Oshkosh Corporation (OSK) Q2 2008 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen and welcome to the Oshkosh Corporation Fiscal Year 2008 Second Quarter Financial Results Conference. At this time, all participants are in listen-only mode. A brief question-and-answer will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.

Thank you, Latonia. Good morning, everybody and thanks for joining us. Earlier today, we published our second quarter results for fiscal 2008. Copy of the release is available on our website at www.oshkoshcorporation.com. Today's call is being webcast and is accompanied by slide presentation, also available on our website. The audio replay and presentation will be available on the web for approximately 12 months. Please refer now to the 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. Those 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. Except described in the form 8-K, 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. Occasionally today, we will refer to previous estimates we made or updated such estimates during our first quarter earnings conference call for fiscal 2008 on February 1, 2008. Presenting today for Oshkosh Corporation will be Bob Bohn, our Chairman and Chief Executive Officer, Charlie Szews, President and Chief Operating Officer; and Dave Sagehorn, Executive Vice President and Chief Financial Officer. So let's begin by turning to slide 3, and I'll turn it over to Bob.

Thank you, Pat. Good morning and thank you all for joining us today. We had another great quarter to report. I will give you a brief review of the highlights and turn it over to Charlie and Dave to discuss the quarter in more detail ahead of your questions. Today, we are reporting record second quarter results for Oshkosh, led by strong performance in our access equipment and defense segments, we more than offset weaker results in our commercial and fire and emergency segments. In the second quarter, we reported net sales of $1.8 billion, up 6.7%; operating income of $168 million, a 24.8% increase; and earnings per share of $0.97, up 42.6% from last year's second quarter EPS, of $0.68. The story for this quarter has really been one of year... of higher year-over-year revenues in both our global access equipment and defense businesses. Together, these two posted a sales increase of $250 million, which allowed us to overcome some economic challenges. Our impressive second quarter performance was the result of hard work, drive and dedication of our 14,000 plus employees at Oshkosh Corporation. They do a super job and I want to personally thank them for their efforts. Of course, our customers, dealers, distributors and suppliers all contributed to our success and they have my gratitude as it goes out to them this morning. There's no doubt about it, we are in the midst of some challenging times including a weak U.S. economy coupled with raw material cost pressures. In response to the raw material cost pressures in front of us, we are in an interesting position of increasing or considering price increases in all of our markets during what appears to be a U.S. recession. It's during times like this that our Oshkosh family of companies shine due to the balance of our business portfolio and our drive and ambition to grow. We continue to invest globally to improve our distribution in key international growth markets and to reduce our supply chain cost as well as rationalize spending at business units where market conditions are soft. These investments help us now and will help us in the future, when currently soft markets come back and they will come back. I have absolute faith that we can be successful. It will take a lot of planning, hard work and execution, but we have a superb senior operating team that will continue pursue smart growth. This morning, we reaffirmed our earnings per share estimate range of $4.15 to $4.35 for Fiscal 2008. That's a projected EPS growth rate of 16% to 22%. Strength in our global access equipment and defense segments along with a backdrop of weakness in domestic residential construction and municipal markets form the foundation of our confidence. I know you want to hear more about the quarters, so at this time I'll turn it over to our President, Charlie. Charlie will go into detail each of our business segments and review some our operating highlights and challenges and help you understand basically why we have confidence in this business going forward. Charlie?

Well, thank you, Bob. We do have challenges, but we also have fundamentally strong operations and strong product offerings that we can leverage as we grow the company in a variety of conditions. Please turn with me to slide four and we'll get started. The second quarter clearly demonstrated the global strength of the JLG brand. Our access equipment sales for the quarter were down nearly 20% in North America, international sales practically doubled leading to JLG growth of about 15% compared to the same period last year. In particular, we are experiencing strong demand for a larger area work platforms. Our business was broad-based in the quarter. Sales outside the U.S. comprised more than half of our access equipment sales for the first time, as their business was quite strong in Europe in spite of significant industry consolidation during the last 6 to 9 months which caused several customers to push out product deliveries. In emerging markets, we had the opportunity to serve a number of start-up rental operations as the concept of renting equipment to support large infrastructure, energy and mining projects takes hold. And in the U.S., our business with independent rental companies improved due to our leading JLG ground support activities, which partially offset lower purchases from large rental companies in response to the weak U.S. economy. Back in March, we launched a number of new JLG products at the ConExpo show to continue our industry leadership. Traffic at the show was very strong, particularly from international customers and the interest level on our new products was impressive. We have significantly raised the bar for customer support and attention to detail for the ground support services including parts fulfillment, repair, rebuild and re-manufacturing. Our new ClearSky asset technology enables rental operators to remotely monitor the condition and use of our products to reduce maintenance costs and improve utilization, clearly raising the bar even further. At the show, we also introduced our new super compact telehandler, which is truly a global product. Frankly, we were a bit late to market this product, but took the opportunity to greatly enhance the customer experience with it and we expect it to perform well for us. Lastly, we introduced our revolutionary new LiftPod, which has the potential to significantly benefit the work at a height trade people and professionals who need to be in the air, but don't need the might or horsepower of a larger area aerial work platform. This low-priced light weight unit is perfect for use but facility maintainers and painting contractors. Please move with me to slide five and let's take a look at our defenses. Defenses continue to operate effectively as we've increased our production output for both new and remanufactured trucks. The segment saw a backlog in funding requests that are currently with Congress, give us confidence and visibility in to fiscal 2009 and provide a solid foundation for fiscal 2010. We expect to be significantly ramping up our parts and service business in the back half of fiscal 2008 as deliveries increased for armor kits to be installed on our medium tactical vehicle replacement or MTVR trucks that are used by the U.S. marines. On April 14, the hardworking team of Oshkosh employees along with their partners at Northrop Grumman submitted a proposal for the technology development or TD phase of the $40 billion 10 year joint light tactical vehicle, JLTV program. We expect at some time this summer the Department of Defense will select three teams to continue into the TD phase, which should last approximately 2 years to be followed by system development and demonstration or SDD phase which will then move to a final down for a production contract for this extremely important program. Production volumes are likely sometime in 2012 or 2013, but could commence as early as 2010 or 2011, if both urgent requirements in the technical capabilities of TD vehicles want the modification to the program. While the competition is fierce, we believe that our team who offers unique capabilities to protect and serve the war fighter at a low total cost that could be compelling to the Department of Defense. Please turn to slide six. Soft markets continue to impact portion of our fire & emergency business, higher fuel prices and the overall sluggish U.S. economy was working against our towing and recovery business. A certain changes in healthcare reimbursement as well as softness in the broadcast industry have impacted the products made by our Oshkosh specialty vehicles business. Pierce saw a quarter in what has been a down market over the past year. In fact, the past four quarters combined form the weakest any period in the past 12 years for fire truck industry orders. But Pierce is turning a strong performance in this market, as orders were up during the quarter. Building on that, we thrilled the crowd and challenged the competition at the FDIC trade show two weeks ago in Indianapolis, when we introduced Pierce ultimate configuration technology on to three additional product platforms. This technology greatly enhances the service ability of the fire pump, while offering significantly more compartment space in a shorter wheel base. We believe that these new products in addition to our best industry dealer network will support us turning up the heat in the fire apparatus business as we compete aggressively in this market. The airport products business was once again led by a strong aircraft rescue and fire fighting, where our vehicles shipment and vigorous order activity in the international markets to support global airport expansion. As we were doing in all of our segments, we will continue to work on cost containment activities to improve our profitability. Also back in late January Pierce announced the price increase effective April 1, that is now been implemented, the early reaction from our duty network has been favorable. Lastly, we hired a new President for our JerrDan towing and recovery business in February and we are very happy with his progress to-date. Mike Walter brings extensive operation, manufacturing and business development experience within and we are delighted with his early progress. Overall, we are facing some tough economic conditions but global opportunities and new products introduction should still permit this segment to delivery modest single-digit sale growth in fiscal 2008. Now please turn to slide seven. Overall results in this segment were quite disappointing; due to difficulties in restructuring our European refuse collection vehicle business and severity to concrete placement downturn. We are committed to investing the time and resources necessary to help this segment return to profitability in fiscal 2009 and achieve long-term value. Conditions for our concrete placement business further weakened in the second quarter as customers remained very cautious due to weak U.S. residential construction market and the ongoing concerns about the overall U.S. economy. After this, the after affect of the large pre-buy that resulted from the 2007 diesel engine emissions standards changes and you have a severe market downturn in concrete. At this time, we do not see significant relief until either residential construction strengthens or pre-buy activity begins ahead of the 2010 diesel engine emission standards changes. We've maintained price discipline during the fiscal year and will raise prices soon if recently announced fuel cost increases hold. We are also stepping up our cost reduction activities to allow this business to better weather this market downturn. We expect to have more to say about this during our third quarter conference call. Our domestic refuse collection vehicle business continues to demonstrate its market leadership and deliver solid performance in a weak economy. We expect sales in this business to be up in the second half of the fiscal year as we realize the benefits of several quarters of strong orders. Finally restructuring progress continues at Geesink Norba Group, which I will call Geesink, our European refuse collection vehicle business. Geesink began production at Norba branded units at our Emmeloord, Netherlands facility during the quarter and will continue to ramp up the Norba production during the third quarter. We are experiencing larger inefficiencies during the ramp-up than we anticipated as we integrate production of the Geesink and Norba product lines. So we believe these inefficiencies will be overcome as our employees move up the learning curve. Geesink also began fabricating parts in its Romanian facility in the second quarter to be used in the manufacturing JLG aerial products in Belgium. While the facility consultation has been difficult, we are encouraged by the progress we have made in the short time and especially by improved quality of the products. We are also particularly pleased to announced new leadership at Geesink, as Chris Tecca became part of the team as Managing Director just last month. Chris comes to us as exceptionally strong general management and broad international operations experience. We all look forward to working with him. I'll now turn it over to Dave who'll run through the number with you.

Thanks Charlie and good morning everyone. Please turn to slide eight. Consolidated net sales of $1.77 billion for the second quarter of fiscal 2008 were up 6.7% compared to the second quarter of last year, lead by strong access equipment and defense segment sales. Operating income increased 24.8% to $168.2 million, with results at access equipment and defense more than offsetting lower operating earnings at our fire & emergency and commercial segments. Consolidated operating income margin increased 140 basis points to 9.5% compared to the prior year quarter, and earnings per share increased 42.6% to $0.97 as a result of the strong operating performance. Corporate operating expenses and intersegment profit eliminations grew by $9.3 million to $30.2 million in the second quarter of fiscal 2008 compared to last year, largely due to higher personnel-related cost and information technology spending to support our growth objectives as well as stock-based compensation expense. Interest expense was lower in the quarter compared to the prior year quarter, due to lower outstanding debt and lower interest rates. And finally, our tax rate for the quarter was 36.7%. This is higher than our first quarter as a result of several discrete items that were recorded during the second quarter. Now let's take a look at each of the segments in detail. Please turn to slide nine. Access equipment recorded sales of $813.1 million in the second quarter, up 14.9% compared to the same period last year, driven mainly by strength in our international markets predominately Europe. Foreign currency movement benefited sales by approximately 550 basis points. Operating income was up sharply to $123.6 million and operating income margin was 15.2%. The operating income margin benefited from higher sales volume, favorable product and customer mix, foreign currency impact of approximately 200 basis points and a favorable comparison with last year's performance then included of repurchase accounting charge of $8.5 million related to an inventory reevaluation that was not part of this year second quarter. The backlog for access equipment was $905.6 million at March 31, 2008, which was down 29.8% compared to March 31, 2007 and down slightly from December 31, 2007. The decrease in backlog is largely the result of the weaker economy which is impacted the timing and frequency of orders from large rental houses. Please turn to slide 10. Defense segment sales in the quarter were $450.8 million, up 47.3% compared to last year's second quarter on continuing strong demand for new and remanufactured trucks and higher after market parts and service sales. Operating income grew from $52.8 million to $59.7 million. Operating income margin for the quarter in the segment was lower as we been estimating to 13.2% as a greater percentage of the segment sales this quarter came from truck shipments under the family of heavy tactical vehicles or FHTV contract that was renegotiated last year. Margins in this segment were also negatively impacted by inefficiencies on a defense service contract and higher bid and proposal costs. Backlog in this segment was $1.5 billion at March 31, 2008, down 12.6% compared to the end of last year second quarter. Delays in Congress completing the 2008 global war on terrorist supplemental budget bill have delayed some funding from being converted into contracted orders for Oshkosh vehicles, resulting in the decrease in backlog. Please turn to slide 11. Turning to fire & emergency, sales decrease by 7.4% compared to the prior year quarter in a more challenging environment. While sales from peers were basically flat in a down market and airport product sales were up modestly, we experienced softer sales that were down in Oshkosh specialty vehicles. The timing of delivery by BAI which shifted into the second half of fiscal 2008 also impacted sales in the quarter. Operating income in the segment declined 25.6% to $20.6 million or 7.6% of sales compared to the prior year quarter do mostly bit to the lower volume. Compared to prior year, the fire & emergency backlog was down about 2% to $624.7 million on March 31, 2008 due to weaker municipal spending in the fire apparatus market, the after effects of the diesel engine pre-buy and weaker order at our JerrDan and OSV businesses. Please turn to slide 12. Commercial sale declined 30.7% to $250.9 million compared to last year's second quarter, due to weak us residential construction and the after effects of the diesel engine pre-buy. This along with an operating loss at our European refuse collection vehicle business, segment operating results to decline to a loss of $5.5 million in the second quarter. Concrete mixer sales were down significantly from the prior year and frankly down more than we previously estimated due to the reasons Charlie described earlier. Our domestic refuse selection vehicle sales were down modestly this quarter and this quarter gas been less effected by the diesel engine emissions standards changes in our concrete business. The Geesink Norba group incurred an operating loss of 8.6 million in the quarter included charges of 3.4 million related to the ongoing restructuring of this business. This business was also directly impacted in the quarter by the production related inefficiencies that Charlie referred to, as well as an unfavorable foreign currency impact. Backlog for the commercial segment was down 16.4% at March 31, 2008, compared to March 31, 2007 with the biggest decline concentrated in our concrete placement business. This decline was largely the result of the weak domestic economy and the pre buyer related back lo last year that carried over into the first half of calendar 2007. Please turn to slide 13 for a review of our guidance for the full year fiscal 2008. All comparisons are to our fiscal 2007, actual results and assume no new acquisition. Due to the strength of our access equipment and defense businesses, we are maintaining our full year revenue forecast between 7.1 and 7.3 billion. This is an increase of 13-16%. For access equipment we are adjusting our revenue expectation up slightly to a growth rate of 25%-30% which is above our previous estimate of about 25% growth. This is based on our strong first half results, strong international markets and a larger benefit from foreign currency movement. We still expect that North American access equipment sales will be down double-digits for the full fiscal year. We're also slightly raising our estimates for defense sales. We now expect the segment to grow by 25 to 30% driven by both our vehicle and parts and service businesses. We're maintaining our expected growth rate for fire and emergency of an increase of approximately 5% reflecting the weakness we're expensing and several of our businesses in this segment. And finally we now expect that commercial sales will be down approximately 20% for the year based on weaker second quarter sales and previously discussed residential construction market conditions as well as the impact and current year demand of the pre buy ahead of the 2007 Engine Emissions Standard Changes. Turning to slide 14 let's review our operating income assumptions. We are slightly reducing our expectations for full year operating income to a range of approximately 670 million to 695 million. This implies a consolidated operating income margin of 9.2% to 9.8%. We now believe access equipment margins will improve by 250 to 300 basis points generally due to increase volume, Product and customers mix, favorable foreign exchange rates in the absence of one time purchase accounting charges recorded in the prior year. We continue to believe that defense margins will decline by range 250 to 300 basis points reflecting the impact of lower contractual margins uncertain of our programs as previously discussed in parts and service mix. If we receive the JLTV technology development contract in fiscal 2008 we'd expect to incur additional expenses related to program development that are not included in this operating income margin estimate. We are modestly reducing our estimate for fire and emergency margins and now expect them to decline by 50 to 100 basis points in fiscal 2008 due to weakness in several of our businesses in this segments. We now expect our commercial segment to incur an operating loss for the fiscal year as we believe that margins will decline by 500 to 550 basis points compared to prior year. Coupled with our lower sales estimate this is a significant change illustrating the recession condition we previously discussed for the segment. The decrease in margins from our previous estimates is the result of lower sales estimates higher cost related to inefficiencies associated with moving production of Norba refuse collection vehicles to the Netherlands, unfavorable foreign currency movement and a shift a high percentage package sales which include lower margin chassis sales. At this time we do not believe that the issues being experienced at Geesink our indicators of goodwill impairment. We'll continue to monitor this business and perform our annual impairment test early in the fourth quarter as required by our policy. We expect corporate and inter-segment elimination expenses will increase by 25-30 million in fiscal 2008 due to estimated expenses associated with investments in personnel and several large information technology projects that support our growth objectives as well as stock based compensation expense. This is down slightly from our previous estimate. Turning to slide 15. Let's take care of few more P&L items. We estimate our interest expense will be in the range of 210-215 million down from our last update on February 1 as a result of lower interest rates. We are maintaining our full-year tax rate estimate of 33.5% reflecting the favorable impact of tax planning strategies. Expectations for equity and earnings are higher than our previous estimates at a range of 5 million to 5.5 million of income. And finally our estimate for the average shares outstanding to 75 million for earnings per share calculations. Finishing up with slide 16, before I turn it back over to Bob. As we mentioned in our press release and earlier during call today, we are maintaining our fiscal 2008 earnings per share estimate range of $4.15 to $4.35 this is an increase of 16-22% over our fiscal 2007 performance we believe these are reasonable and responsible estimates as we have some solid businesses in attractive market but we do face economic uncertainty in rising raw material costs that are impacting a number of our businesses. Our estimates for fiscal 2008 reflect higher steel costs in the second half of the year based on our current knowledge of global steel market. We are estimating a range of a $1.40 to a $1.50 earning per share for the third quarter of fiscal 2008, this represents an increase of 16% to 24% over the third quarter fiscal 2007 performance driven by continued strength that are access equipment and defense segments. And finally we are maintaining our capital expenditure estimate for the year at 110 million and our debt target of between 2.65 and 2.75 billion at the end of fiscal 2008. I'll turn it back over to Bob for our final wrap up before the Q&A Please turn to slide 17.

Thanks Dave. We like many other company's are facing substantial external process and negative conditions in the market for many of our products. But that does not deter us it merely inspires us to work more effectively and efficiently to enter into new areas of opportunity most of them in location outside of the US, we have been planning for this and we are ready for it as we continue to expand our business outside of our traditional US markets. As I said in our last conference call we are still confidant of our ability to grow our Oshkosh in a variety of economic conditions. Both our access equipment and defense segments are performing well in a positive tail wins in several markets area. Counter to this we are experiencing the effects of weaker market in our Fire and Emergency and commercial segments. We will also continue to be diligent with regard to managing raw materials cost as we work to optimize our supply change and raise pricing for our product where necessary. With that in mind we're also proud to be announcing strong result again in reiterating a positive yet responsible outlook as we maintain our full year sales and EPS estimates that result in growth rates of 13 to 16% and 16 to 22% respectively over Fiscal 2007. Our defense business has stayed strong and we have good visibility into the governments need for our tactical wheeled vehicles. We also submitted our proposal for the JLTV opportunity in April. I know you will be monitoring the progress of this exciting program because we are every day. Finally we opened our new Asian procurement offices quarter and have continued to strengthen our operating businesses with the addition of new leaders and our towing the recovery in European refuse collection vehicle subsidiary. We know that a strong global market will be necessary to help us navigate the turbulent times that we are all experiencing in US right now. We are confident that we have the right team and the right strategies to profitably grow our Oshkosh Cooperation. It will come down to execution and we excel at that, here at Oshkosh. But it's our mission to deliver on the commitments we have made to our customers our employees and of course our shareholders. With that I'll turn it over to Pat and the operator for questions. Thank you.

Thanks Bob. Hi there I'd like to remind everyone to please the limit their questions to one plus a follow up. This work's well and gives us the best opportunity for participation on your end. After the follow up, we ask that you get back in queue if you want to ask an additional question. So Operator please begin the Q&A period of this call. Question And Answer

Thank you, ladies and gentlemen we will now conduct a question and answer session. [Operator Instructions] Our first questions comes from Alex Blanton with Ingalls & Snyder. Please proceed with the question. Alexander Blanton - Ingalls & Snyder: Good morning.

Good morning Alex. Alexander Blanton - Ingalls & Snyder: My questions are all about the access equipment is the JLG industries unit. A few day ago while in the Terex call, your large competitor Genie reported that sales were up 7.1% which is less than of half of your sales increase, and the make up of that was quite different than yours, they reported a increase mid single digits in the U.S, high teens in Europe and Middle East Africa double digit in America down in Egypt specific for specific due to problems with whether in Australia I believe. And said that they... you... they had gained market share in the U.S. which it appears that they did. So my question is why are there such large differences between your experience and there's? I would think some of that has to do with your larger teller handler business. And also your largest customer United Rental, yesterday reported their spending for the first quarter was off about 50%, spending on the equipment. So you could comment on effective that. And finally the consolidation you mentioned were also mentioned by Genie, think they are in the U.K. they are rental feels that are combining and they reduce their purchases according to Genie. But they would... they declined to offer any details of who is combining. So if you could identify the companies involved any comment on that as well? Thank you,

Okay, next time I am going to ask you one question with a follow up because I got about eight questions here and I want to give them all. But I'll do the best I can with some this. JLG had a great quarter no question about it most. North American markets down we serve it will be done in double digits and in 2008. And if you look at the reported comments by larger rental companies public rental companies one of the companies poor results in the last couple of weeks. They are all down and like wise we are down in American this year. Part of it is that they are spending less, part of it that they are buying smaller chunk incredibly. We are getting there is a week for customer verses may big chunk quarter. So that was some effect and the results I think compared to get little different customer situations in and help them out. First quarter as your carrier guidance will be doing over the better domestically in the second half of the year. Alexander Blanton - Ingalls & Snyder: Right.

When you look at globally we have in our quarter basically doubled our international business in the quarter and we had a equally that king of performance in all regions other than Australia where now we are basically flourished our resource because of the flooding. So we been very proactive in those markets and doing produce distribution in teen and I think that reflect the results we have seen consolidation in the market place not just in UK, but particularly Spain effect. fit I believe over a half of top 30 rental companies in Europe were involved some sort of consolidation in last six to nine months either acquiring or been acquired. So there is a lot consolidation activity going on, I can't just speak to one or two customers because its been relatively board based. Alexander Blanton - Ingalls & Snyder: Okay. That was good and then Telehandler business also affected you in the US and hurt the business?

Telehandler business was down in 2007 and its down again in 2008. Alexander Blanton - Ingalls & Snyder: That's a bigger factor for you, isn't it?

Oh, that's a big factor there is no question about it and that... we've little more closely tied to residential although it's still dominantly a non-residential product. Alexander Blanton - Ingalls & Snyder: Okay. Thank you.

Thank you.

our next question comes from Jamie Cook with Credit Suisse. Please proceed with the question.

Hi good morning. Just a follow up on Alex's question with AWP side. In the U.S. what percentage do your customer you think have ordered during the first quarter.

Well I don't know if I could give you number out there it's a -- it's too hard to estimate that from here right now.

Was there a mix--

Basically you know we pity well know that the buying plans for all the majors and you know bigger questions within that said world -- buy to their plan but we generally understand that purchasing plans for 2008 we can see them and we know what our market shares are with those customers and we do expect a pity descent second half of the year in fiscal 2008 domestically you know it won't be robust but it's so in the first half performance.

Hey, of the top seven how many order through to you?

Well, for a small.

Within the quarter though

Yeah.

I guess in my final question just within the commercial business and I guess with in think specifically you reduce margins pretty dramatically I'm just trying to get a few how much is related to you know your forecast with entirely I mean what we need to for the draw in this one?

Well, you know it's coming hit very quickly here we essentially moved of the production of into [IND] that's because of the down trend in the 40's decent business and the that we really need to you know exp end of the third quarter because we will be behind in production we need to catch that up and you know I was just on the phone of the major director this morning and we that's make some plan to catch up at the end of the third quarter and this is from we're watching on daily basis. Now but if we can catch up as the end up of third quarter that would be a big step forward force.

And you know how much of the declining operating margins with in commercially is related do you think? Where you changing your forecaster?

Approximately let's say around a 100 basis point is due to the performance as you think in then we probably add another cost to 50 basis points of currency impact our net operation.

Okay thanks I'll get back to queue.

Our next question comes from Steve Barger with KeyBanc. Please proceed with the question.

Hi, good morning.

Morning.

I won't talk about the guidance your commentary for the quarter includes reference to raw material cost pressures. But your guidance doesn't really explicitly consider that issue is that because you think you're covered on that or you don't see it as an issue so much in the back half relative to the reaffirmation of the range?

Steve we do have taking into consideration what we currently on steel and do our forecast for the reminder of the year. So we believe we got it baked into the forecast.

Okay, are you... are your steel wanders telling you that surcharge are coming or how should... and especially as it is related defense segment with your fixed price contracts what's the risk that you are going to see further marginal pressure from rising steel prices?

Steve it's been all over The Wall Street Journal. Seem similar orders in the steel company requesting surcharges. So like everyone else we receive the letters and we already have some impact from it that is reflected into our guidance. In our defense business your right we will be impacted but it's more in the fringes most of our businesses takes place both for the government as well as their supply base and we don't have as much at risk in our defense business. If we go back to 2004 in steel trouble we were the impact our defense business was relatively small. It just wasn't affected heard about it if which you did here about was a lot of were it was much more dramatic impact.

Alright thanks,

Our next question comes from the Charlie Brady, BMO capital market. Please proceed with the question.

Hi, thanks, just with regards to the defense segments, some of your commentary about the service contract inefficiencies and can you comment how much the bid proposal cost increases impacted the quarter and maybe put some parameters on what the JLTV cost might be should you get that contract. Thanks.

Okay, the contracts relate, to contracts in theaters we have turned them to profitability initially, the contracts were not performing that well so it's somewhat reflected in our second quarter results. Yeah, we are just not going to comment specifically on what our bin costs are how much and how much a JLTV is going to cost we are right in the middle of a technology development competition. We submitted our bid on April 14, we are going to here some time this summer what the results that competition are so we really not interested in telling people how much we are going to spending on this competition particularly when we are in the middle of it. But obviously it's a significant number, its a $40 billion program so our partner Northrop Grumman and Oshkosh are working aggressively to compete for that business putting the appropriate resources to. And this again change of our company so, it's top of mind.

Is there any change to the Australian Defense industries proposal and contract any up date on that.

Well, the it was awarded to another competitors a year ago...

Isn't there a secondary contract pending, yeah?

If there is -- it's nothing material.

Okay thanks.

Our next question comes from Robert McCarthy with Robert W. Baird. Please proceed with your question.

First I want -- good morning guys. First I wanted to follow up on your commentary about the concrete placement business being weaker than you expected in the quarter. I assume still improved sequentially as it always does seasonally on the top-line right?

hang on Rob we are focusing on the quarter. Yes it did increase sequentially but by historical standards not much.

Okay so disappointing but the rate of year-over-year decline in terms of percentage terms down fairly significantly compared with prior quarter.

Yeah absolutely I mean we're -- well in excess of 50% decline in concrete sale business.

Rob what we're seeing in the concrete placement business is what we saw back in of course we didn't buy the company that late ago but -- I mean 1991 was the worst this business ever saw when we go back to the history and we are down at those levels if not lower.

I mean its -- to be a little bit more specific we are seeing at 2/3 decline in the market.

Wow and then I, thanks for that then I wanted to ask about comments made couple different times in your prepared remarks about the good visibility that you have into O9 in your defense segment based on your guidance for the full year average revenue in the next couple of quarters would be you know, similar to level of revenue when the quarter just completed assuming I have done my calculations correctly. When you said you have good visibility into 09 is that the way of saying that we believe this revenue run rate can continue or you trying to tell us that your visibility of growth in what has been a steadily growing peace of the business so far.

Rob I think we do expect a expect a strong second half of the year in terms of volume in the defense business we got a strong backlog that would take us into 09 and obviously there is a significant amount of funding requests still sitting with congress but I guess that I would say that we would expect some top line growth next year.

Off course rob that's highly dependent on the global wear and tear supplemental bill getting passed in the next one or two months.

And do you have any insight on the process on the hill their?

I do believe that we don't have any influence but we do have. Is still break it's going to be a hear you know next six weeks but you know you never know

Jack, I know. Okay thanks guys.

Our next question comes from [Indiscernible]. Please proceed with your questions

Thanks for the question and defense margin guidance as you appointed a little way relative your own in expectations' this quarter the full year guidance unchanged I think you know in that you got something better going on stop before may be your conservative as a relates to the second half of the year. Can you clarify that what is getting better in the second half of your prior expectations or will just you have been conservative before.

I think in the past week we have said that margins in '08 could be a little lumpy quarter by quarter once its sequentially drifts down before your guidance was still were it was. Obviously the second half we are going to have growth in both new equipment as well as parts and service so you got some I guess I'll call it some mix issues going out on there.

Well but you weren't baking in the in the service contract issues presumed in times before so there wasn't a thing that surprised you here enough?

I don't know what I would say significantly surprised us you got things move around a little bit here and there In terms of timing of one things are going to be hit.

Okay, and so a similar question on the aerial business I think your second half margin guidance for JLG implies a decline in percent margins versus the second quarter yet the revenues are going to be ramping up is that mix reverses effects impact becomes quite significant or your just again being conservative there?

I think you do have some mix issues going on year-over-year currency is not going to be quite as much and we do expect we will see some steel impact there in the second half of the year.

What are the comments that did not get made an aerial margins was any benefits coming from the cost cutting efforts as you rationalized product lines and so forth were are we on that part of margin story?

Terry this is Charlie yeah we expect to hit our synergy targets over the three year period. We just hired a new chief procurement officer as you know about three months ago he's on boarding and going to be a great chance for us. And several long return we think that's there. It will hurt to see it when you see steel pricing going up but we are generally on track.

Okay, and I guess just to ask you that... that extend your discussion of the raw material price trade off to give addressed into sense if think about fiscal '09 and number of other businesses it would seem to me that you would have to get little more aggressive on pricing in order to match the margin comparison further from here and probably your other three businesses. How should we think about your confidence level as you move into fiscal '09? And some of these businesses and being able to offset those pressures.

We are thankful that our backlog isn't real long right time on a historical basis and we are going to be looking at aggressive price increases in every market. You just can't see steel prices going up like they have and not react aggressively.

Okay. And then lastly can you just remind us raw materials as a percentage to total cost of goods?

70%:

Thanks very much.

Our next question comes from Walt Liptak with Barrington. Please proceed with your question.

Hi thanks and good morning Charley and David. My question I guess relates to the pricing and the 2010, the mission is changed and similar there are really weak markets like concrete placement and other commercial are you going to be able to get price and do we see order dropping off and then picking up before the 2010 the missions change. How are you thinking about their and what your customers telling you.

I mean... I guess the much of your question... the question is, we are going build increased prices in this kind of weak market. We are going to increase prices and it just effect... we are going in a need to. As steel is going up and it just an imperative.

Okay. How are you about the 2010 mission's change are you expecting a pre buy in your various product sectors?

Yeah we are, we are expecting a pre buy the strength of the pre buy is yet to be determined and this there they cross anything that's on a heavier preload [ph] diesel driven engine and chase your going to see some pre buy.

Okay how much do you expect this the chasis are going to be going up as a result of the missions change?

[indiscernible] we cant predict it and if there is better question ask of the OEMs.

Okay, Okay thank you.

We have a follow up question by Alex Blanton. Please proceed with your question. Alexander Blanton - Ingalls & Snyder: Okay could you give us an update... one question update on the caterpillar and European business how its because that's the European [indiscernible] business you didn't have anywhere near the position you have in the US or how is that going in the caterpillar business.

The market share in European is strong, stronger than it was so this positive, we are launching some new products there in that direction that should help this business even further. Alexander Blanton - Ingalls & Snyder: Okay well what your business in European relative to last year the total you gave is outside US is of 100% but can you break it down a little bit into Axis versus APW versus.

Well I am not going to give you a lot of detail there. But I can tell you that our Telehamer business is up Europe and so basically on a same sought magnitude is your raw business. Alexander Blanton - Ingalls & Snyder: Yes, okay. Thank you.

Operator we have got that time for now one more question, okay please.

Okay. Our last question is from Seth Weber with Banc of America. Please proceed with the question.

Yes, good morning everybody.

Good morning, Seth.

Just a couple clarifications was the large areas in the U.S. market up this year this quarter, sorry?

In the--

It booms.

It is very strong right now.

That's up in the U.S. market?

Let me worry.

And then, when should we think about the re buy and the concrete your weakness when does that to analyze. As once the comps be not quit so dramatic.

Yes, I think you seen some another truck in the third quarter of that last majority in the first quarter.

Okay, that's--

I am sorry for concrete business.

There buy on the commercial side.

There are kind of all, doing the concrete is benefited obviously but the pre-buyers.

We expect actually on the second half in the fiscal year

And just, last question on the pricing commentary aggressive facing on the area business, I mean how can you just start conceptually you know how you put that in place in how quickly that can help you. Is there some you don't have the strategy to replace backlogs as this is something if you could price in place of the next couple of months it helps turn the fourth quarter or is that leading to next year may be?

We haven't worked out the detail till now increases conference call so we are looking at it but we are basically looking at... if we have already because in some markets we have increased prices we will be looking at price increases in the third quarter.

I would like to turn the call back over to Management for closing comments.

Okay. Thank you for your question and your time this morning and we are going to continue to drive this company forward. And again we are pleased with the results we have this quarter keeping our estimates firm for the year but we have challenges out there, but that's what makes life interesting and that what we get paid to do. Have a great day thank you.

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your line at this time. Thank you for your participation.