Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good morning, everyone. I'm Courtney Yakavonis, Morgan Stanley's U.S. machinery analyst, and welcome to Day 3 of the Laguna Conference. We're kicking off the machinery track today with Oshkosh. But before we begin, please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately for important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to a Morgan Stanley sales representative. All right. So as many of you know, Oshkosh is a designer and manufacturer of access equipment, specialty vehicles for defense, fire and emergency, municipal and commercial markets. We are very pleased this morning to have with us John Pfeifer, President and COO; as well as Pat Davidson, SVP of IR. So Pat and John, thank you so much for joining us this morning.

Thank you.

Thank you.

And with that, John, I believe you have some opening remarks.

Yes. I'll just get us started with kind of a brief overview of the company and what we're doing today. Oshkosh Corporation, as Courtney mentioned, we're in specialty vehicles and specialty equipment, such as aerial work platforms. We've got about 15,000 people, we call them team members, working in 24 or so countries around the world. And we consider ourselves to be an industrial company, of course, but we consider ourselves to be a different, integrated global industrial company. And I'll just briefly talk about what we mean by that. We operate in a variety of end segments from defense, to fire and emergency, access equipment, refuse collection, concrete, placement and other end segments. And when we say we're a different integrated global industrial, what we mean is that we're not a holding company, that we actually get a lot of leverage and benefit by being in a variety of end segments. And we are able to leverage our expertise and our capabilities across all of those end segments. And so what am I talking about? I'm talking about things like research and development. 1,400 research and development engineers that are developing technology that's not just applicable to defense, or to fire an emergency, but that can be utilized across most of our end segments. We have manufacturing technologies that don't just touch 1 or 2 end segments, but touch multiple end segments. We have strategic sourcing capabilities, partnership capabilities with some of our suppliers that give us an edge. And so that's what we mean we say we're a different integrated global industrial. I'll talk to you a little bit about the way that we see the future. And the way that we see the future is, while we're an industrial company, we've got this great opportunity in front of us with megatrend technology. And by megatrend technology, we believe we can take this megatrend technology and couple it with our industrial might and our leading market share positions in all these end segments to deliver our purpose to those that use our products better than we have ever been able to do it before. So delivering productivity on the job site and delivering safety on the job site better than we've ever been able to do it before using megatrend technology. So I'm talking about electrification. We introduced our first ever electrified scissor lift at the ConExpo Show in Las Vegas. We introduced a prototype fully electric concrete placement vehicle just recently. Autonomy. We're developing a lot of moments of autonomy with our product to make it safer and more productive. Connectivity, giving artificial -- almost artificial intelligence through data analytics and connectivity on equipment to the users of the equipment that allow them to be more productive and safer than they've ever been before. And we're pretty excited about what lies ahead in terms of our ability to do that and to deliver better solutions with the industrial strength that we have in the market segment. So with that kind of brief intro, Courtney, I'll open it up back to you.

Great. Thanks, John. So we'll jump into Q&A. But for those of you who are on the line, feel free to submit questions via the Ask a Question box on the portal. So John, that was a great overview. You joined Oshkosh about 1.5 years ago. Can you just share with us -- you talked about some of these key megatrends, but just share with us what some of your key priorities have been over the past 18 months and going forward. As well as what stood out to you as a relative newcomer to the management team during this most recent downturn.

Yes. Okay. So you're right, I've been here about 1.5 years. My priorities since I've been here for that period of time, has been, first and foremost, to get to know the people of Oshkosh and the company. And get to know the customers and who we serve. And we -- from the Department of Defense, to big rental companies, small rental companies, municipalities that buy our fire & emergency equipment, really understanding the markets that we serve and the customers that we serve. That's been a huge priority for me. And I've gotten to know the culture of Oshkosh, which is a really, really -- one of the biggest strengths we have as a company is our culture. Incredible people, people that know that they matter in terms of delivering the purpose that we deliver to the users of our equipment. And the incredible engineering might that we have has been incredibly impressive to me in terms of our ability to deliver what we deliver. But I've also been immersed in our growth strategy. We've got this great portfolio of businesses and exactly where is it and how is it through technology, through globalization, through life cycle services, where and how are we going to invest to continue to grow in the segments that we serve. That's been another big priority for me as I've started the last 18 months.

And any key thoughts on the most recent downturn?

Yes. So I will say in the recent downturn, first of all, I think that we appreciate more than ever that we are a diversified global industrial because when you see the downturn in the access equipment segment, which you saw in our last reported quarter, which was our fiscal Q3, our access equipment declined by 60% in the last quarter. And when we see that type of a decline, we are really, really happy to have businesses like our defense business and our fire & emergency business, which are much, much more stable during these types of downturns than access equipment is. Now having said that, I think it's been really, really encouraging that we have been able to deliver healthy profitability in our access segment amongst the 60% sales decline. So we delivered over 8% operating margins on a 60% sales decline. And we -- that did not happen by accident. That happened through years of work in making our business more resilient for not only downturns but up cycles and being able to ramp up quickly, but be able to take costs down quickly as a -- what is typically a cyclical market continues to go through its evolution. So we feel -- nobody likes to see a 60% downturn, but we feel pretty good that we delivered that 8% operating margin in a steep downturn. The other thing we feel good about and even better about is we know the access equipment market is going to come back. We're confident it's going to come back. What we still don't know is exactly at what rate of speed it will come back, but we are confident it will come back.

Great. That's helpful. You talked about the profitability of your access division with the 8% margin in the quarter. Many companies, including yourselves, use temporary cost-cutting measures to insulate profitability. I believe you talked about north of $100 million through 2020 that you were able to cut. But you also announced some facility closures and some more permanent reductions, changes to the footprint, I believe totaling $30 million to $35 million by 2022. So can you just talk a little bit about those restructuring decisions. Were they in the works before this downturn, before COVID? Should we be expecting any more additional actions? And how should we be thinking about the net impact of some of these more permanent versus temporary cost cuts when volumes finally do start to come back in that access division?

Yes. So first of all, we did take over $100 million of what we call temporary cost out. So that came in 3 big areas. It came in furloughs, where we would close manufacturing and furlough people for 2 to 4 weeks at a time or even salaried workforce went through furloughs. That was about 1/3 of it. The other 1/3 of it was incentive-based compensation. And the final 1/3 was discretionary spend. When you go through a steep downturn, you stop spending anything that's discretionary. That ended up being a little more than $100 million. Now we go into our fiscal 2021 in a couple of weeks on October 1. We don't believe that, clearly -- of course, we don't believe that on October 1, somebody is going to flip a light switch and all of a sudden, demand is going to come back. So we'll continue to get some of that, what we call, temporary cost reduction, at least in the early parts of 2021, particularly the discretionary spend part of it. We're not going to get all of it in 2021. But we did take, as you noted, $35 million of fixed cost out of the business, a little bit more than half of that we'll see the benefit of in 2021. We'll see the full $35 million benefit in 2022. Now will we take more permanent? I think it depends on the rate and the speed of the recovery. We have a playbook of actions. Right now, we feel really confident about our ability to continue to deliver attractive decrementals in the near term. And we feel confident that we have the ability when the market turns, it will likely turn relatively quickly, and we feel confident we've got the ability to ramp up quickly to meet demand when it comes back. So it's this big balancing act that we're managing. And if we see that we believe the recovery is going to be further out then we have more playbook actions to take more fixed cost out. Right now, that's not in our plan, but that's always an option for us to take if we need to take it. So I think the bottom line is you'll see us continue to deliver attractive decrementals, and then those will turn into incrementals as the business turns and starts to grow again. And as that happens, of course, that's when we look to the difference between the temporary cost versus the fixed costs and how strong of an incremental we deliver.

That's helpful. Maybe just talking a little bit about the utilization trends of your equipment. You obviously talked about the connectivity that you've done. On the last call, you talked about utilization trends not really accelerating in June, primarily due to some of these outbreaks in larger states and some more stringent regulations there. So can you just comment on how much you think utilization is being impacted by COVID? And is it a hole that we're now moving seasonally from? Or are we continuing to see more of an impact as the year goes on depending on the [ break out rates ]?

Well it's a really great question because in the access market, right now, it's really all about utilization rates. And we don't have a perfect understanding of utilization rates, but we've got clear enough understanding where it tells us a lot of what we need to know. And we get it from 2 different places. Our customers tell us about what the utilization rate is from small customers to big customers, and we have telematics on our product, and we can extrapolate the telematic data to try to understand what utilization rates are. So what do we know? Well we know that utilization rates are not back to pre-pandemic levels. That's probably not surprising. If they were, we'd see better market fundamentals right now. But we also know that they are a little bit better than they were in the worst part of the downturn, which was April and May. So to our -- the best of our knowledge, we're seeing utilization rates down from pre-pandemic by mid- high single-digit range, somewhere in there. And therefore, what happens is when our customer base sees an underutilized fleet, they do -- they are reluctant to spend CapEx. That's a very logical, smart thing to do when you see utilization rates down a little bit. And what we expect is that as utilization rates start to grow again, that there will be then need for fleet replacement based upon the aged fleet dynamics that we see. So the question really becomes when our utilization rates going to go back up to pre-pandemic levels. And when we said that -- so I'll go back to June because you mentioned June, Courtney. In early June, we felt pretty confident. We felt confident that utilization was coming back. But then by the time we got to the end of June, we saw it plateau and kind of flatten out. And that was almost directly in line with COVID spikes reemerging in Florida, Texas, California. Those are big construction markets, by the way. That was really in line with the COVID pandemic and the realization for all of us that COVID was not going to go away quickly. And we -- so July and August, we kind of continue to see that utilization rate plateau. And I think we, along with our core customer base, are just kind of looking at utilization rates and trying to determine when are we going to come back to a level of pre-pandemic. Again, we're confident that they will, and I think that our customers are confident that they will because they have not been defleeting. A little trimming here and there in the fleet, but they have not been defleeting. So our expectation is that eventually, it's going to come back.

And we're seeing the fleet age go up too, right, John? It certainly is getting up into that sort of mid -- probably 55 months, give or take, a little bit with aerials. And at that point in time, it's a lot closer to the period when rental companies need to buy new equipment. Otherwise, they're maintenance costs and others start to really accelerate.

And residual values of used equipment drop off after a certain age. So they want to maintain that kind of optimal time to trade out equipment.

Got you. And sorry, just to clarify for me. So would you characterize it things -- I think you said things are better than April and May, things continue to improve in early June, but you're kind of holding firm with its plateaued since June?

Correct.

Okay. Good segue then, I guess, into rental budgets. You mentioned the replacement cycle, but you typically start your rental negotiations in the fall, granted we're only a few weeks in, but I guess maybe how sustainable is it that CapEx stays at the levels that they were at in 2020? Or is it sort of inevitable that we have to see an increase in CapEx from these levels?

Well we would tell you -- I mean, ultimately, it's up to our customers. We would tell you that we believe it's inevitable that they'll start to increase just because we know what the fleet dynamics are. And therefore, we're confident that CapEx will start to increase. I mean the CapEx has been held way below depreciation for a long time now, and it's likely to go back up. And I think we're just waiting for the macro indicators to improve a bit to be confident to -- enough where our customers are going to see the need to increase CapEx budgets.

Have you guys built out a replacement schedule based on what you know? I know some of your competitors have been talking about a replacement cycle that should have been starting in 2021. Was that your view for this as well?