Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

All right. Let's go ahead with the next presentation. So for those that don't know me, my name is Felix Boeschen, I cover some of the truck equipment stocks and specialty vehicle stocks here at Raymond James. This afternoon, we're super happy to have Oshkosh with us, I think for your first ever institutional Raymond James Investors' conference. So first of all, welcome. From the company's side, we have John Pfeifer, the Chief Operating Officer. We also have Pat Davidson, who heads up the Investor Relations efforts with us. But before we get started, again, if you do have a question, feel free to use the Zoom function. I think it should be in the upper left-hand corner. And we'll be sure to kind of weave that in as the conversation flows. But I thought, John, maybe to start, I would turn it over to you for maybe a little bit of a state of the union. So again, this is more of a generalist conference, so if you could help us just maybe step the stage a little bit, who Oshkosh is some of the key markets that you do operate in? And then maybe a little bit of the longer-term vision and strategic vision of the company? And then we'll kind of take into more of a fireside chat after that.

Right. So I'll just take a few minutes to introduce the company to everyone. First of all, Felix, thanks for having us at the Raymond James conference. I'm really looking forward to next year, where we can actually be with you in Florida as opposed to up here in Wisconsin in early March, because I'm sure we have a better weather than we've got. So let me just kind of give you a thumb out sketch of our business and what's going on with it. Oshkosh Corporation has been in business for more than 100 years. We are a diversified different integrated global industrial. And that sounds like a mouthful. So what do I mean when I say that? We operate in multiple different end markets. And what we do is we provide purpose-built vehicles and machines that serve the everyday hero. And when I talk about the everyday hero, I mean a soldier on a battlefield, where we provide tactful wheeled vehicles to make them productive and keep them safe. We provide state of the art fire and emergency vessels for municipalities and airports for firefighters to be productive and safe. We allow construction workers to work at great heights while being productive and safe. We operate in the environmental markets through refuse collection. We operate in concrete placement. We operate in more than a dozen end segments. And we are a -- so we're a Fortune 500 company. We've got 14,000 people that help us execute on that purpose to do what we do. And why I say we're a different integrated global industrial is, while we operate in a lot of unique and diverse end markets, we're able to use our scale and our commonality with regard to how we operate and the technology that we use to differentiate ourselves in every one of those end markets, more than we would be able to do if we were operating independently in those end markets. And that's what we mean when we say we're a different integrated global industrial. The key driver that's happening in our business today is we are -- while we're an industrial company, we're also a technology company. We've got 1,400 engineers, highly degreed people, that work in electrification. They work in autonomy, active safety. We've got autonomous program development with the Department of Defense. We have electrification going on in every single one of our segments, exemplified last week by the win of the next-generation postal delivery vehicle, which will be a zero-emission electrified vehicle, along with a low-emission combustion vehicle. So we have this unique capability to take advanced technology and marry it with our #1 position in all these industrial end markets and really make significant advancements for the people that we serve. And that's driving a lot of change in our business. It's allowing us to serve our purpose today better than we've ever been able to do before. We are positioned for growth in every one of our end segments. So I'll go back in time a year. We're just on about the anniversary of the global pandemic. Like many industrials, the global pandemic, it was a pretty big speed bump for us. It caused our construction markets to go down sharply, but they're starting to recover. It caused some of our other markets, such environmental services and content placement to drop, because of the so many economies around the world really temporarily or some for an extended period were shut down. We're now starting to see recovery in those markets. And when you add to the recovery, the opportunities that we have with our global growth profile. China is the biggest construction market in the world. We have a long way to run to continue to develop that market and ariel work platform expansion for that part of our business. Our defense markets, just got a nice big boost by the postal contract win. So that provides long-term growth. We see growth opportunities in every segment, and we'll enhance that by continuing to develop advanced technology with the technologies I've mentioned, but we'll also do it through M&A work. We may -- we'll do programmatic M&A to expand the categories that we know how to serve to help further grow growth in our business. So postal service is an example. We did that one organically. We didn't have to do it through an acquisition. But the postal service contract represents a new category for us, last-mile delivery. And we're doing it through electrification as well as internal combustion, delivering a modern experience for the 75,000 postal carriers that are in the market today. It's a whole new category for us by doing what we know how to do, designing purpose-built solutions in this space of vehicle for people that work in our economy. So we're excited about the future. We feel really good about it. And we feel good about our opportunity to drive growth in our businesses, both organically and through programmatic M&A work for review. So that's my brief introduction, Felix. And I'll turn it back over to you for some Q&A.

Yes. No, that was great. And you already touched on, I think, quite a few topics that I do want to hit on, not the least of which is the post office contract. But maybe I thought we would start with a higher-level question first before we dive into that one. And that is, John, as we sit here today, March 3, I think we're about a month away from your official transition to the CEO seat. I'm curious if you could just talk a little bit about how that transition maybe has gone and what really investors should expect with you kind of taking over at the helm here in the next couple of months or weeks, I should say, at this point.

Yes. Thanks for asking that question. So we are in the middle of a CEO transition. I've been with the company just short of 2 years now. I've been working very closely with Wilson Jones, who is retiring at the end of this month. And so that entire period of time, we've really been working, I guess, so you could say, on transition. And I think it's been really smooth and very well planned out by our Board of Directors. I'm going to start by telling you what's not going to change. And what's not going to change is 2 primary things: number one, we have an incredible culture here at Oshkosh Corporation. I don't say that lightly. Our culture is really meaningful. It's based around people first where we really treat the 14,000 plus people as our most valuable asset. Everyone comes to work knowing that they're serving the everyday hero in the marketplace, whether it's a soldier or a firefighter and that their work matters. We're also a very -- a highly ethical company. We're on 6 straight years of being considered one of the world's most ethical companies. That's by the Ethisphere Institute. There's only 135 companies that get that designation. So it's a pretty elite company. It means we do business the right way. It means we're a sustainable company. And we're also considered on the Dow Jones Sustainability Index and Barron's Top 100 Sustainable Companies. Our people really care about that. It's important to us to be good members of the community. And we think that a base -- that cultural base is something we need to continue to build on. So that's not going to change. The other thing that's not going to change is our balance sheet. We've got a very strong balance sheet. We're investment grade. It gives us optionality, and we will prudently deploy our capital to drive growth while maintaining that healthy balance sheet with investment-grade credit rating, and that's not going to change as we go forward. So what's my focus as we go forward? What will you see? We'll orient the company much more towards growth in the future than perhaps you've seen in the past. I think you'll see us do both organic growth, which we've just made a major step with, with our postal win, that was all organic. You'll see us grow organically in places like China. You'll see us continue to take market share through technology investment, but you'll also see us grow with M&A, programmatic M&A, where we're making investments in areas that we believe we can grow in and make a difference in areas that are right within our wheelhouse not getting too far out ahead of what we know how to do. And that programmatic M&A, we believe, will also help us drive growth while maintaining very disciplined capital deployment, because we want to maintain the balance sheet strength that we've got. So that's what I'll -- that I'll say about it, Felix.

No, that's very helpful. I appreciate all that color. I do want to touch on M&A maybe a little bit later on, but I was hoping we can talk about the post office contract. So obviously, I think contract was announced last week. From what we've seen about it, a 10-year contract. First of all, could you maybe unpack the contract for us a little bit, maybe initial timeline, the initial post office investment and then really, when production starts in earnest, which I thought was 2023, but any sort of framing around that, I think, would be helpful for investors.

Yes. So first of all, this is a great win for us. It's right in the middle of our wheelhouse. It's a new category, but it's right in our wheelhouse of what we know how to do. We designed and developed a purpose-built vehicle with the postal carrier in mind. There are 75,000 postal carriers, people that deliver mail to our houses every day. We designed it with them in mind, solving the problems that they need to have solved, helping them be productive, delivering the mail of today in the future, which is e-commerce, small packages, helping to be safe, a lot of technology to avoid accidents, avoid collisions. It's a 0 emission, battery electric vehicle and it's a low-emission internal combustion vehicle. And we will supply both from day 1. I think what you'll see is, over time, probably the battery electric vehicles will grow, but maybe one of the best parts about our ability is it's one platform. And in the future, we can convert internal combustion propulsion to battery electric, as the infrastructure gets built out to support battery electric vehicles. So this really does what we all want to see, which is continue to deploy sustainable solutions in our communities. It's 10 years, as you said. It's 50,000 to 165,000 units. The minimum quantity is 50,000. That takes us to economies of scale. But I think what you see is the post office wants to work towards 165,000, because when you look at the size of their current fleet, that's what they really need over time. This is -- again, it's a great win. It does go into production in 2023 in the second half. And it will go out at 10 years. These vehicles will be in the market for 20-plus years. They're designed to last. These are not off-the-shelf vans, these are vehicles that are built to last over time. And that's how we really help the post office to do what they need to do, which is lower their overall operating costs. So it's a win-win for us and the postal service. Most importantly, the postal worker that gets a much better product to allow them to do what they do.

Okay. And so I did want to -- and you touched on this, but the contract includes both internal combustion engines as well as battery electric vehicles. And so I just wanted to clarify a couple of things, because there's been some talk about basically retrofitting later on in the press. So can you help us maybe unpack the mix in the near term? And how is that structured? You're able to do the fully battery electric vehicles, like 100% if the post office chose to do that? Just any sort of color around that.

The mix of it between battery electric and internal combustion is entirely dictated by the postal service. We are able to supply them with any combination that they need. You have to look at it from the eyes of the postal service. They have to build out the infrastructure to support battery electric vehicles. There are postal trucks at every single one of our post offices around the country. And we've -- they've got to build out the infrastructure to support those vehicles. So it's tough for them to order 100% from day 1, because they may not have the infrastructure to support it. Over time, they will, and therefore, we've provided the optionality to convert internal combustion to battery electric as they're able to support vehicles in the market. It really does what President Biden wants to do, which is electrify the fleet. And it does, even what California wants to do, which is be zero-emission by 2035.

Okay. And then you talked about the -- it seems like a fairly wide range, 50,000 minimum to 165,000 at the high end. And I think if you look at the post office fleet, to your point, you can see that [ LLV ] concentration that was effectively produced and, I believe, the late 1980s. And so it seems clear that over the next 10 years, the post office would need probably toward the higher end of those vehicles.

Correct.

But can you maybe talk to about that range and the propulsion split? Because I imagine both of those factors would sort of impact the ASP per vehicle, if that makes sense. I'm just trying to think through, from an Oshkosh perspective, a, financial implications. As we think about those 2 factors have seemed still relatively unknown to us outsiders, if that makes sense?

Yes. So a battery electric vehicle is -- the acquisition cost, it's a higher sticker price, right? And that's because lithium-ion batteries and E-drives are still more expensive than traditional internal combustion engines, IC engines. But when you look at the total cost of ownership over a period of time, we're at the point now today with lithium-ion battery costs coming down and range extensions and e-drive efficiency improvements, where total cost of ownership starts to make a lot of sense over a period of time. But the acquisition cost is still a little bit higher on a battery electric than it is on internal propulsion. But the solution that we provided is great for the postal service to upgrade their fleet. It's great for them to have optionality in the future. And from our perspective, we're happy either way. This is good business for us. This is good business. It's good growth for us. And whether it's an internal combustion engine or it's a low e -- I'm sorry, a zero-emission battery electric, it's good business for us. Remember, even if it's a low -- to start, even if there are low-emission internal combustion vehicles going into the market, those are a dramatic improvement over the current vehicle that's being used by the postal service.

Okay. And then it is housed in your defense business. So I was curious if you could talk a little bit about maybe the margin profile of the contract. Should we think about it as in line with maybe legacy defense margins? Or would that be a kind of a silly way to think about it?

Well, it's a new category for us. So this is not Department of Defense business. It's a new category. It's within the defense business, because our defense business knows how to do 2 things. They know how to work on big government programs, which is -- this was a big government program. And they know how to do purpose-build vehicles for a specific use case. In this case, the postal worker as opposed to the soldier. And so that's why it was a perfect program for defense to work on and defense to execute and be in the defense business. But it is not Department of Defense business. It's U.S. Postal Service, right. I can't -- I cannot disclose the nature of margins of the business. I can tell you that it's great business for the postal service, and it's really good business for Oshkosh Corporation. I can tell you that.

Okay. Okay. Well, I'll leave that there then on the post office, but it does bring me to a bigger picture question, and that is electrification. And you touched on it in your opening remarks, but it's no stretch to say that the post office is one of the largest fleets in the entire world, and you all are leading the charge, kind of no pun intended here, but toward electrification on that end. So maybe could you take a little bit of a step back and talk about your electrification capabilities and strategy in general, as you think about not only this new post office business, but really the rest of your segments also?

Yes. So we're working on electrification application in every one of our segments, in almost all of the end markets that we serve. We have been involved in electrification for more than 20 years. And you didn't hear about it so much, because a lot of times, it was a niche application where the customer was willing to pay for an electrified product for a specific reason. And you couldn't apply it across a wider range of applications, because the cost was really high and the benefits, the total cost of ownership didn't make much sense to apply it to a wider number of use cases. That's because battery costs were too high. Batteries were too big and too heavy. We've gotten to a point today with technology, where lithium-ion batteries costs have come down, range has been extended in between charges. We've got weight that's come down. We've got e-drive efficiency that's gone up. So we're at a point in time where we can apply electrification to a much wider range of use cases and provide total cost of ownership benefit, economic benefit, not just emissions benefit, economic benefit to the customers that use them. That's why you're seeing this more predominant -- more prevalent in our business. So you will see us -- we've just introduced in our access business, fully electrified aerial work platform. It doesn't even have hydraulics on it. It's got electric actuators, primary propulsion is electric, and we're taking orders beyond what our expectations were, because of the overall benefit that the user gets by having an electrified product. In our commercial segment, where we have environmental services. We are a large supplier of refuse collection vehicles. You'll see us this year put fully electric vehicles into the marketplace. So there'll just be a handful start in partnership, but we'll continue to provide electrified solutions in refuse collection as well. We've got a lot of opportunity in every one of our segments. I think you'll see this continue to accelerate. I don't think you'll just continue to see it accelerate with us, I think you'll continue to see it accelerate with a lot of industrial companies. We're now seeing the same thing that we're seeing, the opportunity to apply economic benefit when you use electrification. And that's relatively new as technology has changed just in the past few years.

Right. And so I guess my bigger picture question is you already kind of talked about M&A a little bit in the beginning of your presentation. Maybe more of a focus towards growth area into type of acquisitions. The Post Office contract, obviously, more of an organic initiative, same thing on the access electrification. You did make an investment in a company called Microvast not too long ago. Just curious if you could -- and the Pratt Miller acquisition, I should mention in that same vein. But just curious if you could talk about maybe your appetite for M&A, and should we think about M&A being specifically concentrated along the lines of electrification and/or autonomous type of vehicles? Or is that more something you guys can do internally at this point?

Well, we'll not be focused solely on electrification or autonomy. We'll focus it on a little bit of a wider yet focused perspective. I'll tell you a little bit more about it. So the first moves you've seen us make. We made an equity investment in Microvast. Microvast is a lithium-ion battery manufacturer. We've got a few partners for lithium-ion batteries. Microvast is a really good, solid, stable company that is very vertically integrated in the lithium-ion battery world. We've got a joint development partnership with them along with our equity investment. Allows us to continue to do the work we need to do to develop the batteries for specific use cases in our segments. And again, we've got other really good partnerships in the lithium-ion world. And then with regard to Pratt Miller, so let me talk about our acquisition focus in total. So we have an always-on view of M&A, where we know where we want to make acquisitions. We know where we want to drive growth. Sometimes that's technology, Pratt Miller was kind of a double purpose. They've got a lot of program development capability around autonomy, electrification that enhances our current capability to develop programs, makes us more able to execute on development of a technology-focused program. But the other thing that Pratt Miller does for us is they have a defense business. They work on defense programs today. So by acquiring Pratt Miller, we give ourselves the ability to get into new categories with the Department of Defense that are close adjacencies to tactical wheeled vehicles, which will allow us new avenues of growth with the Department of Defense. So it's kind of a 2 purpose...

Double whammy.

Double whammy. And it's a bolt-on, right? It was a bolt-on style acquisition. You'll see us going forward making acquisitions, primarily either for technology purposes, or to expand into a near adjacent category, that's a new category, but something that's in our wheelhouse that we know how to do that will allow us to drive further growth. You may see us get into more life cycle services or support businesses to get closer to our customers. That's another area that we think is very interesting. So we've got very focused areas for M&A. It won't just be technology that will be different, but it's all focused on growth. We don't look at acquisitions for scale and cost. We look at them as how can we enhance our profile and grow the business.

Got it. Okay. That was super helpful. We got -- maybe I think about 15 minutes or so left, if I'm not mistaken. I was hoping we could talk a little bit about the current environment. One thing that's obviously been, I think, top of mind for investors, are supply chain and really raw material headwinds. You guys did already talk a little bit about some steel headwinds, you might anticipate in the second half of the year. Curious if you could update us on what you're seeing on that end and maybe broadly across your supply chain, how things are holding up?

Yes. So on steel, we've all seen steel prices escalate quite a bit. I think they've hit all time records, in fact. And that's really driven by -- they haven't -- they've kept capacity constant as demand has gone up, which is, of course, has pushed up prices. So that has an impact on us in businesses like access, which uses a lot of steel. So what we've done is we've hit it on both fronts, both on the cost and on the pricing front. We've instituted countermeasures both on cost through hedging activity as well as through pricing actions we've already implemented to offset the material cost impact that we're seeing in steel. The forecast that we're seeing from the industry tell us that this will moderate in the second quarter of the calendar year. I don't know whether or not that's true, but that's what we're hearing. But in either case, we're taking the necessary actions to protect ourselves while being prudent for our customers and making sure that we're still offering them what they need to continue to put the equipment in place to grow their businesses. On the other side of the supply chain, we've seen isolated constraints in certain commodities or not commodities, I don't like to call commodities, components and subsystems that we buy. So microchips would be one of them. We've probably all heard about the [ strength ] in chip world is impacting the automotive industry. It's had some impact on us to this point in time. It's clearly a risk. We've had to resource a couple of things to avoid slowing us down. We've been able to successfully do that. It's still kind of a red risk for us, and we're still paying very close attention to it. One of the benefits that we have is back to our -- we're a different integrated global industrial is we have an integrated supply chain that goes across all these diverse businesses that we have and we're able sometimes to leverage that, where if we have a problem with a unique supplier in one segment, sometimes we can leverage suppliers in other segments to offset the risk. And that helps us a lot of times, mitigate these constraints. But right now, it's isolated in certain types of parts and components, but it's clearly more risk than we normally would have with regard to constraint in the supply base. Now this is totally different from what we saw, say, May through September, October of 2020. That was when we were all panicking because of the pandemic. Suppliers were shutting down due to the pandemic, everything seemed to get turned upside down. It's not that type of chaos that we're dealing with right now. Right now, it's certain types of materials and components that are under constraint, because we're seeing the economy start to growing again. And that's what we're working with, but it's clearly one of our risks that we're having in there.

Okay. But so I believe you called out about $10 million of steel headwinds for the remainder of the year. Is that sort of still what you're seeing as it is right now?

Yes, yrd.

Okay. Perfect. And then I did want to switch over and maybe talk about AWP a little bit. Curious if you could update us a little bit just what you're seeing maybe from some of the utilization data? And then the second part of the question is we continue to think there's a bit of a brewing replacement cycle on that end, specifically in the North American fleet. Curious if you could talk to maybe how customer conversations around replacement have been tracking, if that's something they're talking to you guys about more earnestly and more often at this point?

Yes. We talk to our customers all the time. And so we get as real-time information from them as we can get. And we have telematics on our products. So the telematics data tells us a lot of things. One of the basic things that tells us is what's the utilization look like? And utilization is healthy. It's as healthy as it was before the pandemic. So that's a really good sign. That equipment is being used and is deployed today. Now so what's going to drive growth going forward is when you mentioned the replacement dynamics. So the fleet of booms in the market, which is very important aerial work platform product is aged. Average life of a boom in the U.S. is high 50 months of age. That's -- it should be in the 40s somewhere. And so there's a need to replace equipment. And our customers like to replace equipment at about 7 years of life. Because then that's when it has the optimal resell value in the resale marketplace, so it supports their total cost of ownership equation. If they try to push it out too much, residual value drops off, and then the total cost of ownership equation can suffer. So there's a lot of equipment that needs to be replaced. We couple that with the fact that customers want new equipment. They don't want 8, 9-year-old equipment. They want the latest features. They want the latest safety equipment on the machines. And so our customers know that they've got to give newer equipment to their customers. So that's going to drive multiyear growth just in the replacement dynamics alone and that's good. That's going to be healthy for the rental companies. It's going to be healthy for us, and it's going to allow the users to have the latest equipment. We've also got, coupled with that growth in China. China is the biggest construction market in the world. We're going through a dynamic momentum and growth of the market as they convert old work methods to modern work methods, which is aerial work platforms, and you have to work with heights. So that replaces bamboo scaffolding and a number of other work methods. And we're still in the early stages of where that will go before it reaches maturity. So that will also help us drive growth. We've doubled our capacity in China. We're busy there. The economy is one of the only economies this year or last year that will actually grow. So it's healthy, and that's going to help frankly.

And can you just remind us what percentage of your access revenue is currently derived in China? And maybe what kind of expectations you have for the coming year on that end market specifically?

So today, it's mid-single digits, maybe a little more than 5%, but it's growing at a healthy rate. It's growing faster than any of our other businesses. So it will continue to be a bigger and bigger part of our portfolio as we go forward.

Okay. Awesome. That's helpful. And then since we are talking about international opportunities, one thing that does come to mind is, I don't want to -- not talk about your JLTV. Curious if you could update us a little bit on the international pipeline on that end. I know you think a couple of more contracts, specifically with some, I think, European customers, but curious if you could, a, update us on that and then, b, talk a little bit about the long-term runway there for growth, specifically internationally.

So international, we're always working with on opportunities for international growth, meaning we're actually engaged with countries that want to upgrade their fleets in international markets. And you've seen us do periodic announcements of different countries that are ordering JLTVs. We announced $911 million order last quarter. A segment of that order was for international customers that were ordered through the Department of Defense. So to frame the opportunity for you, because this is a long-term growth opportunity. There are 60,000, 6 0 thousand armored Humvees in the international world outside the United States that are deployed. All of them are aged and need to be replaced. The #1 replacement vehicle for those vehicles is the JLTV. So when you look at 60,000 units that have to be replaced over time, you can see the magnitude of opportunity. Now we're not going to get every single one of them. There are some other competitors that will get some, but we'll get our share of those units, and that will drive material growth going forward. And that's a new phenomenon for us, because it was just over a year ago, that we hit what's called full rate production with the Department of Defense. When you hit full rate production with the Department of Defense, it gives you the ability to sell that product to allies that we have around the world. And that's why it opened up that opportunity of growth. We'd still relatively use.

Got it. Very helpful. The other segment I did want to touch on briefly is fire and emergency. I think there's been quite a bit of consternation among investors just around municipal budgets. But curious if I could maybe get your take on it. Obviously, one of the key parallels we've heard maybe throughout 2020, was that of the Great recession. Obviously, big difference is the housing stability, which I presume would be positive specifically on your fire business. But I guess, a 2-parted question. I mean correct me if I'm wrong, but we've seen the fire truck market already kind of structurally shrink once post the Great recession. I mean, could it go any lower from here? And then what are you currently hearing from your dealers as they think about the 12-month outlook or so on that business?

Yes. So to give our perspective, we were running it at about 5,000 units a year in the U.S. prior to the Great Recession. Great Recession really disrupted the fire truck market and dropped to 3,000 units, so a huge, huge drop, a 40% drop. Then it came back up into the 4,200-ish number, and that's kind of where it's stabilized. Since that period of time, that's what Felix was describing. So we see the market today being long term, healthy. Now when we talk about, well, municipal budgets might be constrained, you're absolutely right. There is not a property tax problem. There's not a real estate problem in the market today. So that's good. This is the primary source of revenue for municipalities is real estate tax. The next -- then they've also got revenue that come from other sales taxes and things like hotel taxes and leisure taxes. That's what's suffered as those taxes. So that's put a little bit of downward pressure on their budgets. So there could be -- if the market drops, it will only be -- in our view, it will only be temporary, and it will be a small drop, not a big drop. But long term, we look at the fire market as being a great market for us. We're the leader in the market. We've got the best dealer network. We continue to gain share every year that goes by. And it's our best margin business. I mean this is a fantastic ROIC business, and we're looking for ways to continue to grow it. We've got opportunities to grow it, both through share gain domestically and through global growth and where there's -- you see municipality spending and development where they need modern fire trucks. So we don't see municipal spending being a long term problem. We see it being a potential short-term problem.

Okay. That's helpful. And you mentioned margins in F&E, and I did want to touch on that a little bit. It's obviously been a very good success story for Oshkosh over the past couple of years. And to your point, not so much a top line story, certainly, share gains, but really more on the margin side. I was hoping you could unpack the simplification progress for us a little bit and maybe characterize what inning you would be in an F&E? And knowing that we have maybe 120 seconds or so left, to what degree you think you could replicate such a process and maybe commercial? I know a lot there. I'll give you the floor on that.

So let me just start by saying our improvement in the Fire & Emergency business over the last 5 years has come from 2 primary areas. One, you mentioned simplification, the 80-20 principle. The second is innovation. We've done a lot of innovating on the product through our aerial platforms, through our communications platforms on those vehicles to make them the absolute best solutions for fire fighters. So on the simplification, it's around 80-20, 20% of what you do typically impacts 80% of your output, whether it's 20% of your product delivers 80% of your sales, and the way you align your sales programs should be around those 20% to how you organize a manufacturing operation around your 20% product that really delivers that 80%. That's the simplest way that I can describe simplification, no pun intended. That has really allowed us to streamline what we do, what our offering is to our customers and allowed us to drive a more efficient business in the way that we operate. Then we couple that with the innovations we've taken to market, and that's what delivers these mid-teens types of operating margins that we're seeing. So if you go over to the commercial segment. Commercial segment delivers 7% operating margins. We're in the early stages of deploying simplification. We've pulled all of our concrete placement vehicles out of operation in -- near Rochester, Minnesota, moved it into a focused factory in Ontario, Canada. We're focusing Rochester on refuse collection. We'll follow the same playbook, but again, it's not just simplification from sales to operations, it's also innovation. So we're innovating concrete placement through our new S Series 2.0. We're innovating concrete placement through intelligent product platforms, giving information and analytics to operators that they've never had before to make them more productive. We're doing the same thing in refuse. We're applying electrification to refuse for applying intelligent product technologies to refuse. So our customers can be safer and more productive. And that's what they want. Talk to waste management. They want us to deliver solutions that allow them to be more productive and safer when they're doing their work every day. And so it's the combination of simplification and innovation that will continue to propel commercial to double digits, similar to what we've been able to do in Fire & Emergency.

Very helpful. Well, that takes us to, I think, just over 40 minutes. I'm going to say thank you, John and Pat, for joining us. Great to have you, and I think we'll wrap up here.

Great. Thanks, Felix. Thanks again for having us at the conference.