Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Great. All right. Good afternoon, everybody. I'm Ross Gilardi, the senior machinery analyst at Bank of America. Thanks for joining us for this next session with Oshkosh Corporation. I hope everybody is having a productive day so far. Very privileged to have Oshkosh here today. Representing the company, we've got CEO, John Pfeifer; and Director of IR, Pat Davidson, who I'm sure all of you -- most of you know very, very well. We're going to keep it pretty open-ended. John, I don't know if you wanted to say a few comments upfront or if we should just get right into Q&A.

I can make a maybe just a few minute intro, Ross.

Yes, let's do that.

So I'll give you kind of a thumbnail sketch of Oshkosh Corporation, who we are, what we do. So we're a Fortune 500 company. We've been in business for more than 100 years. We've got 14,000 people in 24 countries. About $7 billion of revenue that's down from over $8 billion the year before due to the pandemic. You'll see us start to grow again as we go through this year after this pandemic-induced downturn. We are a company that's got an enormous amount of technology, and I'll talk about that in just one second. Let me just first start with our culture because I think the most powerful thing that we have at Oshkosh Corporation is a very powerful culture. So we are all unified by one common purpose. And that common purpose is that we make a difference in the lives of the everyday hero. The everyday hero is the soldier, and the firefighter, and the person that has to work at extreme height, an environmental service as the refuse collector. And I can go on and on because we serve lots of different end markets. Those are the heroes that we serve. We know how important it is for us to make -- help them be productive and help them be very safe at what they do and bring them home every day to their families. That unifies us as a company. The other trademarks of our culture is we're a very ethical company. We're listed by Ethisphere Institute as one of the world's most ethical companies. There's only 135 on the list. So it's a pretty elite company. We're very proud of the way that we do business. We're a sustainable business. We are focused on the environment and sustainability. We're on the Dow Jones Sustainability Index. We're on Barron's list of top 100 sustainable companies. Kind of rare for an industrial to be on that Barron's list, by the way. We constantly make improvements in the sustainability of our current operations, and we're always thinking about how the next product is going to be more sustainable than the product it replaces as it goes into the marketplace. So coming back to the technology piece. I said we serve a lot of different end markets: the soldier, the firefighter, somebody who works at height, et cetera. But what brings us together and what allows us to really do what we do is we are also a technology company. We've got 1,400 engineers. I'm talking about the greed engineers all the way up to PhDs that work on advanced technologies, whether it's mobility systems, electrification, autonomy, intelligent products, and we're able to apply those advanced technologies to all of those end markets that we serve that allow us to make advancements faster than maybe some others can. I think that, that's a big reason why we're #1, essentially in all the market segments that we serve. You're seeing a lot of news these days about electrification in different markets around the world. We've been involved in electrification for more than 20 years. It started with our first electrified boom lift in the 1990s. We've done a lot of discrete Department of Defense electrification programs, introduced a new fully electrified aerial work platform earlier this year. You'll see us introduce electrified refuse collection vehicles. So we're -- we've got a lot of electrification capabilities. That's a big trend in the marketplace because of the performance and the sustainability, of course, that electrification provides. And that's a big focus area for us. So we're happy to be here at the conference. And Ross, I'll turn it back over to you for Q&A.

Great, John. That's a terrific introduction, and I'm sure we'll touch on many of those topics in more detail as we get through the discussion. John, I would just love to hear more about you specifically to start it off. And Oshkosh has had a lot of great leaders over the years. And I'd just like to learn more about your style first and how should we think about Oshkosh now. Is it going to be more evolution versus revolution? And what are the types of things that you like to do? Are you more of an operating guy? Or as a leader, sales and marketing, do you really like to get into the engineering? I just -- that will be helpful to get that type of feedback.

Yes. Yes. Okay. So a little bit of background on me. So I've been in my career for, I think, almost 35 years now. I've always been in -- whether it's automotive or marine, I've been in industries where we design, develop and manufacture and deliver a very sophisticated product or system to the marketplace. That's what Oshkosh does. We do purpose-built vehicles and machines for, what I said earlier, those everyday heroes. That's what I understand. I'll tell you, first of all, what's not going to change, Ross, that is, as I've said before, we've got this powerful culture at Oshkosh Corporation. We have a powerful purpose, 14,000 people understand it and unify around it. We've got -- I talked about the other things that are trademarks to our culture. That stuff's not going to change. We've got a really strong balance sheet. That's not -- we're not going to change that. We're an investment-grade company, a healthy balance sheet that gives us a lot of optionality going forward. So what are you going to see going forward? And what do I see? I see a lot of opportunity to enhance our growth in different areas. I see it both organically through the technological capability that we have, being able to apply advanced technologies in the segments that we're in. And you've seen us do that. I think maybe one of the best kept secrets about Oshkosh Corporation is perhaps all the incredible technology and the capability that we have with technology. You'll see us continue to apply that. You saw us do it recently in the U.S. Postal Service contract win. That was a big part of our electrification capability came through in that. In addition to that, you're going to see us become more apt to take some capital deployment moves with inorganic M&A. You saw the acquisition of Pratt Miller. Pratt Miller is a tuck-in bolt-on acquisition, a nice acquisition for us that helps drive growth. So I see a lot of opportunity to focus the company around real growth opportunities going forward, both organically and inorganically. So what am I like? Well, first of all, you need to know that I'm not coming into a fix-it company. We're not a company that's a turnaround story. We're a healthy company. And I'm not somebody who's the micro manager, and that's good because we got a lot of really, really good people at Oshkosh Corporation who know what to do. They don't need me walking into the -- I love to go through the plants. I love talking to the plant managers every chance I get, but they certainly don't need me to tell them how to manage the plants. My focus is around technology, product development, capital deployment, making sure that we do it responsibly where we're really going to be making a difference for our customers. So I'm a little bit more focused on the long-term outlook for the company. But I love what we do, and I love being a part of the manufacturing process because it's complicated, which is what makes it interesting, and we're really good at it.

Okay. Excellent. Can you actually talk about Pratt Miller a little bit? More on why you acquired this business, and what you think you can do with it.

Yes. So Pratt Miller is a really interesting acquisition because it really checks 2 nice boxes. It's a tuck-in acquisition. You saw we paid $115 million for it. Pratt Miller is a technology company. We bought it -- so going to the 2 reasons we bought it. Number one, they have a lot of capability to enhance our advanced technology commercialization so that's across robotics and autonomy. It's in electrification. It's in telematics and intelligent product. So we've got really strong capabilities in those areas. Pratt Miller enhances those capabilities, gives us a faster cycle time to get those capabilities applied to certain use cases. So that's one. The other thing is in our defense segment. Pratt Miller -- half of Pratt Miller's business is focused on defense. They've been successful there. We saw an opportunity to merge with Pratt Miller. That gives our defense business the opportunity to get into categories that we have the ability to compete in but they're outside of our traditional tactical wheeled vehicle category. So it opens up new growth categories in the Department of Defense is the other thing that Pratt Miller does for us. It's really -- Pratt Miller is really an engineering company, incredible engineering people. And the power sports side of the business makes it a little bit fun as well.

And you're pretty clear that inorganic will be a part of the strategy. Is it -- I mean, is there any way to think about that in terms of like percentage of your operating cash flow or anything like that? And like what you might allocate towards M&A the last few years -- next few years?

So we always like to have a rule of thumb in our capital strategy, and I think it's a good one, that we want to give about half of our cash flows back to our investors. We always pay a dividend. We use kind of the lever there as being the share buybacks, right? And then -- but some years we're 85% returning money to shareholders. Other years, we might be less than 50%. But over time, we like to be 50%. So with regard to share buybacks, I will say that we will look at that going forward opportunistically. What I mean is if we see opportunity where we believe our stock is trading below its intrinsic value, we'll probably take the opportunity to return money to shareholders and buy some shares back. But we'll also be much more aligned around investments we need to make, both organically and inorganically with our cash flow, reinvesting in the business. So that's why you'll continue to see us do more acquisitions as we go forward. And when we look at M&A, we don't look at M&A for cost reasons or consolidation scale reasons. We look at M&A for growth purposes, to drive growth. I explained how Pratt Miller will drive long-term growth. We may make an acquisition that gets us into a near adjacent category that we're not in today, but is right in the middle of our wheelhouse and will help us drive growth in an attractive segment. We may look at M&A in areas of life cycle services and support. We've got millions of pieces of equipment and vehicles in use today, and it takes a lot to keep them running productively. And we'll probably look at that as another opportunity to drive growth for the company.

Got it. Let's switch to the Postal Service contract, very exciting win for Oshkosh, obviously. Any new details you can share? Any sense should we expect kind of a long, drawn-out protest from Workhorse based on anything you've learned recently? And assuming you guys prevail, what are the next milestones to really think about on the contract?

Yes. So let me first kind of give you a thumbnail sketch of what the program is, make sure everyone understands because it was a really nice win for us. This is a -- the Postal Service has not modernized their fleet in, I think, 35 years. So this is a big move for the postal service to modernize its fleet of delivery vehicles that we all see going by our houses and businesses every single day of the week. We provided a zero-emission battery electric vehicle and a low-emission internal combustion vehicle as part of our program. It's 1 vehicle, 2 different options for our propulsion systems. It's up to 165,000 units. It's 50,000 to 165,000 units. And when you look at the postal fleet, there's, I think, around 200,000 in its fleet today. So that's why you get that number up to 165,000 units that need to be replaced to modernize the fleet. It's a 10-year agreement. We start production in the second half of 2023. And this essentially, over time, allows the postal service really to electrify its fleet. Now you've heard a lot of scuttlebutt in the news from different places. We've heard rumors of a award dispute, that would be totally normal. We've been competing for big government programs for decades. Every time you compete for a big program, there's almost always a dispute that somebody has because these are big programs that there's always somebody who doesn't win, and they want to dispute it. So it would be actually unusual for there not to be a dispute about it. And there's -- there are certain states that thought they might get jobs who are now not getting jobs. So you'll hear some complaints coming from that angle as well. I think the most important thing to recognize here is, I can't tell you if this will be a long, drawn-out dispute or not. What I can tell you is that we had the best solution for the Post Office which is why we won. That is one vehicle that's either in zero-emission battery electric or low-emission internal combustion. And the low-emission internal combustion units will be able to be replaced with battery electric propulsion, the exact units will be able to be converted to battery electric in the future. This is directly in line with President Biden's mandate that he wants the federal government to be electrified going forward. We're right in line with what he wants to do, be able to electrify the fleet within 10 years. The Post Office came out with a letter to Congress, clarifying those types -- those points, I think, Thursday night. It's also in line with what California wants. California wants to be zero emission by 2035. This will be ahead of California's time line for zero emission with the postal fleet with this contract. So we're really excited about it. We're excited about it because it's going to be great for the postal carrier. You heard me talk about we make a difference in the lives of the everyday hero. Well, in this case, it's the postal carrier. Today, they're using vehicles that are 30 years old. They're polluting the air around them as they move. They're not the most productive, safe vehicles for the postal carriers that are using them where we've got advanced safety systems. There's auto-stop features that allow -- or avoid and prevent accidents. There's just so many features that make this more productive and more safe for the postal carrier. And it's designed to deliver today's mail, which is e-commerce. It's not the mail of 35 years ago. Today's mail is e-commerce packages, and that's how we designed the vehicle to make it productive to do that. So we're -- this is a great win for us. We're really excited about it.

It's great. Congratulations. Can you speak at all to average selling prices or to profitability relative to the rest of your defense segment?

I'm not at liberty to talk to you about profitability because of the NDA with the U.S. Postal Service. What I can say is that this is great for the Postal Service, great for the postal carrier, and it's certainly good business for Oshkosh. It is good business for us. It's right in the middle of what we do: designing and developing a purpose-built vehicle for a specific use case. In this case, the Postal Service.

Do you think the EV capability that you're ready to provide for the Postal Service will have -- in terms of just perception for all of Oshkosh's products and so forth, will have a positive halo effect on the rest of your business potentially and other EVs that you might be working on in the portfolio?

Yes. We're working on electrification in all of our segments. We've got programs in all of our segments right now that are ongoing. I certainly would agree with that, that this will help highlight the amount of capability that we have at Oshkosh Corporation. It gets us into a new category that we have not been in, but we -- a category that's right in the middle of what we know how to do. That's last-mile delivery. And I want to say that I mentioned that we're -- we've been in electrification for more than 20 years. The reason you're seeing that be more -- so we've done it on discrete projects that were for a specific reason. The reason you're seeing it come to fruition more or be applied to more use cases today is that technology has developed to the point where now it's not just an environmental benefit. Environmental benefit is good. But now -- and I'm talking about industry in general, is able to provide an economic benefit with electrification. Meaning that lithium-ion batteries have developed to the extent where you can get more mileage out of one charge. That's meaningful. They are lower cost than they have been in recent years. E-drives are more efficient. So this allows us to provide a total cost of ownership equation or an economic benefit to customers, which is very, very attractive. And when you combine that with better performance in electrification as well as the environmental benefit, that's what's causing electrification to really start to be applied to more use cases today. I mentioned we're introducing some new refuse collection vehicles this year in our commercial segment. You'll continue to see more advancement in all of our segments as we go by because of the advancement in technology. So I think because of that, we're now starting to get recognized for things we've been doing for the last 20 years because we're applying it in more visible applications than we've been able to do in the past.

What about peers? I mean we're going to have electrified fire engines at some point? Or how do you think about the fire & emergency segment?

I think that you will see electrification be deployed in multiple cases in all of our segments in the future. You've seen us do it in aerial work platforms, fully electrified, doesn't even have hydraulics on it. Aerial work platform, we introduced earlier this year. You've seen the announcement on the Postal Service. I talked about refuse collection. This is -- there'll be more use cases that in the near future, you'll see us commercialize in the near term going forward. But I can't tell you specifically what and when, obviously.

Got it. Okay. Good. I want to shift to access equipment because I know it's a topic of a lot of people's minds. So where are we in the replacement cycle? Is this just the first inning? And does this feel like it could be a real cycle this time because we've had some sort of -- over the last few years, we've had a couple -- some ups and downs and some false dawns perhaps. But does this feel like it's got life to it?

Yes. So you go back in time, and when you look at the access equipment market, it's -- everyone would understand it's a cyclical market. It's not just driven by construction, but construction is the biggest application for aerial work platforms, which is why it's cyclical. But if you look back in time, you see that every peak is higher than the peak that came before it. That's what we expect as we go into this next cycle that will go to yet another new peak. And why are we confident in saying that? Well, we just look at the installed base of equipment in the U.S. and North America, which is large, and we know the age of that equipment. We know that our customers like to replace equipment at around 7 years of age because that's when you get the best residual value, and you keep your total cost of ownership equation intact by doing that. Couple that with the fact that our -- the end users of the equipment, they want new equipment. They don't want old equipment. And that also is why our customers replace their fleets on a fairly regular basis. So when you look at the amount of equipment that was supplied to the market from '12 to '15, you see that there -- we're heading into a robust replacement cycle. That's in North America. That will drive multiple years of growth alone. Then on top of that, there was a little bit of fleet trimming during the pandemic, maybe 5% on average of fleet trimming. That's not too bad in a fairly specific -- significant downturn. But we're starting to see even new applications for growth or where aerial work platforms can be deployed in the U.S. market. You see it more in manufacturing and MRO applications in the economy. So there's opportunities to grow beyond just the replacement cycle. And believe me, the replacement cycle alone will drive a multiple year growth rate. Then you go on top of that and talk about international opportunity. China is the biggest opportunity. China is the biggest construction market in the world. There is a lot of room to run until we reach parity between the U.S. and China in terms of number of aerial work platforms per construction worker. So we'll continue to see strong double-digit growth rates in China for deployment of aerial work platforms in the construction industry. And what I haven't even mentioned is infrastructure bill. We don't know exactly what the impact or if there will be an infrastructure bill. But that will clearly create more growth because they'll be needed -- there will be a need for expanded fleets beyond what we have today to support higher levels of infrastructure investment. So we're at a point we're coming out of a tough pandemic-induced downturn. We've kept our operations healthy through the downturn and we feel like the access segment in total, the market is poised to get healthy again from a growth perspective.

Okay. Got it. So if you're going to have a higher peak next time or this time around, I think you did $4 billion in revenue in fiscal '19. Okay.

I don't know but -- your microphone is hard for us to hear. Have you noticed that when he's -- yes.

If you can just repeat what you just said, Ross, that would be great.

Can you hear me a little better now?

Yes.

Yes.

Okay. All right. Good. So John, you're talking about typically, you'd see higher peaks from cycle to cycle. I think you did $4 billion in revenue in fiscal '19. So can you do $5 billion next -- at the next peak?

I think that's in the range of possibility or probability. Yes.

Without us forecasting specifically.

All right. Good. Maybe just back -- that's over several years, of course. But just closer to home, look, we're looking at the equipment rental CapEx forecasts that are out there. With some of the big guys doubling their capital spending after just cutting their CapEx last year, and have now got the task of potentially having to de-age their fleets over the next few years. So wouldn't it just be logical, just kind of in the near term to -- is there anything blocking just a material boost to the access business over kind of more of the next 12 to 18 months?

Well, I think that we're in a really good position to see what you just described happen, and it's likely to happen. On the other side of it, of course, we have steel prices that have gone up dramatically, right? That's a big input to aerial work platforms and access equipment. We've been able to mitigate that to this point in time. But I think, together with our customers, we'd always say that, that's a risk because we all know what happens when prices go up. It doesn't help an economic model when prices go up. So everything that I read, they talk about adding more capacity or opening up more capacity in the steel industry, which should help everything moderate. I hope that's true. It's what I read. I hope it's true. But that would be one -- steel pricing would be one risk. I think in the near term, you'll see some moderate supply chain risk. We've been able to mitigate supply chain risk to this point in time for things like microchips, for example. But there's still some supply chain risk, suppliers being able to continue to ramp up as we come out of the pandemic. I think that we can work our way through these risks, but those would be some of the risks that I see in terms of our ability to really meet the growth that I think our customers want to see happen with their capital spending.

Got it. John, we just got a question from the field that I wanted to ask. One of the investor's curious. This recent antidumping case for aerials against Chinese imports that the industry launched, how impactful could that be? And where do you see the Chinese competitors?

First of all, we are open to competition and international competition always. We believe to our core in fair -- in free trade, but we also believe to our core in fair trade. And so when we saw some specific instances where there were -- was not fair trade being deployed in the U.S. market, and as an industry, we said, hey, we have to call this out because we welcome competitors. We just don't welcome unfair competitors. And so we decided that we've seen enough unique specific instances that we needed to speak up as an industry, and that's what we did. So that's what I'll say about it.

Okay. Maybe just talk -- you alluded to the Chinese access equipment market before as part of your healthy growth outlook. And maybe you can talk about what is happening over there and how the drivers are different. And just remind us what percentage of revenue comes from China for your access business.

So today, it's mid-single-digit percent of our sales in access equipment, 5%, 6% range. It's growing rapidly. It's growing faster than other markets around the world. So we'll see it continue to go up. And it will be -- it's already a material business, but it will be a more material business going forward in the future. So the market in China is a very good market. There are both domestic and foreign competitors that operate in the market. When I say operate in the market, we have a footprint of manufacturing capability. We make product in China or the China market, so we employ a lot of people in China. And we bring to market the same advancements and innovations that we bring to the -- that you see in the market in the U.S. So when we're in the market in China, it's a big growing market. You have a value side of the market, then you've got a little bit more of a premium side of the market. We tend to compete mostly in the premium side of the market where JLG is a household name, where your customers want the latest features for safety and productivity on the equipment. And so we don't need to be the -- we're the share leader globally, and we're certainly the share leader and #1 in the U.S. and #1 globally. We don't pretend that we want to be the #1 share leader in China. But we'll be a technology and an innovation leader there, and there'll be a -- there's a big material business that will continue to evolve for our JLG brand going forward. I mean it's a big, complicated market in China. It's a very sophisticated economy. And it'll be a material market for a long, long time.

Does the latest round of stimulus, does this $1.9 trillion, give you more confidence just on the basis of some of it going to states and municipalities? And remind us how important that is to your business.

It's a little too early to tell probably. Municipalities -- or municipal spending impacts our fire & emergency segment the most because municipal budgets is what funds replacement or additions to the fire truck fleet. Now there has not been a real estate crisis, which is good for municipal spending because real estate taxes are the biggest source of funds. But there's also hotel taxes and other things that got pressured during the pandemic that have put some pressure on municipal spending. So we've got a really good position in fire and emergency. We've got a really strong backlog. We hope that some of the stimulus is going to help municipal spending not be so constrained, but we also recognize that it might be a little bit constrained. We believe that through our strong position in the market, in our great dealer network that will continue to be the brand of choice. And we also know that with the aged fleet, while there might be some pressure, say, in 2022 in F&E demand long term, just due to the fleet size in the U.S. market alone and where the ages of the fleet, there'll be positive upward pressure over time in that marketplace. So -- but it's too -- the short answer to your question, a little too early to tell how much impact the $1.9 trillion will have on municipal spending. We don't perfectly know yet.

Got it. Okay. We just have a few minutes left and I wanted to make sure I got in some JLTV questions to wrap it up so you have an opportunity to talk about JLTV. Maybe you can just give us a refresher on the timing of the recompete, and your historical experience in a recompete as an incumbent.

Yes. So right now, with JLTV, we won the original contract in 2015. We currently have, I'll call it, commitments that will take us through the end of 2024 into the early part of 2025. We also have international business that continues to develop. We continue to win awards outside of the Department of Defense for JLTVs. So the recompete will be in calendar year 2022. They'll kick it off in the early part of the year with their intent to make a decision by the end of 2022. This is for an additional 30,000 units, which is about $12 billion of orders. And the Department of Defense has made this public. They made it public just recently. Those 2 numbers I just quoted, 30,000 units and $12 billion. We have been refining our capability through -- since 2015 when we developed this platform, refining our manufacturing capability for it. We're continuing to work very aggressively to position ourselves just as good as we possibly can be to be able to win this recompete because assuming we win the recompete, if we win the recompete, this'll take JLTV well into the 2030s, this additional award of 30,000 vehicles. So we're very focused on that recompete as we operate the defense business right now.

And then just lastly on that. What happens with the JLTV over just the next couple of years as the first leg of this contract winds down? Do deliveries -- have they peaked now at this point? Or they start going down next year? Or how should we look at the trajectory?

We'll do 4,000 to 4,500 units this year. It will moderate a little bit next year. It doesn't come off sharply, but it will moderate a little bit next year. What can change that? There's 2 things that can change that. Number one is plus-ups. They do a presidential budget every year. And then there's -- most of the time, there's plus up. Those plus-ups could add to what we're seeing right now in 2022. That's a possibility. But the other side of it is the continued evolving international landscape. We've got the JLTV platform, which provides the best cost, the best-performing product on the market to replace armored Humvees that are aging. And -- so we'll win our fair share of that international business, that will also be something that helps offset some of that moderation.

Perfect. Okay. Great. Well, John, Pat, we're about out of time. I want to keep everybody on schedule for the balance of the day. But very much enjoyed the update on Oshkosh and everything you're up to. A lot of exciting things to look forward to, it sounds like for the company. And thanks so much for being here. And best of luck with the rest of the afternoon.

Thank you, Ross. Appreciate it.

Thank you, Ross. Thanks, everybody.

Thanks, everybody. Thank you.