Oshkosh - Q1 2014
January 28, 2014
Transcript
Operator (participant)
Greetings and welcome to the Oshkosh Corporation fiscal 2014 first quarter results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Pat Davidson, VP of Investor Relations for Oshkosh. Thank you, Mr. Davidson. You may begin.
Pat Davidson (VP of Investor Relations)
Thanks, Brenda. Good morning, everybody, and thanks for joining us. Earlier today, we published our first quarter 2014 results. A copy of the release is available on our website at oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of non-GAAP to 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 about 12 months. Please refer now to slide two of that presentation. Our remarks that follow, including answers to your questions, include 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 results stated on this call are for continuing operations unless stated otherwise. Also, all references on this call to a quarter or a year are to our fiscal quarter or our fiscal year unless otherwise stated. Our presenters today include Charles Szews, Chief Executive Officer; Wilson Jones, President and Chief Operating Officer; and David Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, Charlie.
Charles Szews (CEO)
Thank you, Pat, and good morning. We're pleased to announce an overall strong quarter as we kick off 2014. We exceeded our expectations in many areas, which contributes to our confidence in raising our expectations for 2014 as we track toward achieving our goal of earnings per share of $4-$4.50 in 2015. A combination of disciplined execution and favorable product mix drove our stronger-than-expected results this quarter. Dave will go into more of the details, but I'm very pleased with the work of our team to execute our MOVE strategy and to embrace a culture-changing Oshkosh Operating System. Today, we reported higher year-over-year sales and operating income margins in each of our non-defense segments. This performance offset most of the defense segment operating decline, which was expected. Our team continues to drive forward with our MOVE initiatives, laying the foundation to achieve our 2015 financial targets.
MOVE has driven improved cash flow, which enabled us to complete and exceed our share repurchase program announced in November 2012, with 9.1 million shares repurchased from program launch through December 31, 2013, at a total cost of $347 million, approximately 15% over our target of $300 million. We paid our first dividend under our reinstated dividend program during the first quarter. Based in part on our stronger-than-expected first quarter results and confidence in our MOVE strategy, we're pleased to announce that we are raising our earnings per share expectations for 2014 to a range of $3.40-$3.65 and will provide more color on our outlook over the course of this call. Please turn to slide four for a discussion of our defense segment. Defense results for the quarter exceeded our expectations as the team continued to deliver improved operational efficiencies in the face of significantly lower volumes.
This is another example of disciplined execution of the MOVE Strategy and the Oshkosh Operating System at work. We'll continue to manage our cost structure and pursue opportunities around the globe as we work to offset expected declines in our domestic defense business through the remainder of 2014 and into 2015. We've had some real success internationally with our M-ATV platform, and we're excited about some new variants that we have designed for that vehicle, like our patrol and command units. But as you've heard us say before, international opportunities tend to move at an uneven pace with unpredictable ebbs and flows. That is what we experienced during the first quarter. We thought we might receive additional orders in time to impact our 2014 fourth quarter results. While we still expect these orders due to long lead times, we now believe these opportunities won't materialize until 2015.
As a result, we are lowering the high end of our 2014 defense sales estimates. From a profitability perspective, we believe we can offset the earnings impact of the shifting of potential sales out of 2014 with strong operational performance. We stated that we are pursuing more international opportunities than ever. Let me provide more color on that. Most of these international opportunities are focused around the M-ATV, but they also include opportunities for our medium and heavy tactical vehicles as well. M-ATV opportunities aggregate to a few thousand units, while medium and heavy tactical vehicle opportunities aggregate to a couple thousand units. The potential orders that slipped from the fourth quarter of 2014, aggregating about $50 million, involve vehicle trials that occurred in 2011.
Our understanding is that the funding for these units has been approved, and we expect to receive a contract to deliver these units in 2015. Now, trials were held in December 2013 for another opportunity, and a major trial is being held this spring for a larger opportunity. Our vehicles have been performing well in trials, and our team is focused on converting at least some of these opportunities into sales contracts, but the pace at which these opportunities will proceed is quite uncertain. In addition, we are pursuing the Canadian MSVS SMP program, which is a more defined path forward. We successfully delivered our proposal and test vehicle to the Canadian government in January. They will be evaluating multiple bidders' entries over the next year and a half, with a planned contract award date of June 2015.
It'll be an intense competition, but we have a great solution and great Canadian partners. We look forward to the opportunity to work with the Canadian Department of National Defence on this and future programs to modernize their ground fleet. We don't have a lot of new news to cover on the JLTV. Our team continues to support our U.S. government customers. They've put the vehicles through some grueling tests, and our vehicles are performing well. We believe the program remains on firm footing from both DoD priority and budget perspectives. Let's turn it over to Wilson and turn to slide five.
Wilson Jones (President and COO)
Thank you, Charlie. Good morning, everyone. The Access Equipment segment results significantly exceeded our expectations in the first quarter. Dave usually talks in more detail on the quarter results, but I also wanted to share some insights. The strong margins we delivered in the first quarter were a combination of a more favorable-than-expected product mix, higher pricing, continued improved operational performance, and the settlement of pricing on a multi-year contract for the Department of Defense. Backlog in this segment, as we entered the quarter, represented just under 50% of the quarter's new machine sales and reflected a typical product mix for the business. However, orders received in the first quarter for delivery in the first quarter reflected a stronger mix of aerial work platforms.
We believe this was due to some customers deciding to swap the timing of their aerial work platform and telehandler purchases so they could avoid the price increase on certain aerial work platform models associated with the changeover to Tier 4 engines. The result is that we had a mix more heavily weighted to aerial work platforms than we had expected. Our current expectations for sales in the second through fourth quarters of 2014 now include a product mix a little less weighted to aerial work platforms than our prior expectations, reflecting this swap. I'm sure you're also interested in hearing about our negotiations with the national rental companies. Overall, I would say they have gone well. We believe the North American Access Equipment market remains strong, and the rental companies have positive outlooks. We're nearly complete with these negotiations.
Our backlog at the end of December was down year-over-year, entirely due to lower backlog in North America. The lower backlog reflects that North American national rental company negotiations continued into January. Plus, national rental companies are placing orders closer to when they actually want the equipment. More just-in-time ordering contributes to the challenges of forecasting for the succeeding quarter. I would add that the order trend in January supports our Access Equipment segment outlook for the second quarter. Outside of North America, we saw a nice year-over-year order improvement in Europe in the first quarter. Our Europe backlog at December 31 was up sharply over the prior year. We believe this positive order flow early in the fiscal year is a sign of greater customer confidence in the economy and the Access Equipment market. Demand in the Middle East and Latin America was also strong.
The Australian market remained soft in the quarter, primarily resulting from the ongoing weakness in mining. We do believe that Australia will turn into a positive year-over-year comparable, possibly late in 2014. To close out this segment, I'd like to share with you our excitement surrounding the CONEXPO Construction Equipment Show. Last quarter, we talked about our renewed efforts and investments in the V, or value innovation portion of our MOVE strategy. We think our customers and our shareholders alike are going to be very pleased with the offerings we announce at this major trade show in about six weeks. That's all I'll say about this at this time, but we do hope to see all of you at the show. Please turn to slide six for some comments on our fire and emergency segment.
Last quarter, I told you that we have a lot of work to do in this segment, and that's still the case, but we are making progress, and we have a team that is very committed. I want to congratulate them on improving on last year's first quarter results. Next quarter will be more difficult for the fire and emergency team due to a low volume in our lumpy international airport products business. We also expect more significant margin improvement in this segment to occur in the second half of 2014, when we anticipate that the operational improvements we are making today will be realized in sales. The segment is still in the early stages of benefiting from the optimized cost portion of MOVE, but we are encouraged by the opportunities we see. We have dedicated teams working to improve our order management, product configuration, and production efficiencies.
Our opportunities to improve are significant, and we believe that our teams, supported by the Oshkosh Operating System tools, will be able to deliver 100-150 basis point improvement in margins this year and a greater improvement in 2015. Municipal demand has slowly improved, and fire departments have been replacing some of their very aged equipment. We expect this slow growth will continue in 2014. Federal demand, on the other hand, remained weak in the quarter, and we don't expect it to improve for at least the remainder of this year and possibly not until after 2015. Finally, similar to the Access Equipment segment, our team in fire and emergency is looking forward to a strong industry trade show this spring. At the FDIC show in Indianapolis, we plan to share some exciting and impactful new product offerings with our customers. Let's turn to our Commercial segment.
Please turn to slide seven. U.S. housing starts at 923,000 for the full calendar year 2013 were announced earlier this month. This is an increase of 18% from 2012, and the outlook for 2014 is for continued growth. Our concrete mixer business, which was hit extremely hard by the housing collapse and recession a few years ago, is in a prime position to benefit from these ongoing improvements. We received higher mixer orders year-over-year this quarter. We also benefited from higher sales of replacement drums and spares in our aftermarket business. Turning to our refuse collection vehicle products, we saw a stable U.S. market in the first quarter, and we benefited from international sales growth, largely in Latin America. We continue to believe the U.S. RCV market will grow slightly in 2014 after a down year in 2013.
Finally, we continue to invest in our cost optimization strategy for this segment. We expect that we will see more benefits from these investments in the second half of this year and throughout 2015. I'll hand it off to Dave to review our financial results for the quarter and comment on our expectations for 2014. Please turn to slide eight.
David Sagehorn (EVP and CFO)
Thanks, Wilson. Good morning, everyone. Our first quarter results compared favorably to the first quarter of last year, especially when you consider that defense segment sales were down significantly year-over-year. As Charlie mentioned, first quarter results significantly exceeded our expectations. Improved performance versus our expectations can largely be attributed to strong execution and a strong mix. Consolidated net sales for the first quarter of 2014 were $1.53 billion, a 12.6% decline from the first quarter of 2013. As has been the trend in the last few quarters, higher sales in our non-defense segments, led by a 15% increase in sales in the Access Equipment segment, weren't enough to overcome a more than 40% decline in sales in our defense segment. The decline in defense segment sales was expected and is in line with the outlook we provided on our most recent earnings call.
Excluding sales related to military contracts, Access Equipment segment sales were up 17.2% compared to the prior year quarter. The year-over-year increase in Access Equipment sales reflected continued strong replacement demand in North America, along with a nice improvement in Europe, Africa, and Middle East sales. As Wilson mentioned, we believe that some of the increase in North America was related to customers looking to get ahead of the Tier 4 pricing increase for certain aerial work platform products. Consolidated operating income for the first quarter was $96.5 million, or 6.3% of sales, compared to adjusted operating income of $96.6 million, or 5.5% of sales, in the first quarter of 2013. Improved performance of the non-defense segments offset the impact of lower defense results. Operating income margins were up year-over-year in all non-defense segments, led by the Access Equipment segment, which reported operating income margins of 13.5%.
Operating income margins in the Access Equipment segment increased 510 basis points over the first quarter of 2013. A stronger product mix with a higher percentage of aerial work platforms and improved pricing were the biggest contributors to the stronger margins. Year-over-year performance also benefited from finalizing the price on a multi-year U.S. military contract, which contributed 100 of the 510 basis points improvement. Corporate expenses in the quarter were up approximately $9 million compared to adjusted corporate expenses in the prior year quarter, driven largely by higher IT spending. Earnings per share for the quarter was $0.63 compared to adjusted earnings per share of $0.62 in the prior year quarter. First quarter 2014 results benefited by $0.05 per share from finalizing the Access Equipment segment military contract noted earlier.
First quarter 2014 results also benefited $0.03 per share compared to the prior year quarter as a result of our share repurchase activity. We're also pleased to announce today that our board has approved our next quarterly dividend of $0.15 per share, which will be payable on February 27th to shareholders of record as of February 13th. Please turn to slide nine for a discussion of our updated outlook for 2014. As a result of our stronger-than-expected first quarter performance and continued confidence in our MOVE strategy, we are pleased to be increasing our full-year expectations. We now expect consolidated sales for 2014 will be approximately $6.65 billion-$6.85 billion, reflecting a slight increase on the low end of the range and a slight decrease on the high end compared to our previous estimates as we have moved some anticipated international defense sales out of 2014.
We also now expect consolidated operating income of $490 million-$520 million compared to our previous expectations of $455 million-$490 million. The largest driver of the change in our consolidated operating income outlook is expected stronger performance in the Access Equipment segment. We expect continued improved operational performance in the defense segment to be largely offset by lower than previously expected sales in that segment, along with increased spending on new product development. Our estimated tax rate of 32% is up from our previous estimate of 31%, and our free cash flow outlook remains unchanged at $200 million. When you pull this all together, we now estimate that our 2014 earnings per share will be approximately $3.40-$3.65 compared to our previous estimate of $3.10-$3.40. Looking at the second quarter, we expect continued strong performance in the Access Equipment segment to lead our non-defense segments.
However, we also expect a significant year-over-year decline in defense segment results as we shift a large number of international M-ATVs in the second quarter of 2013, and we also expect lower sales for our major domestic defense programs. I'll turn it back over to Charlie for some closing comments.
Charles Szews (CEO)
Thanks, Dave. We just delivered a strong quarter that significantly exceeded our expectations, and we raised our full-year outlook. Outside of our domestic defense business, we are competing in markets that we believe are generally improving and provide us with opportunities to drive enhanced performance. We have an outstanding strategy with MOVE, and we are still in the early but maturing stages of our cultural transformation with the Oshkosh Operating System. It's a great time to be working at Oshkosh, and we plan to continue working hard and smart to satisfy or even delight our customers and shareholders. We believe we're on track to achieve our previously announced 2015 financial targets and to transform the business to sustain superior growth over the long term. That concludes our formal comments. We're happy to answer your questions, so I'll turn it back over to Pat, and we'll get the Q&A started.
Pat Davidson (VP of Investor Relations)
Thanks, Charlie. I'd like to remind everybody, please limit your questions to one plus a follow-up, and then after the follow-up, we ask that you get back in queue if you'd like to ask additional questions. Brenda, please begin the question and answer period of this call.
Operator (participant)
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and you may also press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your telephone keypad if you wish to ask a question at this time. Our first question comes from the line of Charley Brady with BMO Capital Markets. Please proceed with your question.
Charley Brady (Director of Equity Research)
Thanks. Hi, good morning, guys.
Charles Szews (CEO)
Good morning, Charley.
Charley Brady (Director of Equity Research)
Obviously, first question is going to go to access, not surprisingly. Can you just talk about the $7.5 million military pricing? Was that sort of a one-time catch-up that you guys had, or can you expand on that? And I guess as a follow-up to that, when you talk about the negotiations continuing into January, I guess I'm wondering, in terms of looking at the backlog, maybe some color on how that impacted the current backlog at the end of December, given that negotiations still haven't been completed?
David Sagehorn (EVP and CFO)
Sure. Charley, good morning. It's Dave. I'll handle the first one on the military contract and then turn it over to Wilson to talk about the backlog. Military contract, it really is finalizing pricing on work that has been done over the last several years on a contract. It was an urgent need with the government, and it just took a while to get the pricing finalized. So benefit in the first quarter, but it will not impact us in future quarters.
Wilson Jones (President and COO)
Hey, Charley. On the backlog question, through December, we had a good IRC mix. We did complete some negotiations. We're in the process of basically completing all the negotiations with the national rental companies, and that's why we make the statement we do like our position in January from an order perspective for Q2 and access.
Charles Szews (CEO)
Bottom line, Charley, this is Charlie. We negotiate with the national rental companies. We knew our position in December, but that just didn't get translated into orders, into individual orders, unit by unit. That just comes in January. Our customers are really just ordering closer to the point in time when they want to take delivery.
Charley Brady (Director of Equity Research)
Can you speak to what you're seeing on the independent side? Obviously, you've got the rental show coming up, I guess, in February. You've got ConExpo next month after that. Is that impacting any order activity, particularly on the independent side? Are you seeing them pull back or hold off, or does it still look like it's fairly positive going into 2014?
Wilson Jones (President and COO)
I would say it's still positive, Charley. We've said, I think, each call that it seems like the independents are getting more and more active, more and more finding financing to get back into the machine game. But obviously, exciting time of the year for us to have ARA and CONEXPO back to back. From what we understand, both are going to have good attendance, and we'll certainly be there in full force. And I think the independents will continue to be a good story for us throughout the next couple of years.
Charley Brady (Director of Equity Research)
Great. Thanks.
Operator (participant)
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook (Managing Director)
Hi, good morning.
Charles Szews (CEO)
Hi.
Jamie Cook (Managing Director)
Sorry, just a couple more questions just on the aerial work platform side. I was wondering if you guys could size—you talked about some buying ahead of sort of Tier 4s. Is there any way you can sort of size that opportunity, and then how should we think about Tier 4 pricing and the impact of those products on margin going forward? And then I guess my other question, you did note some strength in the overseas markets within access. Just hoping you could give a little more color on how big the order opportunity was and how we should think about the international mix impacting margins going forward. Thanks.
Wilson Jones (President and COO)
Well, Jamie, I'll take off on the Tier question. In our comments, we talked about how there were some aerial work platforms purchased in lieu of some planned telehandlers. So that shift, you'll see the effects of that in the second, third, and fourth quarter with a slightly less AWP mix than what you just witnessed in Q1. When we look at the Tier changes, that's a big part of our negotiations as we work through with the national rental companies. And again, depending on the size of the engine, the increase varies. But that is built into our 2014 budget. So what you're seeing in our forecast for the year takes into account us receiving those emissions up charges. So that's all baked into our numbers. Again, the mix varies, as you just saw in our Q1.
That is covered in our full year from a Tier change standpoint. It's been a big part of our negotiations with the national rental companies.
Jamie Cook (Managing Director)
Is Tier 4 margin neutral, margin accretive?
Wilson Jones (President and COO)
It varies, Jamie. Each national rental company has different types of terms and conditions. It's part of the negotiations, but obviously, we work to make it accretive. There are some cases where the terms are different. It's hard to just say yes or no to that question.
Charles Szews (CEO)
Yeah, Jamie, but generally speaking, it's margin neutral.
Jamie Cook (Managing Director)
Okay. Thank you. Then, sorry, just the international?
Charles Szews (CEO)
Sure. We are seeing strength in Europe, earlier buying patterns in Europe than traditionally in the last few years. So backlogs are strong in Europe at the end of December relative to prior year. The impact on margins, it's a more competitive environment because the markets are still down 60%. Having said that, it's a good mix of products. So I think you'll see us achieve our overall segment margin goals for the year.
Jamie Cook (Managing Director)
All righty. Thanks. I'll get back in queue.
Operator (participant)
Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.
Mig Dobre (VP of Equity Research)
Good morning, guys, and congratulations on a really good quarter.
Wilson Jones (President and COO)
Thanks, Mig.
Mig Dobre (VP of Equity Research)
I guess I'm going to stick with Access Equipment and maybe kind of a bigger picture question looking into 2015. I'm trying to figure out your 2015 outlook given the way you're guiding 2014. So in essence, you're guiding for roughly 10% revenue growth. In 2014, you've got a 2015 target of $4 billion in revenue, which would imply, say, 17% or so growth. Can you help me think through why would we see such an acceleration in the out year in growth, or maybe your 2014 guidance is too conservative? What are kind of the puts and takes here?
Charles Szews (CEO)
And Mig, we're not going to update guidance and everything here this morning, but what I would say is that as this cycle progresses, non-residential construction should improve, and that's a big driver of our Access Equipment business. And so to see that kind of a growth in 2015 from non-residential spending is certainly within the realm of possibility. Plus, we hope there'd be some acceleration in Europe in 2015. Again, Europe this year is down 60% from peak. Looks like 2014 will be a better year. But if that's the first step, the next step in Europe should be a bigger step in terms of improvement in that construction environment. So we would expect 2015 could be a really good year from buying.
Mig Dobre (VP of Equity Research)
Excellent. That's very helpful. And then on the defense side of the business, can you give us a quick update for how much in M-ATV revenue you had this quarter? And has this been the final quarter for international deliveries, or are there some left in the second quarter?
David Sagehorn (EVP and CFO)
Mig, we did obviously have M-ATVs in the first quarter, but we traditionally don't break that out into the specific programs. We do have some additional M-ATVs in the forecast that are under contract for international deliveries. Right now, our expectation is that we will see those come through as sales in our third fiscal quarter. And then, as Charlie talked about, we did have an expectation that we might have some additional orders in time for us to get those in the fourth quarter, but we have now updated that expectation. We think we'll see those now in 2015 instead of our fiscal 2014.
Mig Dobre (VP of Equity Research)
Great. Thank you.
Wilson Jones (President and COO)
Thank you.
Operator (participant)
Our next question comes from the line of Eli Lustgarten with Longbow Securities. Please proceed with your question.
Eli Lustgarten (SVP)
Good morning, everyone.
Wilson Jones (President and COO)
Hi, Eli.
Eli Lustgarten (SVP)
I think we're getting spoiled by seeing these kind of beats.
Wilson Jones (President and COO)
Yes, sir.
Eli Lustgarten (SVP)
You're training us in the wrong way, I think. I just want a clarification. The $7.5 million settlement with the government and pricing, that falls directly to the bottom line, right? That's both a sales number and an operating profit number?
David Sagehorn (EVP and CFO)
Correct.
Eli Lustgarten (SVP)
Okay. Now, what you did in your guidance for the aerial work platform telehandlers is just basically drop the bottom side. You got the top side and drop the bottom, almost implying that you expect things to be pretty much as you thought, and you just got a stronger first quarter. Is that sort of how you're seeing things? That you'll probably still see a near but probably less than 10% gain in the business this year, and the first quarter was just stronger, and that's why you went to $3.35 billion at the bottom instead of $3 billion?
David Sagehorn (EVP and CFO)
We actually raised the bottom up slightly from $3.35.
Eli Lustgarten (SVP)
Yeah, it went from $3 billion to $3.35 billion. That's the first quarter beat, effectively, isn't it?
David Sagehorn (EVP and CFO)
Well, I guess it's just kind of an outlook on the year. I think a lot of what we looked at in the first quarter, and Wilson touched on this, is we viewed it more as an exchange of telehandlers for aerial work platforms in the first quarter, and we think that will largely reverse itself over the remainder of the fiscal year.
Charles Szews (CEO)
Eli, we never gave a specific forecast for Access Equipment sales in the first quarter. So for us to say we beat or didn't beat, that wouldn't be accurate.
Eli Lustgarten (SVP)
And.
David Sagehorn (EVP and CFO)
Exactly.
Charles Szews (CEO)
Exactly.
Guidance up for the year.
Eli Lustgarten (SVP)
Can you give us some commentary on what the rental companies are telling you? When you talk to them on the side, you hear you see relatively flattish spending plans at a most of some moving back to some talk that they want to shift back more to dirt this year. Then AWPs only recorded the timing of Tier 4 price increases and such. Are they telling you any of that stuff, or they're just committed to what they're saying? And AWPs, there's no change in their attitude, even though the timing's been delayed a little bit?
Charles Szews (CEO)
Eli, I think what you're hearing is relatively consistent with what we're hearing. Flattish up a little bit, maybe, but flattish. Most of the growth that we're projecting for 2014 would come from the independent rental companies in North America, Europe, Latin America, Pacific Rim, Australia, pretty tough year environment, but maybe better in the second half of the year. So again, national rental company view, like you shared, is probably spot on. Unless they see some pickup in the market in non-res spending or something, you could see some growth orders later in the year.
Eli Lustgarten (SVP)
All right. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question at this time, please press star one on your telephone keypad. Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question.
Ann Duignan (Managing Director and Equity Research Analyst)
Hi. Good morning, guys.
David Sagehorn (EVP and CFO)
Good morning.
Ann Duignan (Managing Director and Equity Research Analyst)
Morning. Changing gears a little bit, talking about Commercial. Can you talk a little bit about what you're seeing out there on the cement mixer side? I know you gave us a little bit of color. Would you anticipate some pent-up demand, particularly for the larger ticket items like cement mixers, maybe refuse trucks, maybe fire trucks as we head into CONEXPO, or is that too much to expect?
Charles Szews (CEO)
Ann, with the stock market going up and down here and the volatility in some of the numbers, I'd say that our customer base in concrete mixers is relatively cautious. They're optimistic but cautious. You saw nice growth in our backlog in orders for mixers. So it's going to be a nice year in 2014. It could be a better year if we didn't see some of the volatility in the numbers from month to month. What I do think that means is that if we string forward a couple of good months and housing starts or something like that, you could see some improved buying in the second half of the year. But that's not reflecting in our estimates right now because we have a relatively positive but still cautious customer base out there in mixers.
When you get to refuse collection and fire, it's mostly based on municipal budgets. Yes, they're improved, but not that improved at the present time. And so we're expecting pretty modest growth in both of those markets going forward in 2014.
Ann Duignan (Managing Director and Equity Research Analyst)
Okay. That's good color. On the cement mixers, I mean, the industry peaked at roughly 11,000 units and crossed at roughly 800 units. Where are we now, roughly? If you wanted to give us a 2013 back-of-the-envelope.
Wilson Jones (President and COO)
Yeah. We're sitting around the 3,000-unit range right now, give or take. Just a little bit more color on what Charlie was saying is coming out of World of Concrete. I think we've certainly got more people interested, but they are still in that cautious mode. I think more to come there, but we did have a good experience at the show last week.
Ann Duignan (Managing Director and Equity Research Analyst)
Okay. And just a real quick follow-up. Tier 4 pre-buying, but no tax spending. You haven't mentioned that any customers buying because of the expiration of Section 179 or accelerated depreciation. That was not a material driver of demand in the quarter?
David Sagehorn (EVP and CFO)
No, we don't believe it was, Ann.
Ann Duignan (Managing Director and Equity Research Analyst)
Okay. Good. Thank you. I'll get back in line.
David Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question. Peter, your line is live.
Peter Skibitski (Senior Analyst)
I'm sorry.
Operator (participant)
Oh, sorry. The other line had dropped. Peter Skibitski with Drexel Hamilton. Go ahead, please.
Peter Skibitski (Senior Analyst)
Okay. Yeah. First of all, great quarter, guys.
Wilson Jones (President and COO)
Thanks, Pete.
Peter Skibitski (Senior Analyst)
Just wanted to follow up and understand better the defense margin this quarter. I thought it was pretty solid. Was that because of international M-ATVs, did you say, flowing through this quarter, or was it more so a better mix of FHTV?
David Sagehorn (EVP and CFO)
We certainly did benefit, Pete, from having M-ATVs in the quarter. We aren't shipping at the volumes that we did in the second and third quarter last fiscal year, but it was still a benefit. And then, obviously, Charlie talked about some of the operational efficiencies. The defense group has done a great job in terms of managing that business in the face of some significant sales decline, and they've just been able to continue to improve their operational performance.
Peter Skibitski (Senior Analyst)
Okay.
I guess the balance of the year, are you expecting kind of a linear decline in volumes, or is it going to be more like last year was pretty steady, the first three quarters, and then kind of a sharp drop-off in the fourth quarter?
David Sagehorn (EVP and CFO)
I think it will be more steady throughout the remainder of this fiscal year. Probably see some drop. I don't have the numbers right in front of me, but in Q4, I'm assuming we will see a drop, but probably not to the magnitude of what we saw last fiscal year.
Peter Skibitski (Senior Analyst)
Okay. And let me just ask, at December 31, can you give us how much of your defense backlog was FHTV and FMTV?
David Sagehorn (EVP and CFO)
Oh, Pete, we're probably going to have to get back to you on that one.
Wilson Jones (President and COO)
Yeah, Pete, I'll get with you afterwards.
Peter Skibitski (Senior Analyst)
Not a problem. Not a problem. Okay.
I'll get back to you. Thanks, guys.
Wilson Jones (President and COO)
Thank you.
Operator (participant)
Our next question comes from the line of David Raso with ISI Group. Please proceed with your question.
David Raso (Senior Managing Director)
Hi, good morning. This is a pretty straightforward question. The rest of the year, you're implying access revenues up 7%, and you're speaking about the orders. You feel good about that. Where is the order growth currently relative to that 7% revenue growth guidance?
You covered it with the independent.
David Sagehorn (EVP and CFO)
Yeah. I mean, let me just check your numbers. I'm not sure that, well, it's probably the mid-range or so that those numbers would be 7%. Again, it's where I said it. It's independent to North America. It's.
David Raso (Senior Managing Director)
No, I apologize. I was looking for some quantification. The order growth that you're seeing relative to that revenue growth guidance for the rest of the fiscal year.
The order growth.
Charles Szews (CEO)
Well, again, remember, our backlog is down at the end of December. So you're not going to quite see that, all right? What we see is the negotiated volumes with the national rental companies, what orders are going to come in. And so that's sort of on the come.
David Raso (Senior Managing Director)
Well, I guess that's sort of what I'm asking. I guess, essentially, what have you seen since the quarter close when you say your order growth is making you comfortable with the revenue guidance for the rest of the year? I'm just trying to get a feel. Is there some cushion in that number where you're seeing conversations that imply 15% growth or conversations that imply flat? I'm just trying to understand.
Charles Szews (CEO)
Well, again, national rental companies are flattish for the year. Independent rental companies are up nicely, double-digit. And so that would come back to the point of high single digits for the rest of the year.
David Raso (Senior Managing Director)
Okay.
Wilson Jones (President and COO)
Which is the comment of saying we're consistent with where we thought we'd be for Q2 with what we're seeing in January.
David Raso (Senior Managing Director)
The way to think about the incremental margin in the first quarter, you take out the military settlement number. Basically, the incrementals are about 39%. The mix being a little less aerial the next quarter or two, I guess that's part of the implied incremental margin slow down a bit the rest of the year. Is it that simple?
David Sagehorn (EVP and CFO)
I think it's that. Plus, David, we did have a strong mix of IRCs in the first quarter. As we finalize the annual agreements with the national rental companies, I think we will see more of their volume in subsequent quarters.
David Raso (Senior Managing Director)
All right. That's fair. Thank you very much.
David Sagehorn (EVP and CFO)
Thanks, David.
Charles Szews (CEO)
Thanks, David.
Operator (participant)
Thank you. Our next question comes from the line of Walter Liptak with Global Hunter Securities. Please proceed with your question.
Walter Liptak (Managing Director and Senior Financial Analyst)
Hi. Thanks, guys. Congratulations from me too. Just wanted to ask, I guess, a follow-on to the follow-on on national versus independent. I think that's all pretty clear. But in the past, I think some of your sales were going direct to end users and not to the rental channel. I wondered what you're seeing from that because it seems like construction markets are starting to pick up. If there's a channel there, that you might be seeing some improvement in.
Charles Szews (CEO)
I don't know where you get that from exactly, Walt, that they go directly to the end customers. They go to the end customer in the sense of rental customer. Yes, we sell direct to rental customers. We do have dealers and telehandlers in North America, for example. They then turn around and have some retail sales of telehandlers. But your general Joe Plumber would go through a dealer or a rental company generally to buy their equipment.
Wilson Jones (President and COO)
Yeah. I think just to add on to that, Charlie, is retail really hasn't grown. Coming out of the recession, if you listen to the national rental companies from their report, the rental percentage is growing. So as long as that's going in that direction, we don't see the retail channel picking up.
Walter Liptak (Managing Director and Senior Financial Analyst)
Okay. All right. Fair enough. Okay. Great. And then I just wanted to ask one more on the fire and rescue. The order activity looked pretty good. And I wonder if you could talk about what you're seeing in terms of the mix of product, custom versus standard. And as you get some of these operational efficiencies flowing through, when do they start hitting? Is it more of a 2015 thing where you can get more margin leverage?
Charles Szews (CEO)
Yeah. We have a long cycle to our backlog, Walt. So most of the efficiencies you're going to see from the work that we're doing inside the facilities is going to be 2015 and beyond. You will start to see some benefits in the second half of this fiscal year, but you won't really see it next quarter.
David Sagehorn (EVP and CFO)
And Walt, in terms of the mix of what we're seeing, I think you've heard us talk through the downturn that we didn't really see a big shift from custom over to Commercial. And I think that trend is continuing as we look at orders coming in the quarter. It's still pretty strong and heavily weighted towards custom units.
Walter Liptak (Managing Director and Senior Financial Analyst)
Okay. Great.
Wilson Jones (President and COO)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich (Senior Investment Leader and Head of US Machinery & Diversified Industrials Franchise)
Hi. Good morning. Can you hear me now?
David Sagehorn (EVP and CFO)
Yes, we can hear you.
Jerry Revich (Senior Investment Leader and Head of US Machinery & Diversified Industrials Franchise)
Excellent. Charlie, can you just talk about a bit more color on the MOVE efforts in fire and emergency and commercial segments? How much progress do you expect to make in the back half of this year versus the benefit that you expect in 2015? And obviously, very successful efforts in Access Equipment. I'm wondering to what extent can you apply what you learned there in these businesses?
Charles Szews (CEO)
Well, it's exactly what we've done in access that we are doing in Commercial and F&E. But as we said all along that we were a year to 18 months behind getting started at F&E and Commercial after we started our work in the Access Equipment business. So clearly, is it 20%-25% of the benefit this year? I don't know. But some of the benefit is this year in the second half. A bigger piece you'll see in 2015. No question.
Jerry Revich (Senior Investment Leader and Head of US Machinery & Diversified Industrials Franchise)
Okay. In terms of the demand in Europe and Latin America for your aerial business, can you just flesh that out for us? If you have any rental statistics in Europe, that would be helpful. In Latin America, I'm wondering if you could talk about is that driven by share gains or other factors? Because for other construction equipment product lines, we're seeing a softer market outlook there. I'm wondering if you're gaining share or something else is driving the strength in your business.
Charles Szews (CEO)
Well, I guess Latin America is a two-page story. In Mexico, stronger. Brazil up a little bit maybe in 2014, but not a lot because they're more impacted by the business they do with China. So Latin America will be kind of a north and the south story, if you want to take it that way. But we do think it'll be good for us. Did I answer all your questions? I didn't get every one of them.
Jerry Revich (Senior Investment Leader and Head of US Machinery & Diversified Industrials Franchise)
I apologize, Charlie. The question on Europe, what kind of rental statistics are you seeing there? How much have utilization and pricing picked up if you have that level of detail for your customers?
Charles Szews (CEO)
Yeah. We don't get the same level of detail in Europe. But again, it's really a mixed story. We've got some rental companies, even in the north, that are struggling a little bit. On the other hand, generally speaking, if you're in northern Europe, you're doing better than if you're in southern Europe. But overall, I'd say U.K. is coming on. That's probably U.K. Germany is where more of the strength would be. And go ahead.
Wilson Jones (President and COO)
Well, the one big statistic is if you look at fleet age. Their fleet age in Europe is at least one year to 18 months older than the North American fleet age. So there is going to be replacement demand. It's just a matter of the financing.
Jerry Revich (Senior Investment Leader and Head of US Machinery & Diversified Industrials Franchise)
Okay. Thank you very much.
Operator (participant)
Our next question comes from the line of Steve Barger with KeyBanc. Please proceed with your question.
Steve Barger (Managing Director of Equity Research)
Hey. Good morning.
David Sagehorn (EVP and CFO)
Morning, Steve.
Charles Szews (CEO)
Morning, Steve.
Steve Barger (Managing Director of Equity Research)
Between the cash balance and the free cash flow guidance, you've got a lot of liquidity. Can you talk about the capital allocation plan going forward in terms of reloading the buyback or any other options you're thinking about?
David Sagehorn (EVP and CFO)
Steve, I think we've always talked about trying to be opportunistic here. We just put the dividend back in place late last fall. Obviously, we're going to continue that, and over time, we'd like to grow that. I guess I wouldn't expect share repurchases in the remaining quarters of the fiscal year at the levels that we saw in the first quarter. So as we go through the remainder of the year, we do expect to generate a fair amount of free cash flow. And at this time, we're going to try to be opportunistic with that as we go through the remainder of the year.
Charles Szews (CEO)
Yeah.
If you look for the next quarter, we do a lot of building of inventory, etc., for the third fiscal quarter, which is always a strong quarter too. So you won't see the strength of our cash flow in the next quarter. So we'd probably be a little bit more cautious, certainly in the near term. And then we'll be opportunistic after that. And we'll just have to see where values are and where we can best allocate capital.
Steve Barger (Managing Director of Equity Research)
Just philosophically, do you think the board has a preference for dividend increases going forward versus a buyback, or are both those things under consideration?
Charles Szews (CEO)
I think we're going to try to use all the tools in our toolbox.
Steve Barger (Managing Director of Equity Research)
Okay. That's all I had today. Thanks.
Charles Szews (CEO)
Thanks.
Operator (participant)
Our next question comes from the line of Charley Brady with BMO Capital Markets. Please proceed with your question.
Charley Brady (Director of Equity Research)
Hey. Thanks. Just a little bit back on capital allocation. You've got some bonds that are able to be called. I think it's in March. Just wondering what your thought process is. I mean, they're 8- and-change percent rate. Are you guys thinking about calling those, or what's your thought on that?
David Sagehorn (EVP and CFO)
Charlie, it's certainly something that we would take a look at, but we don't have any announcements to make today.
Charley Brady (Director of Equity Research)
Okay. Thanks.
David Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Alex Blanton with Clear Harbor Asset Management. Please proceed with your question.
Alex Blanton (Senior Analyst)
Good morning.
Charles Szews (CEO)
Good morning, Alex.
Alex Blanton (Senior Analyst)
Glad you got to me. I have a question about a report from the U.S. Department of Defense on the MRAPs that are being retained by the U.S. Army. This said that 8,585 vehicles in total are going to be retained, of which almost two-thirds, or 5,650, are Oshkosh vehicles that were sold some time ago. The rest are going to be Navistar vehicles. I'm wondering what, if any, the financial implications of that are in terms of repair parts in the future or possibly future new vehicles to be ordered by the U.S. Army and so on. What do you have to say about that?
Charles Szews (CEO)
Alex, I think going forward with the lower OPTEMPO, you can expect that our U.S. Department of Defense parts business is going to be on the decline.
We're obviously doing some activities as much as we can to strengthen it or buttress it as much as possible. In terms of new vehicles, the Department of Defense clearly has a strategy to buy JLTV going forward. And we're heavily into that competition. I don't see them buying additional other MRAPs in part because they can get really good performance with the JLTV at a very competitive price, low weight, really all the things that they're looking for. And for that kind of a mission profile, they're going to be looking to the JLTV going forward.
Alex Blanton (Senior Analyst)
Well, it is an endorsement of the quality, I suppose. Two-thirds of the vehicles are keeping in yours. And also, isn't it better, though, than if they didn't in terms of your repair parts?
Charles Szews (CEO)
Absolutely. But those MRAPs aren't exactly going away. I mean, a lot of them are excess defense articles that are going to our allies around the world. And those allies are looking for probably some help to refurbish some of the MRAPs that are going overseas. And so those are also opportunities for us.
Alex Blanton (Senior Analyst)
Well, in terms of that, just to follow up here, all these vehicles that are not being retained by the U.S. Army, a lot of them are going to others who might otherwise buy new vehicles from you. Doesn't that tend to depress your opportunities for foreign sales, the fact that all these used vehicles are on the market?
Charles Szews (CEO)
It's mixed. There's no question that it does impact it. However, we have a few countries that do prefer to buy new and really don't want to buy a vehicle that's been operating in Afghanistan, taking heavy flak, so to speak. And so there's still a number that want to buy new. And that's why we're pursuing more new M-ATVs than ever before globally. And the other thing I'd say is that some of these MRAPs are going to countries that typically wouldn't buy U.S. They've got local manufacturers in their own markets that they would have purchased from, but they're getting them free, and they're going to take them.
David Sagehorn (EVP and CFO)
Alex, maybe just one other item to add on to that.
If you think about the vehicles that are going to foreign militaries, they're largely the Category I or the original versions of the MRAPs, which are a much heavier and less mobile type vehicle than our M-ATVs as well.
Alex Blanton (Senior Analyst)
Well, thank you. Just one more thing. On the margins in the aerial work platforms, what's the potential there? Is it significantly above where you are now or just a modest amount above?
Charles Szews (CEO)
For 2015, back at the analyst day, we said that our target was 15% operating income margins for the year. We haven't updated anything beyond that.
Alex Blanton (Senior Analyst)
Thank you.
Charles Szews (CEO)
Thank you.
Operator (participant)
Thank you, ladies and gentlemen. We have reached the end of our question and answer session. I would like to turn the floor back over to Charlie Szews for closing comments.
Charles Szews (CEO)
All right. Thank you. Let's wrap up. We do look forward to meeting with those of you who plan to attend our annual shareholders meeting next week here in Oshkosh. We also invite you to CONEXPO and FDIC trade shows in March and April for some very exciting new product launches. Have a great day, everyone.
Operator (participant)
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.