U.S. Markets close in 18 mins

Edited Transcript of OSK earnings conference call or presentation 1-Nov-18 1:00pm GMT

Q4 2018 Oshkosh Corp Earnings Call

OshKosh Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Oshkosh Corp earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David M. Sagehorn

Oshkosh Corporation - Executive VP & CFO

* Patrick N. Davidson

Oshkosh Corporation - SVP of IR

* Wilson R. Jones

Oshkosh Corporation - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Chad Dillard

Deutsche Bank AG, Research Division - Research Associate

* Charles Damien Brady

SunTrust Robinson Humphrey, Inc., 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

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - 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, LLC, Research Division - Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

* Themistoklis Davris-Sampatakakis

Crédit Suisse AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Oshkosh Corporation Fiscal 2018 Fourth Quarter and Full Year Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Pat Davidson, Senior VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and thanks for joining us. Earlier today, we published our fourth quarter 2018 results. Copy of the release is available on our website at oshkoshcorporation.com.

Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months.

Please refer now to Slide 2 of that presentation. All 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 otherwise stated.

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

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Pat. Good morning, everyone. We're pleased to announce another quarter of solid results with $1.80 adjusted earnings per share, a strong finish to a year in which we achieved near-term highs in revenues, adjusted operating income and adjusted earnings per share. And our team delivered these results, despite a very challenging backdrop of sharply rising commodity prices and global trade tensions. We're also pleased to announce today our initial outlook for 2019, which we believe will be another good year. Our confidence in 2019 is supported by strong backlogs across all 4 segments and the expectation for favorable end market demand in our businesses to continue. I talked previously about the importance of our team members and our people-first culture to our success. There are many workplace studies that showed that strong cultures drive strong engagement. We believe this engagement is a big part of our success at Oshkosh. Our excellent results in 2018 and our positive outlook for 2019 are only possible as a result of the hard work of our team members. We're focused on continuing to grow our people-first culture and in turn, our team members. It's a journey that never ends, and we're committed to ensuring that our team members are engaged and connected as we move forward.

These team members are key to executing our MOVE Strategy. A significant part of that strategy is simplifying our operations and business processes as we strive to serve our customers and remain the clear supplier of choice in our markets. We recognize that there's more to do, but I'm very proud of the efforts and progress that our team has made to reduce complexity in our business and drive growth.

Please turn to Slide 4, and let's talk about the full year. 2018 was the second year in a row that we grew adjusted operating income by 30%. And we delivered 50% adjusted earnings per share growth in 2018. 3 of our 4 segments, access equipment, defense and fire & emergency, all delivered full year adjusted operating income margins of 10% or higher. And while our commercial segment didn't reach the 10% level, they did substantially increase their margins by 200 basis points, a meaningful improvement versus the prior year. This performance led to free cash flow of $342 million and allowed us to return more than $320 million of cash to shareholders with a repurchase of nearly 3.3 million shares and ongoing quarterly dividends.

In addition, today we're announcing a 2019 earnings per share estimate range of $6.50 to $7.25. We understand that there's uncertainty among investors regarding where the economy is headed in 2019. What we can tell you is we continue to have a positive long-term outlook for our markets and our businesses. We'll battle through the cost and trade policy challenges and continue to serve our customers. We also don't want to forget that our vehicles and equipment age and eventually need to be replaced. Dave will discuss our 2019 expectations in more detail in his section.

And finally, we are raising our quarterly cash dividend by 12.5%. This will be the fifth consecutive year that we're raising the dividend by a double-digit percentage.

Please turn to Slide 5 to begin the discussion for each of our business segments. I'll start it off, as I typically do, with the access equipment segment. For the first time in our history, the access equipment team achieved more than $1 billion in sales in consecutive quarters, quite an achievement. Aerial work platform sales grew more than 20% and telehandlers sales grew twice that rate at more than 40%. Full year sales were up 25% and orders were up 30% during the year, reflecting strong demand for access equipment.

We talked previously about orders moderating and they have since the first half of 2018, when they were up more than 60%, but orders were up nearly 5% in the fourth quarter. JLG is entering 2019 with a backlog of more than $960 million, double the backlog at this time last year.

Much like our comments during the last conference call, and we've met some of you on the road, we are benefiting from a strong rental market for access equipment in North America and most regions around the globe. Our customers have continued to mention good fleet utilization and improved rental rates. Additionally, used equipment values have remained strong, leading to a healthy demand environment.

We previously discussed operational challenges we are facing in this segment, and I'm pleased to say that the access equipment team has continued to make progress addressing these challenges. Our workforce has stabilized, and we're seeing solid productivity gains. We are still experiencing periodic unplanned disruptions from some of our suppliers, although fewer than we did earlier in the year. Most of these supplier situations are related to workforce availability and training and historically low unemployment rates the nation is experiencing. We are actively working with our supply base and expect that these disruptions will continue to become less frequent over time.

Finally, we are spending time with customers discussing their equipment requirements for the upcoming year. We experienced significantly higher material and other costs, including freight, in 2018, the full impact of which we expect to see flowing through our income statement in 2019. The market for aerials and telehandlers is strong, and we need to be responsible to both customers and shareholders. In pursuing fair and reasonable transactions, we have announced a higher-than-typical price increase at JLG for the new calendar year. We expect that some customers will push back, but they also understand steel prices have jumped significantly since last fall. Negotiations may take longer this year in light of the larger-than-normal price increase.

Please turn to Slide 6, for discussion of the defense segment. Defense team concluded the year on a high note, leading to a full year adjusted operating income margin greater than 11%. The continued ramp-up of JLTV production in the fourth quarter along with higher aftermarket part sales looked to partially offset the M-ATV sales decline. The team is executing the JLTV program very well, and they remain on track to allow our government customer to make the full-rate production milestone decision by the end of calendar 2018. The defense team remained busy in the quarter, discussing and demoing JLTV and M-ATV units for potential customers. We are pleased with the responses we received in both the U.S. and Europe at trade shows this past quarter as we showcased our expertise and ability to stay in front with the JLTV as well as other products. We remain firmly committed to our international customers and expect they will become a larger part of our defense business over the next several years.

The team has continued to improve its productivity. Those of you who've visited our facilities in Wisconsin know what I'm talking about. Our operations team has done a great job of training our workforce and optimizing workflows, and there's still opportunity to further improve production processes. It is a long-term approach, and we believe it will help us remain the supplier of choice for tactical wheeled vehicles for the U.S. Department of Defense and foreign militaries.

Finally, I want to briefly mention the recently enacted FY '19 federal defense budget. As many of you know, we can deliver vehicles under the current FHTV contract through 2022, JLTV through 2024 and FMTV through 2026. The funding in the FY '19 budget for our current programs of record sets us on course to meet our financial objectives for this segment.

Let's turn to Slide 7 to discuss the fire & emergency segment. Fire & emergency team did it again, delivering another quarter of year-over-year margin growth. It takes a strong coordinated effort to deliver the performance that our fire & emergency team has been delivering. New products in the Ascendant class of aerials as well as simplification actions continue to help lead the way. Our people have been working hard to master simplification for a few years now, and we're seeing the cumulative benefits of their efforts. The team is excited to continue the simplification journey, allowing them to better serve their customers and deliver solid results for our shareholders.

Our view of the domestic fire apparatus market remains balanced, given the forces positive and negative that impact the industry. On the one hand, we note that fleets are older and demand is there. The municipalities have collected enough tax revenues to allow them to replace older units. On the other hand, there are pension shortfalls and other demands on budgets in many cities that limit their ability to spend as many dollars on new firefighting apparatus as they would like. We believe the recent trend of steady to slightly higher market volumes will likely continue. We have been able to increase share with our broad product lineup and improve margins through operational improvements, and we believe we can continue to successfully grow sales and earnings in this segment.

Please turn to Slide 8, and we'll talk about our commercial segment. Commercial segment finished the year on a solid note, capping off a year that saw significant improvement compared to 2017. This improvement was more the result of execution than sales growth, providing evidence that the simplification actions being undertaken by this team are working. The new business unit structure implemented at the beginning of the year is providing focus for the organization, that is helping us be more responsive to our customers and driving internal accountability.

The RCV market outlook remains encouraging and the long-term drivers of waste hauling, including population growth, strong GDP and construction activity, are solid. We see continued caution in the concrete mixer market, but there are positive signs in different locations. We are managing the business with a focus on simplification and 80-20 principles to allow this business to be able to move quickly as opportunities arise. All in, we have a positive view for this segment going into 2019. We believe we can deliver earnings growth as we execute our strategy despite some of the well-known headwinds such as higher raw material cost and global trade uncertainties.

That wraps it up for our 4 business segments. I'm going to turn it over to Dave to discuss our financials and outlook for 2019 in greater detail.

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Wilson. Good morning, everyone. Please turn to Slide 9. We capped off a very good year with strong fourth quarter. Results for the quarter significantly exceeded prior year and exceeded our expectations. Consolidated net sales for the quarter were $2.06 billion, up 4.8% from the prior year quarter, led by a 27% increase in access equipment segment. Fourth quarter sales in this segment were stronger than we expected, reinforcing the positive outlook that their rental company customers have for their businesses.

Defense sales were down 22% as the prior year quarter included nearly 400 international M-ATVs. Fire & emergency and commercial sales were a little changed from the prior year quarter. Fire & emergency did have several international multiunit sales move from this year into 2019, resulting in sales that were slightly lower than our most recent expectations. And commercial sales were slightly higher than our most recent expectations.

Adjusted consolidated operating income for the fourth quarter was $180.1 million or 8.8% of sales compared to $150 million or 7.6% of sales in the prior year quarter. Each of the nondefense segments delivered higher adjusted operating income and at least 100 basis points higher adjusted operating income margin. Defense adjusted operating income was lower due to the sales -- due to the lower sales volume and the mix shift away from international M-ATVs to JLTVs, offset in part by improved manufacturing performance. We performed a detailed review of margin expectations on the JLTV program as part of our year-end close, and while we see opportunities for margin improvement for the program, at this time, these opportunities are not mature enough to incorporate into the expected overall program margin.

As of the end of September, we have more than 80% yet to complete on this contract, and we need to have a high confidence level in achieving and sustaining improvements before building any of them into our program margin expectations. As expected, we did see higher material costs than in the third quarter in our nondefense segments. Surcharge revenues were also higher than the third quarter, allowing the segments to limit the net impact of those higher costs.

Access equipment adjusted operating income margin improvement was the result of the higher sales volume and favorable pricing, offset in part by higher material and freight costs along with unfavorable foreign exchange rates. We also saw improved operational efficiencies compared to the third quarter, as Wilson noted earlier.

Fire & emergency delivered another quarter of strong results with operating income margin up 160 basis points compared to the prior year. Improved pricing and favorable extended warranty experience, along with the continued focus on simplification, execution more than offset higher material costs. On a full year basis, fire & emergency's operating income margin increased 270 basis points from 2017.

The 100 basis point improvement in commercial segment fourth quarter adjusted operating income margin reflects a more favorable mix and lower warranty costs.

In fourth quarter, corporate expenses were lower than the prior year due to lower stock-based compensation. Adjusted earnings per share for the quarter was $1.80 compared to $1.38 in the fourth quarter of 2017. Higher operating income and a lower tax rate were the main drivers of the higher earnings.

Fourth quarter results benefited $0.07 per share as a result of share repurchases completed in the last 12 months. We repurchased more than 1.16 million shares of our common stock in the quarter. Subsequent to the end of the quarter, we repurchased an additional 300,000 shares under a 10b5-1 program.

As Wilson noted, in 2018, we returned $320 million to shareholders through a combination of $71 million of dividends and $249 million of share repurchases. We repurchased nearly 3.3 million shares during the year.

Free cash flow of $342 million funded the dividends and share repurchases. Free cash flow was higher than our most recent expectations as we received a little more than half of the remaining amount owed to us on the international M-ATV contract. We previously were told that, that payment would not be made until fiscal 2019.

Please turn to Slide 10 for a review of our initial expectations for 2019. Our expectations reflect the adoption of the new revenue recognition standard, which for Oshkosh Corporation is effective beginning in our 2019. On a consolidated basis, we expect the impact at the date of the adoption of the new standard to be a decrease to retained earnings of approximately $80 million. We expect the adoption of the new standard to have a relatively minor impact on our consolidated results in 2019. We expect an immaterial impact to sales and an approximate $10 million and $0.10 per share favorable impact to operating income and earnings per share, respectively. The 2019 impact of the new standard will be concentrated in the defense and fire & emergency segments, and I'll provide some detail of the expected impact to these 2 segments in a moment.

The 2019 impact to the access equipment and commercial segments is expected to be minimal. We believe we're well positioned entering 2019, supported by strong backlogs and expectations for continued solid market conditions and customer demand.

On a consolidated basis, we are estimating sales of $7.85 billion to $8.15 billion compared to $7.7 billion in 2018. We're also estimating operating income of $640 million to $710 million and earnings per share of $6.50 to $7.25.

Breaking that down by segment, we are estimating access equipment segment sales of $3.6 billion to $3.9 billion and operating income margin of 10% to 11%. Our estimates for this segment assumed continued positive rental market conditions. And we continue to believe replacement demand will be a favorable driver for the next several years, although it's difficult to pinpoint the exact magnitude of replacement demand by year. The estimates also assume a larger-than-normal price increase to address significant cost inflation that we are experiencing, especially from steel and freight, along with other inflationary cost increases. We expect this increase will largely cover the higher costs, but not costs plus the margin.

The wider than normal sales estimate range reflects that we're still in the negotiation process with many of the NRCs. And as Wilson noted, these negotiations could take longer this year as we exercise price discipline. We also expect this segment to benefit from improved operational efficiencies compared to the prior year.

Turning to defense. We're estimating 2019 sales of $2 billion at an operating income margin of 9.5% to 9.75%. $2 billion of sales reflects overall strong domestic sales as JLTV volume continues to ramp. It also assumes lower FHTV sales and lower international sales as the most recent international M-ATV contract was completed in the fourth quarter -- first quarter, excuse me, of 2018.

As Wilson noted, the defense team is actively working on securing additional international contracts for both our legacy products as well as the JLTV, but we don't expect any international contracts that we secure to have a meaningful impact on 2019 defense segment results. The margin range for this segment reflects the continued mix shift to JLTVs, as we expect this product to comprise more than 50% of new vehicle sales in 2019.

Included in this outlook for this segment is an estimated $35 million adverse sales impact and a $5 million positive operating income impact related to the adoption of the new revenue recognition standard. I want to emphasize that the new standard will not impact our view of the overall margins for any of our defense programs, but it will impact the margins that we recognize throughout the life of the programs.

Under ASC 606, we will not be able to include units that we have not yet received delivery orders for in our estimated program margins. As new delivery orders are received, we'll update program margin assumptions to include the additional quantities. We expect this change to result in increased earnings volatility on a quarter-to-quarter basis as vehicles ordered later in the contract periods after startup and learning curve are typically more profitable. There will be cumulative adjustments to earnings as new orders are received from our customer to reflect the larger quantities.

We expect the fire & emergency segment to have another strong year with sales of approximately $1.2 billion and operating income margin of 13.25% to 13.5%. The expected increase in sales reflects the continuation of flattish to low growth in the domestic fire apparatus market along with higher airport product sales. Sales will also benefit from the timing of the international sales that moved from 2018 to 2019.

Margin expectations for this segment reflect continued progress on their simplification journey, including improved operational execution and higher pricing, more than offsetting the impact of higher steel, aluminum and other input costs. Included in the outlook for this segment is an estimated $40 million of positive sales impact and $5 million of positive operating income impact related to the adoption of the new revenue recognition standard. The largest change from adopting the new standard relates to the timing of recognizing revenue on sale to our peers versus the dealer has the contract with the municipality. We don't expect this change to result in a meaningful impact beyond the first quarter of 2019.

Commercial segment sales were estimated to be approximately $1.05 billion in 2019, essentially flat with 2018 at margins of 7% to 7.25%. The sales estimate reflects an expected continued strong RCV market in 2019 along with concrete mixer market that remains at levels below historical averages. Margin expectations for this segment reflect the continuation of the simplification journey launched last fall.

We estimate corporate expenses will be $145 million to $150 million, lower than 2018 due to cost reduction efforts and expected lower incentive compensation. And we are estimating the tax rate for 2019 will be 20% to 21%, reflecting a full year impact of U.S. tax reform.

Our estimates assume an average share count of 71.5 million, which reflects the full year impact to 2018 share repurchases and a target of $350 million of share repurchases in 2019. We expect to fund these share repurchases with free cash flow, which we estimate will be approximately $450 million and which incorporates an assumed $165 million of capital expenditures. This is higher than our typical capital expenditure run rate and includes the construction of our new global headquarters in Oshkosh, Wisconsin. Combined with dividends, we are targeting returning nearly 100% of our free cash flow to shareholders in 2019 as we continue to execute our capital allocation strategy.

Looking at the first quarter, we expect higher sales and earnings compared to the first quarter of 2018, led by strong sales growth in access equipment and fire & emergency. We expect to see more impact from higher steel prices than we experienced in 2018, especially in the access equipment segment, which will have a meaningful portion of its first quarter sales that did not benefit from the surcharges as noted earlier. We expect higher margins in this segment in subsequent quarters as they will be through the backlog of orders that were not subject to the surcharge.

We expect defense segment margins to be higher than the prior year quarter even though there were high-margin international M-ATV sales in the prior year quarter due to the expected timing of receipt of additional JLTV orders.

That was a lot. So I'm going to turn it back over to Wilson now for some closing comments.

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Dave. We just concluded a very successful year. The Oshkosh team worked hard to deliver these results, and we'll continue to work hard and execute as we strive to deliver another year of good performance in 2019. It won't be easy, it never is. But we believe the strength of our engaged team members, the people-first culture, combined with our products and technology, will continue to drive our success. I'm proud of our team, and I'm confident that we will continue to execute on our strategic priorities to drive value for all stakeholders.

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

--------------------------------------------------------------------------------

Patrick N. Davidson, Oshkosh Corporation - SVP of IR [6]

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

I'm wondering just if we can dig in a little bit further on the first quarter expectations, just because that's sort of a wide range. And obviously, we're all sort of numerical folks out here. So it sounds like, obviously, you're thinking higher revenues, but lower margins. And I guess, if there is just any other color you could provide to help us sort of dial-in on that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Steve. We don't go into a ton of detail when we talk about the quarters. I think that's kind of conclusion as to what we've done historically. What I would say in terms of the margin there, there will be some headwinds related to steel. We called that out last quarter. I think on the last quarter call, we called out a $15 million to $25 million headwind from steel. As we sit here today, we're thinking that's more near the low end of that range, but that certainly will be a detractor from what we would typically expect from a margin standpoint.

--------------------------------------------------------------------------------

Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

And it sounds like you're thinking the $5 million sort of benefit from the accounting change on F&E, is it all in the first quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Okay, all right. That's something. And then maybe Wilson, just you mentioned some international opportunities, both JLTV and M-ATV. I'm wondering, do you think the near-term opportunity is more one versus the other? And any way to handicap? And then how you think about the timing? I mean, we used to think that as soon as JLTV got the full rate production, that sort of opened the door to international orders, and so I'm just trying to think through how you guys are looking at timing for these things?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes, Steve. I think it really is. It's both JLTV and M-ATV opportunities continuing to be presented to us. You're right. Full rate production decision in December should lead to some more international orders on JLTV. As we've talked before, M-ATV opportunities continued to present themselves in the Middle East. And then I think if you recall back, last few calls, we've also talked that there are some sustainment opportunities. So it's more than just vehicles from the international standpoint. What we did say in our prepared remarks is that, we wouldn't expect any significant sales -- shipments in '19 for international. We should see some order opportunities, but we would expect those shipments to be on into 2020.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [9]

--------------------------------------------------------------------------------

I just wanted to dig in a little bit. Obviously, you had a pretty big access margin beat this quarter versus the guidance you gave. And I think Wilson talked to some of the operational efficiencies that you gained this quarter from some of your labor force. And I just wanted to understand how that relates to the margin guidance that you gave for access for '19? Is it right to assume that operations will be okay and that the headwinds will purely be cost inflation and freight specifically? Or is there something else we should be thinking about as we think about margins in '19?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Courtney, overall, for '19, we do expect to see improved efficiencies. We saw sequential improvement in the fourth quarter, as we mentioned on the call. The biggest dynamic, I think, that we're dealing with when we talk about margins in '19 is really the cost price dynamic. This time, the margin profile that we're estimating for this segment reflects that we'll be able to offset the costs, but not necessarily capture margin on those cost increases. And those cost increases, again as we mentioned on the call, we saw some of the increases in '18, but we expect more of those to come through in '19. There is a little bit of a lag depending -- based on how we purchase steel. And so we're still seeing escalation -- cost escalation as we're heading into the beginning of the year here. But that's all factored into the outlook. We've got pricing assumptions around that. The team is working hard to maintain that price discipline. But that's the biggest driver that we see there. We do believe we're probably going to see some continuation of some supplier disruptions, although we think it will be -- continue to lessen versus what we saw in fiscal '18.

--------------------------------------------------------------------------------

Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [11]

--------------------------------------------------------------------------------

Okay, great. And then just looking at the F&E margin guidance as well. I think that's the highest that we've seen in recent history there. Can you just talk about maybe the quick guidepost for how high F&E margins could go, especially since I think a lot of your backlog there still doesn't have any pricing in it? So was that really just the impact of some of those international orders that are coming in? Or do you think there could be some more upside to that segment over time?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [12]

--------------------------------------------------------------------------------

Courtney, they've been on a nice march improving margins over the last several years. And what we've said is, we don't expect some of the big jumps that you've seen over the last few years. But there are still lots of opportunities for them to simplify the business. They've done some really nice things there, and there's a lot more to come, and they're staying focused on that. We haven't called what we think that number could be. But as Jim Johnson, their President, would say, that there are opportunities, and they do expect to continue to improve their margins over time. But we're going to stay within this year's guidance and end with that.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Themistoklis Davris-Sampatakakis, Crédit Suisse AG, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

This is actually Themis, on for Jamie. Maybe if we could talk about defense a little bit, and then, particularly your margin assumptions for '19. I understand that margins are coming down as a function of the JLTV ramping, but is it just a mix story? Or is there anything else that is worth calling out? And also any comments on the cadence of margins for defense during the year would be helpful.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. In terms of drivers of the margin year-over-year, the other thing that's a factor in there is really related to our R&D activities. And while the level of R&D overall is largely unchanged from '18 to '19, in fiscal '18, the R&D activities were more focused on areas where we were getting paid for that. And as we look at '19, it's going to be more focused on areas where we're pursuing new opportunities on our own. And as a result, we don't have revenue associated with that. So that would be the other component in terms of the overall margin for the year in the defense segment.

--------------------------------------------------------------------------------

Patrick N. Davidson, Oshkosh Corporation - SVP of IR [16]

--------------------------------------------------------------------------------

How about M-ATV? There were some shipments in Q1.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Oh, yes. That's the overall mix from -- M-ATV is coming down, JLTV continuing to ramp. That's the biggest driver, but the other one would be the NPV there. In terms of cadence, some of that's going to be impacted by the new rev rec standard as we talked about. As we get orders in, we will record cumulative catch-up adjustments. So it's -- that's a little hard to call, but outside of that, I would say, the margin should be fairly balanced throughout the course of the year. But again, depending on timing of orders, we do expect to see some lumpiness. It's just a little hard to tell you today when those orders will come in from the government customer.

--------------------------------------------------------------------------------

Themistoklis Davris-Sampatakakis, Crédit Suisse AG, Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Got it. That's helpful. And then maybe quickly on your top line for defense. I think that based on what you already had in backlog last quarter for 2019 and what you booked in the quarter, I'm getting that we need roughly $400 million of incremental orders. So where do you think this is most likely to come from? And how are you thinking about the timing of these incremental orders that we need?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, we had -- as we entered the year, we had about $1.6 billion of backlog for fiscal '19 in the defense segment, so $400 million is a good number to think about it. That's largely all going to come from domestic sources. As we mentioned on the call, we really don't have a lot baked into our outlook for fiscal '19 from an international standpoint. You're always going to see one component being the normal run rate aftermarket business that comes in. So that will be a part of it. The other part will be FY '19 government budget dollars starting to flow in. We'll start getting those in and get some sales later in the fiscal year that are associated with the government's fiscal '19 budget.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [21]

--------------------------------------------------------------------------------

In access equipment, you folks really had an outstanding quarter and demand accelerated from the third quarter versus your expectations. Can you just talk about the demand cadence and what surprised for the upside both from orders and shipments this quarter?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [22]

--------------------------------------------------------------------------------

Jerry, I think the -- from the demand side, if you look at 2018, it's -- I guess, you could term it a nontraditional order year, maybe our big first half that orders were really prevalent and then slowing in the third quarter. So if you look at our Q4, I would say that it's really timing. We've had some customers that are buying in the quarter that probably is a little unusual for them out of their normal cadence. It's really -- I think the whole Q4 order situation be -- just be described as timing. I think it -- and again, it's been a case the whole year where people -- customers were forecasting with us, but not necessarily staying with that forecast. We've had some pull forward and some pushback. If you remember, we carried over quite a bit more backlog than we normally do. So I would term it more as timing. And then, the shipment side, I wouldn't say it was any big surprise to us other than we had some customers that had some projects going and asked to have their equipment a little earlier than what they had planned, which would have been into this quarter.

--------------------------------------------------------------------------------

Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [23]

--------------------------------------------------------------------------------

Okay, and in defense...

--------------------------------------------------------------------------------

Patrick N. Davidson, Oshkosh Corporation - SVP of IR [24]

--------------------------------------------------------------------------------

Q2 orders too -- maybe, we might want to make a comment on that because it is a tough comp.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Q1. Q1 of '19.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, so if you recall last year, Jerry, we had an exceptional quarter for orders in our first quarter of fiscal '19. And back to that timing comment that Wilson made, we don't expect to match that level, but I think overall, our outlook for the business remains very positive. I think the timing that we saw in Q4 at least for some customers is reflective of their positive view of their businesses and their outlook as they head into '19. So while it is timing, I think there's, I think, positive things associated with that timing.

--------------------------------------------------------------------------------

Patrick N. Davidson, Oshkosh Corporation - SVP of IR [27]

--------------------------------------------------------------------------------

And that tough comp Dave's mentioning, that's the $1.75 billion, right, which everybody that follows us understands, that's really an outsized kind of a value. So...

--------------------------------------------------------------------------------

Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [28]

--------------------------------------------------------------------------------

That was a good quarter. And in defense, looking at the top line guidance range of $200 million year-over-year growth. JLTV, I think, is scheduled to be multiples of that in terms of the shipment growth. Can you just talk about what are the headwinds? Is the FHTV business down significantly? Obviously, M-ATV is a $100 million hole, but can you just help us, Dave, what the other moving pieces given the big ramp in JLTV?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, you're directionally right. As we mentioned, FHTV is going to be down. It's not going to be down, what I would say, a ton. But we are certainly going to see JLTV step in with its increased volumes and offset both the lower M-ATVs and the lower FHTV volume. And this is really what we had expected all along as the JLTV is ramping up to be more than half of the new vehicle sales in fiscal '19.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from the line of Neil Frohnapple with Buckingham Research Group.

--------------------------------------------------------------------------------

Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [31]

--------------------------------------------------------------------------------

Dave, I wanted to go back to the margin outlook for the JLTV program. It sounds like you're taking a wait-and-see approach here before making an adjustment for the profitability outlook for the program. But is timing pushed out just a quarter or 2? I mean, can you just help us understand a little bit more here on what else you need to see before adjusting the profitability?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [32]

--------------------------------------------------------------------------------

Yes. Neil, we do look at it every quarter, and we have said in the past that we thought September would be a really good quarter to look at it from a real hard look. We still believe there are opportunities there. And it really comes down to what we said on the call. We have to believe it's achievable and sustainable because we're talking about a program that's an 8-year program. So making a decision on whether we take the margin up, it's not only a reflection of what we're seeing today or the next quarter, but what we think we can sustain and achieve over the full life of that program. So we're looking at things on the material side, we're looking at things on labor side, we're looking at things on the overhead side. There's a number of areas that we're looking at. The team's driving towards delivering improved performance there. And to narrow it down to will it be this quarter or that quarter, that's a little hard at this time. I guess, what I would leave you with is, again, we do believe there are opportunities out there, but we want to be very comfortable before we bake those into the full program margin.

--------------------------------------------------------------------------------

Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [33]

--------------------------------------------------------------------------------

Okay, that's helpful. And then, going back to the access segment margin guidance for FY '19. Could you talk more about what it assumes from a customer mix standpoint? So whether you're assuming more or less IRCs, and also the impact from product mix of teles versus AWPs. Anything unusual there? Or is it just too early to make the call on that?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [34]

--------------------------------------------------------------------------------

Yes, we're going to go back to -- it's still early a little bit. So the going in assumption is relatively similar, both customer and product mix for the year. And as we get through these negotiations, we'll certainly tighten that up. And as we provide our next update on the outlook for the year on our first quarter earnings call, we can -- we'll talk a little bit more about that if we see any meaningful changes.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [36]

--------------------------------------------------------------------------------

I wonder if you could just comment on the access revenue guidance. What kind of capacity utilization are you running at right now? And have any of these supply chain issues caused you to miss sales? Or are you running kind of flat out and the supply chain issues have just impacted margins, if you could just comment on that?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [37]

--------------------------------------------------------------------------------

I think, Ann, overall, the supply chain challenges have improved as we've gone through the year here. But as we talked about earlier, we do expect we're going to continue to see a little bit of that in fiscal '19. If you go back earlier in the year, we did have some situations where supply chain challenges actually shut down the lines for short periods of time. We believe that's largely behind us now, but there are again ongoing challenges associated with that, but it has gotten better.

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [38]

--------------------------------------------------------------------------------

And we've improved capacity. And as we've got our efficiencies enhanced -- we talked about hiring around 600 people at JLG last year and getting all of those folks trained. We're past that now, and we're seeing the efficiencies coming into the right focus. Those things we did just to make sure that we can cover not only our capacity needs, but also we need to do some insourcing or vertical integration. We're opening up a facility in Tennessee that will be supplying fabricated parts and welding for both JLG and our defense segment. So we feel good about where we are from a capacity standpoint and going forward here in this next year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, if orders did increase, you will be able to meet those orders. Is that the way we should interpret it?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [40]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [41]

--------------------------------------------------------------------------------

Okay. And then just a follow-up on the cost side. Can you just describe how your steel purchasing contracts work for access versus defense? I'm just kind of curious because you talked about perhaps the opportunity to increase margins in defense, however, higher input costs are going to weigh on access? Are there differences in the way you've structured the steel purchases for both divisions?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Yes, in general, and defense is a little bit different given the long-term contract nature of that business. We're able to do things a little bit differently there. If you take our nondefense segments, in general, we use a variety of ways that we do procure steel. And one of the main ways, though, is through a series of quarterly locks on pricing. And so that is fairly typical. Others are on an annual basis. But generally, the big differentiator -- differentiating factor between defense and our other businesses is the long-term nature of the defense contracts.

--------------------------------------------------------------------------------

Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [43]

--------------------------------------------------------------------------------

Okay. And does that mean that perhaps the margin weight will be on defense, maybe in 2020 or 2021 if steel prices were to stay at current levels?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [44]

--------------------------------------------------------------------------------

No, we -- the way the defense contracts work is our government customer allows us to build in price increases on an annual basis. And that is arranged as we're entering the contract. So as a result, we're able to work with our supply base and allow them to put in some price increases as well. It's all factored in when you're looking at in terms of these long-term contracts. So historically, what you would see when we see escalation in steel is -- in defense is the price increases that are already baked in from a contractual standpoint would help mitigate the impact of that?

--------------------------------------------------------------------------------

Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [45]

--------------------------------------------------------------------------------

Okay, so something like an inflation-based price increase?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, historically.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Escalation cost.

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [48]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [50]

--------------------------------------------------------------------------------

I'm just trying to square up your comments. You feel the aerial market is strong, but your backlog right now is 25%, 26% of your guidance for access sales. I mean, historically, your backlog going into the year is only 11%, 12% of your eventual access sales. So your backlog is twice as big, let's say, as normal relative to the way you're guiding the sales. And at the same time, I appreciate the idea of price coming in at no margin given the cost as you commented earlier. But even if price plus surcharge was 5%, 6%, even if you strip that out, you're implying your margins are flat, despite the productivity improvements. So I'm just trying to square up, and I know it's the beginning of the year, you can be conservative, I get it. But just so we're going to walk away, market's strong, even pulling out price just offsetting cost, margins flat and you barely grow. And all I could think is when I look at your share repo, you've got $450 million of free cash flow. You're saying you're just going to do $350 million of repo and the dividends, $20 million. So you're not even spending the free cash flow on the repurchase. So I'm just trying to square up the confidence in the statement about access? And if you are confident, we can make our own view of how conservative guidance is, then why are you not buying back more stock?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [51]

--------------------------------------------------------------------------------

Okay, David. I'll start, and Wilson may want to add in. But just on the free cash flow, so $350 million of free cash flow, our dividend for the year is actually going to be around $80 million, not $20 million. So that's $430 million...

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [52]

--------------------------------------------------------------------------------

I'm sorry to interrupt. Your free cash flow guide is $450 million, correct. I thought that -- maybe I heard wrong. I thought the repo guidance was $350 million. Maybe I heard that incorrectly?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [53]

--------------------------------------------------------------------------------

No, free cash flow guidance is $450 million, repurchase is $350 million, dividends are $80 million. So that totals $430 million of cash back to shareholders out of that $450 million.

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [54]

--------------------------------------------------------------------------------

I appreciate that, yes. I misspoke on the dividend. Thank you for that clarification. But the repo and even the dividend not have been quite used in the free cash flow in full. Again, I'm just trying to square. Am I hearing that as evidence of maybe not quite as confident in the access business as you sounded?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [55]

--------------------------------------------------------------------------------

Okay, David...

--------------------------------------------------------------------------------

Patrick N. Davidson, Oshkosh Corporation - SVP of IR [56]

--------------------------------------------------------------------------------

I don't think we would agree with you. If we said...

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [57]

--------------------------------------------------------------------------------

Okay, I'm sorry. I'm trying to understand the guidance scenario.

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [58]

--------------------------------------------------------------------------------

If we said there's another $20 million that we'll return to shareholders, we would say we're at 100%. So I'm not sure how we can be much more confident than that. In...

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [59]

--------------------------------------------------------------------------------

Per your balance sheet, the net debt to cap is only 11%. I mean, you're allowed to go beyond the free cash flow. Again, I'm just -- access, if you're confident in that market, just using the free cash flow or even a little less than that for repo and dividend would still suggest that we want to run the balance sheet at net debt to cap at 10%, 11%.

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [60]

--------------------------------------------------------------------------------

Our view, David, is, this will be the second year in a row that we're returning about 100% of free cash flow to shareholders. We do believe that is meaningful return of cash, and we do believe that, that is a very positive statement about our view of the business. In terms of your question on access equipment overall, between the surcharge price increase, some of the efficiency gains is also likely going to go to help offset the cost increases that we see there. It is a competitive market out there. We also had a couple favorable items in fiscal '18 that we don't expect to reoccur in '19. One that I recall, in particular, was a customer that we had on a deferral basis that they ended up paying us off during the year and that was a nice bump to earnings in fiscal '18 that won't reoccur in '19. And then, you just have some normal, be it, wage inflation and other inflationary pressures that are going to also consume some of that improved efficiency benefit that we will see in the year.

--------------------------------------------------------------------------------

David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [61]

--------------------------------------------------------------------------------

Okay, that's helpful. So price cost isn't -- at least base case right now, isn't necessarily price offsetting cost. There is a little bit of productivity improvements needed as well to offset the cost?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [62]

--------------------------------------------------------------------------------

A little bit, yes.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [64]

--------------------------------------------------------------------------------

Wanted to go back, Wilson, to your comment about this whole negotiations may take longer comment. I'm just trying to think through, why wouldn't you do something different to maybe pivot more to the IRCs away from the national guys? I mean, your backlog is up, I don't know, 90% or something year-over-year or so, which I assume is mostly nationals at this point. So strategically, can you just talk through what your options are here? Why wouldn't you pivot more towards the IRCs where you could, in theory, get better pricing and have a better mix for the year, I guess, my first question?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [65]

--------------------------------------------------------------------------------

Seth, we'll -- you know us, we're not going to tell you our strategy over a call like this. I have a feeling we have a few friends listening here on what we're doing. But we look at all customers and look at all opportunities. This is going to be, as I mentioned in my prepared remarks, it's a tough year. It's going to be a tough year. But you understand and our customers, I believe, understand that these are significant cost increase. I mean, we buy U.S. steel, and it's up 40% to 50%. Steel plate, which we buy a lot of, is right at 50% increase year-over-year. So you can't mitigate that type of cost increase or the freight increases, can't -- you just can't do that inside your company when the market is moving like it is. So we're laying all that out with all customers, it's not just NRCs. It's all the IRCs, too. We want to make sure we're transparent with what we're facing and work with our customers to bridge over this price cost issues. So yes, we have all kinds of different strategies and pivots that we're doing. But it's just not anything that we're going to go into detail on a call like this.

--------------------------------------------------------------------------------

Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [66]

--------------------------------------------------------------------------------

Okay, I appreciate. I appreciate that. Maybe just switching over to defense. Is there any disclosure you'd be willing to talk to about your Saudi Arabia exposure? Whether there is any Saudi exposure in your backlog? Or how you are thinking about sales there for this year?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [67]

--------------------------------------------------------------------------------

Sure, Seth. We obviously were sensitive to this issue and watching it closely on how our U.S. government is reacting to what's in front of them today. We only have a couple of small contracts with the Kingdom of Saudi Arabia right now, I would say they're very small in nature. So nothing as far as any type of large exposure at this time.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Our next question comes from the line of Charley Brady with SunTrust Robinson Humphrey.

--------------------------------------------------------------------------------

Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [69]

--------------------------------------------------------------------------------

Just, I guess, couple of quick ones for me. On the fire business, can you just quantify the deferrals or the pushouts that you had from Q4 into '19? And is that all going to get recognized in Q1?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [70]

--------------------------------------------------------------------------------

It's about $20 million, Charley. I think a majority of that will get recognized in the first quarter.

--------------------------------------------------------------------------------

Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [71]

--------------------------------------------------------------------------------

Okay. And also on fire, we heard from one of the suppliers into the fire market earlier on their earnings call saying that they were hearing from the fire OEMs, there were some supply chain constraints that was helping to build backlogs at the OEMs. I'm just wondering, from a supply chain perspective, is that something you're seeing on the fire business specifically that's impacting any of the ability to get stuff out the door?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [72]

--------------------------------------------------------------------------------

No, Charley. We haven't seen anything significant. I mean, there's the routine supplier issues that we go through in all of our facilities. But there's been no big event or big supplier shortfall in fire & emergency.

--------------------------------------------------------------------------------

Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [73]

--------------------------------------------------------------------------------

I'll just ask one more on access. Have you quantified the price increases, surcharges you're going to be putting through in this next round?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'll share that with you now. No one has asked that question to this point. But -- so recall, we went out with a 4.5% surcharge last spring. We're going to keep that in place for steel with the hopes that, that steel will moderate down, that way we can adjust that pricing for our customers. And then, we've gone out with, what I would call, a low single-digit price increase to cover the other inflationary issues and that will go into effect January 1.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [76]

--------------------------------------------------------------------------------

So just on the commercial side, looks like you're guiding to a pretty healthy step up in margins there. Can you just walk through what's driving that? To what extent, is it mix versus more international sales? And then secondly, just switching over to the access side, can you just talk about how much in your bookings in 4Q was driven by IRCs versus NRCs and to what extent are you seeing maybe a pull forward ahead of pricing?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [77]

--------------------------------------------------------------------------------

Okay, Chad. On commercial for '19, the main thing that's driving our improved outlook there is just continued execution, really, of their simplification journey, something that they kicked off in a real big way in fiscal '18. They made some benefits from that. And this is just taking it into the second year, I would say, of that. So we think the team is headed in the right direction. We've seen what this can do when we look at the fire & emergency segment. We're not necessarily saying they're going to get to the same margin levels as F&E, but we do believe that, that segment can get up to double-digit operating income margins. And then, can you please repeat your question on access?

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [78]

--------------------------------------------------------------------------------

Yes. So just on the bookings side for 4Q. I just wanted to get a sense for what the mix was between IRC versus NRC, and to what extent are you seeing any potential pull forward ahead of the next model year?

--------------------------------------------------------------------------------

David M. Sagehorn, Oshkosh Corporation - Executive VP & CFO [79]

--------------------------------------------------------------------------------

We did see a little stronger IRC mix in the quarter year-over-year, but it was not that significant, though not overall a big driver as we look at the improvement. And then, in terms of the pull ahead, I don't really think we're seeing that. We do believe, as Wilson mentioned a bit earlier, some timing out there. But the -- we've delivered strong growth throughout this year. We think that's going to continue into the first quarter of fiscal '19. But no real indications of a pull ahead. I mean, the price increase has been out there. It's been announced. The surcharge has been out there for 6 months. So at this point, there's not a lot to get ahead of, so to speak.

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [80]

--------------------------------------------------------------------------------

Got it. Okay. And then secondly, can you just walk through your expectations for the price cost cadence in access as we go through 2019? It sounds like you'll see a little bit more pressure in the first quarter. Just want to understand how that builds through the year. And if you can hit more normalized incremental margins at the back end of the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, the first quarter certainly will be the biggest challenge associated with that. That's largely due to having several hundred million dollars of backlog that was in place for fiscal '19 at the time we implemented the surcharge, and we've talked about that before. But after we get through the first quarter, we believe we should have a pretty good alignment of the cost price dynamic there to offset those and, again, as we mentioned earlier, some of the efficiency improvements helping to contribute to a little bit of that. The other segment I would call out is, to make you -- make sure everybody is aware is, fire & emergency. With their significant backlogs, they're going to be looking at really almost going through the first half of the fiscal year before they start to benefit from their surcharges really kicking in.

--------------------------------------------------------------------------------

Operator [82]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [83]

--------------------------------------------------------------------------------

Lot has been asked already. So just 2 quick ones. I guess, on your discussions in access equipment with NRCs, you mentioned that they're taking a little bit longer. And I'm wondering if that has some -- if that's primarily a factor of price adjustments? Or if there are other things, the M&A in the space and so on and so forth that are contributing to this?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [84]

--------------------------------------------------------------------------------

I don't think it's anything outside of what we go through every year, Mig, is -- remember, they're finishing their year, and we're trying to call our next year. So I think with the close of their year, that always adds complication. And then just digesting the difference in costs that we're presenting. I think they're going in and evaluating that. They're starting to build their budgets in -- so it's just requiring, what I would call, a few extra meetings. If you think about sharing the data that I talked about earlier with -- on steel, on freight, we're going in from a transparent standpoint and just sharing the actual information that we have, that we're working with, with our supplier partners. So it's -- I would just say it's -- there's a lot more involved in the discussions this year than in the past because of this price cost issue, and that is taking a few more meetings.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [85]

--------------------------------------------------------------------------------

All right. Do you think that changes the normal seasonality of the orders? And I understand the comps are a little bit strange as we look forward, but if we kind of adjust for that, do you expect sort of a different seasonal cadence to your orders through '19?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, again, it's early, Mig, for us to call that. I wouldn't expect it to be as nontraditional this year as it was last year. But like we talked about in our Q4, we had some customers that had some opportunities and wanted to pull some of their orders from Q1 into Q4. I think we're going to continue to see some of that behavior in '19.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [87]

--------------------------------------------------------------------------------

Understood. And then, lastly, in fire, 2 of your pretty large competitors, obviously, are struggling with some issues, being able to ship product and such. I'm wondering if you're viewing this as an opportunity for share as you look into 2019. And maybe what made your operations different, you think, than some of your peers that have struggled?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, you know us, Mig. We're not going to comment on our competitors. But what I will tell you is Pierce has been gaining share. And I know that's their plan to continue gaining share with some of their new product introductions along with just the good operational efficiencies they're driving through their simplification effort. So the plan is to continue to grow share there, and I would expect that you'll be hearing more about that through this next year.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [90]

--------------------------------------------------------------------------------

I just want to ask on defense. I mean, there was some news, I think, about a month ago that, I think, the DoD might reallocate some budget away from the JLTVs. Is that -- is there any merit to that speculation? And if that happens, is there any risk to the rest of the shipments for the duration of this contract? Or is that something that will be relevant when the contract comes back for rebid in like 2022 or out there several years?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [91]

--------------------------------------------------------------------------------

Well, you have -- we read a little bit about that, Ross, and a lot of speculation, rumor. But if that were to be put into effect, really, the quantities are still well above what the original 16,901 were. So at this time, we're obviously going to monitor that closely, but we don't see any kind of issue with our current program that we have on record today.

--------------------------------------------------------------------------------

Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [92]

--------------------------------------------------------------------------------

Okay. And just on access, sorry to beat a dead horse, but the rental companies have -- there's probably a lot of public posturing that's going on as you guys are negotiating this. But are you talking about flattish pricing from their -- flattish cost inflation from their key suppliers into '19. Have your expectations on pricing come down at all versus a few months ago? And as far as you can tell, are you seeing your competitors match the type of price increases that you are talking about? Or are you seeing any early evidence of scramble for market share?

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [93]

--------------------------------------------------------------------------------

Well, I'm going to let you ask our competitors on what they're doing in the area of pricing. And as you know, I'm not going to comment on our customer. But Ross, when you look at where we are, we have premium brands. We've given a wider range in '19 because we know the importance of being disciplined and protecting our margins. It may cause us to lose some share. That's never optimal, but we believe it's important for our shareholders, it's important for the long-term equity of our brand. We're going to continue to invest in innovation and best-in-class aftermarket service support to further develop this total cost of ownership model we have because we believe that's what wins in the long term. That's what will drive the best customer experience for our customers. So no one likes the price increase. But as you know, these costs are real. So we're going to go out and do our best to be disciplined, and that's our plan, is to capture that cost issue. As Dave mentioned, we're not trying to grow margins here. We're trying to cover our costs. And we think that's fair. And again, I won't speak for our competitors. I'll let you ask them that question, but that's our plan going forward.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Wilson R. Jones, Oshkosh Corporation - President, CEO & Director [95]

--------------------------------------------------------------------------------

I want to thank everyone for joining us today. We look forward to speaking with you at a conference or on our next earnings call. Have a great day.

--------------------------------------------------------------------------------

Operator [96]

--------------------------------------------------------------------------------

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