Good morning everybody, both here in Oshkosh and listening in on the web. My name is Pat Davidson and I'm responsible for investor relations here at Oshkosh. On behalf of our management team and all 13,000 employees of our company, I welcome you to Oshkosh's 2016 Analyst Day. We're happy to see so many familiar faces and we're equally as excited to see many new faces. Hey, we had a great time yesterday, didn't we? YouB know, the weather held out pretty nice, got the demo rides, got a chance to see technology. I hope you enjoyed your opportunities to interact with our team. I know they really enjoyed it as well. That was just the beginning. This could be a very exciting and invigorating morning and we have a lot we want to cover with you. Before I review the agenda, I'd like to go over some logistics.
Since it will be a full morning, we will provide adequate break time. We think we'll go till about 9:50A.M. or so Central time. At that point we're going to plan a 20-minute break for restroom, phone, etc. Will reconvene with our leadership team and our presentations followed by Q&A. We're targeting to finish somewhere around 11:30A .M. or so as we know that many of you have flights to catch as you head into the weekend. Finally, we request that you turn off your cell p hone ringers and limit the use of your mobile devices so that we can fully engage and discuss our strategy and outlook over the next several years. With that, I will quickly, quickly review.
Our Safe Harbor statement.
Our remarks today, including answers to your questions, include statements that we believe to be forward-looking statements. Under applicable law, these forward-looking statements are subject to risks that could cause actual results to be materially different. These results include, among others matters we've described in our SEC filings and some that you will hear today. We disclaim any obligation to update these forward-looking statements.
Good.
Also, as you know, our fiscal year runs from October 1 to September 30. For ease of presentation, today we are going to omit the word fiscal. We don't want to say it many, many, many times. Right? So when we describe a time period, for example, when we say 2016, we mean fiscal 2016 or when we describe the first quarter, we mean the first fiscal quarter. All right. With the housekeeping details taken care of, I'd like to run through our lineup of presenters. We'll kick it off with a presentation by our CEO Wilson Jones, who will share with you how Oshkosh is a different integrated global industrial. He'll describe our MOVE strategy and how it is evolving more value and he will discuss why we are well positioned for long term success.
He will also provide some background on the company and some of our recent successes before he turns it over to our segment presidents who will describe their businesses and share their outlooks. You'll hear from John Bryant on Defense, Frank Nerenhausen, Access Equipment, Brad Nelson on Commercial and Jim Johnson on Fire and Emergency. Our CFO Dave Sagehorn will discuss our financial outlook, our ability to generate strong free cash flow over the cycle and our approach to capital allocation before handing it back over to Wilson for a wrap up and Q and A. It is my great pleasure at this time to turn the meeting over to my friend and the leader of Oshkosh Corporation, our President and Chief Executive Officer, Mr. Wilson Jones.
Thank you, Pat.
Good morning everyone. I'd also like to welcome all who have joined us on the webcast today. We definitely appreciate your interest in our company today. We have our Chairman of the Board, Mr. Dick Donnelly with us here on the front row. I have to brag a little bit on Mr. Donnelly. He recently was recognized by the New York Stock Exchange Governance Awards as a non-Executive Chair of the Year. A great honor and well deserved, Dick. Thanks for being here with us today.
All right, let's get started.
Our goal today is to deliver to you a good understanding of our three key themes. First, we are a different integrated global industrial. How are we different? We'll show you today as we discuss our unique blend of businesses with a variety of attractive end markets as well as our differentiated approach to operating them as a cohesive integrated enterprise. Second, our MOVE strategy has been a big success and a true driver for the company. But we're not done. MOVE has much more to deliver. We're excited to evolve MOVE to include items such as a focus on reducing complexity, eliminating unnecessary cost and driving profitable growth through our simplification activities, as well as providing more value throughout the product life cycle with expanded aftermarket capabilities. And third, we are well positioned for long term success.
We will share with you today some of the many opportunities we have to drive shareholder value in the future. Now, before I go into these three key themes, we have several analysts with us today for the first time. So I'm going to provide some background on our company along with some of the results of our MOVE strategy. We are one of the world's most successful designers and manufacturers of specialty and vocational vehicles. And we've been at it nearly 100 years. While we have a rich history, we are young at heart and full of energy. We are ready to lead Oshkosh Corporation into its second century.
We help our customers perform their jobs.
More efficiently and effectively by supplying industry leading equipment to pour the concrete, raise the steel structure, support the electricians wiring the building, haul away the garbage and respond to emergency with our fire apparatus. And of course we are there to help our brave men and women in the armed forces with high mobility armor protected vehicles that allow them to safely perform missions critical to the success of peacekeeping efforts. For all these applications, we are there to support the work and do it right. We have four business segments with 2016 sales for each segment estimated to range from about $1 billion to nearly $3 billion. We have a nice mix of international business with more than 20% of our sales this year outside our home country the U.S. and we do expect that to move to a higher international mix in 2017.
I believe one of the special features of our company is the breadth of our product offerings and our industry leadership. We lead with No. 1 share position in nearly every industry in which we compete. Our brands are recognized in countries all over the world. Our combination of high quality and reliable products, market leading technology and innovation, as well as on site support and strong follow up contribute to our strong brands which leads to greater shareholder value. We introduced our MOVE Strategy in 2012 with notable success. MOVE represented a great leap forward for our team as we launched it across the enterprise for all 13,000 team members to use as we work to drive significant earnings growth and in a period of defining defense segment sales.
We set three-year targets for improvements in areas that we control such as product process and overhead cost as well as new product launches and we made great progress on these initiatives. Simply participating in the market recovery for each of our segments was also a big part of our MOVE Strategy. Now, a funny thing happened on the way to the recovery that you all know very well. Many of our markets were weaker and less impactful than most economists predicted. The additional impact of weaker energy prices and a strong U.S. dollar also took a toll. Despite all these headwinds, we were still able to grow our adjusted earnings per share at a 10% compound growth rate over the three-year period. These results were impressive when you consider the challenges faced by our defense team as they experienced lower U.S.
Department of Defense spending and saw the revenues decline by approximately $3 billion from 2012 to 2015. In spite of this decline, we still exceeded the earnings growth rate for the S&P 500 over the same period by approximately 300 basis points. So to summarize, despite the weak recovery, our team delivered some impressive results between 2012 and 2015. We were pleased when we started to really look in depth at some of the great things our team accomplished with move. Let's take a look. While the magnitude of the economic recovery was a disappointment to many, we gained share in both North American refuse collection vehicles and fire apparatus. Our teams went above and beyond when it came to improving our cost structure. In particular, we reduced our cost by approximately $200 million over the period from 2012 to 2015.
We've been executing cost reduction projects across the company in record numbers over the last few years as the culture of lean and continuous improvement continues to grow. We also introduced a large number of new products over the three-year period. You've heard us talk about several of these over the past few years, including the revolutionary two-axle Ascendant aerial ladder truck, the world's tallest aerial work platform, and the game-changing JLTV, just to name a few. We continue to expand our global footprint with new sales and service outlets as well as highly successful new products for our international customers. As you can see, MOVE has delivered for us. Now I'd like to pivot back to our three key themes. One, we are a different integrated global industrial. Two, MOVE is evolving to deliver more value. And three, we are well positioned for long-term success.
Let's go into greater detail with our first key theme, why we are a different integrated global industrial. Many companies can claim advantages from having diverse end markets and many can claim benefits from having integrated operations. But not many can point to benefiting from the best of both. As Oshkosh Corporation can. We believe this helps set us apart and makes us different from other industrial companies. In looking at the major drivers of our end markets, there's a lot of good news here. Defense is anchored by a number of strong trends. Construction is a big driver for our access equipment and commercial segments and it continues to grow. Now, it's not always uniform or linear, but building continues and many economists are predicting some level of growth over the next several years.
Municipal tax receipts have been in recovery mode and that means municipal spending continues to recover. Aged fleets are prevalent across many of our businesses and we've seen customers replace these older units as they seek efficiencies and safety enhancements that are not available when their equipment is simply too old. This driver of demand is often underappreciated at Oshkosh. We like to say in many of our markets. Age is our friend. Those of you who have followed us for any length of time know that we believe there are tremendous opportunities available for our access equipment in emerging markets. Penetration rates for these productivity and safety enhancing products have hardly scratched the surface in many of these countries. Finally, global population continues to grow and the trend toward urbanization continues.
We benefit as there are needs for equipment to build, maintain and support the infrastructure that comes with urbanization. Why do we like our mix of businesses? Our mix has helped us grow our company and improve our performance as well as weather some pretty challenging storms over the last two decades. I'm proud to show how our company has pivoted during a variety of economic and geopolitical conditions. We successfully navigated multiple recessions including the Great Recession in 2008 and 2009. We've captured increased demand for tactical wheeled vehicles by the Department of Defense, and we pivoted to capture the post-recession recovery in the North American access equipment market. Today we're ready to execute the next chapter of the Oshkosh story.
As our defense segment ramps up to deliver the initial JLTV production contract, let's take a look at the other attribute that positions us well for future success. Our integrated operations. There are a number of benefits we realize from having an integrated enterprise. Product similarities enable us to leverage engineering, manufacturing and purchasing support across the enterprise. When we couple this with our people first culture that drives our one Oshkosh mindset, it becomes a winning formula. First and foremost, we benefit from a structured and sharing approach among our businesses as we bring new technologies and new products to market. For those of you who are with us, last night you heard Rob Messina talk about this during the reception and I believe you really got the message as you toured our facilities and participated in our Innovation Room.
I do hope you enjoyed the afternoon yesterday, but think about what goes into our products and the innovative expertise in firepower that we bring to the table. Material science is essential to advanced application of protective armor in our defense business. When the opportunity arose, our defense team applied their specialized knowledge and expertise with materials to partner with our fire and emergency team. The end result is an industry first as we introduced the revolutionary two-axle Ascendant aerial truck to firefighters all over the world. Electrical systems, hydraulics, powertrains, as well as the ability to write and program the software that enables the whole package to work together in an integrated and seamless way, are other areas where we leverage technology across the enterprise to develop industry-leading products.
Our suspension technology is legendary in the military as the U.S. Marine Corps, MTVR, the M-ATV and now the award-winning JLTV all benefit from highly engineered versions of the proprietary TAK-4 independent suspension system. We take this off-road technology into other products as well, which you will hear about this morning. Finally, we bring all this knowledge and expertise together and deliver it at an affordable cost for our customers. That is where design-to-cost and effective resource planning comes in. Bottom line, another winning formula. That winning formula is front and center in our lean culture and philosophy. You know the lean journey never stops. Even though we're talking about in our operations section, we don't view lean as only applying to manufacturing. You saw key performance indicators or KPI metrics on display during your plant visits yesterday.
We use similar metrics in functional areas throughout the company. It's this kind of mindset toward relentless improvement that helps build a strong foundation to our success. Now, looking at capacity planning across the enterprise, our operations team applies a rigorous framework when they perform capacity planning in our facilities. They do this utilizing approach which is focused on manufacturing centers of excellence.
Our philosophy is to locate processes where.
We can perform them the most effectively from a cost and flexibility perspective. For example, we utilize our South Plant facility here in Oshkosh for assembly only while both our Kewaunee and Harrison Street facilities are welding and fabrication centers of excellence. This allows us to be nimble when utilizing available floor space in any of our factories to deliver improved performance with our intersegment manufacturing integration. Serving diverse end markets has the added benefit of providing a more stable investment platform for Oshkosh and its suppliers. Our procurement team has taken our supply chain performance to a whole new level as they work with our suppliers to leverage strengths and core competencies into competitive advantages for Oshkosh. VMI or Vendor Managed Inventory and SCRIP Supplier Cost Reduction Idea Program are two programs that suppliers commit to when they do business with Oshkosh.
We strive to take full advantage of Oshkosh's size and scale by utilizing an integrated enterprise approach to managing our entire supply chain. Approximately two thirds of our material spend is concentrated among vendors who supply more than one of our segments. We believe this allows us to leverage economies of scale and increase support from our suppliers. Integrated Logistics Management by taking an enterprise approach over the last three years, we have increased truck trailer utilization by 30%, thereby requiring fewer shipments and minimizing the marginal cost of freight per unit. What does this mean?
Well, it means we're shipping a lot less air and receiving a lot more valuable product with each delivery. Our global approach to materials management allows for implementation of standards for material packaging, movement and presentation to our internal manufacturing environment, as well as eliminating waste and improving quality and availability on the assembly line. Speaking of the assembly line, you saw these blue returnable containers on the line yesterday. These returnable containers are part of our lean material handling strategy. You know, true lean starts in the assembly area with our operators and assemblers and goes back through our internal processes all the way to our suppliers. This part of our lean strategy promotes standardization of container sizes and quantities. Parts shipped from the supply base are line-side ready and the waste to repack is eliminated.
In other words, we handle the part one time and one time only. A lot of positives around this strategy. We achieved price reductions from eliminating the cost of expendable packaging. We reduced transportation costs to improve stackability and better trailer utilization. Everybody benefits from reduced waste to landfill. You've heard us talk a lot about our culture over the years. We never stop trying to positively impact our culture. We call it People first and it means just what it says. People First. We value our team members and it's our belief that if we provide the right training, workplace environment and resources, we can promote a positive winning culture that more effectively meets our customers' needs, driving improved customer satisfaction and improved financial performance. How does it play out in practical terms?
One example late last year when JLTV development work was increasing and Tier 4 emissions work was decreasing, we faced a dilemma. We were overstaffed in our Access Equipment Engineering but understaffed in Defense engineering. We reassigned approximately 50 engineers from our Access Equipment segment to work in our Defense segment to support the JLTV. Been a big win for us as we are getting the critical work done and we've kept some very talented team members in the company. Another victory around this with our integrated systems, these team members did not have to relocate. Finally, we are honored to have been recognized just this past year with a number of awards for accomplishments in our company as we continue on our People First journey.
We've listed a few of the more prominent ones on this slide such as Forbes Best Places to Work and Ethisphere's World's Most Ethical Companies. Well, that's a wrap on our first key theme. We are a different integrated global industrial. Let's go into our second key theme. MOVE is Evolving to Deliver More Value. As we've mentioned and you are aware, we achieved a lot as a result of our MOVE strategy. We put a lot of work into developing it and we know that it works. When we sat down to determine where and how we could go about executing our strategy. Following the initial MOVE phase, we realized that we didn't need to make a major overhaul move.
It's a good and effective strategy and we knew that our company, our customers and our shareholders would be best served by continuing to move forward with MOVE as it evolved to meet our needs. Our MOVE evolution starts up front with M. Where previously we could benefit simply from the expected recovery from deep recession of our key markets, we've updated M to guide our activities. As a market leader in virtually every one of our businesses, we know that optimizing our cost and capital structure are keys to improving our performance and profitability. And while we had great success with this initiative in the initial phase of MOVE, we're confident there's more benefit to capture in the coming years, including a focus on simplification, which I'll discuss in a few minutes.
Value innovation to deliver better products and services to support our customers or the product lifecycle is also a winner. Driving international growth in part with success in emerging markets continues to be an effective way to grow our company and broaden our business. Let's go into a little more detail on each of these MOVE initiatives. As the market leader in nearly every one of our businesses, it's important that we stay sharp and execute on our key initiatives. To remain the market leader, we're enhancing our experience our customers have with Oshkosh by continuing to improve how we interact with them. By improving the use of standard tools and well understood techniques to capture customer feedback such as Voice of Customer actions, we expect to further strengthen our position as market leader.
We are maintaining our relentless approach to effectively matching our cost structure to the demands of our markets. We've been successfully executing programs and actions since we first launched this more than five years ago. Our current plans call for cost reductions of approximately $55 million from 2016 to 2017, which will offset some of the inflationary factors that we expect. We've made a long-term strategic move with a new state-of-the-art production facility in León, Mexico to augment some of our current manufacturing as well as give a stronger presence for the Latin American market. We produce a number of different cross-segment components and products at this facility that position us well to stay competitive over the long term. This facility is still ramping up production so we won't see the full benefit in our 2017 results.
The concept of improving our business by applying a rigorous simplification process is very exciting and represents a pivot for our company and our MOVE strategy to describe it in succinct terms. Simplification looks to focus our actions on those activities that will drive the greatest value for both customers and shareholders, as well as reduce complexity in the organization. We performed a number of smaller simplification projects with encouraging results, and I'll share one of those with you. A business in the commercial segment that is a leader in mechanics trucks and wallboard loaders, in addition to some fairly specialized service vehicles. The business is IMT, Iowa Mold Tooling. First of all, it's important to have strong representation across a number of functions for the engagement to be successful. This was followed by a period of intensive work and analysis where we identified key value drivers.
This includes segmenting customers and products based on volume and profitability. This work helps us identify where to focus our resources to capture the biggest return. The net impact has been an increase in operating income margin during a time when sales declined approximately 20%. We do anticipate there will be a lot more of these success stories in our future. Let's move on to our V or Value Innovation initiative. I want to add to the strong firsthand experience of our innovation that most of you in the room experienced yesterday. Technology leadership and new product launches are part of our DNA at Oshkosh. We are continuing to press the case by investing in new and existing technologies that provide us with a steady pipeline of new products to generate a substantial portion of our revenues in the coming years.
You've seen some great examples in all our segments, and here we highlighted a few of the more impactful offerings we launched in the past couple years. We are targeting 15%-20% of our revenues in 2017 to come from products launched in the past two years. We expect to continue to stay close to our customers and maintain our leadership in innovative technologies so that we can lead our markets in products that solve a problem, reduce the cost, or otherwise deliver value that customers know they can't get anywhere else but Oshkosh. We believe these actions help us build sustainable long term competitive advantages. Increased international sales, driven in part by growth in emerging markets, is a key measure for us.
We are targeting an increase in international sales of approximately 15%-20% in 2017, which will be driven largely by our Defense segment where we have strong visibility in our backlog with M-ATV shipments to the Middle East. We also expect that our Access Equipment segment will perform well in Europe, Middle East and Africa as well as Asia Pacific in supporting our targeted increase in non-U.S. sales. Longer term, we expect that our reach will continue to improve as product adoption and market penetration remain attractive opportunities for us and as countries around the world modernize their equipment fleets. This includes strong expectations for JLTV sales to international customers, although we don't expect these to materialize in the next few years. That's a wrap on our second key theme MOVE is Evolving to deliver More Value, let's advance to our third key theme.
We are well positioned for long-term success. As much as we like to focus on the longer term as we make our decisions and investments, we know that we need to provide you with some of our thoughts and expectations for the near term. Here's what we expect for our company in 2017. We believe that we are in a prime position to leverage our diverse end markets and integrated operations to grow revenues, operating income and earnings per share compared with 2016 in spite of lower sales and results in our Access Equipment segment. David Sagehorn will go into greater detail on our expected performance by segment in his presentation. Let's look at the longer-term potential of our company. We have a lot of good things working in our favor. Some we control and some are outside of our control.
While we are not providing a quantitative forecast for the next several years, during today's meeting we are sharing with you some of the reasons why we like our mix of business and the opportunities we see for very strong performance when we look at the combination of positive market dynamics and our evolving MOVE Strategy. Our Defense segment has numerous tailwinds led in large part by our program WIN with the award-winning JLTV which takes us into the next decade as a supplier for this key program. We've been facing headwinds in our Access Equipment segment across North America and we believe those headwinds will continue to impact this market. However, equipment replacement demand will eventually turn and become a tailwind. You'll hear more about this when Frank Nerenhausen speaks to you about Access Equipment.
Both fire and emergency and commercial segments will benefit from aged fleets and the very obvious need to replace the oldest equipment. These segments are also very focused on self help initiatives intended to deliver improved bottom line results in a slow growth environment. We are realistic in our expectations for these segments and you'll hear about these when Jim Johnson and Brad Nelson talk about their businesses. I do believe we made the case that our successful move strategy will support stronger future performance. When all these are coupled together with strong free cash flow conversion that we target over the cycle, we believe Oshkosh represents a compelling and attractive opportunity that's positioned well for the future. As I conclude my remarks, I want to again summarize our three key themes. We are a different integrated global industrial both in terms of diverse end markets and integrated operations.
MOVE has delivered and is evolving to deliver even more value. And finally, with favorable long term trends driving our end markets and a people first culture, we are well positioned for long term success. It's time for you to hear from our segment leaders who are responsible for executing on the many opportunities in front of Oshkosh. John Bryant, our Defense Segment President, is going to come and lead off with our rising defense business. John.
Thank you Wilson.
I'm John Bryant. I've been with Oshkosh in the defense segment since 2010. This June I was promoted to lead the Defense Organization and I consider it an honor. I enjoyed meeting many of you out on our test and development course yesterday. I hope you enjoyed seeing our vehicles and riding in the JLTV.
Today.
I'll provide you with insight about our Defense segment and our strategy for long term success. As you heard from Wilson, Defense is well positioned for long term growth. First, Oshkosh is the number one provider of tactical wheeled vehicles in the world. We are the preferred provider of light, medium, MRAP and heavy tactical wheeled vehicles for the United States Armed Forces and more than 20 of our nation's allies. With every vehicle we deliver, our team members are focused on the ultimate goal, giving our customers the mobility, performance and protection they need to complete their missions and to return home safely to their families. Second, our strategy for winning in defense starts with a deep understanding of our customer and rallies all of our experience and capabilities around their operational requirements.
Our customers will tell you that we provide exceptional value by any measure, technical, operational, or economic, to win contracts, manage successful programs, and deliver high performance vehicles. That's all true, but I would tell you we win because of our people and their relentless commitment to our customers. We know that our work saves lives and we carry that with us every day. That's why we win. Third, from a financial perspective, we have solid visibility into U.S. Programs and we see promising international market potential. As a result, we're targeting significantly improved financial performance over the next few years compared to our 2015 and 2016 results. Let's take a look at some of the Defense Segment basics. We were founded in 1917 and moved to Oshkosh, Wisconsin in 1918. This is where our global headquarters and defense manufacturing and operations remain.
Our business portfolio is both comprehensive and full service. When customers buy their military vehicle fleets from Oshkosh, they know they can count on us for training service parts and technical support throughout the 20-30-year vehicle life cycle.
On the right, you see a summary.
Of our expected 2016 financial performance. For those of you who have been following our performance over the past few years, you're familiar with the steep market decline we experienced between 2010 and 2015 and the fact that we referred to 2015 as the trough in our return to growth strategy. 2016 represents the start of that return to growth. When we shared our business outlook at our Analyst Day in 2012, we made the commitment that defense would not lose a dime during the downturn. I'm pleased to say we kept our promise given the market challenges we faced during the past few years. I'm proud of our positive expectations for 2016 and our plans for future growth. It's easy to get excited about our defense portfolio when you can show awesome trucks like this. I could talk all day long about every single platform if you let me.
Instead, I'll just give you a quick overview. Starting on the left, our heavy platforms represent Oshkosh's earliest military contracts with the Army and Marine Corps in the 1980s. Moving to the right, we transferred our proven technologies and engineering know-how to the medium category. In 2008, there was an urgent need for a mine-resistant ambush-protected vehicle that could travel off-road in Afghanistan. This presented Oshkosh with an opportunity to transfer battle-proven technologies and off-road capabilities from our medium platforms to win the M-ATV contract in 2009. Most recently, we broke into the light tactical vehicle market by winning JLTV. On the right, I'd like to highlight the importance of our in-house capabilities that were key to winning JLTV.
While our competitors outsourced many of these efforts, Oshkosh developed its own military grade Network Architecture and C4ISR Solutions which stands for Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance. How's that for a military acronym? We're also managing weapon systems integration and using our leading edge suspension to produce the highest performance at the best price. Looking ahead, we believe that our networking systems integration and unmanned ground vehicle technologies will be key to winning defense and international contracts in the future. In aftermarket, we have an equally exciting portfolio. Having served in the Marine Corps for 28 years, I'll tell you firsthand that our customers are very focused on keeping their fleets running at peak performance. In the military, training for vehicle operators and maintainers is critical to achieving fleet performance goals.
We take a multifaceted approach to training which includes classroom, hands-on and virtual training curriculum designed by the vehicle experts at Oshkosh and executed anywhere in the world. Together with training services, our parts and kits and 24/7 technical support offerings help ensure our vehicle fleets achieve the operational readiness needed to support military operations around the world. When the tempo of military operations increases, as we saw during conflicts in Iraq and Afghanistan, our vehicles go through an accelerated life profile. We offer both reset and recapitalization options. Reset will restore battle-worn vehicles to full operating condition. For vehicles at the end of life, we recapitalize, which means tearing them down to their frame rails and rebuilding them to the newest configuration with the latest technologies.
As a Marine, I always knew that I could depend on Oshkosh to keep our MTVR and LVSR fleets at peak performance and that gave us great confidence when we sent our Marines on critical missions. As you heard from Rob Messina yesterday, investing in next generation technologies has always been a priority for Oshkosh and we will continue to be as we develop competitive vehicle platforms and technology upgrades for future competitions. Since the development of our first TAK-4 suspension system in 1998 for the U.S. Marine Corps, Oshkosh has led the industry in providing extreme off road mobility and heavy payloads that our customers need on today's battlefields. Our latest TAK-4 model, the TAK-4i, is a state of the art high pressure gas system. It's unlike anything else on the market and provided a major competitive advantage for Oshkosh in the JLTV competition.
Command Zone is an onboard diagnostic system that was first introduced on our Pierce firefighting vehicles. Today, Command Zone provides our defense customers with critical real-time information about the vehicle's performance and maintenance requirements. TAK-4 and Command Zone are both great examples of how Oshkosh Corporation benefits from being an integrated enterprise. Net Ready is a term that describes our ability to design modern vehicle systems from the ground up to support a comprehensive suite of C4ISR systems. Just as your personal vehicles have become computers on wheels, this is the future of tactical wheeled vehicles as well. So we brought this capability in-house several years ago and saw the direct benefits in the JLTV competition.
Looking ahead in anticipation of future military requirements, we continue to invest in our TerraMax unmanned ground vehicle technology as well as ProPulse, our hybrid diesel-electric propulsion system which provides 120 kW of military grade exportable power. For context, that's enough to power a small forward operating base or high powered weapons system such as those currently in development. Our strategy for winning in defense draws upon all the experiences and capabilities that we've built over the decades and applies them to the fierce competitive landscape and our customers constantly changing requirements. When you think about defense, a major military contract can represent a multi-billion-dollar market segment unto itself. Therefore, we approach each competition to serve a specific customer mission and set of requirements.
For example, FMTV was an intense competition to build a medium vehicle for the U.S. Army based on a government-provided technical data package. In this case, we applied our expertise in lean manufacturing and robust supplier management programs to win. M-ATV was a different competition altogether. This program answered an urgent wartime need. We relied on our engineering expertise to execute our rapid product development phase. We leveraged combat-proven systems from our MTVR platform, including the TAK-4 suspension to design and manufacture a life-saving vehicle in record time. When we look at JLTV, it represents a traditional military procurement spanning 10 years from the initial technology development phase to production contract award. As you know, some pretty big contractors were motivated to invest in this program because of the initial $6.7 billion production contract and additional long-term opportunities.
Once again, we tailored our capture strategy and added new in-house capabilities to respond to our customers' requirements to win this highly competitive program. Let's take a closer look at JLTV. To win the contract, we coupled robust systems engineering with several significant breakthrough technologies designed at Oshkosh to create a unique competitive advantage. Our TAK-4i suspension gives our JLTV extreme off-road mobility that's 70% faster with equal ride quality compared to today's gold standard, which is our own M-ATV. Many of you experienced this firsthand yesterday. CORE1080 represents all systems and components that contribute to occupant safety. JLTV has the ballistic protection of a.
Light tank and the underbody blast protection.
Of a much larger MRAP vehicle. It's a light tactical vehicle that's built to perform during combat missions. Because in today's world, the battlefield can be anywhere net ready brings the network to the mission. It's never been more important for the soldiers and Marines in every vehicle in a military operation to be connected to critical information and to communicate in real time. In this regard, JLTV is the most advanced tactical wheeled vehicle on the planet. Every inch of our JLTV solution was designed to respond to our customer requirements and evaluation factors.
At the end of the day, the.
U.S. Army and Marine Corps are receiving the next-generation protected mobility they need for future missions. Let's hit a few facts about the U.S. JLTV program. It's an 8-year initial effort for $6.7 billion that includes more than 18,000 vehicles, according to the latest figures published in the Fiscal 2017 President's Budget. JLTV is delivered in four configurations. There's a 2-door utility configuration that you can see in the top row. Moving down the page you can see three 4-door configurations including General Purpose Close Combat Weapons Carrier and the Heavy Guns Carrier. Our JLTV was designed with room for growth, which means that it's capable of accepting new technology upgrades as customer mission.
Requirements change over time.
We're confident there'll be opportunities to expand this powerful vehicle platform to include a number of new variants and configurations. JLTV continues to be highlighted by the U.S. Department of Defense as a model procurement program. From a schedule perspective, the JLTV program is on track. In fact, we're delivering our first Low Rate Initial Production or LRIP vehicles to the U.S. Government this month. The initial LRIP vehicles will be used for a spectrum of government testing through early 2018. In 2019, we expect to reach Full Rate Production and soldiers and Marines will begin receiving JLTVs for operational use. On the lower right, you can see the order quantities forecasted by fiscal year, according to the 2017 President's Budget and the resulting approximate sales quantities which generally occur the following year.
Winning the U.S. JLTV contract represents our entry into the light tactical wheeled vehicle market and it will shape the history of military vehicles. Consider the history of light tactical wheeled vehicles, starting with the non-motorized variety. Then there was the Jeep which was originally produced for World War II. More than 640,000 Jeeps were built for World War II alone. Jeeps continued to evolve and fulfill the light utility vehicle role until the Humvee was introduced in 1984. The Humvee brought a leap forward in mobility. Today, the Humvee global installed base is approximately 240,000 vehicles in more than 30 different configurations operating in 60 countries. The Humvee's downfall is that it was never designed to carry 3,500 pounds of armor and even with the additional armor, Humvees don't protect our troops from IEDs and other deadly threats.
In fact, commanders in Afghanistan banned the use of Humvees outside of the wire due to the lack of protection and degraded performance of the vehicle. Thus, the JLTV program was born to provide a new generation of protection, mobility and networking capability. Consider that many of the Humvees operating today are aging past their useful life and approximately 53% of them are outfitted with or capable of receiving heavy armor. That takes away mobility and reliability. JLTV will address the bulk of the U.S. Armored Humvee replacement market and we believe there's significant international market potential after we achieve Full Rate Production approval. Our HEMTT and our M-ATV contracts provide solid benchmarks for the long term value of major U.S. TWV contracts. In 1981, Oshkosh won the U.S. Army HEMTT contract. The original five-year contract was for the 10-ton 8x8 configuration for $998 million.
We delivered more than 7,400 vehicles under the base contract and options that the U.S. government exercised. Fast forward to September 2016. We've delivered more than 35,000 HEMTTs in 10 variants to nearly 20 countries. We're currently on contract to recapitalize approximately 1,800 HEMTTs to extend the life of the fleet. Let's look at the M-ATV. We won the M-ATV contract in 2009. The original U.S. delivery order was for 2,200 vehicles for just over $1 billion. We ultimately delivered more than 8,700 vehicles in three configurations to the Army, Marine Corps and Air Force. In 2014 through 2016. We also reset 1,260 M-ATVs after they were heavily used in Afghanistan to help the Army achieve its operational readiness goals. To meet global customer requirements for more interior volume and seating capacity, we expanded the M-ATV family of vehicles to include a long wheelbase model.
In total, we've delivered approximately 10,000 M-ATVs worldwide in 11 configurations to the U.S. and our allies. Based on the performance of the M-ATV on the battlefield, we believe there's additional market opportunity. In each of these examples, we delivered approximately 4 times the initial contract quantity over time. Generally speaking, this has been a common occurrence in military vehicle procurement. The initial contract typically represents a baseline quantity with the potential for additional variants and quantities to come online as requirements evolve and funding becomes available. For JLTV, the initial production contract requirement was 16,901 vehicles. Today's U.S. government budget documents indicate that they will buy more than 18,000 under the initial production contract. The overall JLTV requirement is 55,000 vehicles through 2040. Considering the historical pattern, the JLTV program has the potential to become an even larger global opportunity in the future.
When we look at the global defense market, this map illustrates where the spending occurs. It's a high-level view, including all types of spending, everything from airplanes to radios to vehicles. For context, the United States represents more than a third of all global defense spending in total. When we look specifically at the Global Tactical Wheeled Vehicle market, we see spending of similar proportions looking to international markets. TWV procurement varies by country. There are many factors that come into play when we evaluate contract opportunities, such as a country's operational requirements, the age and capabilities of their installed base of vehicles, their requirements for interoperability with allies, and their budget capacity, to name a few. Our strategy for international expansion is based on serving U.S. allies primarily across Europe and the Middle East based on their demands for high-performance vehicles and aftermarket services.
We expect that our international contracts will continue to be a mix of foreign military sales through the U.S. Government as well as direct commercial sales. We've been marketing our full vehicle portfolio, including the M-ATV and JLTV platforms across the Middle East and Europe for the past 5 years based on operational demands for protected vehicles with extreme off-road mobility. Both M-ATV and JLTV represent significant international growth opportunities for Oshkosh. Looking at defense industry market drivers and constraints over the next 3-5 years, it's clear that our customers are operating in a high-pressure environment. U.S. budget constraints and routine delays in budget approvals are having a significant impact on our core market.
At the same time, the U.S. Military faces an operating environment with a more diverse array of conventional and unconventional threats and a pace of change that requires constant evaluation and adaptation. Our military is focused on increasing readiness and preparing an agile force that may be called upon to manage multiple conflicts. In spite of these challenges, we are well positioned to help our customers succeed in a very complex operating environment that's reflected in the broad spectrum of programs that we currently have under contract with the U.S. DoD. Circling back to Oshkosh, let's look at our revenue performance and projections over a 16-year period based on market trends and program funding. For our current programs, we're targeting annual defense revenue between $1.7-$2 billion over a three-year period starting in 2017.
Our estimates assume additional international M-ATV awards, a stable backlog for heavy and medium vehicles through 2018, a ramp up in JLTV volumes through 2019, and steady aftermarket performance. Looking out to 2019, there is opportunity for upside if our international M-ATV pipeline matures faster than expected, or if vehicle quantities exceed our customer's stated requirements. We'll strive to exceed our targets, but there are too many unknowns to include such upsides in our estimates. Today we expect international JLTV orders to align with the U.S. government's full rate production milestone in 2019, so our plans assume that we'll start seeing international JLTV sales in 2020. We expect our Defense segment operating margin to increase from 8.5% to 9.5% in 2017 based on a higher sales volume, a more balanced product mix and aftermarket performing at historical levels.
Looking beyond 2017 estimates, we're targeting high single-digit OI margin in 2018 and 2019. Of course, we'll work to exceed this.
Target, but it's too early to tell.
If we'll be successful in delivering higher margins than we're currently targeting. As a wrap-up, I'd like to leave you with a few reasons why Defense is positioned for long-term growth. First, we're focused on maintaining our leadership position in the U.S. and expanding our abilities to serve our allies in international markets to remain the world's leading tactical wheeled vehicle provider. Second, our strategy focuses on giving our military customers a technical edge while providing life-cycle cost benefits. We're making smart investments in breakthrough technologies and expanding our operational capabilities to win future competitions. Third, we have solid budget visibility and a strong financial outlook that extends well into the next decade. Finally, we have a winning team. We have the right people with the right focus and the right values. They pride themselves on delivering life-saving vehicles to the heroes who protect others.
Thank you. Now I'd like to introduce Frank Nerenhausen who leads Oshkosh's Access Equipment segment.
Well, good morning. It's a pleasure to be here today to talk about our company and our industry. As I walk through my presentation, I want to leave you with three key messages that correlate to our long term vision and strategic plans to drive higher margins across the cycle. First, we're proud to be the leader in this industry. We strive each day to learn more about our customers, their requirements and the markets they serve. Our goal is to build long term relationships by demonstrating a strong commitment to a simple concept. Do what we say and say what we do. By maintaining a high level of integrity, customers have rewarded us with their trust and their business, positioning us as the clear global leader in this industry.
Second, we believe the best way to continue to grow this leadership position and improve our performance for shareholders is through the execution of an aggressive strategy focused on three things: driving cost and complexity out of our business through simplification, new product innovation, and delivering exceptional customer service. Third, the current replacement spending pause in North America is distinctly different in our.
Worse than previous downturns.
The return of replacement spending in future years absent of a general economic downturn will create exciting growth opportunities for this business. Many of you already know our business, but there are some new folks here, so I'll point out just a few of the highlights. First, JLG was the pioneer of this industry with our founder, John L. Grove, inventing the aerial work platform. While on vacation with his wife, Mr. Grove drove his RV through the Western United States, taking time to visit friends and dealers along with some traditional famous landmarks. Through various discussions with industry professionals and an observation of an accident made at the Hoover Dam, Mr. Grove formed a concept in his mind combining the obvious need for improved worker safety at height and technology he already knew well. From co-founding the Grove Crane Company, Mr. Grove created the aerial work platform.
He later commercialized this new concept in 1969 and the company that now bears his initials was born. We now conduct business in all relevant markets around the world through four regional divisions with manufacturing capabilities on four continents. Our revenues continue to be largely comprised of aerial work platforms, our leading world leading telehandler products and a small but growing part of our segment that we talk little about our Jerr-Dan towing and recovery business. Our Jerr-Dan team has reinvigorated this business as making a positive impact on the access equipment segment and the towing and recovery industry. JLG has the broadest product portfolio in the industry and we continue to push the envelope in reach and performance with our product innovations.
We continue to pioneer new products into new markets evidenced this past year by the introductions of the 150-foot articulating boom launched in April at Bauma, Germany, and our new low-level access line designed to be a safe and rational alternative to ladders in the commercial and industrial spaces. We recently launched a completely refreshed Telehandler family designed to improve operator efficiency and total cost of ownership. As some of you may already know, we manufacture all of Caterpillar's Telehandlers through a long-term agreement. Our alliance with CAT is strong and we look forward to driving additional growth opportunities for these products with this powerful brand.
Our Jerr-Dan team, as I mentioned before, is making a positive impact on our business and the industry through new product innovations such as the increasingly popular Heavy Duty Wrecker line offering efficient incident management solutions that minimize exposure for operators on the scene. The Jerr-Dan team is also taking advantage of opportunities in shared channels, supply chain and technology with the larger organization to build a solidly performing business in an otherwise low margin towing and recovery industry. As I mentioned in my opening comments.
We are proud to be the leader.
In this industry and understanding our markets is key to maintaining that position. So let's take a brief walk around the world and review our four major market regions and the associated trends and opportunities in each starting with our largest region, the Americas, which comprise approximately 80% of our total revenue base. The largest market in this region, North America, is currently impacted by a replacement cycle which is uniquely different than what we have experienced in the past. What we are seeing for the first time in recent history is a replacement cycle that is independent of the general business or construction cycle. The result of this disconnect is that we are faced with managing a declining business next year with lower rental company replacement CapEx.
While rental industry revenues are expected to improve, current forecast for continued residential and non-residential spending growth through 2017 support the claim for rental industry growth. Now for a couple of brief comments.
On Latin America, I think we're all.
Aware of the challenging circumstances taking place in Brazil and although demand for our products is improving in Mexico as a result of increasing product adoption, it's not enough to offset what we are experiencing in Brazil. Now let's go a little deeper into the North American market dynamics. The key to understanding the North American access equipment business is understanding the cycles that drive it. Let's take a look at AWP shipments since the early 1990s. We see a pattern of solid growth followed by steep declines in the early 2000s as well as during the 2009 and 2010 timeframe. Prior to those declines, we knew that sales grew as a result of construction product adoption and new applications for this relatively young category of products. Remember, AWPs were still fairly new, having been introduced by John L. Grove in.
The prior two decades.
What caused these declines? Of course, the recession in 2001 and 2002 as well as the financial crisis and Great Recession in 2009 and 2010 were the main drivers. There is an additional cause for lower AWP sales that doesn't show up.
In GDP, that is the lower demand.
As a result of lower quantities of aged equipment to be replaced. It's well known that most rental companies replace their equipment after it reaches seven.
To 8 years of age.
When they dispose of this equipment, they generally replace it with new equipment. We believe that during the early 2000s and the Great Recession, our industry was impacted by not only the recessionary business cycle, but also by lower demand as a result of lower purchases of new equipment 7-8 years prior. Essentially, the industry was hit by two negative forces. As we look at economic forecast, we do not expect to see a significant decline in GDP. However, we do expect that lower replacement driven demand as a result of fewer purchases made in 2009 and 2010 timeframe will continue to be a drag on this industry. To clarify, we continue to forecast a lower market as a result of lower replacement demand. But we don't expect to have the additional impact of a general business downturn.
The good news for the industry and for us is that just as replacement demand has been a drag, they will become a driver of growth in the future. Let's look at this another way. The age composition of the top 8 fleets in North America as reported by Rouse, supports the assertion that replacement demand is creating a headwind for our business, but soon should become a tailwind. When you think back to the Great Recession of 2009-2010 and the relatively small number of machines sold during that period, you can actually see the impact in the age composition of the current fleet. Now, 7-8 years later, those few machines need to be replaced. And that, of course, is what we're dealing with now through 2017.
When we think of the beginning of the recovery in 2011 and the rapid growth in fleet purchases thereafter, you can visualize the size of the replacement market in the coming years as these machines reach replacement age. As we think about the direction of our business, we are planning for the effects of a replacement cycle without a corresponding downturn in the business cycle. Should the GDP forecast hold true and the replacement cycle turns into tailwind, the opportunities for growth in this business is significant. Collectively, we've seen Access equipment markets for the EMEA region experience unit growth over the last several years. However, countries in the region exhibit a wide range of economic conditions and a variety of different construction outlooks. Spreading economic crisis, continued terrorist influence, and now Brexit have created an uncertainty in the market and consequently a cautious customer base.
As a result, the market remains difficult to predict. In general, we are seeing some of the mature markets flatten or begin a slight decline, while some of the previously dormant markets such as Italy and Spain are showing a modest recovery. We estimate that the fleet age in Europe could be 12-18 or more months older than the average fleet ages seen in the North American rental fleets. The net impact of all these factors is a market that we believe will be relatively flat in 2017. The Asia Pacific region continues to be a dynamic and growing market for Access Equipment. Although growth rates have eased in recent years, they remain the highest in the world today and there are several reasons for this.
In China, adoption of our machines is steadily increasing as accelerating labor costs and increased scrutiny on job site safety have improved the value of the aerial work platform concept. Increasing demand has fueled the expansion of the rental industry and with that has come the emergence of new professional well capitalized rental companies capable of sustained growth and rational business practices. Korea is rapidly refreshing its age fleet and Japan remains a mature market where we believe share capture is possible. Other regional markets are generally smaller but offer some modest growth opportunities for our business. Moving further south, our view of Australia is a market still transitioning from the mining boom to a commercial and infrastructure driven market. We believe there is an oversupply of machines putting pressure on rates.
As such, demand is increasing for fleet refurbishment as customers look to extend the useful life of their current fleet versus buying new. This is an opportunity we are ideally suited to capitalize on. So if I take all these regional outlooks and consolidate them into one global picture, it is easier to see where we expect growth will come from over the next several years. A majority of our volume will still come from the slower growing mature markets of North America and Europe, with more exciting growth potential coming from the Asian markets. Although starting off a relatively low base, sustained growth rates in the 8%-10% range will make Asian markets more attractive over the next several years.
In addition to new machine market growth, we expect increasing aftermarket revenue and our plans to capture share in key markets will drive a higher sales CAGR than implied by this chart. Our strategy is straightforward and designed to drive cost and complexity out of the business while continuing prudent investments in innovation and customer facing initiatives. Simplification. Okay, what does this really mean for access? Essentially, we continue to thoroughly review our business and evaluate performance of product models, brands, key processes and manufacturing strategies to highlight opportunities for improving our overall performance as we carry out our segmentation work. High effort, low yield products and processes will potentially be rationalized while high return, low effort initiatives will receive investment.
Of course, it's never quite this simple, but the structure of this process will bring focus on elements of the business that we can action to improve returns for our shareholders. Some examples may include sourcing the manufacturing of products closer to end markets as practical or shortening the supply chain to create a more agile manufacturing base and reduce reliance on finished goods inventory. More sharing of resources with Oshkosh businesses to leverage our fixed cost base across more revenue streams. We're already deploying this strategy by co-locating our new West Coast parts distribution center with the commercial segment. Facilities are one resource that can be shared and talent is another. Wilson mentioned the recent transfer of approximately 50 engineers from one of our Access equipment design centers to the defense group that was in need of their talent.
In doing so, our team didn't need to change facilities or, worst case, lose their jobs, and another segment had instant access to a trained team that was ready to go day one. This is an example of a true win-win. We will also be closely monitoring efficiency and utilization of our fixed cost footprint across the globe as we routinely do, and we'll make adjustments if necessary. Some of these adjustments will be structural in nature, designed to generate long-term savings, but could involve charges to implement. For example, earlier today we announced a plan to migrate our existing company-managed North American parts distribution center to a third-party-managed facility in the Eastern United States. This action is in addition to the distribution center expansion I just talked about on the West Coast.
We expect that utilizing a third party to manage our parts distribution centers will save approximately $6 million per year starting in 2018 compared to managing the facilities ourselves. As part of this plan, we will record a one-time restructuring and asset impairment charge which Dave will discuss in the financial portion of this program. Investments that decrease the life cycle cost of our products through improved parts availability, mobile support or machine connectivity will improve the customer experience with JLG while securing a less volatile and profitable revenue stream for our business. We're already taking steps towards this goal. We have talked about the opening of a new parts distribution center in the Western United States to support our customers with improved parts availability and reduced shipping times.
We have added mobile service capabilities in key market areas and are taking steps to improve connectivity with our machines through telematics. Enabling communication between the machine and service network could proactively identify potential problems, perhaps schedule a service call and prevent unplanned downtime. This model currently exists in our Australian region where aftermarket revenue is roughly 10%-15% higher than North America as a percentage of sales. This implies a potential revenue upside of $200 million-$300 million over time by deploying the same support strategy in the North American market. Innovation. It's part of our DNA at Access Equipment. We followed up a strong launch platform in 2015 by introducing 24 new products in 2016 that fit into our four main strategic quartiles. First, we have the exciting 19-foot hydraulic scissors line being built in our shared Oshkosh facility in Mexico.
This product is designed to deliver the required performance and durability for our rental customers at a competitive price. Second, introducing new products into existing markets will expand our revenue potential from existing channels. New product featuring improvements in performance and capacity include our AC powered booms, hybrid booms, an expanded range of rough terrain scissors, new compact crawler booms, and the launch of the largest articulating boom in the world. The 1500AJP are just a few examples. Third, new products such as our agricultural line of telehandlers and our new telescoping LiftPod are products that were modified to adapt to new market spaces. Finally, we are excited about the growth prospects of our EcoLift products targeting the conventional ladder market in industrial and commercial environments.
As those of you in the audience witnessed last night, we will continue to lead in the development of commercializable technology that improves the safety and productivity of our products. Let's look at three of the main categories of development. First, we use new technologies developed for gaming, such as simulators or virtual reality devices to enhance the training experience and make operators more prepared to run the actual machine. Second, once the operator is in the machine, we can include technologies that avoid contact between the operator and fixed structures with the use of crush protection devices or better yet, obstacle detection. Finally, in a futuristic state, the most effective way to protect the operator would be keeping him or her on the ground by the use of robotics or autonomous machines.
Now, the market may not be quite ready for this yet, but autonomous vehicles are right around the corner. For those of you who were with us last night, you heard Rob Messina describe our deep expertise with autonomous technology. Let's synthesize all of the market analysis and strategy we just discussed in the context of our revenue and margin outlook. First, we've included 2008 on this page to illustrate the effects of solid strategy execution on peak over peak performance. Through the execution of MOVE, our teams were able to significantly reduce costs and introduce new product innovative products that delivered 300 basis points of margin improvement between 2008 and 2014. We now have another opportunity through the execution of the next phase of MOVE to simplify our business, drive out costs and complexity and prepare for the next upturn.
Now let's discuss our 2017 outlook from a revenue perspective. Continued weakness in North America as a result of the replacement cycle will more than offset gains predicted in other regions of the world, and we therefore believe global revenue will be down between 5%-8% from our 2016 estimates. We expect our decremental operating income margins to be approximately 30%. Dave will provide some color on the drivers of the decremental margins a little later this morning. Again, forecasts for 2017 do not include any restructuring or asset impairment charges that may occur during the year as we look to simplify the business and prepare for the next upturn. So, in summary, let me reinforce the three key messages of this presentation.
First, we are proud to be serving our customers and realize that providing world class products and support will be the key to remain the global leader in access equipment and a global leader in the towing and recovery businesses. Second, we have a solid strategy. Our customers look to us for safe and productive innovations and we will not disappoint them. We have delivered over 50 new products into the market in the last two years, including the world's largest straight and articulated booms. There is more to come. Expanding our customer service portfolio, lowering the.
Total overall total Cost of Ownership of.
Our products and improving the customer experience with our companies comprise the basic blocking and tackling of our strategic plans. The culture of continuous improvement is strong in Access Equipment segment and we intend to leverage that culture to drive significant improvement over this period. Through our simplification efforts, we are effective at strategy execution and we will strive to improve our peak over peak margins as we have demonstrated in the past. And third, our current low replacement volumes projected for 2017 present a challenge in the short term, but also imply a significant growth opportunity later as replacement spending returns in North America and product adoption continues across other developing markets.
Overall, we are excited about the future.
Of this industry and this business. Our plan is to create a leaner, more agile company, position the Access Equipment segment to take advantage of the next upturn, which of course translates into improved.
Performance for our shareholders.
Well, that concludes my presentation for today and I'd now like to introduce Brad Nelson, President of the Oshkosh Commercial Segment.
Thank you. Frank, good morning. It's great to be with you today. Thanks for being with us.
Today.
I'm eager to share with you the compelling advantage of the commercial segment which uniquely positions us to lead in our markets. We're a differentiated market leader with respected brands, refuse collection, concrete mixers and other extreme use products. We bring a broad and innovative lineup, operational scale and a factory direct approach to further differentiate our company from the competition. Our strategy is sound with focus on innovation, simplification and product life cycle capture. We have strong potential for future growth based on solid market fundamentals as well as demand driven by customers who have already begun to refresh older fleets. With these strengths and a motivated group of team members, we are targeting 10% operating income margins in the future. First, a brief overview of the commercial segment. We have market leading positions in all of our core products.
I mentioned concrete mixers, refuse collection vehicles, mechanics trucks, hydraulic loaders and concrete batch plants. Leveraging our factory direct model, our network of 30 company-owned locations and our broad scale, we have distinct advantages and a very solid foundation on which to build. Now let's talk about our revenue base and our customer and product balance which uniquely positions us through market cycles. First, geographically our focus and our presence is in large and growing markets where we are the market leader. The majority of our revenue comes from the Americas in addition to North America. We have strong presence in Latin America which provides some long-term cycle balance even though those markets are currently under pressure due to the commodity mining cycle. Second, our customer base is diversified and balanced, being made up of fleets, smaller and private customers, independent customers and municipalities.
Third, our product lines and aftermarket parts and service capabilities provide performance and balance throughout the cycle. Building on strong core markets and a diversified product and customer base, we will continue to lead in our markets.
Let's take a look at our market.
Leading products that turn capital into results with respect to premium brands established over time. We deliver dependability for our customers with the right tools for the job, for example concrete placement equipment which has upside with construction patterns, refuse collection vehicles generally stable and less cyclical mechanics trucks and truck mounted cranes which fulfill a wide variety of industrial applications and aftermarket products supporting a large installed base of our equipment as well as competitors' equipment. Our advantage is full life cycle capture of a machine from purchase to parts and service to eventual asset disposition. This along with scale and local support are advantages that competitors cannot easily duplicate. We have a strong history of launching innovations, custom products that have stood the test of time. Our McNeilis brand rear discharge mixer line has been building innovative products for 40 years.
The McNeilis refuse collection vehicle line is celebrating 25 years with many pioneering advancements such as the Auto Reach side loader and CNG powered vehicles just to name a few. We benefit through numerous technological and component synergies across Oshkosh like design and quality systems, hydraulics, performance modeling and of course purchasing. Customers know we will be there with advancements that increase safety, productivity and uptime and lower total cost of ownership. A few examples of recent innovations include first, the innovative Meridian family of front end loading refuse trucks that provide a common scalable platform providing customers standardization flexibility. We've improved performance with 8% more payload, 25% more lifting capacity and a focus on serviceability, all on a lighter weight vehicle. Second, our M80 concrete mixer drum providing enhanced mixing performance and a lower center of gravity for safety.
Third, integrated control systems with digital backbone that leverage synergies across our refuse and mixer product families and fourth, digital diagnostic systems to make vehicles easy to maintain in the field. With exciting product roadmaps and continued investment in R and D, we are positioned well for the long haul. Now let's shift gears into our markets. With elevated fleet age and a still recovering home construction market, we believe the concrete mixer market has headroom in an elongated recovery. With the number one market position, we have the ability to capture expected increased demand. The North American concrete mixer market is poised for growth. Highly correlated to housing starts. The market is still 25% below long-term averages. Markets are currently cautious due to short-term economic uncertainties, but the long-term economic and construction fundamentals remain favorable and show room to run.
For instance, concrete mixer fleet age extremely high at approximately 10 years, up 60% since 2007. This provides replacement cycle upside for new mixers but also immediate aftermarket parts and service opportunities that we are capturing. Housing starts still 15% below long term averages. Homeownership rate at 62.9% is at the lowest level since 1966. Long term trends for housing are positive. Millennials becoming the largest demographic moving into the prime home buying ages of 30 to 40 years old. We all know that eventually their parents are going to want them out of the basement. We do expect some choppiness due to low inventory of buildable lots, some tighter lending standards and builders focusing less on the entry level home segment. But these headwinds will eventually subside as the need for single and multi family dwellings overwhelms the temporary hurdles for first time home buyers.
Of course, the 5-year $300 billion FAST Act should provide additional demand for equipment. However, we don't expect to see this until projects really get up and going. Turning to refuse collection vehicle markets, the refuse market is less cyclical than the concrete mixer market, generally driven by GDP, construction, and population growth. Similar to concrete mixers, fleet age in refuse is elevated, providing opportunity from the replacement cycle as well as significant aftermarket parts and service opportunities. In this market, maintenance and refurbishment are important components. Overall, solid waste generation, which drives the need for refuse collection vehicles, is increasing from a boost in economic activity and a steady increase in population. According to the EPA, the average person generates 4.4 pounds of trash per day. This has stayed fairly consistent since the early 1990s. Folks, trash and recycling collection are not going away anytime soon.
A few other key drivers in this market. Municipal spending is increasing with home values and tax receipts. The Case- Shiller index is up 37% since the post recession low in February of 2012. Jim Johnson will comment on improved municipal spending in his presentation here in a few minutes. Additionally, the market is composed of 35% private or independent haulers. We expect further consolidation among waste haulers which helps us. As a market leader, due to our scale and broad coverage, municipalities continue to privatize and outsource collection. Private waste haulers have increased their share of the market from 70% in 2004 to 80% in 2015. This benefits us as these customers standardize their fleets around best of breed. Looking forward, we expect the refuse collection vehicle market to grow due to high fleet age and modest economic tailwinds.
Although market growth rate in 2017 is expected to slow somewhat from the growth rates of the past several years. Building on our strong market position, our 30 service branches, we will continue to benefit from this relatively stable and attractive market. We will expand our leadership positions through our aligned MOVE strategy. Our plans are designed to boost performance that is sustainable for the long haul. Quite simply, we are executing towards four key focus areas. Our first area of focus is differentiation through customer intimacy. We distance ourselves from our competitors through our market leading products and our factory direct model. However, we're doing much more than that. Customers want uptime and investment return on their rolling assets. So our continued investments in R and D are making our products smarter, more digital, more connected and more efficient.
Strong innovation roadmaps building on proven product performance will continue to drive lower total cost of ownership and drive customer loyalty. Expanding and enhancing our 30 local branches allows us unfettered voice of customer. We were able to respond quickly to customers to optimize their experience with us. This means local stocking of parts to facilitate faster service and faster refurbishment. When a customer has a need, quite simply, we are there. Our second focus area, simplifying our business, as you recall, Wilson discussed simplification earlier. We are applying disciplined 80/20 principles to segment our customers and products as we focus on areas of greatest return. As an example, our investment in common scalable platforms provides synergies across product lines. We are also aggressively leveraging synergies across Oshkosh for gains in purchasing, logistics, engineering and quality driven by the Oshkosh Operating System.
Our third focus area, Diversifying through market cycles with a concrete mixer business that is impacted by construction cycles. Our segment is stabilized by two other large and important businesses, our refuse product line which is stable and late cycle, and our aftermarket parts and service business which provides cross cycle demand and higher profit. To further strengthen performance through the cycles, we continue to invest in our aftermarket infrastructure. Remember the 30 branches that I mentioned earlier? We recently expanded presence in New York City, Baltimore, Denver and New Orleans. We're also expanding our e-commerce platform to customers which makes repeat buying easy and integrates our systems into customer purchasing systems. Our fourth focus area is enabling our winning team.
Of course, all of our initiatives are supercharged as we invest in the best team and talent in the business and foster a people first culture and team atmosphere. Building on a strong foundation, our four focus areas provide tight alignment to quickly leverage market opportunities. Let's take a deeper dive into how we are capturing growth in our aftermarket parts and service business. As mentioned earlier, we are focused on supporting our customers across the full product life cycle to increase their uptime and asset utilization and also capture after sale profit. Using concrete mixers as an example, roughly half of the life cycle profit for a concrete mixer comes after the initial sale. We are clearly leveraged to leverage this value chain. Applying our strategy through our factory direct model, aftermarket sales for the segment has seen 14% CAGR from 2010 to 2015.
Continued investment in this business will provide profit expansion protection against market downturns and will drive repeat customer loyalty moving forward.
Before we take a look at our.
Expected financial performance, let's review how we performed over the past several years. I'm proud of our team as revenues have grown at 10% CAGR from 2011 to 2017 and our operating income CAGR has grown even faster at 46% in 2017. We expect sales to be approximately $1 billion, slightly higher than 2016. This is primarily due to modest order flow from concrete mixers and softer international markets. Mixer customers tend to hold off on purchases until a trend of construction growth has been established. While home construction has improved year-over-year, it remains a choppy market which impacts the enthusiasm ready mix customers show in their order patterns.
Additionally, we expect operating income to be flat in 2017 about 6.75% due in part to the cautious ordering in the concrete mixer market and international markets that I just mentioned as well as continued investment in our MOVE Strategy which should help our margin performance in the long term. When we include this strong long term fundamentals we discussed earlier, we think it represents a very attractive opportunity for our team. Despite some near term choppiness, our markets are poised to grow due to industry and macro fundamentals. Over the long term, the commercial segment is poised to capture this.
How so?
Our market leadership, factory direct model and innovative products set us apart and put us in the pole position. We will focus on enhancing operating margins through simplification. We continue to target 10% operating income margins and believe we will achieve these in time as we execute our strategy and drive for performance.
Thank you.
I would like to introduce our next speaker, Jim Johnson, the President of our Fire and Emergency segment.
Well, good morning.
Thank you very much, Brad. My name is Jim Johnson, President of.
Oshkosh Corporation's Fire and Emergency Segment.
Thank you so much for your interest in our business.
The fire and emergency segment is competing from a position of strength and leadership. We're the leader in our core markets, achieving this position through continual product innovations supported by the strongest and most respected distribution network in our industry. Our operating system allows us to meet the exacting and unique demands of our customers while limiting complexity within our factories. Our position of strength in the industry is also supported by market drivers trending in a favorable direction, including older fleets that need to be refreshed. Consequently, we are on track to achieve our near term target.
Here's a brief overview of the.
Fire and Emergency Segment. At our last analyst day, we emphasized the strength of our brands, our innovation leadership, and our premier dealer network as keys to bringing us out of the effects of a prolonged municipal recession. These levers worked, and we've been on a solid growth path out of those recessionary times. These strategic elements have strengthened this strength. Coupled with expanding municipal budgets, aging fleets, and steady airport demand, support our outlook for sales growth and double-digit operating income in the near term.
Each of our segment's three core businesses.
Provides customers with a full lineup of vehicles. Pierce manufactures fire trucks in numerous configurations such as pumpers, aerial ladders, platforms and rescues. We'll elaborate more on Pierce shortly.
We also serve the global airport market.
As noted here in the center column.
With aircraft rescue and firefighting vehicles, otherwise known as ARFF vehicles, and runway snow removal equipment such as blowers, plows and tow behind brooms. Our frontline operation is the U.S. leader in the broadcast communication vehicle market, providing customers with design, production and integration for broadcast and mobile command vehicles, as well as simulators for our United States military transitioning strategy. Our story really boils down to three.
Challenges we face as a segment.
We are meeting those challenges better than we ever have and better than others in our sector. First challenge is one of complexity. Every fire truck may look alike to you, but they're not. They're snowflakes. Each one is very, very unique.
There is incredible customization in each vehicle, and we are poised to address this.
Challenge as we strive to meet lofty customer expectations. Second is an innovation challenge. Our customers are demanding more capability and functionality from smaller vehicles. Our innovation leadership in the market has positioned us well to meet this challenge.
Third is a service challenge.
When the bell rings at the firehouse, a truck must always be ready to answer that bell.
And having a broad and robust distribution.
Network with access to parts and service 24/7 is a critical distinction for us. I must mention all of these factors are supported by an exceptional and highly motivated team with an average tenure of over 15 years across our entire segment. Challenge 1 complexity to give you a sense of the complexity of our products.
Let's dive a little deeper here with.
A portion of the Pierce product lineup. Pierce represents 75% of our segment's revenue. Looking across the top row, our flagship Ascendant aerial leads the complete lineup of aerial products. These are just a few spanning ladders, tillers or tractor-drawn aerials and platforms, which are ladders with a basket at the end. In the center row you see our custom pumpers. These can be broken down into two major categories, one of which is our proprietary configuration known as the PUC or PUC for Pierce Ultimate Configuration. Pierce was the first to market with this proprietary space-saving pump and body design, providing our customers more maneuverability and capability without sacrificing performance on this smaller vehicle. The product lineup is completed with rescue trucks as well as tankers and small pumpers on commercial chassis.
Vast majority of our aerials, pumpers and rescues are constructed exclusively on one of our own Pierce built custom chassis. Please recall all of these trucks are unique. They're snowflakes. So within each category, trucks can be vastly different in terms of options, functions and firefighting tactics. We manage this complexity by driving, decision making and accountability deep in the organization. Small teams have the responsibility to tailor and simplify processes and product specs to meet the needs of each unique customer while also maximizing the efficiency of orders as they flow through our system. It takes a tremendous amount of engineering and design work to build each.
Vehicle and the support from our enterprise.
Worldwide Oshkosh team with resources and systems provides a massive and distinct competitive advantage.
Slide 2. The Innovation Challenge we are.
Positioned to conquer the innovation challenge because the DNA of our business is imprinted with a track record of constantly leading market trends. Our leadership spans decades with numerous firsts to the fire industry including independent suspension, electronic stability control, front and side airbags, multiplexing the PUC that I just referenced, and our new Ascendant aerial to name a few. The engine that drives the innovation process is our customer.
We are constantly listening.
Our business model is grounded in daily interactions with our customers. For example, our Wisconsin Assembly Plant welcomes 10-12,000. That's 10-12,000 visitors per year for plant tours, construction reviews, truck deliveries and focus groups. Our most recent industry-shaping innovation is the Ascendant Ladder. Until the introduction of the Ascendant, every fire truck aerial fire truck is outfitted with a water tank and a pump. With a 100-foot ladder had two rear axles. The only aerials with one rear axle were in the 75-foot range. For years customers have asked for the single rear axle 100-plus-foot aerial. You know what, just stop by your local firehouse and ask them. But it was considered impossible until now.
The Ascendant 107-foot aerial ladder has truly redefined the single rear axle aerial market, providing firefighters with an unprecedented 107 ft of vertical reach and 100 ft of horizontal reach without compromising on water capacity, performance or safety. The heavy-duty 100,000 psi steel ladder features an innovative gusset design rated at a 750-pound tip load capacity with an additional 100-pound equipment allowance. The Ascendant Queen Configuration boasts a 1,500 gallons per minute tip flow with a 2,000 GPM pump and 500-gallon tank all on a single rear axle with a single set of H-style riggers and a single downrigger. Whether it's below-grade response, high-rise rescues or utilizing the storefront blitz capabilities, the Ascendant, available on the Enforcer, Arrow XT, Impel and Velocity custom chassis, puts firefighters in a position to perform.
The reasons the elimination of the second rear axle are so important to our customers are maneuverability and weight. So think about it. City streets are tight spaces at a premium, communities are introducing roundabouts and vehicles need to be more maneuverable to respond to a fire scene more quickly and efficiently. Plus, lighter vehicles leave less wear and tear on city streets and of course.
They use less fuel.
Now Pierce would love for me to tell you that we designed the Ascendant completely on our own, but we didn't. It was only possible by working together and leveraging the engineering power of Oshkosh Corporation and a great example of our integrated industrial company and again, a distinct competitive advantage transitioning to the third challenge.
The service challenge or as we call.
It's answering the bell. Working with our industry-leading distribution network.
We are positioned to meet the service.
Demands of our customers when that bell rings at the firehouse.
Here are some examples.
200,000 sq ft of investment in new service facilities by our dealer network in the past year and a half is indicative of their commitment to our customer and their confidence in continued market growth. One example highlighted here is our Northern California dealer Golden State Fire Apparatus, their new Sacramento sales and service facility. Golden State was recently featured in a video shown in Times Square sponsored by Chase for Business. A great example of a growing small business promoting and servicing the Pierce brand. MacQueen Equipment Group represents Pierce and our airport snow products in the Upper Midwest and shown here is their brand new service facility in St. Paul, Minnesota. We've reviewed how we are meeting our challenges to provide a distinct competitive advantage.
Let's take a look at our.
Markets starting with our core market, the United States. In order for cities to replace the old equipment I mentioned earlier, they need money. Most funds typically come from property taxes. Home prices have continued to improve on a year-over-year basis, helping to drive year-over-year property tax growth. You will see a chart from Dave Sagehorn in a few minutes showing a continued slow improvement in municipal spending.
As a result, cities and towns are.
In a better position to renew their fire truck fleets today than they have been in many years. These financial drivers coupled with aging fleets support the improving trend for the U.S. market shown here on the next slide. The United States fire market has averaged 8% annual growth since 2012, but has still not reached pre-recession levels. But Pierce's backlog has recovered to levels near prior peak. Much of Pierce's recent growth is driven by mid- to large municipalities placing large multi-year orders to replace aging fleets. Our regular cadence of product launches, recent investments by our dealer network and the agility gained by driving decision making deeper into the organization has resulted in significant share gains. In other words, we've grown faster than our competitors. Now with the solid foundation in North America, we've adopted a prudent approach to serving global markets.
For us, there are two primary global markets, airports and municipalities. Airport standards across the globe are consistent and have enabled our airport products team to generate more than 50% of their revenue. Outside the United States, however, the global municipal fire truck market is more fragmented. For example, some countries adopt a North American style custom chassis while others purchase a cabover engine European style commercially built chassis. Customers in China, Latin America and many industrial companies such as oil, gas and petrochemical value the construction and capability of the custom chassis which has led to significant order intake from these customers. Some recent examples are noted here on this slide. For both Pierce and Airport, margins have been steadily improving since 2012, pulling out.
Of the municipal recession.
The improvement was driven by innovative product launches, simplification of products and processes, our premier dealer network plus production rate increases. This improvement is expected to continue with margins trending closer to double digits in 2017. Fire and emergency is positioned to deliver on those margin expectations because we've developed key and distinct competitive advantages for meeting the three challenges of complexity, innovation and service. Our outlook is supported by solid macroeconomic indicators and aging fleets. Our position is even further strengthened as part of Oshkosh Corporation's integrated global industrial team.
Thank you so much for your interest in our business.
Now I'm going to hand it back over to Pat.
All right.
We're doing pretty well. We're doing pretty well on time. I've got 9:50A.M. and we said we'd take a 20-minute break. So we'll get back together here at 10:10 A.M. Restrooms are out the door to the right. Take care.
We'll see you then.
The Ross tracking how far I've gone, far gone, how high I've climbed on the backs of 60,000.
On the shoulder.
Half-mile line. Come on up.
Come.
On up, we're head tonight. Come on up, horizon. Come on up, horizon. I swear the cross of my calling home with the fire. I can run downhill. Come on up for the R on up. Come on up. Come on up. Sam. I see Mary in the garden, in the garden of a thousand stars, just holding pictures of our children dancing in the sky filled with light. May feel your arms around me. Maybe can feel your blood mixed with mine. A dream of life comes to me like a catfish dancing on the end of my line, sky blackness sky. Come on up. Sam. Where the river runs to rise.
I.
Take school books from your past.
Plaster.
Wire in your kids. Breath of eternity on your ear. Years in the crowded.
Marketplace I drift from face to face.
Hold my breath and close my eyes. Hold my breath and close my eyes.
I wait for paradise and I wait for paradise.
Virginia hills are gone, you brown.
Another.
Day another sun going down.
I visit.
You another dream I've been thinking another.
Dream.
I reach and feel your hand.
Your smell lingers in here. I brush.
Your cheek with my fingertip.
I taste.
The water ponder and I wait. Back in the alley tram. Down on the dark side got love rules try we'll figure out.
And I'll.
Take you all out to where the gypsy angle go and feel like life. Don't know what they can do to you. By the time we made it up to Breezy Lake, I had my head out the window and Janie's fingers were in the cake. I think I really dug her. I was too loose to fake. I said I thought she said honey let me and we danced all night you so very bad and she killed me just right like only angel can. She felt so nice just you. Now the night was bright and the stars do light on Billy and David down the sun and the moonlight that we down near the water and a stone mud till the joke on fast I.
When our hazy Davey got really hurt, he ran into the lake in just his socks and a shirt. Me and crazy J was making love in the dirt, singing our birthday song. Janie said it was time to go, so we closed our eyes and said goodbye to just the angel. RO felt alright. Together we move like spirits every night. Sam. I took over a weekend last month just to try and recall the whole.
Year.
All of the faces and all of the places, wondering where they all disappear. I didn't ponder the question too long. I was hungry and went out for a bite. Ran into a chum with a bottle of rum, and we wound up drinking all night. If those changes in my attitudes, changes in attitudes. Nothing remains quite the same. All of our running and all of our cunning, if we could laugh we would all go insane. Meeting departure signs in some big airport reminds me of the places I've been. Missions was good, good times that brought so much pleasure. Makes me want to go back again. If it's suddenly ended tomorrow, I could somehow adjust.
To the.
The times and riches and son of a. I've seen more than I can recall these changes in latitudes. Changes in attitudes too, but they remain quite the same through all of the islands and all of the highlands. If we couldn't laugh, we would all go insane.
I think about Paris and I'm hungry for wine. I wish I could jump on a plane. So many nights I just dream of the ocean. God, I wish it was sailing again. Oh, yesterday over my shoulder, so I can't look back for too long. There's just too much to see waiting in front of me, and I know that I just can't go wrong with these changes in attitude. Changes in attitude. Nothing remains quite the same with all of my running and all of my cunning. If I couldn't laugh, I just would go insane. We couldn't laugh; we just would go insane. We weren't all crazy; we would all go insane. I used to rule the world. Seas would rise when I gave the word. Now in the morning I sleep alone. Sweep the streets I.
I used to roll.
The d. Feel the fear in my enemies. I listen if the crowd would sing now the old king is dead along with the king. One minute I help the king. Next the walls were closed on me and I summons up my castle down upon pillars of stone. Pillars of sound. I can't cherish the bell to ringing romance. Singing be. My mirror, my sword and shield. A missionary to the borrowed field what I can explain. That was when I moved the world. It was the wicked and wild. Wind blew down the door to let me in the shattered windows and the sound of drums. People couldn't believe what I've become. Revolutionary sway. Who would ever wanted a king. I hear cherish the bells are ringing. Roman cavalry choir singing. In a foreign field for some reason I can't explain. I know St.
Peter will call my dead.
Okay, everyone, we're going to get started here in just a bit. Come on, Bob, have a seat. All right. Good morning, everyone. I'm David Sagehorn, Chief Financial Officer of Oshkosh. You've heard some great things this morning from our Oshkosh leadership team. And I know you had fun on the factory tours, demo rides yesterday, as well as the technology updates from Robert Messina and his team. So this morning I'm going to describe our commitment to creating shareholder value. Similar to the other presenters, I'd like to start with three key messages, then I'll go into more detail before turning it back over to Wilson for some closing comments. Here are my three key messages. First, we have a realistic outlook to deliver earnings growth. Second, we have the building blocks in place to deliver strong free cash flow over the cycle.
Third, we have a strategy to responsibly deploy the free cash flow to drive shareholder value.
With businesses that are.
Exposed to a number of different end markets. There are many different macro indicators and forecasts that we can use to help develop our business and financial outlook. This section includes a few of the key measures that we believe are significant for the majority of our businesses. Most of these are presented as averages from a number of sources and we're not going to show any measures in this section related to defense spending as John Bryant did an excellent job of walking you through those dynamics earlier this morning. To start, we're assuming slow U.S. GDP and housing starts growth for the next few years. While we'd like to see stronger growth rates, we believe we can still deliver growth in a slow economic growth environment. That slow, steady growth plus the aging of vehicles that you heard about earlier this morning works in our favor.
Non-residential construction in the U.S. is another prime indicator for our businesses. The non-residential spending growth rate is expected to continue to moderate from the near-term high in 2015, but it is still projected to grow. Municipal spending is a key measure that contributes to our positive outlook for both fire trucks as well as refuse collection vehicles. The projection is for several additional years of modest increases in municipal spending following a period from 2010 to 2014 where year-over-year changes were either negative or barely positive. Finally, in reviewing OECD estimates for several key regions around the globe, we see that there are reasons for optimism despite expected slower growth rates for China and a continued very challenging outlook for Brazil.
Frank Nerenhausen commented that there is a strong outlook for the aerial work platform market in China and we are expecting continued double-digit access equipment market growth in that country over the next several years in spite of the slowing economic growth rate. The access equipment market growth in China and to a lesser extent Mexico is driven by continued product adoption and growth in China especially will likely stay driven by product adoption for a number of years. OECD is projecting slow economic growth in other major international markets in which we participate, so overall we expect continued slow growth over the next few years for many of the key macroeconomic measures that we follow. Expected growth rates are not great, but do provide a level of growth that supports our outlook.
Combined with our Defense segment outlook and MOVE initiatives, we have an overall positive outlook for the coming years. Before I dive into the 2017 discussion, I'd like to make a few comments about our 2016 outlook. We are adjusting our adjusted EPS estimate range for 2016. Previous range is $2.60-$2.80 per share. The updated adjusted range is $2.85-$3 per share. The main drivers of the increase to the range include an expected higher quantity of M-ATVs in the year than previously estimated. There was a shipment of M-ATVs that arrived in port in the last two days and we believe that the customer will both inspect and accept those vehicles before the end of the fiscal year. That would take the quantity of M-ATVs sold in 2016 for this contract to 325. That compares to our previous estimate of approximately 175.
This would not represent a change in the total quantity of vehicles under the contract, only a change in the timing between our 2018. Another driver of the estimate change is we now expect Access Equipment segment sales to come in at the high end of our previous range. We also now expect our tax rate to be approximately 31%, down from our prior expectation of 32%. The $2.85-$3 EPS range is a non-GAAP range. As noted earlier by Frank Nerenhausen and as included in our press release this morning, we expect to record restructuring and asset impairment charges in the Access Equipment segment in the fourth quarter totaling approximately $27 million, the vast majority of which is non cash related to the outsourcing of aftermarket parts distribution. These actions are expected to drive positive benefits of approximately $6 million per year starting in 2018.
possible that future actions could result in additional restructuring charges. Okay, now on to our 2017 outlook. Looking at a revenue bridge from 2016 to 2017, you can see that defense is the big driver in overcoming an expected decline in Access Equipment segment sales leading to mid- to high-single-digit% consolidated top line growth compared to 2016. Fire and Emergency sales are also expected to be higher. I should note that the 2016 sales number is the midpoint of our updated estimate. Range story for operating income is generally the same as it is for revenue in 2017. That is, we expect weakness in Access Equipment to be overcome by the combined expected stronger performance in the Defense, Fire and Emergency, and Commercial segments.
We're looking at the collective improved performance in our non-Access Equipment segments along with expected lower corporate costs to drive earnings of $3-$3.40 per share in 2017. We have the opportunity to grow revenues, operating income and earnings per share during a time when our largest segment Access Equipment is facing weaker demand as a result of lower demand for replacement equipment. We've taken a different approach with free cash flow by including a directional view into 2018 and the reason we're doing that is because free cash flow is a multi-year story. We'll deliver strong free cash flow in 2016 of approximately $400 million. However, due to the expected working capital investment in our Defense Segment to support international M-ATV sales, we expect to generate significantly lower free cash flow in 2017.
The good news, however, is that we expect there will be a significant reversal in 2018 as that working capital is converted to cash, driving significant free cash flow in 2018. As we said previously, we target 100% free cash flow conversion over a cycle, but there are times like this when we expect that it will be lumpy. All of the drivers we just discussed form the basis of our realistic and positive outlook for 2017. Consolidated numbers shown at the top agree to the analysis we just walked through. The Access Equipment segment estimated sales range represents an approximate 5%-8% decline from our 2016 estimates, with the decline driven by continued lower replacement demand in North America.
The operating income margin range assumes continued challenging pricing, foreign exchange headwinds and higher overall material costs, partially offset by modestly higher absorption and the impact of our MOVE initiatives. Estimated Defense segment sales of approximately $1.85 billion represents a 35%-40% increase over 2016, with the increase driven by the sale of a higher quantity of M-ATVs. The ramp up of the JLTV deliveries in 2017 also contributes to the higher year-over-year sales. We expect the Defense segment to sell approximately 750 JLTVs in 2017. We estimate Defense segment operating income margin will be approximately 9.5%, an increase of 100 basis points compared to 2016. The increased margin expectation is driven by a higher mix of M-ATVs versus 2016, partially offset by bid and proposal and vehicle testing costs for the FMTV contract recompetition.
We know investors are interested in the margin on the JLTV program, but for competitive reasons this is something that we aren't going to disclose. What we will say, however, is that we expect to be able to maintain high single digit operating income margins in the Defense segment as the JLTV production ramps up over the next several years. Turning to fire and emergency, we expect modest top line growth in 2017 as the fire truck market in the U.S. continues to slowly recover. We also expect this segment to benefit from a full year of the higher production rates implemented in 2016. We expect to see another nice step up in operating income margins in the segment in 2017, driven by further operational efficiency gains and improved absorption on the modestly higher sales.
We believe the fire and emergency segment is well on its way to its double-digit operating income margin target. Commercial segment sales are expected to be up slightly compared to 2016. The team expects the cautious approach to concrete mixer demand shown by concrete producers in 2016 to continue into 2017. The team also expects RCV market growth to moderate after several years of solid growth. We expect operating income margins in this segment to be flat versus 2016 as the benefit of operational improvements and spend control will be largely offset by spend on move initiatives and higher new product development investment. There are some additional expectations and assumptions on the bottom half, and I'll let you read those for yourself.
We haven't provided a breakout by quarter, but I will note that we expect the first quarter to be the weakest quarter of the year due to seasonal factors, as we typically do, with earnings per share in the first quarter of 2017 expected to be lower than the prior year quarter. 2016's first quarter included the sale of nearly 275 M-ATVs in the defense segment, and this year we do not expect to sell any M-ATVs in the first quarter of 2017. Overall, we would say this is earlier than we typically provide our initial outlook for the next fiscal year. Many of our customers have calendar year ends and are just beginning their planning for 2017. Taking this into account, we want to provide a responsible earnings outlook at this early stage, and we'll update the outlook as the year progresses.
Let's move on to our capital allocation strategy. For those of you who are at our analyst day in 2012, our capital allocation strategy should look familiar, and that's by design. We have a solid capital allocation approach and don't see a need to deviate from it. As we said earlier, we expect to deliver strong free cash flow over the cycle and how we use that free cash flow to drive shareholder value is critically important. Achieving our long-term targeted capital structure is our top allocation priority and we have a stated goal of running the business with low leverage, generally at or below 2 times debt to EBITDA. As we cascade down the chart, you can see that investing in our core business remains our next highest priority.
By investing in our core business, we are investing in our future and working to stay the leader in our markets, and we think we do a pretty good job of that. There are two items on the next level of the cascade of priorities, investing in external growth opportunities and returning cash to shareholders. These are both on the same line because we don't necessarily favor one over the other. There are times when one will drive more shareholder value and times when the other will drive more shareholder value, so we try to be opportunistic with each. Over the last few years we believe it made more sense to direct our free cash flow back to shareholders. Going back further in time, we believe that using free cash flow to fund acquisitions made more sense.
We intend to maintain our opportunistic mindset in the coming years, although over a cycle we would generally target returning 50% of our free cash flow to shareholders through a combination of dividends and share repurchases. Reducing debt is the next priority, followed by holding cash. So let's review our balance sheet and credit metrics in a little more detail. There's a lot of numbers on this slide, so let me highlight a few of them for you. Our debt to total capital ratio of approximately 30% feels about right to us, given our cyclicality. We believe we have manageable debt maturities as you can see in the chart at the bottom, and have ample liquidity of nearly $1 billion projected at the end of our 2016.
I mentioned the 2 times debt to EBITDA or leverage ratio a minute ago, and we do get occasionally asked why wouldn't Oshkosh be comfortable with the higher leverage ratio. Our answer to that is we operate in cyclical markets, and while we don't believe there's going to be another downturn like the one we experienced in 2008 and 2009, we want to be in a position where we don't have to worry about our debt covenant compliance. We also want to be in a position when that next recession comes, to be able to play offense rather than defense. We'd like to be more active at that time from an M&A standpoint when we might be able to pick up an asset at more attractive prices. I mentioned our commitment to returning cash to shareholders.
We've reduced our share count by approximately 20% over the past nearly four years, and we've increased our dividend two times after reinstating it in the fall of 2013. We haven't levered up and don't plan to lever up for share repurchases. We use our free cash flow to fund our share repurchase activity. We purchased $100 million of shares in the first half of 2016, which nearly fulfilled our stated target for the entire year, and as of June 30, we still had 7.5 million shares outstanding on our share repurchase authorization. Our thinking in regards to share repurchases is to take a simple and opportunistic approach. There's that opportunistic word again. We target returning one half of our free cash flow to shareholders over the course of a cycle. However, it could take us a number of years to repurchase remaining 7.5 million shares currently authorized for repurchase.
Or we could accelerate the repurchase pace, depending on our share price performance.
We have options. I'm going to conclude.
My portion of today's program with some thoughts on external growth opportunities. Today we would characterize Oshkosh as being an opportunistic acquirer. It has to be the right situation and the right value. We made a small acquisition about a year ago, but essentially we've been on the sidelines from an acquisition standpoint for a number of years. Valuations for industrial deals have been high over the past few years, and in fact they continue to remain high. That's one reason why we repurchased our own stock as opposed to pulling the trigger on any meaningful deals over the last few years. Our current view, as we think opportunistically, is that we're more likely in the near term to look at bolt ons as opposed to transformational acquisitions.
If there's one thing you take away from our M&A strategy, it should be that we're looking at a measured or lower risk approach to any deals we would consider, and there must be clear benefits for returns, synergies and technologies. In conclusion, I want to reinforce my key messages. First, we have a realistic outlook to deliver earnings growth. Second, we have the foundational pieces in place to deliver strong free cash flow over the cycle. Third, we have a strategy to responsibly deploy the free cash flow to deliver shareholder value. We believe Oshkosh Corporation has a bright future and we appreciate your interest in our company. I'm going to turn it back over to Wilson now for some closing comments.
Thank you.
Well, as we conclude our formal presentations, we'd like to recap what we've covered over the last 24 hours or so. We've seen two strong facilities that are key assets in our lean journey toward operational excellence. We've made progress in both, but we still have plenty of opportunities to get better. We showed you a glimpse of some of the great capabilities and technologies we possess that will help to define our future. You heard our Chief Technology Officer, Rob Messina talk about what is possible and you've met and had a chance to mingle with our senior Oshkosh leadership team. We also introduced the next evolution of MOVE Strategy along with updated company-wide targets. You just heard Dave Sagehorn, our CFO, talk about our ability to grow earnings at a time when many industrial companies are facing difficult, difficult end markets.
He highlighted our ability to generate strong free cash flow over the business cycle and he walked you through our capital allocation strategy. You also heard from each of our business segment presidents as they described the opportunities in front of us as well as our strategies for keeping Oshkosh in the lead. And last but not least, we provided an exhilarating ride in our revolutionary. I got to apologize. I've been fighting this cold all weekend. I'm taking antihistamines. So you see here some of those words come out. It's not just because I'm a Texas guy. It's because I've got a little fun stuff going on in my mouth here today. So I apologize. But we did furnish this exhilarating ride in a revolutionary. See that revolutionary word again. New military vehicle, the JLTV. This is the world's most capable off-road protected military vehicle.
That's an experience that cannot be duplicated anywhere else in the world.
Right now.
It can only happen in Oshkosh, Wisconsin. Before we close, I'd like to share something that is very meaningful for us here at Oshkosh.
My name is Amy Bermudez and I.
Currently live in El Paso, Texas and I'm a teacher.
I teach seventh grade English.
Andrew Bailey.
I'm a government contractor, prior Marine and.
I live in Alexandria, Virginia.
My name is April Herlevi. I'm from Lake Nebagamon, Wisconsin and right now I'm a PhD student working on my dissertation.
My name is Dan Robinson. I live in Harbor Springs, Michigan, and currently I am working with military entities throughout the country as far as with Gold Star and Blue Star families.
Well, about this time last year, my.
Husband went out on a mission. I think he ended up calling me, and the first thing he said was everybody's okay. He was in the lead vehicle.
Their vehicle hit an IED and it went airborne.
I want to say that I'm thankful that the people here that you guys are so passionate.
Each person that I met today, I.
Can just do like their individual job if they really love it and care about it. That passion really translates because that's what kept my cousin, that if it wouldn't have been a quality vehicle, if he wouldn't have been in the vehicle.
It wouldn't be the same story because when it happened he had months more to go.
Knowing that I could kind of put my faith in that, that he.
If something were to happen to me.
He would be okay.
I know I'm appreciative of the people here in Oshkosh that are working hard for this because I think people sometimes forget that our military is still out there even now, even though some of the wars have been winding down. We've got a lot of Marines and soldiers, soldiers to military members out there still working hard. We definitely appreciate that. I can tell you have so much vested and it's really comforting to know that there's a company like yours that really watches out for these guys. I mean, it's like a family. I'm really appreciative and I thank you all so much for saving my son's life.
Because I'm not a Gold Star father. Again, that's a story that's pretty profound.
My grandson would not have been here.
It had not been for Oshkosh because shortly after this all happened, he was conceived and now he's born and everything will pull him scratch recovery it on there then. Sure, that would go. My name is Richard Grooms and I'm calling from Jackson, Georgia. Just wanted to call and just send my deepest gratitude to you and your company for building that M-ATV. My son was in a firefight in the Helmand province in Afghanistan on Monday. And that vehicle saved my son.
Thank you.
As you can see, our company has significant purpose. That voicemail gets me every time. I probably heard it 100, 100 times. But with this purpose, we are uniquely positioned with a number of attractive end markets. We faced some challenges in our access equipment business, but we always face challenges and we have a deep and talented team to address them. We have strong plan to drive earnings growth in 2017 and a positive outlook towards the future. At the beginning of the day, I mentioned that we'd like you to remember three key themes for Oshkosh. First, we are a different integrated global industrial. Our unique blend of businesses provides us with a variety of attractive end markets. When coupled with our approach to leading the businesses and operating them as an integrated enterprise, it becomes a powerful combination. Second, our MOVE Strategy has been successful.
We are evolving it to remain the primary driver of the company as it guides us on our journey. And third, we are well positioned for long term success as we drive toward increasing shareholder value. Thanks for coming to visit with us today at Oshkosh and thanks to all who are listening on the web. Time for Q&A. I'd like to ask our business leaders to come up and join me on the stage. Since we are webcasting, we're going to have some microphones in the crowd. Please wait until you get a microphone so the folks on the web can hear your question. Okay, Jan and Margaret got our mics. I think Cliff's right there by you, Janet. We'll let him start.
Good morning, Cliff Ransom. First of all, as a member of the parent service of the United States Marine Corps, meaning the U.S. Navy, I'd like to remind you that if you're talking, you are not a former Marine. You're only a former Marine if you're not breathing. This issue of aftermarket. Look, I met John Grove in 1972 and I was in the military before that. The aftermarket has been a huge part of these businesses for a very long time. I'm not trying to. I'm trying to figure out why the change came. Why did you. What were the factors that made you say we've got to push further into this market? Are there things that you could do that could accelerate that push into the aftermarket, even as the definition has shifted from reman to, you know, parts to rebuild?
Well, I'll start and then maybe Frank and Brad would like to comment a little bit about their focus. Cliff, we have had success in the aftermarket, but we see other opportunities to expand that. I'll let them give you specifics of what they're doing in some of the segments. We probably need to be a little careful. Some of that's competitive, that is not out in the market yet. But as you know, especially in the slow growth environment, there are margin opportunities with the aftermarket. And again, another reason we're focusing on that, I think overall we see opportunities with some of the segments to increase where we haven't invested in the past. So specifically Frank and Brad has some great initiatives going on. I'll let them comment a little bit about each of their segments.
Sure.
Thanks. Cliff, I think you mentioned drivers. What's driving this new look? I think what we see is customers getting more and more focused on total cost of ownership. And as we look to ways to expand our service portfolio with those customers, it drives us in new directions. Expanding service, expanding parts, that sort of thing. But also we have technology. And I think we heard that last night and again today with talking about machine connectivity that gives other options for us to leverage service networks along with proactive service opportunities and lower that total cost of ownership.
The only thing I would add to that to supplement a little bit is fleet age, you know, through capital. There's been some conservative capital spending coming out of the downturn and fleets of extended fleet age, which means the need for parts refurbishment and service. In our segment with 30 local branches that are direct controlled, we don't use dealers. These are all McNeilis employees, Oshkosh employees. Using our practices, our OEM parts, using our service practices, we can service those extended fleet age. So we were able to gather a margin layer or a value layer that otherwise wouldn't be there if they were a younger fleet age. And we expect that to continue. That fleet elevation continues to press forward. It's uncoiled opportunity for the future. Ann.
Hi. Thank you. I think at the beginning of the.
Presentation, someone noted that you have gained market share in, I think, cement mixers.
Fire equipment, refuse collection.
Access, either aerial work platforms or telehandlers were absent.
Can you talk about the competitive environment?
Overall in access and what the pricing environment's like, what the competitors are doing.
Why was Access not included in share gain?
Well, Ann, talking about pricing, I think we mentioned pricing several times during the presentation as challenging. Probably expect that to continue into 2017. But relative to shares, I think we are holding our share in our mature markets. There may have been a little bit of slip in Europe in the earlier part of this year with some French laws that were coming out, but that team is clawing that back. But overall, we're comfortable with holding our share positions in our mature markets and there's opportunity for growth in emerging markets.
We believe to be gaining share in Asia Pacific.
Yes, yes. Just to follow up, can we talk about inventory levels across the AWP and probably some of the other segments? We know you had an inventory problem from overproducing in 2015. Can you tell us how it worked through in 2016 as you end the year at this point? What you're feeling about the ability to, you know, how far below retail sales did you produce in 2016 and, and what are you expecting in your guidance for 2017 in that area? Okay, sure.
First, maybe just a minor clarification. 2015, I don't think we overproduced. The market changed pretty substantially in Q3. Minor nuance, but I think we took a very responsible approach to our manufacturing in 2016 to drive our inventory down to targets. We will hit those targets in 2016. Moving into 2017, we will have an approach to match our production more closely with market demand and dynamics.
So, Eli, just to maybe follow on to that, I'd like to congratulate Frank and his team. They did what they said they were going to do coming into this year, which was take those inventory levels down. And they did it in a very responsible manner. They didn't flood the market with product. We did see most of the inventory reduction occur in the second half of the year. And as Frank said, they will meet their targets this year. But that from a. We really, if you think about production in 2016, we really produced at a level that would be commensurate with, call it the lower end of our fiscal 2017 range.
So.
We're taking inventories down by $200 million. So you do the math on the sales guidance for next year. It really implies kind of the lower end of the range for 2017. So I hope that answers your question.
Thanks, Eli.
We're sorry. Okay. Mig. Yes, thank you. I've got two questions. So my first one is on the Access Equipment market slide 60. I don't know if you guys have it handy or not, but as I'm looking at this slide, it looks to me like this slide implies that 2018 is going to be down as well in terms of shipments. And I guess I'm wondering if you could talk a little bit about that and kind of what drives demand beyond 2017, just based on your outlook for construction. And then I have a follow up.
All right, well first, right now we're obviously giving guidance on 2017 and we're in stages of talking to our customers about 2017, but it's still early. They're still focused on finishing out 2016. The 2018 is much more model projected and that will refine as we move through 2017 and have more conversations and get a clearer picture of the market out in that point.
We don't have a position date omig.
That's going to be down or up.
It's unclear at this stage.
Okay, then my follow-up maybe for Brad Nelson. You're talking basically a flat business into next year. I guess I'm just wondering as to why we're still talking about such a wide gap between realized margin and what you're targeting.
10%. How are we going to close that?
When are we going to close that? Because obviously we were talking about these same targets back in 2012.
Yeah, thanks for the question. You know, the catalyst really is construction and concrete mixers. If you look at the makeup of our business, that does make up a fair amount of the business. So as those markets continue to rebound both domestically in the U.S. and internationally, if you look at the international markets, most of those construction markets where you see prevalent mixers are mining and commodity driven which are currently on a downdraft. As those international markets come back together with construction markets in the U.S. with just increased consumer confidence, it's construction that will drive mixers. The catalyst for that growth and that extra profit layer will come from the mixers.
Now our current plan and execution through aftermarket advancement as well as refuse collection advancements which we're doing very well in. You add that component of mixers coming back, that's the catalyst that you mentioned. Yeah, that's exactly what you saw earlier in the strategy that we're executing. At least, we're simplifying the business. That's why we're investing in our operations while at the same time continuing our product innovation. Very, very strong. That's basically a coiling effect that as mixers come back in volume, we'll get that advance, advanced margin. We've been on that track. I mean we've seen 46% CAGR on OI over the past handful of years. We expect that trend to continue.
I'll just add this, Mig. Brad and his team, they're not happy with where they are. And Frank would tell you the same thing. Where their business outlook is for next year. You heard Frank talk about some structural things. He's made one move with the 3 PL move. He's looking at some other things. Brad's team is looking at the same. We know in a slow growth market we've got to make some adjustments from a structure standpoint, but those are still under analysis and we're not ready to talk about those yet. Over here, Margaret.
Thank you, Pete. Thanks.
I just had a couple of clarifications.
For I guess on the international M-ATV.
Contracts, maybe David, John, the first is.
On the second tranche.
Can you talk about the cash flow characteristics of that contract?
Are there any progress payments at all?
There is the whole lump sum, you know, cash payment come after the.
Contract fully delivers, I guess in early fiscal 2018. Is that how to think about it or no?
Pete, if we think about the cadence. We will deliver vehicles largely in the second half of our fiscal year. There are milestone payment milestones that start, for example, when we put the units on the boat X number of days after that we should get payment. But just the way the timing of the delivery works. Our thinking right now is most of that cash collection will fall into fiscal 2018.
Have you gotten any cash payments so far?
I mean, over 300 vehicles this quarter?
Yes, we have. That's what's driving really the recovery in our free cash flow or driving us up to the $400 million for the year. If you look through the first three quarters, we generated around $100 million of cash, significant cash generation in the fourth quarter, largely driven by the payment activity we've seen on that contract.
Okay, and then the other part of.
That was John, or maybe both of you.
Are you factoring in the third tranche?
Of M-ATVs at all in kind of.
That 1819 forecast you have?
Yes, as I mentioned in my brief, our assumptions in the forecast for 2018 and 2019 include an additional M-ATV order beyond what's already in backlog.
Is it fully in there?
Have you factored it? How do I think about that?
We factored it in. So don't picture 1,000 vehicles in a year, but it's factored in.
Thank you. And Pete, we're talking to multiple countries.
So it's not wholly dependent on just one customer in that region of the world. And as you think about 2018 and 2019, the percentage of sales that that will make up of the total defense is lower than we expect in 2017. So we're not going to be as dependent upon those sales in 2018 and 2019.
is Penda Nicole here. Mike, if you would please.
Thanks. So I have two questions. The first is uses of cash in 2017. So with the free cash flow expected to be just $0-$50 million, is it fair to assume that repurchase activity will be pretty low next year? And then secondly around the double-digit margin goal in fire and emergency, just kind of the timeline around when you guys can get to that.
I'll take the first one and maybe turn it over to Jim on the second. So yeah, from a free cash flow standpoint and share repurchase activity, what I would expect for next year is we will be active, but probably more so. So from the standpoint of just trying to maintain our share count, average share count for the year.
In terms of our double-digit margin and the timing, of course today we only gave.
An outlook through 2017. But if you go back to the.
Three challenges we face by continuing to reduce our complexity, leveraging our innovation and of course leveraging our premier dealer network.
We do believe we are on track in the near term to hit.
The double-digit OI target that we mentioned earlier.
Hi.
I guess two questions. One, you know Wilson, just strategically for you, I mean you got all the defense wins that you wanted. Aerials is close to trough or will be in 2017 and you're managing the profitability well. So all the issues or concerns that were out there behind you. So as you think about 2017, does acquisitions become a bigger priority for the company? Should we expect the pipeline to increase because you're in a position to be more opportunistic than your peers? You could buy in a downturn or do you think there's too much going on that you really wouldn't want to do anything? And my second question is, I guess just Dave, longer term, obviously, I think people view there's probably the defense margins that you're talking about over the long term are slightly conservative, like structurally.
Why couldn't we get back to sort of prior peak margins in defense?
Thanks.
Thank you, Jamie. Yeah, you know, 2017 is. Dave, we're not going to generate a lot of free cash flow in 2017, but we do have the opportunity in 2018. And so 2017 we'll certainly be looking. Dave used the word opportunistic like 3 or 4 times in his talk. And we certainly, you know, that was our DNA before. We want to grow. Growth is something that we're interested in, but we want to do it in a prudent way. So we keep an always on this. We study these alternatives with our board on a regular basis and again, the acquisition capacity goes up for us into 2018, and we'll certainly be looking. And again, Dave mentioned it that if there is a cycle this time, we don't want to be levered up, but we want to have some dry powder where we.
Where we really could be opportunistic during a cycle.
I would assume more so in the first half of the year.
Yes. Yeah.
On defense margin, if we think back to prior peaks, prior peaks are when we were doing 1,000 M-ATVs a month. So it's a little bit of a apples and oranges, I think. But as John mentioned in his presentation, we certainly will look for opportunities to raise margins over time. We're just really starting to ramp up the JLTV program, and I think, you know, we'll see how that goes. Historically, we've done very well at ramping up programs. So while we would like to think that there could be opportunities, you know.
We have to prove it.
Okay, thank you.
Charlie.
Kind of the flip side of the M& A on divestitures. You've got some smaller businesses tucked into.
Some of the larger segments.
I wonder, as you look at those, I'm assuming there are internal, you know, return characteristics that you look at on these businesses. Are there businesses there that are, you know, below the bar, that, you know, you think you can get back to the bar, or you're looking at evaluating, saying, you know, at some point there's a cutoff date? We say, we've done what we can do, it's not going to meet the return characteristics, and we're going to divest it. Where are you guys in that process on maybe some of these smaller businesses?
We don't really hear a whole lot about.
We go through that analysis every year, Charlie, and today we believe there's no issues in front of us. Now, we want to always earn our. Our weighted average cost of capital. We have some businesses that aren't doing that right now, and they know they have to. And so there's structural discussions going on on what we need to do to get those businesses in the right place. It is something, again, we discuss with our board on an annual basis. If you do a sum of the parts today, these businesses are worth a lot more to us than would be somebody else. But we'll always study that and make the right decisions for our shareholders.
I'm struck because I don't think I heard the word employee once in this presentation. And a key part of any, if you let me use the word, lean implementation is employee engagement. I mean, I know you do it, but. But perhaps you could give us some words of wisdom on where do you think you are there and what your opportunities are there.
Well, I would say today, Cliff, people get up and they think continuous improvement, where three years ago it was like checking a box, more mechanical. We do Oshkosh Excellence Awards where our team members do continuous improvement events and they turn those entries into a contest by segment and they roll up and the entries that win in the different segments, there's four different categories. They get money and the money they give back to the community, they get to donate to the community or the charity of their choice in their community. So we're doing other things around continuous improvement to not only entice but to reward. And I would say today you look at where we are from a baseball game, we're probably in the place first, fourth inning, but we certainly are moving down the path in a good way.
Simplification is going to add to our continuous improvement journey and be a big focal point for us going forward. But I would say our 13,000 team members, one, they know who their internal customers are. They know how they're supporting that customer and more importantly, what they need to do to better support and improve their work, their workflow to their customer.
Cliff, just one other thing to maybe add to that. We talked about, we didn't say the word employee, but we talked about people first. There's a lot of focus around our team members and making sure that they're heard and that they have input into how they do their work every day and how we make it better for them to come to work every day at Oshkosh Corporation.
I would just say, Cliff, if you look at NEO there, there are three horizon maps. From a strategy standpoint, the first initiative in all four segments is People first enabling that People first culture.
Well, in that strategy map, what is the metric by which you measure that KPI?
It's different in each segment. Whereas one segment may be reducing turnover, increasing morale. It varies by segment, but there are metrics in each one of our segments. If you don't mind, we'll come back to you. But I think there's some people who haven't had a chance to ask a question. Let's make sure we get around the room here.
Mike.
Thanks.
Thank you.
I had a quick question on JLTV and your outlook past 2017. Maybe it's just for John. I guess then is there any kind of major parts opportunity outside of what's already in the current contract? Perhaps when some of these get hit or damaged or what have you, is that part of your 2018 and 2019 outlook or is that maybe more of a 2020 and beyond? I guess I'm asking what parts are included in the current contract and is there basically almost inevitably going to be a second contract for parts afterwards?
Thanks. So what's included right now in our forecast through 2019 is the standard portion of aftermarket support to all of our programs. And as I mentioned just earlier we were talking about it, that tends to be roughly 15% of the truck sales for JLTV. We actually have. The government can choose two paths. We have an option on the existing contract for interim contractor logistics support where our warfighting customer can really get comprehensive support for the first few years for JLTV, more than just the normal parts where we can perform many of the logistics functions for the government. And as an ex-government program manager, we often did that early in the program and then as the vehicles were fielded over time we would transition to more organic support.
So we see the government doing that over time and of course we see great opportunity for Oshkosh in providing the parts, the training and the technical support for that platform. I also mentioned that in the contract itself there's beyond the sale of vehicles, there's fairly significant system technical support and integrated logistics support actually in the, you know, on contract right now.
Margaret, do you want Roy? I believe.
Yeah.
Hi.
Thanks.
Page 47 on defense you have 240,000 Humvees that are on the installed base. On page 48 you talk about the 2040 estimate for tactical vehicles being 55,000. I'm just wondering kind of what your thoughts long term the potential installed base could be. I know it goes for recompete, but just talk about that and then I know you've talked about that JLTV would.
Replace the M-ATV likely as a variant internationally over time.
So what do you think about the?
Relative profitability you've talked about?
Analysts can kind of try to triangulate M-ATV's profitability.
Maybe just talk about, as you transition perhaps longer term to JLTV internationally.
What that might mean.
Why don't you take the space.
So for.
I apologize, I don't have the slide deck in front of me. But the way I think of the market potential for JLTV is that portion of the Humvee installed base, that is armored Humvees. Really if anybody has armored Humvees, they ought to have a JLTV. So it's not the entire Humvee installed base. Where customers use unarmored Humvees, they're doing.
Their job pretty well.
When it comes to customers who need protective mobility, and that's a portion of the installed Humvee base, JLTV is what they need. In terms of the installed base.
Again, I don't have.
I didn't carry the slide up here with me. I apologize. But it's that portion, and you can see it on the slide, that portion that represents armored Humvees. And to your other question on JLTV replacing M-ATV, I don't personally see it that way. I believe that they are. There are two specific platforms and JLTV was designed to replace the Humvee. I see a continued opportunity for M-ATV, particularly with our Middle Eastern customers. I see JLTV as more additive and offering us the opportunity to penetrate markets where customers want lightweight, protected mobility. So I don't actually see one as replacing the other over time.
So with that, you know, John's view is it doesn't go away. What we have said, Troy, in the past is that M-ATVs are the highest margin product in our defense portfolio. We've said that the JLTV is not going to have margins like an M-ATV. That said, we think we went into the JLTV knowing that we had to deliver a decent margin on that, and we will. And as we said earlier, we think there could be opportunities over time to see us grow the margins on that program. And that's probably about as specific as we're going to get with it.
Anybody else got a question? Okay, we come back to Eli after Mike or Janet, please.
Great.
I have mine a little bit out.
In the left field. Back to Troy's slide 547 there. The Jeep and the Humvee and of course the horse are things that any of us can buy today. Many years haven't they introduced, especially the horse, the JLTV.
Is that a potential brand in the?
future you can possibly license out to someone to make in a much higher volume, obviously much more stripped down than perhaps any of us could buy in the future. Is that like a, you know, pure profit opportunity to sell to GM or Ford?
Thanks.
We'll see.
Mike, we've got a lot of military trucks to build first and we do get that question quite often. But our plan right now is to get JLTV going with our U.S. Military. Eli, I think had another question.
Jeff, I want to come back to the commercial segment and looking at it, you have a very nice historical chart 81 showing you how bad the margins have been in that sector almost forever now. I understand the collapse of the mixer market, you know, coming up to the recession.
You know, it's slow recovery.
But we're looking. I think I mentioned earlier that this is a semi-oligopoly market with awful profitability characteristics and still waiting, you know, still mired in this mid-single-digit number, hoping to get 10%. They have two questions. One, if there isn't an infrastructure step-up in spending, to what degree? Or can you give some quantifications of how that might help, you know, to exercise that business too? Do you have too many models or too much going on in the mix that should be streamlined down or cut down to something because it would be in the shareholders' best interest that if it stays at these levels that it probably is not worth more to Oshkosh and probably something that maybe you can redeploy capital to a better business.
The business has strong potential if you combine the makeup of the product portfolio, the leadership positions that the portfolio has in, together with the strategies we're talking about. So you talked about product content complexity, no doubt. So that's core to our strategy, and you saw that earlier. So simplifying the business, which means simplifying in some cases customers and simplifying and segmenting product content for sure relative to infrastructure spending, the FAST Act, those types of things, certainly those are going to add a boost to the market.
When you apply the concrete share of the overall paving market for the highway bill, it's not as big as some people think, but it is definitely an updraft that will help the market. Internationally as mining comes back, I mentioned that before, that will help, but no doubt structurally from a simplification perspective and overall executing performance, we are extremely confident in our strategy executing and delivering to those things. That's our goal. We're going to keep going until we hit it.
One of the other issues, Eli, there is from a competitive landscape standpoint he's dealing with some smaller private owners, not publicly traded companies. The Chinese are now in this. So the challenge for commercial is they still have to be competitive at the right margins for us to go forward with that business. So that's a challenge that Brad's put out to his team and that's why you're hearing some of the internal things that are kicking off there is this.
10% margin number something to think about for 2020 or post-2020 or I mean can you put some time frame on this business given you know we've had almost a decade at this point of low, below, you know, ideal margin. Can it get to a double-digit margin by 2020? Is that sort of what the target is or is it longer than that?
Well, can you tell me what the market will be then, Eli? Maybe we can answer that question. We're still working through a concrete mixer market that's very slow. The ready mix customers are nervous. They're not spending a lot of CapEx because they were down so low. So it's a market issue. If the market comes up and he's successful with these initiatives, then we can get there. But I'm hesitant to tell you a year because I don't know what the market's going to do in those out years.
Would you continue the same strategy? We're talking about a GDP number that could stay for an extended period of time before the market doesn't change radically in an extended period of time. Can you still get to a 10% margin in that kind of environment or do you have to have a volume of code?
There is definitely room for growth because of. I keep reminding you. I'm sorry for the repetition but fleet age. There are about 65,000 active mixers out there now in the marketplace. Of those, the vast majority of those are ours. There are about 80,000 refuse collection vehicles active in the marketplace, estimated a large portion of those are ours. So in my presentation, you saw it earlier, we talked about life cycle capture.
Our strategies in investing and move through this period of time in our branch structure to be able to use parts, service, and refurbishment; those are much higher margins. So even though it might be lower growth, it's that life cycle capture that does give us updraft for our margins. So we're very favorable about it. We've got to execute. We do need some help from markets, but markets won't get us there alone. But our strategies are right to balance all those things across the life cycle.
We're not just going to sit still. We talked about our León facility in Mexico that's going to benefit commercial. It's still in startup mode so we won't get full benefit in 2017. But that will help be something that helps us down the road. I think Ann had a question.
Yeah. Just to follow up.
If a strategic buyer were to approach Oshkosh, is there anything in the JLTV contract, any change of control clause, and is there if a hostile takeover was?
Our target was made. Is there anything in the Wisconsin laws that would prohibit that? I don't know.
Our general counsel sitting right in front of you. Yeah, I should put him on the spot.
I don't know that I'm in a position to answer the details of the JLTV contract, but I can't imagine that there's anything in there that would prohibit a change in control in any way.
It would be pretty unusual for a government contract. But we could get back to you with that.
It's a big contract.
It's certainly not something we focus on every day. Looking at the JLTV contract for a.
Change-in-control provision and Wisconsin law does have some provisions related to business combination rules that are detailed in the statutes, and we would entertain any situation as it presented itself. Thanks, Margaret.
Howard's right there to your left.
Great. Thank you very much for all your presentations and particularly for yesterday. That was very helpful. If your business normalizes over time at the free cash flow levels that you've talked about, and I understand they'll be lumpy due to various contracts, you will generate firepower even if you return half of that to shareholders measured in the $ multi-billion over 5, 10 years, something period of time like that. And that would be quite a meaningful acquisition eventually that you could pursue. You'd probably have to think about that now to ever make something like that happen. So I guess the question is would you prefer something very large and meaningful over some period, you know, down the.
Road, whenever, or.
More bite-sized, spread out over longer periods of time, or neither.
I think Dave talked about we're not really into a transformational acquisition that's not in our thinking today. It'd be more of a bolt on something that fits with, you know, you see what we do well here and we want to make sure that whatever we would purchase we could make it much better.
Yeah. Fire and Emergency, that the margin bump you're expecting next year. I'm just curious if you could. You talked about it in your comments earlier a little bit. But I'm curious how much pricing power is contributing to that expectation. Expectation? How much the cost takeout that we.
Saw yesterday with the new facility layouts.
Is contributing or if there's another bucket? Because I just wonder on the technology.
Side in particular, you know, maybe that's.
A sustainable thing over time, you know, or not.
The cost takeout I imagine will.
Be helpful too over time.
So, just your thoughts on that whole?
Sustainability question, I guess.
Sure.
The answer is both.
We are a premium brand. We do command a premium price and.
You see that from our investments in.
Innovation and access to our robust dealer network which helps us command a premium price.
So that coupled with what you saw.
Yesterday, both of those things are driving.
us to the higher margins.
Can you maybe give us a quick update on any discussions you might have had with your government customer on the LRIP and any sizing that incremental opportunity and also maybe a little color on the FMTV costs that would be coming in fiscal 2017?
Sure.
The government has publicized a couple of times that they're looking at JLTV as possibly meeting the LRV requirement, that requirement for a vehicle for Scouts, in essence. And what Oshkosh will do in that regard initially would be to study various configurations and our ability to mount long range acquisitions and sighting systems and different weapon systems and just provide options for our government customer on what type of, you know, what type of systems he'd like to mount and kits he'd like to mount to fill that LRV role?
Meg, on your question regarding the FMTV recompete, I guess maybe the best way I would say that is absent those costs in fiscal 2017, we would expect to see margins in the defense segment north of 10% next year.
Just to finish on LRV. We see that we talked yesterday about the wide variety of kits that the JLTV is capable of accepting. We see JLTV in an LRV role as really a couple of different kits. Add on to the wide variety of kits we can already mount.
I'm sorry, in terms of units, do you have a sense for what the requirements for LRV are?
Yeah, we don't actually have any sense that the LRV requirements, to the extent that they stay within JLTV, we don't have any sense that that will increase the acquisition objective for JLTV, which is right around 55,000 vehicles.
You're not going to ask about the Postal Service? Okay, you usually ask me about that.
Go ahead.
Hey, Seth. Hey. For, I guess, Frank or Dave, the.
Access decremental this year is a little bit larger than we thought it was going to be.
Did something change with the regional mix?
Or the product mix relative to kind of where we were thinking about.
It just even a quarter ago?
Yes.
I think overall, as Frank mentioned, continued challenging pricing, foreign exchange headwinds, that may be probably the newer one in terms of Brexit. We do have a few percent of the percent of the segment sales there. We really don't have any natural hedge. When you look at the extent to which the pound has fallen, that's a headwind that we typically wouldn't see. Based on our view of where the pound is going to head in 2017. Other than that, the typical things that we would normally see you generally think about ±25% is how we think about it. So a little extra pressure there that's pushing it up towards that 2017.
I think the only thing I would add to that, Seth, is obviously we're not happy with that. Talked quite a bit today about structural changes and things we're evaluating as well as strong cost control to improve upon that situation. But that's the view we have right now.
Is the implication though that if 2018 is a down year again, the decremental?
Could be bigger than 30% or decremental off of if.
We're not saying it's going to happen. I would not, you know, I wouldn't.
Think so because this is the US dollar.
Impact is a 17 versus 16. If you assume it's flattish, then that goes away. So I would think we'd be back to typical.
We would also see some of the impacts of our actions in 2017 start benefiting the business in 2018 as an offset.
Hi Seth, is my real question, but I guess just as a follow up, can you just comment more near term? You know what I mean? What you saw in Europe within aerials in the quarter, have you seen any deterioration or has it still been, you know, a green shoot for you? You know, because Q2 every. Well, calendar year, Q2 was fine for everybody. Right. But it was really was enough time to really see the implications of Brexit and just what your assumptions are in 2017. Thanks.
Yeah, thanks Jamie.
Yeah.
I mentioned in my presentation Europe does remain difficult to predict. We see strength in some areas. We see some recovering markets in Italy and Spain. We see other markets flattening to going down. Overall, our prediction or forecast into 2017 is a relatively flat market. We are making some product introductions this year in the AG market, intelligent handlers that might give us a modest growth opportunity in that telehandler market. But overall our assessment of Europe is relatively flat, as I mentioned in the presentation.
But to be clear, Q4 versus Q3, there's been no. You haven't seen any change in overall demand in Europe for your business? Q4 versus September quarter versus June. You know what I mean?
I'm just.
Over the past three months since you reported, have you seen any changes?
I would not, outside of expected seasonal type of change.
Okay, that's helpful, thank you.
Okay. I think that maybe it's it. You want to come and close us.
Yeah. So I'll tell you what. There's a lot of work that went into the last two days, and it's difficult to name everybody, but certainly Jeff Watt, Janet Heft, Margaret Wacholz, John Sheehy, Katie Hoxtel, John Schwartz. These are folks in the room right now, and I think they did an outstanding job as well as Thad Foster and everybody else. Let's give them a round of applause. And their planning and effort are going to make your trips back to the airport very easy and simple, I believe, as well. So with that as a backdrop, the buses will start arriving. There's the first bus at 11:30 A.M., and that will depart at 11:45A.M. to Milwaukee. The second bus will be coming at noon and that should depart about 12:15 P.M. for Milwaukee as well. If you need help outside of that, let us know. We'll do what we can.
There are box lunches in the Lake Winnebago Room. That's where we ate breakfast. You're welcome to take a lunch, take drinks, take it on the bus with you, take it back to your room or even eat in the room. The Lake Winnebago Room will be open. Certainly to follow up from today's meeting, please don't hesitate to contact myself or Jeff Watt. We really appreciate you coming. Safe travels. Good luck to your college teams or your NFL teams and have a great weekend.
Thanks again for being here. We appreciate it.
Appreciate it.