Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Great. Welcome back, everybody, and we continue on with sort of the machinery/multi-industry tranche of the Jefferies Industrial Conference. I appreciate your interest in sticking with us here this session. We are very pleased to host Oshkosh Corporation. And we have Wilson Jones, the CEO, on your left; and Pat Davidson, who looks after Investor Relations, on your right. Appropriately social distanced from somewhere in Wisconsin, and we look forward to conducting a bit of a fireside chat here. So we will kind of chat amongst the 3 of us for a while here, but we would be quite happy to have any questions or topics that you'd like to see covered. And the way to do that is to go ahead and type those into the box at the bottom of your screen. They will show up here, and I will sort of weave them into the discussion. So first and foremost, gentlemen, thank you so much for joining us.

Yes. Thanks for having us.

Great. So let's just talk, I mean, we just kind of wrapped up the quarter and we're coming back out of that. So with the benefit of a couple of days of thinking and questioning and discussion, Wilson, what do you think were sort of the highlights for you? What went well? What didn't go well? Does it change your view of how life looks sort of post-COVID?

To be determined what life looks like post-COVID, Steve, I'm anxious to get into those discussions on post-COVID. But obviously, we've got some navigation to do now. When I look back at the quarter, I think I said this on the call. I've been with the company 15 years, and we've always been working to better manage our decrementals and incrementals. And what you saw in the quarter was just great execution by our team. We learned early in January. As you know, we've got a big facility in China. We knew we were going to have some headwinds in Europe and in North America. So we started working then on our playbook, as we call it; the different scenarios and the levers to pull. And again, you saw the performance in the quarter. Great management of decrementals. Cost-outs early and moved fast. And again, I think a lot of people probably thought that JLG might lose money in the quarter, and they didn't. Didn't make a lot, but they made money. So what you've seen is us continuing to adjust our footprint and lower that baseline of breakeven. And we'll continue to work on that. I was pleased that we plan like we do. And again, I'm fortunate -- our team -- majority of our team has been together through the Great Recession. So we have some strikes or maybe some scars, if you want to call them, from coming through some of the cycles in the past but we learned a lot as a team and how to work together in this integrated approach that we have. And so all in all, I think the quarter was -- it certainly exceeded my expectations on how we performed. It sets a high bar for the next quarter. But again, we've got the right actions in place, and we're prepared to take more actions if we need to into '21. So I think the -- lot of good around that. The union contract, getting that negotiation behind us a year in advance, positions us well if we do have a recompete with JLTV fire & emergency continued performance with good margins. Obviously, good backlog. Defense continue with great backlog and good operational performance. For us, the things that maybe aren't where we want them to be is just the recovery. We saw an uptick in orders end of May, first of June, but then that hit the wall middle of June with some of the outbreak and the infection rates going up, especially in some of the bigger states. So that caused kind of a second pause in the market. Again, we were pleased with our orders in the quarter. More importantly, we were pleased with the margins of the orders that we received. We maintained our discipline and did about what we thought we would do, but we were hoping that the market might move a little better than it did. So now we've got to navigate through this quarter. And the challenge for us -- and Steve, you've followed us a long time, I think this year in the fall is going to be the toughest year we've had in our negotiations and really understanding what our customers are thinking in '21 because, quite honestly -- and I'm having conversations with a couple of larger CEOs. They're like us. You just don't know when we're going to get that recovery. I think we all believe that we're going to get it, and there are some good tailwinds with replacement demand, with some pent-up demand. But calling when we're going to get that, I think it's going to be tougher for us because, as you know, we start our year in October, and they're finishing their year. So I think this year is going to be more difficult. It may be into the second quarter before we can really define '21.

Right. Okay. Fair enough. And maybe just sticking with a couple of those comments, the sort of the second pause that you described just now. Was that kind of broad-based or focused more in specific end markets?

Yes. I would say it was really around some of the big states. I think some contractors pulled back. When you saw some of those guidelines by governors get more stringent, they kind of tapped the brakes, which pushes the rental company back, which pushes us back. But primarily, it was the bigger states.

Okay. Interesting. And then you mentioned the decrementals were quite impressive. We certainly agree. They were much better than what I was looking for, which maybe just tells you something about my analytical ability. But how much of the benefits that you saw do you kind of consider short term? And sort of what's the trajectory going forward?

Well, trajectory going forward is going to be determined by the recovery. A lot of those that we've talked about, the $100-plus cost reduction -- $100 million plus were temporary in nature. Furloughs, salary reductions, discretionary spending, incentive comp, the things that naturally you would pull first. I think going into next year, again, we'll have to see how the markets go. But I don't think you'll see our -- if we move to incrementals, let's keep putting if here because we haven't called the year. If we do move to a more incremental move, I don't anticipate it being symmetrical like you've seen us in the past. Mid-20s on both ends. I think because of the headwind of incentive comp, the salary reductions, the furloughs, the discretionary spending, if markets pick up, we're going to travel, we're going to entertain, we're going to get out and spend more money. And we're not doing that right now. So those are going to be some headwinds to our incrementals if we are, in fact, able to go forward next year with an incremental model.

So I think you just said you didn't expect them to be symmetrical. But I guess, my thinking was, I think you did like 16% in the third quarter decremental, so I would assume that's kind of the right way to think about incrementals because, as you say, the cost will come back next year.

Yes. And we've been careful with that, Steve, because, again, we just don't know next year. When I say symmetrical, we've always talked about mid-20s on both ends. That's what I was referring to. Obviously, where we are now, we would factor that in going forward if we are going to an incremental. And we would try to help you understand, anyone modeling this, where we believe we can get to. Just like we said this year, we thought we could get to 20% on the decrementals, and we've certainly exceeded that.

Absolutely. Okay. And just in terms of more permanent cost actions that you might have done, you mentioned sort of trying to lower the breakeven. I guess, just describe kind of what's permanent.

Sure. We've been looking at our model in Europe. The -- Europe is still a very important market to us, but it's a market where our customers tend to age their equipment a little longer. And so we were looking at our Romania facility, this was over a year ago, and how we could better position ourselves in Europe. Logistically, there were some challenges there in Romania. It's been a great facility and served us well. But it's always about continuous improvement in how we can do better. And so the plan was when we had a slowdown in the market, we were going to act on that. Well, obviously, that happened, and so we moved on that. So the Romania facility we announced in June, we're closing it with social cost. It will be completely closed this coming June. So we've got a little lag there in what we'll be able to achieve from a cost reduction standpoint in '21. What we said, in '22, we expect $30 million to $35 million in the permanent reductions that we just announced and that -- it'll be -- it should be about half of that in '21. So $30 million to $5 million -- $30 million to $35 million in '22, about half of that in '21. Now again, we have the other levers that we can make some of these temporary reductions more permanent if we need to. And again, as we gauge the recovery and working with our customers, we'll be adjusting that going forward. And if the outlook stays low, then we'll make some more permanent reductions. And those are all in planning scenarios where we can move on those pretty quick if we need to.

Steve, those savings at $30 million to $35 million, that's across the company, right? We did some moves in commercial too. So not only access that Wilson described, but also with us essentially relocating our concrete mixer business from Minnesota to other locations in North America. And some of the simplification efforts we're doing in commercial, those are part of the savings.

Good point.

And those savings would theoretically come sort of above and beyond the normal incrementals. And so they may kind of help you a little bit.

Well, it could. We'll see how…

We're reaching for more.

I'm always -- we always want more. So yes, that's…

So do we. As Wilson said, continuous improvement, right? I mean I think it remains to be seen that obviously, our guys are going to take actions. And depending on, as he said earlier, the rate of recovery, that will probably have -- that's going to have some impact on what volumes are. And I think we're going to run the business very responsibly and generate good, strong free cash and good decrementals so…

Yes. I'm glad Pat mentioned that the commercial segment was part of that restructuring, Steve. I'm really excited about what we can do now in commercial. You watch this in fire. We've simplified that business, really got focused in segmentation, and we can do that in one plant because it's all fire apparatus. We can segregate lines. We tried the same method of simplification. And with refuse and concrete, they're just -- they're just too dissimilar. And so we were making some -- we made some good headway. And they had a nice quarter. So quite a few nonrecurring items that they won't be able to maintain that 10%. But by getting focused factories on just mixers, and focused factories on just refuse collection vehicle, we believe that's going to be a real key to us getting to that double-digit margin target. As you know, one of the challenges they have and they don't let it -- it's not an excuse, but majority of what they build is on a commercial chassis. And in the concrete mixer business, we're really the only public company, and our competitors don't markup commercial chassis. Whereas in fire, we build the chassis. So much more value-add and easier to gain margin expansion versus what we're doing with the concrete mixers in [ retrospect ]. But we still don't accept -- we'll get there. It's just calling it on time, but it's a focus -- it's a good focus move. I think the -- we get some tailwind of market with infrastructure, housing continues. I believe that they can certainly get to that double-digit margin.

Okay. Great. Let's sort of dive into the segments now, and I'm going to kind of go by size. So not surprisingly, starting with access. And we'll get to commercial at the end, I guess. But anyway, talk about the inventory situation in access, both yours and anything that might be in the channel? And kind of how you view that playing out over the next couple of quarters?

Yes. You're probably not used to someone saying that they like their inventory position. But we're not -- we're hardly -- we've shut down for a month in July. 2 weeks in August, 2 weeks in September. So we're not overproducing. And what I like about our inventory, it's right down the middle of the fairway. It's the 40s, the 60s and the 80s that when the market does recover, those are kind of the main products that you'll see a quick jump in. So we don't have any need for any type of liquidation. We like our position, JLG's maintaining their good pricing discipline around that. And there will eventually be demand for that. Calling that a win is obviously something we can't do right now. But we're being careful in not building any more inventory with the lack of production that's going on. But again, I think where we are coming out of this, we could really -- it can work in our favor that we won't have to ramp up and work all the overtime. We'll have -- to have that product that fits. I'm really not going to speak to our competition. I'm going to let you ask them about their inventory and how they're handling it. But going forward, I think the good news is our customers, the conversations we're having, we know there's places in the market for that with the pent-up demand. The replacement schedules that are being shared with us. So that gives us confidence that there's not a liquidation issue coming at us.

Okay. All right. As it happens, I did ask your competitors that yesterday. So…

Okay.

I'm ahead of you on that one.

I'll have to go read the transcripts.

One of the other things that we talked about was sort of the cycle in this business. And what's your view of kind of fleet age? And as you talk to these big customers, are they willing to stretch that fleet age or they don't want to do that? Or what are those conversations like?

Yes. I would describe them as good conversations around they know old machines are troublesome when they're talking to national accounts. When they're bidding new projects, new machines usually win the day for growing share. And so you're seeing -- you see some of the numbers up in the 50s as far as months. Some of our customers have kept their fleets pretty young, and it's because they have a real appetite for growing share. But eventually, especially when you look at what was purchased in '13 and [Technical Difficulty] to a life cycle where there are some parts -- aftermarket parts needs, and then they become a little bit of a liability in a bid situation. So the good news is we understand pretty much replacement cycles and what our customers are thinking, it's the timing. And right now, with a lot of construction sites closed, not a lot of activity, low utilization, they can age for a little bit. But when the market does recover and start to pick up, as in the past, they move pretty quick into the replacement cycle because they know the younger fleet wins a lot of those big projects.

Okay. And let's move to Europe just briefly because you're moving some production out of Europe, I guess. What's happening in Europe? Are you still committed? Do you think it still has the same attractiveness that it did before?

Yes. We're committed. I think the new normal there is -- obviously, you go back to a couple of peaks ago, if you recall, we were doing $1 billion a year in Europe. And we don't see that going forward. You've had a tremendous amount of consolidation. And so that's made it more competitive for us and our other North American competitors to go into Europe and compete with the local competition. We've seen some erosion in margins. So we're being careful with our business there. We believe that consolidating into France and into the U.K. and in using our China facility, our Mexico facility that we can supply the market and still be a good, solid player in Europe. But the shifts going on, Steve, is China. If China stays on the pace it's on, the next couple of years, 3 years, that -- their boom market will be bigger than Europe's boom market, and we're well positioned there. We're expanding our facility and doing well in that market today. That's back to pre-pandemic levels from a border level and also from an overall health level, facility's up and running with no issues today.

So you're saying China is booming?

Yes.

How big is China for you now? And is there an issue relative to local competitors? I mean it seems to be a market right now that's doing better for local competitors and imported-type brands?

I think it depends on the model. If some of our bigger dirt friends are working through dealers, I think that's troublesome as a U.S. company. But our model is direct. We're direct with the rental companies. And those 5 or 6 rental companies there, they're very professional. They're backed by private equity. We've actually bridged them into benchmark with some of our big customers in the U.S. So they operate much like the U.S. model. We sit down and have annual purchase agreement discussions with them. They're very open with what their forecast and what they're working on from a project standpoint, so we can supply them the right equipment when needed. You're always concerned about the geopolitical environment with our administration. But I can tell you, we were the first industrial company to go into Tianjin. And I can say this because I was at JLG when we built this plant. And we have great relationships with the local Tianjin government and they've been very good to work with us to make sure that we're up to speed on what's going on and, quite honestly, shield us from any of that geopolitical stuff that may be going on in China. I think to the relationships that we have with those big rental companies, that helps us because they understand safety and they won't sacrifice that. And unfortunately or fortunately, a lot of the local competitors in China are not working with the same safety requirements that we are, and that shows up. Now no doubt, they'll get there someday. But until they do, we're going to keep going. And our total cost of ownership model makes sense to these big firms in China. We can supply the good aftermarket life cycle support. And that goes a long way with what they're trying to do. Big country, and I would expect that we might see some more big rental companies go in with a professional approach. And the more that happens, the better for us.

Okay. All right. Sounds good. Let's shift to defense just to kind of keep things moving. Maybe describe the outlook for build rates on JLTV over the next couple of years, and then your thoughts around the recompete.

Yes. We've said around 4,000 this year. Next year, will be 4,000 to 4,500. We did talk about the latest Pres Budget did move some JLTVs out. So '22, we expect less JLTVs than, say, '21. Still working -- the next Pres Budget will help us better define that. But if you think about defense over the next couple of years, as a base, we expect about $2 billion. Again, this is not what we're settling for, this is what we know is in front of us with our backlog and the programs that we know we're going to receive orders. Around a $2 billion run rate and a high-single-digit margin. Now defense is working, and I would say that for the next couple of years. But I would say also that defense is working on some adjacencies. They're working on some partnership opportunities. Today, there's a lot of primes working together. And the JLTV is a wonderful platform, and we're seeing some opportunities made with autonomous JLTVs, with mounting some different types of weapon systems on them. So there's a lot of opportunities to grow our defense business over the next couple of years, there are things we're working on. But until those really materialize, we're going to hold off talking about them. But it is kind of nice to sit here today and know you can count on that $2 billion and a high-single-digit margin for the next couple of years. That gives us some balance. As we work through the ups and downs of our access segment. And obviously, fire gives us some balance over the next year or 2. But if you look at our defense programs today, we have the 3 big programs. FHTVs through '22. We would expect continued plus-ups and order years added to that. There's a lot of fleet there that does need to be refurbed. Our JLTV is good into orders in -- or sales into early '25. I think we're positioned well for the recompete. We renegotiated our contract with the UAW here in Oshkosh a year early. So now we have a 7-year run from, say, this day on. That gives us confidence in our labor costs. I think you know we expanded facility in Tennessee to really help us with fabrications. It is a good cost play for us and it can supply other segments' fabrications. So I like how we're positioned. Obviously, we're building a lot of JLTVs today. We've got a great supply chain we're working with. So In terms of recompete, I don't think we could be in a better position to win it. But obviously, we still have to work through that process and win it. And then last one I'd mention was FMTV A2, that goes into 2026. Another good run with that. And we would expect as the FMTV A1 to get 1 up to 10 order years. So we would expect some continued order years on our FMTV A2. And then a lot of foreign military sales opportunities we talk about with JLTV, but our heavies and our medium FMTVs have similar opportunities with our allies around the world. So today, defense is truly an international defense business that we've ever had in the past year. And I think it bodes well. And again, when you think about some of the JV opportunities like what we're doing in the Kingdom of Saudi Arabia, the integration opportunities, working with some other primes, just overall alliances and partnerships, this business can certainly grow from where it is.

And unfortunately, Wilson, I think we might have lost Steve here for a moment, but I'm going to step in just kind of walk right into the conversation about the JLTVs and the foreign military opportunity there. What are some of the key hurdles that you guys kind of need to get over in order to kind of get that business continue to progress? And just more active at the end of the day?

Yes. International, if you watch, so it's a tough, tough business to forecast on the defense side. A lot of bureaucracy in their own country. And then when they come into foreign -- so an FMS, a foreign military sale, there's a pretty big amount of bureaucracy they work through in the U.S. system. And so we've sold to the 3 allies in Europe, the fourth being U.K. that's got 2 grants that they're testing. They're approved by the state department for a little over 2,700 vehicle. So there's 4 that we know that we're building for. We know that there are several others that are in FMS process early, I'd say, early in the process. They'll work their way through and eventually get the state department approval. I think it's just going to be kind of that trickle in. Now the Middle East is showing some keen interest. I think us announcing our JV with Al-Tadrea certainly helps some of our allies over there realize that we're going to have a facility there and can better support, from a sustainment standpoint, our products. So I think you'll hear us talking more about JLTVs in the Middle East. So I talked earlier about '22. We would expect JLTV to slow a little bit from our current press budget outlook. We certainly are working to make sure that we have enough international business to still stay up to that $2 billion and maybe above. But we've got some work to do there and get those orders through. But it is a choppy process to the FMS cases. But again, we still like our position. There are over 10 allies in Europe interested in JLTV that I think majority will eventually materialize to orders.

Does the political environment here kind of -- and a potential of a democratic win or something like that in the fall, does that concern you regarding this business as we move forward?

I don't want to act like it doesn't concern me because we never know with a new administration, but I can tell you we've navigated through administration changes many times. And what I do know is foundational to our marines and to our Army is tactical wheeled vehicles. And the programs of record, I know we've got good support Senate arms, and that's on both sides of the aisle. We've got good support in House arms, both sides of the aisle. We meet with both sides of the aisle. So we're always wondering what a new administration might or might not do. But again, foundational, and we know the fleets are pretty old. We know that our JLTV has stepped in, giving confidence around the Humvee. So I think all that plays into it. But again, crystal ball, I wish we had, I could tell you, but at this stage, we're not -- yes, we'll work with either administration, as we have in the past.

Very fair. And then just wrapping this one up for a moment. The idea of just the margin trajectory as we look a couple of years out here. I know things have changed in the accounting process for how we're looking at defense like that. Just how do you see the overall margin profile of the business as we kind of move 2, 3 years out the road?

Well, what we can see today is at high single digit. What will change that if we're -- continue to be successful with international orders? If you remember back when we got the M-ATV, the MRAPs to our allies in the Middle East, those were direct commercial sales. So when I go outside FMS cases, direct commercial sale, they're going to change the variant. Whereas engineering, if you remember, those were our best margin products in our defense segment back then. And so that could be some opportunities for us to improve the margin in a 2- and 3-year period. I think also some of these adjacencies we're working on, success with sustainment in the Middle East. There's some -- we're certainly working on upside opportunities that could move that margin. But until we start seeing those materialize, we don't want to get ahead of ourselves or for you to get ahead of us. We want to be cautious as we continue to go here.

That's very fair. You know how Stephen gets way ahead, so…

Yes.

Yes.

We expect a lot, Pat. We expect a lot.

Great.

As we look at the fire & emergency business, I kind of wanted to talk a little bit about what you're seeing there currently. How much higher can margins in that business go? It's been extensive of the improvement that you've made over the last few years, just kind of what you're seeing here, both from the overall cost side of the equation as well as just even on the pricing side and just the trajectory that you're kind of looking at for that basis?

Yes. And thanks for asking about fire & emergency. I think in the 3 meetings we've had this morning, we got to talk about fire & emergency, so thanks for asking about it. It is one of our gems. They're all our gems. But fire, a great story. If you look at their margin improvement over the last 5 years, I think it's about 1,200 basis points. And I've had this -- Steve now a few times. He'll ask, like we keep jumping this 200 bps. I would say, "No, we can't." But we can keep moving forward. I think if you were sitting in fire & emergency, you'd hear them say every day that they're learning more around simplification that allows them to continue to enhance margins. The other key for us in fire & emergency is that distribution channel. We got a great channel. And we've been disciplined with our price increases. And they've been disciplined in their pricing in the marketplace. We looked the other day, and if you look at the public companies that report, we know our market share is significant. But the share of operating income is quite significant and what Pierce is doing in that market versus our competitors. And again, that's just good disciplined execution with the channel and with our leaders at Pierce and all the great team members that drive that business. So can it get better? Yes. I think we got to tap the brakes a little bit and see. They're always last in, last out of a cycle. And you would expect some useful tax receipts to be a little lower going forward; to be determined, but we are -- that's how we're watching that business today. The good news is we're solid through next year and that certainly carries it. And you would think if recovery gets started as it has in the past. Obviously, when the other segments start back up. If they do dip a little, we've got that covered with our good balance. But to be determined, I think you've seen the market used to be 5,500. It's down in that 4,500 range now, but their market share, if you look at it, they've actually grown some market share -- profitable market share. So with the market going lower than that, maybe tougher to grow share, but maintaining profitable share is certainly something they'll be focused on. And they have some opportunities outside the U.S. or North America with the airport business unit. Some really good stuff going on with airports around the world. And our Striker is well positioned. We've had some good success with orders throughout the year there, and we'll continue to use that as one of our international products.

And I think with that, we're actually on the top of the close of the time that we have on this session and keep everyone in check on their time. Thank you guys so much for dealing with me instead of having to deal with Steve.

You got better with time there. So even stronger than we started. Thank you.

Thanks for having us. Appreciate your time.

Thanks, Wilson. Thank you, Pat. Have a good one, guys.

Thanks, Chirag. Thanks.