Oshkosh - Q2 2017
April 26, 2017
Transcript
Operator (participant)
Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2017 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may now begin.
Patrick Davidson (Head of Investor Relations)
Good morning, and thanks for joining us. Earlier today, we published our second quarter 2017 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 2 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.
Charlie Brady (Analyst)
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 year are to our fiscal quarter or fiscal year, unless stated otherwise. Our presenters today include Wilson Jones, President and Chief Executive Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide 3, and I'll turn it over to you, Wilson.
Wilson Jones (CEO)
Thank you, Pat. Good morning, everyone. The positive momentum we generated in the first quarter continued in our second quarter, as we reported adjusted earnings per share equal to the prior year quarter and better than we expected. In addition, we exited the quarter with backlog up compared to the prior year quarter in all four segments. Overall, we're pleased with our second quarter results and have a positive outlook. Let me expand on my positive outlook comment. We have favorable market dynamics in our defense and Fire & Emergency segments, opportunities to drive additional shareholder value through continued execution of our successful MOVE strategy, and aging customer fleets that will need to be replaced. We believe the current low replacement-driven demand in North America in our access equipment segment will eventually turn positive and become a driver of new machine sales.
Charlie Brady (Analyst)
We're also currently dealing with what we believe are atypical market dynamics in the Commercial segment that we believe will revert back to more normal patterns in the future. As we celebrate our hundredth anniversary, our team members are engaged and energized about our future. The macroeconomic environment, especially in the U.S., and the sentiment of our customers, are generally positive. The tone of customers at both the American Rental Association Show and CONEXPO was better than previous shows. These factors also support our positive outlook. As a result of our solid performance during the first half of the year and positive outlook for the remainder of 2017, we are raising our full year adjusted earnings per share estimate range from $3-$3.40 to $3.20-$3.50.
I'll let Dave walk you through the details of the increase, while I discuss each of our segments. Please turn to slide four for a discussion of our results and an update on our business. The Access Equipment segment delivered another quarter of solid results. While the dynamic of lower replacement demand in North America and challenging pricing continued in the quarter, there is reason to be optimistic about this market. Construction data in the U.S. remains generally positive, and we believe rental customer sentiment continues to improve. This was evident at both the Rental Show and CONEXPO. There were a lot of customer comments at the shows about strong utilization rates, improved used equipment values, and the expectation for stabilizing or improving rental pricing. Booth traffic was strong at both shows as we showcased a number of new products.
Market conditions in the quarter in other regions remain similar to what we have been seeing. Europe remains solid, while Australia, and to a greater extent, South America, remain weak. The Asia Pacific region continued to show growth, driven by increased product adoption in China. We are pleased that both orders and backlog were up in the quarter, and we now expect 2017 sales in this segment to be at the high end of our previous range. We also made progress during the quarter on the restructuring plans we announced during our first quarter earnings call. Executing these plans will take time, but we are on track as we simplify our manufacturing and parts distribution in both the U.S. and Europe.
Initial work has begun, including the recent opening of our new West Coast Parts Distribution Center, but we don't expect to realize cost savings until 2018, with the full run rate achieved in 2019. Dave will discuss the restructuring-related charges we recorded in the quarter and expected savings in a few minutes. Please turn to slide 5 for a discussion of the Defense segment. The Defense team remains focused on executing existing programs and pursuing additional opportunities. I'm pleased with the solid execution and strong results this team delivered this quarter. The JLTV program remains an important platform for our Defense team. As we have discussed before, we are still early in the low-rate initial production phase of this program, focused on supporting government testing and evaluation....
This program is scheduled to ramp up over the next several years, and we expect it to become a significant revenue generator in our Defense segment for a number of years. We shipped a little more than 20% of our anticipated full year 2017 M-ATV deliveries to the Middle East during the quarter, and remain on track to deliver the bulk of the current order in the second half of the year. We continue to engage in ongoing discussions for additional orders for M-ATVs and other Oshkosh products. While we didn't book any international orders in the quarter, we made progress and expect that we will secure additional orders. We also continue to market the JLTV internationally and expect to be able to begin non-U.S. government sales in 2019 or 2020.
Work also continued in the quarter toward the May 8 submission deadline for the FMTV recompete contract. You may recall from our last earnings call that the government shifted the submission deadline by about four months, from January to early May. We expect that there will be multiple bidders, and we intend to submit a strong proposal incorporating enhancements to the vehicles that our government customer is looking for. Finally, our Defense team continues to closely monitor Defense budget activity in Washington. As many of you know, the U.S. government is currently operating under a continuing resolution. Of course, this is not new, happening on 8 occasions over the past decade. None of our major programs are considered new starts, so the impact to us in 2017 is negligible.
Essentially, all of our second half 2017 expected vehicle sales are in backlog, so we do not believe the timing of signing the 2017 Defense budget will impact our 2017 results. We are hopeful Congress will complete the fiscal year 2017 appropriations process in the next few days. At this time, we expect the fiscal year 2018 budget details to be delivered to Congress in mid-May, which should give us greater visibility into what our Defense customers intend to spend on Oshkosh Defense programs. Let's turn to slide 6 to discuss the Fire & Emergency segment. Progress on Fire & Emergency's journey to double-digit operating income margins continued again this quarter, with the segment reporting strong operating income margin growth.
Our Fire & Emergency team has implemented a combination of initiatives to drive the margin improvements over the past several years. A focus on simplification, continuous improvement, and pricing discipline have been big factors. The Fire & Emergency team will continue to utilize these tools to drive continued margin improvement. As we've said previously, we expect the U.S. fire apparatus market to grow modestly in 2017 due to fleet replacement initiatives, along with the impact of continued construction growth and related increased property tax receipts. But we still expect end of market volumes to remain below historical levels. We experienced very strong orders in our second quarter, some of which were likely related to the timing of a price increase at Pierce. As a result, we exited the quarter with a record backlog in this segment.
We'll have a good chance to gauge market sentiment over the next few days at the Fire Department Instructors Conference, or FDIC Show, in Indianapolis. This is the largest trade show in the U.S. for fire departments. It also offers OEMs the chance to show off their new products. Pierce will be unveiling several new configurations of the extremely successful 107-foot Ascendant aerial apparatus, and our Airport Products Group is launching its all-new Striker 8x8 airport rescue firefighting vehicle, the most capable ARFF unit in the company's history. We're looking forward to seeing attendees' reactions to these new products. Please turn to slide 7, and we'll talk about our Commercial segment. Last quarter, we talked about an atypical slowing of orders, leading to reduced production and underabsorption of costs in the Commercial segment.
We took actions to lower our cost in response to the slowdown, but the impact of these actions was not enough to offset the underabsorption that we experienced this quarter as we worked through that lower demand. The underabsorption, lower-than-expected sales volume, and one-time costs related to the January accident at our manufacturing facility all contributed to the weaker-than-expected and weaker-than-prior year performance. On a positive note, the individuals injured in the accident have all been released from the hospital and are continuing their recovery. We also saw orders rebound in the quarter for both concrete mixers and especially refuse collection vehicles. This order pattern is leading to an expected steep production ramp in the second half of the year.
While we can't say with 100% certainty, it does appear that the order slowdown we experienced late in calendar 2016 may have been a temporary event. I mentioned CONEXPO at the beginning of this call. This show is important for our Commercial segment, just like it is for our Access Equipment segment. We had good booth traffic at the show and introduced a number of new products. Customer sentiment was positive, but we expect concrete mixer customers to remain cautious. Overall, we're glad to see the rebound in orders in the second quarter, but we're not pleased with the financial performance of this segment. While we've seen a more extreme first half to second half demand and production dynamic this year, we need to overcome the impact of that volatility.
We're focusing on addressing these issues so we can deliver a bounce back in earnings in 2018. That wraps it up for our four business segments. I'm going to turn it over to Dave to discuss our financials and updated outlook for 2017 in greater detail.
David M. Sagehorn (CFO)
Thanks, Wilson, and good morning, everyone. Please turn to slide 8. We're pleased to report second quarter adjusted results that exceeded our expectations and matched the prior year's earnings per share. Consolidated net sales for the quarter were $1.62 billion, up 6.2% from the second quarter of 2016. A 50% increase in Defense segment sales, led by JLTV and M-ATV sales increases, more than offset single-digit percentage sales declines in the Access Equipment and Commercial segments. Fire & Emergency sales were down 1.2%, so essentially flat with the prior year.... Access Equipment segment, segment sales were down 4.1%, better than our expected full year percentage sales decline for the segment.
Charlie Brady (Analyst)
Commercial segment sales were down 8.7%, with RCV sales down 20.5%, as a result of the order weakness experienced in the first quarter. As Wilson noted, we did, however, see a rebound in Commercial segment orders in the second quarter. Consolidated adjusted operating income for the second quarter was $97.6 million, or 6% of sales, compared to $91.4 million, or also 6% of sales, in the prior year quarter. Higher Defense and Fire & Emergency segment results, along with lower corporate expenses, offset lower adjusted access equipment and Commercial segment operating income. Commercial segment results included $1.3 million of costs related to the January accident.
Adjusted Access Equipment segment and consolidated operating income for the second quarter 2017 excludes $17.2 million of restructuring-related costs recorded as part of a previously announced restructuring plan. As a reminder, we expect Access Equipment restructuring actions announced in January to deliver annualized cost reductions of $20-$25 million, with partial year savings of $15-$20 million expected in 2018. Implementation costs to achieve these savings are expected to be $45-$50 million, with approximately $43 million to be incurred in this fiscal year. There were a number of drivers to the year-over-year change in segment adjusted operating income, in addition to changes in sales. Rather than call them all out, I will point you to the appendix to the slide presentation on our website for a list of the drivers for each segment.
Better than expected results for the quarter were driven by the Defense and Access Equipment segments. Defense results benefited from sales timing and stronger than expected program execution. Access equipment results benefited from a stronger mix and the timing of discretionary spend. Adjusted Earnings Per Share for the quarter was $0.76, equal to the prior year quarter. Adjusted tax rate was 32% and included Discrete Tax Benefits of $1.5 million. The tax rate in the prior year quarter was 27%, which included Discrete Tax Benefits of $4.4 million. Please turn to slide 10 for a review of our updated expectations for 2017.
As Wilson noted earlier, we are increasing our adjusted full-year EPS estimate range from $3 to $3.40, to a range of $3.20 to $3.50. The increase reflects the solid performance in the first half of the year and positive outlook for the remainder of the year. While we are only partially through the seasonally important spring and early summer time period, which typically drives how our businesses with exposure to the construction season in the Northern Hemisphere will perform, we are encouraged by the strong backlogs in all of the segments as we exited our second quarter. Our updated 2017 adjusted outlook includes the following consolidated changes from our prior outlook, in addition to the adjusted earnings per share range change.
Full year sales are now expected to be $6.6 billion-$6.7 billion, compared to our previous expectation of $6.5 billion-$6.7 billion. Adjusted operating income is now expected to be $415 million-$445 million, up from our prior expectation of $390 million-$430 million. At the segment level, we now expect Access Equipment segment sales to be approximately $2.8 billion, the high end of the previous range. This represents an estimated 7% decline from 2016 sales levels.
We are also increasing our Adjusted Operating Income margin range for this segment from 7.75% to 8.5%, to a range of 8.75%-9%, reflecting both the higher sales estimate and an expected more favorable mix. We're also slightly increasing our Defense segment operating income margin estimate from 9.75% to 10%, reflecting stronger program execution. We are reducing the Commercial segment operating income margin expectation from 6.5% to a range of 5%-5.5%, reflecting higher than previously expected inefficiencies related to a more pronounced production ramp from the first half to the second half of the year, a less favorable mix, and a more challenging price cost dynamic.
We are now estimating that our corporate expenses will be approximately $145 million, compared to the previous expectation of a range of $140-$145 million. All other full year expectations remain unchanged. I'll conclude my section with a brief comment on our third quarter outlook. We expect higher sales and adjusted earnings compared to the prior year quarter, driven by higher Defense and, to a lesser extent, Fire & Emergency sales. We expect the higher sales in these segments to offset the impact of continued lower access equipment segment sales compared to the prior year, and lower expected Commercial segment margin. I'll turn it back over to Wilson now for some closing remarks.
Wilson Jones (CEO)
Thanks, Dave. Before we get started on the Q&A, I'd like to make a few comments. We've talked about Oshkosh being a different integrated global industrial, and I think you're seeing that today. We have a unique blend of businesses with exposure to attractive end markets, and we operate them as a cohesive, integrated enterprise. That said, we know we have opportunities to capture and more work to do. At this time, I'll turn it back over to Pat to get the Q&A started.
Patrick Davidson (Head of Investor Relations)
Hey, thanks, Wilson. I'd like to remind everybody, please limit your questions to one plus a follow-up. After the follow-up, we ask that you get back in queue if you'd like to ask additional questions. Operator, please begin the question and answer period of this call.
Operator (participant)
...Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Tim Thein of Citigroup. Please go ahead.
Tim Thein (Analyst)
Great, thank you. Good morning. The first question was just on, on Access and specifically on product mix as you look into the back half of the year. I know at last quarter, you were, you were expecting that the year to be a little bit more favorable, and it's just, just curious how the, how the order is slotted through and, and specifically, just as you look in the quarter you had, well, it looks like aerials were, continue to grow as a percentage. You also have this, that towing piece, the Jerr-Dan. I know there's a couple other odds and ends in there, but that, that's kind of an abnormally high, percentage of, of 2Q sales.
Charlie Brady (Analyst)
So just kind of wrapping that all together, how do you think about product mix as we move into the back half of the year within Access?
David M. Sagehorn (CFO)
Good morning, Tim, it's Dave. Overall, I think we still continue to believe it will be positive, and that's one of the main drivers why we did increase the margin for the full year. We did see, you know, specifically as it relates to telehandlers, you talked about those being down a little bit. We did see a nice rebound in orders in the quarter for telehandlers, but I still think for on a full year basis, that we're gonna see a more favorable mix than we saw last year.
Tim Thein (Analyst)
Okay, got it. And just on sticking with Access, the pricing, I know you called that out again in terms of the continued pricing challenges, I guess. But I noticed that that was omitted in the 10-Q in terms of quantifying the pricing impact. I'm just curious if you could maybe update us on that. I know that the comps are getting easier, so that helps, but maybe just update us in terms of the expectations on the pricing side for Access. Thank you.
David M. Sagehorn (CFO)
Sure. I have to dial back a little bit and refresh myself on the first quarter, but we certainly have been talking about pricing for a while now. And I think the dynamics that we saw in the quarter were largely a continuation of what we really have seen for the past, probably year plus in the market. As you know, the market's been down, especially in North America, it's going on its third year, the market overall. And historically or typically, what we would see is pricing generally swing more towards the favor of the rental companies. I think as we see the market recover, as replacement demand does pick back up, I think our expectation anyway would be that we will see some improvement for pricing.
Charlie Brady (Analyst)
But as we look at our outlook for fiscal 2017, that does reflect a continued weaker price environment for on a full year basis compared to fiscal 2016.
Tim Thein (Analyst)
I appreciate the time. Thank you.
David M. Sagehorn (CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Jamie Cook of Credit Suisse. Please go ahead.
Jamie Cook (Analyst)
Hi, good morning. I guess a couple questions. One, you know, the backlog in the quarter for Access was pretty strong. You know, I guess my question is, you know, can you just talk broadly, I guess, across product line within Access, how we're thinking about lead times, whether or not they're, you know, getting extended and how you're thinking about production in 2017, are there opportunities to take production up? And then second, just to follow up on Tim's question, can you just give more color on the improvement you talked about in used? And then if used continues to improve, at what point would you expect new pricing to improve? Thanks.
Wilson Jones (CEO)
Jamie, good morning. I'll start, and Dave, you can add some color as we go here. From a backlog standpoint and Access, the product lead times, we're in good shape today. Our sales and inventory operations planning process is robust, and we adjust those production rates as we go. I think what we're gonna learn a lot in the next couple of months, May, June, to really understand how robust the market's going to be and stay or be in place going forward. So we do adjust production levels by models as again the orders move and JLG Access segment, they're very nimble at moving those production lines. So today we're pretty well within all lead times of our customers' expectations.
Jamie Cook (Analyst)
So, just to be clear, is it like 60 days, a couple of months? And then again, what does your guidance imply for production in 2017?
Wilson Jones (CEO)
Yeah, those lead times vary by product line, Jamie. So the higher volume, the 40-foot, the 60-foot AWPs, kind of the center of the fairway, if you will, of Access. Those are anywhere from 6-8 weeks.
Jamie Cook (Analyst)
Okay.
Wilson Jones (CEO)
As you get into the ultra booms, will be a little longer lead time than that. And then, telehandlers are pretty well in line with what you would see our work platforms in that 6-8-week time frame.
Jamie Cook (Analyst)
And then, sorry, production for this year, the assumption?
David M. Sagehorn (CFO)
So if you recall, last year, Jamie, we did a pretty significant reduction in inventory throughout the course of our fiscal 2016, so our production levels were low. As we came into the year, we did talk about an expectation that we would benefit from a little better absorption in fiscal 2017, and that's still the thinking.
Jamie Cook (Analyst)
Okay, but just to be clear, as I just want to make sure I'm understanding the takeaway here. So lead times seem pretty good right now, I guess, but if the order strength continued into your third quarter, there could be opportunities to take production probably up further, in particular in the bigger booms and stuff like that?
Wilson Jones (CEO)
... Yeah, the answer to that question, Jamie, is yes. They're, like I said, they're very nimble and can adjust those production levels, and they do that evaluation through their weekly sales and inventory operations planning process.
Jamie Cook (Analyst)
Okay, sorry. And then last, just to follow up on the used pricing, and then at what point would you expect to see new if used continues to improve? And I'll get back in queue after that.
David M. Sagehorn (CFO)
Yeah, we have seen better used pricing in the market. I think you've heard some of the publicly traded rental companies comment similarly on that. Overall, that certainly is a good sign because I think that's one of the components that the rental companies look at as they're looking at fleet replacement and/or fleet expansion. So I think it's really gonna depend upon the timing and the cadence of the orders and the market pickup from the rental companies. Because that, again, back to historically, what you would see is, as the market for new equipment picks up, that's generally when you see a more favorable pricing environment for the OEMs.
Jamie Cook (Analyst)
Okay, great. Thank you. I appreciate the time. I'll get back in queue.
David M. Sagehorn (CFO)
Thank you.
Wilson Jones (CEO)
Thanks, Jamie.
Operator (participant)
Thank you. The next question is from Charlie Brady of SunTrust Robinson Humphreys. Please go ahead.
Charlie Brady (Analyst)
Hey, thanks. Good morning, guys.
David M. Sagehorn (CFO)
Good morning.
Charlie Brady (Analyst)
Just on the pricing theme, switching over to maybe the fire business, can you remind us when that price increase went into effect? And kind of within the second quarter, what you think that you know the impact of not having that price increase in place, the impact of margins on that?
David M. Sagehorn (CFO)
Charlie, the pricing increase went in effect February one, and given the backlog that we have in that segment, we won't see the impact of that until our fiscal 2018.
Charlie Brady (Analyst)
Okay, so that pricing for the rest of the second half then, still under a pricing pressure from the bookings already in backlog then.
Wilson Jones (CEO)
I wouldn't say pricing pressure, Charlie. They've been very disciplined in their pricing in Fire & Emergency, and last two years now, this is the third year in a row of a price increase and basically holding that price. So backlog that they have in place is in good shape. This is, you know, about going forward and normal increases as we go year over year.
Charlie Brady (Analyst)
Yeah, I guess what I'm trying to get to is because the mix of the airport stuff was down, and that generally carries better margins, and the margins in the quarter, despite airport being down, were still pretty good. But you're also talking about pricing pressure. So I guess I'm just trying to really tease out the operational efficiency gains that you guys have had on a run rate basis, and kind of what that means to margins, you know, even farther down the road.
David M. Sagehorn (CFO)
Actually, Charlie, we were pointing to pricing as being a positive to the quarter.
Wilson Jones (CEO)
Yeah, there's-
David M. Sagehorn (CFO)
Not a pressure.
Charlie Brady (Analyst)
Okay, sorry, my mistake. Read that wrong. Let me switch gears then. FMTV, just a quick one on that, on that recompete product, is that gonna be the government's technical data package as it was last time around, or has that changed, where you're putting your own package in there?
David M. Sagehorn (CFO)
Well, this historically was a government technical data package. As part of the contract, we need to keep it up for any changes that have been made over the course of our number of years with the program. As part of the recompete, the government is looking to do some different things with the trucks, so there is going to be some-
Wilson Jones (CEO)
Enhancements
David M. Sagehorn (CFO)
... enhancements to those. Thanks, Wilson. And the government, similar to the JLTV program, will have the right to procure the interest in those if the OEMs are interested in offering that to the government.
Wilson Jones (CEO)
That process that was in the JLTV is in this FMTV recompete as far as the technical data package.
Charlie Brady (Analyst)
Okay, got it. Thanks.
David M. Sagehorn (CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Mig Dobre of Robert W. Baird. Please go ahead.
Mig Dobre (Analyst)
Yes, good morning. Thanks for taking my question. I just want to go back to Access Equipment. You know, the orders here were, frankly, better than what I expected. And now that I'm looking halfway through fiscal 2017, your orders, your combined orders were up something like 1%. Your backlog is in the best shape it's been in, you know, a couple of years. And I guess I'm wondering, from your perspective, in terms of orders and backlog, how are you tracking versus your initial expectations for fiscal 2017? And I get it that it might be still a little bit early as to comment as to what customers are gonna do going forward, but I'm trying to get a sense here if things are indeed getting better or if it's just sentiment.
Wilson Jones (CEO)
Mig, I think things have improved. I think, as we've said, before, positive sentiment, much more positive sentiment in the market. We said it that we did a little bit better than we expected, and, Access is part of that explanation. I think, as I mentioned to Jamie on her question, we've said this several times, it's May and June that really are the kind of the proving months for us. Those are the heavy times, and we're looking forward to getting in those two months. And again, we're certainly planning on being a big part of the market during those two months and participating, and if things can improve, that's good. We're certainly cheering for that, but we're also trying to be realistic.
Charlie Brady (Analyst)
As you know, this market can change very fast, and we gauge the same question you do. Is it sentiment, or is it really real action? We have seen better action, but we're not ready to say it's, you know, full action, I guess, is the way I'd describe it yet.
Mig Dobre (Analyst)
All right. Then I guess my follow-up, switching to the Defense segment. You know, at your Analyst Day, you talked about targeting $1.72 billion.
Charlie Brady (Analyst)
... of sales as we look into, call it fiscal 2018 and 2019. There are some moving pieces here. I'm not sure that we've gotten any more clarity on the additional M-ATV orders, but knowing what you know today, is that range still appropriate as we look at 2018 and 2019?
Wilson Jones (CEO)
Yes, it is, Mig. Today, if you look at our backlog, plus the adding in the FHTV contract that was not in our March 30 backlog, we're looking at a little over $1 billion in Defense for 2018, that's in backlog. So we still feel comfortable at that 1.7 number. And again, as I mentioned in my prepared remarks, we're having some really good discussions internationally. We haven't booked any of those orders yet, but we like our position there.
David M. Sagehorn (CFO)
What I would just-
Wilson Jones (CEO)
Thanks.
David M. Sagehorn (CFO)
Just to clarify on that, in terms of the outlook, the 1.7-2, I guess I would say that that's, that range is still applicable. And what we also said at the Analyst Day was, while we've got a meaningful quantity of M-ATVs this year, we probably don't need to rely as heavily on those in the next few years.
Wilson Jones (CEO)
That's a good point. And also, you know, we sometimes just have the perception that's just M-ATVs internationally. We're also offering our other product lines from a Defense standpoint, the heavies. There's opportunities for those in the international community, too.
Mig Dobre (Analyst)
Mediums, right?
Wilson Jones (CEO)
Yeah, mediums as well.
Mig Dobre (Analyst)
All right. Thank you.
Wilson Jones (CEO)
Thanks, Mig.
Operator (participant)
Thank you. The next question is from Jerry Revich of Goldman Sachs. Please go ahead.
Jerry Revich (Analyst)
Hi, good morning, everyone.
Wilson Jones (CEO)
Jerry.
David M. Sagehorn (CFO)
Jerry.
Jerry Revich (Analyst)
Wilson, can you talk about within the Fire & Emergency industry, has the consolidation over the past couple of years helped at all with competitive discipline? You know, over the years, it's been tough for anyone not named Pierce to earn a reasonable margin in that business, and I'm wondering, post the consolidation, do you think the margin structure for the industry could start to improve?
Wilson Jones (CEO)
Well, first of all, thanks, Jerry. I think that was a compliment to our Pierce team, so thank you for that. You know, when you talk about consolidation, it really has. Meaningful consolidation has just started. You've seen a couple of companies that have added two or three companies that now are making them a little more significant in size. So I think time will tell. We're certainly glad to see more companies consolidating, especially publicly traded companies. We think that will help drive better discipline from a pricing standpoint in the market. But I think it's a little early at this point, as the two that have started some consolidation really are barely into it.
Charlie Brady (Analyst)
We'll learn more as we go here, but that's certainly something we hope we see is a little more responsible pricing in the marketplace.
David M. Sagehorn (CFO)
And Jerry, regardless of that, as Wilson said, we've been on a cadence where, you know, we're very focused on pricing discipline in our Fire & Emergency segment.
Jerry Revich (Analyst)
And in terms of, I appreciate that it's early, are you starting to see some positive signs on the bid activity? Because presumably, that's started to play out to some extent.
Wilson Jones (CEO)
You know, again, Jerry, I'd say it's early. We're evaluating that, but there's nothing that I could say is a really positive trend at this point. And again, I think it's just because it's early and there's still a, you know, this is speculation on my part, but my guess is there's still a lot of integration activities going on in these companies. And I think, again, in the next year to 18 months, I believe we'll be able to see, be able to evaluate a lot better.
Jerry Revich (Analyst)
Okay. And last I could-
David M. Sagehorn (CFO)
Jerry, we got FDIC today. You can pop down there and see what's going on. So I'm sure a lot of activity.
Jerry Revich (Analyst)
Sounds good. And then in access equipment, can you just talk about what you're seeing in terms of demand trends in Europe and utilization rates there? How does the recent cadence of activity in Europe compare to what we've all seen in the U.S.?
Wilson Jones (CEO)
I would say it's similar, Jerry. We, you know, Europe continues to be, as we described, fairly solid, and it's the normal pockets that you would think of. The utilization rates are doing well. I think there's still, there's still some pricing concerns around Europe. Again, I think it's, as that market's coming back and companies are starting to fleet up a little bit more, that the pricing is getting a little more competitive in the rental space.
Jerry Revich (Analyst)
Thank you.
Wilson Jones (CEO)
Thanks, Jerry.
David M. Sagehorn (CFO)
Thanks, Jerry.
Operator (participant)
Thank you. The next question is from Ann Duignan of J.P. Morgan. Please go ahead.
Tom Simonitsch (Analyst)
Good morning. This is Tom Simonitsch on behalf of Ann. Just a couple of follow-ups on the earlier questions on access, mix, and pricing. Sorry if I missed it, but how did the breakdown of second quarter sales compare to your expectations for telehandlers and aerials? And, similarly, can you give more color on the pricing environment in telehandlers compared to AWP in the second quarter?
David M. Sagehorn (CFO)
I, from a product standpoint, I'd say the quarter played out largely as we expected. We did make a comment about telehandlers being down, and especially in Europe, when where we made the announcement previously that we were gonna be streamlining the telehandler product lineup. We did expect to see some lower sales there, and that played through. In terms of pricing from a various the various product lines, it's something that we typically don't comment on. But again, I guess what I would say is, we did see a continuation of a the challenging pricing environment that we've seen over the past year to year and a half in that segment.
Tom Simonitsch (Analyst)
... Okay, thank you. I'll pass it on.
David M. Sagehorn (CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Nicole DeBlase of Deutsche Bank. Please go ahead.
Nicole DeBlase (Analyst)
Yeah, thanks. Good morning, guys.
David M. Sagehorn (CFO)
Hi, Nicole.
Nicole DeBlase (Analyst)
My question is just around JLTV. I know you guys said that you shipped a little bit less than 20% of the international M-ATVs in the quarter, but I'm curious to know what the shipments looked like for JLTVs and how the ramp looks in the third quarter and the fourth quarter.
David M. Sagehorn (CFO)
Okay, Nicole, you hit on both JLTVs and M-ATVs there. So just to clarify, which one are you interested in?
Nicole DeBlase (Analyst)
So I know you gave M-ATV on the call, how much shipped in the quarter? I'm interested in what JLTV looked like.
David M. Sagehorn (CFO)
We did see a JLTV ramp in the quarter. But if you look on a full year basis, from a revenue standpoint, and we've got under the JLTV program, we have both vehicles as well as non-vehicle contractual deliverables under that. And about 60%-65% of our JLTV revenues will come in the second half of the year.
Nicole DeBlase (Analyst)
Okay, got it. That's helpful. And then, switching gears to Commercial, I understand some of the margin issues that you guys have been facing in the first half, but I guess, what does the progression look like in the second half of the year? And what's your level of confidence that you will be able to ramp margins back up in the segment?
David M. Sagehorn (CFO)
Sure. The second half of the year, as Wilson commented on, what we are seeing or expecting a more, a steeper ramp than we have seen in the prior years. And then in terms of our ability to deliver our expectations for the third... I'll start with the third quarter. The backlog is up year-over-year, so that certainly is a good sign. And what it's gonna come down to really is just that throughput through the factories. Absorption needs to be better, and it will be as we ramp up production here, second half of the year, and then mix. We talked about the second quarter and the first half really being a weaker mix on refuse collection vehicles.
Charlie Brady (Analyst)
As we look at the second half of the year, we expect, based on what we're seeing in the backlog, a stronger mix of RCVs. So, those two combined should help, deliver the stronger margins that we're expecting to see in the second half of the year.
Nicole DeBlase (Analyst)
Okay, and what's actually driving that step up in refuse backlog?
David M. Sagehorn (CFO)
Well, it's really the goes back to the. We'll call it the air pocket of orders in the first quarter.
Nicole DeBlase (Analyst)
Mm-hmm.
David M. Sagehorn (CFO)
We talked about it on the last call, that we saw some weakness in refuse orders in that first quarter. We've heard everything from people were kind of taking a pause around the election to just timing of budgets-
Nicole DeBlase (Analyst)
Calendar year-end.
David M. Sagehorn (CFO)
Calendar year-end. But where we did see some positive this quarter was that pickup in the order pace year-over-year was quite a bit stronger for refuse collection vehicles, especially year-over-year in the second quarter. So I think it appears that a fair amount of this could be timing. Obviously, we'll need to see the next quarter or two play out, but that's kind of our thinking right now.
Nicole DeBlase (Analyst)
Okay, thanks. I'll pass it on.
David M. Sagehorn (CFO)
Thanks, Nicole.
Operator (participant)
Thank you. The next question is from Mike Shlisky of Seaport Global. Please go ahead.
Mike Shlisky (Analyst)
Hey, good morning, guys. I wanted to first-
David M. Sagehorn (CFO)
Hi.
Mike Shlisky (Analyst)
Hey, I wanted to first touch on the FHTV announcement you had in the last couple of weeks, the contract that was announced. I guess I was curious, just wanted to confirm first that almost all of that is fiscal 18 revenue, and maybe a small amount in fiscal 19. But also more importantly, I was kind of looking at what could the margins be on this business? I mean, I think you're gonna be delivering what is essentially brand new equipment that's been refurbished, but is it more parts and service, or is it a higher margin business for you than the segment average, or is it a lower margin business for you? You know, for that particular contract. Thanks.
David M. Sagehorn (CFO)
Mike, in terms of the sales cadence, you're right, it's largely fiscal 18, maybe a little-
Mike Shlisky (Analyst)
Yeah
David M. Sagehorn (CFO)
... spilling into 19, but I think I would say it's fiscal 2018. And then in terms of the margins on the FHTV program, specifically, as you know, that's something we don't go into. What I would say is that does support our outlook that we talked about at the Analyst Day for the segment overall of high single digit margins for the next few years.
Mike Shlisky (Analyst)
Okay. And just also, on the, on the broader Defense outlook here as well, great, great, great margins in the, in the quarter, and, you know, I think your guidance kind of implies that you'll stay, you'll stay at that 10%, maybe a little higher than that for the back half of the year. Is the uptick you've put in your guidance here, is that kind of a permanent change to your efficiencies and cost structure? I mean, is it, is it, is it kind of relevant for fiscal 2018 and fiscal 2019 to kind of bump up our, our overall margins a bit just on your efficiencies? Or is this due to what you've currently got in your, in your mix and execution on these exact programs happening this year only?
David M. Sagehorn (CFO)
Yeah, I think it certainly is a reflection of what we have in the backlog for 2017. You know, we've. If you look at the first half of the year, we delivered about 40% of that segment's sales. We got about 60% in the second half. So it's really gonna come down to execution in terms of how the team performs there. We're confident in the Defense segment. We've got a great group of team members there, but there is a fairly significant ramp-up in the second half of the year. We are benefiting, as you know, from a sizable M-ATV order. As we think about the coming years, as I mentioned earlier, we're probably not going to need to be as quite as reliant on-...
Charlie Brady (Analyst)
on M-ATVs to fill in in the coming years. So, I guess I'll point you back to that high single-digit margin for the segment for the next few years.
Mike Shlisky (Analyst)
Okay, great. Thanks, guys.
David M. Sagehorn (CFO)
Thank you.
Wilson Jones (CEO)
Thanks, Mike.
Operator (participant)
Thank you. The next question is from David Raso of Evercore. Please go ahead.
David Raso (Analyst)
Hi, thank you. I'll try to be quick here. The actual sales guidance increase in Access, maybe I missed it in all the commentary on it. What actually drove the increase in the sales guide, be it geographic or whatever it may be?
David M. Sagehorn (CFO)
What we did, David, is tightened the range, really. It just took it up to approximately the high end of the range, and I think that's a function of what we did see in the first half of the year in terms of sales as well as orders. And where we're probably seeing better results or expectations on sales than we may have previously thought is really in North America. So that has been a positive. And, you know, if you're gonna think about a region of the world to have a little more positive outlook, that's a great region of the world to see that.
David Raso (Analyst)
Within that, a little more aerial and maybe of size versus teles? Because you bumped up, you know, officially, the numbers are, you bumped up the revenue $50 million with $25 million higher EBIT, so it's like a 50% incremental margin boost in the guide. Is it also a positive mix in North America?
David M. Sagehorn (CFO)
Yes.
Wilson Jones (CEO)
Yeah.
David M. Sagehorn (CFO)
Yeah, a positive mix overall, but certainly in North America as well.
David Raso (Analyst)
And again, maybe I missed this, I apologize. The savings on the restructuring and Access, can you lay out again the timing of those? Not the cost, the savings.
David M. Sagehorn (CFO)
Sure. The, call it $15-$20 million in fiscal 2018, and then we get to the full run rate in fiscal 2019.
David Raso (Analyst)
Okay, great. And second, you made the comment, less reliance on M-ATVs going forward. But as you know, you know, one of the anxieties around the stock is $1 of this year's earnings are the M-ATVs, right? So next year, if no new orders come in, you only have about 100 left to ship next year. So you're kind of from $1 to $0.10, let's call it, on M-ATV. So to make up that $0.90, and I appreciate you don't want to give the FHTV margins on the new contract, but can you help us maybe allay some concerns about how do I make up for that M-ATV year-over-year decline of, say, call it $0.90, if I don't get any more M-ATV orders?
David M. Sagehorn (CFO)
Yeah, well, we're not gonna go into a lot of detail at this time, David. I'll keep going back to what we said at the Analyst Day, and we still feel, I think, very comfortable with that, we believe this segment can deliver, call it, high single digit operating income margins for the next few years. In the, you know, the 2017 through 2019 time period that we talked about at the Analyst Day. There's a lot of moving pieces, and it's not all just M-ATV.
David Raso (Analyst)
And to that end, is there an update on the M-ATV negotiations or potential new orders that you can provide for us?
Wilson Jones (CEO)
Well, what we said, David, is we have not booked any new orders, and it's more than M-ATVs in the international community. There's other mediums and heavies that are in play here. But we like our position. We've had good discussions going forward, and we believe we're in good shape, but just haven't booked those orders yet.
David Raso (Analyst)
Okay, I appreciate it. Thank you very much.
Wilson Jones (CEO)
Thanks, David.
David M. Sagehorn (CFO)
Thanks.
Operator (participant)
Thank you. The next question is from Steve Barger of KeyBanc. Please go ahead.
Charlie Brady (Analyst)
Hey, good morning, guys. It's Ken Zener for Steve Barger.
David M. Sagehorn (CFO)
Okay.
Charlie Brady (Analyst)
First question is on Defense margins. It does look like, you are implying flat margins in the second half versus pretty strong margins in the second quarter. But with M-ATVs ramping, shouldn't mix be getting better? Just curious if you can square that with your guidance.
David M. Sagehorn (CFO)
Sure. As I said, I think on one of the earlier questions, we still have about 60% of the sales to secure or, or deliver in the second half of the year. And, it, it's really gonna come down to execution. So we, we have brought on a, a fair number of new employees as we've gone through the first two quarters of the year here. Part of that's to help the ramp-up of JLTV, part of that's to deliver the M-ATV order. It's not, again, all just M-ATVs. We are seeing a, a meaningful ramp in the JLTV program as well.
Charlie Brady (Analyst)
If you think about the second half of the year, we're probably gonna have a little lower absorption than in the first half because we were quite busy in this first half, building M-ATVs to sell in the second half of the year. If the team executes, there is an opportunity to do a little bit better than we're probably guiding to for the year.
Understood. And then I wanted to go back to, I think, a previous question that was asked, but I'll ask it in a, in a different way. Second half Access sales are implied to be down, call it, 8% or 9%, but backlog in the quarter was up 11% year-over-year. And you'd mentioned that lead times seem pretty flexible. So can you, again, just help me square the math there in terms of how we should be thinking about the guidance versus the strong backlog number this quarter?
Wilson Jones (CEO)
Well, what you have is, and we have had a great backlog. You know, we said we performed a little bit better than we expected in the first half. It goes back a little bit to what Dave was talking in Defense on execution. We've said it many times, May and June really determine where Access will finish. And if May and June are stronger, then that will lead us, should lead us to a better finish at Access. But we wanna be patient, we wanna work through that. The Access team is on point and working the market very well. And again, that's we're certainly cheering that they achieve that. But today, you know, we're going out with the guidance as we see it, and we don't wanna get ahead of ourselves.
Charlie Brady (Analyst)
All right. Then just one, I guess, a follow-up to that. I mean, with AWP decremental margins at 53% in the quarter, can you just explain why you have the confidence that second half sees margin growth, despite maybe some conservatism on the sales side?
David M. Sagehorn (CFO)
I guess I would caution you a little bit from looking at just a quarter decrementals. If you look at the first half as an example, I think the first half decrementals are 17%, so significantly better than what you're seeing in the second quarter. Couple things driving the second quarter decrementals, one is incentive compensation. So, taking up the outlook for the fiscal year in that segment, we actually had a little bit of a catch-up from the incentive compensation that we recorded in the first quarter. And if you dial back to last year, we were going the other way. So that kind of magnifies the impact of the incentive compensation adjustment. And in addition, with CONEXPO this year, we did have some higher trade show costs.
Charlie Brady (Analyst)
The other item I would add is, looking at the second half of the fiscal year, volumes certainly do pick up, just from a seasonality standpoint, so we'll benefit there from an absorption standpoint as well. So overall, I would say we do feel good about the margin expectations for that segment.
Perfect. Thanks.
David M. Sagehorn (CFO)
Thank you.
Wilson Jones (CEO)
Thanks.
Operator (participant)
Thank you. Once again, ladies and gentlemen, it is star one if you would like to ask a question. The next question is from Seth Weber of RBC Capital Markets. Please go ahead.
Seth Weber (Analyst)
Hey, good morning, guys.
Wilson Jones (CEO)
Hey, Seth.
Seth Weber (Analyst)
Wanted to go back to Charlie's question on Fire & Emergency. You know, you're looking for-- it looks like second half revenue should be up year-over-year, but pretty modest margin improvement, for the segment for this, for on a year-over-year basis, something like, you know, like a mid-teen incremental margin. I mean, is there some conservatism based on your 8.5, percent margin, outlook for Fire & Emergency for this year, given what you've been talking about with better pricing year-over-year and, and whatnot?
David M. Sagehorn (CFO)
Seth, I guess a couple things would come to mind. One is, we do have some international orders that, probably have a little bit of a different, margin dynamic than we typically would expect, and we'll need to work through that here in the, the second half of the year. That's probably, the big one. And then, you know, we were already making progress last year, so I think, just I'll call it the comps, maybe start to get a, a little tougher in terms of the leap and improvement that we're making. But I don't want to, you know, get the, the focus off of the improvement that the segment is making overall.
Charlie Brady (Analyst)
You know, they've had some very nice margin improvements in the last few years, and we're confident that they are on their, on the path that they need to be to hit that double-digit margin in the future.
Seth Weber (Analyst)
Okay. Thanks, Dave. And then, I guess, just bigger picture, I know it's early days on the JLTV, but conceptually, can you help us maybe think about how much experience with the program do you need to at some point, go back and revisit your margin targets, your internal margin targets?
David M. Sagehorn (CFO)
Sure.
Seth Weber (Analyst)
I mean, is that a, you know, eight-quarter event? I'm just trying to just handicap on-
David M. Sagehorn (CFO)
Yeah
Seth Weber (Analyst)
... how much experience you really need on that.
David M. Sagehorn (CFO)
Yeah, I think, you know, as we sit here today, it's probably late... We look at it every quarter. You know, we're required to do that from a GAAP standpoint, but I don't think we've seen enough yet to make any moves. And if I had to put a date on it, I would say probably late in fiscal 2018, we'd probably be the time when we may have enough experience under our belt to have some confidence to make a move if we felt necessary.
Seth Weber (Analyst)
Perfect. That, that's very helpful. Thanks, guys.
David M. Sagehorn (CFO)
Thank you.
Wilson Jones (CEO)
Thanks, Seth.
Operator (participant)
Thank you. The next question is from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead.
Ross Gilardi (Analyst)
Hey, good morning, guys. Thanks for fitting me in.
Wilson Jones (CEO)
Hey, Ross.
Ross Gilardi (Analyst)
I just want to ask, just back on Access and the competitive environment. You know, clearly, there've been some of, some other competitors really more active doing, well, one another, in particular, over the last year. Clearly, we're getting a lot of questions on, you know, JCB and, you know, what they're up to in the national rental companies and so forth. But I just wanted to get your general view on your ability to sustain market share over the next several years, you know, in this market and perhaps a slightly more crowded space.
Charlie Brady (Analyst)
If, you know, we get that pickup in replacement demand in 2018, and it's more modest, kind of, you know, maybe in a single-digit range, how comfortable are you that you can still grow, and with that type of trajectory?
Wilson Jones (CEO)
Well, I'll talk about the competitive environment a little bit, Ross, and then Dave, if you wanna talk about the growth environment and the margin side. You know, we have seen more entrants come in, Ross, that you're very familiar with. I would say that, you know, we believe that we keep doing what we do best at JLG, and that's really the customer experience, our Online Express with that electronic connection with our customers, and then performing with quality products on time, helping them, you know, do the important things they need to do in their business, we believe will keep us in a good position. Again, it's always about continuous improvement and executing to please those customers.
Charlie Brady (Analyst)
But there, there's gonna be a lot of pressure on supporting products in the marketplace, especially if it ticks up and some growth and replacement goes in. And we believe that helps us sustain a competitive advantage just because of our service footprint, our parts support, and again, those relationships that we've built over many years at JLG.
David M. Sagehorn (CFO)
Ross, in terms of an outlook, you know, I think you described it as a flattish market next year, is that-
Ross Gilardi (Analyst)
Slight, slight growth, Dave. Just kind of in a, like a 5%-ish. This is just a hypothetical number, but in a 5%-ish percentage type growth year, next year, if you got a modest bump in, you know, replacement demand, do you get your fair share? How confident are you that you can kind of sustain market share with, you know, with more competitors in the,
David M. Sagehorn (CFO)
I believe we do get our fair share. The team at Access, there's a lot of pride, there's a lot of competitiveness there, and you know, they are ready for the challenge, I guess I would say, and I'm sure they would say, "Bring it on.
Ross Gilardi (Analyst)
Yeah.
David M. Sagehorn (CFO)
We're not gonna get into specifics around 2018. We're gonna have to see how things play out here. Overall, yes, we do believe we would hold our fair share.
Ross Gilardi (Analyst)
Okay, and just lastly, steel. Is there anything you could say on that? Are you seeing more, you know, pressure? Did you see more pressure come through in Q2? Do you feel any more kind of comfortable with the second half outlook, relative to how you felt three months ago, or any commentary would be helpful?
David M. Sagehorn (CFO)
Yeah, we saw it continue to move up a little bit through the quarter. I think you read various views on where it's headed. I think our expectation for now is that it may not increase a lot through the remainder of this fiscal year, but it's probably not gonna come down a lot, either. And as we get, you know, another quarter down the road here, we'll have an assessment of whether we think it's gonna start to drift back down in 2018. I think there were some expectations that we were gonna start to see it drift back down in the summer, maybe later summer, but I think it seems like that may be pushing out a little bit, yeah.
Ross Gilardi (Analyst)
Got it. Thanks very much.
David M. Sagehorn (CFO)
Thank you.
Wilson Jones (CEO)
Thanks, Ralph.
Operator (participant)
Thank you. At this point, I would like to turn the conference back over to management for closing remarks.
Wilson Jones (CEO)
We'd like to thank all of you for participating on our call today. We're proud of our 100-year strong company and the efforts of our people. We look forward to speaking with you on the road, in Oshkosh, or during an investor conference. Thanks again for your time. Have a good day, everyone.
Operator (participant)
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.