Patrick N. Davidson - Oshkosh Corp. Wilson R. Jones - Oshkosh Corp. David M. Sagehorn - Oshkosh Corp..

Seth Weber - RBC Capital Markets LLC Nicole DeBlase - Deutsche Bank Securities, Inc. Mircea Dobre - Robert W. Baird & Co., Inc. Stephen Edward Volkmann - Jefferies LLC Charles Brady - SunTrust Robinson Humphrey, Inc. Jamie L. Cook - Credit Suisse Michael David Shlisky - Seaport Global Securities LLC Jerry Revich - Goldman Sachs & Co.

LLC Peter John Skibitski - Drexel Hamilton LLC Stanley Stoker Elliott - Stifel, Nicolaus & Co., Inc. Steve Barger - KeyBanc Capital Markets, Inc..

Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2017 Fourth Quarter and Full-Year Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr.

Pat Davidson, VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson, you may begin..

Good morning and thanks for joining us. Earlier today, we published our fourth quarter 2017 results. A copy of the release is available on our website at oshkoshcorporation.com.

Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call, and it's also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months.

Please refer now to slide two of that presentation. Our remarks should follow including answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC.

We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to 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 Officer. Please turn to slide three, and I'll turn it over to you, Wilson..

Thank you, Pat. Good morning, everyone. I'm proud to announce another quarter of strong performance with results that exceeded our expectations. Our strong close to the year helped us deliver full-year adjusted earnings per share that was more than 35% higher than 2016.

Similar to last quarter, all four business segments grew their sales year-over-year, led by our Defense segment. Additionally, we enjoyed another quarter of strong order intake. I'm sure that many of you saw our multiple Defense segment announcements for JLTV and FMTV orders in September.

And in each of our non-defense segments, we finished the quarter with higher year-end backlog. It's a great way to conclude our 100th year in business, and I couldn't be prouder of our team members and their drive to make Oshkosh Corporation the best that it can be.

Before I talk more about our full-year results and our initial guidance for 2018, I am pleased to announce another increase to our quarterly dividend. We are raising the quarterly dividend from $0.21 per share to $0.24, a 14% increase.

I like to remind everybody that our objective is to increase the dividend on a regular basis, and today's increase represents the fourth consecutive year that we've raised the dividend since reinstating it in October of 2013. Please turn to slide four. 2017 was a big year for our company on many fronts.

In addition to celebrating our 100th anniversary, we grew revenues, grew earnings even faster, launched exciting new products, and continue to focus on our team members. Three of our four business segments, access equipment, defense and fire & emergency delivered full-year adjusted operating income margins of 10% or higher.

I'm pleased that our team accomplished so many things, while delivering great results and having some fun. We also continue to execute the MOVE strategy as our simplification actions gain traction. I'm confident that you'll hear more from us about the impact of simplification when we report in 2018.

As a result of our strong 2017 performance and continued positive outlook, we are introducing our initial 2018 full-year adjusted earnings per share estimate range of $4.25 to $4.65. Dave will go into details on our 2018 estimates in a few minutes. Please turn to slide five to begin the discussion for each of our business segments.

I'll start it off as I typically do with our Access Equipment segment. The access equipment team delivered another solid quarter, closing out the year with full-year results that exceeded our initial estimates for the year. Orders in the quarter were up 31% compared with 2016, leading the year-end backlog that was more than double the prior year-end.

These encouraging data points are reinforced by the positive outlook of our rental company customers as our rental company customers have for their businesses and their end markets. Rental rates, fleet utilization percentages and used equipment values are a key rental company metrics that have strengthened over the past year.

In addition, construction data in the U.S. continued to be generally positive. We expect these market conditions to continue in 2018. Looking across the globe, we saw growth in the fourth quarter in most markets, led by the U.S., Europe and China.

Europe is a market with many regional variations, but we are seeing positive trends for 2018, despite expectations of lower telehandler share, as a result of our product streamlining activities. We expect the access equipment industry in China to continue to benefit from product adoption that is really starting to take hold.

While the Chinese AWP market is currently small, we believe we are in the middle of a multiple-year growth trend that will see this market increase meaningfully in the coming years. Let's take a look at our progress on the restructuring plans we announced in the past year. We are largely complete with the domestic portion of our actions.

These actions include consolidating telehandler production in Pennsylvania, and outsourcing the warehousing of our aftermarket parts to locations in Atlanta and Las Vegas. We are now shipping from both of our domestic and aftermarket distribution centers.

Our activities in Europe are progressing, and we expect to be mostly complete sometime in the first quarter of 2018. We outsourced aftermarket parts warehousing to a third party in The Netherlands and our streamlining and consolidating telehandler manufacturing in Romania.

In assessing our performance, we believe the team is on track to deliver the originally-projected savings of $15 million to $20 million in 2018, and expect to achieve full-forecasted savings of $20 million to $25 million in 2019.

And finally, I want to give a shout out to the team at JLG for being named Access Industry Employer of the Year by Access, Lift & Handlers magazine at the group's conference in mid-October.

It was a great conference for us in more ways than one as Rick Smith, JLG's Senior Director of Global Product Training, was named the Person of the Year at the conference. In particular, the judges know that success Rick and his team have had introducing our augmented reality training simulator.

All in all, the team is executing well in an environment that has continued to strengthen. We look forward to growing this business in 2018. Please turn to slide six for a discussion of the Defense segment.

The Defense team closed the year strong with revenue growth driven by the ongoing JLTV ramp, and similar to our third quarter performance, higher deliveries of international M-ATVs. Solid execution and production discipline formed the foundation for this segment's performance, as we build and deliver the world's best tactical wheeled vehicles.

The Defense team remained active in the quarter, supporting JLTV test and development, as well as a scheduled production ramp. We're pleased with the results that our vehicles exhibited, as they were put through grueling government reliability testing at several locations around the country.

As we've said before, the JLTV program continues to perform well against required performance objectives and milestones. Our team displayed JLTVs in September and October at the DSEI and AUSA tradeshows. We had meetings with military leaders from around the world at these annual shows to discuss the JLTV and its capabilities.

We came away from both shows confident in the future of this revolutionary vehicle. We continue to expect that international JLTV orders will follow the U.S. government's full-rate production milestone in 2019 with potential sales beginning in 2020.

Last quarter, we said we expected to have line-of-sight for $1.7 billion of defense sales for 2018 as of September 30. As a result of receiving multiple orders for JLTVs and FMTVs in the fourth quarter, we slightly exceeded that target. We continue to make progress in the quarter on the Middle East opportunities that we've discussed previously.

While there is still a chance that we could secure orders in time to get a small amount of sales in 2018, we currently believe that the vast majority of any sales associated with these opportunities would occur in 2019. Last quarter, we submitted our proposal for the FMTV recompete program.

We currently expect the evaluating authority to announce a winner for this program in the second quarter of 2018. To remind you, we will continue deliveries under the current FMTV contract into 2020. Finally, the federal budget process is always challenging, and the 2018 budget request is no different.

We are currently operating under continuing resolution. Under a CR, spend for existing programs is capped at the prior year's level, and no new programs can be funded. We are in a solid position at Oshkosh. All of our major programs of record have already been started, and they are not considered new programs.

We don't see the CR impacting our 2018, but it could impact us in 2019 if the 2018 budget is delayed too long before it ultimately gets approved. Let's turn to slide seven to discuss the Fire & Emergency segment.

Our Fire & Emergency team finished 2017 with full-year operating margin of 10.1%, exceeding the target we had set for this segment sooner than we'd expected. Double-digit full-year operating income margin is a testament to the effort and progress the Fire & Emergency team has made over the last several years.

And that wasn't long ago that this segment posted low-single-digit margins. The Fire & Emergency team has remained disciplined with its commitment to simplify the business, and we're seeing that in their numbers.

We are confident this approach will lead to further improvements, although we don't expect to see 300 basis point margin improvements every year. The U.S. fire apparatus market in 2017 remained about 20% below pre-recession levels, but is generally stable compared to 2016.

Fleet ages continue to grow, and municipal tax receipts were also stable or up slightly compared to 2016. As we look to 2018, we remain confident that the market outlook supports the positive expectations we have for this segment. We need to continue offering best-in-class products and service to set the pace and remain the industry leader.

International shipments were a strong contributor to improved performance in the quarter, and we remain bullish on this part of our business going forward.

We've talked previously about the many opportunities in Asia, particularly in China where, as an example, there is a focus on increasing the number of international airports to 260 by the year 2020, as part of their most recent five-year plan. Each of these airports will need fire and rescue equipment.

According to our fire & emergency team, there are currently 44 new international airports under construction in China. Please turn to slide eight, and we'll talk about our Commercial segment. Commercial segment fourth quarter results were in line with our expectations. The Commercial team faced a number of challenges this year.

We've talked previously about our plans for simplifying this business, utilizing the proven techniques that our Fire & Emergency team used to achieve success in their segment. We are attacking complexity related to both order management and execution.

In conjunction with our simplification initiatives, we have reorganized our leadership teams in the segment into platform teams to allow for better end-to-end accountability.

As we've said before, there's still a lot to do, and we expect it will take several quarters before the team's efforts really begin to have a meaningful impact on the segment's financial results. From a market perspective, the domestic RCV market grew mid to high-single digits in 2017.

And as we stated on our last earnings call, the RCV market recently exceeded pre-recession levels. In contrast to this growth, the concrete mixer market remains well below pre-recession levels as fleets continue to age.

Looking forward, we remain bullish on the longer-term outlook for both of these markets and the opportunities for RCV and concrete mixer businesses. That wraps it up for our four business segments. I'm going to turn it over to Dave to discuss our financials and updated outlook for 2018 in greater detail..

Thanks, Wilson. Good morning, everyone. Please turn to slide nine. We're pleased to report fourth quarter adjusted results that exceeded both prior year and our expectations. Consolidated net sales for the quarter were $1.96 billion, up 11.8% from the prior-year quarter.

All segments reported higher sales in the quarter, led by increased JLTV and international M-ATV sales in the Defense segment. We also saw a turnaround in telehandler sales in the Access Equipment segment.

Adjusted consolidated operating income for the fourth quarter was $150 million or 7.6% of sales, compared to $123.3 million or 7% of sales in the prior-year quarter.

The Defense, Fire & Emergency and Access Equipment segments each reported higher operating income, with the Fire & Emergency segment delivering a 370-basis point operating income margin improvement and the Defense segment recording a 12.2% operating income margin in the quarter.

Operating income and operating income margin in the Commercial segment were down compared to the prior year, due primarily to an adverse product mix and costs associated with the warranty campaign. Corporate expenses were $5 million higher than the prior year, largely due to higher incentive compensation.

Further information on segment fourth quarter results compared to the prior year can be found in the appendix to the slide deck. Adjusted earnings per share for the quarter was $1.38 compared to $1.05 in the fourth quarter of 2016.

Fourth quarter 2017 results exclude a $0.15 earnings per share impact from the previously announced restructuring actions in the Access Equipment segment. Fourth quarter 2016 results exclude an asset impairment charge and workforce restructuring charges in the Access Equipment segment.

The adjusted tax rate for the fourth quarter was 23.7% compared to 29.1% in the prior-year quarter. The tax rate in the current quarter benefited from a higher percentage of earnings from lower tax rate regions, share-based compensation tax benefits, and the resolution of state tax matters.

Fourth quarter and full-year adjusted earnings per share of $1.38 and $4.25 respectively came in significantly higher than our expectations.

Contributors to the better-than-expected results for the quarter included a full-year adjusted tax rate that was 300 basis points lower than our expectations, higher sales in the Access Equipment segment, better-than-expected operational efficiency in the Fire & Emergency segment, and lower medical costs in the Defense segment.

The lower-tax rate drove nearly half of the adjusted – of the higher-adjusted earnings per share compared to our most recent expectations. And finally, our full-year free cash flow was $183 million, exceeding our previous expectation of $150 million. Please turn to slide 10 for a review of our expectations for 2018.

We're expecting another good year in 2018, highlighted by anticipated improved performance in all non-defense segments. On a consolidated basis, we're estimating sales of $6.9 billion to $7.1 billion compared to $6.8 billion in 2017.

We are also estimating adjusted operating income of $515 million to $565 million, and adjusted earnings per share of $4.25 to $4.65. Breaking that down by segment, we are estimating Access Equipment segment sales of $3.1 billion to $3.2 billion, and adjusted operating income margin of 10.5% to 11%.

Our estimates for this segment assume continued positive rental market conditions, with rental companies again exercising a disciplined approach to their capital expenditures.

Our estimates also incorporate positive price realization, higher material costs driven by the increased steel prices experienced in 2017, and the benefits of the previously-announced restructuring actions.

In the Defense segment, we're estimating sales of $1.8 billion to $1.85 billion in line with the $1.7 billion to $2 billion range that we discussed at our Analyst Day a year ago. Our sales estimate range for this segment is supported by the very strong backlog and sales visibility that we have entering the new year.

We are estimating that operating income margins in this segment will be between 9.5% and 9.75%. Our sales estimate range reflects significantly lower international M-ATV volume as we finish deliveries under the existing contract, offset by higher JLTV and FMTV sales.

Operating margins reflect the impact of the mix shift in sales between the various programs. We are estimating $1.1 billion of sales and operating income margin of 10.5% to 11% in the Fire & Emergency segment. These estimates assume a small increase in the North American fire apparatus market and a small increase in the production rate at peers.

The higher margins compared to 2017 represent the impact of the expected higher volume, a continued solid pricing environment, and a steadfast commitment to furthering this segment's simplification journey. We estimate Commercial segment sales will be $950 million to $975 million with operating income margin of 5.75% to 6.25%.

We expect the North American RCV market to be largely flat compared to 2017, and while fleets continue to age, we don't expect an increase in the concrete mixer market off the current levels, which remain 20% to 25% below pre-recession average levels.

Based on the team's simplification initiatives that have either recently been launched or that will be launched soon, we expect to see meaningful margin improvement in this segment compared to 2017.

Additionally, the commercial team is entering the year with a stronger book position for the first quarter than last year, which is expected to help reduce the impact of production variability that we experienced in the year just ended.

We estimate corporate expenses will be approximately $150 million and we are estimating an adjusted tax rate of 30.5%. This is slightly higher than the adjusted tax rate for 2017 and includes an estimate for share-based compensation tax benefits. We are also estimating an average share count of $76 million, flat with 2017.

This assumes that we will repurchase shares in 2018, sufficient to offset the share creep associated with our share-based compensation programs. Finally, we estimate capital expenditures in 2018 will be $100 million and free cash flow will be $350 million.

A higher expected free cash flow reflects the impact of higher earnings along with the expected timing of collections of cash from the large international M-ATV contract that will be completed this year.

Looking at our first quarter, we expect sales and adjusted earnings to be above the prior-year level, driven by higher Defense segment sales related to the continued ramp-up of the JLTV program and higher international M-ATV sales as we ship the final units for that contract.

With the backlog that is more than double the prior year, we also expect higher year-over-year sales in the Access Equipment segment. However, we expect that higher material costs will adversely impact first quarter incremental margins in this segment. I'll turn it back over to Wilson now for some closing comments..

Thanks, Dave. Before we get started on the Q&A, I'd like to make a few comments. We believe that our fourth quarter and full-year 2017 results illustrate our company's strengths as a different integrated global industrial, and we're proud to announce a positive outlook for 2018.

As we said on our last call, we have opportunities to capture and more work to do. We are committed to driving shareholder value, as we work to make Oshkosh Corporation a great place to work and a great business partner to our customers, suppliers and communities in which we work. I'll turn it back over to Pat to get the Q&A started..

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

Thank you. Our first question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question..

Hey. Good morning, everybody..

Good morning, Seth..

Good morning..

On access, I'm trying to tie together some of your commentary here. I guess, Wilson, I think I heard the words rental discipline, but I think bookings were up about 30% year-over-year.

I mean is there something that – do you feel like that there was some pull forward here of orders whether it's hurricane related or something else? Your backlog is up 150% or something, I'm trying to kind of tie together your current run rates versus relatively modest kind of revenue growth expectations and – yeah, so I guess we'll start there..

Sure, Seth. I think what I would categorize it – the second half of the year, we just saw increased end-user demand. Equipment usage demand picked up. We haven't heard our customers talk about a replacement-driven demand, so it's a little more of a usage demand.

And when you look at the quarter, the fourth quarter, it was a good quarter but the order patterns wouldn't reflect a big jump in orders around the storms. So, what we're basically saying is that we just had a nice second half of the year. And again, from what we're hearing from our customers, it's around equipment usage demand..

Right. But your bookings, I think were, based on our math, were up about 30% year-to-year, which sort of suggest a stronger year than what your revenue outlook for the full-year 2018 might suggest.

So, I mean, I'm just trying to figure out if you felt like – it doesn't sound like you thought that there was any pull forward or anything, but I just want to – I mean, is there something maybe the strength – is the strength coming from outside North America? I'm just trying to tie together. Yeah..

Sure, Seth. And realize this is our position at this call every year, you're probably used to us saying it. It's early. Most of our customers are on a calendar year, so we're still working through with them and their outlook. We feel like we have a good forecast but that will be worked through over the next several months as we get into negotiations.

But today, we feel good about our forecast. And again, when you look at the fourth quarter, there may have been some pull forward in there, but it didn't come in, say, the last month of the quarter like you might think if it was related to the hurricane. We had a pretty even order pattern through the quarter.

So, our look into 2018 is, one if – okay, if there was some pull forward, that's something that we're taking a deeper look at. But still at the high end of our guidance, it's about just below 6% from a revenue growth standpoint for next year. So, I think that's a good first step for us. And as I said earlier, it is early..

Okay. And then I guess on the – maybe for Dave on the first quarter margin commentary. Do you expect access margins to be up year-over-year? It was pretty soft last year in 1Q 2017..

Yes, Seth, I guess I would say it's going to depend really on what we see for the mix for the quarter. As we did say on the call, what we are pretty confident in is that we're going to see some material cost headwinds. So just overall, I think it's going to be a little bit of a challenging quarter for that segment.

But overall, we think the full-year outlook is still good for the segment..

Okay.

So, is there a timing issue where pricing basically kicks in at the start of a calendar?.

I think you had a couple of things here. One, obviously as we go through the year from material cost standpoint, comps will get easier because we did experience some of that, a little bit in Q3 and more so here in Q4. And we'll see that again certainly in the first half of the year.

Also, the price increase that we've talked about or that we've announced is going to be effective first of the calendar year. So, we won't benefit from that in the first quarter either..

Okay, guys. I appreciate the color. Thank you..

Thanks, Seth..

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

Yeah. Thanks. Good morning, guys..

Good morning, Nicole..

So, I also want to focus a little bit on access first. Just if you could comment a little bit on the pricing environment? I know you guys have put through some price increases.

Do you think that other peers are doing some things similar, or is it just at the point where JLG feels like it needs to take some pricing because material costs are moving higher, and it's not necessarily reflective of what the entire industry is doing?.

Yeah. And Nicole, you know us, we're not going to talk about our competitors, but what I will say is, you're correct, we have announced a price increase. If you look at JLG over the last several years, they've done a really nice job of mitigating a lot of inflationary costs. But material costs have exceeded that at this time.

If you think about steel, steel is up 20% year-over-year. So, we can mitigate some of that, but part of that we're going to have to work and partner with our customers as we have announced that price increase.

And those discussions are underway, and that'll be our goal is to always maintain price discipline, and that's something that JLG has been very well focused on..

Okay. Understood. Thanks. And then I guess just a question on the defense business.

When would you guys think about evaluating where you are from JLTV program margin standpoint relative to where you originally positioned margins?.

Nicole, it's something that we do look at every quarter in accordance with GAAP because we are using the percentage of completion method for that program. And I think as we've talked about earlier, we're still fairly early into the program.

If you look at the revenues, I think we got, in fiscal 2017 we ended at about 4% of the total expected program revenues over the eight-year period, so still quite early.

But that being said, I would think that by, let's call it, the end of fiscal 2018 that we'd be in probably a much better position to make a call on where we think margins are ultimately headed for the program..

Okay, got it. Thanks. I'll pass it on..

Thanks..

Thanks, Nicole..

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

Yes. Good morning, everyone. Just want to go back to access as well. And I guess the way I'm looking at this in your guidance, and not to maybe underline this too much. But essentially, when I'm looking at fiscal 2018 guided revenues, you're talking about an additional, call it, $100 million to $200 million worth of revenue.

Your backlog exiting the year is up $273 million. So, essentially, just converting on that backlog with order is flat next year gets you to your guidance. And really, my question is, how much of this is just pure conservatism versus your – is something that's happening in the market.

And at what point in a year would you be able to change these assumptions given the way we're kind of starting out here?.

Well, Mig, first of all, we think this is a good forecast that's in play today based on the information we have. And again, as I mentioned earlier with Seth, it is early. And so, I think you know how we work through this – our first quarter or their fourth quarter and their years, we'll learn more.

And as we have learned more over the years, you've seen us at the next call or at the second half of the year come out with adjusted guidance, if it is appropriate. So, we believe the range that we have today is in the right place. And again, as we learn more and go, we'll share that. But today, we think it is a solid forecast..

Okay.

Also, can you give us maybe an update on restructuring-related cost savings in access in fiscal 2018 versus 2017?.

Sure, Mig. So, in 2017, we were really in what we would call the execution or heavy lifting phase of the changes. So, we called out a number of costs during the year to implement that. We really didn't see any of the benefits in 2017. What we have said is that we expect $15 million to $20 million of savings from those actions in fiscal 2018.

That's what we said at the outset and we still think that's where – what we're looking at for fiscal 2018 as well..

Okay. I appreciate that. Well, I guess even taking your revenue guidance as it is, considering the amount of savings that are coming through in fiscal 2018, it looks to me like the implied incremental margin on the additional revenue is still well below 20%.

So, is this a factor of pure price cost dynamics that you were talking about earlier, or is there something else that we should be looking at here?.

It's the impact of what we're seeing from a material cost standpoint, Mig. The price increase that we are calling out and including in the estimates for the year does not fully offset the material escalation or inflation that we believe we're going to see this year..

And Mig, just to add to your first part of your question around is there something else in the market, no. We think the market is strong. Customers are doing well. Fundamentals are in a good spot. So, we don't see any type of market issue at this time..

Appreciate it. Thank you..

Thanks..

Thank you. Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question..

Great. Thanks, guys.

What are you thinking about product mix in access in 2018?.

I'm sorry?.

What are we thinking about the impact of product mix in access?.

I think we're going to see a little bit of a rebound overall in telehandlers from what we saw in fiscal 2017. But overall, we don't expect too much of an impact from a mix standpoint..

Okay, great. Thanks. And then switching over to commercial, I guess I'm just surprised sort of kind of how much that continues to lag.

And I wonder maybe you could be a little bit more specific about what that needs – what needs to happen there to improve that? Or maybe conversely, what's the chance that it needs a little more tough love in the sense of kind of some more aggressive restructuring and so forth?.

Steve, we look at all those factors that you mentioned there. And from a restructuring, what we have done is gone in and reorganized leadership in more of a platform environment and I think I mentioned that in my prepared remarks. That was something that's really – those techniques have really helped fire & emergency.

And these businesses, as you know, you just don't turn on a dime. It does take some time, especially when you're doing some, what we call, transformational-type work in there.

The processes that we're working on, not only just re-engineering some processes, but good process discipline that we're driving, we believe we'll build this where we can sustain better margins into the future. So, we're taking, in our opinion, the right efforts, putting the right techniques in place.

And we really believe we got a good game plan here as we've seen it work at fire & emergency. So and it's a good business. They are the market leader in mixers and a good market share in refuse collection vehicles, a good return on their cost of capital. So, we believe this business is worth more to us today than someone else.

And as you know, we do some of the parts study every year and we've got a good team there. They're battling, and we believe you look at their backlog, you look at the market dynamics where refuse is still strong, concrete mixers, the fleet age is as old as we've ever seen it. So, the long-term outlook for both of those businesses is positive.

So, we're going to hang in there and get this done and you'll see us progress throughout the year and get this back to where it should be..

And do you still think you can get this business to double-digit EBIT margins at some point?.

That's our goal, Steve. We're not going to put a timeframe on that. But same as we did fire & emergency, we believe we can do with commercial..

Okay. Thank you..

Thanks, Steve..

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

Thanks. Good morning, guys..

Hey, Charlie..

Hey, just a quick one on defense, how many of the M-ATVs did you ship in Q4 and how much are left to go in Q1?.

Charlie, we haven't – I think we kind of got away from giving the exact quantities that we shipped. I would say, we talked as we entered the year fiscal 2017 that we're going to ship nearly a thousand.

We were close to that, and as we get into the first quarter here, we got a little more than 100 units to ship to conclude deliveries under that current contract..

Okay. Thanks. And then just on fire & emergency, again kind of back to the pricing question, but as it applies to fire & emergency and obviously the margins were pretty strong in that quarter. I'm guessing the international had a big, big impact on that.

But can you just talk about maybe the margin in the quarter? And as you look into 2018, what you're thinking about pricing and kind of mix within that business that 12% or so doesn't seem like a sustainable number.

Obviously, it's not in your guidance, but I'm wondering how much of that impact is mix versus pricing?.

Yeah. I think you are right, Charlie, in terms of the outlook that we have for next year. We did benefit in the quarter from a strong international component. As you know, international business is lumpy throughout from quarter-to-quarter and from deal-to-deal, really.

But overall, as we said on our outlook for the year, we do believe we're going to continue to see a favorable pricing environment in that market. But when you look at the year-over-year improvement in margins, we aren't talking about a 300-basis-point improvement like we saw in 2017 on a full-year basis.

We're talking to 50 basis point to 100-basis-point margin. So, I think you had a couple of things going on here. One, again a favorable pricing environment, two, the fact that we're going to benefit from taking the line rate up a little bit. That should help from an absorption standpoint.

And then three, just that continued focus on simplification and driving that to improved operational efficiencies in the business..

Thanks..

Thanks, Charles..

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

Hi. Good morning. I guess just two questions. One, just more strategically, the cash flow was better than expected in 2017. It will be strong in 2018. Your balance sheet will be in good position.

So, Wilson, just strategically, how are you thinking about potential for M&A here given the growth that you see how do you in your balance sheet versus just sort of hunkering down, buying back stock and paying a dividend? And then my second question, can you guys just parse out within aerials just sort of growth that you expect in broadly U.S.

versus Europe? Thank you..

Okay, Jamie. I'll start, and Dave, you fill in if I miss any of the questions. But from an M&A standpoint, Jamie, we've always talked about being opportunistic. We're not sitting here today thinking we have to go buy something, but it is something that we're thoughtful about and study on a strategic basis with our board.

As you know, we haven't generated some free cash in a while. So, we like the position that we're getting into there, and we're certainly going to be thoughtful about our capital allocation going forward. Our goal is always, over the cycle, to return 50% of our cash to our shareholders, and that remains our goal going forward.

So, at this time, we don't have anything to talk specifically about M&A, but it is something that is on our mind and we'll continue to study as we go. On the aerial question that you have, all regions looked to be doing well. The one that we've talk about is down a tad, stays down is Latin America, and that's due to Brazil.

But we do expect this next year for those regions to all be flat, to up a little. Some will moderate along the way, but North America obviously will be the one that we expect to be increasing the most..

Okay. Thank you. I'll get back in queue..

Thank you. Our next question comes from the line of Mike Shlisky with Seaport Global Securities. Please proceed with your question..

Good morning, guys..

Hey, Mike..

Hi, Mike..

I just want a little bit of more color on your free cash flow guidance here. If you take the EPS guidance and just multiply it by the share count, that right there is about $50 million (40:06) by itself, and that's your full year free cash flow excluding any of the M-ATV inflows coming for the year.

So, could you maybe just kind of break down for us what you think in broad terms is the M-ATV free cash.

And then what you – sort of cash you've got obviously for 2018 for perhaps working capital or something else there?.

Sure, Mike. M-ATV is going to be a positive as we've called out. The one thing we didn't call out is also something that's in the Defense segment the JLTV program, one of the program requirements or conditions, let's call it that, is there is a 10% hold back on all units delivered until we pass what's called the Component First Article Test or CFAT.

And so if you think about going doubling or between a doubling and tripling of volume between fiscal 2017 and 2018 and 10% hold back on each of those units until we pass that test, that's going to add probably, call it, $50 million-ish of working capital to the balance sheet in fiscal 2018.

So, excluding that item our free cash flow guidance would start with a four for the year. And just to maybe help you a little more on that, the scheduled timing for that test or approval of that is later in fiscal 2018.

So, if everything goes as we expected well, we'll get approval for that CFAT, and then we'll submit our payment request later in 2018 and get the cash from that hold back in fiscal 2019..

Okay. Got it. I also want to ask secondly that, I've seen some press reports in the kind of local press about Oshkosh trying to find some land for a new headquarters building, I guess, within the city of Oshkosh.

I don't want to ask you like which land parcel is better rather than which – other land parcels, but I'm kind of curious just give us some color color as to what kind of improvement you think you'll get from a new headquarters, kind of what's going to be different there? And what might the all-in cost be, and is any of this going to be in the fiscal 2018 CapEx budget?.

Sure, Mike. This is something we've been analyzing. You've been to Oshkosh, and you probably noticed we're really spread out. And there's an opportunity to get out of a significant number of leased buildings, put our people together, get out some pretty significant maintenance costs, and again, be much more efficient.

Our focus is, we want to continuously improve every area of our business. And one area we've really been focused on is our culture and continuously improving that. And when you have people spread out like we are, it's tough, and we know we'll gain some efficiencies there. But I'll tell you, the bottom line is we are sensitive to what this can cost.

And our goal, if we do something like this, is we're going to remain cost-neutral to our current model in what we're doing, but gain efficiencies by putting our teams together, help our culture move along the way. Our work environment here needs to be improved. It really doesn't match the personality and purpose of our company.

And we see some good opportunities there by making this move, again, with basically no impact to our shareholders..

And, Mike, to your question in terms of the outlook for the year, no decision has been made yet on whether we are going to make a move or not. And as a result, there is nothing included in the financial outlook or CapEx guidance for a new headquarters..

Okay, got it. Thank you so much..

Thanks, Mike..

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question..

Hi. Good morning, everyone..

Good morning, Jerry..

Wilson, I'm wondering if you could just give us an update on the order inquiry rates that you folks are receiving on JLTV and M-ATV platforms from international buyers? Obviously, a lot of evaluation work over the past couple of quarters, can you just give us an update on the inquiry levels to the extent that you can comment? Thanks..

Sure, Jerry. We've talked in previous quarters about some international orders that we're working on in the Middle East. And we don't have anything to report today that we received contract, but what we are seeing is some positive movement there.

These international orders, they go through – if you think about the process, and there's different gates or milestones that they go through. And we just saw one that we've been working on, it's – that's both vehicles and sustainment opportunities go through a significant gate. We don't have a contract yet, but we saw good progress there.

And that's where our prepared comments said that we could see some of this maybe at the end of this year, but more likely in 2019. There're still some other international orders, specifically in the Middle East that we're working on, but nothing to report there. Really nice attention and focus from Europe around the JLTV.

We recently had the two trade shows I mentioned in my prepared remarks. A lot of activities from international military leaders from around the world, but specifically Europe has a lot of interest in our JLTV. You've seen the headlines. The UK MoD is very interested. They've talked about some numbers. They have U.S. State Department approval now.

So, we're expecting them to start a formal military sale process in the near future. But one thing that we're pretty confident is that JLTV sales most likely won't start for us on the international side until after full rate production decision is made by the U.S. military, which should be late 2019 or more likely 2020.

But we do like all the international activity. I would say that the attention to the JLTV continues to grow. And we really like the opportunities that we believe are going to be there for us into 2020, 2021..

Okay. Thank you. And, Dave, I'm wondering if we could just talk about the commercial business, so guiding to about 150 basis point improvement in margins. Can you just give us the biggest moving pieces? I know you've had some warranty costs and other negative variances over the course of 2017.

Can you just give us the biggest pieces that drive the 150 basis point in margin improvement embedded in the guidance?.

Sure, Jerry. So, if you go back two years ago or fiscal 2016, we were nearly 7% margin in the segment, we're guiding to let's call it halfway back on that....

Sure..

Wilson talked about there's a lot of heavy lifting actually going on as we speak in the segment. And it's really all around, let's call it, operational efficiency, attacking complexity within the business..

Yeah..

The top line year-over-year isn't changing that much. So, it's really everything else that's going on within the business that's going to drive the improvements that we're seeing here..

And sorry, just a clarification. So, when we went through this process in Fire & Emergency, it took a while for the savings to come through, and clearly you've gotten it there after considerable effort.

I guess what's the risk from the timing standpoint that we'll get the savings that we're talking about in 2018 versus 2019 plus as we think about this commercial implementation?.

Well, I think as you look at – we're not saying we're going to get back to where we were in a year, and I think that is reflective of the magnitude of the effort that is going on there. So, it's – we're still very much in the implementation phase, and we don't think you're going to see a lot of the benefit in the first half of the year.

We think you'll see more of that in the second half of the year. So, I think that the cadence that we have, it's aggressive by design in terms of we want to turn the business around.

But I think we're also conscious of the fact that there is a lot going on there, and it's probably going to take the course of over two years to get it back to where we thought it or where it was previously. And then as Wilson mentioned earlier, we have aspirations beyond that.

So if we get it back to where it was, we're talking, call it 7%-ish margin, we don't want to stop there. Our ultimate aspirations are to get this segment up to 10% operating income plus..

Okay. Thank you..

Thanks, Jerry..

Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed with your question..

Good morning, guys. Some nice numbers.

I'm trying to get – on your fiscal 2018 defense revenue guidance, I'm trying to get a sense of how much of that is already in backlog, or if you do need some incremental orders to hit guidance, what type of orders should we look for?.

Sure. Pete, we ended the fiscal year with backlog for both new trucks as well as aftermarket at about, call it, $1.7 billion, just shy of that. So, our guide is $1.8 billion to $1.85 billion.

If you take the aftermarket backlog and, let's call it, annualize that for what we see as a typical run rate, our belief is we finish the year with very strong visibility to about $1.775 billion. So, just shy of the $1.8 billion low end of the range. So we don't need much yet for fiscal 2018..

Okay. Okay.

It's just standard – I guess, do you have any FMTV recomplete revenue in your guidance? Are you expecting to win that?.

Yes, we are expecting to win that. But that would be for deliveries, Pete, starting in 2021-ish timeframe. Our existing contract will continue to deliver FMTVs into 2020..

Okay. Got it. Got it. And that is the first quarter for defense likely to be the highest margin quarter because of the....

Yes..

Yes, it is. Just given the mix that we're seeing, we still have some M-ATVs rolling through in this first fiscal quarter..

Great. Okay. Thanks, guys..

Thank you..

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

Hey, guys. Good morning and congratulations..

Thanks, Stan..

Quick question on the comments around international business on the fire. Within those RF units or I'm guessing we're talking about RF units for the airports.

Have they gone through the same sort of simplification process as what you've done at Pierce, one? And then two, maybe could you talk about the margin profile of those businesses relative to kind of the core fire business?.

Stanley, in terms of the component or what comprise the international, it's a combination of both what we call traditional fire trucks, as well as RF units. So, it's a mix, and that mix varies from quarter-to-quarter and from order-to-order. But overall, the original or main focus regarding simplification has been around the Pierce business.

We still – we believe have opportunities with the airport products group in terms of simplification there. So, there's going to be focus on that portion of the business. And then in terms – I think, I'm sorry, I forgot your second part of the question.

Can you repeat that?.

Well, it was – yeah, it's really more just kind of like on the margin profile between the legacy Pierce and the RF business given the amount of what I would assume customization on some of the airport vehicles..

Yeah. So, airport as you know is – it's a fairly global business. So, we do have a higher international component to that business. And you're going to see margins fluctuate from deal-to-deal really depending on what type of product the customer is looking for, where they are located, what the competitive environment is.

So, it's really hard to pinpoint and say definitively what the margin in that business is compared to the margin in our fire or traditional fire business..

Perfect, guys. Thank you very much and best of luck..

Thanks..

Thanks, Stan..

Thank you. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question..

Hi. Good morning..

Hi, Steve..

Hi, Steve..

Hey.

Might be a little early to be asking this, but with orders and volume looking better, can you talk about supply chain in terms of parts availability or delivery, and any concerns about supplier capacity reductions over the past couple of years?.

At this stage, Steve, our goal of procurement team would tell you that our supply base is in good shape. Over the years, we've consolidated some of our supply base to support a couple of different segments, and that certainly strengthened our suppliers. So, today we're in a good spot with our supply base..

And you talked about steel price increases, any other pending price increases on finished goods whether steel or other materials?.

Steels are one that really sticks out, Steve, and partially just because if you think about our products, there is a lot of steel in there. We've seen aluminum spike up a little bit. We use a fair amount of aluminum in fire & emergency, but we have that largely factored into our outlook for the year.

And beyond that, I don't think we're expecting to see any large spikes in material costs over the course of the fiscal 2018..

Okay. Thanks..

Thank you..

Thanks..

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks..

Thank you, operator, and thanks to all for your interest in the Oshkosh Corporation. Our team is dedicated to exceeding customer expectations and delivering strong shareholder value. We look forward to speaking with you on the road, in Oshkosh or during an investor conference. Thanks for your time. Have a good day, everyone..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..