Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Thanks, everyone. Thanks for joining us. I'm Tim Thein, machinery analyst here at Citi. Very happy to once again have the team from Oshkosh with us, unfortunately virtually, not -- rather than in Miami but here nonetheless. And so with -- from the company, we have Mike Pack, who is CFO; as well as Pat Davidson, who everyone knows, who does a great job leading up IR from the company. So with that as a brief introduction, I'm going to hand it over to Mike to kind of walk through -- hit on some high-level points. And then from there, we'll go to Q&A. [Operator Instructions] So with that, again, thanks, Pat and Mike for joining. And now I will turn it over to you.

Sounds good. Thanks a lot, Tim, and I appreciate everyone joining today. It's -- we like talking about the company, a lot of exciting things taking place in -- right now. So looking forward to sharing a little bit of our story with everyone. But just a few opening comments. Just starting off, we recently finished our first quarter, had our call a couple of weeks ago. And we, despite being in the midst of a pandemic, still had a strong quarter that exceeded our expectations. And it was really marked by strong execution by all of our teams across the company and our supply chain partners. And really, it was a team effort. As we talked about on our call, 2 of our main businesses are headquartered in Wisconsin, where we saw particularly high levels of COVID spread this past fall, and that created a lot of production challenges for us. And the team did a nice job delivering a solid Q1, with some of those -- facing some of those challenges. So a little bit more about our why as a company. So we like to say we make a difference in people's lives by building, protecting and serving people and communities around the world. So -- and we have really 3 core focus areas. First of all, focused on innovation. So combining advanced technology with our operational strength to empower our customers to deliver value and really perform their jobs, we focus on serving our customers and really delivering them with -- delivering to them with a relentless focus on our -- on the total life cycle of our products. And really, we advance our purpose by growing our customer base and expanding into markets around the world. And I'd say that growth is both organically and with a focus on inorganic growth, M&A and partnerships. And a little bit about our culture as well. We're really proud of the culture we built in our company. We have a forward-leaning culture with strong leadership. And we have an excellent track record in ESG. So a few examples. Recently, we were named to Fortune's Most Admired Companies list, which we're very proud of. 5 years running now on the Ethisphere's World's Most Ethical Companies. And we're also on the Dow Jones Sustainability Index, which is -- and none of these are by accident. It's a conscious focus to drive -- we want to be good corporate citizens. So these are all by -- very intentional on our part and will continue to be a focus area going forward. We've been investing in megatrend technologies that support our strong outlook for the future. We recently acquired Pratt Miller. We haven't been particularly acquisitive in recent years. But it was a nice opportunity that Pratt Miller fits in under our defense segment, but we really look at them as a force multiplier in our business in the megatrend areas. They've been a great partner with our defense segment, but they have capabilities in electrification, autonomy and a number of other connected vehicle type solutions. We also recently announced a joint development agreement and expected PIPE investment in Microvast. Microvast is a battery technology company. One of the things we've talked a lot about in our recent earnings calls is our focus on electrification in all of our businesses. So we've had some recent announcements of products in our commercial segment and our access equipment segments. But as we said, we have electrification initiatives in all of our businesses, and we look forward to sharing those innovations in the coming months and quarters ahead. Shifting a little bit to our business segments. We operate in 4 business segments. Our largest segment is access equipment. Now access equipment was most impacted of any of our businesses by the pandemic. And just backing up for a minute, really 2 main product categories in our business, it's aerial work platforms to help folks work safely at height as well as telehandlers, and we also have a nice tow truck business and flatbed business journey on -- in that segment. But that the -- we are seeing some signs of recovery in that business. We talked about on our recent earnings call, we had some solid negotiations or discussions with our rental company customers. And we do see, as we said on the call, an improving outlook. So early in our fiscal year, we did mention that we expected growth in the second half of the year but to be down the first half of the year. That outlook has improved, and we talked about the fact that we now expect that second half of the year growth to be sufficient to drive full year growth. So that's positive news. And we do see a lot of exciting innovation in that business. Recently, we launched DaVinci all-electric scissors. So we've been using electrification as a propulsion or drive system for a number of years in that business. DaVinci takes it to the next level of electrifying the entire product, moving away from hydraulics using linear actuators. So it's exciting, and we think this is the first product of many to come over time that are going to be fully electrified in that business. And the customer reception has been great. Moving to our defense segment. Our defense segment is -- has a large backlog, provides a stable base for our company. Our largest program of record there is our Joint Light Tactical Vehicle program, which you can really think of that as the replacement to the Humvee or particularly the armored Humvees. And we also -- we have over 90% of the tactical wheeled vehicle market, also having programs of record in the heavy space as well as the family of medium tactical vehicle space. We had a nice order in the quarter -- or this past quarter for JLTVs of $911 million from our government customer. And we also had some additional international orders. So we're continuing to see momentum in the international space with our JLTVs. So again, just a nice solid base of a business. And what we talk about is this is a business, as we talk about it, being a solid base. It's a business that, over time, for the next several years, we see it as a $2-plus billion business for the next several years as we look out. So again, provides that visibility. Moving on to our fire & emergency business. It's led really by our Pierce brand fire trucks, which is the market leader for fire apparatus here in the United States. Like our defense segment, they executed very well in the quarter. They did face the absenteeism challenges but delivered strong operating income results in the midst of the pandemic. And in fact, we're really proud to say that our Appleton, Wisconsin facility had record labor efficiency in the midst of 25% absenteeism. So just a testament to the dedication of the team and the culture that our President, Jim Johnson, has really helped establish with the team there. We did see -- it's another business that does provide good outlook for us -- or good visibility, I should say. We have a backlog that extends into 2022 in that business, and the backlog is up 9% year-over-year. So that's, again, good stable foundation for the company. And our last segment, commercial. It's a business that -- it's a segment we're really excited about, where we participate in our refuse collection vehicle space as well as the concrete mixer space. We have a lot of great simplification activities taking place in that business and more recently have been embarking upon a focused factory strategy, where we're consolidating our rear-discharge mixer production or concrete mixer production in London, Ontario, Canada. It's allowing us then to focus on refuse collection vehicle manufacturing in our Dodge Center Minnesota facility. So making great progress with that project. They're in a journey very similar to our fire & emergency segment, which they -- the fire & emergency segment, since the Great Recession, has radically transformed the margins really from low single digits into a very solid double-digit business. So we see commercial on a very similar track and believe it should be a business in double digits in the next few years. With that, I think these businesses really provide a good strong outlook. We're confident in our strategy and that it will continue to drive shareholder value into the future. So again, happy to be here today to present to you all. And with that, Tim, I turn it over to you to start the Q&A session.

That's great. Thanks, Mike. Good overview. Maybe we'll start with John taking over. I guess it's a little over 1 month from now, 1.5 months as the new CEO. Is there anything that you would highlight in terms of -- and again, not asking you to speak for your boss, but just how do you think about the priorities as he sees it or any kind of shift in strategic direction that he may drive? And I know from his background that he had quite a lot of M&A experience, at least in one of his prior roles. So I'm curious if you think that portends maybe more of an inorganic growth prospect for Oshkosh going forward.

Sure. Well, first off, I think -- I've been in the CFO chair now for about 1 year, and it's been great working with John and Wilson over the last year. And what I see, the company has a very solid balance sheet, and that's been developed over the last -- really over the last decade. There's been a lot of great work by Wilson and my predecessor, Dave Sagehorn, to drive strong margins in the businesses. You see the improvements in the fire & emergency segment. So there's really a solid foundation that John is entering into that allows -- that really creates a situation for a springboard into the future. So as I look to John's focus areas, John is going to be very focused on continuing to innovate. So you'll hear a lot about electrification, autonomy, megatrend areas. And I think that's where that -- you'll see a lot of organic focus on, on those areas. And where there's opportunities for inorganic growth through M&A, we'll certainly do that. I think our focus will remain having a strong balance sheet. And we've talked about over time, we target to return 50% of free cash flow to our shareholders. But when you get to that level of share repurchases or M&A activity, I think to the extent that there's good opportunities out there, we're going to take advantage of those in the M&A space. Our focus is going to be more bolt-in, tuck-in type acquisitions that really -- it's really in 3 areas. I think megatrend-type areas, like our recent Pratt Miller acquisition, would be an example there, aftermarket support or if there's opportunities to get into near adjacencies of some of our existing segments. So to the extent that we pursue inorganic growth, it's going to be -- it largely would fall in those lines. We're not looking for transformational-type acquisitions that we're going to significantly lever the company up for.

Got it. So we shouldn't expect another JLG where you bring leverage to like 7x. That's probably not in the cards, huh?

No, our target's in that 2x or less.

It didn't get to 7x, Tim.

[ I said what he said. ]

[ Considering he's fine with that ], Pat.

Maybe 3 or 4.

Yes. Yes. It was higher than 3 or 4, if memory serves. Anyways...

We may have to make a bet on that.

The -- maybe one of the most -- unsurprisingly, one of the biggest talking points as far at the conference has been, the -- just the issue around supply -- a tight supply chain and input costs. And you did highlight, Mike, on the call the impact that you foresaw at the time from higher steel costs. Maybe just walk investors through the -- your relative ability to manage inflationary effects through pricing or other actions in those 4 segments -- in the 4 operating segments.

Sure. And just -- I'd start with, first of all, just on supply chain in general. It's -- we're still fighting through the pandemic. I think, ultimately, we'll continue to navigate through pockets. It's a bit of whack-a-mole just in terms of which suppliers are affected either by absenteeism or supply chain shortages. So I think there are going to be hiccups, I think, just in general, as the economy ramps back up across all industries. But specifically, the largest impact we're seeing right now in this ramp-up time is in steel. We talked about we expect that impact could be $10-plus million, very much weighted to the back half of the year. We're managing it well. We've been through this in the past few years ago when the tariffs came into play. We have a number of tools in the toolbox to manage through it, starting with the fact that we're not going to start seeing that despite the fact that spot rates have been elevated now for a few months. We're not really going to start seeing that in our income statement until later Q3 into Q4. We'll continue to manage it. I think, as we look at the market, we're not expecting it necessarily to stay elevated at the levels we're seeing right now. But obviously, it is -- could be a headwind. And we're managing it. We're staying on top of it. As we look out in the market out a little bit further, we do think there's going to be relief on the horizon really as steel producers are able to ramp up back to normal capacity. So I think you have a bit of a supply chain pinch that's one of the drivers of the elevated prices. But again, we'll continue to watch it. We have levers. We've -- we certainly are monitoring the price cost dynamics and can -- to take pricing actions should there be a need. At this point in time, we're expecting it's going to be a more limited term that we're dealing with these elevated steel prices, at least to the magnitude that we're seeing right now.

Got it. Got it. Okay. Maybe we can dig in a little bit into some of the segments, and we'll start, obviously, with access. And as you look at the fundamentals they appear -- certainly in North America, appear to be improving for your big customers. You saw a report this morning from one of them. This trend of kind of sequential improvement and utilization looks to be building, again, with some seasonal factors within that. But how do you -- you guys have some -- maybe a little -- have a better lens of that through in terms of utilization trends through some of the telematics data. Can you kind of update us in terms of what you see, again, more access specific versus -- the reports we see are obviously just very -- include other things beyond access. So what are you seeing from your lens?

Yes. Similar to what we talked about a couple of weeks ago on the call, we're seeing -- and again, we're not in the heart of construction season, but those utilization rates have been solid for access equipment, really back to similar levels to the prior year. And again, not in the peak of construction season, but that's very much a positive factor. As you noted, we did talk about being more positive in this most recent earnings call than we did in the October time frame when we were talking about our Q4 results. And I think the big driving factor is when we started hearing the more positive vaccine news early in December. That was really a bit of a trigger point that I think it did pull up some of the annual negotiation discussions with our customers, not only the nationals but also the smaller IRCs as well. So I think that was certainly a trigger point. And then -- so then it really comes -- with light at the end of the tunnel with vaccines, it comes back to -- and you have some positive utilization data, then it comes back to the fleet age. And the dynamics, as we talked about even back in October, the fleet -- the AWP fleet age in the U.S. was about 55 months based on our data. And that's starting to -- that's a pretty high data point when you go back over the past 10 to 15 years. So that's supportive of replacement demand. And so I think what you're seeing from some of our customers publicly is really aligning with what expectations are that, once you see past the pandemic, you have aged fleets that's going to start getting replaced and that -- and I think that's really driving our view that the second half of the year is not only going to be up year-over-year but sufficient that it's going to drive full year growth.

As you think about the rest of the year, I mean, the -- back up. In the first quarter, booms and scissors, aerials were down a lot less than tele. So is that your expectation for the balance of the year? I mean, obviously, that has placed a meaningful impact on profitability. But is that -- do you expect that trend to persist through the year?

It may not be quite that pronounced. I would say that, just generally, the AWPs are a bit more aged than the telehandler fleet. So I mentioned the 55-month average fleet age. Back in that October time frame, and again, it's only increased since then, it was about 45 to 47 months for telehandlers. And the replacement cycle tends to be somewhat similar. So I think there's -- it's a slightly fresher fleet but not dramatically. So I think there's -- the replacement dynamics are -- exist for telehandlers as well, probably lagging a little bit the AWPs. So I do -- I think it remains to be seen just as the year transpires just the timing of deliveries and so on of whether there's a huge mix shift or not. I think it's really the replacement support of both product categories.

Got it. Got it. When you -- I know you're planning on stepping up production at -- was it McConnellsburg, Pat, that would be the main facility?

McConnellsburg and Shippensburg would be the 2 biggest facilities in the U.S..

So as you know, what we're hearing in a lot of other areas -- and again, I don't know that labor market as well as I should. But we're hearing a theme across a lot of other companies, where just getting labor has been a challenge. Have you seen that? Or are you anticipating that being any kind of an issue or not much?

At this point, it has not been a challenge. And it really is how we manage through the pandemic. So we knew with the dynamics, fleet ages that access was not going to remain low forever, that it was going to come back, and there's going to be some cadence. And the way we managed through this by having those cold shutdowns, what initially started as 2 weeks on, 2 weeks off, we've been able to keep the workforce engaged and employed. And so we have not seen a lot of turnovers. So our workforce is -- so it's very natural now as, now this quarter, we're shut down 1 week a month approximately, exiting the quarter at regular production rates. So our workforce -- we've been very fortunate that we have a wonderful workforce that they've remained engaged. And we've not seen a lot of turnovers. So the workforce is there to respond to the production requirements.

Got it. Got it. Interesting. Okay. And then lastly, within the order book, as you -- the last update that you can provide, what has been the mix between NRCs and IRCs? Has that followed a regular or historical kind of mix? Or is it weighted more towards one or the other?

No, it's -- the mix is pretty consistent with what we've seen the last few years from a mix standpoint. The -- we're seeing pretty similar behavior really driven by similar fleet dynamic, age dynamics between the groups of customers. So we're not expecting to see any sort of notable mix shift from a customer standpoint.

Got it. Got it. Okay. Good. Maybe we shift to defense. And I guess we can start with JLTV for obvious reasons. But maybe just as you think about the milestones for the recompete, I think the proposals are due, what, January, I believe, of '22. How do you -- as you think about preparing for that, how do you prepare for a contract whereby future batches are likely to be recompeted? How do you approach that?