Oshkosh - Q3 2014
July 29, 2014
Transcript
Operator (participant)
Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2014 Third Quarter Results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, VP of Investor Relations for Oshkosh Corporation. Thank you. Mr. Davidson, you may begin.
Pat Davidson (VP of Investor Relations)
Thank you. Good morning, everybody, and thanks for joining us. Earlier today, we published our third quarter 2014 results. A copy of the release is available on our website at oshkoshcorporation.com. Today's call is being webcast and is also 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 the website for approximately 12 months. Please refer now to slide two of that presentation. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.
These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All results stated on this call are for continuing operations, unless stated otherwise. Also, all references on this call to a quarter or year are to our fiscal quarter or fiscal year, unless otherwise stated. Our presenters today include Charlie Szews, Chief Executive Officer, Wilson Jones, President and Chief Operating Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, Charlie.
Charlie Szews (CEO)
Thank you, Pat, and good morning, everyone. We announced solid third quarter results today of $1.23 adjusted earnings per share. As expected, we experienced sharply lower Defense sales. However, we also achieved several significant milestones in the quarter. Specifically, our Access Equipment segment delivered quarterly sales above $1 billion to third parties for the first time ever. The turnaround that this segment has delivered since the depth of the recession is impressive, with third quarter operating income margin again reaching 16%. We believe we're on target to achieve our annual operating income margin target of 15% for this business in 2015. Additionally, our Commercial segment had a breakout quarter this quarter, with operating income margins reaching 8% for the first time since 2007.
You'll recall that we first deployed our MOVE initiatives at the Access Equipment segment and then deployed them to our Commercial and Fire and Emergency segments. The Commercial team is beginning to deliver on our MOVE initiatives, with improving production efficiencies and some strong new product launches in the third quarter. While our Fire and Emergency segment performance was down slightly relative to prior year, we are encouraged by improved production efficiencies on trucks that entered our assembly lines in June and July as we are executing to our strategic roadmap for the business. Also, in our fourth quarter, we expect a large volume of international deliveries in this segment, in part due to delays at various ports and other logistical issues that caused some deliveries to slip from the third quarter.
As part of the disclosures today, we are narrowing our adjusted earnings per share estimate range for the full year to $3.40-$3.55. This updated range is within our prior estimate range, and I would remind you, is above our original estimates for 2014. Among other items affecting our estimates, the Latin American access equipment and commercial markets are not quite as strong as in earlier quarters. Dave will talk more about the updated estimate range in a few minutes. Please turn to slide four for a discussion of our outlook. So we've sustained a strong focus on achieving our MOVE targets through 2015, but we have heard from several of our investors that it would be helpful to provide a bit more of a longer-term view.
So let me add some remarks on our positive outlook. Broadly speaking, our non-defense markets are improving, although not all are improving at the pace we expected during our 2012 analyst day. You may recall we had projected slow growth in many of our markets, and some we've seen very little growth. In fact, for us, the Australian access equipment market hasn't grown since 2012. But importantly, home markets in North America remain strong. These markets have been generally solid, and we expect them to continue their upward trend. That should allow us, in conjunction with our other MOVE initiatives, to drive improved results in 2015 and beyond. Let's talk about our other MOVE initiatives. They're delivering, generally ahead of, ahead of our 2012 analyst day expectations.
In particular, we are enthusiastic about the results with the optimized cost initiatives. Our teams are working hard and smart and are exceeding our overall targets for lowering our product, process, and overhead costs. And we expect this initiative to provide important incremental benefits beyond 2015 as we systematically work through all our products, business processes, and facilities company-wide. Our value innovation initiative picked up steam in 2014, and today we'll talk more about recent launches. We also have a steady pipeline of product launches in process for the next few years. And while we don't talk as much about our international expansion, international orders for our non-defense segments are up over 25% year-to-date, and would be higher, but the access equipment and commercial markets in Latin America have weakened recently.
Of course, in our Defense segment, we continue to pursue large international tactical wheeled vehicle orders and are encouraged about the progress we're making there. We'll comment more about that shortly. So what does that all mean? Despite the slow recovery in a number of our markets, we expect MOVE to deliver higher annual margins in our non-defense businesses for each of the next few years. And if we are fortunate to win some large international Defense business, we could enjoy some very good years ahead of us. Strong results could also provide incremental cash flow to further enhance our options to drive shareholder value. Let's now take a deeper dive into performance of each segment, turning to slide five. Defense results for the third quarter reflect the trend of lower U.S. government defense spending that we have been experiencing over the last few years.
We recently completed our previously announced workforce reduction, lowering our staffing in the segment by an additional 30% to match similarly lower production rates beginning in the fourth quarter. We also recently completed a production shutdown to streamline workflow in our principal manufacturing facilities to support a full range of large and short production runs for multiple product lines. This effort also involved closing or repurposing ancillary facilities. As a result, we have optimized our operations to manage production requirements for potential future contract awards, including the Joint Light Tactical Vehicle, Canadian MSVS program, and international M-ATVs, among others. Turning to the JLTV program, in early July, we successfully completed 200,000 reliability, availability, and maintainability, or RAM miles, to support JLTV EMD testing requirements.
We also attended the government's industry session to discuss the production phase draft request for proposal, or RFP, that was published at the end of June. We continue to expect to receive the production phase final RFP later this fall, with a contract award decision during the summer of 2015. We believe that we are offering the U.S. government and our troops a JLTV platform with unparalleled vehicle performance, protection, and reliability at an affordable cost. We believe Oshkosh is the best value, low-risk solution for the Joint Light Tactical Vehicle. We also remain optimistic regarding our prospects for international programs. In particular, we believe we are well-positioned for M-ATV sales in several countries, primarily in the Middle East, where our vehicles have performed exceptionally well in trials. However, as we said last quarter, the timing and quantity of units that may ultimately be ordered remain uncertain.
In Canada, our MSVS test units recently completed testing by the Canadian government as part of the MSVS project competition. We expect an announcement on the MSVS project during the summer of calendar 2015 as well. Overall, the Defense team is working hard to balance the need to right-size the business to match current demand, while maintaining the capacity to deliver on significant potential contract awards. I'd like to thank the Defense team members for their efforts. I'll turn it over to Wilson now to discuss our non-defense segments. Please turn to slide six.
Wilson Jones (President and COO)
Thank you, Charlie. Good morning, everyone. As Charlie noted, the Access Equipment segment delivered record sales in the third quarter. It also delivered record quarterly operating income of $166.8 million. These results were achieved with the EAME market still down about 50% from its prior peak. The team at Access Equipment is quite simply doing an outstanding job balancing pricing, volume, and cost reduction initiatives to deliver strong results. Year-to-date, Access Equipment incremental operating income margins of 32% demonstrate the success of the team's efforts. Looking at performance in the quarter, the Access Equipment segment recorded sales growth of 10.4% compared to the prior year, or 13.2%, excluding military telehandler contract sales in the prior year quarter.
From a regional standpoint, sales were up everywhere, with the exception of Latin America, where, as Charlie indicated, we did see a slowdown in the market. The EAME and Asia regions reported their highest growth rates, which we view as a positive sign of the continued recovery of the EAME market and the significant long-term opportunity in Asian markets. The North American market has continued to be strong and is core to the segment's performance. Independent rental company activity has continued to grow, and rental fleet metrics in this region remain favorable. Utilization rates are strong, fleet age remains elevated, and used equipment values remain high. Overall, we believe that global market conditions will continue to slowly improve, and together with our MOVE initiatives, will allow this segment to sustain sales and margin expansion into 2015 and beyond.
The new products debuted at ConExpo in March have been well received by the market. We've been busy shipping 185-foot Ultra Booms and have received very positive feedback on the units from operators. We believe this product provides unmatched stability at height and the largest work envelope of any self-propelled boom lift in the world. Customers are also excited to be taking delivery of telehandlers from our new RS Series, which started shipping just last month, as well as two different models of Compact Crawler Booms, the X500 and X600. The crawler booms are European products, which we believe will carve out new opportunities in the North American market. Finally, I'd like to conclude my discussion of the Access Equipment segment with a comment on this segment's backlog. Backlog is down year-over-year, all in North America.
But as we've said previously, we've seen a shift in order patterns over the past year or so to a more order-as-needed approach instead of customers placing large orders to secure OEM line slots. We saw a similar backlog comparison at the end of our first quarter. Please turn to slide seven for some comments on our Fire and Emergency segment. In previous quarters, we've talked about our efforts in this segment to drive operational efficiencies and higher operating income margins. We did not deliver the benefits of these efforts in this quarter's results, but we believe the Fire and Emergency team is turning the corner as we begin to see positive trends late in the quarter in a number of key operational indicators. This gives us confidence that we'll report better results from this segment in the final quarter of 2014 and throughout 2015.
Additionally, we expect the high volume of international orders in the backlog to help drive higher sales in the fourth quarter to close out the year. The U.S. fire apparatus market had been in recovery mode for much of the past year, but industry data for the March quarter, the most recent available, showed that the market took a step back. We've heard that some municipalities held back on ordering new equipment as they sought to manage their snow removal budgets in the tough winter. While this may impact the timing of some stock unit sales in 2014, we don't believe this step back in the market is a trend. Municipal tax receipts have continued to recover, which we believe bodes well for future fire apparatus demand. Let's turn to our Commercial segment. Please turn to slide eight.
As expected, we saw significant year-over-year sales growth in the Commercial segment in the third quarter, led by sharply higher concrete mixer sales, which was partially due to weather-related shipment delays in the second quarter. Mixer orders were strong again in the third quarter. What we're really pleased about in this segment, however, is the 8% operating income margin the Commercial team delivered this quarter. Despite a concrete mixer market that is still nearly 40% below its normalized level on a unit basis, we delivered our strongest operating income margin for this segment since 2007. Higher sales levels certainly contributed to the higher operating income margins, but the Commercial team has also improved operating efficiencies this year, and the results are beginning to show. In the refuse collection vehicle market, we continue to see a market that's not moving much.
We recorded a nice increase in RCV sales in the third quarter, but still only expect to see low single-digit percentage unit growth for the full year. Overall, we're pleased with the progress the Commercial segment has made, but we know there's more work to do. I'll turn it over to Dave to review our financial results for the quarter and comment on our expectations for 2014. Please turn to Slide nine.
Dave Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. Consolidated net sales for the third quarter were $1.93 billion, a 12.3% decrease from the third quarter of 2013. Sales growth of 10.4% in the Access Equipment segment and 27% in the Commercial segment was more than offset by a 46.5% decline in Defense segment sales, which we expected. Consolidated adjusted operating income for the third quarter was $175.3 million, or 9% of sales, compared to operating income of $225.6 million, or 10.2% of sales, in the third quarter of 2013. Higher operating income in the Access Equipment and Commercial segments wasn't enough to offset the decline in Defense segment operating income, which was impacted by the expected overall lower sales volume and lower quantities of higher-margin M-ATV sales in the current year quarter.
Adjusted operating income in the current year quarter excludes two items in the Defense segment. First, results exclude the benefit of a curtailment gain associated with the reduction in other post-employment benefit, or OPEB, liabilities resulting from the June 2014 workforce reduction. Second, results also exclude a charge related to adjustments to reimbursable costs associated with reduced OPEB expense under historical cost-plus contracts. These two items netted to a $1 million reduction in operating income on a GAAP basis. Additional information related to the segment third quarter financial performance can be found in the appendix of this morning's slide deck. Adjusted earnings per share for the quarter was $1.23, compared to earnings per share of $1.67 in the third quarter of 2013.
The decrease in earnings per share was driven by the impact of lower Defense earnings in the current year quarter and a higher tax rate due to discrete tax items recorded in the prior year quarter. Current quarter adjusted results exclude the impact of the other post-employment benefit items in the Defense segment discussed earlier. Finally, we are announcing today that our board of directors has approved a quarterly dividend payment of $0.15 per share, which will be payable on August 28 to shareholders of record as of August 14. Please turn to Slide 10 for a discussion of our updated outlook for 2014.
As Charlie noted, we are narrowing our full-year Adjusted Earnings Per Share estimate range to $3.40-$3.55. This is within the previously communicated estimate, estimate range and above our initial estimate range for the year. Specifically, within the Access Equipment segment, we're making a slight adjustment to the sales estimate range, largely to reflect the slowdown in Latin America that we've seen recently.
...We are also updating the operating income margin estimate to approximately 14.6%, the midpoint of the previous estimate range, reflecting the sales outlook adjustment and higher operating expenses to support continuing new initiatives. The 14.6% operating income margin would represent a 210 basis point improvement over 2013. In the Defense segment, we are adjusting the operating income margin estimate to approximately 4.75%, the high end of the previous range. In the Fire and Emergency segment, we are reducing the sales estimate from approximately $800 million to $775 million, and adjusting the operating income margin estimate to approximately 3.5%, the low end of the previous range, but a 50 basis point improvement from 2013.
The change in sales estimate largely reflects a reduction in stock unit sales based on the pause we have seen in the timing of of municipalities placing orders. The lower operating income margin estimate is a result of a lower sales estimate and the timing of benefits from operational improvements. And finally, in the Commercial segment, we are adjusting the sales estimate range to approximately $850 million, the low end of the previous range. We are also adjusting the operating income margin estimate to approximately 6%, a 60 basis point improvement from 2013. The change in sales estimate largely reflects the timing of orders and chassis deliveries for concrete mixers and a slow growth rate for RCVs. Reduction in operating income margin from the previous estimate reflects the lower sales estimate.
Our full year estimate of corporate expense and estimated tax rate remain unchanged from our prior estimates. While we believe our free cash flow over the course of a cycle will approximately equal net income, we are estimating that free cash flow will be approximately $100 million for 2014. The difference between our 2014 estimated net income and free cash flow is mainly due to a significant reduction in performance-based payments as a result of lower Defense sales and expected higher inventory levels at September 30, 2014, as we look to have a more balanced production schedule in 2015. Finally, our assumption is that we'll have a full year average share count of 86 million, which remains unchanged from the prior assumption. I'll turn it back to Charlie for some closing comments.
Charlie Szews (CEO)
Thanks, Dave. We are pleased with our progress executing our MOVE Strategy. This team is delivering improved results in our non-defense segments this year. We are effectively managing a significant defense downturn, and we have a positive outlook for 2015, where we continue to target 2015 EPS of $4-$4.50 per share. We also believe MOVE will continue to deliver for shareholders beyond 2015. That concludes our formal comments. We are happy to answer your questions, so I'll turn it back over to Pat to get the Q&A started.
Pat Davidson (VP of Investor Relations)
Hey, thanks, Charlie. I'd like to remind everyone to please limit their questions to one plus a follow-up. After the follow-up, if you have additional questions, please get back in queue. Stacy, let's begin the question-and-answer period.
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. One moment, please, while we pull for questions. Our first question comes from Charley Brady with BMO Capital Markets. Please proceed.
Charley Brady (Director of Equity Research)
Hi, thanks. Morning, guys.
Charlie Szews (CEO)
Morning, Charley.
Charley Brady (Director of Equity Research)
Just talk about access for a minute. And I guess, can you maybe give us a little more granularity on the regions as far as North America, and how much Europe and Asia were actually up? And as a follow-up to that, can we just kind of hone in on what you're seeing out of the independents? I mean, what kind of growth are you seeing there? And given the reduction in the kind of the guidance for 2014, are you still comfortable with the initial 2015 guidance you put out there at the Analyst Day?
Charlie Szews (CEO)
Okay, just a few questions there, Charlie. As we said in our prepared remarks, you know, most of the growth was in Europe, Pac-Rim. North America was up. Independents volume is up very nicely year over year, a good solid percentage point. So the independents are clearly coming back. And you know, in terms of 2015, for access equipment, obviously in October, we'll give you our specific estimates for that business, but still looking positive right now.
Charley Brady (Director of Equity Research)
Can you put some numbers around that as far as growth rates you saw from independents, growth rates in the regions?
Charlie Szews (CEO)
Independents, growth rates were up, you know, strong double digits. Again, you know, you know, Europe, Pac-Rim, very high percentage growth rates. You know, good percentage of the overall growth in our segment came from those two regions.
Charley Brady (Director of Equity Research)
Was North America up high single, mid-single, low double?
Charlie Szews (CEO)
Year to date, if you look at North America, you recognize we got a 3% sales headwind from military telehandlers being, you know, not being in our numbers anymore. As that contract expired, we're up double digits.
Charley Brady (Director of Equity Research)
Thanks.
Operator (participant)
Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please proceed.
Jamie Cook (Managing Director of Equity Research)
Hi, good morning. I guess a couple questions. One, you know, just on the incrementals within Aerials, I understand the first half of the year were strong, and year-to-date, your incrementals are still pretty good. But was there anything, you know, unusual in that that was impacting the margins or incrementals, the incrementals, recognizing your overall margins were strong? Just because one of your peers also put up some, you know, lower margins, I guess, relative to what the market would expect. And then my second question just relates to your free cash flow guide. As you know, you cut it from $200 to $100. I don't know if you answered that in your prepared remarks, but if you could just help on that basis. Thanks.
Charlie Szews (CEO)
Sure, Jamie. I'll take the first question, then Dave will pick up on the second. Sixteen percent quarterly OI margin for Access Equipment is a very good margin for us historically. In any one quarter, we have a lot of variables that are impacting our margins, like customer and product mix. Those were very significant this quarter. New product development spend, inefficiencies, new product launches from new product launches, et cetera. So we're primarily focused on the annual margin progression. As you said, our incrementals this year are up, year-to-date, 32% incremental margins. With our target this year, 14.6%, or our current estimates of 14.6% for the year, that's really close to our target for next year of 15% OI margins.
We think our progression is really right on plan.
Jamie Cook (Managing Director of Equity Research)
But I guess just, I mean, you mentioned mix, which, I mean, your AWP sales were pretty strong in the quarter, which are higher, I think, than teles or whatever. So, I mean, is there any way you can break out sort of, you know, what the spend was or the inefficiencies to help us? And then, you know, this year, you'll, based on your guidance, you'll still, you know, sort of exceed your, I think, a normalized incremental for that business of 20%-25%. Is that how we should think about next year?
Charlie Szews (CEO)
I didn't quite hear your second question, but-
Jamie Cook (Managing Director of Equity Research)
I guess I feel like if you just take your guidance for the year on aerial work platform margins, you know, it still implies, if you look at it for a year, you know what I mean? A good incremental margin, I think, in like the mid-30s or so. Is there any reason-
Charlie Szews (CEO)
Right.
Jamie Cook (Managing Director of Equity Research)
In normalized incremental in AWPs, I would think is like 25% and change. I mean, there's no reason to believe we shouldn't normalize sort of to the mid-20s next year, just given the base that you have in 2014.
Charlie Szews (CEO)
Well, again, we're not going to give guidance for next year, all right? But I, I think in our prepared remarks, we did say that we expect to continue to deliver, you know, improved margins, you know, in our non-defense segments each year for the next few years. All right?
Jamie Cook (Managing Director of Equity Research)
Okay.
Charlie Szews (CEO)
Our initiatives are clearly delivering results, and we would expect in every segment to have some benefits. That would say that we'd have, you know, decent incremental margins going forward. You know, in this quarter, we did have a disproportionate mix of sales outside North America in terms of-
Jamie Cook (Managing Director of Equity Research)
Okay.
Charlie Szews (CEO)
That does translate into lower operating income margins for us, because in those smaller markets, you've got higher SG&A costs, et cetera. We've also got some pretty significant NPD spending in the quarter. All of those things kind of factor in together.
Jamie Cook (Managing Director of Equity Research)
Okay. And then, sorry, just on the free cash flow, Scott?
Dave Sagehorn (EVP and CFO)
Yeah, Jamie, a couple things there. One, we did raise our CapEx outlook for the year from $80 million-$100 million, but the bigger piece really is, we believe now that we'll end the year with higher inventory than we had previously assumed, and that's by design. And that's to help us be better positioned to have a smoother production schedule as we enter into fiscal 2015. If you think about it, we've got some of our businesses that certainly deal with some seasonality issues. And what we typically go through is, we end up laying people off for a short period of time. We bring them back, we incur overtime.
As we looked at it, I think the opportunity that we saw was if we would invest some more in inventory, that we could eliminate some of that overtime cost, some of the inefficiencies with sending people home and bringing them back, you know, weeks or months later.
Charlie Szews (CEO)
Frankly, Jamie, we really didn't handle that too well this year. We've had more production issues than we would expect during our bigger quarters, and it's just because we, you know, we didn't plan properly earlier in the cycle.
Jamie Cook (Managing Director of Equity Research)
I guess, which segment is the inventory concentrated in? I promise that's my last question.
Charlie Szews (CEO)
Well, no, it's across the board. It's, it's not just one segment, all right? I think we, you know, we could have handled this past year better in multiple segments if we had adjusted our production schedules, you know, in the late summer and autumn.
Jamie Cook (Managing Director of Equity Research)
Okay, great. I'll get back in queue. Thank you.
Charlie Szews (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Ann Duignan with JPMorgan. Please proceed.
Ann Duignan (Managing Director of Equity Research)
Hi, good morning.
Charlie Szews (CEO)
Good morning, Ann.
Ann Duignan (Managing Director of Equity Research)
Good morning. Just on aerial work platforms and mix. You know, you have exposure to the telehandler market in Europe in that business. I'm just wondering, that tends to be highly leveraged to agriculture. Are you seeing any trends in the agricultural side in Europe?
Charlie Szews (CEO)
Annie, I think you're right it correctly. We're not probably big enough in the ag part of the market in Europe to be able to read the cycle that well in ag.
Ann Duignan (Managing Director of Equity Research)
Okay, that's fair enough. And, you know, back to the outlook for 15, I know you're not giving us 2015 guidance, but it does seem like in your prepared remarks that you are backing away from the revenue target for 2015. Is that correct?
Charlie Szews (CEO)
I don't think we made any remarks on revenue. Our remarks were regarding margins overall, in terms of our expectation that we can continue to deliver with the O initiative and V initiative to drive higher margins. We did make some overall comments that some of our markets aren't recovering as fast as we had initially expected back at the Analyst Day. That's true. That has yet to be seen where 2015 ends, and we'll have more comments on that later. But you are correct there. The base markets, North America, is doing fine. Europe is better, clearly, this year than the last couple of years, so that's good for us.
We had a little slowdown here in Latin America recently, and I think you see this broadly about everyone that's reporting the last several days. I've heard comments on Latin America, and we're no different. So that's gonna be a little bit of a headwind, but they should come back as well at some point.
Ann Duignan (Managing Director of Equity Research)
Is Latin the only region that you're concerned about, or are you concerned about municipal spending in the U.S. if it doesn't come back, despite the fact that cash receipts are growing?
Charlie Szews (CEO)
Well, Australia is still kind of flattish for us. It really hasn't recovered, you know, until mining comes back and maybe some of the bigger energy projects, you know, come back. I think we're gonna be flattish or just slow growth in Australia. So I think that's probably the other bigger region. Municipalities, we did see and made some comments, I think, in the quarter, about there was some slowing in the fire and emergency municipal markets in the quarter ended March. Certainly, when we saw the final data that came out. We do have some better quoting activity now, so that could have been short term. We'll have to see. Refuse, for us, has been sort of a slow recovery, but there are some decent signs of municipal recovery there as well.
You can't go on forever without replacing your garbage trucks, or you don't get reelected. That's a lesson learned by many mayors over the years.
Ann Duignan (Managing Director of Equity Research)
Okay, I'll leave it there and get back in line. Thanks.
Charlie Szews (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Pete Skibitski with Drexel Hamilton. Please proceed.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Good morning, guys.
Charlie Szews (CEO)
Morning.
Wilson Jones (President and COO)
Morning.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Hey, hey, I guess maybe Charlie and Wilson, I'm just wondering if you guys are kind of more confident about access at the end of the quarter versus coming in. I mean, AWPs were up 15%. If I do the adjustment for telehandlers, it looks like they're up about 10.5%. Yeah, pretty good, but then backlog is down pretty sharply, right? And housing starts are kind of mixed, but non-res is improving. I'm just wondering how you feel about the business at this point in time versus maybe, you know, three or six months ago.
Charlie Szews (CEO)
Well, I'll start, and Wilson can continue. You know, if you look at our estimates for the year and then back into the Q4, I think you're, you're gonna see that we're projecting a pretty strong Q4 in access equipment. So I'd, I'd say that we're still pretty positive about the overall market, and Wilson, maybe you have some details to add.
Wilson Jones (President and COO)
Yeah, Pete, I think if you look, as I mentioned, the fundamentals are really good in North America and look to stay strong. When you take a step back, you heard a comment that the IRCs actually, from a percentage standpoint, grew faster than the NRCs this past quarter. So to see them getting bigger has really been nice. And then just looking, still a lot of runway with non-res and res, a lot of NPD work coming out for us. And then, as Charlie mentioned, the emerging markets offer lots of opportunities for us. So, MOVE is working, and we believe the outlook is very positive for access.
Charlie Szews (CEO)
Why don't you comment more about, like, EMEA and what's going on there?
Wilson Jones (President and COO)
Yeah, I mean, if you look around Europe today, we're seeing a lot more activity, a lot more rental companies coming back into the game. Middle East has been very strong for us. Even now, you're seeing activity in the UK, which has been one of the slower markets in Europe. So we -- again, fundamentals are picking up in those market areas around Europe. There's still some slow areas, but for the most part, Europe is really picking up in a nice trend.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Okay. And then just on backlog, with IRCs becoming a bigger part of the mix, should... I mean, should we kind of de-emphasize backlog, or, are they more of a quick turnaround business than the NRCs are?
Wilson Jones (President and COO)
Well, Pete, I think there's a bit of a new norm in access today, in that order patterns, they're not loading up orders to try to provide or hold line slots like, say, pre-recession method. So today, there's just a little bit more orderly. I think from a forecasting standpoint, there's a better communication today between NRCs and IRCs. They know where availability of machines are, and they're not rushing out and putting those big blanket orders out like they used to.
Charlie Szews (CEO)
However, as the market, you know, gets stronger the next couple of years, and yes, it's still a slow recovery, but we're gonna be picking up steam. You know, that's gonna become a bigger issue for all the rental companies, that capacities are gonna start to be consumed, and it'll be more important for, as the cycle, you know, continues, for people to place their orders earlier.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Makes sense. Okay, thank you very much.
Wilson Jones (President and COO)
Thanks, Pete.
Operator (participant)
Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please proceed.
Jerry Revich (Senior Investment Leader)
Good morning.
Charlie Szews (CEO)
Morning, Jerry.
Jerry Revich (Senior Investment Leader)
Charlie, in your prepared remarks, it sounded like you were as positive on the international M-ATV opportunities as I think we've heard you over the past couple of quarters. Could you just flesh that out for us to the extent you're willing, and maybe update us on the long-term estimate that you have of number of M-ATV vehicles that could potentially come up for bid in the Middle East?
Charlie Szews (CEO)
Well, as we've said, you know, multiple times, Jerry, we're pursuing thousands of M-ATVs, Middle East, some Eastern Europe, North Africa. So we've got a big pipeline. We've done extremely well in the trials that we've been in to date. It's an interesting phenomenon. A lot of them have sort of black holes for budgets, so you don't really get to see... You might see a top-line number. It's hard to ever see the insides. There's a lot of discussions among the parties. I'd say overall, we feel good, but until we have a contract, you know, those negotiations could move three months, six months, 12 months. It's very unfortunate.
I'd like to be able to say more to you today, other than ultimately, we do think we're gonna win some additional M-ATVs, you know, in these areas. I just can't tell you how many and when.
Jerry Revich (Senior Investment Leader)
Sure. Is it possible to talk about maybe how many countries are involved, just to help us understand the breadth of demand?
Charlie Szews (CEO)
We are pursuing multiple countries at the present time.
Jerry Revich (Senior Investment Leader)
Okay. And then in Fire and Emergency, I know you're doing a lot of work on the operational turnaround. Can you just talk about the key metrics that you're focusing on and how your progress is? Presumably, that's cycle times coming down, but whatever else you think are the right metrics, just can you give us a sense how that manufacturing turnaround is going?
Dave Sagehorn (EVP and CFO)
Well, as I mentioned, Jerry, it's going better. We're seeing positive trends with their operational metrics. You know, everything from starting in the front end of the business and working with our order entry through production engineering. It's basically we're overhauling a process that we've worked with over the years. It's worked for us, but we see a better way going forward with the new process. So, I would say we're, you know, as in the prepared remarks, I talked about we're seeing the corner being turned. We like the progress they're making. The problem in Fire and Emergency is the backlog is so long. You got long lead times. So Charlie mentioned the June trucks that we're seeing now go down the line.
We're seeing less open work orders. We're seeing less parts missing. All the general metrics that you want to see improve are going in the right direction.
Charlie Szews (CEO)
But unfortunately, those won't ship until probably September. And so you still have other months in the quarter. Now, I would remind you that we've also said that we're gonna have some larger international deliveries in the fourth quarter for Fire and Emergency, so you should see, you know, a much better comps year-over-year in the fourth fiscal quarter.
Jerry Revich (Senior Investment Leader)
Thank you.
Charlie Szews (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Ross Gilardi with Bank of America Merrill Lynch. Please proceed.
Ross Gilardi (Equity Research Analyst)
Hey, good morning. Thank you.
Charlie Szews (CEO)
Morning.
Dave Sagehorn (EVP and CFO)
Morning.
Ross Gilardi (Equity Research Analyst)
You guys cut your free cash flow outlook. You didn't cut your share count for cash. Should we assume you're an active buyer of your own stock at these levels? It looks like you didn't really buy back any stock in the you know this last quarter.
Dave Sagehorn (EVP and CFO)
Yeah, Ross, if you look at year to date between share repurchases and dividends, I think we've returned about $190 million-$200 million of cash to shareholders. And we did signal at the end of our first fiscal quarter that we probably were gonna slow down, just given the amount that we had repurchased in the first quarter. Certainly, as we look forward, we do believe we're gonna continue to generate free cash flow, and again, over time, we think that that should approximate net income. So, I would expect that we will become active again from a share repurchase standpoint. Just can't tell you exactly when and how aggressive that may be.
Ross Gilardi (Equity Research Analyst)
Okay, thanks. And then, on back to the access, margin, I mean, obviously, you don't give profitability by, by geography and access, but given the positive influence of selling to more independents, I would think that would be boosting your margin, not taking away from your margin. So can you say directionally, if you just isolated margins within North America and access, are you getting a positive... You know, would margins actually be up due to the higher mix of, you know, independents?
Dave Sagehorn (EVP and CFO)
Yeah, you certainly would expect that. But again, if you go back to the quarter, a couple things that we talked about here, we did have higher NPD, so that impacted things. We did have some higher operating expenses in the quarter to support some MOVE initiatives. That impacted the quarter. And then, if you look geographically, North America is a better profitability market overall for us.
Ross Gilardi (Equity Research Analyst)
Gotcha. Okay, and then just the last one. I mean, you seem more downbeat on refuse than some of your competitors. I mean, there have been some positive comments on refuse throughout earnings season. Are you losing share at all? I mean, I know your business is very dependent on a few very big customers, but could you comment on that?
Charlie Szews (CEO)
In fiscal 2014, we've picked up a little bit of share.
Ross Gilardi (Equity Research Analyst)
Are you speaking to within your group of customers or the overall market?
Charlie Szews (CEO)
Just the overall market in RCVs.
Ross Gilardi (Equity Research Analyst)
... So what do you think is holding back that market right now? Is it just a municipal spending issue?
Charlie Szews (CEO)
It's municipal spending. It's the large waste haulers who, you know, if they pull back on spending for any reason, it could be internal, you know, that impacts the size of the market. So I think all of them are trying to become, in a more efficient in terms of their route management. So all these things come into play.
Ross Gilardi (Equity Research Analyst)
Gotcha. Okay, thanks very much.
Operator (participant)
Thank you. Our next question comes from Eli Lustgarten with Longbow Research. Please proceed.
Eli Lustgarten (Senior Research Analyst)
Good morning, everyone.
Charlie Szews (CEO)
Morning, Eli.
Eli Lustgarten (Senior Research Analyst)
I have to go back with AWP. You had, the incremental margin, obviously, in this quarter was quite weak, and I guess you cited, the SG&A and the new product development, stuff like that. Your fourth quarter implies that you're gonna have a pretty hefty incremental margin, and almost profitability goes back to more normal and, probably the second best quarter of the year. Is there, what's changing in the quarter to give you so much better profitability, than what we've seen? Or is it, the inventory building also helping to, the absorption rate that gives you the better profitability and incremental margins in the quarter?
Dave Sagehorn (EVP and CFO)
Yeah, Eli, probably the biggest driver is some of the headwind year over year from a NPD spend.
Eli Lustgarten (Senior Research Analyst)
Mm-hmm.
Dave Sagehorn (EVP and CFO)
We don't anticipate that we'll have that next fiscal quarter, just largely due to timing of NPD spend in the prior year.
Eli Lustgarten (Senior Research Analyst)
Can you give us a magnitude of what that spending incremental change was that's impacted?
Dave Sagehorn (EVP and CFO)
Yeah, I don't know if we wanna get that granular, but it certainly drove the incremental margins down in the quarter. I think when you look at NPD and some of the higher operating expenses, if you remove both of those in the third quarter, we would have been looking at incremental margins, you know, in the 30% range.
Eli Lustgarten (Senior Research Analyst)
So it was a big number-
Charlie Szews (CEO)
It was meaningful.
Going on. And when we look out to 2015 at this point, looking into that, but are we looking at, you, you're now trying to stabilize the production schedules with higher inventory levels. Are we also gonna see relatively stable new product development costs or so next year, which also enhance profitability, so we won't go through this, you know, probably somewhat of a surprise in the quarter that incremental margin was so, so weak?
you know, we can't say that, for a couple reasons. One is that certainly with staffing levels, those don't jump around quarter to quarter that much. But, you know, some of the, you know, material costs you buy or whatever for a new product development, you know, they could get lumpy quarter, in a certain quarter. So, you know, NPD spend is sort of lumpy generally.
Eli Lustgarten (Senior Research Analyst)
And maybe can you give us some magnitude of these new products? Sales will start to ship at the end of this year and probably in 10-15. What kind of incremental volume you might be getting from some of these new products next year, particularly in AWPs?
Dave Sagehorn (EVP and CFO)
Yeah, we're not gonna be that open here. I mean, I'm sure you'd like to hear us be more open, but our value innovation initiative has always been important to this company. We've driven this business on that for many, many years, so it is important we get multigenerational product plans in every segment. You will see us launch new products throughout fiscal 2015 in all of our segments, and you'll just have to wait and see what they are.
Eli Lustgarten (Senior Research Analyst)
All righty. Thank you.
Charlie Szews (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Mig Dobre with Robert W. Baird. Please proceed.
Mig Dobre (VP of Equity Research)
Good morning, guys.
Charlie Szews (CEO)
Mig.
Mig Dobre (VP of Equity Research)
So sort of sticking with access, I'm wondering, can you parse out how much of this jump in EMEA demand is driven by U.K. specifically? And I'm wondering where the U.K. is versus prior peak in terms of demand.
Charlie Szews (CEO)
Mig, they're all, you know, 40%-50% down from prior peak. Some countries like Spain are far, much more, much bigger in the hole. So they still all have a lot of room to grow. You know, let's not get carried away here. U.K. is improving, but we have plenty of room to grow across Europe.
Mig Dobre (VP of Equity Research)
Right. But you wouldn't say that the main driver of the improvement in EMEA is the U.K. at this point?
Charlie Szews (CEO)
No, no, no, no. That—we just singled that out as a, a nice example, but, I'd, I'd say across Northern Europe, it's, it's pretty good. It's been a good year for us. Southern Europe is gonna be weaker.
Mig Dobre (VP of Equity Research)
All right. Well, then, if we shift to commercial, maybe, and I don't know if you're willing to comment on, at all on margin there. You gave us a sense for how you're thinking about, performance in fiscal 2015 versus your target. I'm wondering, can you, can you provide us an update on commercial there? If I recall, you were thinking something around 10% operating margin in 2015.
Charlie Szews (CEO)
Yeah, well, we're not gonna get that specific yet. We'll have to wait until October to give estimates for margins in commercial. But we're continuing to drive to our strategic roadmap. And you know, I think our estimates for this year are... We'd still say we've got a lot of room to improve, to get to 10% operating income margins. But we do have initiatives in place, and it is certainly a target for us.
Mig Dobre (VP of Equity Research)
Is it more of a internal initiative story here still, or is, are we talking about end market improvement into fiscal 2015 as the main driver?
Charlie Szews (CEO)
Yeah, it's always been both. If you go back to the chart that we showed in September 2012 for this segment, in terms of where the margin expansion comes, market recovery has always been a big piece of it because we have a fairly significant fixed cost base. So, certainly, market recovery is a big piece of driving our margins up. But if you go back to that chart, you will see that, you know, our own internal initiatives are also pretty relevant.
Mig Dobre (VP of Equity Research)
All right. Thank you, guys.
Wilson Jones (President and COO)
Thanks.
Charlie Szews (CEO)
Thanks, Mig.
Operator (participant)
Thank you. Our next question comes from Seth Weber with RBC Capital Markets. Please proceed.
Seth Weber (Equity Research Analyst)
Hey, good morning, everybody.
Wilson Jones (President and COO)
Morning, Seth.
Seth Weber (Equity Research Analyst)
So in the, sorry, going back to Access, you specifically called out positive pricing in that segment. I was wondering if you could give us any color by region, you know, whether you're seeing, you know, higher pricing across the board in all regions, or if one, you know, I think previously, you had talked about some pockets of irrationality in Europe, for example.
Charlie Szews (CEO)
We mentioned pricing because it's relevant to our sales growth. We did capture higher pricing. We had Tier 4 pricing impact hit our P&L. For the most part, in fiscal 2014, pricing is basically recovering our cost increases. It's certainly not driving any margin enhancement in the business.
Seth Weber (Equity Research Analyst)
Is it pretty consistent across regions or the major regions?
Charlie Szews (CEO)
You know, it varies. It's probably a little bit better in North America than the rest of the world.
Seth Weber (Equity Research Analyst)
Okay. And then just changing gears, I mean, have you, you know, your current thoughts on the balance sheet? I mean, you're going to exit this year pretty close to a net cash or, you know, pretty low debt level, net debt levels. Any change to how you're thinking about the balance sheet, whether it's acquisitions, you know, more buyback, dividend, et cetera?
Charlie Szews (CEO)
You know, we would expect to have a balanced strategy over time. I think we said earlier, we're, we'd like to build a little bit of cash to continue to build various options. But right now, we've got a positive outlook for the business. We've got MOVE initiatives that are expanding margins, and we don't really need to do any M&A. So we're going to be allocating capital wherever the most compelling returns are.
Seth Weber (Equity Research Analyst)
Okay. Thank you very much, guys.
Wilson Jones (President and COO)
Thanks, Seth.
Operator (participant)
Thank you. Our next question comes from Tim Thein with Citigroup. Please proceed.
Tim Thein (Sell-side Research Analyst)
Great, thanks. And just coming back to the commercial comments from a question or two ago. And I know, again, we're limited in terms of what you'll say on 2015, but you presumably that, I think you had mapped out kind of a billion and a quarter, I think, if memory serves, in terms of the top line. Presumably at this point, looks like that, that's probably going to be a bit of a stretch to grow 50% year-over-year.
Can you maybe just kind of bring us back in terms of maybe the sensitivity or many kind of range in terms of what that operating margin kind of you know would kind of put a bit of a ballpark on that, if you can, just any kinds of round numbers?
Charlie Szews (CEO)
On today's call, we're going to be reluctant to do that. What we can say is that we would expect, you know, markets to continue to improve in Commercial segment into the fiscal 2015, so we'd expect our sales to be up. We expect our MOVE initiatives to continue to contribute to a margin expansion in 2015. So, you know, we'd expect higher sales, higher margins, and beyond that, we'll wait until October and have, give you our best view at that time.
Wilson Jones (President and COO)
I think just one comment to add to Charlie's. There is, you know, housing hasn't been what we thought it would be this year, but look how they're performing in commercial. We can't always control the M, but we can really drive the O and execute some initiatives there, and that's really what we're seeing in commercial. So, you know, we'd love to see the markets recover faster, but if they don't, we still got plenty of work to do to execute our MOVE Strategy.
Tim Thein (Sell-side Research Analyst)
Okay, good. And just back to Access in Europe, I know there was recently a big rental show in Amsterdam in late June. Is that typically, can you maybe just... You gave a little bit of the comments by region, but maybe just some of the sentiment that your guys picked up from some of the rental fleets there. And second, does that tend to be a big kind of order? Do you typically get a lot of orders from that show, or, you know, similar to the U.S., or what are the dynamics there?
Wilson Jones (President and COO)
Yeah, the show was positive. Again, we're seeing more rental companies get active, which is nice. I think we commented on the areas of Europe that we're seeing the improvement. Those shows in Europe that you do take orders, I would say from a magnitude standpoint, they're nothing like a ConExpo, but you do write orders in your booth.
Tim Thein (Sell-side Research Analyst)
All right. Thank you.
Wilson Jones (President and COO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Charley Brady with BMO Capital Markets. Please proceed.
Charley Brady (Director of Equity Research)
Hey, guys. Just a follow-up on Access again-
Charlie Szews (CEO)
Sure.
Charley Brady (Director of Equity Research)
In relation to the large national rental chains. Can you just give us a sense of how business is trending in terms of purchases from the large rental houses? Are you seeing—I guess what I'm trying to get to is, how much of a pullback, if any, are you seeing on the large rental side relative to the growth you're seeing on independents?
Charlie Szews (CEO)
Charlie, I think it's mixed between the national rental companies. Some are buying more, some are buying less. Overall, maybe flattish or up a little bit, but you know, most of the North American growth in the marketplace is IRCs.
Charley Brady (Director of Equity Research)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from Pete Skibitski with Drexel Hamilton. Please proceed.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Yeah, a couple follow-up questions, maybe one for Dave. Dave, on the new sort of inventory plan, it looks like, it looks like you'll have working capital grow maybe $200 million or so for the, for the full year, fiscal 2014, year-over-year. I'm just a little bit forward-looking. I'm just wondering directionally, should we expect that kind of inventory growth kind of on a go-forward basis, or is this kind of a one-time adjustment in the growth and, and future years will be a little bit more moderate?
Dave Sagehorn (EVP and CFO)
Yeah, I think it is more, Pete, along the lines of a one-time adjustment. Assuming that, you know, the end of FY 2015, we kind of position ourselves to have a similar, more stable pattern of production as we enter into 2016. So we should be, you know, if we kind of maintain that approach, we should be in a decent shape without having to build inventory other than what you would normally expect in improving markets.
Pete Skibitski (Senior Aerospace and Defense Analyst)
Okay, got it. Got it. And then just last one, can you give us a sense on the defense backlog, what the percentage of backlog from FMTV and maybe FHTV is?
Dave Sagehorn (EVP and CFO)
Pete, I don't have those numbers right at my fingertips. Can we get back to you on that one? Yeah, we can follow up, Pete.
Pete Skibitski (Senior Aerospace and Defense Analyst)
That'd be great. Thank you, guys.
Dave Sagehorn (EVP and CFO)
Sure.
Charlie Szews (CEO)
Thanks.
Operator (participant)
There are no further questions at this time. I would like to turn the call back over to Charlie for closing comments.
Charlie Szews (CEO)
Okay, thank you very much. Thanks, everyone, for spending time with us. We look forward to a strong finish to the year. Have a great day, everyone.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.