Oshkosh Corp (OSK) 2016 Q2 法說會逐字稿

Greetings and welcome to Oshkosh Corporation FY16 second-quarter results.

(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.

Thank you. 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 the reconciliation of non-GAAP to GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months.

Please refer now to slide 2 of that presentation. Our remarks that follow, including answers to your questions, include statements that we believe to be forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our form 8K 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 otherwise stated.

Our presenters today include Wilson Jones, President and Chief Executive Officer; and Dave Sagehorn Executive Vice President and Chief Financial Officer. Please turn to slide 3 and I will turn it over to you Wilson.

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 our MOVE strategy to improve performance. We grew sales, operating income and operating income margin compared to the prior-year quarter in all segments, excluding access equipment. With defense continuing to rebound from the trough in 2015 and the fire and 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 discrete tax items, contributed to the better-than-expected results in the quarter.

There were a number of other positive developments in the second quarter. The competitor protest of the 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. In March we received a $243 million order for the JLTV program to support our production in 2017. I will 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 finalize the funding and vehicle delivery schedule for this contract. I will 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 our 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 discussion about rental customers in North America planning for lower fleet capital expenditures in 2016, and waiting to see how the economy and construction markets looked before placing orders for new equipment, which is what we saw this quarter to a large extent. However, we also saw talk of the recession in the US decline as the quarter progressed. The construction outlook in the US remained generally positive, with some solid data points released in the quarter. And the winter in the US 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 is a timing item and continue to expect the market to be down in 2016, we also view this as supporting a 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 the 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 and equipment show in Munich, Germany. By all accounts it was successful and well-attended show. We also experienced a positive atmosphere at the ARA Rental Show in Atlanta in February.

We entered several products at the shows, including our new 150-foot articulated Ultra Boom, which boasts the largest working envelope in the world even larger than our own 185-foot Ultra Boom. In addition we launched our new line of user- and environmentally-friendly work-at-height products, the EcoLift family of non-powered access units. The EcoLift 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 multistory buildings.

The outlook for the two largest market 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 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 the 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 competitor protest actions on the JLTV was welcomed by our customer and our defense team.

We were always confident in our vehicle, and the highly disciplined and objective competition conducted by the US Department of Defense. Based on the March JLTV delivery border that we received, as well as the proposed funding including 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 FY16 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 FY17 budget request. Combined with this segment's aftermarket request business, our domestic defense business provides a solid base as we ramp up to full-rate JLTV production.

And we continue to remain active internationally. We're very pleased to receive a large international M-ATV contract. As I mentioned earlier, we are working with the customer to finalize the funding and delivery schedule, and have not included any of these units in our 2016 outlook, or our March 31 backlog. We are procuring longer lead-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 contracts. We are very pleased with the improved outlook for our defense segment.

Let's turn to slide 6 to discuss the fire and emergency segment. Fire and emergency team delivered another quarter of improved results. Sales, operating income, and backlog were all higher compared with the prior-year quarter. The segment's performance was driven by its strong product offerings, continued operational improvements, and a modestly growing fire apparatus market.

The market is benefiting from higher municipal spending as well as a number of larger cities that are replacing their aged, fire apparatus fleets. In the years since we introduced the Ascendant aerial ladder truck at the FDIC show in 2015, this product has become one of Pierce's most successful new product launches, contributing to continued share gains at Pierce. To remind you, the revolutionary Ascendant delivers reach beyond what is normally achievable with a two-axle fire truck.

Until now, manufacturers have needed a larger and heavier three-axle chassis to operate a 100-foot steel ladder. Our Ascendant has 107 foot steel ladder on a two-axle chassis, providing customers with a shorter, lighter, and more maneuverable fire truck. The Ascendant is a great example of our V, value innovation component of the MOVE strategy at 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 value and features for our existing and soon-to-be customers.

Leveraging improved operational performance, Pierce increased its production rate in February. The fire and emergency team is planning to increase the production rate again later in the calendar year, resulting in reduced lead times for Pierce's customers and contingent efficiency improvements for Pierce. We are very excited about the progress of our fire and 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 vehicle sales growth drove higher sales in this segment. Fleet replenishment by larger private waste haulers remained a strong driver of market demand, and is right in our wheelhouse as a leading provider of high-quality refuse collection vehicles.

Supported by the fleet replenishment, we are maintaining our outlook for the domestic refuse collection vehicle market to grow modestly in 2016. Share gains also contributed to the strong sales growth that we experienced in this product line.

Before I turn to concrete mixers, I would like to highlight the lighter weight Meridian front-end loader refuse collection vehicle, which is beginning initial shipments. McNeilus is ramping up production of this new product throughout the spring and into the early summer, and we believe it will generate strong customer interest in a market that is looking for innovative trash hauling solutions. Will also be showcasing the Meridian at the McNeilus booth in June at the annual WasteExpo show.

Concrete sales were flat compared to the prior-year, with a smaller segment of that market, our front discharge front mixers, up significantly. Our rear discharge concrete mixers, which comprise the majority of the market, down slightly. While the US 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 our January Q1 conference call, we expect many customers to wait to see how the 2016 construction season is shaping up before fully committing to their new equipment requirements. Despite the current caution in the North American concrete mixer market we believe the longer-term outlook for this business is favorable. We expect positive forecasts for residential and nonresidential construction, and the recently passed highway bill will help drive demand for poured concrete. Fleets also continue to age, and will eventually need to be replaced.

I'll turn it over to Dave now to provide a financial update on our updated outlook for 2016. Please turn to slide 8.

Thank Wilson and good morning everyone. I'm pleased to report results in a challenging environment that were close to our second quarter 2015 adjusted results, and then significantly exceeded our 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 of defense segment sales along with higher sales in both fire and emergency, and commercial segments almost completely offset a decline in access equipment segment sales.

On our last earnings call we said that we thought access equipment segment first-half sales would be down approximately 30%, which implied a 31% decline in the second quarter. For the reasons Wilson noted earlier sales in the segment were higher than we originally expected.

Defense segment sales benefited compared to the prior-year quarter from 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 as we negotiated a new contract with our US 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 compared 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 and emergency and commercial segments were not enough to offset the operating income decline in the access equipment segment, and higher corporate costs. Higher defense segment operating income was the result of higher sales volume in a favorable product mix.

We are also pleased with the progress that our fire and emergency and commercial segments 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 volumes and a more challenging pricing environment, a favorable vendor recovery settlement in the prior-year 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 our previous expectations 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 equipment and defense segment operating income was partially offset by higher corporate expenses, predominantly related to higher start-up expenses at our Mexican shared production facility, and higher health care costs.

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

Please turn to slide 9 for a review of our updated expectations for 2016. We are 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 the stronger-than-expected access equipment segment quarter -- segment second-quarter results as a timing item, and are maintaining our previous full-year outlook, reflecting an implied full-year sales decline of 13% to 18% for this segment. Our updated earnings for share for estimate range does not include any sales related to the recently awarded international contract for more than 1,000 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.

We are leaving our previous free cash flow estimate of $275 million unchanged. As previously discussed, we expect earnings to be weighted to the second half of the year due to seasonality and cautious construction equipment customers. We also expect operating income margins to be higher 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 the segment, we expect a less favorable product mix and a ramp-up in activity to support the JLTV program, to result in lower operating income margin than in the first half of the year. We expect that the third quarter will be the highest quarter of year for earnings per share.

I am going to turn it back over to Wilson for some closing comments before we open it up for Q&A.

Thanks Dave. In summary, I would describe our second quarter as a quarter of making progress. We delivered improved performance and operational efficiencies in our defense, fire and emergency and commercial segments. Our access equipment segment made progress in lowering their inventory, and we received a large contract for international M-ATVs that we have been talking about for the past several quarters.

We also continue to see share 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 some 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 of these honors are a tribute to our hard-working team members, who will remain focused on executing our MOVE strategy. We have an outstanding defense segment outlook, and improving fire and emergency and commercial segment performance. Together with our industry-leading access equipment business, these add up to Oshkosh being a different global industrial, with a positive long-term outlook.

I'm excited about our future and our team. I will turn it back over to Pat to get the Q&A started.

Thank you.

(Operator Instructions)

Seth Weber, RBC Capital Markets.

Good morning everybody. I just wanted to touch on the defense margin outlook here for the year. I appreciate some of the color that you gave about the -- 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 give us a little bit more color on why that is taking such a big step down?

Good morning Seth, it's Dave. A couple things that are driving the lower expected operating income margins in the defense in the second quarter. I'm not going to say specifically what the margin is, but it is significantly lower than the first half. Those two things really are less favorable mix, if you think about the first half of the year we did have several -- almost 300 M-ATVs in, and then in addition, the other factor is we are ramping up activity on the JLTV contract. The first vehicles really I think are scheduled late fiscal year but there is a lot of additional activity going on related to that contract. So we will see spending ramp up as we go through the second half of the year here.

Okay. I guess can you give us your updated LRIP production forecast maybe for JLTV for then next -- how we should be thinking about that for 2016 and 2017?

Sure. For 2016 the quantities are very low. We aren't scheduled to deliver the first vehicles until very late in the fiscal year. For 2017 -- and this is part of the bigger story is -- when we saw the president's FY17 budget request come out, one of the things that we highlighted was the pace at which the JLTV program was expected to ramp up is significantly faster than we previously expected.

So if you go back to last year when we were bidding on the contract, our expectations were that for, call it the first three years of low-rate initial production we were looking at, call it, 250 units in the first year, which would have been FY17, 500 units in FY18 and around 1,000 units in FY19. Now when we look at the president's budget request, it's looking more like 750 units approximately for 2017, around 2,000 units for 2018 and upwards of 3,000 units in FY19. So a significantly quicker ramp-up in that program.

That's very helpful. Thank you very much guys.

Mike Shlisky, Seaport Global.

Good morning guys. I just wanted to touch on the concrete truck business real quick. Can you give us more color, perhaps quantify just how aged the overall concrete truck fleet is out there?

Mike, that is one of the factors that leads us to a positive outlook for our mixer business. If you look at the average fleet age today in concrete mixers in the US, it's 3.5 years older than it was in 2007, right before the recession. So, very old fleet that will need replacement. It leads to our positive outlook for mixers.

And then my follow-up is just on this whole FAST Act thing that might start to ramp in 2017 on the construction side. Can you give us a sense as, if the larger concrete trucks will become a bigger part of the mix at that point. I was wondering if road and bridge projects generally need the larger versions rather than the smaller versions?

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, the highway bill in the past has always been a positive for our business. We don't expect it to be something that's really fast and furious at the start. But we will benefit over that five-year period.

Great. That helps. Thanks so much, guys.

Thanks, Mike.

Pete Skibitski, Drexel Hamilton.

Good morning guys. Nice quarter.

Thank you.

On access margins your guidance kind of implies lower volumes in access in the second half, but the margin guidance makes it look like margins will be flattish year over year in the back half of the year. Is that just lower material costs year over year or is there something else going on there? And then part two is, I'm just wondering how you guys think about the state of the market with what looks like continuing lower rental rates. If I can get some color on all that, that would be great.

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've got a few things going on there. Certainly material costs we do expect to continue to benefit. We will also see a little bit of a pricing challenge, but I think those two will largely offset the second half. I think in terms of -- call it 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 FY15; that is behind us obviously now.

Also if you think about some of the actions we've taken earlier in the year at access equipment to help manage costs, we did lower the -- reduce the salaried workforce by 10% at the beginning of this fiscal year, so that will pull through the second half of the year. Also last year in our fourth quarter we had a reserve that we took during that quarter for used inventory valuations. We don't expect that obviously to repeat itself again this fiscal year.

I will jump in on the market, overall second-half market question you have there. I think you're 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 or July. So that's a phenomenon that we've been working in and continue to work through that scenario. But overall fundamentals, they are not bad. They're not great but they are not bad. You are seeing housing starts up 14% through March. We're seeing overall US construction up about 10% in February.

Again the fundamentals are there, which leads us to believe that there's going to be responsible levels of CapEx spending. Again, we're not trying to sound bullish, we're holding our original expectations for the year. We are not changing those. We had the timing issue that we described in our prepared remarks, where we had some customers that bought in the quarter that -- it was not a surprise that the customers were buying, it was the timing that they bought a little earlier than we expected. We see the back half of the year unfolding and looking very similar to where we are in our outlook. We feel confident with that.

Okay so you guys think the whole mid-cycle pause issue is kind of still the dominant theme that we're going through right now?

Pete, I think what we would describe it as, is a business replacement cycle issue, where there was not a lot of machines purchased in 2009 and 2010, so we've talked about 2016 and 2017 having to work through this replacement cycle issue.

Thanks, very helpful guys. Thank you.

Eli Lustgarten, Longbow.

Good morning everyone. Can I ask one quick clarification, the higher corporate expenses that we saw in the quarter, is that a one-time -- it looks like a one-time deal?

It's largely related to, as we mentioned, startup costs 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.

In the first quarter a large part of the guidance reduction that we underwent reflected the absence of that 1,000 unit M-ATV order, which you now have. Assuming that the -- are the terms still as favorable -- we took $400 million out of your backlog, out of your forecast for the year -- a big chunk of profit. Is it fair to assume that most of that will flow in under similar terms in 2017 so that $0.50, $0.60, $0.70 kind of number, what that represented would just be additive into next year's program?

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

We were 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.

Eli, I'm glad you said that. We feel very positive about our defense business in 2017. We're not here to give guidance for 2017 and 2018 today, but there are some great factual data that's out there. We've been asked the question how do you bridge to JLTV full-rate production, and we believe we built a much better bridge now through our defense domestic programs. If you look at our backlog today, Eli, $1.6 billion in defense backlog, well over $1 billion of that is for FY17. That's in place today.

Now that doesn't include any of these international M-ATVs that we're talking about. It doesn't include an extension with FMTV that we are confident with. And if you look at the Pres budget for 2017, we see increases from the previous year's projections in FMTV, FHTV and JLTV. All that would lead us into 2018 and 2019 sales. Again this is all public information. We are not trying to give guidance for the next two years, but this is why we talk about Oshkosh being a different global industrial, because we have significant defense business today and really look forward to these next few years with defense.

And just a quick follow-up on the access business, where are your inventory levels at this point, can you give us some idea of how production will look, do you have to still compensate for those higher inventories, or are we getting past that?

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

So the operating profitability of that sector is going to be weighted down still by this inventory for 2016, but by the time we get to 2017 we should be completely finished with that problem?

There will be a little bit of a headwind in the second half of the year due to underabsorption. Not as big a headwind as we saw in the first half of the year.

Thank you very much.

Thank you.

Charley Brady, SunTrust Robinson Humphrey.

Good morning guys. On the refuse business in commercial -- I mean up 30%, just about, pretty strong number there but the guidance for the year unchanged. Was there any sort of pull-forward on refuse trucks in the second quarter or is it just a normal timing thing you are seeing there.

Nothing unusual. Fairly normal rate for the waste industry.

But it implied that second half doesn't stay at that pace, correct? If you look at the annual guidance which is unchanged.

Charley, I don't have the numbers at my fingertips here but I would agree with Wilson, we didn't see anything really out of the norm. I think what we are seeing is we are benefiting from some of the private haulers refreshing their fleets, which is certainly positive. I think we're also benefiting a little bit with 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.

Can you comment on the mix of what you are seeing on CNG trucks in the order pattern?

I think CNG is still very positive. Even with the lower oil and gas prices out there. It's typically, I would say somewhere around 30% of the orders in a given quarter are CNG in refuse.

The large national fleets, Charley, have the infrastructure and that is a strategy for them and so they continue to buy CNG.

Thanks.

Thank you.

Mig Dobre, Baird.

Good morning, everyone.

Hello Mig.

Maybe we can go back to the defense segment. If I look historically here, so much has changed over the past decade or so in terms of not only volume but the overall margin of this business. 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 is in terms of margin? Can you frame it as to where you think opportunity is versus what we have seen historically?

Wilson said it earlier; we are not here to give guidance on the next few years. I think the margin profile or dynamics that you see occur in this segment of the business in this market over the last decade is -- the government I guess directionally is driving a little harder bargain than they were maybe a decade ago. I think that does make it a little more challenging for OEMs but I think it's still a good business and I think we have good opportunities with the business as we look forward. Again, we're not going to get into the -- on this call today -- what the margin expectations for that business is going to be in the next few years. We certainly have opportunities.

What I would add to that Mig is what we have today that we didn't have a decade ago is more international opportunities. That will still -- things will continue to change to your point. But we will have an analyst day in September. I think that is where we can get a little bit more specific for you as we go forward with all of our segments.

I see. I appreciate that. I figured it was worth a try on the longer-term question.

You always give it a good try, Mig, and we appreciate that.

In terms of the accelerated build for JLTV, are you in a position where you can handle that requirement or should we be thinking that, that is going to pose some kind of cost strain on you that we need to take into account?

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. We can certainly flex up and down and we've made it clear to our customer that if they want to go even faster than what we have in front of us, we are anxious and willing to help with that.

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

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

I think that's important to note, Mig. We were building something that was not our design on the FMTV.

Understood. Thank you guys.

Jamie Cook, Credit Suisse.

Good morning and nice quarter. I guess two questions. One, David, on the guidance obviously you beat the second quarter quite significantly relative to where the Street is, and your guide implies; you didn't raise as much of the beat I guess is my question. So what gives you caution, I guess, in the back half of the year, or was the Street just wrong on the second quarter? Because you don't provide an actual EPS number I think you just said down year-over-year.

And then my second question, congrats on the international M-ATV contract. I just want to get a sense of what the final hurdles are on the funding that still needs to take place, and how would you rate or what is the probability that the funding does not happen before you exit your fiscal year, or can you just ask about a timeline of when you think the funding will be in place.

I will take the first one Jamie, and let Wilson address the second one. In terms of the second quarter, our expectations or view coming into the quarter were that our earnings were going to be down meaningfully. We certainly did not end up down meaningfully. The largest driver as we see it, and saw it play out here, really is the timing factor that we saw in the access equipment segment. As Wilson said we think there were some customers out there that due to a combination of factors decided to make their fleet purchases earlier in the calendar year than we had previously expected. So I think we look at that as a good thing.

We aren't changing the full-year outlook but customers were confident enough and comfortable enough to acquire equipment earlier than we expected. Overall that is why you didn't 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 in the access equipment segment.

I will grab the international M-ATV Jamie. We were pleased -- I mentioned the progress we made in the quarter -- to receive the contract for more than 1,000 units of M-ATVs into this region. This is our fifth contract with this customer. We always felt it was a matter of when, not if. As I said, we are working on finalizing and the funding and delivery schedule, so we haven't forecasted the timing for these deliveries. This customer -- we're running at the pace of the customer. What we do believe is most of these units will be delivered within 18 months.

I'm sure that the next question will be, well how many do you think you could get in 2016, and we certainly are working close with the customer and as the funding and delivery 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 2016. But again we're 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've 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 theater. I know the customer is very interested in moving forward. We will let you know in the next earnings call of how we are doing, but our goal is to get the funding and delivery schedules in place now that we have the official contract.

Okay. Thank you. I will get back in queue.

Jerry Revich, Goldman Sachs.

Good morning everyone.

Good morning Jerry.

I'm wondering if you could talk about what you're seeing in your access equipment business in Europe. One of your competitors spoke about an acceleration in the demand outlook and I'm wondering if you're seeing that in your business as well?

Access in Europe is as we've said is going to be up modestly this year for us. We just came off of bauma and I would say the energy level and much larger attendance in bauma than three years ago. I think the -- Europe is one of those markets that there is areas where we do well and areas that quite honestly are very competitive from a pricing standpoint. Our outlook is favorable for Europe. Again, we see good progress there.

We are looking at doing some different things with our facilities to better handle that market but it's -- we do have currency that we are fighting against on products and we're not building there. It is exciting to see Europe coming back and we have great team that's growing in Europe to further our business there. So we're positive about Europe, maybe not as positive as others, but it is a good access market for us.

Okay. Thank you. And in North America you mentioned in access that there was a pull-forward in 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's off to pretty good start, so I'm wondering if you would characterize the pull-forward from the September quarter within your guidance as you see it, or do you expect a weaker fiscal third-quarter than you did previously? Thanks.

Obviously what we are implying Jerry is the second half is going be a little less than what we started with our guidance for 2016. I would say that again, what we are off to in April is a start that we have expected. I wouldn't say that it's up, down, just plugging along as we expected. We didn't change our guidance because we still believe our outlook is dialed in. 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. To be honest, we are anxious to get into these next 60 days.

Jerry I guess I still look at this as -- with the guidance unchanged for the year, it is some 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. The fact that it implies that our second half of the year is 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. We listened to that and what we saw was people getting more comfortable. I think we view that as directionally positive.

Okay. Thank you.

Thanks Jerry.

David Raso, Evercore ISI.

Thank you. I apologize if I just didn't hear it. The new 1,000-plus order, it was an issue of, always met with the Ministry of Defense and this was one of the first times in a while, maybe ever, having to sit down with the Ministry of Finance and that was what was slowing it up. Have we now secured the contract? I'm just making sure I'm 100% positive here. We 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 question mark?

What I would say is first of all yes, we have an executed contract, so that is in place.

Different than what you had three months ago, though right? This is incremental.

No. We did not have a contract when we delivered our January earnings call.

So this is incremental, you now have something you did not have three months ago. Correct. And the funding is in place.

You called it a technicality, I would call it more the structure around how funding and delivery schedules line up. There's a lot of planning going on. I think I said it earlier, there's a lot going on in this region.

When you're dealing with the different ministers, the generals that are in charge of some of these units, it takes some time to work through the actual deliveries and what they need, when to field. You can imagine over a thousand units, that's a lot of planning. They do have some other things that are distracting them, too. We're working through that and we're very confident, especially with the contract in hand, that we will get this worked out. What I said earlier is that we believe that these will all be delivered over the next 18 months.

We used to speak to thousands of units of opportunities. Now let's consider this one hopefully a done deal. Are there incremental units with the same customer that are on the immediate horizon as well, or are there other countries engaged in conversation. Maybe you can handicap where do you think you are in those conversations.

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. There are 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. So the opportunities in the region there are good.

But we said it a couple times, we're not going to get out over our skis and talk about contracts that we don't have in hand. So we will keep you posted through the earnings calls on how we are progressing. As I mentioned to Mig Dobre earlier, we've got some great opportunities with defense and again, the international side of our business is really opening up for them that they have not had before. It adds to our positive outlook there.

The significance of the earnings from the M-ATV are tremendous so that is good to hear. The JLTV, you haven't been willing in the past to give us much color on this. I'm assuming the [swag] margin ideas, well hopefully it's better than FMTV, but it's clearly not as high as M-ATV. Can you give us some 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 digits -- the numbers sound nice but they are really not meaningful to earnings and it's all about the M-ATV. Can you help us a little more with the JLTV framework for margins in say 2017 and 2018, just framework.

David, I think the framework that we've given and that you've referenced, not FMTV and not M-ATV is as far as we are going to go. Obviously we know we need to earn a decent return in this business, and that JLTV is going to be a significant part of the business in the coming years. We knew that when we bid this contract.

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

I will just try one more angle and I do appreciate that color. Full throttle doing 1,500, 2,000 -- you call the number, right. The numbers could be sizable with this contract. Can this be a double-digit margin program?

David, we're not going to get into the specifics on it again. We know that it's going to be a big component of the business going forward. We know that we have to deliver a decent return within this business segment. And that's our objective.

And along with the great relationships with the Army and the Marines, we have tremendous international opportunities with the JLTV, too. Good opportunities here for us, Dave.

I appreciate it. Thank you so much.

Ann Duignan, JPMorgan.

This is Mike Conlon on for Ann.

Good morning, Mike.

If I could just follow up on the earlier question about Europe and access. Did you book a significant volume of orders at the bauma show? Would it be possible to see -- would those orders have been substantial enough to see another quarter of access backlog growth year on year in Q3?

We always book orders at the shows, Mike. We don't usually share the amount that we book. I know the access team was pleased with the order rate at the show. I wouldn't say it was anything that would make our backlog look unusual. I would say it fits within the norm.

Plus it was April.

Okay. Thank you.

(Operator Instructions)

Stanley Elliott, Stifel.

Good morning and congratulations. Along the same lines, is the FDIC a big order show for you all as well, since that kind of happened post the close of the quarter.

Stanley, the municipal shows are a little different because you are working through the bid process. Whereas in a construction show you're dealing with companies that are not working through a municipal arrangement like that. So what happens at the FDIC show is the introduction of new products like our Ascendant. They had three nice conference rooms set up, and you see a lot of specifications being modified and written around a lot of the new products. If you gauge the construction shows by the orders you receive, we look at the municipal shows and how we were able to influence specifications. Our fire team, Pierce did a wonderful job at the show and I know they left feeling very good about the progress they made with specifications and the customers that attended the show.

That's great news. And going on to the mixer side, is it still the issue on the rear discharge that there is the availability of chassis, so while there is confidence out there that the lead times are still very compressed so that you could still meet any sort of order activity, assuming we do get a continued ramp in the construction spending through the spring?

That's correct, Stanley. There's capacity and there's chassis again, the cautiousness that they can wait a little bit.

Stanley that's on the rear discharge. On the front discharge those are units that we do build from the frame rails up, so the lead times on those type units are quite a bit longer than the units that we mount on commercial chassis.

Which is where we've seen our increase in orders.

Perfect guys. Thank you.

Mig Dobre, Baird.

Thanks for taking my follow-up. Just a quick one on price cost and really cost specifically into the back half of the year. How are you thinking about any impact that you might see from higher raw materials, steel specifically? Can you mitigate for that hedge or do you have anything in place in terms of handling that?

Mig I think the jump that we've seen in steel has really been quite recent, if you look at the weekly statistics. We're typically, on steel, locked for a quarter basis. So if steel continues to remain higher relatively speaking, we would -- it would be a while before we would see that. We'd first have to get through the lock then you've 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 continue to tick up.

I would add, our procurement teams are constantly working on mitigation strategies, and so it's something that they definitely are aware of, working on and are prepared to mitigate as best we can, if they do go up further.

Do you have the sense that as we're looking into say 1Q 2017, you would be able to pass on any such cost increases to the customers? I'm sure it differs by segment, but I don't know if there's any color you can provide.

I guess the way to answer that, Mig is, our shorter backlog segments definitely you can pass those costs. The longer backlog segments become a little more challenging. This is the first time steel has ticked up in a while. I'll just remind everyone that there is still a lot of capacity for steel out there. We're not scorching earth yet that steel is going to go up 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 there for steel.

All right. I appreciate it. Thank you.

Thanks Mig.

Mike Shlisky, Seaport Global.

Did we lose you, Mike?

Sorry about that. Just a quick follow-up for Dave here, you had mentioned that Q3 could be your best quarter of year for earnings. I was wondering if you could tell us if you think you will be able to beat last year's Q3.

Mike, I think we are just going to leave it at we expect it to be the best quarter of the year. Obviously we came into this quarter with some expectations, we saw some access customers feel more comfortable about buying early, and that ended up being a big positive for us versus our prior expectations. So I guess as we look seasonally, typically you would see the third-quarter being our highest earnings quarter of the year and we believe it will continue to follow that trend this fiscal year.

Okay. I tried. Thanks guys.

Good try.

Charley Brady, SunTrust Robinson Humphrey.

Just a quick follow-up on access. Not trying to beat a dead horse here but just so I understand your thinking on the pull-forward. Is it a function of the anecdotal, we had a mild winter, we saw the orders tick up, or is it from actual conversations with the customers who were telling you, yes we are buying equipment earlier than we were planning on doing this year?

Obviously those conversations are going on daily Charlie with our rental customers. The access team does a great job of staying close to their customers. So yes, those conversations are going on. I think though, you have pockets around the US that had a very mild winter. They are seeing construction start up, and they are using new machines in certain areas to plug into projects and grow market share in some cases. There is a multiple of factors that we believe led to the buying being a little early. I wouldn't read a whole lot more into it. Again, we believe it's all timing. We are not seeing a big change in the second half of our year, it just moved forward a little.

This is presumably coming majority out of independent rental companies, I would assume.

No. We've had a fairly good mix of both independents and national rental companies.

Okay. Thanks.

Thanks Charley.

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

Thanks, everyone. We appreciate your interest in the Oshkosh Corporation and participating in our call today. We have great team that is dedicated to exceeding our customers' expectations and delivering strong shareholder value. Certainly look forward to sharing more information with you at our next earnings call or out in the conferences as we are moving around the country here. Hope everyone has a good day. Thanks again.

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.