Oshkosh - Q2 2014
April 29, 2014
Transcript
Operator (participant)
Greetings! Welcome to the Oshkosh Corporation reports fiscal 2014 second quarter results conference call. At this time, all participants are in a listening 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 from your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
Patrick Davidson (VP and Investor Relation)
Thanks. Good morning, everybody, and thanks for joining us. Earlier today, we published our second 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 approximately 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 the call are for continuing operations, unless otherwise stated. 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 Charlie Szews, Chief Executive Officer, Wilson Jones, President and Chief Operating Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, Charlie.
Charles L. Szews (CEO)
Thank you, Pat, and good morning, everyone. We're pleased to report solid second quarter results today, and with market conditions improved for most of our non-defense businesses, we expect to close 2014 with a strong second half. Adjusted EPS was $0.80 in the second quarter, despite a 42% drop in Defense segment sales from the prior year quarter, which we all know was expected. Our teams were able to largely overcome numerous weather-related challenges in the United States over the course of the quarter, from supplier plant shutdowns, port closures, and late chassis deliveries. As a result of their hard work, we were able to limit the impact on second quarter earnings to less than $0.05 per share from excess overtime, production inefficiencies, premium freight, and sales deferred to the third quarter.
My thanks go out to all our employees and suppliers that stepped up to help us meet our commitments to customers. A slow recovery in U.S. construction continued in the quarter. International orders for the first half of the year grew at a double-digit rate in our Access Equipment segment. We continued to emphasize initiatives to improve our global distribution footprint as part of our move strategy. We did announce an approximate 760-person workforce reduction, effective this summer, in our defense segment to match upcoming lower production volumes. We thank the employees and contractors who will be affected by this change, and we wish them well in the future. We continue to pursue additional contract awards for this business. More about that in a minute. As part of our valuation innovation - our value innovation initiative, we have been investing in our new product pipeline.
In this quarter, we introduced a large number of new products at recent trade shows. We received strong, positive feedback regarding our new product launches by our access equipment and commercial segments at the large ConExpo trade show in March and by our fire and emergency segment at the FDIC Fire Apparatus trade show here in early April. Wilson will describe some of our new products in a few minutes. We were also busy this quarter working on our capital structure. Our team successfully refinanced $250 million of senior notes, extending the maturity from 2017 to 2022, and reducing the interest rate by nearly 300 basis points. We also refinanced our credit agreement, extending the maturity out to 2019 at what we consider to be favorable terms for BB+ credit.
As part of the call today, we are reaffirming our adjusted EPS expectations for the full year of $3.40-$3.65. As I said, market conditions have improved, and we expect to close this year with a strong second half. We expect consolidated operating income margins to improve in the second half of 2014 compared to the first half, due to the benefits of higher expected sales volumes and our optimized cost initiatives. Please turn with me to slide four for a discussion of our defense segment. Defense results for the second quarter reflected the impact of significantly lower sales volume compared to the prior year. We expect additional declines in defense segment sales starting in the fourth quarter, when production rates will decline further, which led to our recent workforce reduction announcement.
The continued decline in sales in this segment is consistent with the defense outlook we have been discussing since 2012... The President submitted his fiscal 2015 federal budget request to Congress in March, and funding requests for Oshkosh programs were directionally what we had anticipated. As a reminder, fiscal 2015 government budget funding dollars will mostly impact our 2016, and to a lesser extent, 2017 sales. Requested funding for the family of heavy tactical vehicles is down sharply, with the dollars requested being earmarked for remanufacturing instead of new vehicle procurement. There was no funding requested for FMTVs, although the five-year outlook submitted with the budget request did include FMTV funding requirements of several hundred million in each of 2017 and 2018.
We believe that the overseas contingency operations budget request for fiscal 2015, which the President has not yet submitted to Congress, will contain additional funding for Oshkosh programs. Remaining in the US, we are currently negotiating a follow-on FHTV contract with our government customer. The extension would allow us to continue delivering these highly capable vehicles for multiple years, albeit likely at a lower production rate based on the current funding outlook. Our JLTV prototype vehicles continue to undergo testing as part of the EMD phase of this program. In fact, the DoD has increased the scope of its testing, causing us to increase our spending on the program. The JLTV program continues to be a high priority for the Department of Defense and for Oshkosh.
We now expect a request for proposal for a JLTV production contract to be issued in late calendar 2014, several months earlier than we previously expected. We expect a production contract award to be made in late summer or autumn of 2015. Now, outside the US, we continue to pursue multiple opportunities for vehicle sales. One of our new M-ATV variants is currently participating in vehicle trials in Saudi Arabia. We also expect to have our vehicles compete in trials in other countries this summer. In addition, our vehicles continue to undergo testing by the Canadian Department of National Defense as part of the MSVS program competition. The expected contract award for this program remains June of 2015.
Overall, we remain optimistic that we'll secure additional international contracts for our products, but as we said in our last earnings call, these opportunities move at an uneven pace. I'll turn it over to Wilson now to discuss our non-defense segments. Please turn to slide five.
Wilson R. Jones (President and COO)
Thank you, Charlie. Good morning, everyone. The team at access equipment did an outstanding job of dealing with some of the most challenging weather-related conditions of any of our businesses. In early March, we thought we'd fall short of our sales goal in this segment due to weather-related material shortages and lost production days. I'm pleased to say that the team really pulled together, working through weekends to make up lost ground to deliver strong quarterly results. Sales in the segment were up 9.3% compared to the prior year quarter, after removing the impact of a little more than $25 million in military telehandlers from our 2013 sales. It is very encouraging that sales were up in all regions of the world, with the exception of Australia. Last quarter, we shared with you our excitement heading into ConExpo.
We introduced new products at this trade show in all major product categories for this segment. Several products can be considered the hit of the show for us, but there was particular excitement around the world's tallest aerial work platform, our new 185-foot Ultra Boom that we began shipping to customers earlier this month. The show was a big success, and we believe our new products are going to help drive improved performance for the segment in the future. A few more comments on the access equipment segment. North American demand for our access equipment products continued to be strong in the quarter, and the relevant measures that we monitor, such as fleet age, utilization rates, and used equipment values, all continued to point to higher demand for new machine sales. Furthermore, our customers are bullish on end user demand for our equipment.
These data points, taken together, help us remain confident and optimistic regarding the segment's outlook. When you add in the strong international sales and orders we had during the second quarter, it drives even greater confidence. Please turn to slide six for some comments on our fire and emergency segment. As evident in the photo on slide six, it was great to see strong customer interest in our Pierce new product launches at the annual FDIC trade show. The all-new Saber Chassis establishes a higher level of performance and value for the custom chassis market and comes with significantly more cab room, increased visibility, and enhanced ergonomics.
Additionally, we launched a new Pierce Enforcer pumper, which is built on a medium-duty chassis and comes with a Pierce exclusive Detroit Diesel DD13 big block engine and TAK-4 independent front suspension as options, giving customers the features they want from the industry leader. We are excited about the potential for these new products. Last quarter, we said the second quarter would be a challenge due to low expected sales, and that's what we saw. While market conditions have improved somewhat, this is a business that requires time to get better. Product and business complexity and long lead times prevent quick fixes. We spent a lot of time during the second quarter working on this business. We have made progress, but there is still more work to do to get to our profit improvement plan fully in place and operating at targeted levels.
We're confident that we'll see better results from this segment in the second half of the year and throughout 2015. Looking at the fire apparatus market, municipal demand has continued to improve at a modest pace. The situation for federal demand really hasn't changed, and we expect federal demand to remain weak as a result of lower funding. Let's turn to our commercial segment. Please turn to slide seven... The U.S., the U.S. concrete mixer market continues to improve, although housing data has been inconsistent. Some months up, some months retracting. It's unclear whether U.S. housing starts will reach the 1.2 million in 2014 and 1.4 million in 2015 that we projected at our Analyst Day, but the data has clearly trended up.
Our mixer orders were up more than 40% in the first six months of the year, and mixer backlog was up 55% at March 31, supporting our expectations for a strong second half of 2014 for this business. We would like to have gotten a few more units out the door in the quarter, but the timing of orders was such that when combined with the weather impact on chassis deliveries, those sales moved out to our third quarter. Like the access equipment segment, several businesses in our commercial segment were exhibitors during the recent ConExpo show. Similar to the experience we had with access equipment, our Commercial segment businesses generated both solid order flow and customer interest in our new and existing products.
Looking at refuse collection vehicles, our McNeilus team is busy meeting with customers in Atlanta today and over the next several days at the WasteExpo show. Despite improvement in municipal tax receipts, the market for refuse collection vehicles has been flat in 2014 relative to 2013, rather than up a modest 3% as we had projected. Fleets continue to age as industry volumes remain down about 30% below peak. Yet, it is unclear when more robust capital purchases will occur in this market and whether we will see the modestly higher industry volumes we had expected for 2014 and 2015. We remain focused on driving improved results in this segment as part of our MOVE strategy.
We're still early in the game compared to the access equipment segment in driving down costs, and we look forward to seeing the benefits from our efforts become more visible later this year and into 2015. I'll turn it over to Dave to review our financial results for the quarter and comment on expectations for 2014. Please turn to slide eight.
Ross Gilardi (Senior VP Finance)
Thanks, Wilson, and good morning, everyone. Consolidated net sales for the second quarter were $1.68 billion, a 15.4% decrease from the second quarter of 2013. Decrease in sales compared to the prior year quarter was largely a result of the previously discussed significant decline in Defense segment sales. access equipment segment sales, excluding military telehandlers in the prior year quarter, were up 9.3%, with all regions except Australia reporting year-over-year sales growth. Consolidated operating income for the second quarter was $123.5 million, or 7.4% of sales, compared to operating income of $134.6 million, or 6.8% of sales, in the second quarter of 2013.
Higher operating income in the Access Equipment segment wasn't enough to overcome the volume-related decline in Defense segment operating income. Looking at individual segment performance, starting with the Access Equipment segment, we are pleased with the 13.5% operating income margin delivered this quarter. This represents a 190 basis point improvement over the prior year quarter. The increase was driven by a combination of benefits from our O, or optimizing cost initiative, improved pricing and better product mix, partially offset by higher new product development spending. Turning to the Defense segment, the team delivered adjusted operating income margins that were near prior year level on 42% lower sales. Defense segment results in the current year quarter benefited from a $4.6 million, or $0.03 per share benefit related to a favorable pension cost adjustment.
The segment also benefited from improved warranty performance. Operating results in the Fire and Emergency segment largely reflected the impact of lower volumes compared to the prior year quarter, which we said we were expecting on the last earnings call. Commercial segment operating results reflect the continued implementation of MOVE initiatives and the portion of the weather impact that we weren't able to mitigate. We expect higher sales and operating income in each of these segments in the second half of the year compared to the first half of the year. Additional segment-related information can be found in the appendix to this morning's slide deck. Adjusted earnings per share for the quarter was $0.80, compared to earnings per share from continuing operations of $0.96 in the second quarter of 2013.
The decrease in earnings per share was largely driven by the impact of lower defense volume in the current year quarter. Current quarter adjusted results exclude the impact of pension curtailment costs in the defense segment related to the recently announced workforce reduction. Current quarter results also exclude costs associated with the recent refinancing of our 2017 senior notes and credit agreement, and a tax benefit related to the reduction of a net operating loss valuation allowance. Finally, we're announcing today that our board of directors has approved our next quarterly dividend payment of $0.15 per share, which will be payable on May 29 to shareholders of record as of May 15. Please turn to slide 9 for a discussion of our updated outlook for 2014.
We're pleased to maintain our full year adjusted earnings per share estimate range of $3.40-$3.65, and expect a strong close to the year. We are, however, making a few adjustments to the individual segments and corporate expectations. We now expect consolidated sales for 2014 will be approximately $6.7 billion-$6.8 billion. In effect, we've narrowed the range by $100 million compared to our prior expectations. We increased the Access Equipment expected sales range by $50 million and slightly lowered the high end of the range in each of the other segments. We are maintaining our estimated adjusted operating income range of $490 million-$520 million.
From a segment standpoint, we are increasing the estimated operating income margin range for the access equipment segment by 25 basis points to 14.5%-14.75%... and the defense segment adjusted operating income margin range by 75 basis points to 4.5%-4.75%. The increase in the access equipment segment margin range reflects the impact of the higher expected sales volume. The increase in the Defense segment margin range is largely the result of favorable settlement of several matters with our government customer and suppliers. We are lowering our expected operating income margin range compared to our previous expectations for both the Fire and Emergency and Commercial segments.
The reduction in margin expectations for the Fire and Emergency segment is largely a reflection of our view that it's going to take longer to realize the benefits of planned operational initiatives than we had previously expected. The reduction in margin expectations for the Commercial segment is due to a combination of an expected negative product mix versus our previous expectations, including lower estimated refuse collection vehicle sales and incremental investment in organic growth initiatives intended to improve margins over the longer term. I should note that even though we are lowering our full year expectations for these segments, we still expect operating income margins for the year to be above prior year levels in all of our non-defense segments.
We are also adjusting our expected level of corporate expenses for the year by approximately $10 million, reflecting an increase over both our prior year adjusted corporate expenses and our most recent expectation. The largest driver of the expected increase is higher incentive compensation, including stock-based compensation as a result of our higher stock price. Our tax rate on adjusted pre-tax earnings, capital expenditures, and free cash flow expectations remain unchanged from our prior expectations, and we are assuming a full year average share count of approximately 86 million. Looking at the second half of the year, we expect that the third quarter will be the strongest quarter of the year in terms of earnings per share, before declining in the fourth quarter as a result of seasonality patterns and a step down in volume in the Defense segment.
I'll turn it back over to Charlie for some closing comments.
Charles L. Szews (CEO)
Thanks, Dave. We are committed to execute our MOVE strategy. We believe the markets for most of our non-defense businesses continue to slowly improve, although some of our markets aren't recovering quite at the pace we had projected. Our team is working hard to deliver higher margins in all our non-defense segments this year. And looking to the future, we continue to target 2015 earnings per share of $4-$4.50. That concludes our formal comments. We are happy to answer your questions, so I'll turn it back over to Pat to get the Q&A started.
Patrick Davidson (VP and Investor Relation)
Hey, thanks, Charlie. I'd 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 if you have additional questions, and, and we'll please, or we'll, we'll answer them. Operator, let's, please begin the question and answer period of this call.
Operator (participant)
Thank you. If you'd like to ask a question, please press Star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star two if you'd 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. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Ross Gilardi of Bank of America. Please proceed with your question.
Ross Gilardi (Senior VP Finance)
Yeah, good morning. Thanks, everybody.
Charles L. Szews (CEO)
Good morning.
Patrick Davidson (VP and Investor Relation)
Good morning.
Ross Gilardi (Senior VP Finance)
On Access, I'm just wondering if you could parse out the international strength by region a bit more, any granularity you could provide? And then just to follow up to that, in the U.S., what are you hearing from the rental companies on the second half outlook?
Good morning, this is Wilson. You know, our range is always about 25%-30% at access for international business, and that was pretty true to form this quarter. EAME was up. They were all up double digits. The biggest jump was probably the rest of the world, specifically double digits, though, in Latin America, Asia Pacific, and EAME. In terms of your second question, you were asking about what the rental companies are saying. I think it's still positive. You know, all the fundamentals are in the right place. We're still hearing very positives from, as in my comments, I talked about, that they all seem to be very bullish on the market.
Charles L. Szews (CEO)
One just little nuance there. We did say in the prepared remarks that Australia was down in the quarter, but other than that, in the international markets, we did see double-digit growth.
Ross Gilardi (Senior VP Finance)
Within Latin America, is Brazil, would it be in line with that double-digit growth, or would Brazil be holding that back a bit?
Charles L. Szews (CEO)
You know, I don't know if we need to get granular by country, but, Latin America, that's an accurate statement, and obviously Brazil is, you know, our biggest market in Latin America. Yep.
Ross Gilardi (Senior VP Finance)
Great. Thanks, guys.
Patrick Davidson (VP and Investor Relation)
Thanks, Ross.
Operator (participant)
Our next question comes from the line of Stephen Volkmann of Jefferies. Please go ahead with your question.
Stephen Volkmann (Equity Analyst and CFA)
Good morning, guys.
Ross Gilardi (Senior VP Finance)
Hey, Steve.
Stephen Volkmann (Equity Analyst and CFA)
Dave, can we just go back a little bit to the defense margin that you were talking about? It sounds like some of these non-recurring contract adjustments are in the new guidance. Can you just straighten that out for me?
Ross Gilardi (Senior VP Finance)
Yeah, some of those, Steve, we did realize in the second quarter. I mentioned a favorable pension cost reimbursement adjustment. It was about $4.6 million. There, we also had some favorable resolution of warranty items in the quarter. And, so I think they were largely in the quarter. We did call out, as from our adjusted numbers, the pension curtailment that's related to the workforce reduction that we announced earlier this month.
Steve Barger (MD and Equity Research)
The pension curtailment is not in the new guidance?
Charles L. Szews (CEO)
Correct.
Steve Barger (MD and Equity Research)
Okay.
Charles L. Szews (CEO)
Right. Yeah, that's excluded. That's in our GAAP numbers, but not in our adjusted numbers.
Steve Barger (MD and Equity Research)
Order of magnitude on the warranty thing, is that meaningful?
Charles L. Szews (CEO)
You know, in the quarter, it was about 80 basis points or so.
Steve Barger (MD and Equity Research)
Okay. And is that this quarter only?
Charles L. Szews (CEO)
Um, yes.
Steve Barger (MD and Equity Research)
Great. Okay, that's helpful. And then, maybe just a quick follow-up. You know, the commercial backlog was up pretty nicely. Can you just give us a sense, is that sort of further out? I, I guess I'm surprised that we wouldn't have a little bit higher outlook in commercial based on that.
Charles L. Szews (CEO)
Well, the outlook, the backlog at the end of March is largely for the third and fourth quarters. We're sitting in a terrific backlog position for the third quarter, in particularly in concrete mixers and really for refuse as well. So we're looking at a strong second half to the year. If you look at our guidance, you'll see, you know, really strong double-digit growth in sales from the first half to the second half of the year, probably 25%-30% growth in sales from the first half to the second half. So we are expecting a strong second half, and most of it's in backlog.
Steve Barger (MD and Equity Research)
Okay, great. Thank you very much.
Charles L. Szews (CEO)
Thanks!
Operator (participant)
Our next question comes from the line of Jerry Revich of Goldman Sachs. Please proceed with your question.
Jerry Revich (MD and Senior Equity Research Analyst)
Good morning.
Charles L. Szews (CEO)
Morning, Jerry.
Steve Barger (MD and Equity Research)
Morning.
Jerry Revich (MD and Senior Equity Research Analyst)
Charlie, in defense, you folks have really improved productivity over the past, I think, 18 months or so. Can you just give us an update of how much more room you have to go on lean initiatives? You know, if things don't change on the base budget, as you point out, you're gonna have to make another production adjustment. I'm just wondering if you could just step us through how much more scope you have for productivity improvement there.
Charles L. Szews (CEO)
Sure. Well, we've already made the announcement for this summer for the production step down. Okay? So I think that's all out in the open in terms of where we expect to head. In terms of additional efficiencies, you know, we've, I don't know that there's more. There could be, if you come to the facility, probably later this summer, early fall, you'll see, you know, the work that we're doing and it'll be complete. But we are positioning our facilities to be able to do shorter runs of both international and domestic contracts, which is going to be the wave of the future. And I do think that will allow us to perform, you know, well on all of those kinds of businesses.
But to say that we're gonna get better from here, it's tough when you're looking at this summer, I think, what, 30% reduction in production.
Jerry Revich (MD and Senior Equity Research Analyst)
Okay. And then in terms of the outlook for Europe and the access equipment business, Wilson, I'm wondering if you could just give us some more context on what you're seeing for rental company pricing and utilization in Europe specifically, and how much visibility do you have in that market compared to, let's say, North America? Thank you.
Steve Barger (MD and Equity Research)
Sure, Jerry. I'd say the visibility is better than it was a year and a half to two years ago. I would say that that business is building. We're still seeing some pockets around Europe that are picking up, a lot more customer interaction and inquiries. You know, I don't have any figures for you on really what that's gonna add up to, but we do like the activity levels and the way things are progressing in Europe.
Jerry Revich (MD and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Our next question is coming from the line of Eli Lustgarten with Longbow Research. Please go ahead with your question.
Eli Lustgarten (SVP and Senior Research Analyst)
Good morning, everyone.
Charles L. Szews (CEO)
Morning.
Steve Barger (MD and Equity Research)
Morning, Eli.
Eli Lustgarten (SVP and Senior Research Analyst)
Can we talk a little bit more about the profitability outlook, particularly in commercial, which I guess the sales numbers haven't changed a little bit down, but the profitability drop, I assume it's muted. Can you put that in the context of what your targets are for 2015 for commercial, particularly the expectation now with refuse being flat, and I mean, we see the strength going on in the cement side. But can you just give us context of, you know, the volume doesn't change much, but the profitability is down, and, you know, how that impacts not so much 2014, but as we look into fiscal 2015?
Charles L. Szews (CEO)
Sure, Eli. You know, if you look at the year, again, we said sales in the second half of fiscal 2014 are gonna be up 25-30%, almost a third in that kind of a range. And we're gonna look at, in our guidance, our estimates for the second half of the year, you'll see our margins, you know, nearly doubling from the first half. So we are starting to see the benefits of all the hard work that we've been doing to improve our efficiencies and margins in that business, and you're gonna start to see it in the second half of this year.
You know, we did take our guidance down a little bit, but overall, if you look at the year, sales are up 10%-14%, and you know, that's what the range would be, and our operating income's up 25%-30%. So it's a good year. We are taking our margins up overall. Now, when you look at next year, you know, we would expect margins to go up again next year in this segment. But other than that, we're not going to update targets here today for 2015. But I can tell you that certainly our expectation that you'll continue to see margin expansion in this segment.
Steve Barger (MD and Equity Research)
Eli, just maybe a little additional color on the second quarter results. We did launch several initiatives in the commercial segment in the second quarter, which had some costs associated with them. We expect that we'll see the benefits of those in the upcoming quarters. And then in addition, we had the ConExpo show, which was a little bit of a drag from a cost standpoint as well in the quarter.
Eli Lustgarten (SVP and Senior Research Analyst)
... Can we talk a little, maybe get some more color on the order patterns that are actually coming out, particularly from the rental companies, you know, in, since ConExpo and since March, and have they continued in, into the, April, May period, or, have things, you know, sort of leveled out? Just trying to get some sense of what the momentum is after the slow, probably a little slower January, February in that part of the business.
Wilson R. Jones (President and COO)
Well, actually, Eli, we had a good order quarter. Q2 was good for access and orders. And, you know, I would tell you, we're pleased with the way orders are advancing through Q3. So I wouldn't say there's been any, you know, slowdown or speed up. I would say it's been pretty consistent order pattern.
Charles L. Szews (CEO)
As you saw, we took our estimates up for access equipment sales for the year by about $50 million.
Eli Lustgarten (SVP and Senior Research Analyst)
Mm-hmm. So, but there was no January, February, March was pretty level in orders, or wasn't there an acceleration in March as we went through the period and it's continued?
Wilson R. Jones (President and COO)
Actually, Eli, it was one of our bigger order quarters, if you look back-
Eli Lustgarten (SVP and Senior Research Analyst)
Yeah
Wilson R. Jones (President and COO)
At the JLG history. It was a nice order quarter.
Eli Lustgarten (SVP and Senior Research Analyst)
Yeah, I'm just wondering. I was asking more about the pattern through the three months, whether it was pretty normal or was there any impact from weather and the impact of the trade show?
Charles L. Szews (CEO)
You know, I think we even commented on this at the analyst conference at Conexpo. The weather didn't impact orders, so to speak. That wasn't an issue for us. The weather impacted, you know, our suppliers, the ports, you know, those sorts of things, and that caused us to have to work weekends and everything else to be able to deliver the kind of quarter that we did. But from a weather standpoint, I don't think it really affected, in the access equipment segment, the outlook of our customers. I think they've been optimistic all along, and it really hasn't changed.
Eli Lustgarten (SVP and Senior Research Analyst)
All right. Thank you.
Wilson R. Jones (President and COO)
Thanks.
Operator (participant)
Our next question is from the line of Jamie Cook with Credit Suisse Group. Please just proceed with your question.
Jamie Cook (Managing Director)
Hi, good morning. Just a couple questions. Can you just comment, you know, within access equipment, what you're seeing on lead times across specific types of equipment? And then just the overall pricing environment that you're seeing in 2014. Is pricing more favorable this year, your ability to get pricing, and also the ability to pass through Tier 4? Thanks.
Wilson R. Jones (President and COO)
Jamie, I'll jump in on this one, and Charlie can probably add some color, too. On lead time, I would tell you that the access team did a really good job in setting up their capacity plan coming out of recession. So we're not having any issues at all right now with lead times. I would say some products have been a little busier than others, but for the most part, we're delivering in normal lead times in Access. On the pricing side, I would say it's kind of the consistent theme we've talked about before on these calls, in that we see some irrational pricing in Europe. We see some in Latin America.
North America has been a little more consistent than the others, but, all in all, I would say, pricing hasn't changed much since our last couple of calls.
Jamie Cook (Managing Director)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please proceed with your question.
Charlie Brady (Machinery sector analyst)
Hi, thanks. Morning, guys.
Wilson R. Jones (President and COO)
Good morning.
Charlie Brady (Machinery sector analyst)
Just with respect to Access, can we just drill down, I guess, you know, I think the big question everyone has on Access is, you know, what are the large rental guys going to do with CapEx this year? Excuse me. And can the IRCs come in to kind of backfill any reduction in CapEx on large rentals? Can you just talk more specifically about maybe what the mix in the quarter was from national chains versus IRCs, and really looking a little bit farther out, particularly on the IRCs, what you're seeing in terms of their CapEx outlook, for the rest of the year, and, you know, even into 2015, if you want to comment that far out?
Charles L. Szews (CEO)
Charlie, you know we don't really comment on 2015.
Wilson R. Jones (President and COO)
You want to know about 2020, Charlie?
Charlie Brady (Machinery sector analyst)
I'm thinking you can give me.
Wilson R. Jones (President and COO)
We do, we do appreciate your aggressiveness, though. You know, in terms of the NRCs and their CapEx, Charlie, if you, if you listen, there's not any major theme out there that they're pulling back. You know, we're hearing even more that some are increasing CapEx. So, I wouldn't say that that's a caution flag or anything at this stage. The NRCs seem to be, as I said earlier in my prepared comments, they're bullish on end markets right now. In terms of the IRCs, we are seeing a continued improvement with the IRC's ability to gain financing, so that is getting more of them into the market. I think the ratios for us, they kind of go up and down with NRCs and IRCs, but it's been pretty consistent over the last couple of quarters.
But we do expect them to continue to get healthier. And then, as you know, as non-res continues to improve along with res, that's going to prove well for both of those groups.
Charlie Brady (Machinery sector analyst)
Okay. And just kind of a follow-up on Access, just in terms of the weather, I mean, what is... You talked about overcoming the impacts of weather. Can you quantify what the weather impact was on, on, sales and margin in Q2?
Charles L. Szews (CEO)
Well, we said, Charlie, overall, it was, you know, it'd be just under $0.05 a share for the company. And on the sales impact, it would have been in our commercial segment, but the cost side would be kind of split between Access and commercial.
Charlie Brady (Machinery sector analyst)
Okay. Thanks.
Wilson R. Jones (President and COO)
Thanks.
Operator (participant)
Our next question is from the line of Pete Skibitsky of Drexel Hamilton. Please receive your question.
Pete Skibitzky (Analyst)
Good morning, guys. Nice quarter.
Charles L. Szews (CEO)
Thanks, Pete.
Wilson R. Jones (President and COO)
Thank you.
Pete Skibitzky (Analyst)
Hey, just wanna see how much I can talk about, mix-wise on the, on the Access side. Telehandlers have kind of slowed on tough comps. Trying to factor out kind of the military telehandlers, it looks like maybe you grew about 8% in the first half of the year.... kind of underlying on telehandlers and obviously, AWPs were much stronger, you know, kind of on easier comps. I'm just wondering if that's kind of the trend we should think about going forward, maybe telehandler growth is kind of more in that single-digit range, and AWPs, you know, kind of maintain some sort of double-digit, type of an outlook. Is that fair?
Charles L. Szews (CEO)
I think for the year, that the mix is probably gonna stay about the same. You know, telehandlers-
Pete Skibitzky (Analyst)
About the same?
Charles L. Szews (CEO)
About where you're, you said, and you know, booms in terms of a mix, it, it's gonna be about the same for the full year.
Pete Skibitzky (Analyst)
Okay.
Ross Gilardi (Senior VP Finance)
You are correct. If you are correct, if you back out the military telehandlers, our telehandlers grew about 7%-8% in the quarter.
Pete Skibitzky (Analyst)
Okay. And that's, I guess, it's fair to say that's, that's a positive margin dynamic for you guys?
Ross Gilardi (Senior VP Finance)
In terms of a better mix of booms, yes, it is a positive.
Pete Skibitzky (Analyst)
Okay. Okay. And then if I could just follow up, just wondering on the defense outlook, the second half of the year, are you kind of thinking that the third quarter is gonna be similar to the second quarter, and then you just kind of fall off a cliff in the fourth quarter?
Ross Gilardi (Senior VP Finance)
Well, Pete, I guess what I'd say there is, as Charlie mentioned, with the workforce reduction, we are certainly gonna see a step down in volume in the fourth quarter. And when you're talking about the magnitude of the reduction that we're making or will make in terms of people, yeah, it's gonna be a significant reduction from Q3 to Q4 in terms of sales.
Pete Skibitzky (Analyst)
Okay. Okay. And if I could sneak in a last one for you, Dave, again, the working capital build this quarter, was there a weather component to that, and you're expecting that to kind of flush back through in the second half of the year?
Ross Gilardi (Senior VP Finance)
We certainly do expect to see a strong free cash flow generation in the second half of the year. There was certainly a little bit of weather impact, especially on the commercial segment, when we weren't able to get units out the door as we had planned. I think you're also just seeing some of the seasonal build that we typically would see as well.
Pete Skibitzky (Analyst)
Okay, got it. Thanks very much, guys.
Ross Gilardi (Senior VP Finance)
Thanks, Pete.
Operator (participant)
Our next question comes from the line of Seth Weber of RBC. Please proceed with your question.
Seth Weber (Analyst)
Hey, good morning, guys.
Charles L. Szews (CEO)
Good morning.
Ross Gilardi (Senior VP Finance)
Good morning.
Seth Weber (Analyst)
I guess just first a clarification, going back to, I think it was Jamie's question about Tier Four pricing. I mean, can you just... Are you covering Tier Four pricing on the Access business at this point?
Charles L. Szews (CEO)
Yes.
Seth Weber (Analyst)
Okay, you're fully whole on that?
Charles L. Szews (CEO)
Yes.
Ross Gilardi (Senior VP Finance)
Yes.
Seth Weber (Analyst)
Okay. On the fire and emergency business, I'm sorry if I missed it, but what were the production delays there, and does that just roll over into the, did that just get pushed out into the second half of the year, the deliveries, I guess?
Charles L. Szews (CEO)
Go ahead.
Ross Gilardi (Senior VP Finance)
Yeah, Seth, this is Wilson. You're right, it does. We, you know, we're working through as this business is building back up into, into better volumes, and so we've been working, as I mentioned, on this business quite a bit through the first two quarters of the year. We are seeing some breakthrough initiatives start to gain some traction. So it's, it's really around some process and overhead moves that we've been making and investing from an old perspective.
Charles L. Szews (CEO)
But all along, you'll recall that back in January, we projected this quarter would be the lowest volume quarter of the year. So we knew it was gonna be tough, and, but we're expecting strong second half in this business.
Seth Weber (Analyst)
Okay. And then I guess, just lastly, on the, the recent defense, the defense layoffs, I mean, is there any margin benefit that we should think about, coming through, or is that basically just to, you know, rightsize the business relative to volume? There shouldn't be any kind of incremental margin pickup there, right?
Charles L. Szews (CEO)
Correct. It's a rightsizing the business kind of a decision that was unfortunate but necessary, shouldn't benefit margins.
Seth Weber (Analyst)
Okay. All right. Thank you very much, guys.
Ross Gilardi (Senior VP Finance)
Thank you.
Charles L. Szews (CEO)
Thanks.
Operator (participant)
Our next question is from the line of Walter Liptak with Global Hunter Securities. Please proceed with your question.
Walter Liptak (Analyst)
Hi, thanks. Good morning, guys.
Ross Gilardi (Senior VP Finance)
Good morning, Walter.
Charles L. Szews (CEO)
Good morning.
Walter Liptak (Analyst)
I wanted to ask about, you know, your comments on the international Access business being up double digits. I wondered if that was referring to revenue or to the sales or to orders, and, you know, what the order contribution was like, you know, from international.
Charles L. Szews (CEO)
You know, we were referring to sales being up double digits. And I think if you look at the second half of the year, that you should also see a very strong participation internationally in our sales, very strong mix of international.
Walter Liptak (Analyst)
Okay. This seems like the beginning of an international pickup for Access. Is that right?
Charles L. Szews (CEO)
Well, we hope so, but, you know, we're giving guidance for this year right now. We'll give you guidance for 2015 in October.
Walter Liptak (Analyst)
Okay. Yeah, I understand. The margins, though, in international, it sounds like pricing might be a little bit tougher in Europe and some other parts of the world. Are margins at par with the rest of Access?
Ross Gilardi (Senior VP Finance)
Well, you're correct, Walt. As I mentioned, we're seeing a little more price pressure in Europe and Latin America, so obviously, the margins are a little less in those two areas.
Walter Liptak (Analyst)
Okay. All right, great. Thank you.
Ross Gilardi (Senior VP Finance)
Thanks.
Operator (participant)
Our next question is from the line of Mig Dobre of Robert W. Baird. Please go ahead with your question.
Joe Grabowski (Analyst)
All right. Good morning, everyone. This is Joe Grabowski for Mig.
Ross Gilardi (Senior VP Finance)
Good morning.
Charles L. Szews (CEO)
Morning, Joe.
Joe Grabowski (Analyst)
Good morning. Just, I guess, another question on access equipment orders, not to beat a dead horse, but if you, if you take the first half, and there were orders that kind of shifted from Q1 to Q2, but if you take the first half of this year versus last year, orders were, I guess, the way I calculate them, up around mid-single digit. And I guess I was just wondering, for the second half of the year, do you think kind of the year-over-year order rate picks up? And, and kind of connected to that, orders that you, that you got at ConExpo, is it kind of safe to say that a lot of those will, you know, be booked more in the second half of the year?
Charles L. Szews (CEO)
If you recall, early on, we've been saying that some of the national rental companies are placing orders closer to the date of shipment. And where we've, you know, we've negotiated annual agreements, we have a good, strong sense of what the annual volume was going to be, but the actual individual order of pieces of equipment would come in later. So what you're gonna see is that some of the national rental companies, it's a big pickup in orders in the second half of the year.
Joe Grabowski (Analyst)
Okay. All right, that's it for me. Thanks very much.
Charles L. Szews (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Alex Blanton with Clear Harbor Asset Management. Please go ahead with your question.
Alex Blanton (Analyst)
Thank you. Could you give us a little more information on the, your foreign business and access? What's going on in, in Europe? What's going on in Asia? What the prospects are relative to North America?
Charles L. Szews (CEO)
Well, Alex, I'll start off here, and these guys can fill in. I think just going around the world, you know, obviously, Europe is a case where it's building. You know, at peak, Europe was a $1 billion of access business, and it's 35%-40% of that today, so a long way to go in Europe. If you look at Asia Pacific, it's a totally different story, and it's really about adoption, driving adoption. So I know us, along with our competitors, are out there, really trying to drive the rental concept and get adoption started in that part of the world.
Going back to Latin America, again, they're ahead of the Asia side on the adoption curve and kind of past that inflection point, so we're seeing that business build. I think Brazil is the best example of that, and how they're buying so many new machines each year. And then North America is just a continued good story, and that the rental concept continues to grow in North America, and that proves well for our business. And as we've said before, both nationals and independents are very bullish on the end markets. So we again like our outlook going forward in North America.
Alex Blanton (Analyst)
Can you give us an idea of the percent of your access sales that are in these four regions?
Charles L. Szews (CEO)
Well, what we've said in the past, Alex, is about 70-75% is North America, and then the other 25% is really split between the rest of the world and Europe. Europe, Africa, and the Middle East. So, you can balance that 25%, about half, and then, 70-75% is North America.
Alex Blanton (Analyst)
All right. Now, in Asia, the adoption you're talking about, and we're talking about it ten years ago, how realistic is it to think that they are going to step up that rate? Because it's been very low. Really hasn't gotten started. You, you established a plant over there to make the equipment, but, but clearly, China is an enormous construction market. Enormous, and yet your sales are minuscule there. So what is holding it back?
Charles L. Szews (CEO)
Well, of course, Alex, you know, it wasn't anyone in this room talking about it ten years ago because we didn't buy JLG until 2006. But anyway, the, I think wage rates need to increase, you know, in China before there's a big change, and then you need to see some changes in laws and work at height regulations. Now, we're part of a consortium working on that in China. And we do see increased adoption in China. Like most of our other markets, there's a big inflection point at some point, and it's very difficult to predict when the inflection point is. Certainly, since the Great Recession, we saw a big inflection point in Latin America. There has been a big spike in buying.
In Brazil, for example, just in one year alone, the whole installed base doubled in Brazil, and it's continued to be a market that's buying at a pretty high rate, and increasing over time. So, you know, Latin America is ahead of Asia. Asia will come.
Alex Blanton (Analyst)
Mm-hmm.
Charles L. Szews (CEO)
Maybe not in my career, but at some point, it will be, you know, the biggest market in the world for aerial access equipment. And that's why we put a plant there. That's why we wanna have, you know, close touch on the market to be, present for the day that Asia becomes the biggest, you know, market for access equipment in the world. But it's not going to be rapid, and I can't say exactly when the inflection point happens. It's probably not this cycle. Is it next cycle? I don't know. But, you know, it should show nice, say, low double-digit growth, you know, for some period of time. But again, since the volume is so low, it's not going to necessarily move the needle for us as a company.
Alex Blanton (Analyst)
Thanks, Alex.
Operator (participant)
Thank you. As a reminder, you may press Star one to ask a question. Our next question is from the line of Steve Barger, KeyBanc. Please go ahead with your question.
Steve Barger (MD and Equity Research)
Hey, good morning, guys.
Charles L. Szews (CEO)
Hey, Steve.
Speaker 16
... I missed some of the prepared remarks, but I wanted to ask about some of the international FMTV programs you've been bidding on. Can you comment what percentage of those units could be considered early stage versus advanced stage in the process?
Charles L. Szews (CEO)
Well, there's a good question. You know, we, we do believe that in the next 12-24 months, we're gonna have some FMTV contracts announced. And hopefully they'll be of size, but they move at their own pace, all right? One day you think they're moving quickly, the next day it slows down. What we can tell you, though, is, is that, you know, our feedback from our customers is that, it's positive. With the actions going on, with Russia and Ukraine, that is also sort of, you know, potentially accelerating opportunities. But, you know, until we have a contract announced, it's -- You know, I know it, it doesn't give you the kind of comfort that as shareholders that you want.
It doesn't give us the comfort either to be able to tell you what we see completely, but I can tell you that we are pursuing more international defense contracts at any time in our history. You know, we are pursuing thousands of M-ATVs. The timing and magnitude of the awards, you know, is kind of a big question mark.
Speaker 16
When you say some of those contracts could be sized, how do you define size?
Charles L. Szews (CEO)
Well, like I said, we're pursuing thousands.
Speaker 16
Right. Are they, are they typically in 100-unit or 500-unit or, or, or a 1,000-unit, you know, program?
Charles L. Szews (CEO)
It's a full range.
Speaker 16
Okay. All right, and then just one last to your comment, Dave, earlier on strong free cash flow generation in the back half of the year. Any update on how you or the board is thinking about capital allocation?
Ross Gilardi (Senior VP Finance)
I don't think our outlook there has really changed. You know, we wanna do what's right for our shareholders, and we will continue to look at share repurchases. We reinstated the dividend. You know, our goal would be to increase that over time, but I would say no changes.
Speaker 16
Very good. Thanks.
Ross Gilardi (Senior VP Finance)
Thank you.
Operator (participant)
Thank you. At this time, I'll turn the floor back to management for closing comments.
Charles L. Szews (CEO)
Well, thank you. Let's wrap up. Thanks for spending time with us. We look forward to a strong finish for the year. Have a great day, everyone.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.