Oshkosh Corporation (OSK) Q3 2008 Earnings Report, Transcript and Summary

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

Thanks, Doug. Good morning, and thanks for joining us everybody. Earlier today, we published our third quarter results for fiscal 2008. A copy of the release is available on our website at www.oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation also available on our website. The audio replay and slide 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 as 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 fiscal 2008 second quarter earnings conference call on May 1, 2008 and updated certain figures on June 26, 2008. On June 26, we announced that we would be recording asset impairment charges of approximately $175 million at our European refused collection vehicle business. The actual amount of the impairment is $175.2 million pre tax and $173.1 million net of tax. Unless stated otherwise all figures and data that we discuss today, will relate to our performance excluding the non-cash asset impairment charges. For the purposes of our discussion today, we believe that excluding impairment charges is the best way for you to participants on this call to better understand our operating performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in the last slide of our presentation as well as in our earnings release; both are which available on our website. Presenting today Oshkosh Corporation will 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. 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 are during the EAA program here in town. So if you hear your jet circling, we are in good shape with that's what's going on here today. On June 26, we pre-announced much of what we will discuss today. We know that some investors were disappointed with our preannouncement, but order activity in our European access equipment business didn't reach our expectations in June. And that was compounded by late multiple order cancellations in the region. Despite that situation in the third quarter, we delivered nearly 30% sales growth in our European access equipment business and 27% operating income growth in the segment. This drove consolidated sales by nearly $2 billion and operating income of just over $180 million. While operating income was down about 6% from the prior year, our domestic non-defense markets were generally estimated to be down anywhere from 10% to 70% through the first nine months of our fiscal year compared to the same period last year. So in that environment, our teams delivered a solid performance in the third quarter and probably gained market share in a few product lines. As we said on June 26, we expect our fourth fiscal quarter earnings per share to fall below our previous estimates from May 1st, 2008 and from prior year performance. Essentially, we expect modestly improved performance in all segments, except access equipment in the fourth quarter. We expect fourth quarter access equipment sales volumes to decline in several Western European countries as those economies start to slowdown. Coupled with the North American access equipment downturn that we believe to face... that we faced earlier in the year and still another cost increases baring down on us. We now expect much lower access equipment operating income in the fourth quarter. This drives our earnings per share estimate range of $0.50 to $0.65 for the fourth fiscal quarter and $3.15 to $3.30 for fiscal 2008. Despite the signs about these market weaknesses in access equipments, we have been realizing strong independent rental company orders in North America and pockets of order strength globally that should help us manage through the current downturn. And we will continue to challenge our team to deliver market leading performance. Because sales curtailed late in the third quarter, we had a little bit more inventory than planned at June 30th. But we were still able to pay down nearly $80 million of debt in the third quarter. We've adjusted our production rates to match current demand levels, which should permit us to generate additional free cash flow over the next six months. Please turn with me to slide 4. During these challenging times, we are managing the business primarily to mitigate difficult market conditions to aggressively drive cash flow for debt reduction and to invest in the limited number of initiatives that will strengthen the business for the next up cycle. We are actively engaged in a comprehensive set of activities designed to improve our cost structure across the entire company. Teams throughout the company are working to make significant reduction to our operating and overhead expenses. We expect these actions to be completed by mid September, so that when we enter fiscal 2009, we'll have a much more competitive cost structure. In November, when we provide fiscal 2009 estimates, we will quantify these reductions for you. We are also aggressively pursuing lower cost sourcing initiatives to offset some of the cost pressures we are seeing today in our business. While it is still relatively early, we are pleased by the results of our recently inactive prices increases in our foreign emergency and commercial segments and expect these increases to greatly reduce the impact of rising material costs. In the access equipment segment, it's too soon to assess the impact of price increases that will take effect on October 1st. But we do know that other competitors have also announced price increases. As we mentioned on our call in late June, we are implementing an aggressive plan to reduce debt and primarily focused on driving down excess inventory and reducing working capital. We believe debt reduction is our best use of cash at this time and we will continue to look for opportunities to reduce our debt. While we are focusing on cost reductions and cash flow generation. We remain committed to prudent investments and growth initiatives. Many of those initiatives are expanding our business globally, and you are seeing the results in our international sales growth over the last 18 months. We expect to share more with you as these initiatives gain more attraction. Oshkosh Corporation is a strong and resilient and company. We have leading brands and leading market positions in almost all of the markets, in which we compete. And while we face weaknesses in several of our markets, we remain focused to more execute on our business plans to mitigate the near-term set of challengers and build the strong foundation for when this economy recovers. At this time, I'll turn it over to you President, Charlie Szews to discuss details on each our segments and review several of our operating highlights and challenges. Charlie?

Thanks Bob. The operating teams are after the challenges and we will do our best to deliver market leading performance in this environment. Let's talk about some of those highlights in most recent quarter. Please turn with me to slide 5, and we will get started. LJG continue to perform very well on most international markets in third quarter. The strong performance across most of the Europe, this segment led the way in the quarter by increasing sale, operating income and operating income margin compared to prior year. Sales in Europe were up nearly 30% in the third quarter, despite weakness is related in the quarter. While we expect demand in Spain, U.K. and France to remain soft in 2009, we believe that our European business will be supported into 2009 as pocket for strength in Western Europe and continued demand across Eastern Europe. On June 26th, we described how the large rental companies in North America has informed us of their intentions to further decreased purchases for the remainder of calendar 2008. Our sales efforts with the independent rental channel are helping offset softness with the large national customers. In the near term, we expect weak residential and non-residential construction spending to limit our sales in North America. Although, we continue to experience strong demand for certain products such as larger ultra booms. We are also driving growth with our ground support aftermarket initiative. JLG products are designed to be remanufactured, and more customers are recognizing the benefits from remanufacturing, especially as steel prices escalated. Emerging market for access equipment like Russia, the Middle East, Latin America and Asia remain solid due to strength in commodity pricing in infrastructure projects and are becoming a larger part of JLG's overall business. As Bob mentioned, we are focused on improving our cost structure and are aggressively implementing plans addressed that we believe will be softer market conditions for the segment in the near term. We announced plans to reduce our hourly and salary workforce a JLG by approximately 600 positions; most of those reductions have already occurred. We have also adjusted our production schedules to track more directly with demand as we work to reduce inventories and convert working capital into cash. Our new pricing at JLG takes effect worldwide for orders received beginning October 1, 2008. We expect this action this will begin to mitigate the impact of the cost increases we are experiencing. We believe we will receive limited benefit from the price increase in our first quarter of fiscal 2009. But we expect to substantially cover our cost increases with these higher selling prices by early calendar 2009. Please move with me to slide 6, and let's a take a look defense. The defense segment posted a very strong quarter as both parts and service revenues, and truck production increased. We are experiencing lower margins in this segment as negotiated margins have been lower under recent contract renewals. But this is not a change from our outlook over the last year or so. The segment's solid backlog in recently approved federal funding request give us confidence and visibility through fiscal 2009 and provide a solid foundation for fiscal 2010. The approved supplemental budget includes more than $2 billion for Oshkosh products and is focused mainly on our family of heavy tactical vehicle, for FHTV products. I should remind you though that this one is very fluid and subject to reprogramming and sales put under contract. We moved some vehicle production from our south plant location to our Harrison Street, our locations during the last six months. Both of these facilities are located in Oshkosh. This capacity expansion was executed great skill as our operations team; we can figure the insight of the 300,000 square foot Harrison Street facility to support the increased demand for military vehicles into fiscal 2009. Finally, we talked with you with you at length in the last quarterly earnings call about the joint light tactical vehicle or JLTV competition. The timing of the down flick of this program is moved back to sometime in late summer or possibly into the fall. I should remind you that production plans are not likely until to 2012 or 2013 that could commence as early as 2010 or 2011 that bought urgent requirement in the technical capabilities of technology development vehicles warrant the modification to that timeline. Please turn with me to slide 7. Soft markets continue to impact most of our fire and emergency businesses. We are pleased that our fire... our Pierce fire apparatus business continues to outperform in a tough market. The strength of our new product launches over the last year and a half is really beginning to payoff as we have had significant orders for velocity and Impel chassis, as well as for the Pierce Ultimate Configuration or PUC. We do have some start up production inefficiencies for these models that we are working through, but that's expected. Overall, this business is performing well in a down market, and gaining several share points in the most recently announced quarterly market share data. 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. Higher fuel prices and economic weakness have negatively impacted our towing and recovery business. But changes in Medicare reimbursement rates continued to address the impact sales of our mobile medical trailer units. There is several cost reduction initiatives underway to improve the profitability for both of these business. Please turn the slide 8. Despite the asset impairment charges that we announced last month, we are making progress at Geesink. We have worked to aggressively reduce our fixed cost structure in this business. And while we continue to experience inefficiencies in the third quarter related to the start up of production of our Norba branded units in our Netherlands facility. We believe this business will have significantly improved results in fiscal 2009 as the new leadership team makes progress. As we previously described, the U.S. country mixer market is anemic with industry volumes down roughly 70%. Our team has increased international concrete mixer sales by over 40%, to partially offset of the domestic downturn, the debt not enough to avoid losses in the business. Hence, we do not expect significant revenue growth in this business and for the broader U.S. economy in construction markets improving mid 2009 or later. We continue to work on lowering the cost structure in this business, so we can remain profitable with weak markets. We've been pleased with the performance of our domestic refuse collection vehicle business in a weak economy. We expect sales in this business to be up in the fourth fiscal quarter as we realize the benefits of several quarters to strong orders. We are particularly excited about the potential for growth in compressed natural gas powered refuse vehicle. We've recently won a competitive bid for 58 of these units for Brook units [ph] in New York. At this time, we do not expect a significant pre buy for either the concrete mixer or refuse collection vehicle product line to ahead of the 2010 engine emissions centers changes. But we do believe that these powers will order higher levels in 2009 as they work to reduce speed age. And before I turn it back over to Dave to discuss our financial results, I'd like to reinforce Bob's comments earlier about our commitment to cost reduction and cash flow generation across the company. We are proactively reducing our cost structure, our inventory levels and our working capital at corporate in all of our segments. We've already begun these actions, and we expect to update you on our progress during our next quarterly call. Dave, you can take us from here.

Thanks Charlie, and good morning everyone. Please turn to slide 9; consolidated net sales of $1.97 billion for the third quarter of fiscal 2008 were up 6.6%, compared to the third quarter of last year, led by defense and access equipment sales. Operating income decreased by 5.9% to $181.2 million, with our operating income margin lower this year at 9.2% compared with the last year. Margins were lower in all segments, except access equipment. Earnings per share decreased 1.7% to $1.19 per share. Earnings per share exceeded our June 26 revised estimate range, largely as result of the timing of deliveries between the third and fourth fiscal quarters, particularly in international markets. Although we began to experience some impact from rising steel costs during the quarter, we expect that the impact will be much more pronounced beginning in the fourth quarter. Finally, we were able to pay down $78.6 million of debt in the quarter. This is a greater reduction than we had previously expected on June 26, due to strong cash receipts in the last few days of quarter. Now let's take a look at the each of the segments in detail; please turn to slide 10. Access equipment sales were $920.2 million in the third quarter, up 5.3%, compared to the same period last year, driven mainly by strength in our international markets. Higher area work platform sales in the Europe, foreign currency movement, and higher aftermarket sales around the globe provided much of the revenue growth in the quarter while telehandler sales declined in all markets. Segment revenues in Europe were up almost 30% with approximately half of the increase due to favorable foreign currency exchange rates, but down in North America about 5%. The segment recorded operating income of $125.2 million, up 27.3% from the prior year quarter, and an operating income margin of 13.6%. Operating income benefited primarily from favorable foreign currency exchange rates, higher parts and service sales, as well as favorable product and customers mix. Backlog for access equipment was $574.5 million at June 30, 2008, which was down 51.7% compared to June 30, 2007. And down slightly from March 31, 2008. The decrease in backlog is largely the result of large block orders placed in the prior year, the weaker economy in the U.S., and weakening markets in certain parts of Europe. Please turn to slide 11; defense segment sales in the quarter were $489.5 million, up 30.1%, compared to last year's third quarter, on continuing strong demand for new trucks and significantly higher aftermarket parts and service sales, as a result of higher armor kit sales. Operating income grew slightly from $65.3 million to $66.5 million. Operating income margin for the quarter in this segment was lower as we expected at 13.6%. As a greater percentage of this segment sales this quarter came from truck shipments, under the FHTV contract that was renegotiated last year. Higher product development costs also contributed to lower margin this quarter compared to the comparable quarter in fiscal 2007. Backlog in this segment was $1.36 billion at June 30, 2008, down 21.9%, compared to the end of last year's third quarter. While the President signed the 2008 supplemental into loss several weeks ago, orders for many of these requirements will not be in backlog until late fiscal 2008 or early fiscal 2009. Please turn to slide 12; turning to a fire and emergency, sales decreased by 3.1% to $281.3 million, compared to prior year's third quarter in a challenging environment. While sales for Pierce and import products were up modestly, we experience softer sales at JerrDan and Oshkosh specialty vehicles for the reasons Charlie noted. We also experienced the shift in timing of deliveries at our European fire apparatus subsidiary from the third quarter to the fourth quarter. Operating income in this segment declined 38.2% to $17.9 million or 6.4% of sales compared to prior year quarter, due mostly to lower volumes at certain businesses in this segment, product mix and a work stoppage at our fabrication facility, that has since been resolved. Compared to prior year, the fire and emergency backlog was up 10.3% to $669.1 million on June, 30 2008, due largely to higher fire apparatus backlogs. Please turn to slide 13; commercial sales declined 7.3% to $294.5 million, compared to last years third quarter due to ongoing weakness in the U.S. residential construction market, as well as the overall weak domestic economy. Revenue was up for both our U.S. and European refuse collection vehicle businesses, but the increase did not offset the declining concrete placement. We recorded an operating loss in this segment of $6.2 million in the third quarter. The loss included an operating loss of $12.5 million at Geesink during the quarter. We continue to experience inefficiencies at Geesink related to the relocation of Norba branded production from Sweden to the Netherlands. We're making progress addressing the through put rate, and we expect that efficiencies will improve significantly as we head into fiscal 2009. Unfavorable foreign currency movements along with higher material and warranty costs also affected Geesink's performance this quarter. Backlog for the commercial segment was up 11.6% at June 30, 2008, compared to June 30, 2007, due to strength in domestic refuse collection vehicle orders. Please turn to slide 14, for a review of our guidance for the full year fiscal 2008. All comparisons are to our fiscal 2007 actual results. On a consolidated basis, we are estimating total sales of $7.03 billion to $7.1 billion, an increase of 11.4% to 12.6% over 2007. For access equipment, we are adjusting our revenue expectations to a growth of approximately 20% for the full year. This equates to a sales decline in the fourth quarter of approximately 20%, compared with the fourth quarter of 2007. Reduction in our outlook compared to our May 1, estimates is based primarily on recent slowdown in Western Europe, and some ongoing weakness in North America. We expect that North American sales in the fourth quarter will be down more than 30% compared with last year's fourth quarter, with European sales expected to be down slightly. We are increasing our expected full year sales growth rate for defense to approximately 35%, driven by both our vehicle and parts and service businesses. For fire and emergency, we expect full year revenues to be up slightly, compared with 2007 results. This reflects strength in our Pierce fire apparatus and airport products businesses, offset by weakness in our towing and recovery, and mobile medical product lines. Finally, we expect that commercial sales will be down approximately 15% for the year. This decrease is driven by a weak concrete placement market, which is being impacted by the previously discussed U.S. residential construction market conditions, as well as the remaining impact on current year demand of the pre-buy ahead of the 2007 engine emission standards changes. Turning to slide 15, let's review our operating income assumptions. We are reducing our expectations for full year operating income to a range of approximately $560 million to $575 million. This implies the consolidated operating income margin of 7.9% to 8.2%. We now believe the Access Equipment margins will improve by 80 basis points to 100 basis points over last year. This implies a lower than previously estimated fourth quarter operating income margin, which is driven by expected lower sales volume, and the impact of raw material cost increases before recently announced price increases in the segment take effect on October 1. We estimate the defense margins will decline by a range of 330 basis points to 350 basis points, reflecting a higher percentage of sales under certain of our lower margin programs. As we said previously, if we receive a JLTV technology development contract in fiscal 2008, we would 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 150 basis points to 170 basis points in fiscal 2008, due largely to weakness in several of our businesses in this segment. We expect our commercial segment to incur an operating loss for the fiscal year of 2.5% to 3% of segment sales. The decrease in margins from our previous estimates is mostly due to expected lower results at Geesink. We now expect corporate and inter segment elimination expenses to increase by approximately $20 million in fiscal 2008, down $5 million to $10 million from prior estimates due to lower estimated incentive compensation, and an increased focus on cost containment. Turning slide 16, let's take care of few more P&L items. We estimate our interest expense will be approximately $215 million. We estimate our full year tax rate will be 34%, expectations for equity and earnings have increased to a range of $8 million to $8.5 million of income. Finally, our estimate for average shares outstanding is $75 million for earnings per share calculations. Finishing up with slide 17, as we mentioned in our press release and earlier during the call today, we have reduced our full year fiscal 2008 outlook, to an EPS range of $3.15 to $3.30, including a range of $0.50 to $0.65 earnings per share for the fourth fiscal quarter. Our current capital expenditure estimate for the year is $85 million, and our debt estimate for the end of fiscal 2008, is between $2.85 billion and $2.9 billion. This is higher than our previous estimated debt balance at September 30, due to lower earnings and higher working capital levels. We've received enquiries regarding our debt levels and our ability to comply with the financial covenants contained in our credit agreement. The financial covenants contained in the credit agreements, specifically exclude the impact of write-downs of intangible assets such as write-down of Geesink. And as of June 30, 2008, we are in compliance with all of our financial covenants. If we determine that our estimated earnings and debt levels will be such that it is likely that would violate the financial covenant, we would seek a waver amendment to our credit agreement, in advance to avoid any violations. Amending our credit agreement would likely result in the payment of significant upfront fees as well as higher interest rates. I'll turn it back over to Bob for a wrap up before the Q&A. Please turn to slide 18.

Thanks a lot Dave, and Charlie and Pat. While we're not able to provide details and comprehensive estimates for 2009 at this time, I would like to make a few high level comments about our next fiscal year, which should help you understand our company and our outlook a little better. Let's take a look at each of our segments please. Our defense business is solid, and we expect to grow the top line in 2009. We expect this business, because we have contracts a healthy backlog, and a recently signed supplemental spending deal that funds this business into our fiscal 2010. We also know that we have a strong and capable group that services our defense customer, and they quite frankly are the best around. Quite simply, our Oshkosh builds the best medium and heavy payload tactical military vehicles in the entire world. We believe there will be continued need for replacement and remanufacture of our vehicles, due to the conflicts in Iraq and Afghanistan, as well as general wear and tear. We will do everything in our power to continue to be as responsive as we can for our customer. We expect the operating income margins of this segment to remain under pressure in fiscal 2009 as we continue to negotiate new contracts with the U.S. government. Our fire and emergency businesses are already facing weak end markets, caused mainly by low municipal tax receipts that are driving weak municipal spending. We have the leading brands in our markets, and we are the new product innovators. Even if municipal spending weakness persists, we believe that the segment can weather the storm. At this time, we expect flat to slightly lower sales and operating income in this segment next year. It is generally the nature of these businesses that they don't grow too rapidly in strong markets, and they don't decline too rapidly in weak markets either. Our commercial segment should benefit in fiscal 2009 from strong domestic refuse collection vehicle orders. When you add this to our expectation that our European refuse collection vehicle business will deliver significantly improved results in 2009, the other potential for solid turnaround of profitability in the segment. We expect our North American access equipment sales to remain under pressure in fiscal 2009 as most forecasters are expecting soft construction markets into calendar '09. In Europe, we expect growth in Eastern Europe while certain western European countries will likely be weak. Additionally, we expect our sales to grow in Latin America, the Middle East, and Asia in fiscal 2009. Overall we anticipate that segment sales will likely decline, but we are the industry leader and customers tend to consolidate their purchases with the industry leaders in times of uncertainty. So, we expect to deliver market leading performance in 2009. It's too early to estimate the full impact of cost increases and product line selling price increases on the segment's performance. To that end, we will be in better position to provide more definitive commentary in several months when we announce our fourth quarter and full year results. Many, many businesses are facing economic headwinds like here at Oshkosh. I have absolute faith and our people remain strong and that we'll emerge from these challenges as a stronger and more robust company. We are taking these actions necessary to optimize our performance. Oshkosh has a long proud history of creating shareholder value, and we will work hard to disown the future. With that, I'll turn it over to Pat, and open it up for questions. Thank you.

Thanks, Bob. I'd like to remind everyone to limit their questions to one plus a follow up. And please avoid the questions with multiple sub parts as it makes it very difficult to ensure that everybody participates. After the follow up, we ask that each participant get back in queue to ask additional questions. And with that, I will turn it over to Hugh Dough [ph]. Please begin the question-and-answer period of this call. Question And Answer

Thank you, sir. [Operator Instructions]. Our first question comes from the line of Walt Liptak with Barrington Research. Please go ahead with your question.

Hi, good morning guys.

Hi, Walt.

Hi, Walt.

My first question to... with regard to the guidance in the access equipment, you get the full year operating problem, I think that implies access operating profit in the 5% to 6% range. Is that about right?

That's directionally correct, Walt.

Okay. Where did margins bottom out in the last recession for JLG? And it looks like you your under-absorption issues are pretty significant, I wonder if you talk about them.

Last downturn it's... it was similar to the range that we're looking at in Q4, Walt. And a couple of things going on here. Obviously we've mentioned that we do expect steel impacts to be more significant in the fourth quarter. And without the benefit of the price increases being in effect in that quarter, we're going to experience more of that. That's probably, 250 basis points to 300 basis points here that... it's... eventually will go away as our pricing kicks in. So, that's one of the drivers. You're right; we do have some absorption issues that are impacting that with the lower volumes as well.

And then Walt, there are costs of similar to the... cost reductions that we're implementing as well.

Okay. So, on the price portion of it, in 2009 that marginal benefit from the 250 basis points to 300 basis points, do you expect more under-absorption in '09?

We haven't given an outlook on the volumes for 2009 other than Bob's comments earlier here that we do expect sales to be down a little somewhat. So, there would be some absorption compared to the full year 2008.

And our cost reduction activities that we're implementing now, are attempting to address that.

Okay. Do you think that the fourth quarter access equipment operating margin is going to be the bottom, or do you think they can go lower than they did last... in the last rescission?

I got... don't know whether we're our prepared comment on that, Walt. We're still working on our numbers for next fiscal year.

Okay. I'll get back in queue.

Our next question comes from the line of Jamie Cook with Credit Suisse. Please go ahead with your question.

Hi, good morning. Just a follow-up on Walt's question. Charlie, I mean, are you... what has been your customers response so far on the access equipment side with the price increase announcement? I think your competitors said you put up of 7% or 7.5% price increase. So, I'm just trying to get a feel for, I know it's not until October, but whether you'll be able to pass it all through or how you're seeing that impact on the sales?

Sure. On June 26, and we pre-announced Jamie, we actually announced the 7.5% price increase at that time to the street. So, that's when we first talked about it. But generally, the customers base as I understand it, understand the price increase. They're seeing across multiple product lines, at the rental company. So, this is certainly not a surprise. And we delayed the increase a little bit given the inventory situation that we saw in the marketplace. But, we would expect that we would start to see it benefit from the price increase in their first fiscal quarter, which ends in December. And starting in the second fiscal quarter, we expect a substantial benefit from that price increase.

Okay. And then, when do you expect to realize, I mean, just in terms of modeling purposes, for the cost reduction efforts I'm assuming we'll begin to see that within the access equipment market... the access equipment segment within the first quarter of fiscal year 2009?

Absolutely it's all... will be effective no later than mid-September.

And then just, follow-up and then I'll let some else queue in. But Charlie, based on what you are seeing, the concern here on your stock is obviously the access equipment, and whether margins get cut in half. Based on the cost reduction efforts, your ability to pass their price increases, it would be conceivable that you could have a margin in the access equipment market in the high single-digit range? Is that inconceivable at this point?

I don't know if I want to talk about what conceivable or inconceivable, but...

Charlie, I think you're pretty good forecaster.

The actions we are taking are significant, that's about all I can say.

All right. I'll get back in queue.

Our next question comes from the line of Terry Darling with Goldman Sachs. Please go ahead with your question.

Thanks. Bob, I am wondering if recognizing you're not going to give us a formal '09 forecast, but you've given us a number of the pieces here. I am wondering if you'd be able to tell us whether your ascent at this point is that your earnings will be up or down, is directional indicator on your part of this one in '09.

Well, as we stated earlier, we are not going to be coming out with firm '09 until we talk in November. We currently continue to work on our budgets that we submit to our directors in early September. And then we've got a lot of activity going on. I can tell you though that we will have a much more competitive cost structure, going into the new fiscal year, which starts at 1st of October, than what we have today. We are doing a lot of work in all the segments from procurement to looking at SG&A, to looking at what we have in our facilities to make sure that we have ultimate utilization of what we're doing. So, that's all I can really say at this time.

Understood. Bob, I am wondering though if you might be able to give us a range on the cost savings targets that you have, even if it's a very wide range, across the company.

The only thing I can tell you today is I think people know us from the past and what we did in this last recession 2002, 2003. What we're going to be doing is significant.

And then lastly, you had mentioned in the defense business, modestly lower operating income margin expected for next year. Can you help us qualify what modestly is that less than 100 basis points, more than 100 basis points? And is that just continued mix driving that or is there something else there?

Again, we'll give more details on that in November. Our defense business continues to grow. We continue to do a lot of remanufacturing. We are doing more work over in the theater [ph] today, also in Afghanistan. And the new LBSR. We are building the prototypes this year that starts the production next year. And then we continue to have our figures crossed on the JLTV. We should hear about that perhaps this summer or late this quarter with our partners and we hope to be one of the two or three down selected in that. It's a great business for us. And the supplemental for last several years they been unprecedented. But we are under some pressure with margins, because we are now negotiating another new contract on the heavies.

Now, Terry, we just commenced discussion on our FHTV contract renewal this week. And so this is difficult for us to project those negotiations as we speak today.

Appreciate that. Just a modestly lower comment include additional cost for JLTV programs?

It doesn't assume an award or not assume an award of the technology demonstrator contract.

Thanks very much.

Our next question comes from the line of Alex Blanton with Ingalls & Snyder. Please go ahead with your question.

Can you hear me?

Yes.

We can hear you.

My questions on JLG and wonder if you could discuss the market share against Europe that you've alluded to. You said you would, during this downturn, be able to take share for weaker comparators, which is the usual thing that happens in the sessions, the strong companies gaining. But can you put some numbers on that? I know that you getting much more business with the major mentor fleets in Europe since you acquired JLG than before, but can you just give us a little more detail in that?

Well, I don't know that we can do that. What we said was in the last recession that there are many of the larger customers, small customers for that matter would convert their fleet to the industry leaders, because part of their profitability equations being able to sell their equipment at some point the future and the residual value is just going to be stronger if you hold most of your fleet with industry leader. So there was a consolidation volume with them and so that did imply some market share gains in the downturn. And we are not saying today we are going to take market share in this downturn. What we are saying is that that was the history. And we are clearly the industry leader, and we would hope the benefit from that if it does reoccur. But to put numbers to it, it's difficult. In Europe, we had a great quarter. We've listened to the other competitors to release numbers and when you fetch out ForEx changes, we've really had a very good quarter. In Europe relative to the competition. Some of which had significant double-digit declines in rhyme or a single digit decline, so we did quite well.

Yes, Okay so it... yes the major competitor Genie in Europe are not doing nearly as well as you did. I wish if you would also comment on the seasonality in the business, because thee has been a conversation here on the call about the profit margins in here September quarter. Now JLG had an October quarter, so it wasn't exactly the same. But the October quarter was quite a weak one for them compared with the prior quarter. So there is a quiet bit seasonality in this business. And the margins that you're anticipating... correct me if I am wrong for your September quarter in JLG are likely compared what JLG used to get in the October quarter. But can we look forward another seasonal upswing in the first part of calendar... first half of calendar 2009. So to speak, the quarter is really incomparable. That's what I'm trying to say; isn't that correct? Could you discuss that?

Yes, you are right, they are not comparable. Typically the first fiscal quarter of '09 with the weaker quarter in the access equipment segment...

Your December quarter, right?

Our December quarter, because you've got the November and Christmas holidays, Thanksgiving and Christmas holidays in there that impact these available to shift. There is as much construction activities, so the rental fleet is still up there. You are so familiarly [ph] equipment during that time period...

Very low.

That would be weaker. You would see they start to pick up them in quarter ended March. Quarter ended June would be the big quarter typically. And actually ended September would be... maybe the second best or tied with the quarter ended March.

Okay. So I guess what I am saying is that or asking is do you think that you will see the same seasonal ramp up in '09 from what you are looking for in the September quarter.

Yes, I think there would be some seasonality to the year... next year. That also just depends on the strength of the broader economies globally.

Okay. Thank you.

Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please go ahead with your question.

Thanks my question was pertains to the fire and emergency segment. And your guidance for the fourth quarter and your top-line guidance implies a pretty strong up fourth quarter. And I am just trying to square that with the fact that you had two consecutive top line declines in that quarter. You are looking for flat-to-down top line in 2009. What's going on in the fourth quarter that makes that sort of and outlier in terms strength is the fact that we you've had a surge in some of the Pierce product that you don't expect to be repeated. Or is that the drag from towing and OSK lesson or go away? And if you could just talk about maybe sort of the impact that you are seeing from OSK and towing in that segment?

In the fourth quarter, what we looking for Pierce. Some of that's just the timing and in terms of when customers want their units. We've got a very large order in our airport segment for Beijing and China, snow units we anticipate delivering this quarter. And at BAI, our European fire truck manufacturer, we've got a very large order there as well. That's being shipped out in mass in the fourth quarter. So that's really driving the Q4 volume increase over Q3. In terms of the towing and recovery and OSV, those markets continue to remain weak. I think what you're seeing is towing and recovery last year fourth quarter was weak. So that there is a little bit of easier comparisons year-over-year. So that's not detracting as much in the fourth quarter as you may have seen in previous quarters, and similar with OSV.

Thanks.

Our next question comes from the line of Robert McCarthy with Robert W. Baird. Please go ahead with your question.

Good morning everybody.

Good morning.

Clearly you've had some non-recurring expenses in the third quarter; it sounds like you'll have more in fourth quarter associated with right sizing the business. Can you give us some idea how large those expenses are?

Rob, we are still are obviously finalizing the plans for the cross reductions. As Bob and Charlie both indicated, there will be significant cost reductions. Charges for those are probably in the range of between $0.05 and $0.10 a share in the fourth quarter; we haven't finalize those yet, because we haven't totally finalized the plans, but that's a range.

And how large in the third quarter?

Actually in the third quarter for the cost reduction initiatives, they were not significant.

Okay. Secondly understanding... well, no, I shouldn't say that I understand it. But you made it clear that you don't want to comment even directionally on your earnings expectation for '09. Can we secure from you a directional comment on your expectations for debt reduction in 2009 compared with the $150 million to $200 million that you now estimate for this year?

Obviously, we got a very high focus on that Rob. We do think it will be more than this year and hopefully quite a bit more than this year.

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

our next question comes from the line of Steve Barger with KeyBanc. Please go ahead with your question.

Hi Good morning. Given the strong growth, the JLG has seen over the last six to seven years and the roll up that occurred during that time between you and your main competitors, it kind of seems like we are in uncharted water with respect to what the downturn actually looks like. So, is there any way you can frame up your comment regarding lower expected total revenue or give us a lower about what you are thinking? Is it closer to 20% or 50%?

Well, I do think you are right Steve, with the remark. And it's a little bit uncharted water, but what is different this time around is that the global key to the business is much greater. It was just under 50% of sales in the current quarter for JLG. So, global is just as a bigger piece of pie. We are still expecting that global sales to be quite strong in the fourth fiscal quarter and somewhat the wildcard is where the global access equipment market going, and that's what different. Right now those certainly their pockets we can feel being very strong next year, because the commodity prices are strong and there is an infrastructure project are strong and a lot of markets, the access equipment market will be there within.

Okay. But now kind of even directional sense in terms of the magnitude of the decline?

It's bit early for us. We'll have more to say in November.

Okay. And then just one quick one on defense. You talked about there being $2 billion of supplemental defense budgets with Oshkosh products, but that that is in firm. Historically what's been the variance between early numbers and actual conversion the contract or is that stable kind of ratio?

It's not stable; we normally get the money by allocation. Now we have lost $100 million to $300 million of it. So it's, until we get it under contract, you don't know. Obviously, we have teams of people working to maintain those numbers and bring them under contract.

But you don't typically see a 50% decline or anything like that?

No, no.

Okay, perfect. Thanks, I'll get back in line.

Our next question comes from the line of Seth Weber with Banc of America Securities. Please go ahead with your questions.

Hi good morning. Can you talk about... so these cost reduction initiatives that you are talking about for next year? Does that anticipate additional headcount reductions? And can you give us an idea where the 600 reductions already occurred? And then as a follow up to that, can you give us... can you quantify what your production cuts have been so far in JLG business?

We are looking at all forms of cost reductions and we'll be probably implementing all forms of cost reductions over the next few months. The 600 that we mentioned all related to our access equipment business JLG, they related to our global business. So it was North America, Europe across the globe and the 600 only related JLG at this time.

So that was also SG&A and production. So a combination already in [ph] salary.

Okay. And can you quantify that how much production you are taking out of JLG going forward here on a volume basis.

Not really, because obviously we have made adjustment year ago, when the North America telehandler market came down, so if you gave you percentages would necessarily be relevant. And we will give guidance in terms of fiscal 2009 volume in November.

Okay. And then as a just the quick follow up. How much of JLG business is actually in the emerging markets at this points, so excluding North America and Western Europe.

Some where around 5% to 10%. Closer to 10%.

Okay. Thanks.

Closer to 10%, Seth.

Okay, thanks very much guys.

Our next question is a follow-up question from Walt Liptak. Please go ahead with your question.

Following up on that the last question; the 600 employees, what is the percentage of the JLG work force that that represents?

From the... little north of 10%, 10% to 15%.

10% to 15%.

Okay. And Charlie, you mentioned the commentary that you thought that you're... the cost reduction that you are going through is the softer market conditions in near term. Does that mean that you think that there is going to be stability after that like in the... and what is short term, one year, two years?

We gave you some broad comments about 2009, so wouldn't call that strong period. So that certainly 2009 is near term is the period that we would expect the challenges. But eventually here we would expect the Georgian access equipment to be growth engine. As the global expands as emerging markets become greater piece of the global economy is penetration of rates grow in Europe as well as really outside North America. Generally, we would expect to see a growth engine for us.

Okay. And Dave you mentioned that, that in your commentary that there is going to be amendment fees or there would amendment fees and rates, but you didn't quantify. I wonder if you can talk to jut about the magnitude of what is going to take if you have to refinance or negotiate?

I really can't give you a number, what I understand is it's depended on market conditions. It's depended on what would be asked for in the event that's that a company would seek amendment. But I really can't give you a range.

Okay, thanks.

Our next question comes from the line of David Raso with Citigroup. Please go ahead with your question.

Good morning. My question is focused on your ability to pay down debt. Little disappoint in the level of debt reduction for fiscal '08. We used to spend $300 million to $400 million; now, overtime roughly a $175 million. But if you just think through how much you took your EPS down, but then the add back from that cut in your CapEx? It's not a huge cash flow hit and you do have over $600 million of finished goods inventory on the book, which I would think would specially if not raising the prices scenarios for months? Your ability to kind of blow that equipment on that I mean obviously this story is now about the balance sheet and getting the debt reduce. Why are we only looking at about $100 million of debt reduction in the fiscal fourth quarter. And how should I think about that then with your ability to pay down debt next year?

David, I guess couple of things. Obviously, the slowdown in Europe happened quite quickly as we previously talked about. We do have excess inventory, a lot which is residing in our access equipment segment. We are working aggressively to reduce the inventory. Unfortunately, it just isn't going to come out overnight I think it will as we mentioned better cash flow generation over the next six months. I think you will see significant inventory reduction come out in our fiscal first quarter of '09 would be my expectation. Also in the fourth quarter, we do have some timing issues I think related to significant government payments that can be a little bit lumpy and they are going to be a little lower in the fourth quarter than they were in prior quarters. Part of that's due to timing of giving the supplemental signing, getting those under contract. And if we do sign the FHTV contract with hope to the larger performance based payment a company there. So that we could in sign in September, October. It is very difficult for us is to make exactly, when it get signed, but there will be a cash confusion there. We can't tell you that in areas where we have excess inventory, we are not producing any of those products. We are only producing product lines, where we are strong continuing demands. So we shut off the inventory quicker I guess in those areas. And it really is... it's a question of how quickly we can run off the access inventory.

Yes, that's my next question. The composition of that inventory. If you had a lot of 19 foot business, I can understand the tough to move maybe at any price. But can you give us a feel for what is that finished good inventory looks like? I mean, needless to say, if they are all 80 foot booms or 100 foot booms, probably can move about a heck of a lot of easier and if it's a bread and butter product, that's really stuck up in inventory in different dealer a lot. Again I just trying to think here, taken ht production costs, you're laying the people off and these finished goods inventory, a lot of cash required to build them is already, eventually been spent. I would just think the inventory reduction should be not that challenging, but maybe a better feel for what is in that inventory, how much of a struggle should it be to blow that inventory out?

As you can expect, most of the excess inventory is in Europe, because that's where we had to pull back our expectations at the end of June, when we pre-announced. And that is the stronger of the markets for us presently. So, we would hope to build to blow that inventory out. But we can't give you a time frame right now. And... but, we can give you a commitment to drive down inventory.

And lastly the comment about significant costs, if you had to seek a waiver on the covenant and so forth. Can you somewhat quantify that, or what is significant representing in you amount?

It's really funny, that's for sure. The credit market conditions aren't very good as you know. And so, I think they are trying to exact higher pain out of people when they do have those kinds of instance than you might have seen two or three years ago. And... but it's the very fluid situation. We are not there right now, but we really don't want to speculate.

Okay. I mean, just some concept of I mean, significant, I'm just trying to think are we're talking about. $150 million, $50 million I'm just trying to get an idea, is there a material impact, besides assuming also obviously if hit with a higher rate.

Look, as Charlie mentioned and I've mentioned previous... it's very subjective to market conditions and what an ask would be in the event that would occur. And it's I just can't give a number.

I can appreciate that. Okay. Thank you very much.

Doug, we've got time for one more question. I will turn it back over to you.

Okay, no problem. Our next question comes from the line of Steve McNeil with GeneSense [ph]. Please go ahead with your questions.

Good morning.

Good morning.

Charlie, can you just remind us, the price increase you said, that you previously announced? Was it 7.5%?

Yes, for JLG, it was 7.5%.

I'm just curious why there is such a huge lag before that price increase is effective?

Basically, when we're not gathering all of our other businesses in those price increases that took effect within a month. In this business, we have pictures of everybody's lots around the world and what the inventory situation is like and just shout that we wouldn't be able to implement in the till October 1, and that was the timing that we gave to that price increase. But, we just had one of our major competitors in Europe said that they're not going to think about a price increase until January '09. So, it's a judgment call, we're implementing October 1.

Okay. Thank you.

Okay. We're obviously focusing on reducing debt, taking our inventories down and better balancing out our production plans to what we have orders out there for. And we're going to have a much more competitive cost structure going into the fiscal year than we have today. That's where we're focused on, that's what we're working on. And this team is going to make it happen. So thank you for your continued interest; and we're going to go back to work. Thanks a lot.

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