Oshkosh - Q2 2013
April 30, 2013
Transcript
Operator (participant)
Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2013 Second Quarter Results. 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. It is now my pleasure to introduce your host, Pat Davidson, VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
Patrick Davidson (VP of Investor Relations)
Thanks, Brenda. Good morning, everybody, and thanks for joining us. Earlier today, we published our second quarter 2013 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 measures used during this call and which is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months, and 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 attributable to Oshkosh Corporation, unless otherwise stated. Results for our Ambulance business have been reclassified to discontinued operations for all periods presented. Also, 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 Charles Szews, our 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. It's a pleasure to be speaking with all of you this morning. We're happy to announce another second quarter of strong results. When we thought about how to best describe the quarter, we kept coming back to the same words: disciplined execution. We're working very hard through the launch of the Oshkosh Operating System to create a culture focused on disciplined execution to serve and delight our customers and shareholders. Our team has been focused on disciplined execution of our MOVE strategy, and the results are evident as the team delivered year-over-year improvements in operating income margins in each of our four segments, and second quarter earnings per share of $0.96, which is more than double last year's second quarter earnings per share.
Despite mixed economic signals around the globe, we experienced strong demand for access equipment and concrete placement products during the second quarter. These businesses have benefited from the ongoing housing recovery underway in the United States, as well as replacement-driven demand, particularly in the case of our access equipment business, as customers are renewing aged fleets with purchases of new equipment. We also expect to see improvement in non-residential construction activity in the coming years, which we believe will bolster demand for our products. In addition to reporting our second quarter results, today, we are increasing our outlook for the full year to an adjusted earnings per share range of $2.90-$3.15. This increase in our estimate reflects our confidence in our plans and company-wide drive to execute. Please turn to slide four.
About six weeks ago, we had commenced a cross-country trip to visit with most of our largest shareholders, as well as with prospective investors, and I know that many of you that we visited are on the call today. The purpose of our trip was to reinforce regular and open shareholder communication, discuss progress with our MOVE strategy, and reaffirm our commitment to drive toward our 2015 targets. Discussions we had were both positive and productive. Our strong execution in the first half of 2013 gives us confidence that we are on track to deliver our targeted 2015 results of $4-$4.15 per share. Of course, there may be some bumps along the way, but on the whole, we're tracking to our plan, and we're generally on schedule with our MOVE initiatives.
The ongoing rollout of our Oshkosh Operating System provides a framework and the tools for our employees to successfully execute our MOVE strategy. We are managing our businesses to maximize the impact of the market recovery on our performance. We are actively optimizing our cost structure, which is contributing to our improved margins. Today, we'll describe some new products launched under our Value Innovation Initiative. And you've heard us talk about going global. We'll describe some recent successes in regard to that during this call. All our MOVE initiatives are being driven utilizing strategy deployment scorecards to ensure effective project management to deliver our targeted results. And as our employees are trained in the tools of the Oshkosh Operating System, we are reaching for new benefits to augment our results.
Before moving on toDefense, I'd like to congratulate our Pierce subsidiary on celebrating its 100-year anniversary of doing business. 100 years of doing business is a remarkable achievement and reflects a strong culture focused on serving our customers. Firefighters have come to appreciate and respect the Pierce experience that they were able to see last week at the FDIC trade show in Indianapolis. This is the type of culture that we are leveraging company-wide through the Oshkosh Operating System. Happy birthday, Pierce! Let's turn to slide five for an update on our Defense segment. I'm extremely pleased with how our Defense segment has performed in the face of challenging conditions. We are all aware that revenues in our Defense segment are moving lower as requirements for protected wheeled vehicles decline due to reduction in Defense spending in the U.S..
In the face of this challenge, for the past year, our Defense team has delivered significant operational efficiency improvements across all of our major Defense programs, resulting in operating income margins that have exceeded our previous estimates. Effective execution of the tools of the Oshkosh Operating System has been the foundation for this success. Speaking of success, I'm pleased to report that sales of M-ATVs for the UAE ramped up in the second quarter. We expect to have another strong quarter of M-ATV sales to the UAE in the third quarter before concluding those deliveries in our fourth quarter. We're also excited to be announcing today an initial order, an initial order of M-ATVs for the Kingdom of Saudi Arabia. The contract for a little more than 100 M-ATVs is scheduled for delivery in 2014.
We are also continuing to pursue other international opportunities to sell M-ATVs and other Oshkosh Defense products. Due to the competitive nature of some of these opportunities, we cannot go into detail about specific opportunities. Our focus on securing additional domestic and international orders for our Defense segment is of utmost importance. As a result of the reduction in Defense spending that I mentioned a moment ago, we expect daily production to decline approximately 30% starting in June. It's because of this lower level of activity that we recently announced the plan to reduce our workforce in the coming months in this segment by approximately 700 production and 200 salaried employees and contractors. We'd like to keep these hardworking employees, but we simply will not have work available for them.
I would like to thank all of these employees for their contributions to Oshkosh Corporation, as well as to our brave soldiers and marines, and I wish them well in their future endeavors. Before I leave Defense, I'd like to make a comment on what we think sequestration means for Oshkosh. We don't expect any material impact on operating results from sequestration on our 2013 vehicle sales, as all of our new U.S. vehicle production for 2013 is under contract. We do believe sequestration will have some impact on our aftermarket business in 2013, and our updated Defense sales estimates on slide 10 in today's packet reflect that impact. We likewise believe that we will experience some impact from sequestration on our 2014 aftermarket sales.
However, we had $2.6 billion in backlog in this segment as of March 31st, including $1.2 billion of our $1.5 billion, 2014 baseline sales estimate. So with approximately 80% of our baseline sales estimate already in backlog, we don't expect sequestration to have a significant impact on 2014 results. Of course, we'll continue to monitor the situation so we can stay nimble to adjust business conditions, to adjust business conditions as they unfold. Now, Wilson Jones will discuss some of the highlights of our business segments. Please turn to slide six.
Wilson Jones (President and COO)
Thank you, Charlie. Good morning, everybody. Charlie mentioned disciplined execution, and that's what you're seeing out of the Access Equipment team. Our operations and supply chain teams worked successfully to move equipment over the mountain in McConnellsburg and around the world through inclement weather to serve our customers in the second quarter. We also have numerous move initiatives ongoing in the Access Equipment segment that are enabling the team to deliver on their margin improvement goals. Our global markets have supported the price increases that we announced, effective January one, and the team continues to lower our product, process, and overhead costs. Excuse me. Today, trends that we've seen over the past few quarters continue to drive this segment.
In North America, we continue to see demand driven largely by rental company fleet replacement, although we are beginning to hear some customers talk about fleet expansion in 2014. The independent rental companies are coming back to the market for new equipment. For any of you who visited our booth at the ARA Rental Show in February, you saw firsthand the high level of activity by independents. Lenders are becoming more active in helping independents secure the financing they need to replace some very old access equipment. Outside North America, the markets continue to be mixed. Overall, we're experiencing slow growth in Europe, with activity better in Northern Europe, but activity remains at very low levels in Southern Europe. Moving around the globe, the Latin American market continues to grow.
The story in this part of the world is infrastructure build-out, and two highly visible drivers are the World Cup in 2014 and the Summer Olympics in 2016, both in Brazil. Turning to Asia Pacific, sales were up, except in Australia, where a large customer paused its purchases and a slowdown in mining and energy projects has curtailed demand. Translating this to activity levels in the second quarter, we experienced a solid quarter in terms of orders. As we have previously mentioned, we believe customers, in general, are using a more balanced approach to placing orders now that they have greater confidence in the equipment OEM's ability to meet their requirements.... We believe our backlog in this segment, which is down year-over-year but up sequentially, reflects this pacing of orders, along with lower requirements for military telehandlers and lower sales in Australia.
Before I close out the Access Equipment segment, I'd like to make a few comments about the Bauma show in Munich. Despite choppy markets in Europe, Bauma had a solid attendance, and we introduced several new products that round out our product portfolio. Customers are looking to replenish their fleets. We believe they're excited about the value we offer with the recently launched European versions of our Rental Series Scissor Units, as well as our new 17- and 20-meter Compact Crawler Booms and new Toucan Mast Booms. Additionally, we've upgraded our Powershift telehandler lineup for Europe with improved visibility, along with several powertrain options on a proven platform. We're excited about our product pipeline over the next year as JLG looks to reinforce its leadership in the work at height business. Now, please turn to slide seven for some comments on our Fire and Emergency segment.
Our Fire and Emergency segment continues to deal with challenging market conditions. With sequestration compounding already weak federal spending, including funds for fire apparatus and airport products, we still have not turned the corner in the federal portion of this market. However, we believe that we have turned the corner in the U.S. municipal fire market, as we are seeing signs of improvement across the U.S., including Florida, the Southwest, and several other areas that were hit hard by the recession. Jim Johnson and his team are moving the business in the right direction, as the segment posted a modest profit in the quarter, which is a significant improvement from our loss in the prior year quarter. Obviously, we're encouraged, but we still have a long way to go.
As a result of our actions and a solid backlog, we believe this segment will deliver stronger results in the second half of 2013. In July of 2012, we announced our intentions to exit the Ambulance business. We completed our last ambulance build during the quarter and are now able to fully focus our efforts in the Bradenton facility on our fire apparatus products. This is important as we strive to deliver improved efficiencies in all of our facilities. During the quarter, we also increased spending on MOVE initiatives to drive this segment to higher margins over the longer term. As I mentioned, U.S. government demand for our airport products, namely ARFF units and snow removal units used at airfields and other government facilities, is soft. This is in contrast to our international ARFF business, where demand remains strong.
In fact, we recently received an order to supply the Japanese military with 22 Global Strikers. As Charlie mentioned, Pierce is celebrating its 100th-year anniversary, 2013. This is a business that has seen a lot over the past 100 years, including up and down markets. Through it all, Pierce has maintained its focus, and today, Pierce is the market leader for fire apparatus in North America and locations around the world that require the best in firefighting equipment. Over the years, Pierce has compiled some impressive figures. During its 100-year history, we've built and sold more than 50,000 fire trucks, and a little over half of those utilize a custom chassis, a market segment that we lead by a wide margin. Custom fire trucks have only been around for about 30 years, so in relative terms, it's still a fairly young market.
It's a market that we intend to keep leading and defining with technology, with superior customer service, and with outstanding quality and reliability. I'll wrap up my portion with some comments on our Commercial segment. Please turn to slide eight. We introduced Brad Nelson as President of our Commercial segment in February. Brad comes to the position from our Access Equipment segment, where he served as our Vice President of Global Marketing. Before coming to Oshkosh, he held leadership positions at both EMC and Eaton Corporation. Brad is currently busy coming up to speed in his new role. Fortunately, he is a quick study, and he will need to be because this is an exciting business due to the ongoing rebound in the U.S. housing market and residential construction in general. He's already making an impact with our team at Commercial, and we welcome him to his new role.
Similar to our Fire and Emergency business, Commercial is actively investing in Move initiatives. I'm not going to go into great detail at this time, but the changes we're implementing in this segment are helping improve our performance, both in our factories and with our customers in the marketplace. Turning to this segment's largest businesses of concrete mixers and refuse collection vehicles, our concrete mixer business saw orders in the second quarter more than double over the prior year quarter. Furthermore, we continue to experience growth in our aftermarket parts and service business. The concrete mixer market in the U.S. declined over 90% during the downturn. While it still has a long way to go to fully recover, it feels good to be part of the pickup in this business. Our RCV business has been choppy this year.
Notably, one of our largest customers has pushed a large portion of their expected 2013 orders to the back half of this calendar year. We've recently started to receive their 2013 orders, but we won't start to see these orders reflected in sales until our third quarter, and some of their orders are likely to slip into our first quarter of 2014. CNG-powered units continue to be a big component of our RCV sales, as they generally average anywhere from 30%-40% of our shipments. We're also seeing more orders for CNG mixers, reinforcing our view that there is significant opportunity for CNG mixers as that market continues to recover.
To conclude my comments on the RCV business, we look forward to meeting with customers at the Waste Expo show next month in New Orleans, where we will introduce some exciting new vehicles. I'll hand it off to Dave now to review our financial results for the quarter and comment on our expectations for 2013.
David Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. Before I discuss our second quarter results, I'd like to remind you that effective this quarter, we have reclassified Medtec Ambulance results to discontinued operations for all periods in conjunction with the completion of our exit from that business. All results that I discuss today will be for continuing operations only. Consolidated net sales for our second quarter were $1.98 billion, a 3.8% decrease from the second quarter of 2012. As has been the trend in each of the last several quarters, sales in each of our non-Defense segments were higher than the prior year quarter, further supporting our belief that, in general, our non-defense markets continue to improve. Sales in our Defense segment were down 16.2% compared to the prior year quarter, largely as a result of lower M-ATV aftermarket parts and service and FMTV sales.
This was partially offset by the ramp-up in sales of M-ATVs to the UAE. Consolidated operating income for the quarter was $134.6 million, or 6.8% of sales. This compared to operating income of $84.1 million, or 4.1% of sales, in the second quarter of 2012. All segments reported higher operating income and operating income margins compared to the prior year quarter, led by the access equipment andDefense segments. Access equipment segment results compared to the prior year quarter benefited from the realization of recent price increases and operational efficiencies resulting from our MOVE initiatives. The Defense segment benefited largely from an improved sales mix, including the ramp-up of sales of M-ATV units, excuse me, to the UAE, and improved operational efficiencies.
Defense segment results also included $1.4 million of net charges related to workforce reductions in that segment. We believe the improvement in our segment operating income margins, especially in our non-Defense segments, is evidence that our MOVE strategy is working. More information on our second quarter results by segment can be found in the Appendix section of today's slide deck. Earnings per share for the quarter was $0.96. This compares to earnings per share of $0.47 in the second quarter of 2012, reflecting the improved performance in each of our segments. Second quarter 2013 results also benefited from a lower tax rate of 29%, compared to 35.8% in the prior year quarter, due to reinstatement of the U.S. R&D income tax credit and lower foreign income taxes.
Please turn to slide 10 for a review of our current outlook for 2013. We're pleased to announce today higher expected results for 2013. We are increasing our estimated adjusted earnings per share from a range of $2.80-$3.05 to a range of $2.90-$3.15. The increase in estimated full-year results is due to expected improved performance in both our access equipment and Defense segments. Specifically, we are increasing our access equipment full-year sales estimate range by $50 million to $2.85 billion-$3.05 billion.
We are also increasing our estimated operating income margin for this segment to approximately 10.5%-11%, compared to our previous estimate of approximately 10.5%, reflecting the higher sales estimate range, favorable price realization, and continued operational improvements. In ourDefense segment, we're reducing our estimated sales range for the year by $100 million to a range of $3.1 billion-$3.2 billion. The reduction in our sales estimates is largely the result of a decrease in our estimate of aftermarket sales, some of which we expect to be driven by sequestration, as well as some vehicle sales shifting to 2014.
We're also adjusting our expected operating income margin in this segment, increasing it from approximately 6.5% to approximately 7%, reflecting the continued operational efficiency improvements that this segment has been able to achieve. We've also updated our estimated full-year corporate spend to reflect the impact of our higher share price on variable share-based compensation compared to our pre-previous estimates. The higher estimated full-year corporate spend compared to 2012 is also driven by higher information technology investments. A few additional changes to our estimates. We are reducing our estimated full-year tax rate to 31% from our prior estimate of 32%.
We are reducing our capital expenditure estimate to $50 million, and we are increasing our estimated free cash flow to a range of $110 million-$135 million, reflecting expected higher earnings and slightly lower capital expenditures. Finally, we're assuming a share count of approximately 89 million, which excludes the impact of any additional share repurchases we may make in the third or fourth quarters. I'll close with a quick comment on our expected quarterly earnings per share split in the second half of the fiscal year. We expect the third quarter to be our strongest quarter of the year as a result of strong seasonally driven demand for products with exposure to the construction market and sales of M-ATVs in the Defense segment.
We expect our fourth quarter results to be the lowest quarter of the year as we start to see the seasonal decline in access equipment and commercial segment sales. We also expect fourth quarter Defense segment sales to decline significantly from third quarter levels as we complete sales under the 750-unit international M-ATV order and as production levels for our other Defense programs decline. Please turn to slide 11, and I'll turn it back over to Charlie for some closing comments.
Charles Szews (CEO)
Thanks, Dave. We are focused on execution and committed to delivering the MOVE targets that we shared with you. We are confident that we have the right roadmap and the right team to drive to our 2015 EPS target range of $4-$4.50. That concludes our formal comments. We're happy to answer your questions, so I'll turn it back over to Pat to get the Q&A started.
Patrick Davidson (VP of Investor Relations)
Thanks, Charlie. I'd just like to remind everyone, please limit your questions to one plus a follow-up, and after the follow-up, we ask that you get back in queue to ask additional questions. Brenda, please begin the Q&A period of this call.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.... 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 have a question at this time. Our first question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Stephen Volkmann (Analyst)
Good morning, guys.
Charles Szews (CEO)
Good morning, Steve.
Stephen Volkmann (Analyst)
I guess I wanted to focus a little bit on the commercial segment. It feels to me like you guys have your forecast is up about 10% or so, and the backlog is up significantly more than that. And I guess if the mix, if I'm reading this right, the mix is shifting a little more towards CNG, which I assume has much higher ASPs as well. And I guess I'm just trying to figure out why that 10% isn't pretty conservative at this point, or if there's some maybe headwinds that I'm not thinking about.
David Sagehorn (EVP and CFO)
Steve, you're right on the CNG, but I think that's been somewhat consistent-
Charles Szews (CEO)
Yeah
David Sagehorn (EVP and CFO)
In terms of the % of sales over the last number of quarters. We have obviously seen orders pick up on the mixer side of the business. Wilson talked a little bit on what we're seeing on the RCV side, especially with the timing of orders from one of the customers. So I think that is probably the biggest driver that we would see there. And I'm not... I don't have specifically the numbers that you're referencing, and the 10% isn't jumping out right now.
Stephen Volkmann (Analyst)
I guess I'm looking at your backlog up 24%, and it sounds like you're saying you're expecting more RCV orders later in the year, but you're already up 24%. It just, again, it feels like there's some conservatism built in here.
David Sagehorn (EVP and CFO)
Well, we don't know that. We, we've developed what we view as a realistic forecast for the second half of the year.
Stephen Volkmann (Analyst)
Okay. I'll, like, leave that one. On Defense, the margins were a little better than I thought, and I guess I'm wondering if it's possible, just maybe qualitatively, to talk about how much that has to do with mix and how much it has to do with sort of internal margin opportunities. And I guess what I'm trying to get at is, as we look into 2014 and 2015, are we starting to think maybe margins in Defense could be a little higher than what we had previously thought?
David Sagehorn (EVP and CFO)
Steve, the drivers of the mix in the second quarter, the biggest driver was the M-ATV mix, international order that we've previously talked about. Operational efficiencies did contribute, and as they did last quarter, so we're very pleased with in terms of the performance out of the Defense segment as they continue to operate that business. I think, as we said last quarter, you know, we'll provide updates on 14 and 15 later in the fiscal year.
Stephen Volkmann (Analyst)
Okay, great. I'll leave it at that. Thanks.
David Sagehorn (EVP and CFO)
Thanks.
Operator (participant)
Our next question comes from the line of Eli Lustgarten with Longbow Securities. Please proceed with your question.
Eli Lustgarten (Analyst)
Good morning, everyone. Nice quarter.
David Sagehorn (EVP and CFO)
Good morning. Thank you, Eli.
Eli Lustgarten (Analyst)
Can we just a clarification. You adjusted the corporate expenses up to $140, $145 million because of share base and IT investments. Can—and I hate to do this to you, but is that a run rate for 2014 also, or does that number begin to come down? And I know you can't predict the stock component, but the IT stuff should be visible.
Charles Szews (CEO)
You know, Eli, the IT investment will still be high in 2014, but we really can't predict what's gonna happen on the share base side.
Eli Lustgarten (Analyst)
But, but would it be fair to the number will be similar? I mean, I don't, precision doesn't matter. I just wonder whether it's similar or do we come back down, you know, from the level? That's a little, because that's a big change from last year.
Charles Szews (CEO)
Yeah, we really don't have any guidance for you for 2014 yet.
Eli Lustgarten (Analyst)
Yeah. Yeah, I, I tried. And can we talk about what's going on in the access business? You know, one of your competitors had a pretty strong quarter in volume, and they gave, they claimed a lot of their improvements actually came from overseas, particularly actually, the U.K. was the one that surprised them more on the upside. You had a decent quarter, backlog down a little bit. Can you give us an idea of what you're seeing in the business, whether you know, maybe you have any expectations as you look forward to the next couple of quarters, both here and abroad, and what's going on in pricing in that business?
Charles Szews (CEO)
Well, you know, we're seeing good market conditions. We did take our estimates up for the year, in this segment in terms of total sales.
Eli Lustgarten (Analyst)
Mm-hmm.
Charles Szews (CEO)
You know, pricing environment generally is favorable. We are sticking to our guns with our price increases that we've announced, and, you know, that is something that I think that we're leading the industry on, and we're gonna continue to pursue.
Eli Lustgarten (Analyst)
Is that costing you a little bit of share at this point because of stronger pricing?
Charles Szews (CEO)
It's hard to tell. You know, one quarter doesn't make, you know, a trend.
Eli Lustgarten (Analyst)
Mm.
Charles Szews (CEO)
I think if you look at trailing 12 months-
Eli Lustgarten (Analyst)
Mm
Charles Szews (CEO)
You know, we're like spot on with all of our competition. So, I think we're doing fine.
Eli Lustgarten (Analyst)
You're expecting it to fall off somewhat materially in the fourth quarter at this point. You know, so you're assuming that the market softens as you look out?
Charles Szews (CEO)
That's just a normal seasonal trend for the business.
Eli Lustgarten (Analyst)
And that even though interim final Tier 4 comes next year and, you know, you, you have, you know, potential headwinds, you know, investment tax credit changes, what have you, I'm just sort of, you know, surprised that you're cautious.
Charles Szews (CEO)
No, we're, we're not seeing any kind of pre-buy initiative from the fleets. I mean, they've all been pretty well conditioned, I think, to keep their utilization rates high, and if they pre-buy much, that, that causes a concern in the marketplace.
Jerry Revich (Analyst)
All right. Thank you.
Charles Szews (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Andrew Garthwaite (Analyst)
Hi, this is Andrew Garthwaite on behalf of Jamie Cook. Just another question on your access equipment side. Can you just comment more so on orders, kind of what's the mix you're seeing there? I know that was down a bit in the quarter. Can you comment on sort of the cadence you're seeing of the orders throughout the quarter and into the current quarter?
David Sagehorn (EVP and CFO)
Yeah, Andrew, I think I made some comments about how the rental companies are a little more measured with their order approach this year. Now that the OEMs are on the pace of delivering, we're seeing a much more balanced order schedule. We're certainly pleased with our current bookings pattern. I think the mix has been what we've talked about before, a higher telehandler mix for us, but on track from an order standpoint, from our view.
Charles Szews (CEO)
And, I mean, it was on track enough, Andrew, that we took our guidance up for the year. Right? If you look at our total backlog at the end of the quarter, it's almost $800 million in this segment, much higher than what you're gonna see elsewhere, you know, at other competitors. So, we're feeling pretty good about where the year sits. And then just don't forget that, you know, last year at this time, we had a big, you know, military telehandler, you know, backlog. We don't have that this year. So our commercial business is very strong.
Andrew Garthwaite (Analyst)
Okay, thanks. And then, on your Defense side, you had mentioned a fair amount of activity internationally. Is this, is this in line with what you're expecting, or is it, is it a little bit better than you were expecting, you know, at, at this point this year? And kinda long term, is this, do you think that that potentially your international expansion for Defense could sort of be better than what you've been guiding at your Analyst Day?
Charles Szews (CEO)
I think what we're realizing is consistent with what we expected before. We've said all along that we expected additional M-ATV orders. You know, we got an additional initial order from Kingdom of Saudi Arabia. We would expect additional orders to follow over time. We're still chasing a large number of potential M-ATV orders, as well as other, you know, Defense products volume over the next couple of years. And, you know, basically, the Defense business is proceeding much like we expected it to.
Andrew Garthwaite (Analyst)
All right. Thanks, guys.
Charles Szews (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Charley Brady with BMO Capital Markets. Please proceed with your question.
Charles Brady (Analyst)
Thanks. Good morning, guys.
David Sagehorn (EVP and CFO)
Good morning, Charley.
Charles Szews (CEO)
Good morning.
Charles Brady (Analyst)
Hey, on the Defense segment, can you give us how many, what the shipment was for FMTV and of the UAE M-ATV order? So how many units got shipped in that order in Q2?
David Sagehorn (EVP and CFO)
Charlie, FMTVs in the quarter were about 45% of the total sales volume.
Charles Brady (Analyst)
Okay.
David Sagehorn (EVP and CFO)
On the M-ATVs, it was about 200 units in the quarter that were shipped.
Charles Brady (Analyst)
That's about a 750 unit order all in, correct?
David Sagehorn (EVP and CFO)
Correct.
Charles Brady (Analyst)
Okay.
David Sagehorn (EVP and CFO)
So we will see higher, we will see higher sales volumes from the M-ATV program, or M-ATV order in the third quarter.
Charles Brady (Analyst)
Okay. And just to follow up on access, did you mention what % of sales were coming from independents in Q2, and how that compared with a year ago?
Charles Szews (CEO)
We didn't give a %, but the mix is higher in the current year in terms of sales to IRCs.
Charles Brady (Analyst)
Okay, great. Thank you.
Operator (participant)
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich (Analyst)
Hi, good morning.
David Sagehorn (EVP and CFO)
Morning, Jerry.
Charles Szews (CEO)
Good morning.
Jerry Revich (Analyst)
Charlie, I'm wondering if you're comfortable commenting on what the ultimate size of the Saudi Arabia opportunity is beyond the initial order, that you just mentioned. And then in the past, you've been willing to comment on the overall market opportunity for M-ATVs in the Middle East, based on inquiries that you're seeing. I'm wondering if you'd just give us an update on the size of that opportunity here.
Charles Szews (CEO)
I mean, we're still pursuing roughly 2,000 M-ATVs globally. I don't have any specifics, you know, by country to give you.
Jerry Revich (Analyst)
But it is more than just the Middle East?
Charles Szews (CEO)
Yes. Right. Yeah, the M-ATVs that we're pursuing are beyond just the Middle East.
David Sagehorn (EVP and CFO)
I think, Jerry, the 2,000 that Charlie references, that's additional in terms of to what we already have. So I think the original 3,000 target is still intact for us.
Charles Szews (CEO)
But the orders are gonna come—you know, over time. And, you know, just like this one from the Kingdom of Saudi Arabia, the initial order, they're gonna come of varying sizes and over time.
Jerry Revich (Analyst)
Charlie, can you address the first part of the question, or is that market sensitive in terms of how big the Saudi follow-on orders can be?
Charles Szews (CEO)
Yeah, I'd prefer not to comment on that.
Jerry Revich (Analyst)
Okay. And in access equipment, you know, telehandler shipments were really excellent again in the quarter. I'm wondering if you're seeing just a sharper pickup in U.S. housing driven or, what, what markets are driving that for you?
Charles Szews (CEO)
... You know, I still think it's largely replacement-driven demand. But certainly, I think our customers are seeing that it's a good time to get their telehandler fleet, you know, in good shape, as the housing recovery does expand. But, you know, the housing recovery isn't, you know, real, real robust right now, okay? We're, we're hovering just under or just around 1 million housing starts. So, it's a better number than it's been. It's not real robust, so I don't think you're seeing any real expansion capital here. It's just refreshing the fleet, just in time for probably a recovery in 2014 and 2015.
Jerry Revich (Analyst)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question.
Ann Duignan (Analyst)
Hi, good morning, it's Ann Duignan.
Charles Szews (CEO)
Morning, Anne.
David Sagehorn (EVP and CFO)
Morning, Anne.
Ann Duignan (Analyst)
Hi, guys. On the commercial side, you know, when we were out at the World of Concrete earlier in the year, your team noted that that's a business that the industry peaked at about 11,000 units back in 2006 and fell to about 800 units in 2010. Can you give us any sense of what you expect the industry unit volume to be in absolute basis this year?
David Sagehorn (EVP and CFO)
Anne, maybe the best way, and I'd have to do a little math here, but I think we're still down probably 65%-70% from peak.
Ann Duignan (Analyst)
Okay.
David Sagehorn (EVP and CFO)
This is where we're trending towards this year.
Ann Duignan (Analyst)
Okay, so that's a good step up from 800 units in 2010?
David Sagehorn (EVP and CFO)
Absolutely, but we've got a lot of steps to go to get back to where we were before.
Ann Duignan (Analyst)
Absolutely. Now, on that-
Charles Szews (CEO)
Ann, if you- Ann?
Ann Duignan (Analyst)
Yep.
Charles Szews (CEO)
If you take a look, too, at our, I think, our Analyst Day slides and even the investor handout we had in March, and we do have, you know, kind of our historical last several years for mixers here in the U.S., and then we project out a couple of years. So that'll give some, I guess, some quant to your question as well.
Ann Duignan (Analyst)
Yeah, I was just curious, year over year, I mean, that's pretty sizable step up despite the fact that we're still well below peak. And on the cement mixers again, we've been hearing out there that there may be regions that are actually short of cement mixers. Are you hearing anything like that, that this is more, you know, we cut back significantly after 2006, now it's not just replacement, it's incremental demand?
David Sagehorn (EVP and CFO)
Well, Ann, we haven't heard of any areas that are short. If you send us those sales leads, we'll follow up there. As far as we're hearing, there is a lot of customer activity. I talked about doubling our order intake this past quarter. I can tell you it's a very active sales group, a lot of people getting fleets going again. I talked about our aftermarket business being up. Again, they're pulling all their old fleet off the line and getting them back into service. So a lot of good activity, but to answer your question, we have not heard of a shortage anywhere, but please send those leads to us.
Ann Duignan (Analyst)
I sure will. And then just, as a follow-up on the backlog, there was a question earlier. The push out of the orders for the refuse business, those are still in the backlog, I presume. They're not orders that are gonna reshow up in backlog as we go forward?
David Sagehorn (EVP and CFO)
I think we started to see some of those orders come in in the second quarter, Ann. We do expect that we're gonna see additional orders in the coming quarters.
Ann Duignan (Analyst)
Okay. Okay, thanks for the clarification. Okay, I'll get back in line. Thanks.
David Sagehorn (EVP and CFO)
Okay, thanks.
Operator (participant)
Our next question comes from the line of Mircea Dobre with Robert W. Baird. Please proceed with your question.
Mircea Dobre (Analyst)
Good morning, guys.
Charles Szews (CEO)
Morning, Mircea.
David Sagehorn (EVP and CFO)
Morning, Mircea.
Mircea Dobre (Analyst)
Just shifting over to Access real quick. You mentioned a bit of a headwind in Australia, and I'm sort of wondering, how big is this market for you guys here?
Wilson Jones (President and COO)
Australia is a big market for us. You know, one of the major players there is going through a process that is causing them to you know to pause their purchases, and it's a particularly big customer for us, so that's probably the biggest impact. Secondarily, though, there are mining projects as well as you know LNG projects that are delayed or are moving along slower. So that is impacting the market, but it's a good market for us.
Mircea Dobre (Analyst)
Can you give me any sort of numbers to work with here?
David Sagehorn (EVP and CFO)
Well, Mig, let's... If you just look globally, I mean, we're, we're calling it 70%-ish North America, and the rest of the world is largely split, half-
Mircea Dobre (Analyst)
Mm-hmm
David Sagehorn (EVP and CFO)
... Europe and half everything else. Australia would be part of that everything else.
Mircea Dobre (Analyst)
Okay, that's helpful. And also, very good margin in Access here, and you talked about pricing, you talked about efficiencies. I'm also wondering, what sort of impact are we seeing from the aftermarket business? Because you highlighted that as being a little bit better than it's been in the past as well. Could we be seeing a little bit of margin lift from aftermarket as well? That's what I'm wondering.
David Sagehorn (EVP and CFO)
Yes, we could. Yep. You know, the team's working hard to make sure they're, they're supporting our customers out there, and I think as we see the activity levels pick up, we're seeing that translate into higher aftermarket sales as well.
Mircea Dobre (Analyst)
But can you sort of parse out as to what the impact in the quarter, for instance, on the 260 basis point year-over-year margin expansion would be from mix OE vs aftermarket?
David Sagehorn (EVP and CFO)
We're not gonna go into that level of detail on this call.
Mircea Dobre (Analyst)
All right. Thank you very much.
Charles Szews (CEO)
Thank you.
David Sagehorn (EVP and CFO)
Thanks, Mig.
Operator (participant)
... Our next question comes from the line of Walt Liptak with Global Hunter Securities. Please proceed with your question.
Walter Liptak (Analyst)
Hi. Thanks. Good morning, guys, and-
David Sagehorn (EVP and CFO)
Good morning, Walt.
Walter Liptak (Analyst)
Wanted to ask a follow-on in Access about the margin mix. At this point, is the margin the same in telehandlers as it is in Access or other products?
David Sagehorn (EVP and CFO)
No, historically, it's been less or lower margin product compared to the booms, and that trend continues.
Walter Liptak (Analyst)
Okay, so as we get into the back half, you know, there'll be some margin pressure from the telehandler sales.
David Sagehorn (EVP and CFO)
Actually, I think as we look to the second half of the year, we think, from a product mix standpoint, we'll see a little richer mix of booms compared to telehandlers.
Walter Liptak (Analyst)
Okay, got it. And then wanted to switch to Defense and just ask about, you know, the layoffs, I guess, that you've announced. Have you talked about a charge yet, in the coming quarter?
David Sagehorn (EVP and CFO)
Yeah. Well, actually, we took a $1.4 million charge in the second quarter, Walt.
Walter Liptak (Analyst)
Right.
David Sagehorn (EVP and CFO)
There might be-
Walter Liptak (Analyst)
Okay, is that-
David Sagehorn (EVP and CFO)
There might be some small amounts in the third quarter, but they, we don't think they're gonna be significant.
Charles Szews (CEO)
Yeah, that would be the bulk of it.
Walter Liptak (Analyst)
Okay, great. Okay, and then, just the last one on, and probably the biggest question, just on the sequestration. You know, as you're thinking about 2014 and 2015 and the backlog and what's firm, what can the government do, in terms of, canceling or pushing out? You know, how are you protected, from sequestration and what's already in the backlog?
Charles Szews (CEO)
Well, for the convenience of the government, they can cancel any order they've ever given, right? And there's a potential for compensation if they do that. But generally speaking, I think we feel very good about the $1.2 billion we have in backlog against this baseline number of $1.5 billion for next year. You know, the cuts really have to get dramatic before they start canceling orders. They're much more likely to pare back on their aftermarket spend, like they have already started to do to some extent. You know, we feel still very good about our ability to hit the sort of baseline numbers going forward. But you know, there will be some pressure.
Our sense is that the kind of pressure we're gonna get from sequestration is within our ability to develop countermeasures and adjust to that scenario. So, you know, we're in a unique situation where our volumes were already coming down significantly so that any, you know, adjustments around the fringe don't, you know, don't have as big an impact.
Walter Liptak (Analyst)
Okay, got it. Okay, thank you.
Charles Szews (CEO)
Thanks, Walt.
Operator (participant)
Our next question comes from the line of Basili Alukos with Morningstar. Please proceed with your question.
Basili Alukos (Analyst)
Hey, guys. Good morning.
David Sagehorn (EVP and CFO)
Morning!
Basili Alukos (Analyst)
Just going back, kind of what people have been talking about, the margin improvement. I was wondering if you could try to help us break out what I calculated, like a 3.5% improvement in gross margins, if you could parse out kind of the benefit of pricing vs the benefit of operational improvements. I don't think you guys bring breakout units, so it's kind of hard to calculate the difference in unit costs and unit pricing. Maybe you can just help us think or give us some clarity about how to look at the improvement from both pricing and operations.
David Sagehorn (EVP and CFO)
Yeah, price was the biggest driver. As we look at things, it was probably, you know, three-to-four-to-one in terms of price compared to operational efficiencies in the quarter, in Access.
Basili Alukos (Analyst)
I guess, as I look kind of across the whole company, then that's probably the same ratio, or?
David Sagehorn (EVP and CFO)
No, not necessarily. I think we implement price increases at different times in the various segments. I think if you look at the fire and emergency, I would characterize price as being similar in weighting to what we saw for the changes in operating expenses. And in commercial, I think what we largely saw there was it was more absorption-driven, just on the higher volumes.
Basili Alukos (Analyst)
Okay, great. Thanks a lot.
David Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Mircea Dobre with Robert W. Baird. Please proceed with your question.
Mircea Dobre (Analyst)
Yeah, thanks for taking my follow-up here. I had another margin question, this time on Defense. If I interpreted your comments correctly, the sequester is expected to have, I guess, more of an impact on the aftermarket revenues rather than the OEM. So I guess I'm wondering, how comfortable are you with the Defense margin guidance, presuming that, you know, some of those aftermarket revenues could be potentially coming under pressure over the next couple of years?
Charles Szews (CEO)
Well, in terms of 2013-
Mircea Dobre (Analyst)
Yeah
Charles Szews (CEO)
... you know, our guidance for the rest of the year factors in our view of sequestration impact on aftermarket sales, margins, and all of that. As far as 2014, we haven't provided specific guidance, but what I was trying to give you qualitatively was some commentary that, you know, baseline, you know, revenues, margins are in the ballpark, and we don't think that sequestration will have a really significant impact to those numbers. And if it does, it's within our capability to deliver countermeasures in the business.
Mircea Dobre (Analyst)
Very helpful. Good luck, guys. Thanks.
Charles Szews (CEO)
Yeah, thanks.
Operator (participant)
It seems-
Charles Szews (CEO)
All right. Well, thank you very much.
Operator (participant)
Fine.
Charles Szews (CEO)
We didn't catch you. What did you say?
Operator (participant)
Oh, I apologize. I just said there are no further questions at this time.
Charles Szews (CEO)
Very good. Well, we appreciate all of our shareholders' interest in Oshkosh. We want you to know that we're working to deliver value for you day in and day out, and have a great day, everyone.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.