Oshkosh - Q2 2016
April 28, 2016
Transcript
Operator (participant)
Greetings and welcome to Oshkosh Corporation reports fiscal 2016 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 push star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Patrick Davidson, Vice President of Investor Relations. Thank you. You may begin.
Patrick Davidson (VP of Investor Relations)
Thank you. Good morning and thanks for joining us. Earlier today, we published our second quarter 2016 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation which includes a reconciliation of 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 references on this call to a quarter or a year are to a fiscal quarter or fiscal year, unless otherwise stated. Our presenters today include Wilson Jones, President and Chief Executive Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, Wilson.
Wilson Jones (President and CEO)
Thank you, Pat. Good morning, everyone. Today, we announced second quarter performance and earnings per share of $0.76, exceeding our previous expectations as the Oshkosh team continued to execute on our MOVE strategy to improve performance. We grew sales, operating income, and operating income margin compared to the prior year quarter in all segments, excluding access equipment, with defense continuing to rebound from the trough in 2015 and the fire and emergency and commercial segments both executing on their journeys to deliver improved operational efficiencies. We also finished the quarter with essentially flat or higher year-over-year backlogs in each of our segments, including access equipment. Timing of sales in the access equipment segment and strong defense segment results, along with the benefit of discrete tax items, contributed to the better-than-expected results in the quarter. There were a number of other positive developments in the second quarter.
The competitor protest of the JLTV production contract awarded to us was abandoned in mid-February, allowing us to continue to move full speed ahead with our Department of Defense partner on this critical program. In March, we received a $243 million order for the JLTV program to support our production in 2017. I'll talk a little bit more about this program in a few minutes. The defense segment also received a contract from an international customer for more than 1,000 M-ATVs that the team has been pursuing for some time. Our defense team is currently working with the customer to finalize the funding and vehicle delivery schedule for this contract.
I'll let Dave discuss our updated outlook in more detail, but we are raising our full-year earnings per share outlook slightly to reflect the tax benefits we recorded in the second quarter and increased expectations for results in the defense segment. Our expectations for our other segments remain unchanged from our last earnings call. Please turn to slide four for a discussion of our segments, starting with access equipment. As I mentioned earlier, our access equipment segment performance in the quarter was significantly better than we had expected. There has been a lot of discussion about rental customers in North America planning for lower fleet capital expenditures in 2016 and waiting to see how the economy and construction markets looked before placing their orders for new equipment, which is what we saw this quarter to a large extent.
However, we also saw talk of the recession in the U.S. decline as the quarter progressed. The construction outlook in the U.S. remained generally positive, with some solid data points released in the quarter. The winter in the U.S. wasn't as severe as last year, allowing construction jobs to start earlier this year. We believe the combination of these factors led some customers to place their fleet orders earlier than they might otherwise have and earlier than we previously expected them to. While we largely view this as a timing item and continue to expect the market to be down in 2016, we also view this as supporting a reasonable level of fleet investment. In line with our expectations, orders in the quarter were lower than the prior year quarter, but backlog in March 31 was up slightly compared to the prior year quarter.
We view this backlog level as supportive of our outlook for this segment for the second half of the year. Two weeks ago, our team attended the Bauma Construction Equipment Show in Munich, Germany. By all accounts, it was a successful and well-attended show. We also experienced a positive atmosphere at the ARA Rental Show in Atlanta in February. We introduced several products at the shows, including our new 150-foot articulated Ultra Boom, which boasts the largest working envelope in the world, even larger than our own 185-foot Ultra Boom. In addition, we launched our new line of user and environmentally friendly work-at-height products, the EcoLift family of non-powered access units. The EcoLift was developed in the United Kingdom and has carved out a unique place in that market.
This niche product is creating a lot of excitement among our customers as they understand its value proposition for finishing work in multi-story buildings. The outlook for the two largest markets for this segment has not changed since our last quarterly conference call in January. We still expect North America to be down compared to last year and Europe to be up modestly for the full year. Operationally, inventory levels in this segment began to decline in the second quarter as we expected. The team is systematically planning for inventory reductions to continue in the second half of the year as this business enters its seasonally busiest time of the year. Longer term, we have not deviated from our position that we believe this business has a strong future that will be driven by construction growth, increased global adoption, and new applications for the equipment.
Please turn to slide five for a discussion of our Defense segment. The outlook for our Defense business has continued to improve. Of course, the end of the competitor protest actions on the JLTV was welcomed by our customer and our Defense team. We were always confident in our vehicle and the highly disciplined and objective competition conducted by the U.S. Department of Defense. Based on the March JLTV delivery order that we received, as well as the proposed funding including the President's 2017 budget request, we now expect that the production ramp-up of the JLTV will be quicker than we previously expected. We also received a large volume of contract awards for our legacy Department of Defense programs during the second quarter, which were funded with the government's fiscal 2016 budget dollars.
These awards, along with others previously received, provide multiple years of funding for our FHTV and FMTV programs. There are additional funding requests for these programs included in the President's fiscal 2017 budget request. Combined with this segment's aftermarket business, our domestic defense business provides a solid base as we ramp up to full-rate JLTV production. We continue to remain active internationally. We're very pleased to receive the large international M-ATV contract. As I mentioned earlier, we are working with the customer to finalize the funding and delivery schedule and have not included any of these units in our 2016 outlook or our March 31 backlog. We are procuring longer lead-time materials to allow production of these units. We continue to pursue additional opportunities with multiple countries' armed forces, but from experience, we know that international discussions take time to turn into contracts.
We are very pleased with the improved outlook for our defense segment. Let's turn to slide six to discuss the fire and emergency segment. The fire and emergency team delivered another quarter of improved results. Sales, operating income, and backlog were all higher compared with the prior year quarter. The segment's performance was driven by its strong product offerings, continued operational improvements, and a modestly growing fire apparatus market. The market is benefiting from higher municipal spending, as well as a number of larger cities that are replacing their aged fire apparatus fleets. In the year since we introduced the Ascendant aerial ladder truck at the FDIC show in 2015, this product has become one of Pierce's most successful new product launches, contributing to continued share gains at Pierce. To remind you, the revolutionary Ascendant delivers reach beyond what is normally achievable with a two-axle fire truck.
Until now, manufacturers have needed a larger and heavier 3-axle chassis to operate a 100-foot steel ladder. Our Ascendant has a 107-foot steel ladder on a 2-axle chassis, providing customers with a shorter, lighter, and more maneuverable fire truck. The Ascendant is a great example of our V, value innovation component, of the MOVE strategy at work. At the 2016 FDIC show just last week, we introduced several new configurations centered on the Ascendant platform as we strive to offer more value and features for our existing and soon-to-be customers. Leveraging improved operational performance, Pierce increased its production rate in February. The fire and emergency team is planning to increase the production rate again later in the calendar year, resulting in reduced lead times for Pierce's customers and continued efficiency improvements for Pierce.
We are very excited about the progress of our fire and emergency team, what they've made, and what they continue to make with their quest to achieve double-digit margins in this segment. Please turn to slide seven, and we'll talk about our commercial segment. Like our other non-access equipment segments, the commercial segment delivered improved year-over-year results in the second quarter. Strong refuse collection vehicle sales growth drove higher sales in this segment. Fleet replenishment by larger private waste haulers remained a strong driver of market demand and is right in our wheelhouse as a leading provider of high-quality refuse collection vehicles. Supported by the fleet replenishment, we are maintaining our outlook for the domestic refuse collection vehicle market to grow modestly in 2016. Share gains also contributed to the strong sales growth that we experienced in this product line.
Before I turn to concrete mixers, I'd like to highlight the lighter-weight Meridian front-end loader refuse collection vehicle, which is beginning initial shipments. McNeilus is ramping up production of this new product throughout the spring and into the early summer, and we believe it will generate strong customer interest in a market that is looking for innovative trash hauling solutions. We will also be showcasing the Meridian at the McNeilus booth in June at the annual WasteExpo show. Concrete sales were flat compared to the prior year, with the smaller segment of that market, our front-discharge concrete mixers, up significantly, and rear-discharge concrete mixers, which comprise the majority of the market, down slightly. While the U.S. concrete mixer market continued to experience cautious buying practices, we did see increased order activity in the second quarter compared to the prior year quarter.
As we said on our January Q1 conference call, we expect many customers to wait to see how the 2016 construction season is shaping up before fully committing to their new equipment requirements. Despite the current caution in the North American concrete mixer market, we believe the longer-term outlook for this business is favorable. We expect positive forecasts for residential and non-residential construction, and the recently passed highway bill will help drive demand for poured concrete. Fleets also continue to age and will eventually need to be replaced. I'll turn it over to Dave now to provide a financial update and our updated outlook for 2016. Please turn to slide eight.
Dave Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. We're pleased to report results in a challenging environment that we're close to our second quarter 2015 adjusted results, and that significantly exceeded our previous expectations.
Validated net sales for the quarter were $1.52 billion, nearly flat with second quarter of 2015 sales of $1.55 billion. A near doubling of defense segment sales, along with higher sales in both the fire and emergency and commercial segments, almost completely offset a decline in access equipment segment sales. In our last earnings call, we said that we thought access equipment segment first half sales would be down approximately 30%, which implied a 31% decline in the second quarter. For the reasons Wilson noted earlier, sales in the segment were higher than we originally expected. Defense segment sales benefited compared to the prior year quarter from having a full quarter of FHTV activity and the delivery of the remaining international M-ATVs from the contract that we received last summer.
You may recall we had a break in production on the FHTV contract last year as we negotiated a new contract with our U.S. government customer. Higher aftermarket parts sales and higher content vehicles sold contributed to defense segment sales in the quarter being higher than we previously expected. Consolidated operating income for the second quarter was $91.4 million, or 6% of sales, compared to operating income of $109.7 million, or 7.1% of sales in the second quarter of 2015. Improved operating income and operating income margins in the defense, fire and emergency, and commercial segments were not enough to offset the operating income decline in the access equipment segment and higher corporate costs. Higher defense segment operating income was the result of higher sales volume and a favorable product mix.
We're also pleased with the progress that our fire and emergency and commercial segments made as they delivered stronger results in the quarter. Lower access equipment segment operating income and operating income margins reflected the impact of the lower sales volume and a more challenging pricing environment, a favorable vendor recovery settlement in the prior year quarter, and adverse absorption resulting from continued lower production levels. The impact of these items was partially offset by lower spending on engine emission standards changes. Compared to our previous expectations for the second quarter, access equipment segment operating income benefited from the higher-than-expected sales noted earlier, and the defense segment benefited largely from higher sales and improved operational performance. The higher-than-expected access equipment and defense segment operating income was partially offset by higher corporate expenses, predominantly related to higher startup expenses at our Mexican shared production facility and higher healthcare costs.
Earnings per share for the quarter was $0.76 compared to adjusted earnings per share of $0.81 in the second quarter of 2015. Current quarter results benefited by $0.06 per share from discrete tax items and $0.05 per share from a lower share count as a result of our share repurchase activity over the past year. We did not repurchase any shares of our common stock in the second quarter. Please turn to slide nine for a review of our updated expectations for 2016. We are slightly increasing our 2016 earnings per share estimate range from $2.20-$2.60 to a range of $2.30-$2.70, largely to reflect the lower estimated tax rate as a result of the discrete tax items recorded in the second quarter and higher expectations in the defense segment, partially offset by higher estimated corporate expenses.
We view the stronger-than-expected access equipment segment quarter second quarter results as a timing item and are maintaining our previous full-year outlook, reflecting an implied full-year sales decline of 13%-18% for this segment. Our updated earnings per share estimate range does not include any sales related to the recently awarded international contract for more than 1,000 M-ATVs, as we are still working with our customer to finalize the funding and delivery schedule. At this time, it is not clear whether we will recognize any sales for this contract in the current fiscal year, and we are leaving our previous free cash flow estimate of $275 million unchanged. As previously discussed, we expect earnings to be weighted to the second half of the year due to seasonality and cautious construction equipment customers.
We also expect operating income margins to be higher in the second half of the year compared to the first half for all segments except the defense segment. While we are raising our full-year outlook for this segment, we expect a less favorable product mix and a ramp-up in activity to support the JLTV program to result in lower operating income margins than in the first half of the year. We expect that the third quarter will be the highest quarter of the year for earnings per share. I'm going to turn it back over to Wilson for some closing comments before we open it up for Q&A.
Wilson Jones (President and CEO)
Thanks, Dave. In summary, I would describe our second quarter as a quarter of making progress. We delivered improved performance and operational efficiencies in our defense, fire and emergency, and commercial segments. Our access equipment segment made progress in lowering their inventory.
We received a large contract for international M-ATVs that we've been talking about for the past several quarters. We also continue to see share gains in our fire truck and refuse collection vehicle businesses in North America. Along with this progress, we are benefiting from a number of recent new product launches that leverage innovative technologies that will help us sustain some long-term competitive advantages. Last, but certainly not least, our talented team received some great recognition in the quarter. We were named by the Ethisphere Institute to the list of World's Most Ethical Companies, an honor for which we are very proud. Our people-first culture was acknowledged by Forbes magazine as they recently named us to their list of Best Large Employers 2016. Just a few months ago, Popular Science magazine selected our JLTV for its Best of What's New 2015 list.
All these honors are a tribute to our hardworking team members who will remain focused on executing our MOVE strategy. We have an outstanding defense segment outlook and improving fire and emergency and commercial segment performance. Together with our industry-leading access equipment business, these add up to Oshkosh being a different global industrial with a positive long-term outlook. I'm excited about our future and our team. I'll turn it back over to Pat to get the Q&A started.
Patrick Davidson (VP of Investor Relations)
Thanks, Wilson. I'd like to remind everyone to please limit your questions to one plus a follow-up, and then after the follow-up, we ask that you get back in queue to ask additional questions. Operator, please begin the question and answer period of this call.
Operator (participant)
Thank you. Ladies and gentlemen, we will now be conducting our question and answer session.
If you would like to ask a question, please push star one on your telephone keypad now. A confirmation tone will indicate your line is in the question queue. You may push star two if you would like to remove your question from the queue. For any participant using speaker equipment, it may be necessary to pick up your handset before pushing the star key. One moment while we pull for questions. Our first question comes from the line of Seth Weber from RBC Capital Markets. Please go ahead.
Seth Weber (Managing Director)
Hey, good morning, everybody.
Wilson Jones (President and CEO)
Hey, Seth.
Seth Weber (Managing Director)
I just wanted to touch on the defense margin outlook here for the year.
I appreciate some of the color that you gave about kind of what helped the second quarter, but to get to your full-year guidance, I think it suggests something in the very low single digits for the back half of the year, like 2% kind of margin for the defense segment. Is that the right way to think about it? And can you just maybe give us a little bit more color on why that's taking such a big step down?
Dave Sagehorn (EVP and CFO)
Sure. Morning, Seth. It's Dave. A couple of things are driving the lower expected operating income margins in the defense in the second quarter. I'm not going to say specifically what the margin is, but it is significantly lower than the first half. And those two things really are a less favorable mix.
If you think about the first half of the year, we did have several hundred, almost 300 M-ATVs in. And then in addition, the other factor is we are ramping up activity on the JLTV contract. There's going to be the first vehicles really, I think, are scheduled late fiscal year, but there's a lot of additional activity going on related to that contract. And so we will see spending ramp up as we go through the second half of the year here.
Seth Weber (Managing Director)
Okay. I guess, can you give us your updated LRIP production forecast maybe for JLTV for the next how we should be thinking about that for 2016 and 2017?
Dave Sagehorn (EVP and CFO)
Sure. For 2016, the quantities are very low. We aren't scheduled to deliver the first vehicles until very late in the fiscal year.
2017, and this is part of, I think, the bigger story is when we saw the president's FY 2017 budget request come out, one of the things that we highlighted was the pace at which the JLTV program is expected to ramp up is significantly faster than we previously expected. So if you go back to last year when we were bidding on the contract, our expectations were that for the, call it, the first three years of low-rate initial production, we were looking at, call it, 250 units in the first year, which would have been fiscal 2017, 500 units in fiscal 2018, and around 1,000 units in fiscal 2019. Now, when you take a look at the defense or the president's budget request, it's looking more like 750 units approximately for 2017, around 2,000 units for 2018, and upwards of 3,000 units in fiscal 2019. So a significantly quicker ramp in that program.
Seth Weber (Managing Director)
Okay. That's very helpful. Thank you very much, guys.
Dave Sagehorn (EVP and CFO)
Thanks, Seth.
Operator (participant)
Thank you. Our next question comes from the line of Mike Shlisky from Seaport Global. Please go ahead.
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
Good morning, guys.
Dave Sagehorn (EVP and CFO)
Hey, Mike.
Patrick Davidson (VP of Investor Relations)
Morning, Mike.
Wilson Jones (President and CEO)
Morning.
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
I just wanted to touch on the concrete truck business real quick. Could you maybe give us some more color or perhaps quantify just how aged the overall concrete truck fleet is out there?
Wilson Jones (President and CEO)
Yeah, Mike. That's one of the factors that leads us to a positive outlook for our mixer business. If you look at the average fleet age today in concrete mixers in the U.S., it's three and a half years older than it was in 2007, right before the recession. So very old fleet that will need replacements. So again, it leads to our positive outlook for mixers.
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
And then my follow-up is just on this whole FAST Act thing that might start to ramp in 2017 on the construction side. Could you give us a sense as if the larger concrete trucks will become a bigger part of the mix at that point? I was wondering if sort of road and bridge projects generally need the larger versions rather than the smaller versions.
Wilson Jones (President and CEO)
Well, they use a variety of trucks to pour concrete, again, depending on the size of the job, Mike. But we do expect that that will help us. The highway bill in the past has always been a positive for our business. We don't expect it to be something that's really fast and furious at the start, but we will benefit over that five-year period.
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
Okay. Great. That helps. Thanks so much, guys.
Wilson Jones (President and CEO)
All right. Thank you. Thanks, Mike.
Operator (participant)
Thank you. Our next question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead.
Pete Skibitski (Senior Equity Research Analyst)
Hey, good morning, guys. Nice quarter.
Dave Sagehorn (EVP and CFO)
Hi, Pete.
Wilson Jones (President and CEO)
Thanks, Pete.
Dave Sagehorn (EVP and CFO)
Thank you.
Pete Skibitski (Senior Equity Research Analyst)
I guess on access margins, your guidance kind of implies lower volumes at access in the second half, but the margin guidance makes it look like margins will be kind of flattish year-over-year in the back half of the year. Is that just kind of lower material costs year-over-year, or is there something else going on there? And then part two is I'm just wondering how you guys think about the state of the market with what looks like continuing lower rental rates. If you could give some color on all that, that'd be great. Thank you.
Dave Sagehorn (EVP and CFO)
Sure. Pete, this is Dave. I'll take the first part of that and turn it over to Wilson for the second part. In terms of the margins in the second half, I think you've got a few things going on there. Certainly, material costs, we do expect to continue to benefit. I think we will also see a little bit of a pricing challenge, but I think those two will largely offset in the second half. I think in terms of, call it, differentiators, we do expect to see significantly lower spending year over year on engine emission standards changes. We were still spending on that in the second half of fiscal 2015. That is behind us, obviously, now.
Also, if you think about some of the actions we've taken earlier in the year at Access Equipment to help manage costs, we did reduce the salaried workforce by 10% beginning of this fiscal year, so that'll flow through the second half of the year. Then also, last year in our fourth quarter, we had a reserve that we took during that quarter for used inventory valuations, and we don't expect that, obviously, to repeat itself again this fiscal year.
Wilson Jones (President and CEO)
Pete, I'll jump in on the overall second half market question you have there. I think you're hearing different customers talk about the second half or the next six months, so to speak, and I would say that they're fairly positive. We see good fundamentals. The rate pressure has been going on since, well, probably back to last June, July.
So that's a phenomenon that we've been working in and continue to work through that scenario. But overall fundamentals, they're not bad. They're not great, but they're not bad. And you're seeing housing starts up 14% through March. We're seeing overall U.S. construction up about 10% in February. So again, the fundamentals are there, which lead us to believe that there's going to be responsible levels of CapEx spending. Again, we're not trying to sound bullish. We're holding our original expectations for the year. We're not changing those. We had the timing issue that we described in our prepared remarks where we had some customers that bought in the quarter. It wasn't a surprise that the customers were buying. It was the timing that they bought a little earlier than we expected.
So we see the back half of the year unfolding and looking very similar to where we are in our outlook. We feel confident with that.
Pete Skibitski (Senior Equity Research Analyst)
Okay. So you guys kind of think that the whole mid-cycle pause issue is kind of still the dominant theme that we're going through right now?
Wilson Jones (President and CEO)
Well, Pete, I think what we would describe it as is this replacement cycle issue where there was not a lot of machines purchased in 2009, 2010. So we've talked about 2016 and 2017 having to work through this replacement cycle issue.
Pete Skibitski (Senior Equity Research Analyst)
Thanks. Very helpful, guys. Thank you.
Wilson Jones (President and CEO)
Thanks, Pete.
Dave Sagehorn (EVP and CFO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Eli Lustgarten from Longbow. Please go ahead.
Eli Lustgarten (SVP and Senior Research Analyst)
Good morning, everyone.
Wilson Jones (President and CEO)
Hi, Eli.
Dave Sagehorn (EVP and CFO)
Good morning.
Eli Lustgarten (SVP and Senior Research Analyst)
Can I ask one quick clarification? The higher corporate expenses that we saw in the quarter, is that a one-time? It looks like a one-time deal, one-time step-up.
Dave Sagehorn (EVP and CFO)
Yeah, Eli. It's largely related to, as we mentioned, startup costs at a shared facility in Mexico. We are not up to full-rate production in that facility yet. So as we ramp up production, that should go away. Go away.
Eli Lustgarten (SVP and Senior Research Analyst)
In the first quarter, a large part of the guidance reduction that we underwent reflected the absence of that big 1,000-unit M-ATV order, which you now have. Now, I'm not trying to talk to you, but assuming that the term still is favorable that it took $400 million out of your forecast for the year and a big chunk of profit, is it fair to assume that most of that will flow into under similar terms in 2017 so that $0.50, $0.60, $0.70 kind of number, which what that represented, would just be additive to next year's program?
Dave Sagehorn (EVP and CFO)
Yeah. Eli, obviously, a lot of discussions with the customer regarding that contract. But in terms of how the final contract ended up, the terms were no different than what we were looking at as we exited the first fiscal quarter. So we are looking at whatever turns out to happen in 2016, 2017 is shaping up to be a very, very strong year for the defense business next year.
Wilson Jones (President and CEO)
Well, Eli, I'm glad you said that. We feel very positive about our defense business in 2017. And we're not here to give guidance for 2017 and 2018 today, but there's some great factual data that's out there. We've been asked the question, how do you bridge to JLTV full-rate production? And we believe we've built a much better bridge now through our defense domestic programs.
If you look at our backlog today, Eli, $1.6 billion in defense backlog, well, over $1 billion of that is for fiscal year 2017. So that's in place today. Now, that doesn't include any of these international M-ATVs that we're talking about. It doesn't include an extension with FMTV that we're confident with. And then if you look at the President's budget for 2017, we see increases from the previous year's projections in FMTV, FHTV, and JLTV, all that would lead us into 2018 and 2019 sales. So again, this is all public information. We're not trying to give guidance for the next two years, but this is why we talk about Oshkosh being a different global industrial because we have a significant defense business today and really look forward to these next few years with defense.
Eli Lustgarten (SVP and Senior Research Analyst)
And just a quick follow-up on the access business.
Where are your inventory levels at this point? Can you give us some idea of how production will look? Do you have to still compensate for the higher inventories, or are we getting past that in the second half?
Dave Sagehorn (EVP and CFO)
Eli, as we said, really, when we started the year, we expected most of the inventory reduction to occur in the second half of the year, and that is still the case. We did see inventories decline in the access equipment segment in March, so we're pleased with that. I guess we would characterize it as on track, and we think the access equipment team has a good strategy to continue to reduce inventories as we go through the remainder of the fiscal year.
Eli Lustgarten (SVP and Senior Research Analyst)
So the operating profitability of that sector is going to be weighted down still by this inventory for 2016, but by the time we get to 2017, we should be completely finished with that problem.
Dave Sagehorn (EVP and CFO)
Yeah. There will be a little bit of a headwind in the second half of the year due to underabsorption, but not as big of a headwind as we saw in the first half of the year.
Eli Lustgarten (SVP and Senior Research Analyst)
Thank you very much.
Wilson Jones (President and CEO)
Thank you, Eli.
Operator (participant)
Thank you. Our next question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Please go ahead.
Charley Brady (VP of Investor Relations)
Hi, thanks. Good morning, guys.
Dave Sagehorn (EVP and CFO)
Hey, Charley.
Charley Brady (VP of Investor Relations)
Hey. Just on the refuse business in commercial, I mean, up 30% just about, pretty strong number there, but the guidance for the year unchanged.
Was there any sort of pull forward on refuse, I'm sorry, yeah, on the refuse trucks in the second quarter, or is it just kind of a normal timing thing you're seeing there?
Wilson Jones (President and CEO)
Yeah, Charley. Nothing unusual. Fairly normal rate for the waste industry.
Charley Brady (VP of Investor Relations)
But it implies that second half doesn't stay at that pace, correct? If you just look at the annual guidance, which is unchanged.
Dave Sagehorn (EVP and CFO)
Yeah, Charley. I guess we don't have the numbers at my fingertips here, but I would agree with Wilson. We didn't see anything really out of the norm. I think what we are seeing is we're benefiting from some of the private haulers refreshing their fleets, which is certainly positive. I think we're also benefiting a little bit with increased municipal spending.
We can take a look at the second half of the year, but I think overall, our outlook for the year is unchanged from what we previously indicated.
Charley Brady (VP of Investor Relations)
And just, can you comment sort of on the mix of what you're seeing on CNG trucks in the order pattern?
Dave Sagehorn (EVP and CFO)
Yeah. I think CNG is still very positive. Even with the lower oil and gas prices out there, it's typically, I would say, somewhere around 30% of the orders in a given quarter are CNG and refuse.
Wilson Jones (President and CEO)
Yeah. The large national fleets, Charley, have the infrastructure, and that's a strategy for them, and so they've continued to buy CNG.
Charley Brady (VP of Investor Relations)
Great. Thanks.
Wilson Jones (President and CEO)
Thank you.
Dave Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Mig Dobre from Baird. Please go ahead.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
Good morning, everyone.
Wilson Jones (President and CEO)
Hey, Mig.
Dave Sagehorn (EVP and CFO)
Hi, Mig.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
Maybe we can go back to the defense segment. If I look historically here, so much has changed over the past decade or so in terms of not only volume but the overall margin of this business. And I'm sort of wondering here, now that obviously your outlook is improving and you're starting to get visibility in terms of volumes for the next few years, what do you think the earnings power of this business is in terms of margin? Can you frame it as to where you think opportunity is versus what we've seen historically?
Dave Sagehorn (EVP and CFO)
Mig, I think Wilson said it earlier. We aren't here really to give guidance on the next few years. I think the margin profile or dynamics that you've seen occur in this segment of the business in this market over the last decade is the government, I guess, directionally is driving a little harder bargain than they were maybe a decade ago.
I think that does make it a little more challenging for OEMs, but I think it's still a good business, and I think we have good opportunities with the business as we look forward. Again, we're not going to get into on this call today what the margin expectations for that business is going to be in the next few years, but we certainly have opportunities.
Wilson Jones (President and CEO)
Yeah. What I would add to that, Mig, is what we had today that we didn't have a decade ago was more international opportunities. So things will continue to change, to your point, but we will have an analyst day in September, and I think that's where we can get a little bit more specific for you as we go forward with all of our segments.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
I see. I appreciate that. I figured it was worth a try on the longer-term question, but.
Wilson Jones (President and CEO)
You always give it a good try, Mig. We appreciate that.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
In terms of the accelerated build for JLTV, are you in a position where you can handle that requirement, or should we be thinking that that is going to pose some sort of a cost strain on you that we need to take into account?
Wilson Jones (President and CEO)
No, Mig. If you think back, I know you know us well, 2009, 2010, we built close to 10,000 M-ATVs in 10 months. So we can certainly flex up and down, and we've made it clear to our customer that if they want to go even faster than what we have in front of us, we're anxious and willing to help with that.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
I was thinking more to the tune of the FMTV, really, rather than the M-ATV and the build-out there. But I get your point.
Dave Sagehorn (EVP and CFO)
Yeah. Mircea, what I would say there is JLTV is our design. FMTV was not our design.
Wilson Jones (President and CEO)
I think that's important to note, Mig, is we were building something that was not our design on the FMTV.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
Understood. Thank you, guys.
Operator (participant)
Thank you. Our next question comes from the line of Jamie Cook from Credit Suisse. Please go ahead.
Jamie Cook (Managing Director)
Hi. Good morning and nice quarter. I guess two questions. One, David, on the guidance. Obviously, you beat the second quarter quite significantly relative to where the street is, and your guide implies you didn't raise as much as the beat, I guess, is my question. So what gives you caution, I guess, in the back half of the year, or was the street just wrong on the second quarter because you don't provide an actual EPS number? I think you just said down year-over-year.
And then my second question, congrats on the international M-ATV contract. I just want to get a sense of what the final hurdles are on the funding that still needs to take place, and how would you rate or what is the probability that that funding does not happen before you exit your fiscal year? Or can you just ask about the timeline of when you think the funding will be in place? Thank you.
Dave Sagehorn (EVP and CFO)
I'll take the first one, Jamie, and I'll let Wilson address the second one. So in terms of the second quarter, our expectations review coming into the quarter were that our earnings were going to be down meaningfully. We certainly did not end up down meaningfully. And the largest driver, as we see it and saw it play out here, really is the timing factor that we saw in the access equipment segment.
As Wilson said, we think there were some customers out there that, due to a combination of factors, decided to make their fleet purchases earlier in the calendar year than we had previously expected. So I think we look at that as a good thing. We aren't changing the full-year outlook, but customers were confident enough and comfortable enough to acquire equipment earlier than we expected. So overall, that's why you didn't see a big move in the full-year guide, because the biggest component of the beat versus our previous expectations was focused on that timing in the access equipment segment.
Wilson Jones (President and CEO)
I'll grab the international M-ATV, Jamie. We were pleased (I mentioned the progress we made in the quarter) to receive the contract for more than 1,000 units of M-ATVs into this region.
This is our fifth contract with this customer, so we've always felt it was a matter of when, not if. As I said, we are working on finalizing the funding and delivery schedule, so we haven't forecasted the timing of these deliveries. This customer is—we're running at the pace of the customer. What we do believe is most of these units will be delivered within 18 months. I'm sure the next question will be, "Well, how many do you think you could get in 2016?" And we certainly are working close with the customer. And as the funding and delivery schedule materializes, if it does something fast or in a timely manner, then we could get a couple hundred of these units in the back half of our 2016. But again, we're not going to put those in our outlook. This is a very fluid situation.
A lot going on in this region, but we're very close to the customer. I've been over there twice in the last three months, and I can tell you the need for the vehicles were there. Our vehicles are performing well in the theater, and I know the customer is very interested in moving forward. So we will let you know on the next earnings call of how we're doing, but our goal is to get the funding and delivery schedules in place now that we have the official contract.
Jamie Cook (Managing Director)
Okay. Thank you. I'll get back in queue.
Wilson Jones (President and CEO)
Thanks.
Dave Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Please go ahead.
Jerry Revich (Managing Director and Head of US Machinery, Industrial & Environmental Services Research)
Hi. Good morning, everyone.
Wilson Jones (President and CEO)
Morning, Jerry.
Dave Sagehorn (EVP and CFO)
Morning, Jerry.
Jerry Revich (Managing Director and Head of US Machinery, Industrial & Environmental Services Research)
I'm wondering if you could talk about what you're seeing in your access equipment business in Europe.
One of your competitors spoke about an acceleration in the demand outlook. I'm wondering if you're seeing that in your business as well.
Wilson Jones (President and CEO)
Well, access in Europe, as we've said, is going to be up modestly this year for us. We just came off of Bauma, and I would say the energy level, the much larger attendance in Bauma than three years ago. I think Europe is one of those markets that there's areas where we do well and areas that are quite honestly very competitive from a pricing standpoint. So our outlook is favorable for Europe, and again, we see good progress there. We're looking at doing some different things with our facilities to better handle that market. But we do have currency that we're fighting against on products that we're not building there.
But it is exciting to see Europe coming back, and we have a great team that's growing in Europe to further our business there. So again, we're positive about Europe. Maybe not as positive as others, but it is a good access market for us.
Jerry Revich (Managing Director and Head of US Machinery, Industrial & Environmental Services Research)
Okay. Thank you. And in North America, you mentioned in access that there was a pull forward of demand in your fiscal second quarter. Can you talk about the demand environment as you see it in your fiscal third quarter? Because it sounds like, at least for your customers, it's off to a pretty good start. So I'm wondering if you'd characterize the pull forward from the September quarter within your guidance as you see it, or do you expect a weaker fiscal third quarter than you did previously? Thanks.
Wilson Jones (President and CEO)
Well, obviously, what we're implying, Jerry, is the second half is going to be a little less than what we started with our guidance for 2016. I would say that, again, what we're off to in April is a start that we've kind of expected. I wouldn't say that it's up, down, just kind of plugging along as we expected. So we didn't change our guidance because we still believe our outlook is dialed in. We'll see how the quarter unfolds. I think the next 60-90 days is going to tell us a lot about the construction access side of our business. And to be honest, we're anxious to get into this next 60 days.
Dave Sagehorn (EVP and CFO)
Yeah. Jerry, I guess I still look at this as, with the guidance unchanged for the year, it is some challenging environment out there.
I still look at this as a positive that we saw customers choosing to purchase equipment earlier than they previously may have intended. So the fact that it implies that our second half of the year is maybe a little lower than our previous expectations, again, you had a lot of customers being very vocal early in the calendar year about their plans to not purchase a lot of equipment in the first calendar quarter. And we listened to that, and what we saw was people getting more comfortable. So I think we view that as directionally positive.
Jerry Revich (Managing Director and Head of US Machinery, Industrial & Environmental Services Research)
Okay. Thank you.
Wilson Jones (President and CEO)
Thanks, Jerry.
Operator (participant)
Thank you. Our next question comes from the line of David Raso from Evercore ISI. Please go ahead.
David Raso (Senior Managing Director)
Hi. Thank you. And I apologize if I just didn't hear it. The new 1,000-plus order, it was an issue of always met with the Ministry of Defense.
This was one of the first times in a while, maybe ever, having to sit down with the Ministry of Finance, and that was what's slowing it up. Have we now secured the contract? Just making sure I'm 100% positive here. We obviously don't want any further delays. Has the Ministry of Finance signed off, and the funding is literally a technicality, or is there still a funding question mark?
Wilson Jones (President and CEO)
What I would say is, first of all, yes, we have an executed contract, so that's in place.
David Raso (Senior Managing Director)
It's different than what you had three months ago, though, right? This is incremental.
Wilson Jones (President and CEO)
No. No. We did not have a contract when we delivered our January earnings call.
David Raso (Senior Managing Director)
Well, that's what I'm saying. So this is incremental. You now have something you didn't have three months ago. Just making sure.
Wilson Jones (President and CEO)
That's correct. That's correct.
David Raso (Senior Managing Director)
Okay. Good. Okay. And the funding, please.
Wilson Jones (President and CEO)
It is. You called it a technicality. I would call it more just the structure around how funding and delivery schedules line up. And there's a lot of planning going on. I think I said it earlier. There's a lot going on in this region. And so when you're dealing with the different ministers, the generals that are in charge of some of these units, it takes some time to work through the actual deliveries and what they need, when to field. You can imagine over 1,000 units. That's a lot of planning. And as I said, they do have some other things that are distracting them too. So we're working through that. We're very confident, especially with the contract in hand, that we'll get this worked out. And what I said earlier is that we believe that these will all be delivered over the next 18 months.
David Raso (Senior Managing Director)
And we used to speak to thousands of units of opportunities. Now, let's consider this one hopefully done deal. Are there incremental units with the same customer that are on the immediate horizon as well, or are the other countries engaged in conversation? Maybe you can handicap where do you think you are in those conversations?
Wilson Jones (President and CEO)
Sure. I was just over there, and I can tell you this customer has more needs. So we're seeing opportunities with our current customer. But there's some other customers we've been working with that have purchased. They have needs. And now we have some new countries that we're talking to and have done some trials with. And so the opportunities in the region there are good, but we've said it a couple of times is we're not going to get out over our skis and talk about contracts that we don't have in hand.
So we'll keep you posted through the earnings calls on how we're progressing. But as I mentioned to Mig Dobre earlier, we've got some great opportunities with Defense. And again, the international side of the business is really opening up for them that they haven't had before. So adds to our positive outlook there.
David Raso (Senior Managing Director)
I mean, the significance of the earnings for M-ATV are tremendous. That's good to hear. The JLTV, you haven't been willing in the past to really give us much color on this. I mean, I'm assuming the swag margin idea is. Well, hopefully, it's better than FMTV, but it's clearly not as high as M-ATV. Can you give us some, at least, framework now that maybe you have a little more clarity on 750 units and then beyond that? Just some sense of the profitability piece.
If it is low single digit, I mean, the numbers sound nice, but they're really not that meaningful to earnings, and it's all about the M-ATV. But can you help us a little more with the JLTV framework for margins in, say, 2017 and 2018? Just framework.
Dave Sagehorn (EVP and CFO)
David, I think the framework that we've given and that you've referenced, not FMTV and not M-ATV as far as we're going to go. Obviously, we know we need to earn a decent return in this business and that JLTV is going to be a significant part of the business in the coming years. So we knew that when we bid this contract.
Wilson Jones (President and CEO)
I would just add a little more color to that, David, in that so it's not FMTV, but it's our design. And David, you've seen us over the years.
Once we get going with a contract like we did with FMTV, internally, we work, and we enhance margins. We improve margins, and that will be the plan for JLTV. And again, we're excited because we're now going to have the opportunity to build more earlier, and that will just help us further that focus on margins.
David Raso (Senior Managing Director)
I'll just try one more angle. I do appreciate even that color. Full throttle doing 1,500, 2,000. You called the number, right? The numbers could be sizable with this contract. Can this be a double-digit margin program?
Dave Sagehorn (EVP and CFO)
David, we're not going to get into the specifics on it. Again, we know that it's going to be a big component of the business going forward and that we know that we have to deliver a decent return within this business segment, and that's our objective.
Wilson Jones (President and CEO)
And along with the great relationships with the Army and Marines, we have tremendous international opportunities with the JLTV too. So good opportunities here for us, Dave.
David Raso (Senior Managing Director)
I appreciate it. Okay. Thank you so much. Thank you.
Operator (participant)
Our next question comes from the line of Ann Duignan from JPMorgan. Please go ahead.
Mike Conlon (VP and Group Assistant Treasurer)
Hi. Good morning. This is Mike Conlon on for Ann.
Wilson Jones (President and CEO)
Morning, Mike.
Mike Conlon (VP and Group Assistant Treasurer)
Can you talk just if I could just follow up on the earlier question about Europe and access. Did you book a significant volume of orders at the Bauma show? Would it be possible to see or would those orders have been substantial enough to see another quarter of access backlog growth year-over-year in Q3?
Wilson Jones (President and CEO)
Well, we always book orders at the shows, Mike.
We don't usually share the amount that we book, but I know the access team was pleased with the order rate at the show. I wouldn't say it was anything that would make our backlog look unusual. I would say it fits within the norm.
Dave Sagehorn (EVP and CFO)
Plus, it was April, right? So. Yep.
Mike Conlon (VP and Group Assistant Treasurer)
Okay. Thank you. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please push star one on your telephone keypad. Our next question comes from the line of Stanley Elliott from Stifel. Please go ahead.
Stanley Elliott (Director of Investor Relations)
Hey, guys. Good morning and congratulations. Thank you. Along those same lines, is the FDIC a big order show for you all as well since that kind of happened post the close of the quarter?
Wilson Jones (President and CEO)
No. Stanley, the municipal shows are a little different because you're working through the bid process, whereas in a construction show, you're dealing with companies that are not working through a municipal arrangement like that. So what happens at the FDIC show is the introduction of new products like our Ascendant. They had three nice conference rooms set up, and you see a lot of specifications being modified and written around a lot of new products. So if you gauge the construction shows by the orders you receive, we look at the municipal shows at how we were able to influence specifications. And our fire team peers did a wonderful job at the show, and I know that they left feeling very good about the progress they made with specifications and the customers that attended the show.
Stanley Elliott (Director of Investor Relations)
That's great news.
Kind of going on to the mixer side, is it still the issue on the rear discharge? There's the availability of chassis. So while there's confidence out there that the lead times are still very compressed so that you could still meet any sort of order activity, assuming we do get a continued ramp in the construction spending through the spring?
Wilson Jones (President and CEO)
That's correct, Stanley. There's capacity and there's chassis. And again, the cautiousness, they can wait a little bit.
Dave Sagehorn (EVP and CFO)
And Stanley, that's on the rear discharge. On the front discharge, those are units that we do build from the frame rails up. So the lead times in those type units are quite a bit longer than the units that we mount on commercial chassis.
Wilson Jones (President and CEO)
Which is where we've seen our increase in orders.
Dave Sagehorn (EVP and CFO)
Right.
Stanley Elliott (Director of Investor Relations)
Perfect, guys. Thank you.
Dave Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question is a follow-up from Mig Dobre from Baird. Please go ahead.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
Hey, thanks for taking my follow-up. Just a quick one on price cost and really cost specifically into the back half of the year. How are you thinking about any impact that you might see from higher raw materials, steel specifically? Can you mitigate for that hedge, or do you have anything in place in terms of handling that?
Dave Sagehorn (EVP and CFO)
Yeah. Mig, I think the jump that we've seen in steel has really been quite recent if you look at the weekly statistics. And we're typically on steel locked for a quarter basis. So if steel continues to remain higher, relatively speaking, it would be a while before we'd see that. We'd first have to get through the lock, then you got to actually procure it, produce the units, and sell them.
So it would likely be more like a fiscal first quarter for us, I think, before we would really see anything if it does continue to tick up.
Wilson Jones (President and CEO)
But I would just add our procurement teams are constantly working on mitigation strategies. And so it's something that they definitely are aware of, working on, and are prepared to mitigate as best we can if they do go up further.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
And do you have the sense that as we're looking into, say, 1Q17, you would be able to pass on any such cost increases to the customers? I'm sure it differs by segment, but I don't know if there's any color you can provide.
Wilson Jones (President and CEO)
Well, I guess the way to answer that, Mig, is our shorter backlog segments, definitely you can pass those costs. The longer backlog segments become a little more challenging.
But this is the first time steel has ticked up in a while. And I would just remind everyone that there is still a lot of capacity for steel out there. So we're not scorching earth yet that steel is going to go up fast. But if it does, we do have some strategies that would be in play. But again, there's still a lot of capacity out there for steel.
Mig Dobre (Associate Director of Research and Senior Research Analyst)
All right. Appreciate it. Thank you.
Wilson Jones (President and CEO)
Thanks, Mig.
Operator (participant)
Our next question is a follow-up from the line of Mike Shlisky from Seaport Global. Please go ahead.
Wilson Jones (President and CEO)
We lose you, Mike?
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
Hey, sorry about that. Just a quick follow-up for Dave here. Dave, you had mentioned that Q3 should be your best quarter of the year for earnings. I was just wondering if you could tell us if you think you'll be able to beat last year's Q3.
Dave Sagehorn (EVP and CFO)
Yeah. I guess, Mike, we're just going to, I think, leave it at we expect it to be the best quarter of the year. I mean, obviously, we came into this quarter with some expectations. We saw some excess customers feel a little more comfortable about buying early, and that ended up being a big positive for us versus our prior expectations. So I guess just as we look seasonally, typically, you would see the third quarter being our highest earnings quarter of the year, and we believe it'll continue to follow that trend this fiscal year.
Mike Shlisky (Managing Director and Senior Equity Research Analyst)
Okay. I try. Thanks, guys.
Dave Sagehorn (EVP and CFO)
Thank you. Good try.
Operator (participant)
Thank you. Our final question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Please go ahead.
Charley Brady (VP of Investor Relations)
Yeah. Just a quick follow-up on access. And I'm not trying to beat a dead horse here, but just so I understand, you're thinking on the pull forward, is it a function of it's anecdotal? We had a mild winter. We saw the orders tick up. Or is it from actual conversations with the customers who are telling you, "Yeah, we're buying equipment earlier than we were planning on doing this year"?
Wilson Jones (President and CEO)
Well, obviously, those conversations are going on daily, Charley, with our rental customers. The access team does a great job of staying close to their customers. So yes, those conversations are going on. I think, though, you have pockets around the U.S. that had a very mild winter. They're seeing construction start up, and they're using new machines in certain areas to plug into projects, grow market share in some cases.
So there's a multiple of factors that we believe led to the buying being a little early. I wouldn't read a whole lot more into it. Again, we believe it's all timing. We're not seeing a big change in the second half of our year. Just move forward a little.
Charley Brady (VP of Investor Relations)
And this is presumably coming majority out of independent rental companies, I would assume.
Wilson Jones (President and CEO)
No. We've had a fairly good mix of both independents and national rental companies.
Charley Brady (VP of Investor Relations)
Okay. Thanks.
Wilson Jones (President and CEO)
Good.
Dave Sagehorn (EVP and CFO)
Thanks, Charley.
Operator (participant)
Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to Mr. Wilson Jones for closing comments.
Wilson Jones (President and CEO)
Well, thanks, everyone. We appreciate your interest in the Oshkosh Corporation and participating in our call today. We have a great team that's dedicated to exceeding our customers' expectations and delivering strong shareholder value.
And certainly look forward to sharing more information with you at our next earnings call or out in the conferences as we're moving around the country here. Hope everyone has a good day. Thanks again.
Operator (participant)
Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.