Oshkosh Corp (OSK) 2016 Q4 法說會逐字稿

Greetings and welcome to the Oshkosh Corporation reports FY16 fourth-quarter and full-year results conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Mr. Patrick Davidson, VP of Investor Relations. Thank you Mr. Davidson, you may begin.

Good morning and thanks for joining us. Earlier today we published our fourth quarter and full year 2016 results. A copy of the release available on our web site at Oshkoshcorporation.com. Today's call is being web cast and is accompanied by a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call, and it 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 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, if at all. All references on this call to a quarter or a year are to our fiscal quarter or fiscal year unless stated otherwise.

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

Thank you, Pat. Good morning everyone. Today we announced fourth quarter adjusted earnings per share of $1.05 and full year 2016 adjusted earnings per share of $3.14. Our team members overcame a number of challenges this year to deliver solid full-year results and to position us for a positive 2017 and beyond.

As we get started, I would like to address our fourth quarter outperformance. We surpassed the full year EPS guidance we provided at our analyst day in September. So where did we outperform? The last several weeks of the quarter are always busy, with numerous moving pieces representing both upside and downside potentials as we approach the end of the quarter. Fortunately for us, almost everything went in our favor this quarter, as the access equipment team reported higher-than-expected sales. The Defense segment also had a delay in planned bid and proposal costs for the FMTV recompete, and some positive year-end adjustments. These were the primary contributors to our better-than-expected performance. Dave Sagehorn will provide additional color during his discussion.

As is our standard approach, I will talk about our performance in the quarter as well as the year, I'll also provide some color on our four business segments before turning it over to Dave to discuss the numbers and our full year 2017 outlook. We will wrap it up with time for Q&A.

Our fourth-quarter results benefit from strong performance in our Defense segment compared to the prior year, including higher sales and operating income margin. In particular, the Defense team sold 325 international M-ATVs in the quarter. Those of you who follow us remember that we discussed this at our analyst day. The Access Equipment segment also delivered higher adjusted operating income margin compared to the prior year quarter. Additionally, we had an exceptional quarter from a free cash flow standpoint as we benefited from significant cash receipts on international defense contracts, and continued inventory reductions at Access Equipment.

Based on the way we finished 2016 you may ask why we aren't raising our expectations for 2017. It is a question we have considered thoroughly and thoughtfully. We concluded there haven't been any significant changes in our businesses, and the outlooks for our markets haven't changed since our analyst day. As a result we are reaffirming our expected earnings per share range of $3.00 to $3.40.

Please turn to slide 4 for a discussion of our full-year results. We grew both sales and adjusted earnings per share in 2016, which was only possible because of the outstanding efforts of our Oshkosh team and the benefits we get from being a different integrated global industrial. Our Defense and Fire & Emergency segments both grew sales by double-digit percentages for the year, leading the way for our strong performance.

Not all of our businesses benefited from growing markets. Our Access Equipment business experienced lower replacement CapEx demand in its primary market of North America. We also experienced a stagnant concrete mixer market in our Commercial segment. Looking internally, in 2016 we continue to focus on driving operational efficiencies and simplifying our businesses. As we noted during our analyst day, we recently announced some structural changes in our Access Equipment segment. We continue to analyze opportunities to optimize our businesses to best serve customers in 2017 and beyond.

We continue to return cash to shareholders in 2016, demonstrating responsible capital allocation as we repurchased approximately 2.5 million shares of our stock earlier in the year, and we announced another increase in our quarterly dividend of more than 10% this morning. This is our third straight year of double-digit percentage increases in our dividend, and our strong fourth-quarter free cash flow helped us generate $490 million in free cash flow during the year, positioning us well to support our 2017 working capital requirements.

Please turn to slide 5 and we'll review our segments, starting with Access Equipment. While we are pleased with the better-than-expected results in this segment in the fourth quarter, our outlook for the access equipment market remains unchanged from our analyst day. Rental customers in North America continue to have a positive outlook about their businesses for the remainder of 2016 and 2017, but they remain cautious with their capital expenditure plans. Our rental customers are closely watching their fleet utilization rates and local market rental rates, leading them to continue to be selective with their capital expenditures.

Additionally, you have heard us talk about the impact of extremely low levels of new access equipment purchases by rental companies during the years of 2009 and 2010. We continue to experience low replacement-driven demand in North America as a result of lower purchases during that time frame. We are actively engaged in discussions with the national rental companies regarding their 2017 CapEx plans, and we expect these discussions will continue through the end of the calendar year.

We did experience growth in Europe again this quarter. Southern European markets are recovering from very low bases and we saw some continued recovery in Benelux and the Nordics. The UK market took a pause after the Brexit vote, but we believe Europe and the broader Europe, Middle East and Africa region can be solid contributors again in 2017.

Operationally, the access equipment team achieved their target of responsibly lowering inventory levels during the year. I want to thank them for their efforts in helping drive our strong free cash flow in 2016. We also announced in September that the Access Equipment segment plans to outsource its aftermarket parts distribution. This will take place over the next year, as we work to implement this change with outstanding execution so we maintain the high service levels our customers are accustomed to with JLG.

Our longer-term outlook for this business continues to be positive. We expect that the headwind of replacement demand will become a tailwind sometime beyond 2017. This tailwind, along with construction growth that we expect over the next several years, an overall trend toward improved safety and productivity, and product adoption opportunities globally all contribute to our positive outlook for the Access Equipment business.

Please turn to slide 6 for a discussion of our Defense segment. It was a year of good news and improved results in our Defense segment, and we finished the year with a strong quarter. Our leading position in the military tactical wheeled vehicle business is a big source of pride for us at Oshkosh. Our JLTV only further enhances this pride. During our analyst day many of you listening on the phone today had the opportunity to take a ride in JLTV and experience the outstanding performance of this truly game-changing vehicle.

Earlier this summer we began building JLTVs on our production line in Oshkosh. We started shipping those initial units to the US Army in September to support government testing activities during the low rate initial production, or LRIP, phase of the program. To remind you, we are looking at approximately three years of LRIP, coupled with extensive government testing before we achieve full-rate production, which is slated for 2019. To support this milestone, our production ramps up over the next three years. We expect to deliver nearly 750 JLTVs in 2017, and based on the President's 2017 budget request, we expect to deliver approximately 2,000 in 2018 and 3,000 in 2019.

We also continue to be pleased with the level of interest we are receiving for the JLTV program from international militaries. We engaged in positive discussions with a number of foreign militaries at the recent AUSA Defense trade show. We also recently supported a JLTV demonstration with the US government for NATO allies. As we've said previously, we believe that international JLTV sales are a few years away, but we are confident that the international JLTV sales represent a significant opportunity for Oshkosh.

We continue to execute on our legacy contracts, primarily the FMTV and FHTV. During the quarter we received orders for additional FMTVs. We had spoken about this as a likely event, and it did in fact occur. In the week or so following the issuance of the orders from the program management office at TACOM, the orders were protested by a competitor. The protest was filed with the Government Accountability Office, or GAO, and is currently expected to be resolved by the GAO on or before January 9, 2017. We are confident that the Army acted appropriately and within its authority when it issued us the orders. Most of the deliveries under these orders are scheduled for 2018, but about $70 million are planned for delivery later in 2017.

As I mentioned earlier, we shipped a large amount of M-ATVs to the Middle East during the fourth quarter. We still expect to ship nearly 1,000 M-ATVs during 2017, and we're continuing to pursue additional M-ATV orders around the globe. Our Defense team is excited, motivated, as we have solid visibility for future business in this segment in the coming years.

Let's turn to slide 7 to discuss the Fire & Emergency segment. The Fire & Emergency team delivered another quarter of year-over-year revenue growth, and continued on its path toward achieving double digit operating income margins. For the year, revenues grew almost 17% and operating income grew more than 50%, leading to a 160 basis point increase in operating income margin. As important, we believe F&E's 8.7% fourth quarter OI margin supports our 2017 full year OI margin estimate of 8.5%.

Higher demand as a result of the continued recovery of the North American fire truck market has contributed to the margin improvement in the segment, but that's not the only driver of the higher margins. During the last couple of years we have implemented a number of changes in our Pierce factories in Wisconsin and Florida, as well as in our front end order processing, and we are seeing the benefits of those actions. We believe the combination of simplification activities and the rewards delivered by the Oshkosh operating system are very powerful drivers of the margin improvement.

We've also spoken extensively about our new product launches and the improved municipal spending environment in the US, which continues to benefit our traditional fire truck businesses as cities and towns look to replace aged equipment. Additionally, we work with a motivated and experienced dealer network that has been investing in facilities and capabilities as they see the opportunities before them. We believe these factors bode well for this business, and expect the Fire & Emergency team will build on the momentum they have generated.

In contrast to the strength we are experiencing with traditional fire trucks, the airport products group reported lower sales in the fourth quarter. Airport products are comprised of ARFF units and snow blowers, plows and sweepers. More than half of airport product's revenues come from outside the US, and they are often impacted by the timing of large international delivery orders that can skew quarterly results. We saw that in the fourth quarter, as the prior-year quarter includes several large international sales. We believe the strength of the US dollar has also had a negative impact on international orders for airport products.

Finally, we know that the equipment being used in the North American fire truck industry is fairly old, with high average fleet age. We believe this dynamic will continue to be a solid demand driver for this business as we look out over the next several years.

Please turn to slide 8 and we will talk about our Commercial segment. Commercial team finished 2016 with slightly higher operating income and operating income margins compared to the prior year on sales that were even with last year. Overall, market conditions in the segment haven't changed since our analyst day.

The refuse collection vehicle market remains attractive, and demonstrated growth in 2016 in large part due to fleet replenishment by larger private waste haulers. I am proud of our team, as we outperformed our competitors and gained share during the year. That said, we expect to see the market growth rate moderate in 2017, following several years of solid growth. Additionally, the fundamental drivers of municipal tax receipts and construction activity continue to be long-term positive drivers for RCV market.

Now turning to concrete mixers, we continue to experience modest and choppy order flow from customers who placed orders for new equipment. Customers remain cautious due to short term economic uncertainties, but the long term economic and construction fundamentals remain favorable and show room to run. And with each month that passes, fleets only get older.

As we said at the analyst day, we're focused on simplification efforts in this segment to help drive both a better overall customer experience, and improved operational efficiencies. As I mentioned a few minutes ago, we are also continuing to investigate other structural changes in our businesses. We are committed to delivering margin improvement in this segment.

That wraps it up for our four business segments. I am going to turn it over to Dave to discuss our financials and outlook for 2017 in greater detail.

Thanks, Wilson and good morning everyone. Please turn to slide 9. Today I am going to compare our fourth-quarter results to the prior-year fourth quarter, and our full-year results to the outlook we provided at our analyst day in September, and to the prior year.

Let's start with the comparison of our fourth-quarter results to prior-year quarter. Consolidated net sales for the quarter were $1.76 billion, up 11.2% from fourth quarter 2015 sales of $1.58 billion. All segments reported higher sales in the quarter, with Defense's 48% increase led by higher international M-ATV and FHTV sales being the largest driver of the increase.

Adjusted consolidated operating income for the fourth quarter was $123.3 million, or 7% of sales, compared to $89.5 million or 5.7% of sales in the prior-year quarter. Higher Defense and Access Equipment segment adjusted operating income drove the improved results. Corporate expenses in the quarter were approximately $9 million higher than in the prior year, driven by higher share-based and incentive compensation expenses.

Access Equipment segment adjusted operating income for the fourth quarter 2016 excludes $27.8 million of asset impairment and work force reduction charges related to transitioning its aftermarket parts distribution to a third party. Access Equipment segment and corporate fourth quarter 2015 adjusted operating income excludes a combined $2.9 million of costs related to workforce reduction charges. Further information on segment fourth-quarter performance can be found in the appendix to the slide deck.

Adjusted earnings per share for the quarter was $1.05 compared to $0.67 in the fourth quarter of 2015. Fourth quarter 2016 results exclude a $0.23 earning per share impact from the asset impairment and workforce restructuring charges in the Access Equipment segment that I discussed earlier. And fourth quarter 2015 results exclude $0.03 per share impact of workforce reduction costs in the Access Equipment segment and in corporate, also as I discussed earlier.

Third-quarter results benefited $0.03 per share compared to the prior-year quarter as a result of our share repurchase activity in the past year. We did not repurchase any shares of our common stock in the fourth quarter.

Switching gears to our full-year results compared to the outlook we provided at our analyst day, the higher-than-expected results were concentrated in the Access Equipment and Defense segments. Results in the other segments and corporate largely offset each other.

The better-than-expected results in the Access Equipment segment were driven by higher-than-expected sales. There were several larger transactions that we weren't sure whether the sale would occur in 2016 or 2017. Normally, we would see the sale of some of the orders like this fall into the subsequent quarter, but in this instance a large percentage occurred in the current quarter.

Better-than-expected results in the Defense segment were due to a delay in bid and proposal costs for the FMTV program, as a request for proposal was released by the government later than we expected, and favorable year-end adjustments.

Full year adjusted earnings per share was $3.14, up from adjusted earnings per share of $3.02 in 2015. A $113 million increase in Defense segment operating income on a 44% sales increase, and higher Fire & Emergency segment operating income combined to effectively offset a decline in Access Equipment segment sales and adjusted operating income, and higher corporate expenses.

2016 full year adjusted results benefited $0.17 per share as a result of share repurchase activity. As Wilson mentioned, we finished the year with free cash flow of $490 million, ahead of our estimate of $400 million as a result of strong cash collections in September. The strong free cash flow in the year was driven by solid net income as well as positive cash generation from working capital, which is largely due to the significant inventory reduction in the Access Equipment segment.

Please turn to slide 10 for a review of our expectations for 2017. As we mentioned earlier, our view of our markets in 2017 hasn't changed since our analyst day. As a result, our financial expectations for 2017 are unchanged from our analyst day, with an EPS estimate range of $3.00 to $3.40 per share, and free cash flow of $0 million to $50 million. As a reminder, we expect Access Equipment segment sales to be approximately $2.7 billion to $2.8 billion, down 7% to 10% from 2016. We expect operating income margin in this segment to be in a range of 7.75% to 8.5%.

Positive impact of MOVE cost reduction initiatives and modestly higher absorption are expected to mitigate the negative impact of continued challenging pricing, foreign exchange head winds and overall higher material costs, but not enough to offset the impact of lower sales on operating income.

Defense segment sales are expected to be up another 35% to 40% in 2017, with the increase driven by the sale of a higher quantity of international M-ATVs and the ramp up of JLTV production. We expect margins in this segment to be approximately 9.5%. Fire & Emergency and Commercial segment sales are both expected to be up approximately $1 billion, up mid single-digit percent at Fire & Emergency, and up slightly at Commercial. We expect operating income margins for Fire & Emergency to increase to 8.5%, and to remain flattish in the Commercial segment. We expect corporate expenses to be in range of $140 million to $145 million. We have included some other items at the bottom of slide to help you with your modeling.

As we've said previously, while we expect strong free cash flow in total over the next few years, we are expecting lower free cash flow in 2017 as we invest working capital in support of the large international M-ATV contract. Remaining deliveries for this contract are expected to be weighted to the second half of the year, with a large amount of cash proceeds expected to be received in 2018.

I will conclude with a brief comment on our first-quarter outlook. As we discussed at our analyst day, we expect the first quarter of the year to be our lowest earnings quarter due to seasonal factors. In addition, last year we sold more than 200 M-ATVs in the first quarter and don't expect to sell any in the first quarter of 2017. The Defense segment is also going to be busy working on the FMTV recompete request for proposal during the first quarter. Combined, these items are expected to lead to first quarter results that are lower than 2016's first quarter.

Please turn to slide 11 and I will turn it back over to Wilson for some closing remarks.

Thanks, Dave. I want to thank you all who attended our analyst day, where you heard us talk about three key things. I would like to remind you of those in support of our positive long term outlook before we go to Q&A.

First, we are a different integrated global industrial. We bring a unique blend of businesses with a variety of attractive end markets, as well as our differentiated approach to operating them as a cohesive, integrated enterprise. Defense and municipal are two of our primary end markets with positive near-term outlooks, which differentiate us.

We also have shared operations that allow for synergies in engineering, purchasing, manufacturing and logistics. These provide us with knowledge-sharing opportunities and advantages of scale that are beyond the reach of many of our competitors. And of course, leveraging the strengths of our team members with our people-first culture provides additional advantages for the Company.

Second, our MOVE strategy has been a big success and driver of solid results for the Company. MOVE has much more to deliver. We are excited to evolve MOVE, as we include areas such as a focus on reducing complexity, eliminating unnecessary costs, and driving profitable growth through our simplification activities.

And third, we believe we are well positioned for long-term success with a number of opportunities to drive shareholder value in the future. We discussed these in great length at our analyst day, and I believe we have touched on many of them during our call today. I will turn it back over to Pat to get the Q&A started.

Thanks, Wilson.

(Caller Instructions)

Operator, let's please begin the question-and-answer period of this call.

Thank you.

(Operator Instructions)

Our first question comes from Mike Shlisky of Seaport Global. Please proceed with your question.

Good morning, guys.

Hey, Mike.

Great quarter.

Thank you.

Just wanted to touch quickly on access first. With what looks like some bigger orders getting shipped here in the fourth quarter, did your FY17 outlook for access just come down a touch to the lower end due to just timing?

You know, Mike, timing was some of that. Dave mentioned in his prepared remarks that we had some large transactions. It wasn't just the transactions. We had some really strong finish in a couple of our international markets, Europe and Asia Pacific. Looking out the next year, you have heard us say this before, we're at a bit of a disadvantage because this is still the fourth quarter of our customers. So it is early for us to know specifically the timing, if that's going to affect 2017.

We believe with the ebbs and flows that normally happen in access, that we still are in a good position with where we have forecasted for next year. That's why we talked about holding our guidance. And again, I wouldn't suggest that it is on the lower end. It is just too early. We will continue to update as we go. The next earnings call we will have a lot more information as we finish our discussions with the national rental companies this quarter.

Okay. Got it.

I also want to ask, secondly, it sounds like you guys agonized a bit about your guidance for 2017 even though it has only been a month since the analyst day, you were speaking about making changes. Could you give us some kind of thoughts as to which businesses you would feel most confident about potentially raising estimates for, for 2017? And maybe which you feel least confident about based on where things are headed at the start of the year here?

Well, Mike, you know us, we're confident going forward. We have talked about a positive long-term outlook. I wouldn't say specifically that there's any concerns about the four business segments, where we are today. I think we still feel good; as we said in our remarks, we were very thoughtful in working through that. We always want to be as close, dialed in on our forecast, as possible; and I think going forward, we will update you as we go, but I wouldn't say there's any upside or downside that we would need to share with you today.

All right, guys. I will leave it there. Thank you very much.

Thanks.

Our next question comes from the line of Charley Brady of SunTrust Robinson Humphrey. Please proceed with your question.

Good morning, guys.

Good morning.

A quick question on access: sort of bigger picture, you have got an ANSI standard coming into play in the beginning of 2017 with a year adoption rate; and I am just wondering, from a manufacturing OEM standpoint, what you guys are doing to really wrap your hands around that and try and estimate what that might do to demand as far as accelerating and/or pushing out replacing vehicles because of those new standards that are going to have to be required by the beginning of 2018?

Well, Charlie, we are in the middle of all the analysis and working through that modeling, how that's going to flow. At this point I wouldn't suggest that it is going affect the market either way. I think it is early. Our take is that this is, we kind of tackle this like a tier change, where we work through a nice project plan and we will be ready to go at the time the requirement is supposed to be in place.

Does it accelerate, though? Clearly the cost up is not as much as the engine change was. I am just wondering from a manufacturing cost standpoint, as we look out over the next 12 months, should we expect to see some slight tick-up in manufacturing cost to come, to bring products into compliance with this? Or is that already baked in to existing, new product development and R&D?

With a change like this, there's always some minimal costs. I think I want to be careful in how I answer how we're going to flow this in, from a competitive standpoint. There's always strategies around this, in how you work it into the market; and again we're just -- it is early and I don't want to get too far out of our skis in how I answer this question.

Got you. Thanks.

All right, Charlie, thanks.

Our next question comes from line of Mig Dobre of Robert W. Baird. Please proceed with your question.

Yes, good morning, guys. Thanks for taking my question.

Sticking with access equipment, and sorry to sound like a Debbie Downer here, but I am trying to figure out your top line guidance as well. Here is how I am thinking about it: you've had, in FY16, about $2.85 billion worth of orders. And if I remember correctly in 1Q 2016 you benefited from a pre-buy, ahead of Tier 4 on telehandlers, and you're guiding for 2017 at the midpoint, roughly $100 million down from the orders that you have gotten in FY16, even though we all know the headwinds that are setting up for 2017. So I guess my question is this: what are you hearing from customers to give you confidence that the top line, at this point the guidance on the top line in access, is properly calibrated?

I will start and Dave may jump in here with me, too. First of all, the pre-buy was in 2015. You mentioned Q1 2016; that was actually in our FY15. When you take that off the table, then you go back to where we are with our discussions, the way we have sized the market from the macro and micro trends, and again with our discussions with all of our both national rental companies and independents, we believe that the 7% to 10% down from last year is a logical spot for us right now. So, I don't have a lot of concern, especially if you are tying it back to the pre-buy, with the $100 million difference.

Now, Dave, I --

Mig, I would just add, our view is that the rental customers are in general in pretty good shape, and I think they have a fairly positive outlook for their 2017. We do know that we are going through this replacement cycle issue, and we have talked about that. We do expect that, that is going to continue.

And then I would add, just additionally, I think when we look internationally, Europe, I think, is going to be a solid contributor for us again next year, maybe not quite the growth we saw this year; and then Asia Pacific is, I think, setting up again be a nice contributor next year. Latin America can't really go any further down than it already is, just given the challenging conditions in certain areas there.

So, as Wilson said, we have taken a look at it. We hear what customers say. We are in discussions with the national rental companies. Those discussions are not complete yet. But overall, we think that the range that we have put out there is appropriate at this time.

All right. Then if I switch to defense, can you maybe give us a little more color as to exactly what the cadence on deliveries on M-ATVs is going to be next year? You said none in the first quarter, but beyond that, because I would imagine this is going to cause quite a bit of a swing in margin sequentially?

Yes, so Mig, as we looked at it and as we have said previously, we do expect it to be very much second-half weighted. None in the first quarter. We do think we will get some into the second quarter, but very much weighted to second half of the year.

All right. Thank you.

You are not going ask about the USPS? Rob Messina is going be disappointed that you didn't ask that question.

All right, fine, I'm going to ask about it. How is that going? (laughter)

It is going good. We were one of those six companies that received the contract, built six prototypes, the prototypes are due next fall. You know, it is always nice to have these other types of projects that come in, and it picks up morale in the Company -- just different things to work on. I know Rob and his team are focused on it. The opportunity could be big. The Postal Service has talked about a total of 180,000 vehicles over a five- to seven-year period. Anything like that, we're pleased that we got into the competition, and you have seen us over years when we get into competitions we normally do pretty well.

Thanks for asking.

Do you know when the contract actually gets awarded?

I don't think it has been specifically defined. I think they want to get the prototypes in and formulate, through some testing, and then they will be putting out a new RFP.

Mig, I would assume the RFP probably isn't going come out for another 18 months or so for the production contract, at least.

Okay. Thank you.

Thanks, Mig.

Our next question comes from the line of Nicole DeBlase of Deutsche Bank. Please proceed with your question.

Yes, thanks guys, good morning.

Hey, Nicole.

Hey there.

So my first question is around the FMTV, the $70 million that you guys are expecting to book in 2017, was that already embedded in your guidance, or is that incremental?

That is in our guidance.

Okay. Got it. Great.

And then, with respect to the international M-ATV program, since you guys did ship more than you expected to ship in 4Q, I am clear that 2017 is looking similar to the 1,000 that you guided to before, but does that mean that there's not really much that flows over into 2018?

Yes, there will be a small quantity from that specific order that does flow into our FY18.

Okay. Thanks. I'll pass it on.

Thanks, Nicole.

Our next question comes from line of Ann Duignan from JPMorgan. Please proceed with your question.

Hi, good morning, guys.

Hi, Ann.

Hi. A lot of my questions have been asked, but just on the commercial side you said that the dollar weighed down international orders. Is the strong dollar weighing on orders anywhere else? Is it weighing on any of your defense customers? Or can you just talk about the impact of the stronger dollar, [across] to different businesses?

Yes, Ann, what I think I believe I said in my prepared remarks, the strong dollar was affecting our airport business unit, where about 50% of their sales are global. Outside of that, you know, JLG obviously is affected by the strong dollar in international markets, and then with some of the international competition coming into North America.

Okay. Can you talk about Brexit and the UK and what impact that might have on your outlook going forward, into 2017. I mean, I know Brexit is unclear, but is it weighing on UK purchases?

Just overall, UK Brexit impact on the market outlook there.

You know, we do a couple percent in the UK through JLG. We expect that there will be continued pressure there with some of the UK manufacturers. But what we are seeing around Europe is some growth opportunities in the Nordics, Benelux. I think Dave mentioned that we do see some solid contributions coming from that region, Middle East, and Africa. So overall, our forecast is to continue to navigate around some of that currency, and what currency we do know about is in our forecast.

Ann, we do believe that we are going to see a headwind just on the translation of the sales, so that is a headwind in the access equipment market specifically that we do have factored into our outlook for FY17.

For the UK.

Yes.

Okay. Can you tell us at what exchange rate you are using for your 2017 forecast?

Somewhere, I don't have it right in front of me, but somewhere between $1.20 and $1.25.

Okay. I appreciate it. I will get back in line. Thank you.

Thanks, Ann.

Our next question comes from the line of Ross Gilardi of Bank of America Merrill Lynch.

Good morning, guys. Thank you.

Hi, Ross.

I just wanted to ask you about the stagnation in the concrete business. You guys seem to look at that as an isolated situation on a very specific product category. But why isn't that a canary in the coal mine for the broader nonresidential market, which you clearly remain pretty optimistic on? In the past when you have seen a slowing there, has it led to a slowing in some of your other non-res exposed businesses, is what I am really asking?

Well, Ross, the way I would describe where we are with the concrete mixer business is, we're seeing a tale of two cities here. Our front discharge business is up significantly year over year, longer lead times, so we are seeing some responsible buying patterns there. It's the rear discharge market is where there's the most consternation. The Ready Mix customer was hit really hard; if you recall, they were down four to five years through the recession and after the recession. So they're a little more cautious about buying equipment; the equipment is very old. So the advantages they have is there are a lot of commercial chassis available out there, and they can get quick builds if they get on projects and need more equipment. Where we see that the aged fleet is really coming into play is our aftermarket business is up in the concrete mixer areas.

It is a little bit of a weird dynamic, and with the FAST Act, we think that, that will be some positive. But then again, if you look at the highways around the country here, only about 15% or 20% are concrete. The majority are asphalt. I think a lot of people believe we will have a nice pickup off the FAST Act around concrete, and we will have a pickup, but it won't be as significant as most people think.

All right. Thanks, guys. That's really helpful.

And could you talk about the overall environment for used pricing with access? I imagine you track that pretty closely, and there was an inventory overhang, you having a lot of that, last year on new equipment that you have worked down. Are you seeing anything notable in the used equipment market which would tell you that an oversupply of equipment is working through the system, or to the reverse, getting worse?

I don't believe there's an oversupply of equipment. You've heard some of the larger rental companies talk about their margins are good on their used disposals. Our inventory is in good shape. We are waiting on the Rouse data to come out; we haven't seen Rouse data in a while; just to get the latest calibration on where used is. But I would tell you overall, it is not having any type of material effect on our new machine sales and we watch that, you're right, we do watch that very closely on the orderly liquidation values. So today I would just tell you that it is very similar what it's been the last few quarters, with no change to our business.

Got it. Thanks, Wilson.

All right. Thanks.

Our next question comes from Seth Weber of RBC Capital Markets. Please proceed with your question.

Good morning, everybody.

Hi, Seth.

A lot of questions have been asked and answered, but on the plans to outsource the aftermarket parts distribution, can you talk about what does that mean for your inventory specifically? Does that inventory go off of your books at that point? Or do you keep that inventory in your working capital?

That's still our inventory. It is just being managed and fulfilled by a third party.

Thanks, Dave.

And then on the defense costs that you are expecting to hit in the fourth quarter, do those just slide into -- should we think about those sliding into the first quarter? Is it first half? Can you help us with the cadence on how we should be thinking about the headwind there for costs that you didn't see in the fourth quarter?

Yes, I think you are talking about the bid and proposal costs for the FMPV?

That's right.

That RFP did hit the street in mid-October, so our team is fully engaged in working on that right now. So, we will see a large component of those costs in the first quarter, and probably spilling into the second quarter as well.

Okay. And then, thanks, and then lastly, can you size for us the -- on the access business, there was the reversal on the lower provision for valuation reserve. Was that meaningful?

Let's call it mid-single-digit millions.

Okay. And is that something you do every quarter? Or is that just an end-of-year kind of thing?

That was a prior year. We took a charge in the fourth quarter of last year to a net realizable value adjustment to our used inventory last year. We didn't do that this year, so it ended up being a year-over-year --

It is just a year-over-year delta? Okay, sorry. Thanks, that's very helpful. Appreciate it, guys. Thanks.

Thanks.

Our next question comes from the line of Stanley Elliott of Stifel. Please proceed with your question.

Hey, guys. Good morning, thank you for taking my question.

A quick question: in the release you guys talked about continuing to work additional opportunities on the defense side. What sort of vehicle classes are we talking about here? And what is the potential for some of those to be shipped in 2017?

Stanley, I wouldn't say that we have any in our forecast in 2017, but it is a good question because I think most people believe internationally we're just working M-ATVs. But we're working FMTVs, FHTVs. Our full line of defense products are being quoted internationally. There's more than just the M-ATV opportunity, and as we have said before, in a few years we will be getting into JLTV opportunities. But most recently we had some great discussions at the AUSA show, the big defense show, and we just did a nice demonstration for our NATO allies with our US military in Europe, and received some really nice interest there. So, it is a little bit of a balance, there's probably more interest on the M-ATV and eventually JLTVs, but there is interest on our heavies and our FMTVs.

Great. And then, we think about the fire business and kind of the progress toward a 10% sort of a margin, you have done a nice job with a lot of new product development. Is it really now a function of more the volumes taking place to hit that target? Or how do we think about the progression toward achieving that hurdle?

No, Stanley. It is not just volume. What we have said all along is, we want to get this business foundationally set for the future where volumes do go up and down. I have to applaud the F&E team. They have been very focused on simplifying their business. The front-end process, their order entry process, all the way through their manufacturing process, and I know if they were on the call today they would tell you, they still have plenty of run room there to improve internally, and that will be the plan.

We want to get, again, the foundation there. So, as you know we have a lot of fixed costs in that business, and so we want to make sure all of those processes and manufacturing operational efficiencies are in place, if and when they do have a little bit of a downturn.

Perfect. Thank you very much. Best of luck.

Thanks, Stanley.

Our next question comes from the line of Jamie Cook of Credit Suisse.

Good morning.

Most of the question have been asked. I guess a follow up on the access equipment market. Do you have any update on how you're thinking about when this business troughs: whether you are more confident it is 2018 or 2019, just given sort of the negative non-res data points and just concerns over Europe? And then, also, and I am sorry; I have been on a couple of earnings calls. Have you seen anything, or is there any reason to be more optimistic about Brazil, because historically that had been a good market within access? Thanks.

Thank you, Jamie.

I don't think we're banking much on Brazil these days. We're going to take a real wait-and-see approach there, and hopefully that country gets their act together here in the next several years. But that is -- we're not forecasting any uptick there in the near term. You know the question after 2017, as you know we're still working through 2017 and finalizing with the national rental company discussions, and those are going well. We, like some of our competitors, agree that logically 2018 should be some type of inflection point, but we don't want to just put a stake in the sand and say that's definitely going to happen because, as you know, this access market has not been easy to forecast. So, we will keep you posted as we move through this. For now, as you know, we're really focused on 2017 performance.

Okay. Thanks. I will get back in queue.

Our next question comes from the line of Eli Lustgarten of Longbow Securities. Please proceed with your question.

Good morning, everyone.

Good morning.

Can I get some clarification, because a lot has been asked on the access business, near term and longer term details: you mentioned you were happy with inventories. Are inventory levels at the place you wanted to be that you would be producing at retail? Or would there be a period of time that you still produce below what you are selling? Two, you are down 7% to 10% for the year; is that going to be first-half weighted? In other words, will most of that decline happen over the next two quarters [of forthgo] into next year, or is it spread out? Down 7% to 10%, do you have any FX impact in that 7% to 10%? And is that part distribution agreement, does that impact your profitability or margins, or how will that affect it?

All right. A lot packed in there, Eli. If we miss some, please remind us and we will try to circle back and catch them.

As it relates to inventory, yes we think we are appropriately positioned from an inventory standpoint to be able to produce at a retail level for FY17. The team did a really good job throughout the year of responsibly bringing the inventory levels down. They followed their plan really almost to a T throughout the year, so I think they did a really good job with that. In terms of the outlook for sales on a quarterly spread, I think we do believe we're going to be down in the first quarter. And we didn't provide a lot of specifics around that, but I think as we look through the year, if you take the 7% to 10% down on a quarterly basis, it could range within that in each of those quarters. I don't know that we have got it dialed in a lot tighter than that, especially since we're still in discussions with our national rental company customers.

Regarding the FX impact: a little bit of that 7% to 10% decline is going to be FX-related, and I would say probably more so focused in the UK piece. As Wilson mentioned, the pound is down about 15% compared to the prior year, and we have got a couple percent of our sales in that market typically. So, we will see a little bit of an impact from that, but that certainly isn't going be the big driver of the 7% to 10% down. And then, I think that I am -- (Multiple speakers) We don't think that is going to have much of a negative impact. We're not planning for it to have a negative impact. As Wilson mentioned, we are going to go about this thoughtfully. It is going to take some time to transition here, but we know the importance of maintaining strong customer service levels in terms of aftermarket fulfillment, and the access equipment team is laser-focused on that, and they're going to make sure they do everything they can to have a smooth transition here.

I would just add to that, Eli, that this is not a turn the switch off at our current parts distribution and turn one on at the 3PL. We are going to keep our current distribution center open until this transition has happened and we're satisfied that we're executing 100%.

All right. Thank you very much.

Thanks, Eli.

(Operator Instructions)

We have a follow up question from Mig Dobre of Robert W. Baird. Please proceed with your question.

Yes, thanks for taking my follow up.

I don't know if I missed this or you didn't mention it, but can you maybe break up the -- I am going call them one-time items, that you had in the fourth quarter in defense that aided margin? I am trying to understand what the core margin was excluding LIPO and all of these other items that you called out.

Yes, there were about four items, I think, that we called out. The FMTV bid and proposal costs, LIPO, warranty, and then benefit costs. In total, if you compare that to what we were talking about at Analyst Day, they all add up to a total of about $8 million. There isn't one of them that necessarily stands out as being the main driver of all of those. So it is -- I guess I would call it four smaller things, certainly the FMTV costs are going to carry over into the next year; LIPO is always a little bit of a wild card. So I wouldn't really expect much there; and then the warranty and benefit costs, hopefully we can see some of those carry over. But again, I think those would be offset to a great extent by the bid and proposal costs.

Dave, those are versus our expectations or versus prior year?

Versus our expectations.

Good.

Okay. Thank you.

There are no further questions at this time of the conference. I would now like to turn the conference back over Wilson Jones, President and CEO of the Company for closing remarks.

All right. Thank you for participating on our call today. We certainly appreciate your interest in the Oshkosh Corporation. We have a motivated team delivering strong shareholder value, and we are certainly looking forward to exceeding our customers' expectations well into the future. Look forward to seeing you all out on the road, at Oshkosh here, or during the next Investor conference. Thanks again for your time today. Have a good day.