Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Hey, everyone, thank you all for tuning in today. My name is Stanley Elliott, analyst here at Stifel, covering machinery and construction materials. We are very pleased to have Oshkosh Corporation presenting with us at our 2020 virtual conference this year. From the company, we have Wilson Jones, CEO; and Pat Davidson, who's head of their Investor Relations Department. We will end up to kind of keep it as fairly informal Q&A fireside chat. [Operator Instructions] But with that, Wilson, Pat, thank you guys very much for joining us.

Thank you, Stanley. Thanks for having us.

You bet.

These are pretty interesting times, to say the least, with the virus and the disruption that we've seen across the economy. You guys did a very nice job of navigating that despite all of these uncertainties. Would love to get an update, if you can, from a high-level perspective, kind of what you're seeing across the marketplace?

Well, Stanley, we talked about it on our last call that we're fortunate. Our defense business, over $3 billion backlog there. Our fire business, over $1 billion backlog there. They had a record order quarter. And so that gives a good visibility on 2 of our segments that are performing well, but it gives this visibility into '21 for us. The other side is more related to construction and, obviously, JLG customer demand really slowed in the quarter, and then we had some supplier issues. So we closed the North American plants and the European plants for the month of April. And then what we've been doing is 2 weeks on, 2 weeks off, and we're going to do that through the end of July. That helps us manage our inventory, manage the current SIOP level, sales, inventory and operation planning process levels, that our customers are calling for right now. And I think if you look at access in China, we learned a lot when China went down. We have a fairly large facility there that builds construction equipment, JLG Equipment, for Asia. And you look at that market today, and it's back, it's actually above pre-COVID levels. Our plant is running right at 100%. So that market had a really sharp V recovery. What we're waiting, and we talked about this on the call, is to get through these next couple of months and have a better understanding of our own customer, what they're saying comment-wise, where they see it going, and then we're going to better describe that at our next earnings call in July. So more to come on North America and European access. I think we shared that we expect Europe's recovery to be slower than North America. But we're not calling North American recovery yet. As more and more states are opening up, construction sites are opening up, we've seen a few states move projects forward. I know Florida pulled some projects forward. The rental company commentary that we're hearing is stabilizing. They're seeing more dollar utilization. They're seeing more equipment out in the field. So it sounds like their call would be -- it has troughed, and now it's starting to move back up. The question is how fast is it going to move up? So we're prepared. We took actions across all 4 segments, even though 2 of them are pretty well performing to plan. But with our integrated approach, that's just the way we do this, we share across there. So fire & emergency and defense took salary reductions because they've got the backlog to build, but that's how they're participating. But then JLG and our commercial segment are doing some furloughs. I mentioned plant closings. We've done a lot of discretionary spending moves. So our call at the end of our quarter was, today, we were -- or back then, we were calling it temporary at the time. And so what we're evaluating now is, is that going to remain the same? Is it going to move up? Or is it going to move down? And I think most of you that follow us know we keep playbooks on all types of different scenarios, the V, the elongated V, U. And so we have those levers in place if we need to pull them up or down, and if we do go down more, I believe we'll have to be looking at some structural changes. But again, we have those plans in play if we need to. Commercial is -- the refuse collection vehicle business has been doing well. I think it's the concrete mixers in that segment that really follow construction just like JLG. So they have -- refuse is going pretty well, but then the concrete mixer business has slowed. So thankfully, we have some balance in our portfolio and we can lean on defense and fire. We talked about -- today, we're in a much better spot than we were back in the Great Recession. We were levered up. That -- it was a tough time here. But today, our balance sheet is in great shape. We've got about $1.2 billion of liquidity. The outlook for defense is still promising with our international opportunities. So we believe we will come out of this in a good place. And I think we talked to, from a decremental standpoint, the changes, the adjustments we've made in simplifying our business. We believe JLG can hold around that mid-20s decremental. So that will be something we'll talk more about as we move through this back half of the year. But it's hard to say. We feel positive about our business today, but we do. In spite of what we're going through, I like our position and where these markets can go long term and then some of the activities that we're doing around the ecosystem of each market.

Yes. No doubt. It is pretty amazing how quickly these markets all decelerated, but then, also, how quickly you all were able to adjust the cost structure, even on -- even if it is more of a temporary sort of a basis. Can you remind us again, you mentioned some of the 2 weeks on, 2 weeks off. I think we're talking about $80 million to $100 million number out. How does that break out between all the different businesses? And kind of what are some of these other things you have in your playbook to look at, whether you're going to address more structural costs or extend those costs, I guess, into fiscal 2021?

Well, the $80 million to $100 million is still a good number. I think we're going to trend to the higher end of that range. And all that's in play and from my vantage point, it's well placed, and I don't see any problem with us achieving that. What we -- we've been careful, Stanley, about breaking it out percentage-wise. But as you can imagine, JLG is a majority of that. But as I said, fire and defense, even though they're pretty well capable of performing to plan, they're still participating with sale reductions, some discretionary spending, some other moves around SG&A. So everyone is participating, but JLG has definitely got the biggest share of that $100 million.

It was interesting when you...

I think when you think about long-term and some of the structural things, I just want to be careful about that because we haven't discussed this with team members. But you can imagine, we can take days out of schedule, we can reduce headcount, we can hold hiring. There's a lot of other levers that we have and as you know, we've been through a few of these cycles in the past and what gives me confidence is we've learned. We learned a lot of lessons for this. And if you look, the majority of our leaders today in these businesses have all been here through the Great Recession together. So they know how to do this. They've all been simplifying their businesses, so we can lower -- manage those decrementals better than we have in the past. So we'll probably be talking about positive and negative levers at the next call. But a little premature for me to get into that today, Stanley.

Yes. No. And I didn't want to put you on the spot there. I know you guys have plenty going. But it -- frankly, it's a fairly fluid environment. Maybe we'll see some -- hopefully, some positive green shoots as some of these economies start to open and then all of this will be in the rearview mirror. But it does feel like the both -- the real channel is kind of feeling a little bit better, a little more -- found some footing. On the CapEx side, are you seeing both the nationals and the independents pull back and be equally cognizant of the fleet that they're trying to bring on? We've always thought that the industry is improving from an analytical standpoint and that it should lead to more rational behavior. And I'm just curious if that's something you've seen within conversations.

Yes. I would say they've all taken a cautious approach. I think some, where we have seen some business levels, it's areas of states that came back quicker. Construction sites got going quicker. We've seen that's -- there's some different areas in the country. Florida is one of those, Texas is another. And then you've got some areas up in the Northeast that are just now opening up. Pennsylvania shut down pretty tight. So it varies, but I would say they've all taken a more cautious approach. I think, just in general, how many times do we hear in a day, what do you think is going to happen with this COVID? Are we going to have school in the fall? There's just so many uncertainties that I think, as we talked about on the call is, they think the business is going to be there, it's just when. When will this recovery get a little bit steeper. But we're hearing the same things that you mentioned. I was President of JLG for 3 years, so I've maintained relationships with all the leaders of the national rental companies. And my conversations with a couple of them have been just that, that they're seeing more original equipment get out in the field. They're seeing dollar utilization move up. And so -- stabilizing is, I think, a term I've heard a couple of them say.

But it sounds like on the access fleet side that even your peers are being more disciplined in terms of the inventory out there right now. So then, when these markets do finally turn, it should be better for all parties involved with those incrementals. Can you talk about, one, you mentioned this commitment to the 20% decremental. Can you talk about some of the -- or mid-20s, pardon me. You also talked about some of the things you've done since the great financial crisis. And then also, not to forget that we had a soft patch in access and lifting equipment in kind of the '15, '16 time period, but some of these things that you've learned to make the enterprise a better operator.

Sure. When we go through these, I mentioned earlier that we don't want to just get through them, we want to learn. So when we do go through them again, we get better every time. And so we started working on JLG's footprint several years ago, and we took about 25% of floor space out, yet maintained about the same available capacity levels. So that helped us there. A big -- another big help has been really just getting better coordinated with our strategic sourcing as it relates to what I would call the higher volume, higher margin lines. And kind of the basic 80-20 exercise, Stanley. We call it simplification because we don't want to call it what somebody else calls it. But a lot of simplification. You've been in some of our plants, but we're doing more work with digital manufacturing. I think we've gotten bigger with our data science and I think our -- just our overall business intelligence is better today. The relationships with customers is much more transparent for our sales, inventory, operations planning process. So if you remember, we consolidated 3 telehandler lines into one facility. So that's -- that can run much leaner and meaner. We consolidated the Jerr-Dan product line into one facility. And then we've continued to make adjustments to our lines and they've got -- JLG has gotten really good. So good, they can take a line down over a weekend and be running a different model on the following Monday. So I would just say our operational execution is really improved. We've been fortunate that a majority of our leaders have stayed, that we haven't had turnover there. So that gives us continuity to continue the -- continue our continuous improvement efforts. So a lot of work inside the company. And then, just being disciplined, if you recall, last couple of years, got hit with steel costs. And so we had surcharges and price increases. And hats off to the JLG team. They went and were disciplined, and they got it. And you saw that in their margins and some of our competitors didn't. And so I think you -- the bottom line is it's really just a much more disciplined senior team that's continually making their model better. And that's equating to those good decrementals that we're talking about.

Last one on access, I promise. But hearing that China is running above kind of where you were pre-COVID is very encouraging. Certainly, the biggest growth market out there today. What are you seeing from the Chinese rental companies? How are they valuing like Oshkosh and the high-quality products that you guys are bringing to the market? Because it sounds like it's resonating quite well.

Yes. It is, Stanley. The -- we're fortunate there's 5, I would say, that are sophisticated rental companies. They've come over to the U.S. and benchmarked with some of the big companies over here. So they operate very similarly. They do annual purchase agreements. They share fleet information with us. We help them bid projects based on what size of aerials are needed for jobs. So we're really building closer relationships there, but they really act a lot like a national rental company here in the U.S. And I think what helps us with them is they want the safest technology. Again, there's a lot of private equity behind them. And so they want to get the best value. And our aftermarket life cycle services supports them very well, just like we do in North America and Europe. That's been a big help to them. And then just our products have a better residual value than others. And some of our competition that's in-country over there has not taken safety to the levels that meet our product specs. So there's 2 or 3 things that are going for us. And again, we do fleet planning with them every year and we've hit those numbers, hit those targets for them, and that helps them grow share. So we like the model. We think 3, 4 years, if it continues on the pace it's on, it will be bigger than the aerial market in Europe. I think the -- well, I guess I'll stop there. I don't want to just keep piling on the China. But the nice thing about the research that we've done with our customers recently in China is you might think this is a bubble because they stopped for 3 months. But what we're being told is, no, there is a catch-up mode to this. But they see the rate that we were running before COVID coming back and being able to sustain that and grow off of that. So promising that there are still lots of infrastructure projects going on in China and it appears to be going on for several years. So that's been a really good move for us to have a facility there that just supports Asia. It's working out well for us.

Absolutely. And let's switch gears and talk a little bit about the defense business. We talked about being a differentiated industrial company. I mean, this is case in point. Good backlogs. Could you remind us what sort of visibility you have within this business with all the projects that you've won here recently?

Sure. Defense is one of those businesses, it's nice, because you get a long, long look, where JLG is that short porch of 30 and 45 days in advance. Defense, we've got really good visibility. So the 3 big programs, I'll start with FHTV. That's the heavies. We've had that contract since back in the '80s. That -- we have that program through 2022. We believe that there'll be some plus-up opportunities and probably some additional [ orderers ] coming with that. That's been the process for FHTVs for a number of years. Then the big one, JLTV, that's the Humvee replacement program. We have visibility with that to make deliveries into the first quarter of 2025. So we're building around 3,500 to 4,000 of those this year. Next year, it will be 4,000, maybe a little more than that as more international work start to come in. We've had good look with getting 3 European countries to order, and we've got another 12 that are looking at JLTVs. And we expect some of those, a majority of those, to come in, in the next 18 to 24 months. I think we've talked about they -- there is a recompete that they were talking about in 2022. They have put out a lot more information other than talking about that would be probably the year that they would do it. Again, we would still be delivering trucks into '25. Obviously, we don't plan on losing it. But if we did, we would still have international opportunities. But again, the plan will be to recapture that as we have recaptured the FMTV, which I'll talk about now, and that's now the FMTV A2. But we have deliveries for that program into 2026. So that gives us a really good view of about at least a $2-plus billion run rate for the next several years. And I know our defense team is not going to rest on $2 billion as you probably know. I'm not going to let them rest on $2 billion. And that's where the international opportunities come in. We're starting to see some more interest in the Middle East with our allies, both MRAP and JLTV. And then some interest coming from Central and South America, but that's probably a little farther out. So those are the main programs. I think we've talked before, there's a potential for a couple of programs that are in the works now. We haven't talked really publicly about those. And then the other potential opportunity there is the United States Postal Service next-generation delivery vehicle. We're in that. And we have a nondisclosure. Can't talk about that. But we expect the proposals to be due like mid-summer for that.

Great. And in terms of like the international opportunity. So let's say, if you're talking to another 12 maybe 18, 24 months, when would those start to show up into the order book, just to kind of ballpark it?

Yes. I would expect you to start to see -- receive orders first part of next year, first part of '21, mid-'21, which will allow us to probably ship those in, if not late '21, '22.

And just to clarify, I would expect the recompete to not be an issue. But you all would get all international vehicles regardless of the outcome of the recompete, correct?

Yes, we could sell our JLTV to any ally for the life of this company, if we choose to.

Great. Let's switch, I guess, now to the fire & emergency business. You have very good backlogs within that business right now. Are there any concerns that you'll -- if local budgets are feeling stressed, that those vehicles end up getting -- or those orders get canceled or anything along those lines?

You know what, we've been asked that question a few times. And I said it earlier, in my 15 years with the company, I can't recall a fire truck being canceled. When they go in, Stanley, it's a municipal contract between them and between municipality and Pierce. So it's a contract. There's, I guess, if a city went bankrupt, something like that, there might be an extenuating case that we would. But I can tell you, no one's talking about that today. I think municipalities, as we've seen over the years, Pierce fire trucks usually last in, last out of a cycle. And so the backlog that they have now, 21 is in good shape for them. 22 is where we could have some issues if the municipal spending slows down. I will say this, two things working for them. It is still an old fleet out there, fleet ages are high on fire trucks. And as you can imagine, fire trucks are usually a top priority and a budget, especially if your truck is aged. That's a big issue if a fire truck doesn't show up to a scene or doesn't work at a scene. So we found during the Great Recession that a lot of fire departments were finding out ways to still get some new equipment just because their equipment is aged so much, they're worried it wasn't going to perform. So we'll have to see. I think we'll learn a lot more in the next 3 to 6 months on what this is going to mean for municipalities.

Well, it definitely feels somewhat on the municipal side, Stanley. But in terms of your question on cancels, many times, they've either paid a large down payment or maybe the whole truck is paid for early on/upfront, and they just -- they don't cancel.

We do have quite a few prepaid.

Yes.

Yes. And you've also done such a nice job over the past several years. It's coming up with some pretty innovative products for the entire space for the part trucks that kind of re-enhance -- kind of validate what you guys are doing in terms of value and kind of cross functionality of those vehicles, too.

Yes. It's -- sharing technology has helped Pierce, using some of the defense material science to get the Ascendant area line going. That's been a really good move for them. I think if you look, Stanley, at the market, when I was at Pierce, the market was 5,500 trucks a year. That was kind of the norm. And that was with about 500 trucks being built in the U.S. by different manufacturers for Saudi Arabia, a couple of areas in the Middle East were buying U.S. fire trucks at the time. Coming out of the Great Recession, they stopped buying U.S. trucks and started buying European fire trucks. And so the market retracted, and we saw a further retraction as volunteers were struggling and weren't buying as many trucks. So that market now has been down in the low 4,000s for a few years. And we don't see that changing a lot. But what's happened is Pierce has been able to grow market share in a shrinking market a lot because of their good innovations. Another good reason is they've got a really good distribution channel that gets out works and really performs service. They take great care of the customers and lot of service trucks running around the U.S. performing service work on Pierce fire apparatus.

And with kind of the disruption of business coming from COVID-19, a lot of the Pierce business is customized. And you go up to Appleton, you see a lot of people walking around, speccing out their product. Has that been disrupted at all? Have you been able to kind of do walk-throughs through Facetime or Zoom or anything of that nature to keep the continuity going?

Yes. We -- it caused us a little problem last quarter. We talked a little about we missed some shipments because customers couldn't travel. And some of those travel restrictions have remained in place. Pierce has done a nice job of developing a virtual inspection for these fire brass committees. So they can sit in their firehouse around a conference table and come into a Webex and our Pierce technicians can go around the truck with like a 360 view, and they can go line-by-line item in their specification and check off. And that stripe was supposed to be an inch, and it's only 3 quarters inch, so they can catch those changes and make those modifications and still -- and then ship the truck. So that did cause some problems. There's some of that, that they're still going to have to work through this quarter and maybe a little bit more of a new normal form, at least in the next several quarters, just to do much more virtual inspection.

Yes. That would make sense. Let's kind of wrap it up. We've got a couple of minutes here left, but love to talk about your financial position. You guys are in great shape, obviously, irregardless of what happens with the economy. How are you all thinking about capital allocation at this point? And then, yes, let's leave it at that, and then we'll talk about maybe M&A next.

Yes. I -- you've watched this over the years. I think we've been prudent. We've been disciplined. We've looked at really where is the highest return on our capital. We felt like we were the better buy. We're pretty aggressive with share repurchases. I think we'll continue to look at that. We suspended the program. Thought it was the right thing to do. I think most companies today are making sure they're managing their cost structure and preserving liquidity. And that's -- we want to do that, plus when you're furloughing your people and taking salary reductions, it's tough to keep share repurchases going and not lose the morale of some of your people. So we've always wanted to keep our dividend going. That's why we came out with a little lower dividend when we started back and so we did keep that going in the quarter. That will be a discussion we'll continue to discuss with our Board. But when you look at our cash generation opportunities, you look at the senior leadership team we have in all the businesses, we could certainly make some moves, strategic moves on M&A, if it was a right opportunity. But one thing that we've added to our playbook is a little more nontraditional approach where we don't have to own it. We can work with other people. So we've been partnering on a few projects. You're probably familiar with Pierce, they came out with a photo kite that -- the tethered drone attaches to the fire truck, things that we can further our strong equity of brand in the ecosystem of the market they're in. So I think Chief of Staff of the Army called the top 10 meeting today, we're there at the table. We're known as good integrators. So there's defense partnering opportunities. If you follow defense, there are more and more primes working together now than they ever have been. So I think we have -- we partner with a company for JLG on a special boon that's built for us. So we're learning how to do more without owning it. Now that's not to say we wouldn't own something if it was the right business to add to our portfolio here. But I think what we want to make sure is that if we make any move, it doesn't cost you or any of our -- cause any of you or any of our investors to scratch your head going, what the heck are they doing? We want to be smart. And again, it's -- having said here, during the Great Recession and looking -- levered up 4x and bank covenants and sit here today and have that liquidity and the balance sheet is -- seats a lot more comfortable today than it was back then.

Yes.

I certainly understand. Well, with that, gentlemen, we are out of time. So Wilson and Pat, thank you guys so much for your time this afternoon. And to everyone on the webcast, thank you for tuning in. We sure do appreciate it. Everyone, have a great week.

Thanks.

Thanks, Stanley.