the non-access segments versus then, and I think it's very apparent that we're different. And even access, we're coming off of a much higher base, but overall, as you think about the decrementals for access in fiscal '20, as we said in the prepared remarks, we got a number of positive things there, one being lower amortization expense. So some of the purchase accounting amortization from the JLG acquisition is rolling off. That's about a $25 million favorable item year-over-year. We've got operational initiatives, which really fall under the whole simplification category there. We've talked a lot about some of the improvement year-over-year, working with the supply base. We think we still have opportunities there as well as things internally that we're working on that will help us. Offsetting those, as we've mentioned, regional mix is going to be a little bit of a headwind for us and then higher NPD as we continue to invest in the business. But I would say that our view really is there's nothing heroic in here. A lot of things that we do have within our control, that we think we can execute on to deliver the decremental margins that we've put out there.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [4]

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Okay. That's helpful, Dave. And then just I wanted to ask about the margin outlook for the commercial segment for FY '20, 7%, I think you may have said 7% to 7.25%. So I think excluding the roof collapse in FY '19, you would have been north of 7%, I believe. So could you talk about sort of why the margin outlook wouldn't be higher for next year when also considering the simplification initiatives and the low single-digit sales growth?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [5]

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Sure. The biggest driver there is continued investment in the business. We talked about the higher NPD, and we're really seeing that across all of our segments. And then there's some other initiatives that they are undertaking to better position themselves for the future. So I think overall, we view this as a very good thing that we're investing for the long-term future of the businesses.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [6]

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I think if you go back, Neil, to when fire & emergency started their journey, the first couple of years were slower improvement from a margin standpoint because of the investment that they made. And that's what you're seeing with commercial. They're in the early stages of that continued investment.

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Operator [7]

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

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [8]

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You folks had really strong share gains in access equipment and in fire & emergency. Can you just talk about -- are there any specific product lines or distribution initiatives that are driving the share gains? Can you just expand a bit more on your really strong performance and momentum in the market?

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [9]

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Yes, Jerry, I think from a share gain standpoint, we've been focused, targeting the segments that we see where we can grow profitably, and we're putting more resources to those areas. I think the refuse collection has been a good area for us. Fire & emergency with some of their continued introductions of the Ascendant and some variants of that, where we have a clear competitive advantage, just continued innovation, price that we're introducing that gives us that sustainable long-term competitive advantage. So I can't point to just one really big thing, but the telehandler share was probably the one that maybe jumped (inaudible) at the most and that was because we didn't have the capacity in '18, and we had it in '19, so we gained our share back. But I guess if you're asking what is the biggest share gain, it would be back in telehandlers in '19.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [10]

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Okay. And then in terms of the outlook in '20 for the access segment, are there any share gains embedded in the top line outlook? Because it looks like the order run rate exiting the year is a bit tougher and, obviously, we had backlog come down over the course of '19 as you deliver to that strong telehandler backlog. So I'm wondering if you could just touch on any tailwinds that we should be keeping in mind relative to market demand that's embedded within the top line outlook, considering what we're seeing appeared to be more significant CapEx cuts out of the rental industry.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [11]

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That's a lot, Jerry. I think the quick answer for you is that there is not any significant market share gains into our forecast. I think it's -- we have some targeted conquest accounts that we -- that you would see in our sales plan on a year and based upon an annual basis, but there is not any really large targeted market share gains. It's really working through our normal customer contacts and working through the markets like we do year in, year out. I don't know, John, if you have anything you want to share with that.

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [12]

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Well, I just -- this is John. Just talking in general about the outlook for access in 2020, we've got a pretty robust forecasting process with the business, and we think we've got the right outlook for the year. We've modeled in a 15% to 20% decline in North America in access based upon what we're seeing in the marketplace, still high neighborhood that we're in. We like the neighborhood that we're in. It's just not going to be as frothy as '18 and '19. We've got double-digit declines we're forecasting in Europe, but we've also got double-digit improvement or increases in Asia Pacific. And we think that this is, right now, the right outlook for 2020 for the business and that leads us to the access forecast that you see.

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Operator [13]

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

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [14]

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Actually, first, can you clarify that JLG amortization roll-off of $25 million for 2020?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [15]

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Yes. You have to have -- if you go back and look at the 10-K last year, David, it was -- we've put the next 5 years amortization numbers in there, and it was indicated that there would be a significant roll-off.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [16]

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I guess I'm trying to understand the roll-off. Is it just simply that it's been about 13 years since the deal? Or is there something unique to that step-down?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [17]

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No. We had some of the intangible assets that had lives of 12 to 13 years, and they're becoming fully amortized.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [18]

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Okay. And regarding the comment 50% of free cash flow to be returned to shareholders, just trying to figure out if there is some messaging there. The last couple of years, you've essentially used most all the free cash flow for dividend and repo. And even with the new repo -- I mean the new dividend rate of $0.30 a quarter, I mean, dividend is only about $80 million. So I'm just trying to square up, a, why is it only 50%? And then b, the share count is assumed flat for the whole year, when (inaudible) you should be able to take out 2.5% of the shares before creep. So a, is it that much creep? And again, why so low as a percent of free cash flow, given the net debt to cap is 11% and net debt to EBITDA is only 0.4%?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [19]

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So if I miss any of your questions that were all embedded in there, David, please just remind me. But -- so the 50%, you've heard us talk over time about our capital allocation strategy. We try to take a disciplined approach with that, that targets returning 50% of our free cash flow to shareholders "over the course of a cycle." And you're going to see that ebb and flow from year to year. The last couple of years have been significantly higher. You go back a few years, and it was significantly lower than that. This is the initial guide for fiscal '20. It's early, and the 50% is right in line with what we've said is part of that capital allocation strategy and approach. So we think that makes sense at this time. We'll continue to monitor that as we go through the year, and we can adjust as we deem appropriate with that.

And then in terms of the share count, on a full year basis or average for '19, we're at 70.6 million. We're guiding to 69 million. There will be some creep, and depending on the timing of when we repurchase shares in the year, right now, the assumption going in is that we will purchase those shares evenly throughout the year. Again, that may change, depending on how we see things play out here during the year. But those are kind of the components that came into the whole calculation of share count for the year.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [20]

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I appreciate that. So [again], the messaging here isn't only 50% of free cash flow less than the last 2 years going to dividend or repo because we're more acquisitive in our thought process for '20? It's just simply the mechanical, we've said 50%, that's the baseline, and we'll go from there...

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [21]

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Yes. It's more the baseline. We were not intending to message one way or the other. We're going to continue to be opportunistic, and that may mean more or less share repurchases, that may mean we do look at external opportunities if they present themselves.

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Operator [22]

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

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [23]

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Just one question on defense. Maybe you can walk through some of the programs in terms of how they're expected to play out here in '20? I was thinking that JLTV would be up the order of magnitude $300 million to $400 million based on what's been announced. So maybe you can just help us with some of the other puts and takes. I think -- I thought the FHTV had some odds within the recent budget that should be helping you, but maybe you can just give us some more color in terms of mediums and heavies and how those are expected to land here in '20.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [24]

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Sure, Tim. As we've said on the prepared remarks, we do expect continued sales growth in JLTV, that's going to become a bigger percentage of the segment sales overall. And then along with that, we expect some modest declines in both the heavies and the mediums in terms of sales, and that's really in line with what we've seen out of the President's -- or the DoD budgets the last several years. So I think it's really kind of consistent with what we've been saying for a while now, that JLTV continuing to grow in moderation in the 2 other major domestic programs.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [25]

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And that backlog is pretty well in place.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [26]

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Yes. Yes, $2.1 billion of backlog for fiscal '20, so that -- we feel real good about how defense is setting up for the year.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [27]

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And again, I know it's difficult but not impossible to forecast. But what is the team hearing from an international landscape in terms of M-ATV prospects?

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [28]

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Yes. Tim, we continue to hear good things from international standpoint. I think you've probably heard us talk about Slovenia. We have a letter of agreement with them. Lithuania has state department approval. And just recently, Montenegro got state department approval. So starting to see more activity from some of our European allies. We've talked before about our U.K. customer that has 2 variants that they're testing right now. We expect them to come with an order. We're not sure about the timing of that order at this point because they are testing. But several other countries in Europe and the Middle East, we've had a couple of good trade shows, and I would say the interest level is continuing to grow for our international JLTV.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [29]

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Tim, I would just add that I think we're overall confident that we are going to actually get some international JLTV orders in the backlog this year for sales starting in fiscal '21. So it's taken a little while, but we're dealing with international customers and that's probably not unexpected. But I think we're on the cusp of seeing some of the -- this activity translate into actual purchase orders.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [30]

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And I think the Full Rate Production decision has helped push some of that along, too.

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Operator [31]

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

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [32]

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My first question is on the access business. You have [enclosed] surcharges, not list price increases, when the steel prices rose. And I'm wondering, are customers now looking at requiring you to lift those surcharges now that the steel prices are down? Or are those now embedded in list prices too? If you can just talk a little bit about the price cost environment and what your customers are asking of you.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [33]

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Sure, Ann. First, I would say, I think you saw our pattern in '19. Our teams were very disciplined with their pricing. It's important to cover our costs. Some of those costs were significant. So we're in discussions now with the NRCs and actually in discussions with all of our customers in the nondefense segments. I think the thing that you would hear us talk a lot about, and I'm not going to be too specific today from a competitive standpoint, but there are other factors from an inflationary standpoint than just steel. If you look today, in access, they have the ANSI safety standard costs that are coming into play. I think all manufacturers are going through increase in labor costs, with access to skilled labor being very scarce. Other non-steel material issues that we're working through. I think you probably know, we try to buy the majority of our steel in the U.S., but there are some components that we have to buy outside, and those are subject to some of the 301 tariffs, and we're working through those from an exclusion standpoint, and those are on an annual approval. So there is a lot involved in going into setting pricing and -- because we are in the middle of negotiations right now, we're going to hold back on some of the specifics of what we're going into the market with and probably talk more about those as we get farther into this year. But I would say the discussions are going well. Most of our customers, they understand that these costs are real, even though steel has moved down. There is some significant movement in other costs that we're dealing with.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [34]

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Okay. I appreciate the color. And then on the backlog for access heading into fiscal '20, does that -- do orders have to reaccelerate before the end of this quarter for you to make your forecast? Or can we wait until we get into the spring? Is that kind of your expectation then, that we may not see large rental companies order until we get into sometime around ConExpo? Just help me with the risks to be outlooked on the access side.

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [35]

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Ann, this is John. I'll start by answering that question. First of all, we've seen a big shift in timing with regard to orders, and probably the shift was really in '18 and '19, when things really changed, and we're seeing it go back to normal. So some of the big orders that we would have gotten last year in the fourth quarter, we're expecting those orders at a later point in time. But if you really look at our backlog over the past few years, our backlog is very consistent with where it was, say in the '16, '17 period. So it's not an abnormal backlog right now. It's only abnormal when you look at it against the gigantic backlog that we had a year ago.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [36]

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And Ann, maybe -- this is Dave. Just to add a little color on that. So if you look at headline numbers in terms of fourth quarter orders and backlog, there are -- it's very easy to see when we look into that, there were several larger customers last year that placed sizable orders in the fourth quarter that are now placing those orders in the first quarter of this year, and so -- on the magnitude of a couple of hundred million dollars. So if we look at the orders in the fourth quarter and try to do more of an apples-to-apples and kind of remove some of this timing issue, we think, on a more pure basis, orders instead of being down 30-ish percent were down like 7.5% in the quarter. So I think that just kind of supports a little bit of what John was saying about some of the timing shift back to a more historical, typical pattern that we've seen in the past.

The other thing I would say is, we've got to remember last year, the first quarter, we had also a very strong order quarter. It was like over $1.5 billion the last 2 years, again, kind of talking about how those 2 years kind of stood out from what we had typically seen in the past. So as we go through this quarter, we're going to see some timing benefits from some of those customers that shifted from Q4 into Q1, but it wouldn't surprise us to see some of the larger customers move some of their orders out of Q1 and into Q2. So it's going to be a different year this year in terms of the order cadence in access, and I think we should all expect that.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [37]

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That's very helpful color. And if I could squeeze in a real quick follow-up on that. How big is Asia in access as a percent of total sales then?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [38]

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It's nowhere near where North America and Europe is, but it is our fastest-growing region. We've seen strong double-digit growth there. And what I would say is, it is quickly becoming more relevant. We expect that's going to continue into the coming years.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [39]

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But is it 10%, 15%, 5%?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [40]

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Today, it's less than 10%.

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Operator [41]

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

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Seth Robert Weber, RBC Capital Markets, Research Division - Analyst [42]

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Actually following up on the Asia access question. Can you just frame the size of the investment that you're making there and kind of what that -- what kind of capacity level you'll be at for that market? And then I guess, it sounds like, I think in your remarks or how you answered a question, Dave, it sounds like the margin profile from some of these faster-growing markets may be lower than the more established markets. So is that the right way to think about going forward, that Asia Pac margins are going to be dilutive to access going forward?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [43]

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Sure. And -- so let's start with the expansion. I'm not going to get into the specifics, but from a production capacity standpoint, this is a significant increase from a percentage of production. So it's a meaningful expansion in the region and we think it's warranted, given the growth we've seen there in the last couple of years and given the outlook that we expect in the coming years. We're excited about the opportunities there. And then just overall on the regional mix, yes, so North America, it's probably not surprising, is our best margin region in the world. If you think about some of the smaller international regions, one, we're still building infrastructure in Asia. So we're scaling that for growth that we expect there. So that's a little bit of -- going to be a drag on margins. We do produce a lot in country, but there are certain things that we are still shipping over there from North America. And we got logistics costs associated with that, that you don't see in North America. So I think over time, you're going to see those -- the margins in those regions moderate or increase and get closer to what we're seeing in North America.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [44]

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Yes. Just to add a little bit. The SG&A is high there because we're investing. It's a -- as you know, a big country, Seth, and we're trying to work it. There's 5 or 6, what I would call, very sophisticated rental companies that operate a lot like the NRCs in the U.S., and we've built good relationships with them and working closely with them. And one thing we really like about this market is it's a heavy boom market. They don't have palletized loads in China. So lot of booms. They use power cranes to move materials around job sites. So potential down the road to develop telehandlers is still in front of us. So it's a -- we started with booms, we expect that -- down the road, that we'll have some opportunities with telehandlers. So the dynamics of this market, if it stays on the pace it's been, it won't be that many years until the boom market is as big as Europe's boom market. So we like China. We like Asia Pacific.

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Seth Robert Weber, RBC Capital Markets, Research Division - Analyst [45]

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And then just a clarification. JLTV is still 4,000, 4,500 units? Is that still a good number to use for 2020?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [46]

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Yes.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [47]

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Yes.

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Operator [48]

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

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [49]

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I want to go back to access equipment and I guess I'm just looking to understand your thinking and how you kind of assemble your revenue outlook for fiscal '20. And I guess the framework that I'm using, what I'm looking at is, in fiscal '19, you had $3.5 billion worth of orders, you've got, call it $400 million worth of backlog, but backlog obviously is down about, call it $600 million or thereabouts from the prior year. So when you're looking at fiscal '20 and you're talking about $3.5 billion to $3.8 billion of revenue, what are sort of the puts and takes here that get us to $3.8 billion? And is it that we have to assume a flat market from an order standpoint versus fiscal '19? Are you assuming some kind of re-acceleration? And if so, where would that happen? Because it strikes me, and correct me if I'm wrong, that when you talked about your outlook embedding declines in North America and Europe, that's really predominantly a factor of existing backlog rather than future demand. So maybe correct me if I'm misunderstanding something or shed some light here, if you would.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [50]

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I'll take off, Mig, and let John and Dave jump in. Real broad question you're asking, but a good question in terms of, okay, how do we build up our outlook for 2020. And John touched on some of it. It's a very robust process. And we review it on a regular basis to make sure that we are looking at the right assumptions. I think the first thing that we had to come to understand is that '18 and '19 were anomalies. Those order years, we haven't seen order years like that, that type of expansion. And in talking with our customers, I think you were hearing the same commentary we are. They see '20 as a good business year for them. But our categories of equipment, they're expanding quite a bit, and we believe they're going to take a little bit of a pause with the level of buying they were making.

So if you go back to '16 and '17, where we came into those years, you'd see a very similar backlog number that we have today. So the buying patterns in '16 and '17 are very similar to what we've seen our customers go to today. There was capacity. Manufacturers were performing on time and so lead times have come down and our customers are comfortable now ordering within that quarter and taking delivery of products in the same quarter. So there's a lot of -- lot more science to it than what I'm going to share with you on the call today, but I can tell you from an assumption standpoint, we don't look at this forecast as a big heroic forecast. And obviously, on the high end of the guidance or low end of the guidance, North America could be down 20%, double digits in Europe. But we do see construction needs. We see construction spending. And a lot of good commentary with our customers on what they are thinking about and looking for in this coming year. So there's a lot more buildup to it than what I can go through on the call, but I can tell you we've worked through this long and hard and are comfortable today with the assumptions we have with the guidance we've introduced.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [51]

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Okay. Recognizing that obviously this is a backlog business, and we're all kind of trying to figure out expectations for Q1 as well, how would you advise us to think about revenue here on a year-over-year basis and margin for Q1?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [52]

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I think we commented during the prepared remarks, Mig, that we do expect lower sales in the first quarter. I think we're probably going to see sales down year-over-year pretty consistently throughout the quarters based on the early view that we had here and, obviously, we'll firm that up as we go. But this is going to be, as John has talked about, Wilson has talked about, orders are going to be coming closer -- coming in closer to actually wanting the equipment. And '19 and '18 were a little different from that respect. We're back to where we were prior to those 2 years.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [53]

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Okay. But I guess what I'm trying to figure out here is that if we're starting with backlog that's down, call it, 60%, should we be thinking that revenue in Q1 is going to be down 30%, 40% on a year-over-year basis?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [54]

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No. No. No. Nope, we do not believe that. We believe it will be down in line with our overall guidance for the year.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [55]

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Okay. Last question for me is on the segment margin, the low end of margin of 11.25%. I think somebody already asked about the decrementals, that they're relatively low, in the low 20s. Let's just assume that there is downside versus the low end of your revenue guidance. How do we think about any decremental on that additional revenue decline? Meaning, should decrementals accelerate? If, for instance, we're talking an extra $200 million to $300 million of revenue downside, how would you advise us to think on that?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [56]

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I wouldn't say -- well, I would say, I would start with a typical decremental, which is, depending on the margin mix, the region mix, whatever is going to be, in the low 20s to mid-20s percent. And then if things get worse in the magnitude that you're talking about, I guess what I would say first off is the magnitude that you're talking about is -- we would look at as a full-blown recession based on what we've seen historically in this market absent '08 and '09, and I don't think anybody is thinking we're headed there again. But I would start with that [mix at] low to mid-20%. And then if we get into a full-blown recession, we'll take a look at what actions we can take to mitigate that and pull that decremental margin down. We'll be responsible. This is something that would be timing. We are not going to sacrifice the long-term health and opportunity for this business overall, but we would work to mitigate that.

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [57]

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Just -- this is John, Mig. Just an additional comment on that. We do not see right now, we're not forecasting, we are not seeing with any of our customers a "downturn scenario." It's more of a leveling before we start to grow again in '21 and beyond. That's what we're seeing in the market.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [58]

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I understand. I just want to make sure that we stress test the assumptions here and everybody can kind of have something to work with if they want to think about the world a little differently than you. So I appreciate the color.

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Operator [59]

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

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [60]

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I guess just a couple of follow-ups on access. The 15 -- they're down 15% to 20% in North America. Is that what your customers are telling you in North America? Or do you have a different view than them? And then my other question is, is there -- you talked about regional mix. I guess is there a mix relative to booms versus telehandlers implied in your guidance? And then third, just color on the F&E margins which are going to hold up very well again in 2020 despite sales, which are off modestly or flattish, just what your assumption is on sort of self-help simplification efforts.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [61]

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I'll start, Jamie, and then I'll let Dave and John jump in here, too. But on the access, North America down 15%, 20%. This is our view. Obviously, our customers are part of our view, but we take in a lot of other factors there that roll up our assumption. So I wouldn't say it's -- most of our customers, you're hearing the same commentary we are. They look at next year as a good year for them, from a business standpoint. We just believe our category is going to be a little less than what it has been in the last couple of years. On the regional mix, I'll let Dave jump in on booms and...

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [62]

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Yes, I understand the regional mix. I'm just trying to understand if there's a favorable boom versus telehandler mix.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [63]

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We -- I think overall, Jamie, we don't expect a significant shift. Telehandlers, we do believe we're going to be down, but then you have movement within the product category. So for example, within the telehandler family or within the boom family. So overall, as the numbers have rolled together, we don't see a significant tailwind or headwind from a product mix standpoint.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [64]

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And F&E margins.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [65]

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And in F&E margins, just a continuation of the simplification activities that they've been successfully executing over the past number of years. The team continues to be energized and engaged, and it's fun to watch them in action. I think they find new opportunities every day and challenge themselves every day and they have high confidence in their ability to meet the outlook that we're providing for them for fiscal '20.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [66]

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And what's needed. Our commericial team is running with that same playbook now. I think we're excited about what they're going to do with the same type of product placement, things that are going on with fire & emergency.

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Operator [67]

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

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [68]

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You said to us on the last conference call that fiscal 2020 in access could be down modestly. Now looking at guidance here in FE, at the midpoint, you're probably down about 10%. So is that what you were thinking last quarter? Or has your outlook for access improved or softened since August 1?

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [69]

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Mike, I think our outlook has evolved. The more conversations we have, the more data points we get as we work to roll up our guidance for the year. You get a little bit better with every meeting and every data point that's added. So we weren't calling a specific number back in the last quarter, other than we felt like it would be down modestly. And this is what we rolled up to now is what you're seeing today.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [70]

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Okay. And then secondly, I wanted to follow up on your last comment earlier on Jamie's question about commercial margins. I mean, clearly, you've done great on fire, 10-plus points of margin over the last couple of years. It's a different business, of course, but can you give us an update on to -- as to where you think you can get commercial margins as far as a number and a time frame?

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [71]

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Well, our goal is always to be double digit OI margins with all of our businesses, Mike. This one is a little bit tougher in that they're dealing with a commercial chassis. If you look at fire & emergency, the majority of their products were custom chassis, where they have much more value-add available to them than, say, a commercial concrete mixer or refuse collection vehicle that's on a freightliner or Mac chassis. So little more challenging to get to that margin level with commercial, but we believe they can do it. And what you're seeing now is continued investment as they're carving their way and simplifying their business really around 80-20 principles. We believe that they will start to gain momentum. Unfortunately, we had the event last February that slowed them down a little bit, but last 2 quarters were good quarters for them, good execution by their team, and we expect that to continue. It's just going to -- we haven't called the actual year when we get there, but that will be the goal for them going forward.

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Operator [72]

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Our final question comes from the line of Ross Gilardi with Bank of America.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [73]

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Just wanted to know, these California power outages and the wildfires -- obviously, last year was a huge wildfire issue. Is that become -- has that become any type of like structural demand driver for your fire & emergency business? For any parts of your access business? For any parts of the refuse business? I mean, has it moved the needle at all?

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [74]

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Ross, it's moved it a little bit. I wouldn't say anything significant. The fire example, we build wildland vehicles, but it's not one of our primary product lines. And there has been cleanup with refuse collection. There has been pouring of concrete because of, unfortunately, the fire devastation. But I wouldn't say it's anything that has been a big needle mover for us.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [75]

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Okay. Got it. And just on access and inventories, just curious to hear your view on how you're managing production, how your inventories -- how they looked at year-end relative to history going into a softer demand year like this. And just what are you seeing competitively? Does it feel like there's just a lot of equipment out there from your competitors that need to find a home?

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [76]

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This is John, Ross. I'll answer the question. We -- to put it very directly, we really don't need to take any extraordinary steps to manage inventory. We didn't make any big bets in the last year or so. We're comfortable with the level of inventory that we have. And certainly, production in 2020 for us is going to be lower than it was in 2019, as we get production in line with demand. But that lower absorption is factored into the forecast and guidance that we've got.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [77]

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Yes. And I'd just add there, Ross, that -- you've watched us over the years, we manage our production levels on a weekly basis, and so we've been adjusting production since orders were slowing this past year. I think [the thing] that our teams are really good at is letting head count go down with attrition. We look at managing overtime. We look at all the different factors that go into a product line that may be slowing down. We try to stay way ahead of that with our weekly management of our sales and inventory, operations, planning process. And as John said, we've got that all factored into our guidance for 2020.

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Operator [78]

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

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [79]

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I just had a quick question to follow up on the comments about the robust growth in APAC on access and fire & emergency. I called out some of the trade policy impacting your international orders there. So I guess I just wanted to understand why is there that different dynamic between the 2 segments? And if we can also kind of get a sense of whether you think the international orders in F&E are kind of being pent up and will come back when we have some resolutions, or if those are kind of going elsewhere and also how big international was as a percent of F&E in 2019.

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John C. Pfeifer, Oshkosh Corporation - Executive VP & COO [80]

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Yes. It's a great question. First of all, in our F&E business, our business is highly weighted to the North American market, first of all. Having said that, our international growth is material to our business. And China, for example, is one of the largest export markets that we have in the F&E business when you look at it on an international basis. And because we're a primary exporter to China, that's why the trade war has hurt our business in China. I do believe there is a little bit of pent-up demand there that we're not able to fill. And we hope for an easing of the trade conflict so that we can resume normal business and get that growth back. But that's primarily what's going on. Our access business produces in China, so they're a lot less impacted by the trade conflict that we're seeing.

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [81]

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Yes. The other thing I would add, Courtney, on that is you just look at the end customer. So the fire & emergency customer is typically a governmental entity, and access equipment customers are commercial entities.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [82]

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Okay. Great. That's helpful. And then just on the new product development costs that you called out of about $25 million, how does that split between the divisions? I think you said that it's kind of higher across all of the segments. And how does that growth year-over-year compare to your growth in NPD over the past couple of years?

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David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [83]

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Yes. As we said, it's all 4 segments that are going to be spending more. From an absolute dollar standpoint, the segment with the highest dollar growth is going to be defense within that. And then in terms of the growth year-over-year, this is a -- it's a more meaningful growth than we have seen year-over-year in the new product development spend.

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Operator [84]

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

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [85]

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A quick question on the North American fire market. It sounds like it's kind of flattening, maybe up modestly. If I'm not mistaken, I feel like we're still fairly well off from kind of prior peak or kind of a higher level normal. I mean, is this the new normal that we're thinking about? I'm just trying to get kind of a framework to work with as we move even beyond this coming year.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [86]

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We believe so, Stanley. At [4,500-or-so] unit market, we'll see a little bit of growth here and there. But back 10 years or so, maybe a little farther than that, that market was 5,500. That's when there was a lot of export going on out of the U.S., into the Middle East, and that really has slowed and in most cases stopped with U.S. fire trucks going that way. So we believe the new normal is about where it is now, with some growth opportunities.

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Operator [87]

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This concludes our question-and-answer session. And I would like to turn the call back over to management for any closing remarks.

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Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [88]

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I just want to thank everyone for joining us today. We appreciate your interest in the Oshkosh Corporation and look forward to speaking with you at a conference or on our next earnings call.

Take care, everyone.

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Operator [89]

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This concludes today's teleconference. You may now disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.