Oshkosh - Q3 2015
July 30, 2015
Transcript
Operator (participant)
Greetings and welcome to the Oshkosh Corporation fiscal 2015 third quarter results. 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. I would now like to turn the conference over to your host, Mr. Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may now begin.
Patrick N. Davidson (VP of Investor Relations)
Thanks, Rob. Good morning, everybody, and thanks for joining us. Earlier today, we published our third quarter 2015 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.
These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to our fiscal quarter or fiscal year unless stated otherwise. Our presenters today include Charlie Szews, Chief Executive Officer, Wilson Jones, President and Chief Operating Officer and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three and I'll turn it over to you Charlie.
Charles L. Szews (CEO)
Thank you, Pat, and good morning. Today we announced third quarter earnings per share of $1.13. These results did not meet our original or revised expectations. We also reduced our adjusted earnings per share estimate range for 2015 to $3-$3.25. We're disappointed in these short-term developments. We'll talk more about what happened and actions we'll be taking. But let me first focus shareholders on the big picture, which remains positive. We expect our Defense segment to provide meaningful earnings growth in 2017. We expect to finalize international M-ATV contracts this quarter and next quarter, which include substantial volume requirements for 2016.
We believe the magnitude of the expected return to growth in our Defense segment, coupled with expected improved performance by our Commercial and Fire and Emergency segments, will be sufficient to more than offset a dip in Access Equipment demand that impacted our third quarter results and which we believe will extend through 2016. So while we are experiencing a pause in our earnings recovery in the second half of 2015, we believe it will be short-lived as we expect to return to solid EPS growth in 2016. Our commentary today will address current market conditions as well as fill in important details regarding our positive 2016 outlook. Specifically regarding our Defense segment outlook, we'll provide more specific estimates for 2016 in late October so what happened in our third quarter?
Demand signals were strong entering the quarter, but heavy rains across the southern U.S. delayed construction starts and ongoing projects. For instance, Texas, a very large market for Access Equipment, endured record May rains and extensive flooding. These rains, along with reduced demand from lower oil and gas rig counts, appear to have led to softer utilization rates and stagnant rental rates for a couple months for some of our customers. With these metrics holding up a little better for Access Equipment, this unfortunately led some customers to withhold orders we had expected in the quarter. We also believe potential industry consolidation among independent rental companies slowed some order flow for JLG and we experienced some modest delivery delays with several new product launches on mid-June. We updated investors regarding Access Equipment market conditions as we saw them and revised our EPS estimates downward.
Unfortunately, orders anticipate for late June shipments did not materialize as expected or they arrived too late to ship in the quarter and our new product launch delays continued. Now we're largely back on track in late July with new product deliveries, but have a few more new products to launch in August. Given the disappointing results in the third quarter, we worked with our Access Equipment team in July to set the direction of Access Equipment equipment markets globally. Overall, we believe Access Equipment demand remains solid. However, we now believe that a shortened construction season in the U.S. from severe weather over the last two quarters, along with the impact of lower oil and gas prices on rental fleet utilization, among other factors, are leading rental companies to reduce Access Equipment purchases from our earlier expectations for 2015.
This led us to further reduce our 2015 adjusted earnings per share estimates today to $3-$3.25. Now, our other segments met our expectations in the third quarter and we expect they will meet prior earnings expectations for the full year. And as I said up front, we expect meaningful earnings growth in our Defense segment to lead to solid EPS growth for the company in 2016. So given the recent decline in our share price coupled with our confidence in longer term outlook for Oshkosh. Our current plan is to repurchase shares in the coming months. Dave will talk more about share repurchases in a few moments. Please turn to slide 4 for a discussion of our positive outlook for our defense business. The Past Few Quarters we project our Defense segment earnings to be a trough in 2015.
We expect to meaningfully grow both revenues and operating income in this segment starting in 2016. Tangible evidence of that expected growth can be seen in the backlog for this segment, which grew for the first time since the fourth quarter of 2011. The 38% increase in backlog compared to a year ago is certainly a welcome addition and it doesn't yet reflect the significant international M-ATV orders that we are pursuing. The backlog increase is largely a result of receiving FHTV and FMTV orders from the government's FY15 budget. During the quarter, we finalized a new 5-year contract with the U.S. Army to recapitalize FHTVs. This will allow us to begin shipping units in the fourth quarter 2015 fiscal quarter, that is after a 6-month break in production.
We have stated beginning in October 2014 that achieving our 2015 EPS estimates required an international contract to be executed in time to achieve revenue recognition of a modest quantity of vehicles in our fourth quarter. We believe we are within days of executing that contract for a few hundred international M-ATVs, of which we still expect to ship 150 units by the end of our fourth quarter. Given very tight timing for ocean shipment and vehicle acceptance in country, our ability to achieve revenue recognition in our fourth quarter is too close to call for these 150 units. As a result, to be conservative, we have removed the 150 international M-ATVs from our Defense segment earnings estimates for 2015, but based on other initiatives, we expect to achieve our previous 2015 earnings estimates for the segment.
Also, we continue to make significant progress in our pursuit of a few thousand additional international M-ATVs for delivery over a multiyear period. Specifically, we made important progress on a follow-on contract for over 1,000 M-ATVs, a majority of which we believe will be for delivery in fiscal 2016. We expect to finalize and enter into this contract during our first quarter of fiscal 2016. We also now believe additional contracts aggregating a couple thousand M-ATVs or more could be entered into later in fiscal 2016 for shipments beginning in 2017. These M-ATV opportunities are a primary reason for a positive outlook for the company as a whole in 2016 and 2017. Unfortunately, we were recently informed that we were not awarded the MSVS contract in Canada. While we are disappointed, this loss does not have a significant bearing on our overall outlook for the defense business.
Finally, let me make just a few brief comments on the JLTV program. Last evening we submitted our final proposal revisions for the program. Our JLTV offering provides next generation mobility and survivability to our troops at a fair value. I'm very proud of our team's efforts to compete for this program. We look forward to the contract award announcement which we now expect will be made in September. I'll now turn it over to Wilson to discuss our non-Defense segments. Please turn to Slide 5.
Wilson Jones (President and COO)
Thanks, Charlie. Good morning, everyone. Charlie described a number of challenges we faced in the Access Equipment segment during the quarter along with our revised outlook for 2015. I would like to emphasize that we believe the fundamental drivers of this business are solid. In the U.S. we expect residential and nonresidential construction spending to continue to rise slowly over the next few years, driving rental fleet demand for access equipment, and we expect rental company operating metrics to remain strong. Outside the U.S. we believe replacement demand will moderate in Europe following a surge in replacement demand in a few countries in 2015. In other regions of the world, we believe product adoption from increased safety requirements and productivity demands will support healthy industry volumes. So what does this mean for 2016?
In the U.S., which currently represents approximately 75% of our access equipment sales, we believe that rising construction activity will lead to higher demand for access equipment. However, as Charlie stated, we now believe this construction driven demand will not be enough to fully offset likely reduced replacement demand in 2016 resulting from very low industry purchases in 2009 and 2010 leading to an approximate 5%-10% sales decline in the U.S. in 2016 overall. Outside the U.S. we currently expect access equipment sales to decline at a similar level, 5%-10% rate in 2016 with some areas experiencing higher demand and other areas declining. It is still early and we will continue to refine and update our view of 2016 prior to our next earnings calls. But we believe we're in the ballpark of expected demand.
As we focus attention on the big picture, we believe we will deliver earnings per share growth in 2016 despite an approximate 5%-10% sales decline in our higher margin and access equipment segment. We believe our MOVE initiatives will enable us to reduce costs sufficiently to offset a meaningful portion of the earnings impact of the expected access equipment sales decline. Further, we believe the magnitude of the earnings from the expected return to growth of our Defense segment will be significant and we expect improved results in our Fire and Emergency and Commercial segments. Taken together, we expect these to deliver solid earnings per share growth in fiscal 2017. Let's turn to a discussion of the impact of lower 2015 sales expectations on inventories and cash flow.
Previously, we implemented a plan to level load our factories over the course of the year, allowing us to better manage the inefficiencies associated with the seasonal production swings. Given our lowered outlook for the remainder of the year in this segment, inventory is currently higher than we would like it to be, so we are taking prudent actions to reduce our inventory, which will result in reduced absorption in the coming months and in 2016. The impact of this is reflected in our updated outlook for this segment. We expect that this rebalancing and other factors will provide a meaningful lift to our Free Cash Flow in 2016. Finally, as an indication of our confidence in the outlook for this business, we concluded a small acquisition in the quarter of Power Towers, a United Kingdom low level access business with annual sales of approximately $10 million.
Low-level access is a rapidly growing niche in the access equipment market and we are very pleased for the Power Towers team to join our company with their innovative product line. Please turn to Slide 6 for some comments on our Fire and Emergency segment. Progress continued in the Fire and Emergency segments as we delivered higher operating income margins. Again this quarter we separated our primary vehicle assembly line in Appleton into two lines as part of our objective of improving operating efficiency in the Service segment. We are pleased with the results so far, but it is still early and I want to reinforce this is a long-term process for accomplishing lasting change. We continue to expect modest growth for the North American firefighters market in 2015 driven by the impact of slow economic growth.
However, Pierce's order rate has grown faster than this as we believe Pierce's share is increasing partially due to its steady cadence of new product introductions. In conjunction with that, it was a good quarter for trade shows and new product announcements for both the Fire Department Instructors Conference show in April and the Interschutz in June. We launched the revolutionary single-rear-axle 107-foot aerial ladder truck, the Ascendant, in April and we announced the Oshkosh XP fire apparatus which is designed to meet the needs of firefighters in leading markets outside North America. Our dealers are particularly excited about the Ascendant, which offers greater reach and turning radius at an attractive price. Please turn to Slide 7 for an update on our Commercial segment. Both refuse collection vehicle and concrete mixer sales grew in the quarter.
RCV sales grew approximately 40% during the quarter versus the prior year. Like the U.S. fire truck market, the U.S. RCV market has benefited from the impact of the slowly improving economy. Cities and towns across the U.S. are in much stronger financial condition and they are spending their funds responsibly as older units are finally being replaced. Additionally, we are seeing a steady supply of private haulers replacing older units. We have also been gaining share in RCVs. We've accomplished this by introducing a steady stream of new products, including our most recent new product, the lighter weight Meridian Front End Loader. First shown to our customers last month at the Waste Expo show. The Meridian delivers optimal payload and weight balance with McNeilus quality and durability so our customers know they are going to be able to earn greater returns with longer uptimes.
The Meridian won't ship in volume until early next year, but we are already receiving orders for this innovative new product. When you couple the strength of recent new product launches including split bin rear loaders and the revamped automated zero radius side loader units launched in 2014 with a slowly growing market, you can understand why we have a positive outlook for our RCV business. Concrete mixer sales have been solid this year, including up double digits in the third quarter, but similar to the access equipment segment, we saw a slowdown in orders during the quarter as construction has been slowed by weather conditions in the US, we remain bullish on this market long-term because there are still plenty of opportunities for housing starts to improve, non-residential construction to grow and infrastructure updates to be made.
However, we do expect to see some choppiness in the short term, which we believe we will offset with improved RCV demand. We're confident that our team is making the right moves to navigate this very competitive market in North America.
I'm going to turn it over to.
Dave, now to walk us through our financial results.
David M. Sagehorn (EVP and CFO)
Thanks Wilson and good morning everyone. Consolidated net sales for the third quarter were $1.61 billion, a 16.6% decrease from the third quarter 2014. On a constant currency basis, sales declined 14.7% compared to the prior year. Quarter sales were up year-over-year in the Commercial and Fire and Emergency segments, partially offsetting declines in the defense and Access Equipment segments. The higher Commercial segment sales were led by strong RCV unit sales and to a lesser extent higher concrete mixer sales driven by a higher mix of package units. Increased Fire and Emergency sales were driven by a shift to higher content fire trucks and higher shipments of airport product units. Sales decline in Defense was a result of the continued break in production of FHTV units, lower FMTV requirements and no sales of international M-ATV units in the quarter.
Sales in the Access Equipment segment were down 10.3% or 7% on a constant currency basis, with the decrease concentrated in North America. Consolidated operating income for the quarter was $136 million, or 8.5% of sales compared to adjusted operating income of $175.3 million, or 9% of sales in the third quarter of 2014. Operating income in the Commercial and Fire and Emergency segments was higher than the prior year largely as a result of higher year-over-year sales, with operating income margins in the Commercial segment being negatively impacted by ongoing investments in MOVE initiatives. Lower operating income in the Defense and Access Equipment segments compared to the prior year quarter was largely the result of lower sales volume. Access Equipment segment results were also negatively impacted by unfavorable foreign currency and production inefficiencies related to several new product launches.
Lower incentive-based compensation as a result of lower full-year expectations for this segment than previously anticipated partially mitigated the earnings decline. Corporate expenses were lower than the prior year as a result of the impact of reduced full-year earnings expectations on incentive compensation. Additional information related to segment third-quarter financial performance can be found in the appendix to this morning's slide deck. Earnings per share for the quarter was $1.13 compared to adjusted earnings per share of $1.23 in the third quarter of 2020. Current year quarter results include $0.09 per-share benefit related to tax audit settlements and expirations of statutes of limitations. The current year quarter also benefited $0.09 per share from a lower share count as a result of our share repurchase activity over the past year.
Both of these benefits were expected and were included in our previous outlook for the third quarter and the full year. Foreign currency exchange negatively impacted current year quarter earnings per share by $0.11. Please turn to Slide 9 for an update of our 2015 full year outlook. Our updated adjusted earnings per share estimate range of $3-$3.25 represents a 10%-17% decline from 2014 adjusted earnings per share. The reduction in our full year outlook is wholly related to the reduced outlook for the Access Equipment segment. The other three segments exited the quarter with higher backlog compared to the prior year, which we view positively. We had previously expected that continued strength in the Access Equipment segment and continued improvement in the Fire and Emergency and Commercial segments would overcome the expected significant decline in sales and earnings in the Defense segment in 2015.
Changes to our outlook for the Access Equipment segment include lowering our full year sales outlook to approximately $3.4 billion compared to our previous estimate range of $3.7 billion-$3.8 billion. Sales of $3.4 billion in this segment would represent an approximate 3% year-over-year sales decline or approximately flat on a constant currency basis. We are also lowering the full year operating income margin estimate for this segment to approximately 12.8% compared to a previous estimate of approximately 15%. The reduction in expected sales versus our previous estimates is more heavily weighted towards aerial work platforms which have higher margins leading to a larger incremental margin on the sales decline than would normally be expected.
You may recall that we had a higher mix of telehandlers in the first half of the year driven by timing of new engine emission standards for telehandlers which were effective at the beginning of this calendar year. We were expecting a higher mix of aerial work platforms in the second half of the year leading to a full year product mix similar to what we experienced in 2014. We now believe that this segment will have a lower mix of aerial work platforms in 2015 compared to the prior year. In addition, production inefficiencies related to several new product launches and lower absorption related to planned production rate decreases will also negatively impact full year operating income margins compared to our prior estimates and the prior year.
We reduced the Defense segment sales estimate compared to our previous estimate to reflect the shift of revenue recognition on the 150 international M-ATVs that Charlie discussed. We still expect operating income to be slightly above breakeven, however, reflecting better than expected third quarter results and operational performance above our prior expectations. We are also reducing our corporate expense estimate range to reflect lower incentive compensation expense as a result of our lower earnings expectations for the year. Our capital expenditure estimate for the year remains unchanged at approximately $150 million as a result of lower expected earnings, an expected slower drawdown of inventory in the Access Equipment segment and a later than previously expected shipment of international M-ATVs in the quarter which will push collection of the cash for these sales from late in our fourth quarter to the first quarter of 2006.
We are reducing our free cash flow estimate for the year to a usage of approximately $150 million. While not what we had originally expected, the shifts in timing should result in higher free cash flow in 2016 than would have otherwise been expected. Our full year diluted share count assumption remains unchanged at 79.5 million. As Charlie noted, we do expect to become active again on the share repurchase front. We don't expect this to have a meaningful impact on 2015 full year average share count given that we're already 10 months through our fiscal year. This would, however, have a more meaningful impact on 2016 full year share count. I'll turn it back over to Charlie now for some closing comments.
Charles L. Szews (CEO)
As I said at the outset of this call, we are disappointed with our third quarter results and our change in outlook for the remainder of 2015, but we have reason to be positive. We expect a strong recovery in our defense business supported by improving performance in both our Commercial and Fire and Emergency segments to lead to solid earnings growth in 2016 and beyond. That concludes our formal comments. We're happy to answer your questions. I'll turn it back over to Pat to get the Q and A started.
Patrick N. Davidson (VP of Investor Relations)
Thanks, Charlie. 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 an additional question. Rob, let's please begin the question and answer period of this call.
Operator (participant)
Thank you. If you'd like to ask a question at this time, please press star1 on your telephone keypad and 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 that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from the line of Eli Lustgarten with Longbow. Please proceed with your questions.
Eli Lustgarten (Analyst)
Good morning everyone. Just a clarification. You talk about share repurchase first. Can we talk about magnitude of share repurchase or what do you expect to do?
David M. Sagehorn (EVP and CFO)
Sure, Eli. We've got 2.9 million shares remaining on our current authorization. We expect that we will reacquire at least that amount and probably go back to the board for an update or refreshing of the authorization. But in the coming quarters, I guess I would say we're probably looking 100 million or more over the next several quarters.
Eli Lustgarten (Analyst)
Okay, thank you. Can you talk about the magnitude of the defense upturn that you're looking at and that I guess, you know, we're talking about a few hundred million dollars in revenue? I assume we're talking about mid-single-digit operating margins and I guess the real bottom line, you know, we went from over $4 expectations to, you know, $3.75-$4 now to the low $3s. How far? How much of the ground do you think you can make up in 2016 vs. 2015 today? Just driven by with the help of defense as you think about next year, I mean can you get all the way back towards the $3.75-$4 or is that still a stretch?
Charles L. Szews (CEO)
Eli, you got a lot of questions.
Eli Lustgarten (Analyst)
Well, you only gave me two. Okay, give me a break.
Charles L. Szews (CEO)
No, I think you have about 5 or 6 in there. But anyway, let's get started. You know, we're in advanced stages of negotiations for these international M-ATV contracts. All right. And advanced stages of the approval process. First few hundred vehicles should be executed in days. You know, real short term here. The second contract for over 1,000 vehicles has been forwarded up the approval process. Given our knowledge of that process in historical time frames to flow through all those remaining steps, we'd expect a contract in the first quarter of fiscal 2016. But it could still happen in our Q4. I mean, so this is a process that is not that can move at different pace depending upon what's going on inside the dynamics in the country.
But you know, for purposes of, you know, our comments today on our outlook for 2016, we've assumed that we will execute a contract in the first quarter. When you combine, you know, these two contracts, we're talking meaningful number of M-ATVs in 2006 and many of these are extended wheelbase. They are variants with a lot more content on them. So these are relatively substantial vehicles. We've said for some time these are good margin business and we're not going to say a whole lot more than that.
Eli Lustgarten (Analyst)
Are these $500,000?
Charles L. Szews (CEO)
Pierce business machines vehicles? Yes, absolutely.
Eli Lustgarten (Analyst)
I guess the real question is how much of the ground do you think you can make up from the short, from the double shortfall that we now have? Okay, I'm not looking for precision.
Charles L. Szews (CEO)
Yeah, I'm not going to give you precision, but I want to give you a background that we do have real substantial contracts in queue. There are actually more beyond that that I mentioned in our prepared remarks that would hit 17. Now our view of the 2016, there's still some items that are in flux. Right. But we still haven't had. We don't have a definitive view on Access Equipment demand in 2016. It's early for our customers to talk about things like that. We've heard relative commentary. We can see replacement demand probably coming down because 2009 and 2010 were lighter years in terms of industry purchases. All right, so we need to get a little bit better sense of that. But right now our view is it's 5%-10% down in sales and Access Equipment segment.
You know, we're down 3% this year, 5%-10% down next year. That feels in the ballpark. Anything much more than that and we're talking a recession. We're not hitting a recession next year. There's no signals whatsoever. Construction demand is up. You know, industry fundamentals are strong, rental company metrics are strong and all of that. All right now the exact date that we sign and execute some of these international contracts also has a view of how many vehicles that we're going to get in 2016. So I've got, you know, until we get those contracts signed, I can't be extremely definitive. But pulling it together, our early view is solid EPS growth would mean low double-digit EPS growth from 2015. Then on the high end our EPS could reach our Analyst Day EPS targets for 2015 just a year late. So it's a broad range.
I know that we're narrowing it in October, but it's a function of.
Eli Lustgarten (Analyst)
Really.
Charles L. Szews (CEO)
Executing a couple contracts knowing exactly how many vehicles we're going to get in 2016 and such. But overall we feel very good about our ability to deliver EPS growth next year. We also have lots of initiatives inside our business to continue to take cost out of the business. We've been saying for a long time that our biggest benefit of our old initiatives come in 2016 and that still is true. So we think we can mitigate a lot of the sales decline in Access Equipment through cost reduction and then we've got lots of opportunities in defense to grow from there. And of course we still have a good positive outlook for Commercial and our Fire and Emergency segment. Our Fire and Emergency segment, for example, has very significant backlogs relative to prior year. And this backlog extends out 9 months, maybe 10 months.
It's probably longer lead times than we've had in years. And so we see very nice backlog for that segment going forward as well.
Eli Lustgarten (Analyst)
All right, thank you very much. I'll let somebody else go.
Patrick N. Davidson (VP of Investor Relations)
Thanks, Eli.
Operator (participant)
Our next question is from the line of Jamie Cook with the Credit Suisse Group. Please bear with your questions.
Jamie Cook (Analyst)
Hi, good morning. I guess just clarification, you talked about the excess inventory in the channel on the AWP side. I'm just wondering if you could quantify sort of what that number is. And I think you said you'll get it out between now and the beginning of 2016. Is that sort of a first quarter 2016 event? And then just broadly one of your peers talked about the pricing environment, which seems rather competitive. Again, just trying to get more color on what you're seeing in the market, given the excess inventory.
Charles L. Szews (CEO)
Okay, let me get started. And then both Dave and Wilson will provide some more color. First of all, when you look at our inventory build, you got to recognize that half of it relates to our defense business. I think people are over projecting the impact of our inventory build in access equipment, and a lot of that inventory we're going to be shipping here in our fourth fiscal quarter. Not sure on when the revenue recognition is. We said it's too close to call, so be conservative. We said next year in terms of earnings recognition, it could happen this year. All right, so that's a lot of the inventory right there. And then on the other hand, we're going to have some substantial working capital requirements in defense for the multiple contracts that we're talking about here going forward as well.
So in our defense business, you're going to see our inventory levels relatively high for some period of time, and that's a good thing because we're going to be generating a lot of earnings for the company. On the pricing side, I'll let Dave talk more about where we are in terms of bleeding off inventory and Access Equipment. But it will take us several months to get there, but we will do it in a rational manner. Pricing, I would say that most of the pricing stress or whatever in the marketplace is focused in Europe a little bit in Asia. Why? You can see the exchange rate impact this year, people taking advantage of that. Some of their markets, home markets for some of our competitors are in stress. And so they've had to deploy their inventory, you know, around the rest of Europe and the region.
So I'd say that we've seen more dislocation price there. You know, the rest of North America, you know, it's always competitive, but it's more rational. And, you know, it would be our intent to retain rational pricing, you know, for ourselves going out into 2016.
Wilson Jones (President and COO)
So, yeah, Jamie, this is Wilson. I'll jump in here. Just to be clear, on the access inventory that we have, it's not in our forecast to sell all that this quarter. We're going to be orderly about that. We believe we have good inventory. It's in the sweet spot of the market, so we're going to be disciplined with that and sell that appropriately.
Jamie Cook (Analyst)
All righty, thank you.
Operator (participant)
The next question is coming from the line of Ann Duignan with J.P. Morgan. Please go ahead with your question.
Ann Duignan (Analyst)
Hi, good morning. I'm giggling here to myself because good inventory sounds like an oxymoron usually. Can we talk a little bit about the defense business? Could you tell us just will these products that are in the backlog, will these be milestone payments or will they be bill upon ship? Just want to know how to model them.
David M. Sagehorn (EVP and CFO)
Mostly on international, excuse me, business. It's bill upon shipment and in some instances it's when it arrives in port is when we will get revenue recognition. So that starts the clock ticking from a payment standpoint.
Ann Duignan (Analyst)
Okay, that's helpful. Thank you. And can you give us a little bit more color on both your Commercial and your Fire and Emergency businesses going into 2016 and what are the headwinds and the tailwinds that you're factoring into your outlook?
Wilson Jones (President and COO)
Yeah, on the Fire and Emergency side, it's, you know, it's a good story. The municipal budgets are strengthening. Housing is driving municipal tax receipts. So we continue to see good activity. I talked a little bit about how our fire and rescue company Pierce has gained some share, some really good new product introductions that are going to kick in in 2016 for them. So we see a positive outlook for them. Again, it's a story of continuing to focus internally and drive operational efficiencies and then continue to win in the marketplace like they've been doing on the Commercial side. The really high note for us there is refuse collection vehicles. That market is again following some of the municipal indications like a Pierce or a fire business does. So we're seeing good activity around the refuse collection vehicles, which is our higher margin in the segment mixers.
We're bullish on that, but it's choppy. The ready mix customer is working through weather issues, CapEx issues. So we have a positive outlook for mixers, but we do caution it as being choppy.
Ann Duignan (Analyst)
Okay, that's helpful. I'll leave it there. Thank you.
Charles L. Szews (CEO)
Thank you.
Patrick N. Davidson (VP of Investor Relations)
Thanks.
Operator (participant)
Our next question is from the line of Pete Skibitski with Drexel Hamilton. Please go ahead with your questions.
Peter Skibitski (Analyst)
Yeah, I just want to understand the international M-ATV. The first shipment, I guess, is my first question. So in guidance, are you basically expecting to ship and book 150 in this quarter and the last 150 in the.
First quarter or have all 300 slid.
To the first quarter?
Charles L. Szews (CEO)
So in our estimate range of $3-$3.25, we've assumed that all of the units of this first contract ship in our first fiscal quarter. Having said that, it's not a done deal. It's too close to call. And because it was too close to call. We took it out of our estimates for the fourth quarter, but it's still possible.
David M. Sagehorn (EVP and CFO)
Pete, maybe just one clarification there. So the rev rec all in the first fiscal quarter, we actually expect that we're going to have units on the boat on the way yet this fiscal year. Right.
Peter Skibitski (Analyst)
Okay.
Okay. And then just on your thoughts on Access next year, I think some of this was touched upon. But how much are you assuming in terms of lower units versus lower pricing and are you assuming, you know, AWPs and telehandlers decline at the same rate or does one side face more headwind than the other?
Charles L. Szews (CEO)
Pricing in 2015 is relatively flattish for us in terms of volumes. Our basic assumption is that both categories, booms, telehandlers are down a little bit. Scissors up.
David M. Sagehorn (EVP and CFO)
Yeah, hopefully, Pete, we get back into this year. We're ending up with a lower percentage of booms than we anticipated. Just given the focus by customers in the first half of the year on telehandlers and as they brought their CapEx outlook down late in the year when we had anticipated a higher mix of booms late in the year, we believe that we will get back into a more normal balance next year as a lot of this engine emission driven mix change is behind us.
Peter Skibitski (Analyst)
Okay, thanks.
Operator (participant)
Our next question is from the line of Tim Thein with Citigroup. Please go ahead with your questions.
Timothy Thein (Analyst)
Great, thank you. Good morning. Just to follow up again on Access, can you comment a bit on just kind of the order trends across the nationals or more so just in terms of the independents? I guess I'm curious there how they've been dealing with this kind of softer utilization. And presumably some have less ability to kind of move their fleet around with the weakness in certain markets. So just curious one, order trends between the two major classes. And then in that initial forecast for 2016, which I'm sure there's quite a bit of guesswork forecasting next year and not even out of July. But just what if any kind of underlying shift is assumed in there in terms of the split between nationals and IRCs? Thank you.
Wilson Jones (President and COO)
I would say that we're seeing a similar percentage the last two years as a percentage of growth. IRCs have grown a little faster than the NRCs. This last quarter we saw similar activity. IRCs continued to buy, as did the NRCs. And I would say that the mix hasn't shifted a whole lot. And as you pointed out, it is early for us to really forecast 2016 and what that will look like from a percentage standpoint. We're starting those discussions. Now, most of our customers are on a calendar year and we'll have a little more definitive information for you in October.
Timothy Thein (Analyst)
Just to clarify, that 5%-10% number, was that for the segment overall or for the U.S.? I thought I heard different things on that.
Charles L. Szews (CEO)
For the segment overall,
Wilson Jones (President and COO)
we talked about.
The international markets being similar to the U.S. in the 5%-10% decline.
Operator (participant)
Okay, thank you. The next question is coming from the line of Jerry Revich with Goldman Sachs. Please go with your question.
Jerry Revich (Analyst)
Hi, good morning.
Charlie.
It looks like there's been a bit of a shift in the military's focus on investment spending towards your categories. Can you just give us some more color on the drivers? When we look at your full year guidance for defense, that implies fourth quarter run rate of revenue in the $250 million range at mid-single-digit margin. So is that the run rate we should be thinking about for the base FHTV and FMTV business and then layer on whatever assumptions we make for M-ATV? Is that the framework at these levels?
Charles L. Szews (CEO)
You're in the ballpark in terms of base business. I wouldn't say that there's been a dramatic shift in Department of Defense's view to buy more in terms of tactical vehicles. We just had an inordinately long time to renegotiate the FHTV contract, which caused a break in production. But so the funding has been visible for some period of time. It's not like the funding levels increased. It's just we finally got the contract negotiated, we can start shipment again. But so we do see though sort of the base level of tactical vehicle shop spending continuing in North America or in the US for some period of time, our international M-ATV business growing. But frankly we're getting a lot of opportunities for other product categories in defense as well. Globally we're seeing more opportunities for FMS cases, et cetera going forward.
Jerry Revich (Analyst)
Okay. In Access Equipment, you had a number of new product introductions this year. Can you just talk about what's been the overall year-to-date headwind this year as a result of those transitions? And what's the new product introduction cadence for next year? How much of that do we get back in 2016.
Charles L. Szews (CEO)
So the vast majority of our product launches this year went very well. We just had a lot of them. All right. And if you read, parse through our comments, we say to a much lesser extent was delivery issues. And that's primarily where it's been. We've been able to, you know, contain quality to be solid with all of our product launches, some being exceptionally good; we've had a steady cadence all year long. Roughly 30, 30 new product launches in 2015. So it's a hefty year. But in part of it was expected because the telehandler product line, all new engine emission standards changes were coming through this year. So virtually that whole product line, we had to upgrade it for engine emission standards. While we're doing that, we upgraded our product line so the telehandlers have more reach, higher lift capacities, those kinds of things.
We've done the same thing with our booms that we've been launching this year. So it's been a robust year. We do expect 2016 to be another robust year. Maybe a little bit fewer products, but not many. So it's going to be another big year for us in 2016 and we expect that these products will offer greater features and better performance for our customers as well as contribute to margin expansion.
Jerry Revich (Analyst)
Thank you.
Patrick N. Davidson (VP of Investor Relations)
Thanks, Jerry.
Operator (participant)
Our next question is from the line of Mike Shlisky with Global Hunter, please.
Michael Shlisky (Analyst)
Good morning guys. Just wanted to touch on access. While we recognize that certainly we could see some production coming down from here, is there anything you can do on the cost side to kind of minimize the margin downside or have you kind of gone through that over the last two years and now it's just going to come down to up and down leverage on volume and pricing?
Wilson Jones (President and COO)
Well, as we've been saying all along that with these product launches they're intended to also provide margin expansion. Our biggest benefit from these initiatives come in 2016. We've been saying that for at least a year, but until we prove it to you in 2016, maybe you don't believe it, but it's our expectation that they're going to be high performing products for our customers as well as good performing for our shareholders as well.
Charles L. Szews (CEO)
We'll also, we have some opportunities from the SG&A standpoint that we'll be taking a look at in terms of the remainder of the 15. It takes a little bit of time to get those implemented. We'll start to see the benefit of those in CY.
Michael Shlisky (Analyst)
Great.
And then maybe.
In the fire business as well.
What sort of inning are you in getting some of those cost efficiencies in the Pierce business? And is it fair to say that we'll see better margins there in 2016 versus 2015 and then 2017 versus 2016 as you get these kind of cost benefits down here?
Wilson Jones (President and COO)
Yes, Mike, that's the plan. We're getting our operational efficiencies in place and we've shown improvement the last few quarters and we plan to stay on that plan. If you remember back in 2009, that was a 10% OI business and we've certainly got a path to get there. We haven't been definitive on the years because we want to make sure everything we do today we can sustain long term. But that is the plan.
Michael Shlisky (Analyst)
There still is quite a bit of ways to go there. There's some runway left here.
Wilson Jones (President and COO)
Oh, yes, yes.
Michael Shlisky (Analyst)
Great.
Thanks, guys.
Patrick N. Davidson (VP of Investor Relations)
Thanks, Mike.
Operator (participant)
Our next question is from the line of Ross Gilardi with Bank of America. Please go ahead with your question.
Ross Gilardi (Analyst)
Yeah, good morning. Thank you.
Charles L. Szews (CEO)
Morning.
Wilson Jones (President and COO)
Morning, Ross.
Ross Gilardi (Analyst)
Hey, Charlie. I'm just trying to understand a little bit more why you're suggesting low double-digit earnings growth for 2016 when clearly what's happened today wasn't foreseen 8 weeks ago. I mean, what kind of defense revenue and earnings growth are you suggesting we model for 2016 when you got a 5%-10% decline in access. You're saying concrete mixers are slowing and inventories, even if you take out the defense, are still going to be up. It seems like 15%-20% year-on-year. So I just try and understand a little bit more the magnitude of what you're saying we should put in for defense because otherwise it just doesn't. I don't see how you get to that type of earnings growth.
Charles L. Szews (CEO)
We've been saying it's meaningful, it's significant and that's what you should assume. That's what we're assuming. All right. I don't know how many times I have to say that, but that is what our expectation. Now again, let's go back to Access Equipment. You know, 5%-10% sales decline. We made prepared remarks that we expect we can mitigate a substantial piece of that through our MOVE initiatives. So you don't have to recover at all. Okay. Just some of it. And you look at, you know, hundreds of vehicles of M-ATV. If you parse through all of our comments, it's pretty clear we're doing that. And these are expensive units at decent margin. You can drive some really meaningful growth in earnings in our Defense segment.
You add on top of that the fact that we've got Commercial and fire emergency which we expect to continue to grow. You make the comment about the mixer orders, but we see that was much more weather-related construction short-term. We do think that. As you see the growth numbers, housing getting a little bit better, non-res getting a little bit better. We would expect that going into 2016 that would recover or come back again. Our overall year-to-date numbers and mixers are very solid and they will be for the year. We would expect that to continue into next year. So the mixers would grow next year. Our refuse collection vehicle business is doing very well right now in a slowly improving market. But we've been gaining some significant market share with our new product launches.
One of our biggest launches is coming up here with the Meridian as we start production of our new lightweight front loader that we're taking a lot of orders already and we're not even starting production until January or February 2016. So we'd expect that to be good. And there's upside even in the defense business. But again, it's early to quantify it too much. You need to have contracts in order and that's why we're being sort of broad range in our overall outlook.
Ross Gilardi (Analyst)
Got you. And then just one for Wilson, maybe. Wilson, could you just talk a little bit more about what you're saying in European Access Equipment, because that's been one of your strongest growers recently. Is that slow? Is Europe slowing down as well? And I think you mentioned something about the pricing being tougher in Europe, if I heard that correctly.
Wilson Jones (President and COO)
Yes, Ross, pricing has remained pretty tough in Europe. But what I was referencing in my prepared remarks is we had a couple of countries that really went pretty heavy into replacement this past year and we don't expect that to continue next year. The business, we believe, will still be good, but just not as robust in a couple of the countries that we saw in 2015.
Ross Gilardi (Analyst)
Gotcha. Thank you.
Charles L. Szews (CEO)
Thanks.
Operator (participant)
Our next question is from the line of Ted Grace with Susquehanna. Please go ahead with your questions.
Ted Grace (Analyst)
Good morning, guys. Wilson appreciated the comments on inventory within Access Equipment. I was wondering, could you talk about channel inventory and kind of how we should think about the inventory that's sitting at the dealer and distribution level, whether you in dollar terms or months of sales? And kind of how long you expect that side of the equation to take to kind of normalize?
Wilson Jones (President and COO)
Well, it's anecdotal for us. We don't have a metric that's shared with us. You hear some of the comments that are out there. What we're hearing is most of the O and G has been redeployed, so that's getting better. We're hearing they're not fighting through weather, so absorption that's been needed. We believe it's happening pretty fast. I'll give you one reference point. Our July is certainly on track with our revised estimates. We're hearing now that on rent is encouraging with the rental customers in July. So the surplus that's out there seems to be being defined pretty fast.
So just to be even more direct here, when we ship, I mean 90%+ of what we're selling certainly in North America is going to rental companies and goes into the utilization rates right away. They're absorbing it very quickly and they pace their purchases so that they can absorb it quickly. As you read the commentary from some of the larger rental companies, we'll see Access Equipment utilization rates remain pretty good. They were a little bit weak in May. That caused, you know, some slowdown in orders in late May and June and that impacted us in our year. But they're back to strong levels and should support purchase going forward. We have very little inventory and it's primarily in telehandlers that go in North America that goes to a dealer and could sit in their inventory.
When the national rental companies buy equipment for retail, that's quick turn business for them as well. It's not like they're buying hundreds of units and sitting them on a lot. We're not able to capture any of that data. It's very clear that's almost a pass through they give us. When they get a retail order, they give it to us and it goes out to the customer. We have a little bit more of that. When you go globally in terms of. We do have dealers in certain countries but it's pretty clear when we go around the world that people aren't sitting on a lot of inventory at dealers.
Ted Grace (Analyst)
Okay, that's helpful. The second thing I was hoping to ask is just and more kind of a refresher on history. If we were to go back to the inflection in your aerials business in the U.S. and think about the mix of national rental companies versus the independents, could you just remind us kind of like how those two paths have progressed and where you see the national rental companies and their CapEx cycle versus the IRCs just so we can think about how that plays itself out over the next couple of years.
Charles L. Szews (CEO)
I think it's been pretty normal. In the weakest times of the market the NRCs are just as significant piece of the overall spend in the marketplace and the IRCs are relatively small. As the cycle progresses the IRCs start to pick up when their balance sheets are stronger and they can, you know, buy inventory. We're still at a point where as the cycle progresses in 2016, 2017 and 2018, you know, a lot of most, you know, forecasters are still projecting pretty good residential and non-residential spending through those years that you would still see IRCs becoming a bigger piece of the market in each of those years. That's what we would expect over time.
Ted Grace (Analyst)
So, Charlie, in terms of what's embedded in your 2016 framework of down 5-10 in the U.S. for access equipment, would it be fair to assume that NRCs are down more than that and IRCs are down less or up? I mean, just how would you frame those two groups next year? Because I think that's where a lot of people are trying to figure out.
Charles L. Szews (CEO)
I think they're very similar, and we've had conversations a lot of customers. We think we're in the sweet spot of where they're heading. But again, it's still a small sample size because there aren't that many talking. And there's certainly factors that could move it in multiple different directions. If non-residential spending picks up at a faster pace, then we're going to be at the lower end of that range. And if it still stays slow, we're probably at the higher end of that range. But again, for us to be down more than that, it would really have to be a turn in the overall global economy, and everybody ought to be putting their money into cash.
Ted Grace (Analyst)
Good luck this quarter, guys.
Charles L. Szews (CEO)
Thank you.
Operator (participant)
Our next question is from the line of Seth Weber with RBC. Please go ahead with your question.
Seth Weber (Analyst)
Hey, good morning. Just one more on Europe Access. Wilson, is there any color around the countries that you're talking about? Because when we look at the age of the European rental fleets, it's actually quite old. So I was surprised to hear the commentary about the moderating replacement demand. Can you just give us any color on which countries that you're seeing that specifically?
Wilson Jones (President and COO)
Yeah, Seth, I'll give a little more color there. The UK had a really big year. UK was one of the slower countries in Europe to come back, and it's always been a big market. So they had what we consider past peak year. So we just don't know that they can sustain that this next year. The initial information we're receiving is still a little gray, so it could, but we're anticipating that it may dial back just a tad. And then the Benelux was very strong this year, stronger than usual. And again, we're looking at can these markets sustain those levels? And those are the two that we're just not sure can do that next year.
Seth Weber (Analyst)
Yeah. Okay, that's helpful. Thank you. And then when I look at your Commercial business to get to your margin target for this year. I mean the incremental margins in that business are not particularly heroic. Are you still seeing some issues on the supply side with the supply chain or I mean why wouldn't the incremental margins start to be better there given the revenue growth that you're seeing?
David M. Sagehorn (EVP and CFO)
Seth, I think we've got a couple things going on there. We talked a little bit about. We're seeing more package units and that's when we sell the body that we manufacture. So that's really our value add and a chassis that's a third party Commercial chassis. I think we've talked in the past that we don't make a lot of money on the chassis Commercial chassis that we supply in those package units. I think the second thing is the construction continued investment in MOVE initiatives. As you recall, we launched a lot of the MOVE initiatives around the O on cost optimization in the Access Equipment segment. We proved out some of the methodologies there, so to speak, and have been subsequent to that rolling those out into the other segments. So we're seeing Commercial more still in the investment mode for from that standpoint.
Seth Weber (Analyst)
And so should that. Should we expect incremental margins to be more typical next year after you start to harvest some of this investment?
David M. Sagehorn (EVP and CFO)
I think one of the wild cards.
Is going to continue to be what we see on a body only versus package mix. We do anticipate that we're going to continue to have some additional MOVE investments next year in that segment. So.
So.
It's still early as we said here and we'll provide more color as we firm up our view in terms of what the market looks like and what the mix within that looks like for the October call.
Seth Weber (Analyst)
Okay, thank you very much guys.
Operator (participant)
Our next question is from the line of Stanley Elliott with Stifel. Please go with your questions.
Stanley Elliott (Analyst)
Hey guys, good morning. Quick question for you on the JLTV. Is that the one that was submitted, is that still going to be a single source sort of a product where kind of a winner take all approach or has there been any mixing as far as technology platforms or anything of that nature?
Charles L. Szews (CEO)
It's clearly going to be a single source and frankly the volumes aren't adequate to go to a dual source. We're highly confident it'll stay single source.
Stanley Elliott (Analyst)
Okay. And then in terms of the mixers with that having kind of slowed down, if I remember correctly, that still pretty old fleet out there. Could you help us with kind of the age of the fleet and maybe where we are from prior peak?
Wilson Jones (President and COO)
Yeah. Right now, Stan, we kind of estimate we're in that 5,000 range from an annual mixer market. We think it can go. I'm sorry, I misspoke there. It's about 4,000 truck market right now. We expect that it will move up. It used to be in that six some years we saw 7,000. We don't know that it will ever get back to that. It's in that 4,000 unit range right now. Again, 6,000 is what we would call a normal.
Stanley Elliott (Analyst)
Great. Thank you very much.
Operator (participant)
Thank you. Our last question is from the line of Brian Chin with Bank of America. Please go ahead with your question.
Brian Chin (Analyst)
Hi, how are you? So just a couple of questions on the Defense segment of the business here. One is you said the first contract that's coming up you're expecting to sign in the next couple of days, that's for 150 units. But the one that's for sounds like thousands of units. Is that as near of a certainty as the first contract?
Charles L. Szews (CEO)
So the first contract is for a few hundred of which we would expect to ship 150 in our fourth fiscal quarter. And revenue recognition is too close to call. Could be in our fourth quarter. Could be in our first quarter. We put it in our first quarter. To be conservative in the estimates that you saw today. The second contract is for over 1,000 units. All right. Then we have a few other contracts that are in progress that are a couple thousand or more that would follow behind that. All right. So we've got multiple stages here of contracts. What was your question about the second one again? Sorry, I lost it.
Brian Chin (Analyst)
Yes, sorry. So I guess what I meant by that is it sounds like this first contract for 150 or 200 units is a near certainty because it's going to be signed in the next couple of days. But are you as confident about the second contract? Because obviously the one for 1,000.
Charles L. Szews (CEO)
So we've got a letter of credit on the first contract. I mean we're, you know, we're just waiting for one more signature. All right. In terms of. And that's the first contract for the second contract for 1,000 plus, you know, we conclude negotiations. There's a contract that has been, you know, brought forward and it has a process. And this next step of this process. Well, there are probably four or five steps that we actually go through from this point until we actually have a contract. And that can be as long as, you know, sometime in mid-1Q2016. But yet it can be completed, perhaps because of some more urgent needs in that region.
We can't be too definite on it, but once it gets to this stage, we're highly confident that we're going to have a contract and that we're going to be shipping units in 2016.
Brian Chin (Analyst)
Is that the same buyer between these two contracts or is it a different?
Charles L. Szews (CEO)
We're not talking about who the customers are here. Sorry, but that's privileged. Our customer would prefer not to be mentioned.
Brian Chin (Analyst)
I just have one quick follow up question if I could. So you were saying that the defense business will essentially drive earnings growth for next year. In that defense forecast that you guys have, are you guys essentially including any type of some type of weighted probability of winning the JLTV, even though it's like on. I think the first couple of years is on an LRIP.
Charles L. Szews (CEO)
Right, right. We're not going to give probability, but, you know, we're evaluated as a leader going into EMD phase. We tested very well. We tested very well. We believe that we have a very competitive offering. We're giving the warfighter next generation mobility very good survivability. It's really an awesome vehicle and you ought to see videos of it that you probably can see on our website. It's impressive. Having said that, we've been fortunate to win contracts or sometimes you lose them. We're not here to predict it, but we were again the leader going into this phase. We tested well and we have a.
Competitive offering, and it would not, if we're fortunate enough to win. And again, we think we got a great offering. It would not have a significant impact on our fiscal 2016 results. Just as you mentioned on the LRIP cadence, we start to see that more in 2017 and 2018 and really ramp up starting in 2019 for us.
Brian Chin (Analyst)
Okay.
All right. Appreciate it.
Thanks, guys.
Operator (participant)
Thank you. At this time, I will turn the floor back to management for closing comments.
Charles L. Szews (CEO)
Okay. Thank you all for your questions today and for your interest in Oshkosh Corporation. We expect our defense business to be an earnings catalyst for the company in 2016 and 2017. We also see a nice uptick from Commercial. Commercial and our fire emergency segment. So we again believe we have a positive outlook going forward. Have a good day, everyone.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.