Oshkosh's (OSK) CEO Wilson Jones on Q2 2016 Results - Earnings Call Transcript

| About: Oshkosh Corporation (OSK)

Oshkosh Corporation (NYSE:OSK)

Q2 2016 Earnings Conference Call

April 28, 2016 9:00 AM ET

Executives

Patrick Davidson - Vice President-Investor Relations

Wilson Jones - Chief Executive Officer

David Sagehorn - Chief Financial Officer & Executive Vice President

Analysts

Seth Weber - RBC Capital Markets

Mike Shlisky - Seaport Global

Pete Skibitski - Drexel Hamilton

Eli Lustgarten - Longbow

Charlie Brady - SunTrust Robinson Humphrey

Mig Dobre - Baird

Jamie Cook - Credit Suisse

Jerry Revich - Goldman Sachs

David Raso - Evercore ISI

Ann Duignan - JPMorgan

Stanley Elliott - Stifel

Operator

Greetings and welcome to Oshkosh Corporation Reports 2016 Second Quarter Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Patrick Davidson, Vice President of Investor Relations. Thank you. You may begin.

Patrick Davidson

Good morning, and thanks for joining us. Earlier today, we published our second quarter 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 is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide 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 a year are to a fiscal quarter or fiscal year unless stated otherwise.

Our presenters today include Wilson Jones, President and Chief Executive Officer, and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide three. And I'll turn it over to you, Wilson.

Wilson Jones

Thank you, Pat and good morning everyone. Today we announced second quarter performance and earnings per share of $0.76, exceeding our previous expectations as the Oshkosh team continued to execute on a new strategy to improve performance, improve sales, operating income and operating income margin compared to the prior quarter in all segments excluding
access equipment, with defense continuing to rebalance from the drought in 2015 and the fire & emergency and commercial segments both executing on their journeys to deliver improved operational efficiencies.

We also finished the quarter with essentially flat or higher year-over-year backlogs in each of our segments including access equipment. Timing of sales in the access equipment segment and strong defense segment results along with the benefit of discreet tax items contributed to better than expected results in the quarter.

The word of numbers of other positive developments in the second quarter, the competitive protest JLTV production contract awarded to us was abandoned in mid-February allowing us to continue to move full speed ahead with our department of defense partner on this critical program. And in March, we received $243 million order for the JLTV program to support our production in 2017. I’ll talk a little bit more about this program in a few minutes.

The defense segment also received a contract from an international customer for more than 1,000 M-ATVs that the team has been pursuing for some time. Our defense team is currently working with the customer to file us the funding and legal delivery schedule for this contract. I’ll let Dave discuss our updated outlook in more detail, but we are raising our full year earnings per share outlook slightly to reflect the tax benefits we recorded in the second quarter and increased expectations for results in the defense segment. Our expectations for other segments remain unchanged from our last earnings call.

Please turn to Slide 4, for discussion of our segments starting with access equipment. As I mentioned earlier, our access equipment segment performance in the quarter was significantly better than we had expected. There has been a lot of discussions about rental customers in North America planning for fleet capital expenditures in 2016 and waiting to see how the economy and construction markets looked before placing their orders for new equipment, which is what we saw this quarter to a large extent. We also saw talk of the recession in the U.S. decline as the quarter progressed.

The construction outlook in the U.S. remained generally positive with some solid data points released in the quarter and the winter in the U.S. wasn’t as severe as last year allowing construction jobs to start earlier this year. We believe the combination of these factors led some customers to place their fleet orders earlier than they might otherwise have and earlier than we previously expected them to. We largely view this as a timing item and continue to expect the market to be down in 2016, we also view this as a supporting or reasonable level of fleet investment.

In line with our expectations orders in the quarter were lower than the prior year quarter, but backlog in March 31, was up slightly compared to prior year quarter. We view this backlog level as supportive of our outlook for this segment for the second half of the year. Two weeks ago, our team attended the BAUMA Construction Equipment show in Munich, Germany. By all accounts it was a successful and well attended show. We also experienced a positive atmosphere to ARA Rental Show in Atlanta in February. We introduced several products at the shows including our new 150 foot articulated ultra boom, which boosts the largest working envelope in the world, even larger than our 185 foot ultra boom.

In addition we launched our new line of user environment friendly work high products, the Equilift family of non-powered access units. The Equilift was developed in the United Kingdom and has carved out a unique place in that market. This niche product is creating a lot of excitement among our customers as they understand its value proposition for finishing work in multi storied buildings. The outlook for the two largest markets for this segment has not changed since our last quarterly conference call in January. We still expect North America to be down compared to last year and Europe to be up modestly for the full year.

Operationally, inventory levels in this segment began to decline in the second quarter as we expected. The team is systematically planning for inventory reductions to continue in the second half of the year as this business enters seasonally busiest time of the year. Longer term, we have not deviated from our position that we believe this business has a strong future that will be driven by construction growth, increased global adoption and new applications for the equipment.

Please turn to Slide 5 for discussion of our defense segment. The outlook for our defense business has continued to improve. Of course, the end of the competitive protest actions on the JLTV was welcomed by our customer and our defense team. We were always confident on our vehicle in the highly disciplined and objective competition conducted by the U.S. Department of Defense. Based on the March JLTV delivery order that we received as well as the proposed funding included in the President’s 2017 budget request, we now expect the production ramp up of the JLTV will be quicker than we previously expected.

We also received a large volume of contract awards for our legacy Department of Defense programs during the second quarter, which were funded with the government’s fiscal 2016 budget dollars. These awards along with others previously received provide multiple years of funding for our FHTV and FMTV programs. There are additional funding request for these programs included in the President’s fiscal 2017 budget request. Combined with this segment’s aftermarket business, our domestic defense business provides a solid base if we ramp up to full rate JLTV production.

And we continue to remain active internationally. We’re very pleased to receive the large international M-ATV contract. As I mentioned earlier, we’re working with the customer to finalize the funding and delivery schedule and have not included any of these in our 2016 outlook or our March 31 backlog. We are procuring longer league time materials to allow production of these units. We continue to pursue additional opportunities with multiple countries armed forces, but from experience we know that international discussions take time to turn into contract. We’re very pleased with the improved outlook for our defense segment.

Let’s turn to Slide 6 to discuss the fire & emergency segment. Fire & emergency delivered another quarter of improved results. Sales, operating income and backlog were all higher compared with the prior year quarter. Segment’s performance was driven by its strong product offerings, continued operational improvements and a modestly growing fire brigade market. The market is benefiting from higher municipal spending as well as a number of larger cities that are replacing their fire brigade fleets. In the year, since we’re going to introduce the Ascendant aerial ladder truck at the FDIC show in 2015, this product has become one of Oshkosh’s most successful new product launches contributing to continued share gains with peers.

To remind you, the Revolutionary Ascendant delivers reach beyond what is normally achievable with the two-axle fire trucks. Until now, manufacturers have needed a larger and heavier three-axle chassis to operate a 100 foot steel ladder. Our Ascendant has a 107 foot steel ladder on a two-axle chassis inviting customers with a shorter, lighter and more renewable fire truck. The Ascendant is a great example of our weak value innovation component of the most strategy of work. At the 2016 FDIC show, just last week, we introduced several new configurations centered on the Ascendant platform as we strive to offer more valiant features for our existing and soon to be customers.

Leveraging improved operational performance, peers increased its production rate in February. The fire & emergency team is planning to increase the production rate again later in the calendar year, resulting in reduced leak towns for persist customers and continued efficiency improvements for peers. We are very excited about the progress of our fire & emergency team, what they’ve made and what they continue to make with their quest to achieve double digit margins in this segment.

Please turn to Slide 7 and we’ll talk about our commercial segment. Like our other non-access equipment segments, the commercial segment delivered improved year-over-year results in the second quarter. Strong refuse collection vehicles sales growth to higher sales in the segment. Fleet replenishment by larger private resource remained a strong driver of market demand and is right in our warehouse as a leading provider of high-quality refuse collection vehicles. Supported by the fleet refreshment, we are maintaining our outlook for the domestic refuse collection vehicle market to grow mostly in 2016. Tier gains also contributed from sales growth that we experienced in this product launch.

Before I turn to concrete mixes, I would like to highlight the ladder weight, Meridian front end loader, refuse vehicle which is beginning initial shipments and uses ramping up production of this new new-product throughout the spring and into the early summer and we believe it will generate strong customer interest in a the market that is looking for innovative threshold and solutions. We’ll also be showcasing the Meridian Magnilus boots [ph] in the June at the annual waste export show.

Concrete sales were flat compared to the prior year was the smaller segment for the market, our front-discharge concrete mixers up significantly and rear-discharge concrete mixers, which comprised the majority of market down slightly. Although U.S. concrete mixer market continued to experience cautious buying practices, we did see increased order activity in the second quarter compared to the prior year quarter. As we said on January Q1 conference call we expect many customers to wait to see how the 2016 construction season is shedding up before fully completing to the new equipment requirements.

Despite the current caution in the North America concrete mix market we believed longer-term outlook for the businesses favorable. We expect positive forecast for residential and non-residential construction and the recently passed highway bill have help drive demand for poured concrete. Fleets also continue to age and will eventually need to be replaced.

I’ll turn over to Dave now to provide the financial update and our updated outlook for 2016. Please turn to Slide 8.

David Sagehorn

Thanks, Wilson and good morning everyone. We are pleased to report results in a challenging environment that were close to our second quarter 2015 adjusted results and the significantly exceeded the previous expectations.

Consolidated net sales for the quarter were $1.52 billion, nearly flat with second quarter of 2015 sales of $1.55 billion. A near doubling our defense segment sales along with the higher sales and both the fire & emergency and commercial segments almost completely offset a decline in access equipment segment sales. In our last earnings call we said that we thought access equipment segment first half sales will be down approximately 30% which implied the 31% decline in the second quarter. For the reasons Wilson noted earlier, sales in the segments were higher than we originally expected.

Defense segment sales benefits compared to the prior year quarter having a full quarter of FHTV activity and the delivery of the remaining international M-ATVs from the contract that we received last summer. You may recall we had a break in production on the FHTV contract last year has we negotiated a new contract with our U.S. government customer. Higher aftermarket parts sales and higher content vehicles sold contributed to defense segment sales in the quarter being higher than we previously expected.

Consolidated operating income for the second quarter was $91.4 million or 6% of sales due to operating income of $109.7 million or 7.1% of sales in the second quarter 2015. Improved operating income and operating income margins in the defense Fire & emergency and commercial segment were not enough to offset the operating income declined and access equipment segment and higher corporate cost.

Higher defense segment operating income was result of higher sales volume and a favorable product mix. We are also pleased with the progress that our Fire & emergency and commercial segment made as they delivered stronger results in the quarter. Lower access equipment segment operating income and operating income margins reflected the impact of lower sales volume in a more challenging pricing environments. A favorable vendor recovery settlement in the prior quarter and adverse absorption resulting from continued lower production levels.

The impact of these items was partially offset by lower spending on engine emission standards changes. Compared to previous expectation for the second quarter, access equipment segment operating income benefited from the higher than expected sales noted earlier and the defense segment benefited largely from higher sales and improved operational performance. The higher-than-expected access equipments and defense segment operating income was partially offset by higher operating expenses predominantly related to the higher start-up expenses at our Mexican shared production facility and higher healthcare products.

Earnings per share for the quarter was $ 0.76, compared to adjusted earnings per share of $0.81 in the second quarter of 2015. Third-quarter results benefited by $0.06 per share from discrete tax items and $0.05 per share from all over share count as a result of over share repurchase activity over the past year. We did not repurchase any shares of our common stock in the second quarter.

Please turn to the Slide 9 for a review of our updated expectations for 2016. We’re slightly increasing our 2016 earnings per share estimate range from $2.20 to $2.60 to a range of $2.30 to $2.70, largely to reflect the lower estimated tax rate as a result of the discrete tax items recorded in the second quarter and higher expectations in the defense segment. Partially offset by higher estimated corporate expenses.

We view this stronger than expected access equipment segment second-quarter results as a timing item and are maintaining our previous full-year outlook reflecting an implied full-year sales declining of 13% to 18% for the segment.

Our updated earnings per share estimate range does not include any sales related to recently awarded International contract for more than 1000 M-ATVs as we are still working with our customer to finalize the funding and delivery schedule. At this time it is not clear whether we will recognize any sales for this contract in the current fiscal year. And we are living our previous free cash flow estimate of $275 million unchanged. As previously discussed we expect earnings to be we waited to the second half of the year due to the seasonality and cautious construction equipment customers.

We also expect operating income margins to be higher in the second half of the year compared to the first half for all segments except the defense segment. While we are raising our full-year outlook for this segment, we expect a less favorable product mix and a ramp up in activity to support the JLTV program to result in the income margins than in the first half the year.

We expect that the third-quarter will be the highest quarter of the year for earnings per share.

And I will now turn the call back over to Wilson for some closing comments before we open it up for Q&A.

Wilson Jones

Thanks, Dave. In summary, I would describe our second quarter as a quarter of making progress. We delivered improved performance and operational efficiency in our defense, fire & emergency and commercial segments, our access equipment segment made progress in lowering their inventory, we received large contract for international M-ATVs that we’ve been talking about for the past several quarters. We also continued to see sure gains in our fire truck and refuse collection vehicle businesses in North America. Along with this progress, we are benefiting from a number of recent new product launches that leverage innovative technologies that will help us sustain for the long-term competitive advantages.

And last but certainly not least, our talented team received some great recognition in the quarter. We were named by The Ethisphere Institute to the list of world’s most ethical companies, an honor for which we are very proud. Our people first culture was acknowledged by Forbes Magazine, as they recently named us to their list of Best Large Employers 2016. And just a few months ago, Popular Science Magazine selected our JLTV for its Best of What’s New 2015 list. All these honors are a tribute to our hard-working team members who remain focused on executing on those strategies. We have an outstanding defense segment outlook and improving fire & emergency and commercial segment performance, together with our industry-leading access equipment business, Oshkosh being a different global industrial with a positive long-term outlook. I’m excited about our future and our team.

I’ll turn it back over to Pat to get the Q&A started.

Patrick Davidson

Thanks, Wilson. I’d like to remind everyone to please limit your questions to one plus a follow up and then after the follow-up, we ask that you get back in queue to ask additional questions. Operator, please begin the question-and-answer period of this call.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting our question and answer session. [Operator Instructions] Our first question comes from the line of Seth Weber from RBC Capital Markets. Please go ahead.

Seth Weber

Hey. Good morning, everybody.

David Sagehorn

Hey, Seth.

Seth Weber

I just wanted attention on the defense margin outlook here for the year. I appreciate some of the color they gave about the kind of what helped the second quarter, but to get to your full-year guidance. I think it suggests something in the very low single digits for the back half of the year. Like 2% kind of margin for the defense segment. Is that the right way to think about it? And can you just maybe give us a little bit more color on why that’s taking such a big step down?

David Sagehorn

Sure. Morning, Seth. It’s Dave. A couple of things are driving the lower expected operating income margins in the second quarter. And I’m going to say specifically what the margin is, it is significantly lower than the first half and those two things really are less favorable mix, if you think about the first half of the year, we did have several hundred almost 300 M-ATVs and then in addition the other factors, we are ramping up the activity on the JLTV contract. There is going to be the first vehicle is really I think are scheduled late fiscal year but there is a lot of additional activity going on related to that contract and so we will see spending ramp up as we go through the second half of the year.

Seth Weber

Okay, I guess can you give us, your updated overall production forecast maybe for JLTV for the next - how we should thinking about that for ‘16 and ‘17.

Wilson Jones

Sure for ‘16, the quantities are very low. We aren’t scheduled to deliver the first vehicle until very late in the fiscal year. ‘17 - and in this part I think the bigger story is when we saw the presidents FY17 budget request come out, one of the things that we highlighted was the pace of which the JLTV program is expected to ramp up is significantly faster than we previously expected. So if you go back to last year when we were betting on the contract, our expectations were that for the first three years of low rate initial production, we are looking probably 250 units in the first year which would have been fiscal 17; 500 units in fiscal ‘18 and around 1000 units in fiscal ‘19. Now when you take a look at the sense or the President’s budget request, it is looking more like 750 units approximately for ‘17; around 2000 units for ‘18 and upwards of 3000 units in fiscal ‘19, so significantly quicker ramped in that program.

Seth Weber

Okay that’s very helpful, thank you very much guys.

Wilson Jones

Thanks, Seth.

Operator

Thank you. Our next question comes from the line of Mike Shlisky from Seaport Global. Please go ahead.

Mike Shlisky

Good morning, guys.

Wilson Jones

Good morning, Mike.

David Sagehorn

Hey Mike.

Mike Shlisky

I just wanted to touch on the concrete truck business real quick. Can you give us some more color on, perhaps quantify just how age, the overall concrete truck it is out there.

Wilson Jones

Yeah Mike, that’s one of the factors that leads us to a positive outlook for our mixer business. If you look at the average fleet rates today in concrete mixers in the U.S. is 3.5 years older than it was in 2007, right before the recession. So very old fleets that will need replacements again it leads to our positive outlook for mixers.

Mike Shlisky

And then my follow up is just on this whole fast actions that made such a ramp in 2017 on the construction side, could you guys sense that if the larger concrete trucks of the world become a bigger part of the mix at that point, I was wondering if sort of road and rich products generally need the larger versions rather than the smaller versions.

Wilson Jones

Well they use a variety of trucks to pour concrete again depending on the size of the job Mike, but we do expect that will help us that how we build in the past as it is always been a positive for our business. We don’t expect it should be something that is really fast and furious at the start but we will benefit over that five year period.

Mike Shlisky

Okay great that helps, thanks so much guys.

Wilson Jones

All right, thanks Mike.

David Sagehorn

Thank you.

Operator

Thank you. Our next question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead.

Pete Skibitski

Hey good morning guys, nice quarter.

Wilson Jones

Hi Pete.

David Sagehorn

Hi Pete, Thank you.

Pete Skibitski

I guess, on access margins your guidance kind of implies lower volumes and access in the second half but the margin guidance look like you margins will be kind of flattish year-over-year in the back half of the year. Is that just kind of lower material cost year-over-year or is there something else going on there and then your part two is I am just wondering how you guys think about the state of the market, it looks like continuing lower rental rates, give some color on that would be great. Thank you.

David Sagehorn

Sure Pete, this is Dave I will take the first part of that and turn it over to Wilson for the second part. In terms of the margins in the second half I think you got few things going on there. Certainly material cost we do expect to continue to benefit and we will also see a little bit of pricing challenge but I think those two will largely offset in the second half. I think in terms of quality differentiators we do expect to see significantly lower spending year-over-year on engine emission standards changes. We were still spending on that in the second half of fiscal ‘15 that is behind us obviously now. Also if you think about some of the actions we have taken earlier in the year that access equipment to help manage costs we did lower the reduce the salaried workforce by 10%, beginning of this fiscal year so that will flow through the second half of the year. Then also last year in our fourth quarter we had a reserve that we took during the quarter for used inventories evaluations and you don’t expect that obviously to repeat itself again this fiscal year.

A - Wilson Jones

Pete I’ll jump in on the market overall second half market questions you have there. I think you are hearing different customers talk about the second half or the next six months so to speak and I would say that they are fairly positive. We see good fundamentals, the rate pressure has been going on since probably back to last June, July so that’s a phenomenal that we have been working in and continue to work through that scenario but overall fundamentals they are not bad. They are not great but they are not bad and you know you are seeing housing starts up 14% through March. We are seeing overall U.S. constructions up about 10% in February. So again the fundamentals are there which lead us to believe that there is going to be responsible levels of CapEx spending. Again we are not trying to sound bullish. We are holding our original expectations for the year. We are not changing those, we got the timing issues that we described in our prepared remarks we had some customers that barred in the quarter wouldn’t surprise if the customers were buying it was the timing that they bought earlier than we expected. So we see the back half of the year unfolding and looking very similar to where we are in our outlook. We feel confident of that.

Q - Pete Skibitski

Okay, so you guys think that the whole mid cycle pause issues kind of still the dominant team that we are going through right now.

Wilson Jones

Pete, I think what we would describe it as is the replacement cycle issue. Where there is a not lot of machines purchase in 2009, 2010 so we talked about ‘16 and ‘17 having to work through this replacement cycle issue.

Pete Skibitski

Thanks, very helpful guys. Thank you.

Wilson Jones

Thanks Pete.

Operator

Thank you. Our next question comes from the line of Eli Lustgarten from Longbow. Please go ahead.

Eli Lustgarten

Good morning, everyone.

Wilson Jones

Hi Eli.

David Sagehorn

Good morning.

Eli Lustgarten

Can I ask one quick clarification to higher corporate expenses that we saw in the quarter, is that a one time, looks like a onetime deal?

Wilson Jones

Eli it is largely related to as we mentioned started up cost at a shared facility in Mexico, we are not up to full rate production in that facility yet. As we ramp up production that should go away.

Eli Lustgarten

Okay in the first quarter a large part of the guidance reduction that we underwent reflected the absence of that 1000 unit M-ATV order, which you now have. Now I am trying to argue, assuming that you know are the terms still as favorable that you know it took 400 million out of your backlog out of your forecast for the year. Big chunk of profit, is it fair to assume that most of that under the similar terms in 2017 so that 50, 60, 70 cent kind of number of what that represented would just be added into the next year’s program.

Wilson Jones

Eli, obviously a lot of discussions with the customer regarding that contract but in terms of what how the final contract ended up the terms were no different than what we’re looking at as we excited the first fiscal quarter.

Eli Lustgarten

No we are looking at, whatever turns out to happen in 2016, 2017 is shaping up to be a very strong year for the defense business next year.

Wilson Jones

Well, Eli I am glad you said that, we feel very positive about our defense business in ‘17 and we don’t, we are not here to give guidance for ‘17 and ‘18 today but there is some great factual data that is out there. We have been asked the question of how do you bridge to JLTV full rate production and we believe we build a much better bridge now through our defense domestic programs if you look at our backlog today where 1.6 billion in defense backlog were over a billion of that is for fiscal year ‘17. So that’s in place today, that does not include any of these international M-ATVs that we’re talking about, it doesn’t include an extension with FMTV that were confident that and then if you look at the press budget for ‘17, we see increases from the previous year’s projections in FM TV, FHTV and JLTV, all would lead us in the ‘18 and ‘19 sales. So again this is all public information and we are not trying to get guidance for the next two years, but this is what we talk about Oshkosh being a different global industrial because we have a significant defense business today and we really look forward to this next two years with defense.

Eli Lustgarten

Thank you so much. Could you follow up on the access business where are your inventory levels at this point can you give us some idea how production will work that you have to still compensate for those higher inventories you’re going to face that?

Wilson Jones

Eli, as we said, really when we started the year we expected most of the inventory reduction to occur in the second half of the year and that is still a case. We did see inventories declined in the access equipment segments in March, so we’re pleased with that, and I guess we would characterize it as on track and we think the access equipment team as a good strategy to continue to reduce inventories has we go through reminder in the fiscal year.

Eli Lustgarten

So the operating profitability of that sector is going to be waited down still by inventories for the ‘16 by the time we get to ‘17 we should be, before we finish with that problem?

Wilson Jones

Yeah. There will be little bit of headwind in the second of the year due to the under adsorption, but not as bigger than headwind as we saw in the first half of the year.

Eli Lustgarten

Thank you very much.

Wilson Jones

Thank you.

Operator

Thank you, our next question from the line of Charlie Brady from SunTrust Robinson Humphrey. Please go ahead

Charlie Brady

Thanks. Good morning guys.

Wilson Jones

Hi, Charlie.

Charlie Brady

Just around the refuse business in commercial I mean up 30% just about pre-strong number there but the guidance to the year on change, was there any sort of pull forward on refuse, on the registration the second quarter or is it just kind of normal primary thing you’re seeing there?

David Sagehorn

Yeah Charlie, nothing unusual, fairly normal rate for the waste industry.

Charlie Brady

Well it implied that the second have does not state that pace correct?

Wilson Jones

Please look at the annual guidance which is not changed.

David Sagehorn

Yeah, Charlie, I guess it, we don’t have that numbers on my fingertips here, but I would agree with Wilson we did not see anything really out of the norm, and I think what we’re seeing is we are benefiting from some of the private hollers refreshing their fleets, which is certainly positive. I think we’re also benefiting a little bit with the increased municipal spending. We can take a look at the second half of the year, but I think overall our outlook for the year is unchanged from what we previously indicated.

Charlie Brady

And can you comment on the mix on what you’re seeing on the CNG trucks, in the order pattern?

David Sagehorn

I think, CNG is still very positive, even with the lower oil and gas prices out there, it’s typically I would say some around 30% of the orders in the given quarter are CNG in refuse.

Wilson Jones

Yeah. The large national fleets Charlie have the infrastructure and that’s the strategy for them and so they’ve continue to buy CNG.

Charlie Brady

Great, thanks.

Wilson Jones

Thank you.

Operator

Our next question comes from the line of Mig Dobre from Baird. Please go ahead.

Mig Dobre

Good morning everyone.

Wilson Jones

Hi, Mig

Mig Dobre

Maybe we can go back to defense segments on the, if I look historically here, so much has changed over the past decade results in terms of not only volume, but the overall margin of this business and I’m sort of wondering here now that obviously your outlook is improving and you’re starting to get visibility in terms of volumes for the next few years. What do you think the earnings power of this business in terms of margin? Can you frame it as to where you think opportunity is versus what we see historically?

David Sagehorn

Wilson detailed earlier we’re not here to really give the guidance on next two years. The margin profile or dynamic that you see occur in this segment of the business in the market over last decade, the government I guess directionally is driving over higher bargain then the will may be a decade ago I think that does not make it a little more challenge for OEMs, but I think it still good business and have good opportunities the business as we work forward. And we’re not again get into the on this call today with the margin expectations for the business going to be the next two years but we certainly have opportunities.

Wilson Jones

Whatever that may guess that, what we have today that we did not have decade ago this more international opportunities. So that was still things will continue to change to your point but we will have analyst Day in September and I think that’s where we can give a little bit more specific for you as we go forward with all our segments.

Mig Dobre

I see. I appreciate that, I figure it was worth a try on the longer-term question, but—

Wilson Jones

You always give us a good try and we appreciate that.

Mig Dobre

In terms of the accelerated build for the JLTV are you in a position where you can handle their requirements or should we be thinking that is going to pour some sort of a cost strain on you that we need to take in to account?

David Sagehorn

No, Mig. If you think back, I know you know us well, 2009, 2010, we built close to 10,000 M-ATVs in 10 months, so we can certainly flex up and down and we’ve made a clear to our customer that if they want to go even faster than what we have if almost when accessing and willing to help with that

Mig Dobre

I was think more to the tune of the FMTV really rather than the M-ATV and the build out there, but I get your point.

David Sagehorn

Yeah, Mig. What I would say there is JLTV is design, FMTV was not our design.

Wilson Jones

I think that is important to know Mig, we were building stuff and that was not our design on the FMTV.

Mig Dobre

Understood, thank you guys.

Operator

Thank you. Our next question comes from the line of Jamie Cook from Credit Suisse. Please go ahead.

Jamie Cook

Hi. Good morning, a nice quarter. I guess to question, one David on the guidance, obviously you beat the second quarter quite significantly relative to where the street is in your guide in place. You didn’t raise as much as the beat, I guess this is my question. So what give you caution I guess the back of the year was the street just wrong on the second quarter, provide actually EPS number you just set down year over year? And my second question, congrats on the international MATV contract I just want to get a sense of, what the final hurdle are on the funding that still needs to takes place and how would you rate, what is the probability that funding does not happen before you access your fiscal year or can you just ask about a, timeline of when you the think the funding will be in place? Thank you.

David Sagehorn

I will take the first one Jamie and Wilson address the second one. So in terms of the second quarter, our expectations review coming into the quarter were there are earnings we’re going to be down meaningfully. We certainly did not end up down meaningfully and the largest driver as we see it in - so I’ll play out here, really is the timing factor that we saw in the access equipment segment. As Wilson said within there are some custom results there due to the combination of factors decided to make their click purchases earlier in the calendar year than we had previously expected. So I think, we look at that as a good thing we’re not changing the full year outlook but customers may confident and an comfortable enough to acquire equipment earlier than we expected so overall that’s why you did not see a big move in the full year guide, because the biggest component of the beat versus our previous expectations was focused on that timing access equipment segments.

Wilson Jones

I’ll wrap the international M-ATV Jamie, we were pleased as I mentioned in the progress made in the quarter to receive the contract for more than 1000 units of M-ATVs into this region. This is our fifth contract with this customer that we’ve always felt it was a matter of win not if, as I said, we are working on finalizing in funding and delivery schedules, so we have a forecast planning on the deliveries. This customer is - we run at the pace of the customer, what we do believe this most business will be delivered within 18 months. I’m sure that the next question will be how many do you think you could get in ‘16 and we certainly are working close with the customer and as the funding delivered schedule materializes, if it does something fast or in a timely manner then we could get a couple hundred of these units in the back half of our 16 but give we are not going to put those in our outlook. This is a very fluid situation. A lot going on in this region but we are very close to the customer. I have been over there twice in the last three months and I can tell you the need for the vehicles are there, our vehicles are performing well in the theatre and I know the customers is very interested in moving forward. So we will let you know in the next earnings call of how we are doing. But our goal is to get the funding and deliver schedules in place now that we have the efficient contract.

Jamie Cook

Okay thank you, I will get back in queue.

Wilson Jones

Thanks.

Operator

Our next question comes from the line of Jerry Revich from Goldman Sachs. Please go ahead.

Jerry Revich

Good morning everyone.

Wilson Jones

Good morning, Jerry.

David Sagehorn

Good morning, Jerry.

Jerry Revich

I'm wondering if you could talk about you are seeing in equipment business in Europe, one of your competitors spoke about acceleration in the demand outlook. I’m wondering if you are seeing that in your business as well.

Wilson Jones

Well access in Europe as we said is going to be up marginally this year for us. We just came off Bama [ph] and I would say the energy level, the much larger attendance in Bama than three years ago. I think the no Europe is one of those market, there is areas where we do well and there is that are [indiscernible] very competitive from a pricing stand point, so our outlook is favorable for Europe and again we see good progress there. We are looking at doing some different things with our facilities, to better handle that market but it is, we do have currency that we are fighting against some products that we are not building there but it is exciting to see Europe coming back and we have a great team that is growing in Europe to further our business there, so we are positive about Europe, maybe not as possible as other but it is a good access market for us.

Jerry Revich

Okay thank you and in North America you mentioned in access that there was a pull forward of demand in your fiscal second quarter can you talk about the demand environment as you see it in your fiscal third quarter because it sounds like at least for your customers it is off to a pretty good start so I am wondering if you could characterize the pull forward from the September quarter within your guidance as you see it or do you expect weaker fiscal third quarter than you would previously, thanks.

Wilson Jones

Well obviously what we are implying Jerry is the second half is going to be little bit less than what we started with our guidance for ‘16. I would say that, again what we are off too in April is the start that we have kind of expected, I wouldn’t say that it is up, down, just kind of flogging along as we expected so, we didn’t change our guidance because we still our outlook is dialed. We will see how the quarter unfolds, I think the next 60 to 90 days is going to tell us a lot about the construction, access side of our business and to be honest we are anxious to get into this next 60 days.

David Sagehorn

Hi Jerry, I guess I still look at this as with the guidance unchanged for the year, it is a challenging environment out there. I still look at this as a positive that we saw customers choosing to purchase equipment earlier than they previously may have intended. So the fact that it implies that are second half of the year or maybe a little lower than our previous expectations. Again you had a lot of customers being very vocal early in the calendar year about their plans to not purchase a lot of equipment in the first calendar quarter and we listened to that and what we saw was people getting more comfortable. So I think we view that as directionally positive.

Jerry Revich

Okay thank you

Wilson Jones

Thanks Jerry.

Operator

Thank you. Our next question comes from the line of David Raso from Evercore ISI. Please go ahead.

David Raso

Hi, thank you and I apologies if I just didn’t hear it. The new 1000 plus order it wasn’t an issue of always met with Ministry of Defense, this is was one of the first times in a while maybe ever having to sit out with Ministry of Finance and that what’s slowing it up. Have we now secured the contract, just making sure 100%, obviously don’t want any further delays. Has the Ministry of Finance signed off and the funding is literally a technicality or is there still a funding questions mark?

Wilson Jones

Dave what I would say is first of all yes, we have an executive contract so that is in place.

David Raso

It is different to one that you had three months ago right? Like this is incremental?

Wilson Jones

No, we didn’t have a contract when we delivered our January earnings call.

David Raso

[Indiscernible] so this is incremental, you now have something you didn’t have three months ago.

Wilson Jones

Yup correct.

David Raso

Okay good and the funding?

Wilson Jones

It is - you called the technicality, I would call it more just the structure around how funding and delivery schedules line up and there is a lot planning going on and I think I said it earlier there is lot going on in this region and so you know when you are dealing with the different ministers, the generals that are in charge of some of these units, it take some time to work through the actual deliveries and what they need, when to field, you can imagine over a 1000 units, that’s a lot of planning and as I said they do have some of the things that are just distracting them too, we are working through that, we are very confident, especially with the contract in hand that we will get this worked out and what I said earlier is that we believe this will all be deliver over the next 18 months.

David Raso

And we used to speak to thousands of units of opportunities now let’s consider this one, you know hopefully done deal, are there incremental units with the same customer that are on the immediate horizon as well or there other countries engage in conversation maybe you can handicap where every you think you are in those conversations.

Wilson Jones

Sure, I was just over there and I can tell you this customer has more needs so we are seeing opportunities with our current customer, some other customers we have been working with that have purchased, they have needs and now we have some new countries that we are talking to and have done some trials with and so, the opportunities in the region there are good but we said it couple of times as we are not going to get out over our skies and talk about contracts that we don’t have in hand. So we will keep you posted through the earnings call and how we are progressing but as I mentioned to Mike Dobre earlier we have got some great opportunities with defense and again the international side of the business is really opening up for them, that they haven’t had before so adds to our positive outlook there.

David Raso

I mean the significance of the earnings for M-ATV are tremendous, so that’s good to hear. The JLTV you haven’t been willing in the past to really give as much color on this, I mean I assume the swag margin ideas, well hopefully it is better than FMTV but is clearly not as high as M-ATV. Can you give us some least framework now that maybe you have a little more clarity on 750 units and then beyond that, just some sense of the profitability. If it is low single digit, I mean the number sound nice but they are really not that meaning for to earnings and it is all about the M-ATV but can you help us a little more with the JLTV framework from margins and to say ‘17 and ‘18 just frame work.

Wilson Jones

David I think the framework that we have given that you have referenced now FMTV and M-ATV as far as we are going to. Obviously we know we need to earn a descent return in this business and that JLTV is going to be a significant part of the business in the coming years. So we knew that when we did this contract.

David Sagehorn

I would just add a little more color to that David in that. It is not FMTV but it is our design and Dave you have seen this over the years as once we get going with a contract like we deal with FMTV internally we work and we enhance margins. We improve margins and that will be the plan for the JLTV and again we are excited because we are now going to have the opportunity to build more earlier and that will just help us further that focus on margins.

David Raso

I will just try one more angle [indiscernible] that color. Full throttle doing you know 1500, 2000 you call the number either numbers could be sizeable with this contract, can this be a double digit margin program?

Wilson Jones

Dave, we are not going to get into the specifics on it again, we know that it is going to be a big component of the business going forward and we know that we have to deliver descent return within this business segment and that is our objective.

David Sagehorn

And along with the great relationships with the army and marines, we have tremendous international opportunities with JLTV too, so good opportunities here for us, Dave.

David Raso

I appreciate. Okay thank you so much.

Operator

Thank you. Our next question comes from the line of Ann Duignan from JPMorgan. Please go ahead.

Unidentified Analyst

Hi, good morning, this is Mike Coleman [ph] for Ann.

David Sagehorn

Good morning, Mike.

Unidentified Analyst

Can we talk just follow up on an earlier question about Europe and access, did you put significant volume on orders at the BAMA show would it be possible to see with this orders and substantial and after seeing other quarters of access backlog growth year-on-year in Q3?

David Sagehorn

Well, we always look worse at the shows Mike, we don’t use the share the amount that the book but I know the access team was pleased with the order rate at the show. I wouldn’t say that anything that make our look unusual, that would say, it fits within the norm.

Unidentified Analyst

Okay. Thank you.

David Sagehorn

Thank you.

Operator

Thank you. [Operator instructions] our next question comes from the line of Stanley Elliott from Stifel. Please go ahead.

Stanley Elliott

Hey, guys good morning and congratulations.

David Sagehorn

Thank you.

Stanley Elliott

Along the same lines, is the FDIC see a big order show for you all as well sometimes can happen close of the quarter.

David Sagehorn

No Stanley, the municipal shows are a little different because you’re working for the bid process, whereas in the construction you’re dealing with, that are not working to our - range like that, so what happens that FDIC show introduce new products like our Ascendant, they had three nice conference rooms setup and you see a lot of specifications being modified and rig around allowing this products. So, if you engage to a construction shows by the orders received we look at the municipal shows, how we influence specifications and our team have done a wonderful job at the show and I know that they will be feeling very good about the progress they made specifications and customization in the show.

Stanley Elliott

That’s great news. And can I go on into the mixer side is there is a still issue on the rear-discharge the availability of chassis, so others confidently out there that the—time are still very compressed so that you could still meet the any sort of order activity assuming we do get the continued ramp in the construction spending to--?

David Sagehorn

That’s correct, Stanley. There is capacity and there’s chassis and again that the consciousness that can wait a little bit.

Wilson Jones

That’s Stanley, that’s on the rear-discharge and the front-discharge those are units that be to build from the frame rails up and the lead times in those type units are quite a bit longer than the than the units we mount on commercial chassis.

David Sagehorn

Which is where we see our increase in orders.

Stanley Elliott

Perfect guys. Thank you.

David Sagehorn

Thank you

Operator

Thank you. Our next question is a follow-up from Mig Dobre from Baird. Please go away

Mig Dobre

Thanks for taking my follow-up just a quick one on price cost and really caused specifically into back after the year, how are you thinking about any impact that you might see some high raw material still specifically, can you medicate for that edge or do you have anything in place in terms of handling that?

David Sagehorn

Mig, I think that, that the job we see in - really have been quite resent if look at the weekly statistics and were typically on steel locked for a quarter basis, so steel continues to remain high relatively speaking we would allow before you would see that, we first had to get through the lock and you got to actually procure it, produce the units and sell them, so it would likely be more like a fiscal first quarter for us I think before we would really see anything if it does continues to do tick up.

Wilson Jones

But I just add our procurement teams are consistently working on mitigation strategies and so it’s something that they are definitely aware of working on and are prepared to mitigate this best we can if they go up further.

Mig Dobre

Do you have the sense that as we’re looking into say 1Q ‘17 you would be able to pass on any such cost increases to the customers? Differences by segment but I don’t know if there is any color you can provide?

Wilson Jones

Well, the shorter backlog segments, definitely you can pass those across longer, backlog segments become little more challenging but this is the first time steel has ticked up in a while and I just remind there is still a lot of capacity for steel out there so we are not [indiscernible] at the steels can go fast, but if it does we do have some strategies that would be in play, but again there is still a lot of capacity out for steel.

Mig Dobre

Alright. Appreciate, thank you

Wilson Jones

Thanks, Mig.

Operator

Our next question is a follow-up from line of Mike Shlisky from Seaport Global. Please go ahead.

Wilson Jones

We lose you Mike?

Michael David Shlisky

Hey, sorry about that. Just a quick follow-up for Dave here, Dave you mentioned that Q3 to be your first quarter for the year for earnings. Can you just tell us if you think you’ll be able to beat last year’s Q3?

David Sagehorn

Yeah, I guess, Mike - I think we were at, we expected to be the best this quarter of the year. Obviously we came into this quarter was-- we saw some access customers and I feel more comfortable about buying early in and that ended up being a big positive force versus our prior expectations so I guess just as we looked seasonally typically you would see the third quarter being of our highest earnings quarter for the year and believe it will continue to follow this trend this fiscal year.

Michael David Shlisky

Okay. I’ll try Thanks guys.

Wilson Jones

Thank you. Good try.

Operator

Thank you. Our final question comes from the line of Charlie Brady from SunTrust Robinson Humphrey. Please go ahead please go ahead

Charlie Brady

Yeah, this is quick follow-up on access and much on a bit - here, but just to understand here you’re thinking on the full--, is there function of it, in a total we had mild winter we saw the order checkup, or is it from actual conversations with the customers you were telling, we’re buying the equipment earlier then we’re planning on in during this year.

David Sagehorn

Well, I will say those conversation are going on daily Charlie with our customers they are an existing great job close to their customers, yes those conversation are going on I think though you have around the U.S. that had a mild winter. This construction start-up and there using new machines and in certain areas before going to the projects grow market share in some cases so there is multiple factors that we believe that we believe led to the buying being a little early. I wouldn’t read that whole more into it again believe it or timing and we are not saying the change in second half of the year, I just moved forward a little.

Charlie Brady

And this is presumed becoming major and independent companies, I would I assume?

David Sagehorn

No we had a very good mix of both independent and national -

Charlie Brady

Okay. Thanks.

Wilson Jones

Thanks Charlie.

Operator

Thank you. Ladies and gentlemen there are no further questions and queue at this time. I would like to turn the floor back over to Mr. Wilson Jones for closing comments.

Wilson Jones

Thanks all. We appreciate your interest in the Oshkosh Corporation and participating on our call today. Exceeding customer expectations and delivering strong shareholder value and certain look forward to sharing more information with you all on next earnings call, who are all in the conferences that we’re moving around the country here. Have a good day, everyone.

Thanks again.

Operator

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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