Oshkosh - Q4 2013
October 31, 2013
Transcript
Operator (participant)
Greetings, and welcome to the Oshkosh Corporation's Fourth Quarter Fiscal 2013 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
Pat Davidson (VP of Investor Relations)
Thank you. Good morning, everybody, and thanks for joining us. Earlier today, we published our fourth quarter 2013 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 measures that are used 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, and please now refer to that presentation, to slide two, excuse me, of that slide 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. Now, all results stated on this call are for continuing operations attributable to Oshkosh Corporation, unless stated otherwise. Also, all references on this call to a quarter or a year are to our fiscal quarter or our fiscal year, unless stated otherwise. Our presenters today include Charlie Szews, Chief Executive Officer, Wilson Jones, President and Chief Operating Officer, and David Sagehorn, Executive Vice President and Chief Financial Officer.
Please turn to slide three, and I'll turn it over to you, Charlie.
Charlie Szews (CEO)
Good morning, and thank you, Pat. We're pleased to announce another solid quarter and very strong results for fiscal 2013. I'll start out with a review of the quarter, highlight some results for the full year, and before moving on to a discussion of the individual segments, I will review our performance versus the MOVE targets we announced at our Analyst Day in September 2012. Our team closed out a strong year with solid fourth quarter results. Adjusted earnings per share for the quarter of $0.49 contributed to full-year adjusted earnings per share of $3.74, above the top end of our most recent estimate range. Improved operating income margins in the Access equipment and commercial segments partially offset the expected significant decline in our defense segment sales in the quarter.
The MOVE Strategy is driving improved financial and operational performance, and our outlook for the business remains positive. As a result, this morning we announced that our board has approved reinstating a dividend, with the first quarterly cash dividend of $0.15 per share payable on December second to shareholders of record as of November eighteenth. Through our disciplined capital allocation strategy, improving margins, and historically strong free cash flow, we believe we can sustain and grow the dividend. We also believe that we will generate sufficient free cash flow to sustain regular share repurchases, although it is our intent to be more opportunistic in this area. We did repurchase over 700,000 shares this quarter and have now repurchased about 202 million shares against our $300 million share repurchase authorization.
Finally, we are pleased to announce our initial expectations for 2014 earnings per share of $3.10-$3.40. During our third quarter earnings call, we said that we may not have a linear path to earnings from 2013-2015 due to our stronger than originally expected performance in 2013, as well as the expected significant sales decline in our defense segment in 2014. We expect higher sales and operating income in each of our non-defense segments in 2014, but we do not expect these improvements to be quite enough to overcome the previously communicated defense decline.
However, these expectations are comfortably ahead of our internal targets for 2014 earnings as of the Analyst Day, and we strongly believe that we are on track to achieve our 2015 EPS target range of $4.00-$4.50. We'll further explain that belief in a few moments. Please turn to slide four for a brief discussion of our full-year results. It was an excellent year for Oshkosh, one that demonstrates the power of our MOVE Strategy. Despite slightly lower revenues due to a 23% decline in defense sales, we posted higher earnings for the company and grew revenues in all non-defense segments and operating income margins in all segments.
Adjusted full-year earnings of $3.74 per share were $1.14 per share above the high end of our initial estimate range of $2.35-$2.60 for the year. That's a 44% improvement over our initial estimate range. We also generated $386 million in free cash flow and returned $202 million of capital to our shareholders through share repurchases. Daily, structured execution of our MOVE strategy and deployment of the Oshkosh Operating System have been keys to our performance. We are building the skills of our 12,000 employees to better serve our customers and continuously improve our processes, and it shows in our results. Please turn to slide five for a review of our performance relative to our 2013 MOVE targets.
Let's take a few minutes to assess the progress of our MOVE initiatives in 2013 and update our projected performance in 2015. The bottom line is that we are, we clearly performed well in 2013 versus our MOVE initiatives, and we're, we believe we're on track to achieve our 2015 EPS target range of $4-$4.50. Now, not every initiative is as far along as we want it to be, but overall, we're on track and executing countermeasures to drive all initiatives toward target or above. As you can see, we expect to achieve or exceed our O, V, and E 2015 targets, and we currently believe we'll be below target in the M initiative in 2015.
Essentially, we believe our O, V, and E initiatives will enable us to overcome a slower market recovery to achieve our 2015 targets. In terms of the market recovery initiative, in 2013, we saw continued improvement in the North American Access equipment market and the U.S. concrete mixer market. The European and Australian Access equipment in North American, refuse collection vehicle markets underperformed expectations in 2013 and have caused us to project the M initiative in 2015 to be below target. But there are signs that each of these markets will improve in 2014, and we believe it is still possible that the M initiative could achieve target in 2015. We'll also provide more color on these markets in a few minutes.
We made very good progress on our O initiatives in 2013, and we expect to exceed our 2015 target as we maintain a focus on improving our product, process, and overhead costs. We estimate the projects implemented in 2013 will drive about 110 basis points of the 130 basis point margin improvement that we had targeted for 2014. So we are off to a good start on this initiative for 2014. Value innovation initiative results did not meet our targets for incremental revenue from new products in 2013. We made some engineering management changes midyear, reallocated resources, and made structural changes to our product development Stage Gate Reviews to bring this initiative back on track.
We believe customers and shareholders will like the results of our countermeasures with new launches that we expect in 2014 and 2015. We expect to be near target with this initiative in 2014 and back on target by 2015. We achieved our 2013 target for international sales. We continue to invest in international business development resources and believe we're on track to achieve our 2015 target of growing international sales to greater than 25% of total sales. Finally, as I mentioned earlier, we believe we are positioned to achieve our most important target, earnings per share of $4-$4.50 in 2015.
In fact, I am more confident today in our ability to deliver our earnings per share target for 2015 than I was at our 2012 Analyst Day. Of course, we need to execute, and our markets need to sustain slow recoveries. We have great, great products and an outstanding team committed to meet this target. Please turn to slide six for a discussion of our defense segment. As we described in our last quarterly earnings call, we are building defense vehicles at a substantially reduced rate following production step-downs in February and June 2013. Our team has done a great job of managing our cost structure to these lower production levels, while at the same time allowing the defense team to pursue opportunities around the globe.
We completed shipments of M-ATVs to the UAE this quarter and look forward to delivering more vehicles to international customers in 2014. Of course, we continue to seek additional international sales opportunities. For example, in December, we'll be submitting our proposal for the Canadian MSVS program. Test vehicles are due in January 2014, and there will be extensive testing and evaluation ahead of the planned contract award in June 2015. The program calls for approximately 1,500 heavy tactical vehicles, with deliveries expected to be from late 2016 through 2017. It'll be an intense competition, and we're working hard to deliver the best value solution to the Canadian government. Let me close with some comments on our JLTV offering.
We are one of three finalists competing in the EMD phase for the JLTV competition. We delivered 22 of our high-performance, fully integrated vehicles to the government early in August for testing. We'll be actively supporting the government's rigorous test and evaluation schedule over the 14-month test period. We don't expect to be able to report on progress as the government testing plays out, but we'll be happy to answer questions that you have regarding the overall parameters of the program. Now, one item that we are focused on with this program is assuring certainty of our bid costs.
... We were pleased to recently agree to a five-year contract extension with our union, representing the production employees in Oshkosh. The contract extension represents a true partnership with our employees and will result in certainty of our production labor costs for future programs, including the JLTV. The extension makes the contract effective through 2021. We are grateful to our employees for their commitment to serving our military customers and positioning Oshkosh to be effectively compete for the JLTV program. Let's turn over to Wilson, and please turn to slide seven.
Wilson Jones (President and COO)
Thanks, Charlie. Good morning, everyone. The Access equipment segment closed out the year on a high note with continued strong operational and financial performance. This is a direct result of the great progress we have made with our MOVE Strategy. This segment was first to begin working on our MOVE cost optimization initiative. I know that several of you have visited our operations this past year, and you've seen the benefits firsthand as you walked through the aisles of McConnellsburg, Shippensburg, or one of our other locations. The Access equipment market continued to be driven primarily by replacement demand in North America and independent rental companies returning to the market for new equipment. Outside of North America, our markets were mixed in 2013, but the outlook is better for 2014.
Europe appears to have turned the corner, and we expect growth, albeit slow growth, in that region in 2014. A number of our primary markets in Western Europe experienced a lengthy winter and flooding in 2013, so we could also benefit from a longer construction season in 2014. We believe that the Middle East will continue to be strong and grow in 2014, and that Latin America will continue to move forward, but at a more modest pace. Finally, we expect year-over-year growth in the Pacific Rim, supported by a return to growth in Australia, following a down year in 2013. To close out the segment, I'd like to address our plans for product pricing in 2014.
Several weeks ago, we announced to our customers our plans for a general price increase of up to 3%, depending on the model for aerial work platforms and telehandlers. This pricing, which is in addition to a pricing increase for required Tier 4 engine upgrades, will go into effect on January 1, 2014, and is applicable across the globe. Please turn to slide eight for some comments on our fire and emergency segment. We still have work to do in this segment, but we exceeded our expectations for 2013, and we're gaining traction with our margin improvement initiatives. Stronger municipal orders allowed us to report a higher backlog, and higher international sales supported improved revenue in the quarter.
Our municipal orders continued to pick up in most regions around the U.S., but I should caution you that the pace was measured and still a little uneven. While we've seen evidence that municipal spending is improving, we have not seen that same improvement from our federal customers. We believe that the federal business has bottomed, but we don't expect an upturn in federal demand to start until 2015. Operational improvements are a key component of the O in MOVE. The team in our Bradenton, Florida, facility has made significant strides in improving their operations. This is critical as we expect the improvements we deliver with our MOVE strategy will drive benefits for many years. Global customers have responded to our efforts to expand the business.
The fire and emergency segment grew its international revenues on a year-over-year basis in 2013 by more than 20%, largely through the success of offering high-quality Pierce-branded fire trucks, as well as our Oshkosh-branded global Strikers in markets throughout the world, especially in Asia and South America. Stay tuned for more anticipated good news from our fire and emergency segment. Let's turn to our commercial segment. Please turn to slide nine. MOVE activities gained momentum in the commercial segment as we continue to implement improvements in our operations that will drive down our cost structure. We are happy with our progress, but recognize that we have much opportunity remaining. Concrete placement products demand in the U.S. benefits most directly from improving housing starts, and we saw this again in the fourth quarter in the form of higher year-over-year sales for concrete mixer trucks.
The improving market conditions have driven increased competition, as we have seen some competitors become more aggressive. We will keep an eye on this as we seek to win business through superior quality, reliability, lower lifecycle costs, and our market-leading customer support network. Turning to our refuse collection products, our fourth quarter RCV sales were up year-over-year as we thought they would be, but were down on a full year basis, as was the market. We believe this market will show improvement in 2014, but we also need to deliver on our value innovation MOVE initiative in this business to drive improved RCV sales. I'll hand it off to Dave now to review our financial results for the quarter and comment on our expectations for 2014. Please turn to slide 10.
David Sagehorn (EVP and CFO)
Thanks, Wilson, and good morning, everyone. As Charlie mentioned, 2013 was successful on a number of fronts. We're pleased that we were able to deliver stronger-than-expected earnings as we executed our MOVE Strategy. Consolidated net sales for the fourth quarter of 2013 were $1.73 billion, a 15.8% decline from the fourth quarter of 2012. The decline in consolidated sales compared to 2012 reflected a significant decline in defense segment sales, which was expected and which we have previously discussed. Sales in each of the non-defense segments were up compared to the prior year quarter. Access Equipment fourth quarter sales grew 8.9% compared to the prior year quarter and continued to be largely driven by favorable market conditions in North America, along with higher incremental pricing and aftermarket parts revenue.
Sales in Australia this quarter remained weak. Adjusted consolidated operating income for the fourth quarter was $78 million, or 4.5% of sales, compared to adjusted operating income of $108.9 million, or 5.3% of sales, in the fourth quarter of 2012. 2013 fourth quarter adjusted results exclude a $9 million non-cash and tangible asset impairment charge recorded in the Access equipment segment and $3.8 million of costs in the defense segment related to a recent extension of a union contract from 2016 to 2021....
Reduction in consolidated adjusted operating income and adjusted operating income margin compared to the prior year quarter was largely a result of the decline in the Defense segment, along with higher corporate expenses, offset by improved performance in the Access Equipment and Commercial segments. Access Equipment segment adjusted operating income margin increased 330 basis points from the prior year quarter to 11.6% on an 8.9% sales increase, reflecting a better product sales mix, net pricing impact, and continued contributions from cost optimization initiatives. Defense segment adjusted operating income margin declined to 2.9% in the fourth quarter, compared to 6.6% in the prior year quarter, largely due to the approximate 46% decline in sales compared to the prior year.
Further information about segment fourth quarter results can be found in the appendix to this morning's slide presentation. Corporate expenses in the quarter were $52.1 million, compared to $34.4 million in the prior year quarter. The change compared to 2012 is a result of the impact of the significant increase in our share price on variable stock-based compensation, higher IT investment, and expenses associated with September 2013 stock-based compensation awards. Adjusted earnings per share for the quarter was $0.49, and full-year adjusted earnings per share was $3.74, above the top end of our most recent guidance for the full year. During the fourth quarter, we repurchased 712,000 shares of common stock at a total cost of $32.8 million.
That brings the total number of shares repurchased under our $300 million share repurchase program to 6.1 million, at a total cost of $201.8 million. Earnings per share in the fourth quarter improved $0.02 compared to the prior year quarter as a result of lower average diluted shares outstanding. Full-year results improved $0.11 per share compared to 2012, as a result, also as a result of lower average diluted shares outstanding. Please turn to Slide 11 for a review of our initial outlook for 2014. In the Access Equipment segment, we expect sales of $3.3 billion-$3.4 billion, representing a 6%-9% increase from 2013.
We expect improved international sales will bolster expected continued strong sales in North America, led by ongoing fleet replacement and the continued return of independent rental companies to the market. At this time, we are not planning for a significant contribution in 2014 from improving non-residential construction market conditions. We believe this will be more of a contributor by 2015. We estimate that operating income margins in the Access Equipment segment will be approximately 13.5%-13.75%, compared to an adjusted operating income margin of 12.5% in 2013, reflecting the continued impact of MOVE initiatives and expected higher sales.
We estimate the Defense segment sales will decline to approximately $1.75 billion-$1.85 billion, from $3.05 billion in 2013, a drop of 40% or more. These estimates are within the sales range that we discussed at our Analyst Day in 2012. We believe operating income margins in the Defense segment will be approximately 3.5%-3.7%, which is above the 3% level that we estimated for 2014 at our 2012 Analyst Day. The Defense team has worked hard to adjust this segment's cost structure to reflect the significantly lower sales volume that we expect in 2014, while retaining the capability to win new business.
In the Fire and Emergency segment, we expect sales of $800 million-$825 million, compared to $792 million in 2013, reflecting the slow recovery in the municipal fire markets that we've recently seen as a result of improving tax receipts. We expect operating income margins in this segment to increase to 4%-4.5% in 2014, as we begin to see more of the benefits of our optimizing cost MOVE initiative take hold in this segment. Commercial segment sales are expected to increase to a range of $850 million-$900 million, an 11%-17% improvement over 2013, driven by continued strong recovery in the concrete mixer market and an improving RCV market.
Operating income margins in this segment are expected to be approximately 6.75%-7%, reflecting the expected benefits of higher sales and the impact of other MOVE initiatives similar to the other segments. Expect corporate expenses will be near 2013's level as we continue to invest in IT initiatives and our Oshkosh Operating System. Our effective tax rate for 2014 is expected to be approximately 31%, and we're assuming a full-year share count of 86.5 million. We expect to complete the remaining approximately $100 million of our $300 million share repurchase program in 2014, the benefits of which will be partially offset by the impact of scheduled vesting of stock-based compensation awards.
Incorporating all these items, we believe 2014 consolidated net sales will be approximately $6.6 billion-$6.9 billion, down 10%-14% from 2013. We estimate consolidated operating income will be in the range of $455 million-$490 million, and earnings per share will be approximately $3.10-$3.40. These amounts are lower than adjusted 2013 results, which was a possibility we noted during our third quarter earnings call.
We expect solid improvement in the results of each of our non-Defense segments in 2014, and we believe that we'll see further improvement from each of these segments in 2015, which we anticipate will allow us to attain our targeted $4-$4.50 earnings per share in that year. A few comments on our first quarter outlook. The first quarter is typically a seasonally weak quarter for us, as our customers with exposure to construction markets in the Northern Hemisphere slow down their purchases of equipment. We expect to see this play out again in the first quarter of 2014. In addition, we will also see a significant year-over-year reduction in defense segment sales and earnings, in line with the reduction that we've discussed.
We have a number of initiatives in process, so that we plan to start, like our IT, ERP systems upgrade, that will result in spending during this seasonally weak quarter. As a result, we believe that we'll see first quarter earnings that are less than half of the Adjusted Earnings Per Share we reported in the first quarter of 2013. I'll close out my comments on 2014 with a few additional items. We expect Free Cash Flow of approximately $200 million, which assumes $80 million of capital expenditures. Our estimated capital expenditures are higher than the last several years as we plan to make further investments to support our initiatives. We also have approximately $65 million of required principal payments that will be due on our term loan in 2014.
I'll turn it back over to Charlie for some closing comments.
Charlie Szews (CEO)
Thank you, Dave. We just completed a successful 2013, with strong earnings and free cash flow. Looking ahead, we remain confident with a realistic outlook for our slowly recovering markets. Our non-defense markets are improving, and the MOVE Strategy is delivering results. Yes, our defense business creates a challenge for us in 2014, but it also offers the biggest potential for upside over the near term if we're able to capture additional international sales opportunities. Our culture is strong, our commitment is unwavering, we have a great team of experienced leaders. All these factors lead us to believe we remain on track to achieve our 2015 EPS target range of $4-$4.50. That concludes our formal comments.
We're happy to answer your questions, so I'll turn it back over to Pat for the Q&A.
Pat Davidson (VP of Investor Relations)
Thanks, Charlie. I'd like to remind everybody, please limit your question to one-plus a follow-up, and after the follow-up, we ask that you get back in queue if you'd like to ask additional questions. Devin, let's please begin the question and answer period of this call.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Eli Lustgarten with Longbow Research. Please proceed with your question.
Eli Lustgarten (SVP)
Good morning, everyone.
Charlie Szews (CEO)
Good morning, Eli.
Eli Lustgarten (SVP)
So I'm more victimized, but you kept beating by big numbers, and people keep expecting you to continue doing it.
Charlie Szews (CEO)
I think we were above our high end of our estimate for the year.
Eli Lustgarten (SVP)
Yeah, I guess the whisper number was even bigger. Can we talk a little bit about last year? You started off with extremely conservative guidance and blew through it completely. And again, I don't know what you call this year's fourteen conservative, but my real question is on Access equipment for two reasons. One, with 3% price increase, plus emissions, and you know, which have been pretty strong results, you've got a relatively six to nine percent gain in market projected, which, you know, there's more pricing. And it seems that you, you're telling us something about conditions in the marketplace as we go into the fourth quarter into next year. Have rental companies pulled back? Are they shifting the mix? Or can you get some idea of what's going on in the marketplace?
You know, the trend of orders through the quarter and into next year, you know, towards the end of the year, because you're sort of suggesting probably a more calm market, I think, than people had expected.
Charlie Szews (CEO)
Okay, there are a lot of questions in there, Eli. We'll try to do our best, and I'm going to start and hand it over to Wilson. You know, Eli, it's early. We're right in the middle of annual agreement negotiations with the national rental companies. You know, those discussions and negotiations will continue probably through December, maybe into January. And, so it'd be premature for us to be bullish about a year until those negotiations are complete. You've probably listened to their earnings calls. You know, they range from being flat, maybe up a little bit, and perhaps up in categories other than aerial as well. So, you know, we're at that point, that's pretty early in the fiscal year for us to be bullish.
Having said that, you also heard them make comments that they expect, you know, strong non-residential spending increases in 2014. And, you know, if those things come to fruition, you'll see them increase their buying, you know, over the course of the year. So I think we're prudent with our guidance right now. It reflects, you know, what we've heard from the national rental companies. We do expect independent rental companies to come back to into the market. We are seeing signs of improvement around the globe, and, you know, perhaps Wilson can comment more on that.
David Sagehorn (EVP and CFO)
Sure. Eli, first of all, are you okay today?
Eli Lustgarten (SVP)
Well, it was a tough night, but you can't have everything.
David Sagehorn (EVP and CFO)
Yeah, we feel it for you. Anyway, I think it's really three things, Eli. If you look at where we are in 2014, we are seeing some non-res, but if you look at Global Insight, look at all the third-party advice out there, a lot more non-res in 2015. We mentioned in our prepared remarks that Europe was getting better, Australia is getting better, but we see that as a better 2015 than 2014. So you're right, we are coming out a little conservative. To Charlie's point, it is early. We're hoping that the fundamentals even get better.
Charlie Szews (CEO)
... But, for now, we think we're at a good spot. We try to be realistic when we start the year. Obviously, if we can improve that, you know us, we're going, we're going to do our best to do that.
Eli Lustgarten (SVP)
Yeah. And can we just follow it up quickly when you talk a little about what's going on commercial and what it would take to get the profitability of that business up to a, you know, a more respectable level than, you know, mid-single digits?
Charlie Szews (CEO)
Well, you know, a couple of things, Eli. First of all, we've got our O initiative, and, you know, as we said, really in a few different, calls, that we started that O initiative in Access equipment segment, and then we followed up with, commercial and fire and emergency. And I think you're seeing, they're coming, to the forefront with their margin expansion, you know, following Access. So in 2014, we are seeing, I don't remember the precise number, but it's 150 basis point improvement in margins in the commercial segment. And, we continue to expect to see, continued margin expansion beyond that into 2015. We've got, significant, activities in the works.
Plus, as the volume starts to pick up in this segment with housing recovery, we would expect some natural absorption benefits. So I do think that now you're seeing over the next few years, you know, much improved margins in that business.
Eli Lustgarten (SVP)
All right. Thank you. I'll get back in line.
Charlie Szews (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Andrew Buscaglia (Research Analyst)
Hi, this is Andrew Buscaglia on behalf of Jamie. So I just noticed that your baseline assumption that you guys put out at your Analyst Day in September for $1.5 billion for 2014 is below what you guys have now forecasted at $1.75 billion-$1.85 billion. Same with margins. I believe the baseline target is about 3%, and you guys have guided ahead of that. So based on that, does that imply in 2015, you're at a point where you can exceed your baseline targets? And if so, where do you feel more comfortable? Is it on the revenue or the margin side?
Then, I guess on top of that, if do you think that 2014 could pull forward from 2015?
Charlie Szews (CEO)
I'll take the last part first. I don't see any pull forward, so, you know, that's not impacting us, any pull forward from FY 2015 into 2014. You know, we're not providing FY 2015 guidance, you know, certainly by segment, today. What we have said today is that we strongly believe that we're on track to hit our 2015 targets of $4.00-$4.50 per share. You also recall in my prepared remarks, I said that we see the biggest upside opportunities to be in our defense segment. You know, that's all good. We're optimistic about international sales opportunities. Don't have anything to announce today.
And in this kind of environment, I couldn't tell you, at least today, you know, the magnitude of it or when, you know, we might have some opportunities actually under contract. So those are all kind of wild cards in the international arena, but we are optimistic.
Andrew Buscaglia (Research Analyst)
Okay, that's helpful. And then, just on the JLTV, you guys are testing right now. Do you have an updated timeline around that?
Charlie Szews (CEO)
Timeline is pretty much the same. It's 14 months of testing. You know, we submit a proposal for production in 2015, and award sometime later in that fiscal year is the current timing.
Andrew Buscaglia (Research Analyst)
Okay. Thanks, guys.
Charlie Szews (CEO)
Mm-hmm. Thanks, Andrew.
Operator (participant)
Thank you. Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Stephen Volkmann (Equity Analyst)
Hey, good morning, guys.
Charlie Szews (CEO)
Good morning, Steve.
Stephen Volkmann (Equity Analyst)
I was hoping we could kind of go back to Access, and I'm just trying to sort of think through the cycle a little bit here. 6%-9% growth next year. I guess I would've thought you would get 2%-3% of that from pricing and maybe another 2%-3% from kind of content with Tier 4 Final. So it feels to me like that is a fairly low number. Is there something going on in mix or something that might offset those tailwinds?
Wilson Jones (President and COO)
Steve, this is Wilson. I'll jump in, and then if someone wants to add, please jump in with me. But no, it's really... If you look at the market dynamics, Steve, we had a big year in 2013, a little bit bigger in some areas than we expected. We are hearing some rumors that a few of the rental companies are gonna focus on some other mix, specifically some dirt equipment. We don't think that'll significantly affect us, but it will move some things around price-wise. So all in all, we think, as I said to Eli earlier, we think we're coming out with a realistic forecast, but we're gonna work to improve that as we go through the year.
Charlie Szews (CEO)
We continue to remind you, it's early. You know, a lot of the companies that we're negotiating with for annual agreements are still making their own decisions yet today about what they're gonna spend in 2014.
Stephen Volkmann (Equity Analyst)
Okay. I understand it's early, but you know, we got to push you guys a little bit. On the margin side, on the margin side, I guess I had assumed that there would be a few positives going on, mix-wise, with respect to telehandlers versus aerials and with respect to you know, independent rental guys versus nationals. Are we still supposed to think in those terms?
David Sagehorn (EVP and CFO)
Steve, I think we're largely gonna see, I think, a mix that's similar to what we saw for the full year of 2013 here, based on our early view. I think, as Charlie mentioned, we'll and/or Wilson, we'll still continue to see more benefit from the independent rentals continuing to come back into the market. So I think that will be a positive. We talked about investments in initiatives. I think you're gonna continue to see that in the Access equipment segment as well.
You know, so if we look at, you know, the, the margin improvement year-over-year, I think it's a, it's a good margin improvement, but there is a little bit of a drag from some of the investments that we're doing to continue to invest in the business and drive results forward beyond even 2014.
Charlie Szews (CEO)
And I think you need to put this in perspective, that the What we're saying here today is that operating income next year, we're estimating to go up, you know, 10%-20% in the Access equipment segment, and this is, you know, early in the fiscal year. That doesn't sound as conservative as, you know, it seems that people are believing it to be right now.
Stephen Volkmann (Equity Analyst)
Okay. Fair enough. Thank you.
Charlie Szews (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please proceed with your question.
Charlie Brady (Director of Equity Research)
Hi, and thanks. Good morning. Just on Access, can you talk a little bit more about the independents this quarter and what you're seeing as far as indications on how that plays into your growth assumptions into 2014?
Wilson Jones (President and COO)
Sure, I'll jump in here, Charlie. Good to hear from you. We are seeing a nice increase in IRCs. If you go back through last year, each quarter was better. 2013 finished the year-over-year better than 2012. We expect 2014 to be bigger. It ebbs and flows. As they get more financing, they come in. We do see it as changing our mix a little bit this next year. I wouldn't say it's a significant change, but we do see some continued growth out of the IRCs.
Charlie Brady (Director of Equity Research)
Okay. And thanks. And Charlie, can we just go back to your comments on the Q1, where you said it's gonna be essentially less than half of what it was last year, so less than $0.30 a share. Does that imply... I mean, are you looking at Access... Access will still be up year-over-year, even though it's a seasonally weak quarter, correct?
Charlie Szews (CEO)
Yes.
Charlie Brady (Director of Equity Research)
Okay. Okay.
Charlie Szews (CEO)
It's really driven by defense.
Charlie Brady (Director of Equity Research)
No, I get that. But, I mean, you've really, you've got to push some low growth expectations for even the other businesses, in particular, Access, just to, just to push it down below $0.30. I'm just trying to make sure that you're still looking for up.
David Sagehorn (EVP and CFO)
It's a big drop in defense.
Charlie Brady (Director of Equity Research)
Yeah, no, I get that. Hey, on the corporate expense line, when you say flat with last year, are you excluding the $16 million proxy expense?
David Sagehorn (EVP and CFO)
Yes.
Charlie Brady (Director of Equity Research)
Okay, great. Thanks. I'll get back in queue.
Operator (participant)
Thank you. Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.
Mig Dobre (VP Equity Research)
Good morning, gentlemen.
Wilson Jones (President and COO)
Good morning.
Mig Dobre (VP Equity Research)
I'd like to stick with Access as well. But, you know, as you, as you look out to your 2015 targets that you outlined back in 2012, you know, you're expecting 7% growth in 2014. Getting anywhere near that 2015 target would imply something like 19% growth in 2015. And I'm wondering: Is that, is that target still achievable? And how, how do we get there as far as maybe US versus international, independents versus large rental houses? Any help would be appreciated.
Charlie Szews (CEO)
Mig, as we said in the call, it is still possible to have a growth like that in Access in 2015, and it would be all around non-residential spending in North America, would be the primary. You could also see Europe finally starting to pick up, Australia coming back. Those are big markets. So, you know, this is very conceivable. We also tend to have better pricing leverage, you know, when the market is coming up like that. So I think there's plenty of opportunity to have a very robust Access equipment segment in 2015.
Mig Dobre (VP Equity Research)
Okay. Then, if I look at commercial, the orders there, at least to me, appear to be softening a little bit. I'm wondering: Can you sort of give us a breakdown for how concrete mixers are doing? And, again, what sort of underpins your confidence in your outlook, or your revenue outlook for next year in commercial?
Wilson Jones (President and COO)
Yeah, Mig, it's mainly around timing. We, we had a big Q4 last year, a couple of big orders there, so that kind of skews the way the year finished. But, I can tell you from an activity standpoint, we're very pleased with what's going on in October. Market seems to be very active, much more active than we've seen in the last five years. So, we believe that it, that trend will continue. Obviously, November and December are traditionally the slower months for commercial, so there may be a little tail off of some orders in those two months. But we do, we do—we are experiencing a good October right now and expect, again, year-over-year to go up in the mixer business.
David Sagehorn (EVP and CFO)
Mig, I think we also need to remember that this is a market that's, you know, it, for several years, was down more than 90%. We've had—we had nice growth in 2013, but it's probably still down more than 60%-70%.
Mig Dobre (VP Equity Research)
Okay. Appreciate it. Thank you.
Wilson Jones (President and COO)
Thanks, Mig.
Operator (participant)
Thank you. Our next question comes from the line of Walt Liptak with Global Hunter Securities. Please proceed with your question.
Walt Liptak (Equity Research Analyst)
Hi, thanks. Good morning, everyone.
Charlie Szews (CEO)
Good morning, Walt.
Walt Liptak (Equity Research Analyst)
Wanted to ask about the fire markets and your 2014 outlook, the 4% revenue growth at the high end. Those markets should start picking up here with the housing recovery that's been going on and pent-up demand. And so I wonder if you know, you'd comment on how you came up with your revenue number, as well as you know, what you've done on the cost side to improve profitability there?
Charlie Szews (CEO)
Sure. If you look at, you know, this business, we probably have more of the federal business than the competition, so we're a little bit impacted more by that than our competitors. But late in the year, we did see the municipal demand picking up, you know, really around the country, so it looks pretty good in terms of an outlook. And we would expect a higher municipal order pace over the next few quarters. Of course, once you get an order, it's six to nine months before it hits your P&L, right? So that's part of what you're seeing. In terms of, you know, margin enhancement, we've got a lot of projects underway to take costs out of the business.
I think at the high end of our range, we're looking at operating income up 50% in this segment in fiscal 2014. You know, I don't remember exactly what the percentage is on the lower end, but we're talking about a you know a robust recovery here.
Walt Liptak (Equity Research Analyst)
Okay. This is a business that had done, you know, I think, low teens operating profit margins in the past. Is there any reason it couldn't get back there with more volume?
Charlie Szews (CEO)
As a segment, we had never reached low teens. We were in a, you know, 9.5, 10% or so, as a segment for a full year, so we didn't quite hit your numbers. But, from what I'm seeing in the business and, from what we're able to do with the Oshkosh Operating System in the business, you know, I think that, the potential is better than what we've ever been able to deliver, but it's gonna take two to three years to deliver, you know, that kind of improvement because it's a lot of hard work. You know, you have to redesign products, redesign, processes, and then it needs to hit your order book, which is always six to nine months later.
It's a lot of hard work, but I think there's more potential today in this business than, you know, I've ever seen in it.
Wilson Jones (President and COO)
I would just add, Walt, that, you know, with all that hard work that Charlie's talking about, requires some investment. So that's why the two to three-year to really get to these operating margins where we think they can be. And, you know, all the segments, the commercial segments, we're working diligently with our Oshkosh Operating System to drive these cost improvements.
Charlie Szews (CEO)
Mm-hmm.
Walt Liptak (Equity Research Analyst)
Okay, fair enough. Thanks.
Charlie Szews (CEO)
Thanks, Walt.
Operator (participant)
Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed with your question.
Pete Skibitski (Senior Equity Research Analyst)
Good morning, guys.
Charlie Szews (CEO)
Good morning, Pete.
Wilson Jones (President and COO)
Good morning, Pete.
Pete Skibitski (Senior Equity Research Analyst)
Hey, I just want to understand Access a little bit better. On the pricing increase you're seeking, I think you said 3% on top of Tier 4 pricing, and your guidance, I think, is 6%-9%. So are you assuming the revenue increase in 2014 is all pricing and that unit volumes are flat?
Wilson Jones (President and COO)
No, Pete, if you listen to what we're saying, we're saying up to 3%. So, it's a model balance where we're adjusting model pricing based on regional pricing. So it's not a full 3%, but we are confident. You know, 2013, we achieved good pricing realization in Access, and we believe, you know, we're in the first stages of negotiations with our large customers there. So, our goal is to work that out like we did last year, where it's a win-win, but the increase is not all pricing to really answer your question.
Pete Skibitski (Senior Equity Research Analyst)
Okay.
Charlie Szews (CEO)
It doesn't go into effect until January first.
Pete Skibitski (Senior Equity Research Analyst)
Okay. So, total pricing increases is 2%-3%, the balance is unit increases?
Charlie Szews (CEO)
Isn't that correct?
Pete Skibitski (Senior Equity Research Analyst)
Okay. Okay. And can you give me a sense of, you know, whether or not AWPs and telehandlers, you know, kind of grow at the same rates next year, or if you're assuming in your guidance, one grows faster than the other?
Charlie Szews (CEO)
Pete, I think we'd said a similar mix. We anticipate, in 2014 that we saw in 2013.
Pete Skibitski (Senior Equity Research Analyst)
Okay. Okay, understood. Let me throw in one defense question as well. Just in terms of your assumptions, are you assuming we have, you know, the sequester takes place, and we have a full year CR, which is maybe the worst-case scenario? And, you know, and if we do get a fiscal 2014 budget pass, is there any upside to your forecast in defense?
Charlie Szews (CEO)
You know, by the time that would pass, it would probably impact our FY 2015 numbers, mostly. So, I don't know that that would make a whole lot of difference. We think we've got it pretty well pegged where our volume's gonna come out, you know, sequestration, CR, whatever situation we're in. You know, I suppose it means that we're not that positive about where we think the budget situation is headed.
Pete Skibitski (Senior Equity Research Analyst)
Mm-hmm.
Charlie Szews (CEO)
So I don't see a whole lot of downside to where we are. From an upside standpoint, you know, that would probably come mostly from international sales opportunities, and, you know, we need to get those under contract relatively soon to actually impact 2014.
Pete Skibitski (Senior Equity Research Analyst)
All right. Okay.
David Sagehorn (EVP and CFO)
Also, the significant amount of the backlog that we had at September 30th in the defense segment was under contract already for fiscal 2014. So that should, you know, if there is sequestration.
Pete Skibitski (Senior Equity Research Analyst)
Mm-hmm
Charlie Szews (CEO)
... or, you know, CR, I think we should be in a pretty good shape from a revenue standpoint.
Pete Skibitski (Senior Equity Research Analyst)
... Okay. Is aftermarket contribution, you know, on a percentage basis, going to change meaningfully next year?
David Sagehorn (EVP and CFO)
I think with the sales decline, I think you'll see it be, you know, a larger percentage. But, the sales, aftermarket sales have come down, and we saw that through 2013. I think that's a function of probably two things. One, the troop drawdown in Afghanistan, as well as some of the impacts from the first year of sequestration.
Pete Skibitski (Senior Equity Research Analyst)
Okay. And on an absolute basis, do you expect it to come down a little bit more next year?
David Sagehorn (EVP and CFO)
Uh, flattish.
Pete Skibitski (Senior Equity Research Analyst)
Flattish. Okay. Okay, great. Thanks, guys.
David Sagehorn (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Rudy Hokanson with Barrington Research. Please proceed with your question.
Rudy Hokanson (Managing Director)
Thank you. I want to go back to the defense, and I realize that you don't have particular contracts or orders that you can talk about, but you certainly sound, you know, confident that Oshkosh has a product that's going to be in demand around the world, and, or a product line. And I was wondering, Charlie, maybe if you could talk a little bit about what products give you that confidence? You know, something that could be sold in 2014 without having to be, you know, newly designed or, or you know, go through a long process like some of the others are right now. Which line? And then also, geographically, what areas do you see probably needing to, you know, beef up their defense equipment?
Again, this is more broad, rather than asking, you know, if you have a particular order in hand.
Charlie Szews (CEO)
Sure. On a broad basis, we're pursuing more international sales opportunities probably than any other time in our history. Okay, that's kind of broad, and that's, I think, a big statement. So we've got a lot we're working on. And, you know, probably most of it will be focused in the Middle East, but we have pockets of opportunities in Europe, Latin America, and those are probably the key areas, Africa. So we are working pretty diligently. As I said before, we're optimistic. We see this as our biggest upside potential would be in our defense business. But it, again, there is a lead time here, and you need to get things under contract and then ship it.
We do need to see some contracts get signed in the next, you know, few months to be able to hit our 2014 numbers. Otherwise, the opportunities will hit 2015.
Rudy Hokanson (Managing Director)
Could you maybe highlight which products, you know, which trucks, which vehicles seem to be those of most interest internationally right now?
Charlie Szews (CEO)
Sure. Sure. Our M-ATV is clearly the model that has the most opportunity for international sales. But you know, the MSVS program, for example, that's a heavy tactical vehicle, more like you know, one of our heavy tactical vehicle platforms. I'm not going to say which one. But in addition, we're looking at logistics vehicles. We're looking at you know, medium payload vehicles around the world. We're looking at refurb programs. So there's you know, really a significant amount of opportunity right now.
Rudy Hokanson (Managing Director)
Okay, thank you very much.
Charlie Szews (CEO)
Thanks, Rudy.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Ann Duignan with J.P. Morgan. Please proceed with your question.
Speaker 13
Hi, good morning, guys. It's Damian on for Ann. How are you?
Charlie Szews (CEO)
Good morning.
Rudy Hokanson (Managing Director)
Good.
Speaker 13
Could you guys just talk a little bit about the competitive environment in commercial? Do you guys -- are you guys comfortable that your margins are sustainable there, given that, you know, you're saying the competition is getting more aggressive?
Charlie Szews (CEO)
Yes, we're confident in our ability here. We are projecting 150 basis point improvement in margins next year, I believe. And it's primarily focused around our O initiative. We've got, you know, a number of nice things in the works. I think in our overall scorecard, we talked about where we are, that we've got about 110 basis point margin improvement that we've already sort of implemented the projects for FY 2014 of our original 130 basis point target. So we don't have a whole lot more to sort of implement to hit our target. And you know, it's pretty balanced across our non-defense segments. So I think we're going to, we feel pretty good about our margin improvement opportunity in commercial.
Speaker 13
Great, thanks. And the competitors that you're talking about here, are they new entrants or some players that have—that are just now pushing harder? Like, what's the driver that's causing this increased competition there?
Charlie Szews (CEO)
They're not really new competitors. You know, everyone's trying to fill up their factories, I suppose, and so that's what we're seeing. On the other hand, you know, we have the capacity for the market, and if the market really starts to, you know, grow like it should in the next couple of years, I mean, this market needs to come to us, needs to come to McNeilus.
Speaker 13
Okay, great. Thanks, guys.
Charlie Szews (CEO)
Thanks.
Operator (participant)
Thank you. Our next question is a follow-up question from the line of Charlie Brady with BMO Capital Markets. Please proceed with your question.
Charlie Brady (Director of Equity Research)
Hey, thanks. I don't know if I've articulated or not. Do you have a growth outlook and better your guidance for concrete and RCV that you could share?
David Sagehorn (EVP and CFO)
We haven't. I don't think we gave the quantification of it, Charlie. I think, you know, again, we saw strong growth in 2013 in concrete. We expect to see pretty strong growth again, just given where the market is. I think our comments on the refuse market is, it actually ended up being down a little bit in 2013. We think we're gonna see small growth overall, I think, in that market in 2014, and I guess as it looks, as it relates to our sales, probably mirroring what we would expect to see in the market.
Charlie Brady (Director of Equity Research)
In your comments at the top of the call on the M part of MOVE being below target, that is primarily the refuse market or, you know, across the other businesses as well?
Charlie Szews (CEO)
I think it's a little bit of refuse because the refuse market was actually down this year, and we had projected to be up 3%, and we're looking at, you know, modest growth in that market in the next couple of years. We're also talking, I think about Europe and Australia being perhaps a little bit weaker in 2015. That's our current view. Of course, if you recall, we said we expect to overcome that with our other initiatives to get to our target of $4-$4.50 in 2015. And we also said that it wouldn't take much for us to be wrong and those markets to come back and deliver the kind of growth that we originally projected.
We just think that there's a little bit of caution to be had here, and that we should tell you the breadth of what we see.
Charlie Brady (Director of Equity Research)
All right. I wonder if you just comment. You've got some bonds that are callable in sometime in March of 2014. Have you given any thought to what you would do? Would you be willing to call those, and they're 8.25 bonds?
David Sagehorn (EVP and CFO)
Yeah, Charlie, I think, you know, if the bond market would hold where it is today, I think that's something that we would strongly consider. You know, we'll have to see where the market is at in March when we get there.
Charlie Brady (Director of Equity Research)
All right. One more, and I'll hop off. Can you give us the share count, the exact share count at the end of the quarter?
David Sagehorn (EVP and CFO)
It was 86.2 million, I believe.
Charlie Brady (Director of Equity Research)
Thanks, guys.
David Sagehorn (EVP and CFO)
Thank you.
Charlie Szews (CEO)
Thanks, Charlie.
Operator (participant)
There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.
Pat Davidson (VP of Investor Relations)
Okay, thank you. Our sights are firmly set on our fiscal 2015 targets. We'll continue to work day in and day out to execute and drive toward these targets for you, our shareholders. Hope to see many of you at the Baird Industrial Conference next week. Have a great day, everyone.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you, thank you for your participation.