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Executives

Patrick Davidson – VP, Investor Relations

Charles Szews – President and CEO

David Sagehorn – EVP and CFO

Analysts

Steven Woghin – Jefferies & Company

Charles Brady – BMO Capital Markets

Jamie Cook – Credit Suisse Group

Ingrid – JP Morgan Chase

Andrew Obin – Bank of America/Merrill Lynch

Walter Liptak – Barrington Research Associates

Josephine Millward – Benchmark Company

Robert McCarthy – Robert Baird

Basili Alukos – Morningstar

Charles Brady – BMO Capital Markets

Oshkosh Corporation (OSK) F2Q12 Earnings Call April 26, 2012 9:00 AM ET

Operator

Greetings and welcome to the Oshkosh Corporation Fiscal 2012 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson; you may begin.

Patrick Davidson

Thanks Elisa. Good morning, and thanks for joining us. Earlier today we published our second quarter results for fiscal 2012. 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 is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that 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.

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.

Presenting today for Oshkosh Corporation will be Charlie Szews, President and Chief Executive Officer and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Let’s begin by turning to slide 3, I’ll now turn it over to you, Charlie.

Charles Szews

Well thank you Pat. Good morning, today we’re announcing results for second fiscal quarter that exceeded our expectation. Overall total company sales increased 18.9% at $2.08 billion for the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011. Earnings per share of $0.41 in the quarter was lower than the second quarter of fiscal 2011 due primarily to an adverse sales mix in our defense segment partially offset by strong growth in our access equipment segment.

Our outperformance in the quarter versus our expectation was driven by continued strong replacement driven demand for access equipment product which led to 61.4% year-over-year sales growth along with significantly higher operating income in this segment. We expect the access equipment segment along with our other non-defense businesses to lead us forward in the coming years. We previously described fiscal 2012 as it being a year of transition and investment in our MOVE initiative.

As expected our defense segment continued to transition to second quarter towards the higher percentage of sales from our lower margin FMTV program. We’re pleased to report that profits on the FMTV program continue their upward trend in the quarter. Also in our second quarter, we made good progress on initiatives in each of our major MOVE categories which I’ll describe in a few minutes.

We added engineering, operations and business development talent and resources in the quarter to better position us to deliver on the high level MOVE target that we previously described to you, namely a 250 basis point improvement in margin through product, process and overhead cost optimization and an increase in international sales to 30% of consolidated sales.

Let’s talk about our current market condition and please turn to slide four. Following a trend that has been ongoing for the past several quarters, the access equipment market continues to exhibit a strong recovery. I am looking at the makeup over 61% increase in sales in this segment during the second quarter. We experienced strong, double digit growth in all major regions of the globe but the performance is again driven largely by replacement aged equipment in North America.

Business fundamental support, continued recovery in access equipment. In North America, higher equipment utilization, rental rates and used equipment values are making it more cost effective to replace older equipment. Average fleet is come off their peak but still remain significantly higher than historical levels at more than 50 month. Outside of North America, we see continued strength in South America and Australia driven by continued product adoption along with economic and infrastructure driven demand. And even the European access equipment was still cautious due to economic concerns show positive signs in the second quarter compared to what we saw in the fall and early winter.

Wilson Jones and his team just returned from a successful Intermat show last week in Paris and even though the European market lag the recovery that we would experience in North America, we are generally encouraged by what we’ve heard and saw.

The strong recovery in the market for access equipment products in North America is continuing to occur without a measurable recovery in construction activity. When construction activity does begin to recover meaningfully, and I believe it will, we expect this will help extend the positive trend in this market. Finally, we ended the quarter with a backlog of just over $941 million in the access equipment segment which positions us well for a strong finish to fiscal 2012.

Now turning to defense in February after we last spoke of many of you on our quarterly conference call, the Obama administration published its fiscal year 2013 budget proposal. Included with the budget proposal was the DoDs current view of future year defense funding. For the primary programs that Oshkosh supplies to the army namely the FHTV and FMTV, we saw a lower anticipated funding request for those future years than what was previous published in the fiscal year 2012 budget request. Given that the environment in Washington the potential to see frustration, this is not a significant surprise probably we’re going to take a step back and consider a few points though.

At the end of our second fiscal quarter, we had more than $3.9 billion of backlog in our defense segment. We expect many of these sales to occur in fiscal 2013. In addition there was a significant amount of funding for our programs in the approved fiscal 2012 federal budget that is yet to make its way to us in the form of orders that appear in our backlog. We expect that this funding will result in additional orders in fiscal 2013 and 2014 sales.

We requested fiscal 2013 federal funding and the current view for fiscal 2014 funding, would contribute sales to our fiscal 2014 and fiscal 2015. We’re talking up to three years out which is a long time. We also know that the further out you go the more likely is that things will change. I also want to enforce that we’ve been expecting U.S. Defense spending to decline in the future but there are still many attractive opportunities to supply our government and other friendly governments with tactical wheeled vehicle. During the quarter we submitted our bid for the engineering and manufacturing development phase of the JLTV program. This last week I drove our vehicle for the beta test site. Our team has developed the vehicle truly worth of the Oshkosh name.

We’re also waiting to hear about the Canadian tactical armored protected vehicle program which is a competition that should have a winner announced before the end of June. Then the Canadian MSVS SMP program is another program that we are competing for and we expect to submit our proposal for this program in May.

We also continued to work several opportunities to sell our M-ATV and other defense products to international customer. We have a strong track record of delivering outstanding vehicles that meet or exceed performance specs and we believe that we’ll be a strong competitor for all of these opportunities.

Turning to our fire & emergency segment, U. S. fire truck market remains down annualizing at a significant lower run rate than we have seen for many, many years. We believe that the domestic fire truck market will continue to remain near the current depressed levels through at least 2013. As we have discussed on previous earnings call we have been able to offset some of the domestic weakness with sales growth in international market both Pierce and our airport products groups again secured number of international orders in the most recent quarter including orders for vehicles in China, Taiwan, Brazil and even in Europe which was previously a very difficult market for us to break into.

In our commercial segment we continued to see growth in RCV sales especially CNG powered unit. The market for CNG power rough use vehicles continues to grow with more than 30% of our RCV unit sold during the quarter powered by CNG. We also saw another quarter of year over year concrete mixer sale growth of extremely low level.

Let’s turn it to slide 5 and we will provide an update on our operations issue.

We saw significant improvement in margins at JLG in the second quarter largely through a combination of higher volume and realization from our January 1 price increase. We believe we still have some opportunities for additional price increase realization that would help our performance in the back half of the year. We also continue ramping up production in Romania and China in the quarter which negatively impacted access equipment margin. Production rates are on schedule at both facilities to reach target cost.

As we achieve higher volumes of both facilities, we expect that both facilities will contribute to higher margins in this day. We continued broad based cost reduction activities across the company in the second quarter. Our integrated project teams continue to drive product process and overhead cost reduction. Lead teams continued to drive down FMTV product cost contributing to higher margins in the second quarter than the first quarter. In our Florida ambulance and commercial fire apparatus production facility we made solid progress resolving issues from an earlier facility consolidation.

Ambulance product design and assembly process changes permitted us to sharply reduce overtime at the facility, and we released 40 temporary employees in April. Further changes are planned throughout the spring and summer to drive our cost at that facility to targeted level.

Quality and delivery are back on track which also permitted us to announce 6% price increase for our ambulances effective June 1, 2012. Also on the fire and emergency segment we exited the U.S. mobile medical trailer product line which involved writeoffs of inventory and intangible assets plus severance cost following $2 million in the quarter. Mobile medical trailer sales continue to decline in the U.S. following reductions in Medicare reimbursement rates.

So we determined that we would be more profitable focusing our resources elsewhere and we downsized staffing at Pierce resulting in $0.4 million in severance cost to reflect the continued decline in the U.S. fire operator demand described earlier. In our commercial segment, we reconfigured our RCV production lines to streamline production. We believe these efforts will lower assembly cost, increase production flexibility and improve product quality. So far the moves are meeting expectations, the commercial segment also closed a small fabrication facility in the quarter.

Please turn to slide 6. In our drive for continued improvement in cost reduction as part of our MOVE strategy we’re extending the launch of the Oshkosh Operating System into more areas and parts of the company. OOS is a customer centric application of lean principle. The Walker plant to see that there are now operating under common metrics of more and more application of lean tool.

And integrated projects teams are attracting tough cost functional process improvement project. We’re also deploying new material MOVE strategy to deliver parts to manufacturing at lower cost and with less in-stock inventory. We believe that our application of the Oshkosh Operating System will expand significantly over the next one to two years and will positively contribute to lower product cost, higher inventory returns and greater customer satisfaction of course we have been active with other elements of our MOVE strategy including product innovation.

We participate in number of trade shows during this time of year. From new innovations from Oshkosh include our Rental Series scissor lift. These products largely produced in China are entry level access equipment products specifically designed for the rental market.

Now with the FDIC show in Indianapolis last week we introduced our Dash CF product line to include Pierce’s exclusive DD13 big block engine and aerials for the fire market. The Dash CF addresses long standing needs in the fire industry to provide greater space and visibility for the driver and captain operating the front row of a customer fire apparatus while also greatly improving the serviceability of the apparatus.

And at AUSA Winter that the association US Army winter show in February, Oshkosh debuted its initial prototype ground mobility vehicle, with this vehicle Oshkosh continues to expand its tactical wheeled vehicle portfolio to very light weight extreme off-road performance solution. We will launch more new products this spring and summer at Waste Expo and other event.

We also continued the global expansion MOVE initiatives during the second quarter Oshkosh Defense opened a program management office in the Ottawa, Ontario, Canada to improve in-country support for Canadian defense customer as we compete for the TAPV, MSVS, SMP and other Canadian programs. Oshkosh Defense also had multiple business development hires in Middle East and Washington D. C. to support international expansion effort.

We believe Oshkosh’s portfolio of vehicle designed for Military, Homeland Security and Law Enforcement requirement is uniquely capable of addressing emerging threats globally. We intend to forward deploy provide improved support to our international customer.

Now please turn to slide 7 and Dave will take us through a brief discussion of our financial performance for the quarter and our updated expectations for fiscal 2012.

David Sagehorn

Thanks Charlie and good morning everyone. Consolidated net sales for our second fiscal quarter were $2.08 billion, an increase of 18.9% from the prior year quarter. Significantly higher access equipment segment and FMTV sales were partially offset by lower FHTV and after market part sales in the defense segment. FMTV sales made up more than 40% of the defense segment sales in the quarter compared to less than 5% in the second quarter of fiscal 2011. Consolidated operating income for the quarter was $75.9 million or 3.7% of sales, this compares to operating income of $132.4 million or 7.6% of sales in the second quarter of fiscal 2011.

Similar to our first fiscal quarter the sales mix shift in the defense segment from higher margin FHTV vehicle and after market part sales to lower margin FMTV vehicle sales was the largest driver of the lower operating income and operating income margin in the quarter, offsetting significantly improved operating margins in the access equipment segment. While improved from the first quarter, FMTV profit levels remain in the low single digit. As a reminder we include a slide for each of the segment highlighting the financial results for the quarter along with the major drivers of the performance versus the prior year quarter in the appendix to our earning calls slide.

Earnings per share for the quarter was $0.41 compared to $0.74 from last year’s second quarter. Results for the quarter include a $0.02 per share of charges related to the proxy contest in connection with the company’s 2012 annual shareholders meeting that concluded in the quarter and $0.02 per share related to the exit from the U.S. mobile medical trailer product line and workforce reductions at Pierce. And we also paid down $32 million of debt in the quarter.

Please turn to slide eight for a review of our current outlook for fiscal 2012. We are increasing our outlook for fiscal 2012 compared to what we provided on our last earnings call largely as a result of the strong performance in the access equipment segment in the second quarter. I’ll give a few brief comments on our fiscal 2012 outlook for each of the segments starting with the access equipment.

We now believe that access equipment segment sales will be 35% to 40% higher than fiscal 2011 compared to our previous estimate of 25% to 30% higher. Stronger than expected orders and sales in the second quarter led us to increase our sales outlook for the year. We expected operating income margins in this segment will improve modestly in the second half of the fiscal year compared to the second quarter of fiscal 2012 which leads us to now estimate that full year operating income margins in this segment will be in the 7.5% to 8% range for the year recognizing that first quarter segment operating income margin will negatively impact the full year measure.

In our defense segment, we believe sales for the year will be slightly higher than our previous estimate of down 15% versus the prior year. Our outlook for full year operating income margins for this segment remains unchanged to nearly 5%. We continue to believe that fire and emergency segment sales will be up slightly compared to fiscal 2011 backlog in this segment supports significantly higher sales levels in the third and fourth quarters versus the first two quarters of this fiscal year including 97 vehicles in transit to customers at the end of March which is significantly higher than normal.

Second quarter results that miss our expectations led us to reduce our full year expected operating income the segment to approximately breakeven. Our outlook for the commercial segment remains unchanged from our prior call. Sales are expected to be up approximately 15% with low single digit operating income margin. We believe that our corporate expenses in fiscal 2012 will be slightly higher compared to fiscal 2011 due primarily to the proxy contest cost. We also expect lower interest expense reflecting the expiration of our interest rate swap in December and the full year impact of fiscal 2011 debt reduction. And our expected tax rate for the year remains unchanged from our previous estimate of 32% to 34%.

We believe that earnings in the second half of the year fiscal year will be modestly higher than in the first half of the year. We also believe that quarterly earnings per share for the year will peak in the third quarter before declining in the fourth quarter due largely to seasonality in the access equipment segment and to a lesser extent in the commercial segment. To wrap up my comments on our fiscal 2012 outlook, we now believe our capital expenditures for the year will be between $75 million and $85 million down from our previous estimate of $85 million to $95 million. I will turn it back over to Charlie for some closing comments.

Charles Szews

Thank you, Dave. This is an exciting time for us at Oshkosh. Yes we have several businesses that remain challenged due to extreme market condition. For our access equipment market outlook continues to improve and we expect to gain traction with our MOVE initiatives over the upcoming quarters. On a final note, we’ve begun planning for an Analyst Day on September 14 in Chicago to share with our progress and our MOVE initiatives, our longer term outlook for each of our market, metrics to measure our progress and more. We look forward to many of you joining us for this important event again on September 14.

That concludes our formal comments. We are here to answer your question, so I will turn it back over to Pat to get the Q&A started.

Patrick Davidson

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

Question-and-Answer Session

Operator

(Operator Instructions). Gentleman, our first question comes from the line of Steven Woghin with Jefferies & Company. Please proceed with your question.

Steven Woghin – Jefferies & Company

Great, hi good morning guys.

Charles Szews

Good morning.

David Sagehorn

Hi Steve.

Steven Woghin – Jefferies & Company

My question is on Defense and some interesting discussion seem to be happening at the DoD and there is couple of headlines we’ve seen recently one that suggested that they might be targeting a cut of 60,000 vehicles from the tactical wheeled vehicle fleet as they kind of think about their downsizing and then another one which suggested they may replace up to about a third of that fleet with contractors and I know these things are always sort of trouble and get floated so forth but I guess I’m just wondering if you guys have a view on those things how it might impact your company?

Charles Szews

All right well it’s a very fluid situation Steve but I think our near term future is pretty well determined in the last budget I do think that the funding that I see in the President’s budget submission ultimately will flow down to Oshkosh and in that of course the FMTV did come down to only a couple more years of funding left I believe and our FHTV funding goes to low level so I think all of that is well known and kind of changes we’re talking can’t change that whole lot.

Steven Woghin – Jefferies & Company

Okay what about the contractor part...

Charles Szews

Its going forward I mean what’s going to be important is that we win some nice international programs, retain or sustain that business and build up on that and compete very aggressively for JLTV.

Steven Woghin – Jefferies & Company

When they talk about replacing part of it with commercial contractors could you be that contractor?

Charles Szews

Quite often these commercial contractors for example operate in Afghanistan, they operate a wide fleet that could be a whole range of vehicles, some 30, 40 years old just moving equipment in the battle zone and now that’s a difficult business to get in to and if the conflict in Afghanistan is winding down that’s not going to be that big of an opportunity any way.

David Sagehorn

Steve I think also a lot of it is, a lot of these trucks are the line haul fleets that truly today are not what we would consider tactical wheeled vehicles anyway.

Steven Woghin – Jefferies & Company

Great thanks, I’ll get back in queue. I appreciate it.

Charles Szews

Thank you.

Operator

Thank you. Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please proceed with your question.

Charles Brady – BMO Capital Markets

Good morning guys this is Andrew on for Charlie Brady.

Charles Szews

Good morning.

David Sagehorn

Morning.

Charles Brady – BMO Capital Markets

Our question is around, the restructuring at Pierce, we’re just kind of wondering how long you guys see that going on and just kind of what are the actions being taken?

Charles Szews

Sure, probably you will see some challenges in that segment for the next in a few quarters but every quarter we’re expecting things to get a little bit better. The quality and delivery out of that facility now is terrific. I just spent the last week at the FDIC Trade Show meeting with dealers and customers and really didn’t hear any negative comment.

So we’ve turned the corner, our overtime levels are cut in half from what they were, now we’ve start to release some temporary employees based upon increasing our efficiencies we have an action plan that are pretty robust over the next coming quarters to continue to improve our efficiencies and the feasibility, unfortunately what you see is that we can make changes but it take, changes you make this quarter starts benefit the following quarter in terms of shipment, so there is a lag effect here but we do expect every quarter it get better. And our intent is to be able to show significantly better results more in fiscal 2013.

Charles Brady – BMO Capital Markets

Okay great. Is there any way to kind of quantify I guess over the next few quarters like how much well you are looking to kind of get from that?

David Sagehorn

I guess the best way to answer that would just be in terms of our outlook for the full year. We are guiding towards breakeven for the year and for the first half of the year we have had losses in each of the two quarters, so I think that would be kind of be reflected in the performance that we will see in the second half of the year.

Charles Brady – BMO Capital Markets

All right great, thanks guys.

Operator

Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse Group, please proceed with your question.

Jamie Cook – Credit Suisse Group

Hi this is actually Leon in for Jamie Cook.

David Sagehorn

Good morning.

Charles Szews

Good morning.

Jamie Cook – Credit Suisse Group

Good morning. So I just wanted to know, could you guys go a little bit more in depth for the AWP margin guide, the guide looks just a little bit light given the second quarter print and as we head into a seasonally strong portion of the year?

Charles Szews

Yeah I think you – in terms of the depth there and the full year would imply that we do see better margins in the second half of the year. And that’s based on what we see for the outlook. We believe, we do have additional opportunities to capture some of the pricing increases that we announced previously so I think overall we feel confident that we will see better margins in the second half of the year than we saw in the first half.

David Sagehorn

And if you are looking at the annual guidance and comparing that to the most recent quarter, you do have to remember that our first quarter became right out of the box with higher raw material cost not being offset by a price realization that came through in the most recent quarter and so you know again if you look forward, our margins we do expect to be modestly better in the second half.

Jamie Cook – Credit Suisse Group

Okay great and then switching over to defense, could you give a little bit more color what is implied in that modestly better defense outlook?

Charles Szews

Versus our previous expectation?

Jamie Cook – Credit Suisse Group

Right, right.

Charles Szews

I just think it’s a lot of timing around the orders with our government customer. As you know we have programs that are multiyear programs and we receive delivery orders from the customers and things tend to move around a little bit and just as we sit here today, the outlook is in terms of timing a little bit more favorable for delivering in FY ‘12 than we would have thought three months ago.

Jamie Cook – Credit Suisse Group

Okay great thanks so much guys.

Charles Szews

Thanks.

Operator

Thank you. Our next question comes from Ann Duignan with JP Morgan Chase. Please proceed with your question.

Ingrid – JP Morgan Chase

Good morning. This is Ingrid, I’m just standing in for Ann.

Charles Szews

Good morning.

David Sagehorn

Good morning.

Ingrid – JP Morgan Chase

Wanted to talk about the AWP market, I mean so far it’s been relatively just a replacement market, are you seeing any kind of fleet expansion going on?

Charles Szews

Okay in North America, you’re right, it’s clearly been mostly a replacement driven recovery. We’re seeing some fleet expansion in the energy sector primarily around the Marcellus Shale but otherwise North America it’s really replacement driven. We go down to Latin America, that’s little different, the fleet size of AWP in Latin America is much higher presently than it was a year ago or two years ago, there has been significant fleet expansion there and we think that, that will sustain itself as a strong market down in Latin America. Australia has also been very strong.

Ingrid – JP Morgan Chase

Great, then also you had mentioned that sales in Europe were at double-digit, I was just wondering if you can give us a little bit more color about what you’re seeing in Europe and that for in April?

Charles Szews

Okay, you know Europe is a tale of two houses as we’ve been saying for a while and I think everyone sees that. Northern Europe little stronger, Southern Europe is pretty much on its back in terms of EWP market and although we’re seeing continued signs earlier about three, six months ago, our customers are more cautious about placing orders, they’re talking to us and they’ve delayed, well they ended placing the orders so I think that there is a little bit increase in contents particular in the Northern half. We also had good traffic at the Intermat show here last week in Paris and taking really customers from Middle East, Africa where there as well and overall those markets look favorable as well. So broadly based market on that.

Ingrid – JP Morgan Chase

Okay. That’s helpful. And then finally, I was just wondering on the FMTV, you’ve much – producing anymore trucks and trailers right now, and I am trying to get a little bit better understanding of impact on mix. If that then later on transitions to more trailers than trucks what would be the impact, would that be a net positive or net negative on margins?

Charles Szews

I think overall, you’re still going to see a very heavy mix in terms of trucks just when you think about the price of a truck versus a price of a trailer there, they’re significantly different but I guess as we look forward, I don’t anticipate a significant shift in the mix.

David Sagehorn

Ingrid , in the last two months or so right we have contract announcements on the FMTV, a little more than 300 million between two announcements

Ingrid – JP Morgan Chase

Right.

Charles Szews

And those are mostly trucks, but obviously those are out in the future.

Ingrid – JP Morgan Chase

Right, but then eventually you will be left with the trailers –

Charles Szews

No we’re delivering...

David Sagehorn

We are delivering trailers all along, I am not sure where you’re getting the perception that we aren’t delivering trailers.

Ingrid – JP Morgan Chase

No, I just was under the perception you are delivering lot more trucks than trailers.

David Sagehorn

Well, on an absolute unit count it’s probably double but we are at sort of the maximum effective level in both trucks and trailers.

Ingrid – JP Morgan Chase

Again from a dollar standpoint this contract is very heavily weighted towards...

Charles Szews

Price. When it was first announced, it was probably 55% or 60% truck and the rest trailer on a unit basis, and as they’ve ordered it’s been a lot higher in trucks.

Ingrid – JP Morgan Chase

Right, okay. That’s helpful. Thank you.

David Sagehorn

Thank you.

Charles Szews

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch. Please proceed with your question.

Andrew Obin – Bank of America/Merrill Lynch

Hi, yes good morning. Just on the first one.

Charles Szews

Good morning, Andrew

Andrew Obin – Bank of America/Merrill Lynch

Just a question on JLG, as smaller businesses, again those smaller rental houses come back as you sort of getting your suppliers on track, looking 12 months out, do you think we can sustain and I understand that you’ve given guidance but just in theory if volumes remain strong, do you think we can sustain on improved operating leverage that we’re seeing?

David Sagehorn

We broadly based if you recall part of move initiatives just to expand our margins out of the cycle by 250 basis point, so we do think that there will be operating leverage as our cost initiatives take effect and through this cycle, you get the volume benefit certainly and there is a benefit and as you just hinted in the smaller rental companies starting to buy more, maybe kind of bigger part of the mix obviously that does benefit margin.

Andrew Obin – Bank of America/Merrill Lynch

Could you give us more color on commercial because I think last quarter you commented that you felt that improvement in commercial sales had to do with on tax incentives but the business continue to grow this quarter, what specifics are you seeing, what is driving the demand, what product? Thank you.

Charles Szews

Well it is sequentially down I think from the first quarter to the second quarter, in terms of refuse so you really did see this impact last quarter of the prebuy for the depreciation benefit, but generally speaking the refuse market is a little bit better than it was a year ago primarily due to – towards the fleet expansion plans that a couple of the larger fleets and they are really dominating that change.

David Sagehorn

I think also Andrew, we did see higher sales in concrete but again this is off a very low levels but it’s the second consecutive quarter in a row that we seen improve performance there, so I think that’s a positive and then in addition even on the parts and service business we’ve seen improvement there, and historically that would maybe be an indicator that that we are going to see improved performance in the coming years but we will continue to watch that obviously.

Andrew Obin – Bank of America/Merrill Lynch

Thank you very much.

Charles Szews

Thank you.

Operator

Thank you. Our next question comes from the line of Walt Liptak with Barrington Research Associates. Please proceed with your questions.

Walter Liptak – Barrington Research Associates

Thanks good morning guys.

Charles Szews

Good morning.

Walter Liptak – Barrington Research Associates

Charlie, I wonder if you could just clarify something, in your commentary when you were talking about kind of the visibility going through 2013, you commented that you would have a $3.9 billion backlog. Were you guiding that 2013 defense revenue would be around $3.9 billion?

Charles Szews

No, that wasn’t the intent. The intent is to state that we still have a big backlog much of which extends into FY ‘13 plus we’ve got some funding that that is yet to go under contract in the several months. And that should bode well for FY ‘13. We will provide better guidance maybe that’s not the right word.

David Sagehorn

Comprehensively.

Charles Szews

More kind of right. We will provide guidance for FY ‘13 specifically at a later time this year.

Walter Liptak – Barrington Research Associates

Okay but as we are trying to model 2013, I guess I had been using some big declines in 2013, maybe more than what you are seeing even this year. Is that the right assumption, is that the right trajectory?

David Sagehorn

Well, as we sit here today it’s probably going to be lower than FY ‘12. I think there is still time we need to go through the rest of the fiscal year to see what we bring under contract yet or their team had when we look at the backlog today its 3.9 billion at the end of March. Of that approximately 2 billion related to beyond FY ‘12 so we’ve already got a very good start for ‘13.

Charles Szews

Right you got to remember also that we did delay some FHTV shipments from ‘12 and ‘13 because of tire issues. We even talked a little bit about that and that certainly impacted the current quarter and does have follow-on benefits for FY ‘13.

Walter Liptak – Barrington Research Associates

Okay thanks for the color and as you think about you’ve talked a lot about the fire business getting restructured and obviously access equipment gotten restructured as you get further on to 2013, 2014 does defense, are the programs in place where do you think the defense margins go to?

Charles Szews

Again we’re going to provide more commentary on September 14th at our Analyst Day and I don’t want to get ahead of ourselves the six month earlier than we would be normally providing guidance for next year.

Walter Liptak – Barrington Research Associates

Okay I appreciate it so it’s a long lead time business so I guess, during the quarter is it possible that we can get an idea of how much FMTV sales were in to our part sales?

Charles Szews

FMTV was about 40% of the segment sales.

Walter Liptak – Barrington Research Associates

Okay and how about parts?

Charles Szews

We, FMTV specifically?

Walter Liptak – Barrington Research Associates

I guess, how we look at it parts in general I guess for defense trucks.

Charles Szews

I think...

Patrick Davidson

Parts and service is probably a little higher than its typical 20% to 25% probably a little rich in this past quarter.

Charles Szews

Thanks Pat.

Patrick Davidson

Sure.

Walter Liptak – Barrington Research Associates

Okay.

Charles Szews

(Inaudible) reports.

Walter Liptak – Barrington Research Associates

Okay. Thanks for the help.

David Sagehorn

Thank you.

Charles Szews

Thanks.

Operator

Thank you. Our next question comes from the line of Josephine Millward with Benchmark Company. Please proceed with your question.

Josephine Millward – Benchmark Company

Good morning.

Charles Szews

Good morning.

Josephine Millward – Benchmark Company

Charlie, in light of the precedence of fiscal year ‘13 budget request and the potential of sequestration, do you think you can still sustain the defense business at 2 million to 2.5 billion a year over the next three to five years?

Charles Szews

Sure.

Josephine Millward – Benchmark Company

I know visibility is good for ‘13 but if you can help us out?

Charles Szews

Okay. First of all regarding sequestration, obviously it could happen but we have a lot of representatives on both sides of the aisle that really don’t want to take us in that direction and I think there is going to be a strong effort on both sides of the aisle to avoid that but regarding your specific question, 2 billion to 2.5 billion is our target for fiscal 2014 and 2015 timeframe for defense sales and I need to emphasize at our target, we must win some additional programs around the globe to get to this range. If the FY ‘13 and FY ‘14 defense budgets proposed this is going to be likely challenging to hit that range but if we win some of these international programs, we can get there. So it’s going to be tough but it’s still our target.

Josephine Millward – Benchmark Company

What do you think the FMTV mix will look like next year and do you think you can do better on margin in ‘13 for defense?

Charles Szews

For the segment as a whole or FMTV specifically?

Josephine Millward – Benchmark Company

For the segment as a whole? I think well, it has a lot to do with your FMTV mix and on FMTV as well in general.

Charles Szews

Again with respect to next year, we are going to be providing better visibility or we’ll be providing our guidance on September 14 and I don’t want to get ahead of that since you have several months to work this. But I can tell you that I meet on a regular basis with our teams on the FMTV program and we remain very focused to continue to take your margins up on that program.

Josephine Millward – Benchmark Company

Thank you, that’s helpful.

Operator

Thank you. Our next question comes from the line of Robert McCarthy with Robert Baird. Please proceed with your question.

Robert McCarthy – Robert Baird

Good morning, this is Nick Dobrey sitting in for Rob. Just tucking on to the previous question here. I guess, I was wondering if you could provide us with a little more color on the business development hires in defense and how you are sort of perhaps changing your strategy with regards to how to drive some of these foreign government contracts?

Charles Szews

As we said a few things with respect to our business going forward, it will be more important and relevant that we win additional international business for our defense segment. Fortunate, we have really the full product line from light to heavy and not too many companies have that kind of a product line for tactical vehicles there is a extreme need in many parts of the world for our types of vehicles even though we are taking about U.S. Defense spending coming down and they’ll be pulling out of Afghanistan.

You just read the papers every day the world isn’t getting safer there is certain countries that are much more concerned about the threats today than they probably were a couple of year ago so what I would say is that we’re forward deploying in countries of opportunities we’ve said in the past that we have opportunities to sell upper to 3,000 M-ATVs internationally so obviously we’re deploying people in those regions that roll with it and opportunity we’re deploying in Canada as we mentioned in our prepared remarks and we got a few other countries where we’ve been deploying people because when you’re there every day you have a much greater opportunity for success.

Robert McCarthy – Robert Baird

Great then switching over to AWP can you give us a sense for order progression through the quarter and whether or not you get any sort of sense from your rental customers that there has been a bit of boost from weather in the current quarter’s numbers?

Charles Szews

Good question on the weather. I don’t think that that was a significant event, why because the order intake started pretty early last year and it sustained itself for some period of time so could there have been some shift obviously there could be but I do think that broad based we’re seeing good demand certainly in North America and we would say that the business fundamentals are such as that the market should be strong for some period of time.

Robert McCarthy – Robert Baird

So it’s fair to say trends have remained robust into April then?

Charles Szews

Yes.

Robert McCarthy – Robert Baird

Thank you.

Operator

Thank you. Our next question comes from the line of Basili Alukos with Morningstar. Please proceed with your question.

Basili Alukos – Morningstar

Hey, good morning guys.

Charles Szews

Good morning.

David Sagehorn

Morning.

Basili Alukos – Morningstar

I was wondering the rental houses have talked that they were in a midst of a secular shift and that their customers now are not purchasing equipment, they are going more to rent them and so the rental houses have been doing well, I guess one, can you talk about if you see that shift and then two, can you just talk about your profitability remind us your profitability selling into rental houses versus to the customers themselves?

Charles Szews

Okay. Much of what we see in terms of a secular shift to rental, we hear it third hand or second hand through our rental company customers. So we’re relying really on what they have to say there.

The only really significant product line was a big retail like presence with telehandlers and there aren’t a lot maybe scissor lifts, the booms generally are rental anyway but I do believe that, you can see that from their commentary and from the robustness of the market generally that my suspicions that they’re making some nice inroads into other sectors and in terms of profitability, it’s a nice leading question certainly the larger rental houses than they have the best margin or the best pricing and it does impact our margin and as the cycle progresses, it tends the smaller warehouses start buying and it does benefit us over the cycle. So certainly today we have a significant mix of sales in international overall.

Basili Alukos – Morningstar

Great, that’s all my questions, thanks.

David Sagehorn

Thank you.

Charles Szews

Thanks.

Operator

Thank you. Gentlemen, our last question is from Charlie Brady with BMO Capital Markets. Please proceed with your question.

Charles Brady – BMO Capital Markets

Thanks, good morning guys.

Charles Szews

Hey Charlie, good morning.

Charles Brady – BMO Capital Markets

I popped on the call list, I apologize if you covered this, let me know and I will catch you offline, just on AWP, can you talk about it sounds some of the independent rental guys are coming back in little bit early. The rental showdown in New Orleans, lot of activity on day one from these rental independent guys with – coming with list for pricing on day one, are you seeing this cycle, the independents coming back sooner than you have in the past, are you concerned that maybe it’s pulling something forward and is it having any kind of material impact on the margin it will be great?

Charles Szews

Okay.

Charles Brady – BMO Capital Markets

I had to lock there, sorry.

Charles Szews

Well, I will take it simple. The independent rental companies still face issues with financing and getting adequate financing so I would argue that they are coming in little bit later in the cycle. And although they do tend to come in later in the cycle anyway, so if there is any difference this cycle to last, it would be that they are maybe coming in later or about the same time.

David Sagehorn

Although Charlie, we have seen over the last several quarters an uptick in activity with the independents. Because I mean you go back to ‘09 and ‘10 and that was largely dormant but we have started to see some improvement.

Charles Brady – BMO Capital Markets

Okay and I am assuming that then it sounds like there is no impact on the margins material anyway?

David Sagehorn

Well, hopefully over the cycle, it will have more of a benefit as independent starts to buy more.

Charles Brady – BMO Capital Markets

Okay, and just switching on defense, you talked about some of the foreign programs you’re going after and can you quantify the potential size with the understanding maybe you don’t win everything obviously but what is the sort of top end potential as we try and look out into sustainable run rate for defense going forward?

Charles Szews

These are very difficult questions, the competitions we are in there are usually five or six tough competitors to everyone and so, it’s very hard for us to give you that kind of an estimate but we’re a tough competitor as people have seen over time and every – we go after everyone very aggressively.

David Sagehorn

But Charlie the quantities are out there, we’ve talked cap fees about what Charlie 500 vehicles and MSVS is to more than 1500 just a long service and parts we still see with that, so

Charles Szews

Right both of them have long sustainment pieces to the contract.

Charles Brady – BMO Capital Markets

All right thanks, guys.

David Sagehorn

Thank you.

Charles Szews

Thank you.

Operator

Thank you. We have come to the end of our Q&A session. Mr. Szews, I’d like to turn the floor back over to you for closing comments.

Charlie Szews

Well thank you very much for your interest in our company today. We’re very pleased that access equipment market is turning the corner, has good business fundamentals for the near term here and we’re also pleased for the progress on our MOVE initiatives and we’re looking forward to a good closing year. Thank you very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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