Oshkosh - Q3 2016
July 28, 2016
Transcript
Operator (participant)
...Greetings, and welcome to the Oshkosh Corporation Fiscal 2016 Third Quarter Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Pat Davidson. Thank you. You may begin.
Patrick Davidson (Head of Investor Relations)
Good morning, and thanks for joining us. Earlier today, we published our third quarter fiscal 2016 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 it's also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide two of that presentation. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.
These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or year are to our fiscal quarter or fiscal year, unless otherwise stated. Our presenters today include Wilson Jones, President and Chief Executive Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, Wilson.
Wilson R. Jones (President and CEO)
Thanks, Pat. Good morning, everyone. Today, we announced third quarter earnings per share of $1.13 and raised our outlook for the remainder of 2016. I'm proud of our team and their continued focus to deliver another quarter of solid results in a challenging environment. You've heard us all talk about Oshkosh being a different integrated global industrial. I think you're seeing that in our results, and we'll see more in our performance in the coming years. Our MOVE Strategy and evolving People First culture, along with our industry-leading brands and unique blend of businesses with diverse end markets, provide us with an opportunity to deliver solid performance for shareholders. In particular, our Defense, fire truck, and refuse collection vehicle businesses benefit from drivers that support improving end market demand at a time when our access equipment and concrete mixer businesses are seeing lower market demand.
Highlights for the third quarter include continued strong sales growth in the Defense and Fire & Emergency segments. Our march toward margin enhancement continued, with higher operating income margins in the Defense, Fire & Emergency, and Commercial segments, and progress on the funding and delivery schedules for the large international M-ATV order that we received in the second quarter. As I mentioned earlier, we increased our full-year earnings per share outlook. We also tightened the range. Our new earnings per share estimate range is $2.60 to $2.80. Later on this call, Dave will walk you through the details of our new range. Overall, it was a good quarter, and we're excited about our outlook. Please turn to slide four for a discussion of our segments, starting with Access Equipment segment third quarter results largely reflect the dynamics we're seeing in this industry.
The North American market remains cautious. To remind you, the North American market is experiencing low replacement-driven demand as a result of lower purchases during the 2009 to 2010 time frame. In addition, our rental customers are closely watching their fleet utilization rates and local market rental rates, leading them to be more selective with their capital expenditures. We continued to see solid activity in Europe this quarter as this market continues its recovery. It is too early to provide an accurate assessment of what the long-term impact of Brexit will be on our business. There has been little change in our markets in the near term. The long-term impact is unknown and will evolve over time. I would like to remind you that the U.K. represents only 1% to 2% of our consolidated sales, so the direct impact on us is limited.
Elsewhere, the Brazil market remains extremely depressed, while we continue to see growth in the Asia Pacific region, and the market in Australia continues to feel the impact of the ongoing slowdown in mining. Rounding out our thoughts by region, we continue to experience generally challenging pricing environments, driven primarily by the strong U.S. dollar and lack of market growth. As the market leader in access equipment, we will always strive to maintain pricing discipline. Operationally, the Access Equipment team made good progress, responsibly lowering inventory levels this quarter. The reduction that started in the second quarter accelerated during the third quarter, and we remain confident that we will achieve targeted inventory reductions by the end of this year. We aren't providing a forecast today for 2017, but we believe these challenging conditions in the access equipment market will continue, likely leading to lower sales in this segment in 2017.
While the rental industry is generally performing well, we believe customers in North America, particularly, will maintain their cautious approach to fleet purchases in 2017. In contrast to current access equipment market conditions, our longer-term outlook for the business is positive. Solid domestic construction forecast over the next several years, as well as product adoption and market penetration in newer, less developed markets, along with the overall trends for improved safety and productivity, contribute to our positive outlook Access Equipment segment. please turn to slide 5 for a discussion of Defense. Our Defense segment is a big differentiator for Oshkosh Corporation. Our backlog for this segment is now $2.3 billion, nearly double what it was last year at this time, with $1.6 billion of the backlog slotted for 2017 sales. The Defense team was very active in the third quarter.
One of the highlights was the promotion of John Bryant to Segment President in June. John served in the U.S. Marine Corps for 28 years, retiring as a colonel before coming to Oshkosh, where he ran all of our domestic vehicle programs for the past 5 years. John has been instrumental in the return to growth of our Defense business, including managing a portfolio of heavy, medium, and mine-resistant tactical wheeled vehicles for the U.S. Department of Defense, as well as leading our campaign to enter the light tactical wheeled vehicle market by winning the JLTV program. JLTV continues to move forward as a model program for the U.S. Army and Marine Corps. We are working side by side with our U.S. government customer every day to build, test, and field the world's most capable, light, protected, tactical wheeled military vehicles.
In early June, we held a JLTV supplier kickoff event in Oshkosh that was attended by more than 200 suppliers. The positive tone and productive discussions at the event reinforced my confidence in our ability to deliver a great vehicle that fills many mission roles for our country's servicemen and women. In the third quarter, we continued our international JLTV marketing campaign, displaying the vehicle at the Eurosatory trade show in Paris. I'm not going to go into details on this call, but we received a high level of interest in the JLTV from international militaries. It's unlikely that we will receive or realize any international JLTV revenues in the near term, but we are highly confident that there will be customers for these vehicles outside the U.S. As I mentioned earlier, we made progress with the large international M-ATV order during the quarter.
Our investment in procuring a limited amount of longer lead time materials early this year has paid off as we begin shipping a limited number of M-ATVs to our customer this month, contributing to our improved fourth quarter outlook. We continue to engage in discussions with foreign militaries regarding the requirements for Oshkosh Defense vehicles and are confident that we will secure additional orders. But as we previously said, the timing of securing additional contracts is uncertain. Our outlook for the Defense segment has not been this strong for some time, and we're very excited about the potential for this business in the coming years. Please turn to slide 6 to discuss the Fire & Emergency segment. The Fire & Emergency team delivered another quarter of improved year-over-year results.
This is a testament to the efforts of our team members, not only in this quarter, but over the past couple of years. The Fire & Emergency team has implemented numerous process improvements and structural changes, and we are really starting to see the benefits flow through in this segment's performance. Third quarter results benefit from these operational improvements, along with strong demand from cities and towns that are replacing aged fire trucks and demand for recently introduced innovative new products. The operational improvements allowed us to increase our fire truck production rates earlier this year, and we are increasing our build rates again during the fourth quarter. We're pleased with the improved performance at Fire & Emergency and are confident that Jim Johnson and his team will build on this momentum going forward.
The fire truck market in the U.S. has continued to slowly recover from the downturn experienced from 2009 to 2013, benefiting from improved municipal tax receipts and the demand to replace aging fleets. A good example of this is Kansas City, Missouri. About a year ago, we received a significant order for Pierce fire trucks from the Kansas City Fire Department. This order was to replace a large portion of Kansas City's fire truck fleet. I'm pleased to announce that we've been shipping these units, including a substantial block of them, this quarter. Kansas City is representative of a number of large cities that have been placing orders to replace and upgrade their fleets. We expect the slow recovery of the U.S. fire market will continue into 2017. Please turn to slide seven, and we'll talk about our Commercial segment.
The Commercial team delivered a good quarter, with higher operating income compared to the prior year quarter on modestly lower sales. Fleet replacement by larger private waste haulers has continued to lead a nice recovery in the domestic refuse collection vehicle market. Solid levels of construction activity and improved municipal tax receipts are additional catalysts to the RCV market and to the improvement that we've seen in this past year in this business. We've also continued to gain share in this market, driven by our innovative lineup of RCV models. We did have a tough comparison in the third quarter due to a large international RCV sale in the prior year quarter, but we still delivered solid RCV sales this quarter.
Turning to concrete mixers, we continued to experience solid orders and backlog for front discharge mixers in the third quarter, while most rear discharge mixer customers continued their more cautious approach to ordering. We did see the typical seasonal pickup in demand for this product. However, rear discharge customers have continued to place orders for new equipment at a measured pace. That wraps it up for our four business segments. I'm going to turn it over to Dave to discuss our financials and our changes in outlook in greater detail.
David M. Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. Consolidated net sales for the quarter were $1.75 billion, up 8.4% from third quarter 2015 sales of $1.61 billion. Sales increase was driven by strong percentage increases in both Defense and Fire & Emergency segments, along with a slight Access Equipment segment sales increase. Commercial segment sales were slightly lower than the prior year quarter, due mainly to the large international RCV sale in the prior year quarter, as Wilson noted. The increase in Defense segment sales was driven by higher FHTV sales. You may recall, last year, we had a break in FHTV production as we negotiated a new contract with our U.S. government customer.
The increase in Fire & Emergency segment sales was due to improved operational efficiencies, which allowed this segment to increase its production rate to meet the higher demand that they've experienced over the past year. Slight Access Equipment segment sales represents a significant improvement in year-over-year sales change when compared to the year-over-year sales change in the first half of the year. This is more the result of the comparisons getting easier in the third quarter than a change in overall market conditions, however, from the first half of this year. Consolidated operating income for the third quarter was $146.8 million, or 8.4% of sales, compared to $136.6 million, or 8.5% of sales, in the prior year quarter.
We're pleased and encouraged by the higher operating income and operating income margins reported in the Defense, Fire & Emergency, and Commercial segments. Higher operating income compared to the prior year in the Defense segment was driven by a positive mix, along with contractual price increases and the higher level of sales. Defense operating income margins of 7.2% in the quarter were significantly higher than our expectations. Better operational efficiencies and lower SG&A expenses contributed to the higher-than-expected margins. Further, our previous Defense outlook had not factored in JLTV contract revenue associated with engineering and test support costs incurred during the quarter for this program. Higher Fire & Emergency operating income was driven largely by the higher sales volume and improved pricing, and higher Commercial segment operating income was a result of improved product mix.
The lower operating income and operating income margin Access Equipment segment on relatively flat sales was attributable to a more challenging pricing environment and the reversal of accrued incentive compensation expense in the prior year quarter, when the segment lowered its full-year outlook, partially offset by lower spending on engine emissions standards changes and the benefit of slightly higher sales volume. We commented in our second quarter call that pricing had become a headwind on margin performance in this segment. As we expected, that environment continued into the third quarter, and we believe it will continue through the fourth quarter as well. Corporate expenses were higher this quarter compared to the prior year due to higher incentive compensation costs.
Similar to the Access Equipment segment, in the third quarter of 2015, we reversed previously accrued incentive compensation costs as a result of lowering our expected full-year outlook for 2015. This year, we accrued incentive compensation expense in the third quarter, commensurate with our expected increased full-year results. Earnings per share for the quarter was $1.13, the same as the prior year quarter. Prior year third quarter results included 9 cents per share benefit related to the settlement of tax audits and expiration of statutes of limitations. Current quarter results benefited 7 cents per share compared to the prior year quarter as a result of our share repurchase activity over the past year. We did not repurchase any shares of our common stock in the third quarter.
Please turn to slide nine for a review of our updated expectations for 2016. We are increasing and narrowing our 2016 EPS estimate range, $2.30 to $2.70, to a range of $2.60 to $2.80, on sales of $6 billion to $6.1 billion and operating income of $340 million to $360 million. There are a number of pieces to the change in the EPS estimate range, so let me walk through those with you. We are narrowing the sales range for Access Equipment to $2.9 billion to $2.95 billion, or effectively, the high end of our previous sales range.
We are also lowering the estimated full-year operating income margin for this segment from approximately 10% to a range of 9.5% to 9.75%. Reduction largely reflects an expected less favorable mix compared to our prior expectations. In the Defense segment, we increased our estimated sales to $1.25 billion, largely to reflect the expected sale of approximately 175 M-ATVs in the fourth quarter, under the large international contract that we received earlier this year. We also increased this segment's estimated operating income margin, 5.25% to approximately 7.75%.
Drivers of this increase include the higher expected sales volume, improved operational efficiencies realized in the third quarter and expected to be realized in the fourth quarter, and the update to the JLTV engineering and test support revenue that I discussed earlier. We increased the Fire & Emergency segment sales outlook from $900 million to approximately $950 million, to reflect the expected timing of vehicle deliveries. We increased the margin expectation in this segment from 6% to approximately 6.75%, largely to reflect the increased sales volume. We also increased our estimate range of corporate expenses to $150 million to $155 million, to reflect higher incentive compensation expense related to the expected higher results for the year.
We are increasing the estimated tax rate for the year from 30% to 32%, to reflect a higher proportion of earnings in higher tax rate regions. Finally, we are increasing our estimated free cash flow for the year from $275 million to approximately $400 million, largely to reflect progress made on collecting payments on international Defense contracts early in the fourth quarter. A lot of moving pieces, but overall, a positive outlook for 2016. I'm going to turn it back over to Wilson now for some closing comments before we open it up for Q&A.
Wilson R. Jones (President and CEO)
Thanks, Dave. On our last earnings call, I described our second quarter as one in which we were making progress. That's the case again this quarter, as we delivered solid performance and have a strong outlook. Before we take questions, I'd like to summarize why we are a different integrated global industrial, and why we believe we can deliver solid performance for shareholders in the coming years. Our Defense and Fire & Emergency
David M. Sagehorn (EVP and CFO)
... are delivering strong results with extensive backlogs and solid tailwinds behind them. These businesses are both gaining momentum and will drive our performance until we see a recovery in the access equipment market. Our Commercial segment is growing and posting higher margins. We have a team delivering solid results despite uneven market. Access Equipment segment is currently operating in a period of lower demand, but we are the market leader, and we will manage our production levels and cost structure to drive operating efficiencies across the cycle. Collectively, we are a technology leader with market-leading products that drive sustainable, long-term competitive advantages across our segments. As we finish our prepared remarks, I'll remind you of our upcoming Analyst Day. We're planning a fun, high energy, informative event on September 22 and 23.
We were asking analysts to come out early to experience the thrill of riding in a JLTV on our famous test track. I'm confident that every one of you who takes a ride in our revolutionary new vehicle will step out of the unit with a big smile on your face. I invite you to come on out and give it a try. If you haven't been in contact with Pat or Jeff about securing your spot at our Analyst Day, please reach out to either of them to get information on our event. I'll turn it back over to Pat now to get the Q&A started.
Patrick Davidson (Head of Investor Relations)
Thanks, Wilson. I'd like to remind everybody, please limit your questions to one plus a follow-up. After your follow-up, we ask that you get back in queue if you'd like to ask additional questions. Operator, please begin the question and answer period of this call.
Operator (participant)
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 Tim Thein with Citigroup. Please state your question.
Timothy Thein (Analyst)
Great. Thank you, and good morning. The first, maybe for Dave, I was on, coming back on access and just kind of thinking about some high-level thoughts. You had, you had mentioned that the initial outlook for lower sales in '17, and just help us think about some of the drivers to, to decrementals. On the one side, you, you did mention that the, the challenging pricing environment, and, yeah, if sustained, it looks as though steel costs could be a, could be a headwind, though at the same time, you are-- you would presume that, that some of this under absorption penalty would be behind us. So maybe just help us kind of frame some of the, the, the how you're thinking about decremental potentials, decremental margins in '17.
David M. Sagehorn (EVP and CFO)
Sure. As you touched on there, Tim, a number of pieces to that. I would say in terms of the volume, we're still working our assessment of the volume outlook for 2017, and we'll provide more color on that on the Analyst Day. But at this time, you know, we're thinking more in a, you know, maybe modestly lower, so not significantly lower from that standpoint. You know, we know we need... We've been through this before. We know we need to manage our way through it from a, in terms of dealing with any of the headwinds from a pricing standpoint. And we talked about that impacting the third quarter here.
I think for the fourth quarter, our view right now is we expect to see that kind of flatten out, similar impact in the fourth quarter than the third quarter. So, I don't know that that's going to necessarily be a big headwind next year. Again, yet to be determined, I think a little bit there. You touched on absorption. We certainly have underproduced to sales this year as we've brought the inventory levels down in that segment. So, the headwind that we've experienced this year from that standpoint, we certainly should not have next year and may actually be a little bit of a tailwind for us.
So, you know, there's a number of moving pieces, but we know that, you know, we've talked about targets of, call it, the mid-20%, incremental or decremental margins, and I think that's what we would be shooting for, next year, depending on the extent of the downturn that we see in the market.
Timothy Thein (Analyst)
Okay, understood. And then just maybe some help on the ASP for the M-ATV award. I know that there's more to it than this, but if I just take the change in the segment guidance implied for the full year and divide it by the 175, it implies kind of a low $400,000 per unit, which I'm guessing is probably not the right answer, but maybe if-
David M. Sagehorn (EVP and CFO)
Yeah.
Timothy Thein (Analyst)
Would be a little lower than I'd expect, so maybe a little help there.
David M. Sagehorn (EVP and CFO)
Yeah, it is a number, your number is low. There's a number of miscellaneous items additionally moving around, but typically, if you go back to what we sold M-ATVs for to the U.S. government, you know, that was close to $550,000 range.
Timothy Thein (Analyst)
Mm-hmm.
David M. Sagehorn (EVP and CFO)
So, start there and then think about probably a little inflation over time.
Patrick Davidson (Head of Investor Relations)
Additional models as well.
David M. Sagehorn (EVP and CFO)
Additional models as well.
Patrick Davidson (Head of Investor Relations)
Yeah.
David M. Sagehorn (EVP and CFO)
Yeah.
Patrick Davidson (Head of Investor Relations)
Different variants with different, you know, functionality.
David M. Sagehorn (EVP and CFO)
We're precluded, Tim, from talking a lot about that contract just because of the terms of the contract itself. But again, if you start with what we sold them to the U.S. for, that's a decent starting point.
Wilson R. Jones (President and CEO)
Tim, this is Wilson. If I could, if I could just dial back a little bit, maybe one more piece of color on your, on your access question. You know, we are in a kind of a challenging time, and we are taking, probably a, maybe a more conservative approach to 2017, and not ready to talk about it in full. But, you know, you keep in mind, the rental companies, most of them are on calendar years. So to work on our, next year's forecast with our fiscal year starting in October, it's. A lot of those companies are still formulating their 2017 plan. So, you know, we're very preliminary in our view now. And again, we may be viewed as being too conservative for next year.
We're not sure about that, but we thought we would stay on that side versus the opposite. And then just one closing remark. I enjoyed reading your report this morning, and just want to let you know, I appreciate you recognizing our Defense business as a visible catalyst. That's something that we see as a, you know, a real game changer for us going forward, and just want to let you know, I appreciate you recognizing that.
Jamie Cook (Analyst)
Got it. Appreciate the call here. Thank you.
Wilson R. Jones (President and CEO)
Thanks, Tim.
Operator (participant)
Our next question comes from Eli Lustgarten with Longbow Securities. Please state your question.
Eli Lustgarten (Analyst)
Thank you. Good morning, everyone.
Wilson R. Jones (President and CEO)
Hi, Eli.
Operator (participant)
Hi.
Eli Lustgarten (Analyst)
First, back on the Defense business, during your remarks, you indicated that I think you said $1.6 billion of the $2.3 billion backlog is deliverable for 2017. Is that accurate? And that doesn't include, spare parts or any other stuff. So, if you have $1.6 of that backlog, I assume that the revenue potentially could be somewhat higher than that.
Wilson R. Jones (President and CEO)
Yeah, you're spot on, Eli. That does not include aftermarket. So that's a good number for 2017. It's on contract.
Eli Lustgarten (Analyst)
We wouldn't be surprised if margins should at least hold next year, if not improve. Is that a fair statement?
David M. Sagehorn (EVP and CFO)
We've got a pretty decent mix for next year, Eli.
Eli Lustgarten (Analyst)
Yeah. And-
Wilson R. Jones (President and CEO)
Eli, we'll share more of that with you at Analyst Day for sure.
Eli Lustgarten (Analyst)
I figured that. I just want to make sure, but you know, we have to get there.
Wilson R. Jones (President and CEO)
All right.
Eli Lustgarten (Analyst)
Now, as far as the AWP market, you know, the big thing is obviously, besides the rental markets, is the amount of equipment coming back from the oil field. Can you give some idea, not only where your inventory level numbers were, which you said you'd probably be in line the end of the year, but we think the industry would be? And with production closer to, you know, retail sales or your sales number next year, because you don't have to underproduce, is it possible that even if you have down sales, you probably would have improved profitability as opposed to, it's not a decremental margin, but you'll still be able to show improvement in profitability just because of the absorption?
Wilson R. Jones (President and CEO)
Well, Eli, I think we're going to stay away from that second question. Again, we'll define that better for you in 2017.
Eli Lustgarten (Analyst)
Yeah, later on.
Wilson R. Jones (President and CEO)
On the oil and gas question, you know, what we're hearing from the majority of our customers is they feel that that's all been absorbed. Majority of it has. So, you know, our inventory is not as extensive in oil and gas as some of the other,
Eli Lustgarten (Analyst)
Mm-hmm
Wilson R. Jones (President and CEO)
... dirt equipment OEMs. So we think we're in pretty good shape in oil and gas. We did notice, you know, if you're watching the data, the little uptick in rig count, which is nothing to celebrate yet, but it is a positive step. But I think we're in pretty good shape from an oil and gas standpoint.
Eli Lustgarten (Analyst)
Yeah, let me just try the profitability number. Is there any reason to assume why margins wouldn't improve next year if you're producing closer, you know, to actual sales as opposed to underproducing?
David M. Sagehorn (EVP and CFO)
Yeah, as we said on the prior call, Eli, there's a number of things that are going to be in play here. You've got the actual volume level itself, and you know, absorption, depending on the magnitude of the decline, could be a tailwind for us. Pricing year over year, I think that's yet to be determined, but that could be, you know, flattish to down. Yet to be seen, as we said. Material costs, while you know, we have seen the spike, we've started to see some things, steel come down a little bit over the past few weeks, and the third-party reports we read, we expect it to continue to come down here, but that could be a little bit of a headwind for us. So there's just...
We're still early, as Wilson said, and a lot of moving pieces, and we'll try to pull that together in a more cohesive manner for the Analyst Day call.
Eli Lustgarten (Analyst)
Thank you very much.
Wilson R. Jones (President and CEO)
Thanks, Eli.
Operator (participant)
Our next question comes from Jamie Cook with Credit Suisse. Please state your question.
Jamie Cook (Analyst)
Hi, good morning, and congratulations on a nice quarter. Just a couple questions. Wilson, I was hoping you could provide, I mean, you said you've made progress on funding of the international M-ATV. Any color that you could share? I assume the $175 million of international M-ATVs for the fourth quarter you have funding for. And can you talk about the progress, you know, on the remaining $825 million and just over time, based on that contract, how we should think about that impacting, you know, receivables over time? And then my second question is, you know, your guidance, you increased your free cash flow guidance nicely in the quarter. It seems fairly fourth quarter weighted. So Dave, if you could just, you know, provide a little color on why the fourth quarter is, the cash flow is so strong.
Thank you.
Wilson R. Jones (President and CEO)
Thanks, Jamie. Well, Dave and I will both tackle this one for you. Yeah, we did make good progress. This is our fifth contract and actually the largest contract with this customer. We do expect to deliver 175 units in our fourth quarter. What we expect to do is approximately 1,000 will be in our next year, fiscal year 2017, and then we will have a carryover of some into 2018. So this is a pretty big contract for us. One that you know, we did lean ahead on some long lead time items, and that's going to help us improve the fourth quarter, as we mentioned in our prepared remarks.
I think what, what you need to keep in mind, and, and Dave will jump in here on the free cash flow in just a second, is we are going to generate some working capital or have some working capital flowing in, in 2017 to build this contract with payments. And this is weighted toward the second half of 2017, so you'll see some of that carry over, from a free cash, issue into 2018. So I'll, I'll stop and let, let Dave jump in on your free cash flow question.
David M. Sagehorn (EVP and CFO)
Yeah, Jamie, if you recall back, and probably the last several quarters, we've talked a little bit about seeing some of our international Defense customers kind of slow down their payment cadence, and that applied to us as well. So what we're seeing is we've had really good progress on working through that situation, and you're gonna see the benefit of that in the fourth quarter free cash flow numbers. And that's really the reason that we're taking the free cash flow outlook up for the year, is the progress-
Jamie Cook (Analyst)
Okay
David M. Sagehorn (EVP and CFO)
We've made on those. And just to dial back a little bit to a comment that Wilson made on the large order that we received in the second quarter. As he said, we expect about 1,000 units under that contract for fiscal 2017, weighted more heavily towards the second half of the year. And then, just under the standard contract terms, there will be a working capital build, and that will be, we'll collect probably more of the cash in 2018 than 2017 on that contract. So just from a free cash flow cadence, we're gonna have strong free cash flow this year. We'll invest a little in that contract in fiscal 2017 and then reap some of the benefits in fiscal 2018, so.
Jamie Cook (Analyst)
But sorry, just to be clear, do you have the funding for the $175? And I guess the positive is I assumed, I mean, the $175 would subtract from the $1,000, so the contract is actually larger than the initial $1,000?
David M. Sagehorn (EVP and CFO)
Yeah. Well, we've always said that it was for more than 1,000 units. Well over.
Jamie Cook (Analyst)
Okay.
David M. Sagehorn (EVP and CFO)
Yeah.
Jamie Cook (Analyst)
Okay.
David M. Sagehorn (EVP and CFO)
We just haven't. We're giving up probably a little more quantification of that or idea of how much more than 1,000 that is.
Jamie Cook (Analyst)
Okay.
David M. Sagehorn (EVP and CFO)
And again, we're a little handcuffed by the terms of the contract, what our customer is allowing us to say on this. So, we're trying to be as helpful as we can with it.
Jamie Cook (Analyst)
Okay.
Wilson R. Jones (President and CEO)
I think one other answer for you there, Jamie, is, we talked in our last call about coordinating a funding and delivery schedule, and that is in place today. We have that in place. So, this contract is good to go.
Jamie Cook (Analyst)
Okay. Congratulations. Thank you.
Wilson R. Jones (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Pete Skibitsky with Drexel Hamilton. Please state your question.
Peter Skibitski (Analyst)
Hi, good morning, guys.
Wilson R. Jones (President and CEO)
Hi, Pete.
Peter Skibitski (Analyst)
Yeah, just to be clear, to follow up on that. So, yeah, Defense backlog was up about $600 million. So that's the whole order is actually in backlog now, just to be clear?
David M. Sagehorn (EVP and CFO)
The whole order is actually in backlog, Pete.
Peter Skibitski (Analyst)
Ah, very good. Very good. Okay. And that follow-on order that's kind of, you know, positive for 2000 units, that's still potentially out there as well?
Wilson R. Jones (President and CEO)
Yeah, Pete, we have several opportunities that we continue to work on, and obviously, we're gonna be careful on how we talk about those until we get the actual order and contract. But there's a lot of good activity in the Middle East right now around our products.
Peter Skibitski (Analyst)
Okay, got it. Got it. And then, I wanna—with JLTV, are the margins on that program better than you expected? It sounds like that was a positive benefit this quarter.
David M. Sagehorn (EVP and CFO)
It was a positive benefit this quarter, Pete, from the standpoint of when we put together the initial forecast. We knew we were gonna have some test support costs for that program in the second half of the year here. And really, I'll take the responsibility I didn't for this. I didn't equate or assign the revenue that was gonna be associated with those in the outlook for the year. Wasn't a large amount for the year. We're talking, you know, less than $10 million, but we had the costs in, but we didn't have the revenue in the prior outlook.
Peter Skibitski (Analyst)
I see. I see. If I could just ask one last one, Dave. With this, you know, kind of huge inflow of cash in the fourth quarter, your share count looks like doesn't assume much in the way of share repurchases. But, you know, the way you guys trade, it seems like you get a lot of bang for your buck repurchase-wise. How are you guys thinking at this point in terms of capital deployment?
David M. Sagehorn (EVP and CFO)
Yeah, I think, you know, our outlook or view on capital deployment really hasn't changed. You know, we had talked about coming into the year, returning a significant amount of the free cash flow to shareholders. If you think back to our first quarter, we repurchased around $100 million of stock, and then through the dividend, along with that, we will have accomplished returning a significant amount of cash to shareholders. As we just said on the, you know, the last question, we do expect there to be a working capital investment in fiscal 2017 to help support that M-ATV contract. So, I wouldn't expect a lot in the way of share repurchases in our fourth quarter, but it is certainly something that we will continue to look at.
We do wanna return cash to shareholders, and we also wanna make sure that we're in a position that we can strive to increase the dividend rate each year as well.
Peter Skibitski (Analyst)
Okay, great. Thanks very much.
David M. Sagehorn (EVP and CFO)
Thank you.
Wilson R. Jones (President and CEO)
Thanks, Pete.
Operator (participant)
Our next question comes from Anne Duignan with J.P. Morgan. Please state your question.
Ann Duignan (Analyst)
Hi, good morning, guys. It's Anne.
Wilson R. Jones (President and CEO)
Hi, Anne.
Ann Duignan (Analyst)
I'm looking forward to having a smile on my face, having driven the JLTV.
Wilson R. Jones (President and CEO)
Yes. I wanna. If you're driving, Anne, I'm riding with you.
Ann Duignan (Analyst)
Of course, I will. Anyway, can you just describe what happens in the year of an election with the Department of Defense budget? I mean, we know the president has requested a budget, but you know, what happens between now and November or now and next January when everything changes?
David M. Sagehorn (EVP and CFO)
Good question, Anne. I think, you know, we've seen the last several years where, you know, budgets have not generally been completed on a timely basis. And what we've lived under in those situations are continuing resolutions, where they will basically continue to fund at the prior year levels. If we think about the impact of that on Oshkosh for our fiscal 2017, with the, you know, almost $2.3 billion of backlog, $1.6 billion of that for our fiscal 2017, that are our domestic programs, we've largely got almost all of that in backlog already. So they will, you know, they'll work through, and they'll finalize the fiscal 2017 budget when they finalize that. And that really would impact more our fiscal 2018 sales.
But we believe there's certainly plenty of time for them to work through the budget, and get the dollars flowing down to the contracting agencies, such that we really don't expect much of an impact overall.
Wilson R. Jones (President and CEO)
Just to add a little bit to that, Anne. We've had no gains or losses, so our funding levels have stayed intact through the June fiscal year 2016 omnibus reprogramming through Congress. That's all fully authorized now from Congress and the Senate. So if you look out there, this is all public information, but in the President's budget for fiscal year 2017, we got some really nice increases in FHTV, FMTV, and of course, they pulled forward volumes in JLTV. So, you know, rough order of magnitude, there's well over $1 billion in just domestic business that's in this President's budget 2017. So we're certainly looking at this as a really great extension to a good pipeline that's already in place.
Ann Duignan (Analyst)
No risk as far as you're concerned, in terms of, you know, demand being pushed out or deliveries being pushed out, that you can foresee at this point?
David M. Sagehorn (EVP and CFO)
Not that we can foresee at this time.
Ann Duignan (Analyst)
Okay, thank you. I appreciate that. And then I think, you called out, stronger demand in telehandlers. You know, you usually think of telehandlers as being more oil and gas-related or European, maybe. Can you just, give us some color on where the telehandler demand was strong and what's going on there?
Wilson R. Jones (President and CEO)
Yeah, there's a little uptick in residential construction in certain states, Anne, and you know, our telehandlers go in first there and work around a home site there. Multifamily, there's a little bit of an uptick there with uses of telehandlers. We've seen some from a commercial standpoint, some a little more office work going on. There's been some hotel work. Our rental customers have better specifics on all the different facets of the market that's going on. But we have seen a little bit of an increase there in just jobs that are coming out of the ground now. We were in Florida and Texas the last couple weeks, and a lot of work going on there now. Projects in Florida.
Texas seems to be getting past some of the weather issues, and a lot of good construction going on in those two states.
Ann Duignan (Analyst)
Okay, so it was general U.S. non-res construction in general, that's supporting demand?
Wilson R. Jones (President and CEO)
Yeah, a little bit of res, but, but mostly non-res.
Ann Duignan (Analyst)
Okay. Thank you. I'll leave it there. Appreciate it.
Operator (participant)
Our next question comes from Stephen Volkmann with Jefferies. Please state your question.
Stephen Volkmann (Analyst)
Hi, good morning. Maybe to start with just a quick follow-on to that. Obviously, the mix has hurt margins a little bit in access with telehandlers this year. Do you have any visibility or thoughts as to what that mix might look like in 2017?
David M. Sagehorn (EVP and CFO)
Steve, we're still pulling together the outlook for 2017. As Wilson said, you know, the national rental companies here, they're still kind of mid-year, and so, you know, our guys are having a lot of discussions with them. But at this point, we don't have a firm outlook yet on 2017 mix.
Stephen Volkmann (Analyst)
Okay. I'm curious, just Dave, about how the accounting works for JLTV. I guess this is percentage of completion, please-
David M. Sagehorn (EVP and CFO)
Yes.
Stephen Volkmann (Analyst)
Correct me if I'm wrong. Yeah.
David M. Sagehorn (EVP and CFO)
That's right.
Stephen Volkmann (Analyst)
So does that mean that as you start to deliver on this contract, that margins... I know you don't want to get too specific on that, but that we should expect margins to kind of come out of the gate at fairly reasonable levels, or is this a situation where we would expect the first few units to be sort of minimally profitable, and then it kind of ramps up over time?
David M. Sagehorn (EVP and CFO)
Yeah, under the percentage of completion, and we're using a kind of a cost-to-cost methodology under that, we will provide a forecast or a projection of the full program profitability, what will be profit or our profit rate for the full program, and we will recognize profit at that level each quarter throughout the life of the program. And then we will assess each quarter whether we think, you know, that profit level for the full program is still appropriate or not. And if we do, you know, if we deem it's necessary or appropriate to adjust it, what will happen is there would be a cumulative catch-up for all the sales that were recognized in previous quarters. And we've used this approach on some of our prior contracts as well.
Stephen Volkmann (Analyst)
Perfect. That's exactly what I was looking for. And then just order of magnitude, and if you wanna push this off, fine, but I'm wondering, I mean, there's quite a few deliveries, obviously, under M-ATV next year, and I'm wondering, you know, this could be a pretty big drag on free cash flow, I guess. I mean, you may actually not even generate any free cash flow next year. Is there any way to just sort of size that with some big brackets?
David M. Sagehorn (EVP and CFO)
I think we will push it off a little bit to the Analyst Day. But, you know, directionally, you're right, it is a large contract. It is more heavily weighted to the second half of the year. So yeah, there will be a meaningful investment in working capital. It's a transitory investment. Obviously, it ramps up and then ramps back down as you get paid under the terms of the contract. But as I said, strong free cash flow this year. We're gonna see the impact of that investment in working capital on our free cash flow next year, and then 2018 will benefit from that.
Stephen Volkmann (Analyst)
Right. Good. Okay, thanks so much.
David M. Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Our next question comes from Seth Weber with RBC Capital Markets. Please state your question.
Seth Weber (Analyst)
Thanks. I just wanted to go back to the Defense margin question for a second. And Dave, you called out that the JLTV payment was not, you know, hugely significant. So, I mean, can we think about this, the third quarter margin, you know, the low 7% range as sort of the margin for the baseline business? Is, is there anything else in there? I mean, it sounds like you, you know, margins benefited from cost reductions and efficiencies and whatnot, but I would assume that, that, you know, continues going forward. So is there some reason why the 7%-ish, you know, wouldn't be a good way to think about the baseline Defense business here?
David M. Sagehorn (EVP and CFO)
Yeah, I think we're gonna ask you to be patient and wait for the Analyst Day. You know, and, you know, there's a lot of moving pieces in terms of the components of what's in the Defense business and, you know, what's the definition of the base business versus how we're looking at the composition in the coming years. So I think we can do better justice to that with a little more time at the Analyst Day.
Seth Weber (Analyst)
Okay. Fair, fair enough. And on the JLTV program, I think last quarter, on the call, you kind of recalibrated the cadence, the delivery cadence. Is there anything that's changed that? I think you had previously... I think you kind of reset to about 250 units or something this year, or a low number this year, and then maybe 750 or so next year. Is that still kind of the right way to think about it, going at, you know, maybe 2,000 in 2018 or so?
Wilson R. Jones (President and CEO)
Yeah, Seth, we did recalibrate last call, and those numbers are still in play. The 2017 number went from 250 to 750, and then the 2018 number went from 5,000 to 2,000. I'm sorry, 500 to 2,000. And then, 2019 went from 1,000 to 3,000.
Seth Weber (Analyst)
Right.
Wilson R. Jones (President and CEO)
Basically, our rate production went from 1,750 up to 5,750.
Seth Weber (Analyst)
Right. Right. Okay, so no, no change there. And I guess, sorry, just my follow-up on the mixer business, the cement mixer business. I mean, given the, you know, the highway bill and things like that, I mean, it's a little surprising that you've seen some mixed results there. I mean, do you have any thoughts on what's causing the bifurcation in that market?
Wilson R. Jones (President and CEO)
Well, we do expect to benefit some from that, Seth. But if you look at the statistics that are out there, Portland Cement furnishes these, but a lot of our roads and highways are asphalt. I think a lot of people just assume that everything's concrete, but the majority are asphalt. Now, more of the highways, federal highways, are going more to concrete, which again, we'll benefit from. But I think if you listen out there, some of the asphalt companies are doing pretty well now, and those seem to be some of the jobs that have kicked off early. But we certainly do plan to benefit from that.
But it's a business that's just been choppy, and our customers know that the commercial chassis are available, and they know we have capacity in the industry. So there's a lot of just waiting and seeing, and when they get some bigger jobs, they know that there's some units available that they can get for pretty quick delivery. So that's an issue we're just gonna have to continue to work through.
Seth Weber (Analyst)
Okay. Appreciate the color, guys. Thanks very much.
Wilson R. Jones (President and CEO)
Thanks, Seth.
Operator (participant)
Our next question comes from Jerry Revich with Goldman Sachs. Please state your question.
Jerry Revich (Analyst)
Hi, good morning, everyone.
Wilson R. Jones (President and CEO)
Hey, Jerry.
David M. Sagehorn (EVP and CFO)
Good morning.
Jerry Revich (Analyst)
I'm wondering if you can talk about with the new access equipment, you had excellent performance in Europe. Can you just give us some flavor in terms of where the major countries, in terms of where your shipments into Germany, et cetera, Spain, versus prior cycle levels, just to calibrate that for us? And, to the extent you're comfortable talking about it, can you comment on what the business has been like in July and in the broader EU area in terms of from an inquiry level standpoint? Thanks.
Wilson R. Jones (President and CEO)
Well, Jerry, I wanna be careful. Obviously, there's some competitive concerns here about, you know, where we're doing well or not doing well. What I will say is historically, we've done well in several areas in Europe. Benelux has always been a good area for us, the Nordics. We've done well over the years in the UK. I think most of Europe, where we see construction, you see JLG doing fairly well. So I wouldn't say anything has really changed in where we're having our success. Europe's fleet is still very old, and we see continued opportunities there with some construction.
But obviously, we're gonna be a little guarded as we go here and watching and seeing what else occurs with Brexit and anything around that. Again, that's a very small part of our business, but we'll have to see from a macro standpoint what that does for Europe.
David M. Sagehorn (EVP and CFO)
Jerry, you had asked about compared to prior levels, Europe overall. I mean, this is a market that's still probably down, I'm guessing, close to 40% from what we saw in 2007 and 2008. It has just recovered much slower than what we saw in North America.
Jerry Revich (Analyst)
Okay. Thank you for the color. And in Defense, you had really excellent margin performance in the quarter. You mentioned one of the platform was repriced. Can you just share with us which platform, just so we can understand? Order of magnitude, and then, you know, with M-ATV shipping in the fourth quarter, the 175 units, did you get any absorption benefit in the third quarter as you started the work?
David M. Sagehorn (EVP and CFO)
Yeah, Jerry, in terms of, you know, we regularly or on a regular basis go through pricing renegotiations with our government customers on some of these base programs that we have. We aren't gonna get into the specifics as to which program was repriced in the quarter or such that we could see the benefit in the quarter, but it is something that occurs on a regular basis. And then in terms of the absorption impact, yeah, we were building some units here in the third quarter for the international M-ATV contract, so that certainly did help the volumes running through the factories. I don't have at my fingertips an impact on what that would have been on absorption.
You know, given the overall volumes that we're talking about, it wasn't a major driver of performance in the quarter.
Jerry Revich (Analyst)
Okay. Thank you.
David M. Sagehorn (EVP and CFO)
Thanks, Jerry.
Operator (participant)
Our next question comes from Mig Dobre with Robert Baird. Please state your question.
Mircea Dobre (Analyst)
Hello, guys. Good morning. Sticking with Defense, can you maybe help us understand a little bit more about your maintenance and parts types revenue, going into next year, or maybe even what you're able to do this year? And then also, in Defense, any color that you can provide us on the Army LRV program, as well as maybe the longer term JLTV international demand potential?
David M. Sagehorn (EVP and CFO)
I'll, Jerry, I'll take the, or, Mig, I'm sorry. I'll take the aftermarket question. So typically, in the Defense segment, you depending on the new truck volumes, you're gonna see our aftermarket business be 15% to 20%-ish of that segment's sales. And I think as we're, you know, thinking about 2017, that's probably a decent range to think about as well.
Mircea Dobre (Analyst)
Great.
David M. Sagehorn (EVP and CFO)
On the LRV, Mig, not a lot has changed since we last discussed that with you, in that we do see it as an opportunity for JLTV, but most of the discussions right now is just around JLTV. We are excited that's in the conversation, but we'll certainly provide some more details as those come into play for us. But for now, it's kind of the second thing we're working on with our U.S. customer. On the JLTV international opportunities, I believe you asked about, we do have a lot of inquiries, especially after being at the Eurosatory show in Paris, and see that as a viable product.
We do see that as you know out more into the future. Right now, probably the biggest opportunity we have from an international standpoint is M-ATVs in the Middle East region.
Mircea Dobre (Analyst)
I appreciate it. And then my follow-up, maybe for you, Dave. I'm trying to get a little more comfortable with your working capital dynamics, and I appreciate all the commentary for next year, given what's going on in your Defense business. But if we can maybe separate Defense from your other segments, can you maybe give us an update as to what's going on with the receivables and inventory elsewhere, and how you're thinking about that going forward?
David M. Sagehorn (EVP and CFO)
Sure. I would say as it relates, for example, to AR, you know, the DSO trend that we've generally seen there outside of Defense is held steady. You are typically going to see a little bit longer terms internationally than you see domestically, but that's again, that's typical. So really, I would say we haven't seen a lot of change there, and I don't expect that we're gonna see much change as we head into '17 or go through '17 from that standpoint. The inventory outside of Defense, and we've talked about bringing the inventory levels down Access Equipment segment, you know, I wanna compliment the team out there for successfully doing that. They made great progress in the third quarter.
I think we're gonna end the fiscal year with inventory levels that are better aligned to where the market is than when we came into the year. So I don't think we're gonna need to see any, you know, real inventory builds next year, but I also don't think we're gonna see a lot of inventory flushing out next year from the Non-Defense segments either.
Mircea Dobre (Analyst)
But David, if I may, in access equipment inventory specifically, where do you expect to end the year versus where you started it? Can you give us a number there or quantify it somehow?
David M. Sagehorn (EVP and CFO)
Sure. It's, I think we'll end. I don't have it at my fingertips, but from memory, I would say that we're looking at several hundred million less inventory Access Equipment segment as we exit this year than when we entered the year.
Mircea Dobre (Analyst)
Great. Thank you.
David M. Sagehorn (EVP and CFO)
Thanks, Mig.
Operator (participant)
Our next question comes from Charlie Brady with SunTrust. Please state your question.
Jerry Revich (Analyst)
Good morning, guys.
David M. Sagehorn (EVP and CFO)
Hey, Charlie.
Charles Brady (Analyst)
Hey, just on Defense, I don't know, maybe I missed it, but in the release, you talk about a contractual price increase. Can you just give us more detail on where that came from and maybe the magnitude of that? And are there follow-on contractual price increases yet to come?
David M. Sagehorn (EVP and CFO)
Yeah, there was a question earlier, Charlie, and, you know, these are -- we go through this on kind of a normal basis with our contracts that are multi-year. And as I said earlier, we're not gonna get into specifically which contract or contracts, but this is somewhat of a normal case, you know, renegotiate the contracts. And it just happened to be that this year, compared to last year, we were operating under, you know, a new pricing regime on some of those contracts. So, it wasn't, you know, the biggest driver in the quarter, but it certainly was something that we did benefit from.
Charles Brady (Analyst)
Okay. Just on the M-ATV orders, as you go through 2017, do you expect the cadence of deliveries to be relatively stable? I mean, I'm assuming it's a, you know, you're gonna ramp up from Q4, but, you know, with a little bit of ramp, but relatively stable as you go through the year? Or does it get fairly lumpy on how you plan on delivering that?
David M. Sagehorn (EVP and CFO)
I'm sorry, on what, on what program again, or?
Charles Brady (Analyst)
On the M-ATVs that you're delivering to the Saudis.
David M. Sagehorn (EVP and CFO)
Yeah. To our Middle East customer that we haven't identified, we do expect that that's gonna be more heavily weighted to the back half of the fiscal year. So if you think of the third and the fourth quarter.
Charles Brady (Analyst)
Okay.
David M. Sagehorn (EVP and CFO)
I would say significantly more heavily weighted to this, to the, back half of the year.
Charles Brady (Analyst)
Great. That's helpful. Thank you.
David M. Sagehorn (EVP and CFO)
Thanks, Charlie.
Operator (participant)
Our next question comes from Mike Shlisky with Seaport Global. Please state your question.
Michael Shlisky (Analyst)
Good morning, guys.
David M. Sagehorn (EVP and CFO)
Good morning, Mike.
Michael Shlisky (Analyst)
I wanted to turn to fire real quick. You had mentioned that the world market continues to kind of modestly recover here. I was wondering if you could kind of update us as to what inning you think we're in, in that fire market recovery?
David M. Sagehorn (EVP and CFO)
Well, first of all, Mike, thanks for asking about our fire business. They're doing a wonderful job there, and really on a nice margin enhancement road. So thanks for asking about them. The right now, the market's been growing in about a 6% to 8% pace, and the good news is Pierce has been basically double that in their growth. So we estimate the market in 2016 to be around 4,500 units from a domestic standpoint. The historical market size has always been in the 5,000 to 5,500, so this is coming out of the recession and building back up. But the way we view it is it's still gonna be a slow growth market.
The good news for us is that it's a very aged fleet out there, and our Fire & Emergency team is doing a great job of growing share in a slower growth market.
Michael Shlisky (Analyst)
Okay, great. I also want to ask about your corporate costs. There's been some ups and downs through some of the accounting around incentive comp, et cetera. Can you give us a sense as to where you think the appropriate run rate is going forward? It looks like you're looking around maybe the high 30s, almost, almost like $40 million in the fourth quarter. Is that kind of the way things might roll going into 2017?
David M. Sagehorn (EVP and CFO)
Mike, Mike, we're still working on the budget for fiscal 2017, so that hasn't been finalized yet. You know, on a full year, this year, we're talking about $150 million to $155 million. I think that's, I'll call it, in the ballpark. For next year, I don't think it would be any higher than that, and I don't know, though, that we have a lot of opportunity for less than that.
Michael Shlisky (Analyst)
Well, perhaps asked a different way, I mean, if you see earnings grow next year in any modest way, and some of us do feel that way, is there a chance you'll have additional stock incentive compensation in 2017 that you did not see in 2015, or a higher dollar amount in 2017 versus 2016, of that one item?
David M. Sagehorn (EVP and CFO)
Yeah, from an incentive compensation standpoint, there could be some additional pressure on that. But again, I think, you know, we're gonna look at ways to keep the overall corporate costs at what I would call a manageable or a reasonable level. So if we see some upward pressure on that, which would certainly be a good thing because it means we're doing well, then we may be able to manage a few costs in other areas of corporate to not see a big increase next year.
Michael Shlisky (Analyst)
All right, great. Thanks, guys.
David M. Sagehorn (EVP and CFO)
Thank you.
Charles Brady (Analyst)
Thanks, Mike.
Operator (participant)
Our next question comes from David Raso with Evercore ISI. Please state your question.
David Raso (Analyst)
I have a couple questions, but you were willing to give a little more color on the M-ATV totals before. It's now in the backlogs. I assume it's appropriate to ask now. I used to model as 1,400 units, 1,200 next year, 218. Obviously, some got pulled forward. Is that a fair number for the total, total order?
David M. Sagehorn (EVP and CFO)
That's in the ballpark.
Charles Brady (Analyst)
You're in the ballpark, David.
David M. Sagehorn (EVP and CFO)
So if we say 175 this year, call it approximately 1,000 next year, and, you know, a few spilling over into 2018, that's in the ballpark.
David Raso (Analyst)
Just for modeling purposes, back half loaded, you've mentioned, but I mean, should we think of it as literally, like 200 first half, 800 back half, just to help with the modeling? Is it that back half loaded for next year?
David M. Sagehorn (EVP and CFO)
It's significantly back half loaded.
David Raso (Analyst)
All right, we can talk offline about that. The fourth quarter Defense margin, you're implying a fourth quarter Defense margin that's no better than the third quarter. But needless to say, the M-ATV shipments are a positive mix comment. Is there something else about that fourth quarter Defense margin that we should digest and not think the margin's up sequentially?
David M. Sagehorn (EVP and CFO)
Yeah. Well, I think one thing that comes to mind is, we do expect that the request for proposal for the FMTV recompete to hit the street. So there will be some investment or costs associated with that. There will be a little bit of a drag on margins in the fourth quarter.
David Raso (Analyst)
Okay, that's helpful. Back to the thoughts around access next year on the mix. I know it's early, you haven't had a ton of conversations with the rental companies about next year with any firm discussions, but telehandlers, at least if we speak about the current backlog, are teles a larger percent of the backlog today than a year ago? And within teles, obviously, and when oil and gas is weak, you're not getting the 10,000 to 12,000-pounders, you're getting the 5,000- or 6,000-7,000-pounders going into resi. That's also, at least usually, a negative mix. So I'm just trying to understand what's the mix we're sitting on today as at least a base case for the mix for 2017.
David M. Sagehorn (EVP and CFO)
David, we're gonna have to do a little math. So, I don't have that right handy here, but we certainly can get you that number.
David Raso (Analyst)
Okay. How about the idea, at least of, it sounds like from your commentary, Europe up next year, North America down next year, are the key components of the aggregate access base case, modestly lower next year?
Wilson R. Jones (President and CEO)
David, it's as you know, you know the market very well, and it's hard to pinpoint. Again, our customers are in the middle of their year, so we're still pulling and defining that, working through the analysis. Directionally, you would think that the lack of replacement needed would be an issue in North America, so that would be where we'd be mostly down, we would say today. Europe seems to be doing okay. So I think directionally, you're right, but we just wanna be careful, and I think we are taking a conservative look at this.
We have some good meetings set up, discussions over the next two weeks, and that's gonna help us get a little more clarity of what our customers are thinking for 2017.
David M. Sagehorn (EVP and CFO)
David, back to your question on backlog composition. Telehandlers, as a percentage of total backlog last year, was a little higher than it was this year at June thirtieth.
David Raso (Analyst)
Okay. So that's a positive, and maybe the mix within teles is negative, but at least the aggregate base case, it's a heavy tele backlog going into next year isn't correct. You would argue, in fact, it's a little bit lower than a year ago.
David M. Sagehorn (EVP and CFO)
Yeah, I think we're actually probably gonna see in the fourth quarter, a little positive mix versus last year.
David Raso (Analyst)
Okay, that's good. Okay. Helpful. I appreciate it. Thank you.
Wilson R. Jones (President and CEO)
Thanks, David.
Operator (participant)
Our next question comes from Stanley Elliott with Stifel. Please state your question.
Stanley Elliott (Analyst)
Hey, guys, thank you for taking the question, and congratulations on the quarter. Going back to the fire business, you know, lots of new products that have come out over the past several years. Is the focus going forward to, or, or are there holes in the portfolio where you wanna come up with new products, or do you feel like that now the focus is gonna be on, really improving the manufacturing process and driving towards that 10% sort of op margin?
Wilson R. Jones (President and CEO)
Well, we're gonna do both, Stanley. It's the focus inside Fire & Emergency will continue. They have a lot of runway there, a lot more initiatives coming out of there. Oh, of the MOVE initiatives. And then, you know, our being the leader of the industry, our new product development, we have a nice multigenerational product plan that you'll see us continue to develop and introduce new innovations that... What we're really focused on is introducing products that really provide that long-term, sustainable competitive advantage for us. And they have a nice pipeline of those coming for us here in the future. So we're gonna continue to do both. And again, they are performing well, and I like the progress we're making in Fire & Emergency.
Stanley Elliott (Analyst)
Yeah, absolutely. And on the access business, I believe you said growth in Asia Pacific. Is that more product adoption picking up, or do you think the construction markets in those in that region have, you know, bottomed and maybe even improved?
Wilson R. Jones (President and CEO)
It's really adoption. We're seeing more and more opportunities there. They have some safety regulations are becoming more prominent with governance around those safety regulations. We have seen labor rates tick up a little bit, so we can make the productivity case with our machines. So overall, it's adoption. We're seeing what I would call bigger, more professional rental companies develop in that region, which are driving more for our machines, better technology. So it's a nice adoption play, and it is growing and making some big moves, but you have to keep in mind, we're coming up from a very low base there.
Stanley Elliott (Analyst)
Yep, great. Well, thanks, guys, and best luck.
Wilson R. Jones (President and CEO)
Thank you.
Operator (participant)
Our final question is from Ross Gilardi with Bank of America Merrill Lynch. Please state your question.
David Raso (Analyst)
Thanks, guys. I really appreciate you fitting me in. I just wanna understand a little bit better: How were you able to avoid steel cost inflation? Because clearly, it's been a pretty significant spike. I mean, is it that you have more annual contracts? Is it that you had restocked steel at a much lower price? Help us there a little bit, and why isn't this a big risk into early 2017?
David M. Sagehorn (EVP and CFO)
I don't think, Ross, that we said we were gonna totally avoid it. I think we'll see different dynamics in our various businesses. In Defense, historically, just the way that we, the contract mechanisms that we have with our government, afford us the opportunity to enter into long-term supply arrangements with our customers. And if you dial back over time, well, you know, 2008, 2004, when we went through very major steel spikes, we saw very little impact from that on our Defense business, and we expect we're gonna see the, you know, have the same result this time. If you think about our other businesses, we generally lock on a quarterly basis, and there is a lag to that.
Steel, if it stays where it is, and again, we've seen it start to come down in the last several weeks, and what we're reading is, at least many of the experts think it's going to continue to come down some more. But if it does stay elevated, we'll probably see the impact of that starting later in this calendar year. But what I would say is, you know, steel isn't, steel isn't, you know, it, it's not all of our cost of goods sold. And if you look historically, when we have went through meaningful increases in steel, we have not seen, you know, if steel jumps 30%, our cost of goods sold doesn't jump 30%.
You know, there is a muted impact just because of it. It is only a certain percent of our cost of goods sold. You know, our supply chain team has a number of tools that they like to use to mitigate this to the extent that they can.
Wilson R. Jones (President and CEO)
Yeah, I think one just little more color to add there, Ross, is the big part of steel that we buy is plate. And if you look at the average plate price, 2016 versus 2015 is actually down for us. So the plate price is. They've all been kind of moving up and down this summer, but all the groups we work with, they don't believe that those steel prices are sustainable. There's just too much capacity in the market, and so their forecast is for it to continue to come down to a more normal pace.
David Raso (Analyst)
Okay. Thanks very much. Appreciate it.
Wilson R. Jones (President and CEO)
Thanks, Ross.
David M. Sagehorn (EVP and CFO)
Thanks.
Operator (participant)
This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.
Wilson R. Jones (President and CEO)
Well, thank you for participating on our call today. We have a talented, motivated team that is dedicated to exceeding our customers' expectations and delivering strong shareholder value. We hope to see all of you at our upcoming Analyst Day. Thanks for your time. Have a good day.
Operator (participant)
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.