Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Chad Dillard. I'm the lead analyst for the machinery sector here at Bernstein. And today with me, I have Oshkosh, and I have the Chief Executive Officer and President, John Pfeifer with me. And today, we'd like to go into a fireside chat format, talk about all the key questions surrounding Oshkosh in the stock. Before we do that, I'd like to hand it off to John to make some opening remarks.

So we're delighted to be here with you today, Chad. Let me -- as you said, let me just open with some remarks about our company to give everyone a perspective about who we are and what we do and what we see going forward in the foreseeable future. We -- at Oshkosh Corporation, we've got a very powerful purpose and a very powerful culture that is really centered on that purpose. And that purpose is where -- we are in business to serve and make a difference in people's lives who are people in our communities, all of our communities around the world who are doing some of the most difficult work that there is, difficult in terms of difficult to do, and in many cases, it's dangerous work, I'm talking about serving firefighters, I'm talking about serving soldiers, people who work in construction and other industries at great height, people in environmental services. And we believe that our purpose is to deliver purpose-built machines and vehicles that allow those people that are doing those -- that difficult work to do it productively, and most importantly, do it safely. We want to bring every firefighter home to their family every night, as an example. And you can feel that purpose when you go into any one of our 150 locations, around the world. If you go into one of our manufacturing locations, you feel the sense of pride and the sense of purpose that people have in delivering that to those people that are in our communities that we're serving. And we think that, that unifies us, and that's very powerful. We're also unified around a culture of ethics. We're an ethical company that gets recognized all the time as being one of the world's most ethical companies. We're very proud of that. We're a sustainability company on the Dow Jones sustainability indices, always working to make our internal operations more sustainable and always working on the product that we deliver to our customers to make it as sustainable as it possibly can be. So when we look at ourselves as a company right now, we call ourselves a different integrated global industrial. And what we mean by that is, hey, we're an industrial company that we're appropriately classified as an industrial company, but we're a little bit different. We're also a technology company. We are an engineering and technology company, first and foremost, and we drive a lot of innovation. And the innovation that we drive, we're able to apply it across our broad portfolio of businesses, whether it's a defense vehicle or a fire & emergency vehicle, an airport product, an aerial work platform, we work with very advanced technologies. You know what many of them are: electrification, autonomous product, delivering autonomy and moments of autonomy to the people that use our products, intelligent products, where we have lots of advanced analytics taking data from the vehicles and machines and delivering powerful insights to allow users and fleet operators to do work more productively and more efficiently than they've ever been able to do before. We think that, that advantage of having such technological capability and being able to apply it across about a dozen end markets that we serve gives us a unique advantage as an industrial company. And we look at our ability today where technology is and where mega trends are to deploy advanced technology more and more as we go into the future to really differentiate ourselves in all these end markets. We're #1 in all of our end markets, which serves us well, and we plan to continue to make investments in innovation, which will drive organic growth in the segments where we compete. We see ourselves also -- we've been in business for 100 years. All those #1 positions I just mentioned, mean that we have an enormous amount of equipment, machines and vehicles that are in the installed base today, all over the world, hundreds and hundreds of thousands of vehicles and machines. And we see the ability to expand our position in supporting the life cycle support of those vehicles. We think we can expand our participation in life cycle services, to make it better for the people who are using our equipment, but it also drives growth and very, very profitable growth in the industries that we serve. And finally, I'll mention our balance sheet is very strong. And a strong balance sheet gives us a lot of optionality to make prudent investments to drive growth in our business. So of course, we're making investments in innovation, which will help us drive growth. We're making investments in areas where we need to expand capacity to drive very profitable growth for our business. But you also see that we'll make investments to expand geographically into markets that we think that we can serve that are underserved today, but also in inorganic investments, expanding our participation in specific categories or getting into new adjacent categories that are right in our wheelhouse of purpose-built vehicles and machines to deliver productivity and safety to people doing difficult work. And that will help us drive growth over the horizon and allow us to apply our technology to some new categories, which will mean essentially that one plus one equals a lot more than 3, for example. So we're excited about the future. We're excited about where we are today and the direction that we're heading. And with that kind of overview, Chad, I'll turn it back over to you for some Q&A.

Great. Thanks so much, John. And so just for those of you out in the audience, it is definitely meant to be an interactive session. [Operator Instructions] So first question for you, John. John, so you've been CEO for less than a year at Oshkosh, and you've come as an outsider. So you have a very good perspective. So based on that perspective, what do you think the company currently does really well? And I guess, more importantly, where do you think there is work that needs to be done?

Yes. So the thing that drew me to the company first, that I think we have a huge strength in is what I opened with, and that's -- we've got a really powerful culture. And culture is really important for any organization, whether it's a corporation or a nonprofit organization. Culture really helps unify people and really helps you drive advancement when you have people that are unified and really understand the purpose of an organization. So that is a very powerful thing to build upon. And we're also -- when I see Oshkosh corporation, we are an innovative company with -- we're an engineering and technology company, probably first and foremost. And I understand that because that's where I came from. I might be new to Oshkosh, but where I came from, which was Mercury Marine, we had a similar culture and similar engineering and technological advantage. And so I understand that advantage. And I think that it's a great base from which to grow at a sustained rate from. I think the thing that we can do a little bit better job at, and I touched on it in my intro, is I think we can expand on our focus in life cycle support for the installed base of vehicles and machines that we have in the market around the world. I think that we can broaden our perspective of how do we really wrap our arms around the users of our equipment, the fleet operators of our equipment and deliver them really intuitively exactly what they need and when they need it to keep their fleets productive and running the way that they need them to run to be as productive as they want to be. And I think that's an area for growth for us. I think it will get us closer to our customers, but it will also drive less cyclical growth and very healthy profitable growth as well. So that's an area that I think we can continue to make some improvement in.

Okay. Well, let's dive in on that life cycle support opportunity. Maybe you can first start off by just reminding us how much of your business is -- I guess, parts which would apply to the life cycle support. And like maybe you can construct the framework to walk us through the framework for where you think that can go and how you get there? And I guess, we arrive at that destination, how big can the growth be?

Yes. So I'll give you, kind of, the straight answer right upfront. So today, we're high-teens percentage of our total business, which is life cycle or aftermarket business. I think that we can double that over the planning horizon. So that gives you kind of my specific view of where we are versus where we should be. When you look at any one of our pieces of equipment or one of our vehicles that's in the marketplace, and you look at the fleet operator, so the fleet operator buys the equipment. When you look at the life cycle of a piece -- of a vehicle, it's typically 10 to 20 years that it will be in the marketplace, sometimes even a little bit longer than that. And when you look at the total spend on that vehicle, from the time that the vehicle's purchased until it reaches the end of its life cycle, only about 15% to 20% of the total spend happens when the original equipment is purchased. About 80% to 85% happens after the original equipment is purchased. And that's in a variety of areas from service and parts and accessories and upfit of machinery and the used market and refurbishing equipment, and there's a really healthy ecosystem. And that's where we see significant opportunity to expand participation in how we serve that part of the ecosystem for all the end markets where we participate.

Got you. Okay. And then in terms of your planning horizon, is this like a 3-year target? Is it 5-year target?

5 years. When I talk planning horizon, I'm typically talking about a 5-year period of time.

Okay. And then just in terms of, kind of, like getting there, I mean, is this more of a kind of like displacing third-party part providers? Or is it more so about, like, engaging existing customers that may not be, I guess, keeping their equipment as up-to-date as possible?

Well, I think it comes from a few different places. Number one, it comes from doing a better job of intuitively delivering to our customers, the aftermarket service parts that they need when they need it, that's number one. That alone tends to drive growth. I think that there's a lot of opportunity to deliver to our customers. Upfit kits, which modernize equipment that might be 5, 6, 7, 8 years old, but makes the equipment more productive. I think there's M&A opportunity to acquire certain businesses that are very successful in supporting equipment in the aftermarket that those acquisitions would be very beneficial as tuck-in acquisitions to serve the ecosystem better. So it comes from a few different areas.

Got you. Okay. So look, I mean, John, you have a track record of organic and inorganic growth while at Mercury. You've arrived at Oshkosh, and there's a very strong balance sheet. You're pretty well positioned. So what's your [indiscernible]?

Yes. So I think, first of all, the most -- some of the most impactful and the best investments we can ever make are organic investments in new product development and in our capacity and our manufacturing capability. We have the ability to take very, very high ROIC businesses today and prudently add some capacity to grow those high ROIC businesses that are capacity constrained. That's some of the most powerful investment and best return on investment we can ever make as well as making investments in new product innovations for the industries that we serve. But I think that we also have the ability to add to that by making inorganic investments. I'm not talking about big, boil the ocean, mega merger type things, that's not what I view as our acquisition road map. I look at bolt-on, tuck-in acquisitions that either get us into a new category that is right in our wheelhouse, delivering a purpose-built vehicle or machine to an end market where you have people doing very difficult work, adding our technological capability that can be very, very powerful in that type of a bolt-on acquisition or maybe expanding our participation in a category that we already serve to allow us to deliver even more value than we're serving today. That's kind of the way we view the inorganic opportunities that are in front of us. So I think it's a nice balance of both, both the organic and the inorganic, that'll help us really drive nice growth rates over the horizon.

Got you. Okay. And if I [indiscernible], it sounds like, if you kind of [indiscernible] into 3 buckets, right, it's about new products, capacity and inorganic, right? So...

Yes. That's accurate. Yes.

Yes. So if I were to take kind of like each of those buckets, like, what is your -- how would you rank order, what are some of the key capacity initiatives you have [indiscernible] for product? And then if you can give us a sense for what makes sense in terms of like inorganically, what white space you need to tell?

Yes. So on the organic side, I think you're seeing us do it all over the place. We made -- we saw the opportunity to organically get into a brand-new category, which is last-mile delivery. And we believe, because the postal service was going through a process to reinvest in its fleet, we saw an opportunity that we thought we could do it organically. And we were able to be successful in delivering them the absolute best design and the best solution for the postal carrier and that was an organic move and an organic investment that has been a huge success for us because now we're a big last mile delivery supplier. And the postal contract alone will drive significant material growth over the next 10 years. That was an organic move. We'll continue to make organic product investments like that. We have electrification happening in every end market that we serve today. You'll see in the near future more announcements in other segments of Oshkosh where we're delivering a brand-new fully electrified product that not only is great for the environment, but it delivers total cost of ownership benefit and performance benefit to the people that are using the vehicle. So that's -- it's a really powerful combination that we're able to deliver. On the capacity side, we've got really strong businesses like F&E, great performance at F&E. 15% operating margins, really high ROIC. We need to prudently expand some capacity where we can continue to grow that business. That's very, very strong payback for us when we make those decisions. In terms of our M&A activity, we have an always-on pipeline, we call it always on, a very dynamic process where we continue to look at potential targets that we believe will be really strong contributors to our overall portfolio.

Okay. So I just wanted to pick up a little bit further on electrification. What are Oshkosh's aspirations for the commercial EV market? Do you think you can remain an assembler, or do you think you need to vertically integrate to succeed?

Well, I think it's -- I don't think it's one or the other. I think it's kind of a combination of both. Remember, one of the things that Oshkosh has been best known for over many, many decades is mobility systems. We're a really strong mobility systems company. And we allow vehicles to do things that vehicles were never thought they could be able to do. When you look at some of the capabilities of a defense vehicle, for example. So mobility systems are right in our wheelhouse. So when you look at electric propulsion, it's not just the lithium ion battery, that's a big and important part of it, there's also the e-drives and the -- and other parts of the propulsion system that are critical to driving an efficient electrified vehicles. So some of it, we think, is going to be a vertical, and some of it will be partnerships. For example, we do not foresee ourselves being a lithium-ion battery packager or manufacturer. We've made some investments with partner companies minority investments, but we don't see that as being part of our vertical integration. We think partnership in that part of the market is the best way to go. There's other parts of the electric propulsion that we think we need to be vertically integrated on. So it's a little combination.

Okay. No, that makes sense. And just going back to your U.S. postal service plan, there's certainly a portion of it that can be electrified. And so I guess my question is, how do you expect to use that as a springboard to further EV ambitions? And if we look 5, 10 years out, what percentage of your commercial vehicle business do you think could actually be electrified versus where it is today?

Yes. Well, first of all, the postal contract is 10 years. By the end of the 10-year period, I expect nearly 100%, if not 100% of the fleet to be fully electrified. So we -- the intent is to make the postal fleet electrified over a 10-year period. One of the best things that I think the postal contract has done for us is it's shown the world what our capabilities are with electrification. Electrification is not new to Oshkosh Corporation. We've been doing it for a long time. You haven't necessarily heard about it because it's usually a small discrete program that provides a unique benefit needed by the Department of Defense or by the access equipment industry, but has not been prior to now applicable to a broader base of machines or vehicles. Now where we are with advancement in technology, we can apply electrification because of the economic and cost position that's come to where it is as well as the refinement in the technology as well as the environmental benefit. And we can provide it to a much wider array of use cases. That's all relatively new in any industry that's looking at electrification. It's now economically viable, which is making it more prevalent in passenger cars as well as heavy-duty trucks. And so I think the best thing that happened with this U.S. postal service contract is it really showcased to the world our capability in electrification, which, again, is not new to us but probably new to many people that are not close to Oshkosh Corporation. You'll see it applied in all of our markets. You'll see it this year, more introductions of electrified product in other segments in Oshkosh Corporation. I think how much will ultimately be electric will depend on the end market. I think, for example, last mile delivery will rapidly go to all-electric over a period of 10 years. I think that refuse collection will go to electric faster than, say, defense vehicles, which, for obvious reasons, can't take fully electrified vehicles because of the charging infrastructure and the places that they have to operate those vehicles, for example. So it will be different depending on the segment. But I think you'll see more electric vehicles every year from us than the year prior for a long time.

So we talked about all -- what you could add to your current portfolio, but we haven't discussed like where you can optimize. Can you talk about the framework in terms of how you think about which businesses belong in Oshkosh portfolio and which don't? What sort of KPIs do you actually use? And I mean, if you can, I mean, are there any particular divisions or groups that, kind of, fall below that threshold?

Yes. I think it's a great question because when we talk about M&A, we don't just talk about acquisitions, we talk about the whole portfolio and management of the portfolio, which is what your -- I think your question is centered around. And that's a dynamic kind of always on process. And right now, what I'll tell you, we have 4 externally reported segments. We like all 4 segments, and they serve about 12 different end markets out of those 4 main segments. We like them all. We are investing in all of them. And therefore, we have expectations for growth in the business of all 4 of those segments. Now when I say that, business is dynamic. And when you get to a point where you see bigger opportunity in one category versus another, you do sometimes have points where you decide to make a divestment so that you can invest more in another segment. That may happen. Right now, we're very happy with all 4 segments. You did see us make a small move not long ago. We had a business called CON-E-CO. CON-E-CO was a batch -- concrete batch plant business. It was a good business. There's nothing wrong with the business. We just looked at it and said, we don't think we want to invest much in this business because we've got bigger priorities. And therefore, we divested that business to another company who did want to be in that business. So those types of things will certainly evolve over the course of the next few years. Again, right now, we like all 4 segments we're in. But as the business dynamically changes, and I'll reserve the right to say, we've made a little bit of a shift, but we see growth in all 4 right now.

Fair enough. So John, if I gave you $100 million tomorrow in terms of R&D or CapEx, how would you allocate it?

If you gave me $100 million -- by the way, one of the advantages that we have right now Chad, as you know is, we have a very healthy balance sheet. So we have the ability to make investments that we need to make. But let's say, I didn't have that healthy balance sheet, and I had a $100 million from you and you said, where would you put it, assuming you didn't have the benefit of strong cash flow and a healthy balance sheet, I would put most of it into prudent capacity expansion and organic product development. That's where I would go because those are the best return on investments, and they're typically the least risky investments.

Sounds good. So I want to shift gears a little bit to the access equipment business specifically. That has been an area of Oshkosh which has certainly surprised the upside in terms of growth over the last couple of quarters. And we're presumably looking at an up cycle as we go forward. And I'd love to get your perspective on how you think about the shape of the up cycle, I'm sure you're going to touch on just the [ elevated agent fleet, ] but also, maybe you could talk about to what extent do you see actual growth driving the volumes? And when should we expect that growth to materialize?

Yes. So in the access market, and this is our biggest business, we see ourselves entering into a new multiyear growth cycle in this business. And we see going materially higher than our most recent highest peak. You saw us in the last reported quarter, we started to grow again a little bit of growth. It was 5%, 6% growth and we delivered 11% margins on it. So I think we're starting from a very healthy spot as we go into this next growth cycle. The growth cycle is -- that we're confident in, comes from a few different things. You mentioned one, which is the replacement dynamics or the fleet age. So there's a healthy fleet out there, especially in the United States, a big fleet, that fleet is aging. It's probably got an average life that is longer than it's maybe ever been. And that's what's putting so much upward pressure on orders right now is our big national customers and our small independent customers know that they need to replace fleet. That fleet age and the replacement cycle alone will drive multiyear growth going forward. When you add to that the fact that we're always finding new applications for our aerial work platforms and our telehandlers, that's another generator of additional growth. So what do I mean? We're continuously finding new applications for aerial work platforms. When you look at the DaVinci Scissor Lift, which is an all electric, no hydraulic scissor lift and where that can be used indoors and in clean room environments and in sports arenas and hospitals and airports, inside airport terminals that expands the use cases, for example, of that aerial work platform. You look at telehandlers going into agriculture markets, going into residential housing construction, those are all new applications for the equipment, that drives growth. And then finally, we've got a lot of global growth. China is continuing to grow at a rapid pace. We've got a strong position in China. We've got domestic production there to support domestic growth. So that's another adder to growth. So those things coming together are what give us confidence that we're entering a new multiyear growth cycle and that we will far exceed the most recent peak.

Got it. Okay. So yes, just in terms of -- I think you made a comment that you expect volumes this cycle will be higher than the prior peak. In that context, how should we think about margins? Should margins actually follow and be higher than where they were at the prior peak?