Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the fireside chat with Oshkosh. I'm Jerry Revich with Goldman Sachs, and I'm really excited to have with me John Pfeifer, Executive Vice President (sic) [ President ] and Chief Operating Officer; Mike Pack, Executive Vice President and Chief Financial Officer; and Patrick Davidson, Senior Vice President, Investor Relations. John, Mike and Patrick, thank you very much for joining us.

Thanks.

Glad to be here.

You bet.

So the management team has a few minutes of prepared remarks, and then we'll jump into our fireless chat here. Gentlemen, the floor is yours.

Good morning, everyone. This is John Pfeifer, Oshkosh Corporation. I thought I'd start by just giving a -- kind of a thumbnail sketch overview of Oshkosh Corporation and who we are. Some of you may be familiar with us, but let me just provide an overview. So we are a global company with -- fiscal year 2019, we closed our revenue at $8.4 billion. We've got about 15,000 team members in our company worldwide. We operate in 23 different countries and 150 sites around the world where we operate from very high level -- stuff. So segment-wise, we've got 4 segments. Our largest segment is access equipment, that's primarily the JLG-branded product, the aerial work platforms and telehandlers where a Oshkosh Defense is our second largest segment, tactical-wheeled vehicles for the U.S. Army and the Marines. And a lot of international Departments of Defense as well. Third largest segment is our fire & emergency segment, led by the Pierce brand but also emergency vehicles for airports around the world. And that is our highest performing segment when you look at an operating margin perspective. And then our final segment, certainly, not least, is our commercial segment. We do a lot of commercial specialty vehicles for maintenance applications, refuse collection applications, concrete mixer applications, those types of products. So if I go into the company in total, we have about 10 brands in those 4 segments and we are market leaders everywhere we participate or we compete. So of the 10 in 9 of those segments, we're the #1 brand. And in one segment, we are a #2 brand. So we're in diverse end markets, but we call ourselves a different, integrated global industrial. And we call ourselves different, integrated global industrial because while we participate in a variety of diverse end segments, we are able, because there's enough similarity in what we do, we are able to leverage a lot of our core company -- competencies in every one of those segments. So what am I talking about? I'm talking about manufacturing. We have a core capability in our defense manufacturing for coatings. And our fire & emergency segment leverages that capability in manufacturing to provide superior performance for our fire trucks that our competitors cannot match. We have integration in our sourcing and supply chain capability, which has served us really well as we've gone through this downturn due to COVID-19. We've been able to continue running as a critical industry because we've got such an integrated supply chain that when one supplier goes down, we're able to make adjustments and use other qualified suppliers to prevent inefficiencies in our own manufacturing operations. And perhaps the -- not perhaps but clearly, the largest benefit we get out of being this different, integrated global industrial is our technological and engineering capability. We're able to apply engineering advancements that we make to multiple segments serving diverse industries. And we think that that's a big strength for us as a company. We are a recognized leader in making a difference in a lot of different ways. We're the 2019 World's Most Ethical Companies list, that's by Ethisphere, that's hard to get on. We're on the Dow Jones Sustainability Indices. So we do a lot of work on ESG, and we're proud of that work, and we're proud of the sustainability that we have in the ethical position that we have as an organization. Just a little bit more about our engineering capability. So we've got about 1,300 to 1,400 engineers. These are highly degreed people that work in our corporation. And we've got -- to give you an example, right now, the tally's 858 current patents on new innovations that we have created with our engineering capability. And when we look at ourselves, we look at ourselves continuing to make advancements in big megatrends whether it's automation or whether it's electrification or whether it's connectivity with telematics products, active safety innovations. Applying that to our -- what is "industrial businesses" and really continuing to excel in what we do in terms of the purpose that we serve to firefighters, defense markets and other industrial markets that we serve. So that's all part of that different, integrated global industrial approach that we have as an organization. Finally, I'll say in my intro. We've got disciplined capital allocation. We typically target about 50% of our free cash flow going back to shareholders, and we make investments with the other 50%. It's not perfectly 50% every year, depends on the situation every year. But if you look through time, you'll see about 50% of our free cash flow goes back to shareholders. So that's kind of my brief intro and who we are as a company and what we do. And Jerry, go back to you.

Terrific, John. I really appreciate the overview. And your last comment really introduced an interesting question, right, because we've got all of these core competencies that we're talking about across the portfolio in a downturn like this. How high on your to-do list is M&A? Clearly, this is the right point in the cycle to -- if you are to make an investment in an additional brand or products, this would be the time to do it. How high is that on your list when compared to the track record that we spoke about, in terms of returning cash to shareholders consistently?

Yes. Well, what I'll say is we -- first of all, we've got a very healthy balance sheet. We expect to maintain our healthy balance sheet through this downturn. And I think you saw that in our earnings release a couple of weeks ago that we're staying healthy. This -- we're not out of the woods, by any stretch of the imagination, in terms of this economic downturn but we're very confident we'll remain healthy through it. So we do believe, of course, that there could be some opportunities ahead in the M&A world. And we'll -- we've got an always-on pipeline. We call it the always-on pipeline. And we always are reviewing potential targets that we think make good, I'll call it, bolt-on style acquisitions, enhancing our strategic position in what we do as a company, whether it's a -- in defense segments or in fire & emergency segments. We're always looking at those opportunities. And as we come through this downturn, sure, there could be opportunities for us to make some moves, but it's always on our mind and we review it regularly.

And if you really look, this is Mike -- if you look in recent years, we've really been the best investment over -- I think our -- so you saw that with our buyback activity, particularly last year. And we've been investing a lot in new product development with increases on a yearly basis and frankly, as -- even as we navigate through this pandemic. That's one place that we're -- we continue to focus our resources on. And -- but coming out of this, we're going to watch multiples closely. I think there's -- as we think of M&A, I would think, to John's point, we think of adjacent technologies, things that complement our products well. Bolt-ons, tuck-in type-acquisitions, probably not transformational ones at this point in time. But that's really where the focus is. And we'll be watching as we come out of the cycle.

And in terms of the organic part of the story has been really interesting, not only from a top line standpoint, but the margin improvement efforts in fire & emergency and access equipment stand out the most. I'm wondering at this point, can you talk about what are the most significant corporate objectives that you folks are looking at over the next 3 to 5 years? What's next given the margin journey you've been on?

Yes. Well, this is John, Jerry. I think that while we're in a slump -- the economy is in a slump right now. And so we're managing very prudently through this slump. But I will tell you that we feel very optimistic about our position in the markets that we're in over the next 3 to 5 years, when you look a little bit longer term. Because we've got the -- we have the engineering capability and the technological capability to continue to make investments in new innovations and new products. And new innovations and new products always lead to our position as a premium player in the market. They help us -- they're a huge part of how we generate margins. And so when we look at -- it's always tough to get to manage through the trees in a tough climate like we're in right now. But when we look forward 3 to 5 years, and the investments we're making organically in our products and the technology that we provide, marrying high-tech with kind of the industrial products that we make, we feel really, really well-positioned for that.

In terms of any opportunities to come out of this cycle with an improved margin structure, are there any facilities that could be rationalized or anything along those lines that could lead to higher-margins in the next cycle beyond the products?

We worked hard in recent years, and you really see it with the margin improvements we've had to really structure the business to be able to weather through ups and downs. And it's something we're always looking at. But at this point, we're really viewing and the actions we've taken are more temporary in nature. From -- as we had announced on the -- recently, we are taking $80 million to $100 million of cost actions as a result of the situation. So again, more temporary in nature. But we have a playbook just looking at really the full variety of scenarios, whether we're V-type recovery or whether it's more elongated. We have the ability to take more actions that -- we're always looking for opportunities though to improve our operations. And if you look at, for instance, that F&E and access, we've done a lot from a simplification though they're -- opportunities remain in those areas, and we'll continue -- it's something that we're constantly looking at, constantly focused on getting better so not -- at this point, we're not doing any large restructuring activities at this point because we still believe this is more temporary in nature.

And on the margin improvement journey. Can we talk about the opportunity set in commercial, either from a simplification strategy or other areas? Is there a runway towards the 500 basis point type of margin improvement that you saw in access and fire & emergency?

As we look at commercial, we believe it's -- we can achieve double-digit operating margins. We're -- we continue on our simplification journey there. Similar to F&E, you see that innovation was a huge part of -- fire & emergency's journey of improving the margins, and you see innovation taking place in commercial as well. Recent launch of our new S Series 2.0 Front Discharge Mixer. So we're continuing on that innovation and simplification journey, a bit behind fire & emergency, just from a timing perspective. F&E really led the charge with it. But we believe the playbook will work or works well in commercial as well.

And from a timing standpoint obviously we saw the new product launch this year. Any other meaningful milestones that we should think about in terms of building visibility on that path towards double-digit margins?

I think, really, if I understand the question, yes, we're continuing. If you were to visit our facilities, we're continuing to optimize our line flow to essentially really dedicate those lines to individual products, very similar to the journey we had at F&E over recent years. So very similar type activities taking place real time right now.

Okay. Good. And on the last conference call, it was really nice to hear the commitment towards decremental margin targets at what would be historically really low levels. Can you talk about how much is improving pricing discipline in the access equipment industry contributing in this cycle, even as steel costs decline? Is that one of the major factors in terms of this cycle versus last?

I really think it's just fundamental business execution. I would really look to -- it's everything from our cost structure, understanding our fixed and variable costs and being able to adjust quickly to ups and downs. It's disciplined pricing, it's our innovation. I think our innovations allowed us to -- in some cases, some of our product areas gained share and command strong margins. So I would really look to all of those as legs of the stool that are contributing to our improved decremental situation.

Okay. And on the conference call, we spoke about a daily supply chain update considering all the issues going on globally. Can you talk about -- has the tracking list of suppliers come down at all as we've seen folks starting to go back to work? Has it gotten any easier for your supply chain organization into May?

Yes. This is John, Jerry. The simple answer is, yes, it's gotten a lot better in the last week to 2 weeks. So we had -- I'll give you a kind of -- an explanation of what's been going on with the COVID-19 pandemic. We had 240 suppliers around the world shut down their operations, and they shut down their operations anywhere from 2 weeks to 6 weeks, and there's still a few that have not come back up. Today, about 89%, that's how closely we track it, of those 240 are back online and running production. But as you know, we're in what's considered a critical industry. We have letters from the Department of Defense that say it is imperative for you to continue to operate through this pandemic. And we have not shut down our operations at all because of a supply chain disruption. We shut down JLG for a few weeks because of matching supply with demand, but that was not a supply chain interruption. So to have 240 suppliers shut down and not shut down our own operations just shows that we really have done some nice work in managing our supply base through the pandemic. And I think that, that's a tribute to ourselves being a different, integrated global industrial. So I'll give you an example. We had a case, and there's hundreds of these cases. We had a case where a supplier of isolator mounts shut down. Now isolator mounts are a critical component in our F&E business. They are what -- that's what mounts a pump to the chassis, and it's a highly engineered product. The isolator mount supplier went down. We were able to shift that production to another qualified supplier in a different segment that was able to tool up, qualify and get running in less than 4 weeks. Narrowly missed a shutdown, but we did not shut ourselves down because we've got that capability to manage an integrated supply base across all of our segments. That's one of many, many examples, but back to the short answer. It's a lot better today than it was a couple of weeks ago. We're not completely out of the woods yet because we still have 11% of our suppliers down. And -- but we'll continue to manage it the way we have the past 8 weeks as we go through the pandemic.

Keeping that intensity, right? You can't let up. And the key is, well obviously we're monitoring our suppliers. Certainly, make sure that they're not having outbreaks or so on in their facilities. But it's -- so it will probably, at this point, you'll probably get some adds and subtracts on over time, but definitely continue to watch it daily.

So that's a really interesting point on the example of qualifying and receiving shipment from a supplier within 4 weeks. I mean that's normally what, a 9-month type process? So what can we do coming out of this pandemic in terms of -- is there an opportunity to qualify more suppliers quicker? And how much do you think your ability to manage the supply base can improve on a sustained basis, to get that down to 4 weeks? It's just really surprising.

Yes. I think when you go -- any time you go through a crisis like this and you're really challenging an organization, stressing it and pressure testing it, you'll learn a lot. And we're learning things about our supply chain that we didn't know. Some of them really good and some of them, areas for improvement. So there are some components where we're single-sourced, that we're realizing, "Hey, there's maybe a small cost benefit to be single source." But the risk component would say that maybe we should be dual-sourced. Those are -- that's an example. I mean -- but there's certainly learnings that we've had as we've been in a pandemic and that's caused a pressure test of our supply base, and that will help us going forward when you get challenged like this, and you make it through. Typically, it makes you stronger.

And John, any other learnings for other parts so the organization? Or anything else that could present an opportunity for you folks having dealt with this situation?

Well, I think in all parts of the organization, we've learned a lot. We've learned a lot as we man -- we manage our own operations in this pandemic climate and how we organize work. And the resilience and motivation of our people has been encouraging to us. I think the ability of us to find new ways to work when we're in a pandemic and you've got people remote working or having to socially distance when they work. So we've got sales teams that -- sales teams typically like to be out with customers, and they can't be with customers. And they found new innovative ways to stay very closely connected with customers that we'll probably benefit from going forward. And I think that these are all -- it's really hard when you go through it. There's positives that come out the other end.

Really interesting. And in terms of the product in the field. So one tool that you folks have in this cycle that we didn't have a decade ago is telematics. I'm wondering if you could talk about how you're able to leverage the business intelligence that you're getting from telematics, both in terms of tailwind to your parts business as well as your planning process given all the real-time information that you're getting now.

Yes. I think our telematics provides us with connectivity and provides us with data that we have not had previously, and we're able to do analytics on that data. And that's where the real value is, is when you get the -- you get the data, but you have to be able to do the analytics to be able to provide value from it. And we provide value for our customers, from fleet operators to the users of the equipment, make the driver of a truck more productive or the user of aerial work platform more productive. So our focus is to drive customer productivity, but it also does certainly help our aftermarket business because we can provide proactive maintenance and support, making it easier for our customers, and that's also good for us, of course, and good for the aftermarket business. We've certainly learned that our aftermarket business is resilient in a downturn. Now that's not a surprise. That's not necessarily anything new but we more -- we know more about it because of connectivity than maybe we did in the '09 downturn when we didn't have connectivity. And all we would see is aftermarket would be more resilient, but we wouldn't know necessarily real-time information as to where it was happening. But I think more than that, as we're in this downturn, we pay attention very closely with every single customer in the access market to utilization rates. And that's not really related to the telematics product. That's just what's the utilization rate at the rental companies, our core customer base. And of course, it's come down in this pandemic. It's leveled off. It's come down 15%, is what Sunbelt and United have been quoted at, had leveled off at that point. So we pay close attention to how we can support them during that. They're not reducing the size of their fleets at this time, which means that they're kind of in a wait-and-see mode to see how the recovery goes. We think it's good that they're not reducing the sizes of their fleets. And I think as economies are going to start to open up over the next couple of months, there's some that will take longer, we're now seeing in some parts of California. But we'll know a lot more 4 weeks from now, we'll know a lot more 8 weeks from now than we do right now in terms of what we think this recovery is going to look like.

And do you have a rough sense of what proportion of your fleet is connected assets today in the U.S.? How significant is that field population?

It's more significant with -- and it depends on the segment, right? So we're just starting to apply it to our concrete mixer products. And this is something the concrete mixer industry has never seen before. This type of capability and productivity improvement you get from it. We introduced it at the CONEXPO Show on that Front Discharge Mixer that was there. So it's just beginning in that segment. It's been in the aerial work platform business for quite a while, but it's still not 100%. And even when the capability is there, sometimes, it's not turned on. But every quarter that goes by, there's a little bit higher percent where we have the ability, through telematics, to get data and be -- and provide connectivity, analytics to our customers and learn ourselves about how the machines are being used.

And you have some rental customers that generally have their own telematics strategies for equipment tracking and more basic functions of -- when we were talking about working about the capability set on the equipment you've provided. To what extent are you folks set up to let them piggyback off of your hardware instead of having to spend additional hardware dollars? How integrated are you with those top customers that are essentially -- have been doing some of the same things?

Yes. What I'll say is that's -- it's -- from an engineering perspective, it's fairly straightforward to provide a telematics product. The difficulty is -- or the real value that's created is in the data analytics. So to provide a telematics product and get data, that's one small step from an engineering standpoint. The bigger thing is to be able to take that data and do analytics and provide value from it. And that's what we believe we can do better than anybody else because we designed the equipment. So we know how to read the data and make sense of what it's telling us, where a third-party analytics provider that doesn't know how a machine was designed, might be able to provide some basic data, but they're not going to be able to do the real analytics that we can do. So we would always prefer to be -- to have our customers use our analytics product. But you're absolutely correct. They're sometimes -- when they use a third party solution but more of our products is being designed in with it on as it arrives. So it makes it easier for a customer to just flip the switch on our telematics product versus having to go put a third-party system on.

And John, you had mentioned what the rental companies you reported, in terms of trough utilization levels and first week of April, and then steady recovery into the back half of April. I'm wondering based on the telematics and machines being turned on, so to speak, at your construction sites that -- where work had not been allowed in April, are you starting to see lights come back on in May as the stay at home orders are lifted? Are you seeing that show up in the data?

Yes. We are. Yes.

Okay. And in terms of the concrete placement part of the business. If we can just shift gears, talk about that product line. How do you expect the cyclicality of that business to play out in this cycle? We never really had a strong residential recovery in this cycle, and this business really didn't get back to prior cycle high levels. So how should we think about the cyclicality here compared to what we were looking for on the JLG side?

Yes. That's a good question because every downturn is a little bit different. And both our access business and our concrete mixer business tend to follow residential and nonresidential construction but the concrete mixer business correlates strongest with residential construction. And residential construction, this cycle does look like it's a little bit better and a little bit healthy than it is certainly than '09, of course, but even other downturns. Now while I say that, I want to remind all of us that we are still in a fog right now. We're still in the middle of a pandemic. We still have a lot of shelter-in-place orders going on with most states in the country, in many, many countries where we do business. And so we're -- we still need to see economies open up again and shelter-in-place go away, before we're really going to be able to understand more about what does the outlook look like for the mixer business and residential construction.

Okay. Good. And then, in terms of -- shifting gears to cover the full portfolio. Can we talk about in defense, you folks had really excellent JLTV demand. I'm wondering if you could talk about what that demand cadence has been like since the pandemic hit. Are you seeing any impact on international defense budgets in this environment, if at all?

At this point, it's been -- we've been pushing through with the customers. We are working with about 10 customers or 10 countries right now on opportunities. We haven't seen any slowing up a bit through the pandemic because their needs remain. So far, we really haven't seen any impact and work continues.

And what about in terms of inquiries and field testing? Has that gotten pushed out at all?

Not really. Nothing meaningful. We're -- that were -- a lot of times, these negotiations take months to go through and activities that we were working on sort of a pre-COVID, and were expecting to be working on a -- have really stayed the course. Our defense businesses stayed operating and really the corresponding customers on the other end, foreign countries have continued to operate. So those dialogues continue are ongoing -- are -- in certain cases, there may be modifications that, that the foreign militaries want to the units, some of the work from an engineering perspective, looking at potential opportunities around that -- those modifications continues. So really, it's been largely business as usual.

Yes. And if you look at predominantly NATO and Middle East allies that we work with. That seems -- maybe that was understood but there's dozen plus that we're currently engaged with right now on potential orders. I mean it's continuing. It's a real growth opportunity for us.

Okay. And then, can you talk about -- or is there any new product opportunity set in defense to think about? I mean you folks have really effectively expanded the scope of the company from essentially heavy tactical vehicles, to medium now to light and throw in M-ATV in there for good measure. So the segment has been really successful in expanding into adjacencies. Any other adjacencies for us to think about that are possible?

I think you will continue to see opportunities for adjacent opportunities. And I think over time, you'll continue to see us partnering with companies. We have a unique skill set to be able to be able to integrate some of the products we've developed with other products that other companies have developed. As an example, we recently won an award for the Elbit self-propelled howitzers that are mounted on our FHTVs, and it's just a great example of how we can partner with companies using our technologies and other company's technology. So I think you'll see that continued trend. And I think that many other opportunities out there, we've talked about [ ISB ] in the past. And we're going to continue to pursue those types of opportunities.

Okay. Perfect. And then, if we could circle back towards fire & emergency, that's a business where the margin performance has really been tremendous over the years. Can you talk about whether you still have additional opportunities to continue to improve the margin structure, or are we at a point where it's tougher to get more juice out of the lemon, if you will?

Jerry, I'll take the question. So the F&E business, I think I've mentioned it in my opening comments. Our -- from an operating margin perspective, it's our highest performing business, but we're never finished in terms of our drive to improve margins. And when you look at any segment, we can do, at a very simple level, 2 things to drive margin improvement. We can either invest in the product and/or the revenue creation, or we can invest in the operating capability, the cost side of the equation. And typically, the product and revenue-creating investments that we make have a bigger impact on margin than the cost investments. Now luckily, it's not a mutually exclusive thing. You always have to do both. You've got to make investments to improve your cost position and you got to make investments to improve your product and revenue-creating position. So I would say that at F&E at this point, we've got more opportunity in the product and revenue-creation investments that we see. We'll continue to make investments on the cost side of the business, for sure. But there's probably more in terms of the innovation that we talk about and our technological capability that we'll be doing to improve that business than on the cost side going forward.

And John, is there anything that you're ready to talk about on that side, in terms of -- are we talking project adjacency? Are we talking about improving the performance or manufacturability of existing product that -- any comments you can share on that point?

I don't think I can go into many more specifics to that, where we're making the investments at this point.

Stay tuned.

Yes.

Sounds good. And then in terms of -- for the fire & emergency business this year, it sounded like there was a supply chain issue this past quarter. Can you talk about -- has that been addressed along with other supply chain improvements that we spoke about earlier on the conversation?

Yes. Well, the one specific thing -- there were 2 things that held F&E back in the fiscal second quarter. One of them was we couldn't make as many shipments as we would like due to the COVID-19 pandemic because there's a very intense delivery inspection process. And when customers can't travel, you can't deliver and therefore, ship a new unit. And so while we produced units, we couldn't ship all the ones that we wanted to. So we've been making improvements to that, put social distancing in, and be able to do that inspection process. The other one, which is, I think, what you're referring to is we did have a supplier quality issue in fiscal Q2. It has been resolved. That prevented us from also shipping units in the second quarter because we had to wait for conforming material to come in before we could complete the build on some units. And -- but the most important thing to know about that is that's been resolved and it is not recurring going forward. We expect to make that up through the end of the fiscal year. The supplier quality issue.

And really, that drove an unfavorable mix in the quarter as well, really those 2 factors. So that mix normalizes the rest of the year.

And the quarter was pretty good despite that. Perfect. Well, please join me in thanking John, Mike and Pat, for making time for our fireless chat this morning. Gentlemen, I really appreciate your attendance, and thanks to everyone for dialing in.