Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good morning, and welcome to the Eighth Annual Credit Suisse Industrials Conference. My name is Jamie Cook, and I'm the machinery and engineering and construction analyst at Credit Suisse. In terms of the format, I will moderate the Q&A with management. If you have a question, please email me at [email protected], and I will make sure I get that question asked for you. And without further ado, I'm very pleased to announce the management team of Oshkosh. We're excited to have with us today John Pfeifer, who's the President and Chief Operating Officer; but just recently, a couple of weeks ago, he announced he will be appointed officially to Chief Executive Officer on April 2. So congratulations John, and we're excited to have you at our conference.

Thank you.

We also have Pat Davidson, who heads the Investor Relations efforts, who everyone is -- knows very well. As most of you know, Oshkosh has been on a great journey. They're one of the few industrial companies that has exceptional defense exposure with a great visibility that gives them better earnings visibility than their peers. They've also been on a margin improvement story when you think about fire & emergency. And the access margins have held in better, so I think they have a great story to tell. I'm going to hand it over to John for some prepared remarks. After which, we'll open it up for Q&A. So John, thank you so much for being here.

Thank you, Jamie. I'm delighted to be here. I wish that we were all in person, but we're all getting some really nice vaccine news. So hopefully, next time, we can actually do this in person. But we've got the video going, nonetheless. So we're -- I'm kind of coming from a strong position, which sounds strange for me to say as we're all still kind of in the middle of a pandemic. Give you a thumbnail sketch of Oshkosh Corporation. We've got 14,000 people around the world. We operate in 150 locations on -- in 23 countries, and we operate in various end markets. I'll talk a little bit about that. And we just finished our fiscal year 2020 on September 30, and we reported just under $7 billion in revenue. Now that's down quite a bit, down about $1.5 billion from the prior year because of the pandemic. So why am I telling you we're coming to you today from a position of strength, I want to give you some thoughts as to why we're continuing to do very, very well even with the drop that we've seen in 2020. So challenging conditions in the past year, obviously, for just about everybody. Within those challenging conditions, where we saw our sales come down by $1.5 billion, we delivered 19% decremental margins on that drop in revenue. In all of our segments in this severe downturn have performed exceptionally well. We believe that our performance in this downturn is indicative of a new benchmark for performance of what Oshkosh looks like in a downturn. And we think that, that's a very positive indicator for us going forward. Some examples within that, our commercial business delivered its best operating margin in over 10 years. And that's in spite of the challenges that they saw with demand in this pandemic-induced downturn. We've had record operating margin performance at our fire & emergency business. In the fourth quarter, we delivered 16.4% operating margins. We expect to continue to maintain very healthy mid-teens margins in that business going forward. We achieved full production rates for our joint light tactical wheeled vehicle platform, which is kind of one of the marquee platforms we have in our defense business today. That gives us great visibility, which Jamie referenced in -- when she introduced us. We've got visibility that we are comfortable saying it's a over $2 billion business annually for the next several years going forward. We love that kind of visibility. And in fact, that helped us in the downturn because defense business was very strong throughout the downturn that we've just gone through. And in our access business, which is our most cyclical business. Access delivered 8.5% operating margins with a -- on a $1.6 billion revenue decline. That is certainly a new level of performance for access equipment in a down market. And we believe, as we are positioned today, that a recovery is imminent. It's not about if, it's more about exactly when is it going to start. So that's a little bit about the detail of why I believe even within a pandemic-induced downturn, we're a strong company. And we feel really good about our future, both medium and long term. We got -- that starts here at Oshkosh with a really strong culture. I'm going to be succeeding Wilson Jones. Wilson Jones has been our CEO for a little over 5 years. He's helped really build a great culture in this company. And the culture starts with People First. We have 14,000 team members around the world. We are all completely centered around our purpose in that we deliver productivity and safety for the everyday hero. And who are those everyday heroes, they're soldiers, they're firefighters. There are people that work at extreme height to get their jobs done. People that work in dangerous occupations. We know that we have to deliver for those heroes that are in the marketplace. And we know that we have to take care of ourselves so that we can take care of those heroes that we're in business to take care of. That culture, I think, served us well in the pandemic because no matter how bad it's been, we've rallied around that purpose. And we think about that person, that firefighter, that soldier and never ever letting them down, I think that, that's been a foundational part of how we've performed so well during a pandemic. We're very proud of being an ethical company. We get rated as one of the most ethical companies in the United States by Ethisphere. Actually, the world's most ethical companies. I'm very proud of being a very ethical company. We think that if you're not ethical and you're not transparent, then there's almost nothing else that you can be relied on to do. And we're a sustainable company. We just achieved -- being put on the Dow Jones Sustainability Index for the second straight year. That's not by accident. It's by design. We try to be there. We have a lot of programs to drive sustainability in our products and in our operations, both. Our people care deeply about it. And as we would all know, millennials care significantly about whether or not we're a sustainable business, and that's important to us because we need the best millennials to be working for Oshkosh Corporation. We -- going forward, sometimes you probably heard Pat Davidson talk about we're a different integrated global industrial. That positions us really well to take this strong foundation that we've got and look towards growth for the future. So when we say we're a different integrated global industrial, we participate in a lot of different end markets, defense, technical wheel vehicles, fire trucks, airport products, waste collection, concrete placement, access equipment. And I'm not even giving you the full list. And so you think, well, how do all these businesses fit together? Well, they all fit together because we're able to leverage our manufacturing competence or manufacturing technology but, more importantly, our innovation capability and our innovation technology to deliver better than we could if we were independent companies. And we're able to harness megatrend technology from electrification to autonomy, to active safety to intelligent product features across all of the products that we deliver in those end markets to make sure that the solutions that we can provide those everyday heroes are better than anything they could have ever imagined in the past. And we think that gives us and positions us for a strong growth platform into the future. We've also got a very strong balance sheet. We've kept the company financially healthy in the downturn. Balance sheet's in great shape. That positions us well to invest for growth. So you'll see us make investments not only in innovation in our current businesses, but we'll also be making some investments in acquisitions as we go forward. So we feel good about where we are and be happy, Jamie, to take some questions.

Great. I guess, if I could just kick it off, listening to your prepared remarks, I think investors want to get a better handle on what will change even if it's slightly under your leadership relative to Wilson's leadership, and it seems like growth is a big opportunity for you. I think you've done -- Oshkosh has done a great job on the margin front. But where is growth focused? Is it more internationally? You've been successful in the U.S.? And then we haven't heard Oshkosh talk a lot about M&A in a while. And so I'm just trying to understand how you think about M&A and where that focus would be? Big deals, niche deals. And then sorry, third part on that. I always ask too many questions just because it relates to M&A. Are there certain divisions within the portfolio that you would like to become a bigger part versus smaller part type of thing? Like is the portfolio optimization in terms of mix where you would like it to be?

Yes. Okay. So let me address those. First of all, I want to make sure it's clear that we are always going to have a mix of returning cash to shareholders versus investing in the business. So in terms of dividends, we continue to increase our dividend, or in terms of share buybacks we're going to continue to do that because we're a big industrial company. We believe we should be returning money to shareholders over time. So that will continue. The great news is, is that we can do that and also invest in growth. And the growth investments are going to come from R&D investments, innovation. We've got -- one of the most impressive things about our company is we've got a product development group that has nearly 1,500 people in it. 1,200 of those people are degreed engineers, from 4 year degrees up to PhDs. Our capability is very strong in some of the megatrend technology that we need to continue to be investing in. So that's always going to be a big source of investment, and we believe we've got organic growth opportunity there. With regard to M&A, we see our business having opportunity in 2 different primary areas. Number 1 would be -- and by the way, we primarily look at M&A in terms of bolt-on, tuck-in style of acquisitions. I would never rule anything out, but we're not out saying we need to go add a fifth segment to the company. That's not part of our thought process. We really like the 4 segments that we're in. And we think we've got opportunity to expand, over time, year-over-year by making bolt-on, tuck-in style acquisitions to those businesses. I would say that all of -- we are looking at targets in all of those segments. One of the biggest areas that we believe we've got opportunity to expand our participation in is life cycle support. So we are a very, very strong player in whole goods, in every single market we compete in. In fact, we're #1, every end market -- in every end market that we compete in with one exception where we're #2. And we believe that in the life cycle, which we participate in today, there's a lot of value for us to continue to invest there to grow that part of our business. It's high-margin business. It's -- so it's accretive to us. It's less cyclical. A lot of recurring revenue that happens in the life cycle of the business. When you look at many of our end segments, when you look at a piece of equipment that we supply, and when you look at it from the eyes of our customers, only 15% of what they spend is on the original equipment. 85% of what they spend is in the life cycle of that equipment to operate it and continue to maintain it throughout its 10-, 15-year life cycle or what -- depending on what the case is. So we participate in it today but opportunity to expand our participation in that area. And I would say that, that's relevant across all of our businesses. We will also see us -- while we have incredible -- incredibly strong R&D, great engineering capability, with the advancement of megatrend technology, we will likely be doing some small deals to add to our technology portfolio as is necessary as we continue to develop autonomy or electrification and other forms of advanced technology. I think this is one of the best opportunities we have. We're an industrial company with really strong positions. And when you think about what we can do by adding technological capability to what we do, it's a very powerful combination. And that's where a lot of our focus is right now.

Okay. And what about sort of where Oshkosh sits today in terms of your mix, North America versus overseas? Is that a big opportunity? Because I know it's part of the move strategy. It's the emerging markets, I think.

It is a big opportunity. It's very, very material to us. And if I look at -- most of this overseas growth is more organic in nature. Now there could be a JV we have to invest in to facilitate some of it, but it's mostly organic in nature. The headline stories would be our access equipment business in the -- in many countries around the world. There is room to grow the access business. In other words, the amount of aerial work platforms per construction worker is far lower than what it is in the United States. So we know that there's opportunity for more fleet growth of access equipment outside the United States. China is certainly number 1 where we're making a lot of investments in China, and we're growing at strong double digits in China. China is the largest construction market in the world. So you'll see us grow rapidly in China year-over-year for a long time. Another area is our defense business, tactical wheeled vehicles. We keep getting orders from countries around the world for joint light tactical wheeled vehicles, the JLTV. That platform will run globally for many years as countries upgrade their tactical wheeled vehicle fleets. And our -- even our fire & emergency and our airport products business. The thing that might surprise you is even with the pandemic, the orders for our airport products have not slowed down. A lot of that is global orders coming in with airport construction continuing in many regions of the world. So a lot of organic opportunity outside the U.S.

Okay. And just building, because you talked about the fire & emergency business as well as the access business, the operation -- the operating margins are above sort of other publicly traded companies, and you've done a good job holding decrementals and the businesses. I mean, like what inning of the ball game are we, you know what I mean, as you think about the fire & emergency business? Because the margins are already pretty good -- very good. I'm just wondering where there is to go there and then as well as access.

So fire & emergency, the operating margins are great. Now let me tell you how we've gotten there because it is sustainable. Two primary things have taken us to where we are with our mid-teens operating margins in fire & emergency. Number 1 is our operating capability around simplification. So we look at everything from an 80-20 lens. We focus on the 20% that delivers 80% of the margin. And we try to shape demand to that 20%. And we organized our operations to be perfect on the 20% that delivers 80%. That's as simple as I can put it. It's harder to execute than it is for me to say it. But that really has helped us significantly. The other part of it, which is extremely important is the innovation side. You've seen us innovate a lot in fire & emergency to get to where we are with margins. The Ascendant aerial platform was a big driver to our margins. Our competitors have not been able to replicate that performance. Today, we're doing new connectivity solutions where we've just come out with a brand-new product, where we have a tethered drone that goes up into the air when a fire truck arrives at the scene. It gives firefighters real-time information about hotspots, where the most productive spot is to fight a fire danger spots. More information for a firefighter than they've ever had. It makes them safer and more productive. Those innovations drive margin. And they always will. That's not unique to us in our industry. But as long as we innovate and as long as we continue to drive the operational simplicity that we've been doing, we will maintain, and we'll always even continue to strive to grow those margins in F&E. I think in the access market, you saw our margins drop back down to about 8.5% in fiscal year 2020 with a 1 point -- nearly $1.6 billion sales decline. So we're very proud of the 8.5%. We've never been able to deliver 8.5% in a severe downturn in the past. That's a lot -- that has a lot to do with simplification in that business and variabilizing our cost base is how we've been able to do that. So as we go forward and we see access recover and we believe access will go into a multiyear recovery phase, you'll see margins come back up to where they were in the prior peak. The prior peak being recent in the kind of the '18, '19 time frame is what we expect to see on margins there. And by the way, commercial is in its early innings of margins.

Yes. There's still a lot to go in commercial.

Still a long way to run in.

Yes.

So why don't you start on commercial, because then I wanted to shift over to defense. So if you just want to talk about the margin opportunity there, and then we'll move to defense.

Yes. So commercial, I think that they've delivered nice results, which give them credibility. I talked about them getting to a 10-year high operating margin this past year. They are under -- they have a large simplification strategy underway in the form of a restructuring, where we're focusing all of our concrete placement in a concrete placement-focused operation in Ontario. And we're focusing our refuse collection in Minnesota outside of Rochester. That's a big step towards operational simplification. And we're also driving a total cost of ownership mindset where we can shape demand towards what we call that 20%, which is going to be a big part of how we drive that simplification strategy. We've also got a lot of innovation going on in commercial, which is the other part of driving margin enhancement. So we've come out with a new S-Series 2.0 concrete mixer product. We've got intelligent product enhancements on our refuse collection coming out. That all helps us continue to drive total cost of ownership and margin growth. And we're confident in our ability to get to double digits in that business.

Okay. And then just following up on the defense business. You guys have talked about the $2 billion-plus in top line visibility over the next couple of years, which is very nice to have. The margins are a function of mix, right, greater JLTV. But with some of these incremental wins that you've mentioned on JLTV and some of the overseas markets or what -- how do we think about the margin opportunity on the defense side? Is it with more volume? You know what I mean? Can we just improve the margins? Is it a mix function of the different types of products? I'm just wondering if there's upside there over the longer term or do we cap margins sort of where they've been because of the mix?

Well, over the long term, we'd always say that there's margin upside, right? Because we're constantly competing on new programs that are adjacent to where we currently compete. And that can help us drive accretive margins. And some of our global growth will help drive accretive margins. When it's a direct commercial sale to a global customer, like it was in Europe recently, that can help drive accretive margins. Shorter term, the next couple of years, we're kind of mostly supplying the Department of Defense on current programs. And we like -- we're confident in saying it's high single-digit operating margins in those businesses. The good thing about it, though, is it's very predictable. It's not like the access market. You go into a pandemic, and it doesn't matter that it's a pandemic. We know what our backlog is. And we know exactly how much we need to supply in the next few years. And that visibility is the trade-off that we have on some of those margins.

Yes. Jamie, the contract that we -- that we announced earlier this week, I guess yesterday morning, as a matter of fact, it's a little over $900 million. And that actually takes us into fiscal '22 and even into the early part of fiscal '23. So that's excellent visibility.

Okay. And then -- sorry, I just got 2 questions via e-mail. One was just any recent commentary on transferring the rental customers on the access side with some of the news on the vaccinations and understanding where we sit politically, whether you see that as a positive development relative to where we were. And then the other question, just in the interest of time that we got from someone was just the post office award.I mean like what's going on with that, the timing? I understand it's sensitive, but anything you could say or how strategic that is to the company.

I'll start with postal, then I'll go to access. So there's only so much I can say about postal because we have a confidentiality agreement with the United States government. What I can tell you is we provided a comprehensive proposal to the U.S. postal service that meets all of their needs. And it's a big material program if we win it. We believe it will -- we will know in the first quarter of calendar year 2021. That's the best information that we have in terms of when they're going to make their decision. So -- and we're down to one of three. It's us or 2 others that are still in the running for this program. So our fingers are crossed, and we'll wait and see. On the access business, so the only reason we're not providing guidance today is because of the unpredictability of when the recovery will start within the access market. We have enough visibility in our other markets, but that's a big business for us. And so we feel really confident about the medium and the long-term for access equipment. It's the short term. And when I say short term, I talk 12 months. And when we give guidance, we give guidance for 12 months. And when we don't know when the recovery is going to start, is it going to start in our fiscal Q2, which is January to March? Or is it going to be April to June. We don't know exactly when the recovery is going to start. So that's why it's difficult for us to provide guidance. Now we hope to be able to give -- have enough information to give guidance, maybe even as early as our next earnings call. I'll give you some color behind it. Utilization rates are where they were before the pandemic, and I give you that from 2 data points. Rental companies tell us what their utilization rates are versus a year ago, and they're close to being back to where they were a year ago. We also measure utilization with our own telematics products. We have connectivity on all of the products that are in the field today. We know when they're used and when they're not, so we can measure utilization rates that way as well. And all that data tells us that utilization is back, and it's back on fleet sizes, which have remained very healthy. A little bit of trimming of fleets, but not big cutting of fleets. So the only thing we're waiting for is our customers' confidence that society has the pandemic under control so that they're willing to continue to release more CapEx. And when they release more CapEx, we'll start to see the recovery kick in. And the recovery will last because fleets are aged, and our customers know that they need to replace their fleets over a multiyear period. And that will drive -- even if there's continuous kind of lagging nonresidential construction improvement, even without that, you'll see fleet replacement drive growth in the industry. That's why we're confident in the marketplace.

Okay. And then, John, just as you taking over, again, understanding you're an Oshkosh veteran at this point but taking over as CEO in April, what do you think is the most underappreciated by investors maybe as we look at the company 3 years from now under your leadership?

Yes. It's a really good question. I think there's a few things. Number one, I think that we sometimes or recently have maybe not fully articulated that, hey, even in a severe downturn, we're considered a mature industrial company with some cyclical businesses like access that even in a severe downturn, we can perform very -- at very healthy levels. I think as we go forward, we'll continue to get recognized for that ability. I think maybe more importantly is our technological capability is not fully appreciated by the market. We are a technology company as much as an industrial company. Some of the things that we're delivering on our products today within access, for example, fully electrified scissor lifts, self-leveling chassis, which nobody else can do, which drives lots of productivity for a construction site. The types of technology that we have, you'll see more electrification come from us in the future across segments. I don't think we get fully appreciated for our technological capability. I think that will become more appreciated in the future. And I think that we'll get appreciated for our ability to grow in the future. I think maybe those are some flavors of things that don't get fully recognized by the community around them.

Among many.

Among many. Yes.

Okay. Well, John and Pat, I really do appreciate your time and support for this conference. I wish you and your families a happy and healthy Thanksgiving. And John, we very much look forward to seeing what the future holds with Oshkosh as you as CEO. So congrats again.

Thanks, Jamie. Thanks for having us today.

Okay. Have a great day.

Take care.

Thanks.

You, too.