Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Great. Thank you, everyone, for tuning in. I appreciate you joining us here on the third and final day of Stifel's CSI Conference. My name is Stanley Elliott. I cover machinery here at Stifel on the equity side. I'm very pleased to have Oshkosh Corporation presenting with us here today in this fireside chat. From the company, we have Mike Pack, Chief Financial Officer; and Pat Davidson is off of the wings. We'll keep this pretty informal fireside chat format. If you do have any questions, feel free to look at the bottom of the web browser. There should be a box where you could ask questions to me. I'll try to incorporate that into the overall conversation flow and look forward to your participation. So with that, Mike, thank you very much for joining us. Let me turn it over to you and you'll give us a quick overview on Oshkosh and some of the great things you guys have going on.

Sure. Thanks a lot, Stanley. And first of all, I appreciate the opportunity to speak at your conference. We very much appreciate it, and I always love to talk about our company. So with that, I just thought to give a little bit of background. We have a lot of exciting things going on at Oshkosh. And as we look at our company, really, our purpose is to make the difference in the lives of the everyday hero. And that everyday hero can be a variety of individuals, whether it's a construction worker, working 180 feet up in the air in one of our aerial work platforms; or a firefighter responding to emergency; a refuse collector helping to keep our city streets clean; our troops, keeping them safe and completing their missions; and most recently, the U.S. postal carrier. So really excited about winning the next-generation delivery vehicle contract with the Postal Service. We operate in 4 segments. Our largest segment is the access equipment segment, key products, our aerial work platform, so boom lifts, scissor lifts and so on as well as telehandlers, which are used more and more frequently in both commercial construction and residential construction. Our defense segment is our second largest segment, historically been very involved in tactical wheeled vehicles, have significant market share there with our -- in the U.S. tactical wheeled vehicle market for the defense industry. Our largest contract there is a Joint Light Tactical Vehicle, which is really the replacement to the Humvee. More recently, we won the Postal Service a couple of months back. So we'll start delivering the postal service vehicles in 2023. Just a great opportunity to get into -- in that last-mile delivery business. And then last week, we won the MCWS program, which is we've talked a lot about over the last few years that we're looking for other opportunities to get into some defense adjacencies. And MCWS is about $1 billion contract that really accomplishes that mission. So we're very excited about that. Our commercial segment were refuse collection vehicles as well as front and rear discharge concrete mixers. So that's a business, obviously, a lot of exciting things going on. We have a lot of simplification initiatives going on in that business. And last but certainly not least, fire & emergency, where we build municipal fire trucks as well as airport rescue firefighting trucks. And one of the exciting things just this week, we announced that segment. We have electrified products now in both the municipal fire spaces and for our vehicles, under the Volterra platform of chassis. So very excited about that. Our mission really in the company or our focus right now is to really drive innovation, serve our customers in advance. And so we think about innovation, we have significant innovative activities going on in all of our businesses. You see that through our products with our -- the Postal Service vehicle, Volterra I just mentioned as well as our many new products in our access equipment business. We're going to continue to focus on innovating, but it's not only innovation in our products. It's also in our processes. We continue to drive digital manufacturing practices to increase that first pass yield on the shop floor creates efficiencies. And we continue to innovate with our simplification on the shop floor, which is really driving 80-20 principles into our business. From serving our customer perspective, driving increases in aftermarkets and life cycle services, we see that as a continued opportunity. And certainly, last but not least, we look at focusing on advancing our business, and that's growing in international markets, getting into product adjacencies and you see that with our recent Postal Service wins and again, that MCWS program. So a lot of exciting things happening in our business right now and look forward to answering your questions, Stanley.

Perfect, Mike. Thank you very much for that overview. I think you did a very nice job. In the past, I think some investors may have did well, these are 4 different businesses, very different, not a whole lot in common. But you're mentioning the innovation piece and if you kind of look over the years, you've done a nice job of taking technologies from the Ultra Boom lift and putting into the fire department and the trucks, right? And now you've got the suspension systems on the fire trucks that are going into JLTV. And now we're talking about electrification really across the entire portfolio. Talk a little bit about the Volterra, pardon me, the very interesting timing of that opportunity set on the fire trucks and what that could mean.

Yes. We're really excited about it. And over about the last year now, we've been talking about on our earnings calls that we have significant electrification projects ongoing in all of our businesses. And we'll continue to see products being launched. And this week, it's really the Volterra chassis and they excluded really exciting thing about Volterra and the Pierce version of it is, it's been operating for over a month in Madison really unknown to the greater public because I think it was pretty powerful to say, this truck has been out on over 200 emergency responses and is working flawlessly. So the Volterra chassis is unique in that sometimes if you're fighting a fire, you could be running literally a pump for hours. So what Volterra allows for is the vehicle will largely operate on electric power, electric drive. If you're in a situation where you're having to fight a fire for an extended period of time, there is an internal combustion engine that you can fire up to continue the pump running and to get back to home base. So the neat thing about it is this battery technology continues to evolve, the longer you can go without firing up that internal combustion engine. But generally, for the majority of calls and so on, on emergency response, if you have a smaller fire or cars on fire, there's a dumpster fire, that type of thing. That could be -- that mission can be completed completely electrically. So we're very excited about that. We're also, likewise, launched an ARFF vehicle, which is an aircraft rescue firefighting vehicle. That's with the Volterra technology. We have the ability in that product to operate around an airport under electric drive. If you're responding to an emergency, it's hybrid, so you have the ability to fire up the internal combustion engine as well, and it gives you significant speed advantages, acceleration, so on to get to the emergency faster, which is very important. Those seconds in that type of a scenario at an airport, seconds make a big difference. So it's a pretty compelling optionality for our customers. So we're very excited. The initial reaction has been great. And this is just beyond Postal Service, [indiscernible] and JLG electrification initiatives. You're going to continue to see more products coming out in all of our segments.

You know what, you mentioned the DaVinci, I guess, on prior calls, speaking of electrification. What does that do in terms of expanding end user applications?

Yes. We're -- the DaVinci has been an exciting product. So the DaVinci, the initial launch is of its scissor lift. And traditionally, we've been electrifying scissor lifts for a long time. What DaVinci adds is electric actuators and uses a small lithium-ion battery, which actually regenerates or recharges the battery as you're lowering it. The great thing about DaVinci is it eliminates -- with linear actuators, it eliminates all the hydraulic fluids. So it really opens the door to using that product in hotels and other buildings where you don't want to risk having that hydraulic fluid leak. And so we're seeing continued expansion opportunities of the applications that you can use that product. And certainly, we'll have more products with that technology launched over time.

Yes. The design team has done a nice job of developing these platforms that can move in incremental stages, right? I mean the Postal Service contract is a perfect example where you talked about being able to move between battery-powered and combustion engine. Talk a little bit about that platform and what it means for Oshkosh in terms of opportunity set, potential to move into adjacent markets, because it seems like a nice long-term win for you guys.

Yes. I head software engineers and the whole team at defense and how they approach that contract Because we had a very innovative solution that, again, we're good at building purpose-built vehicles and certainly, the next-generation delivery vehicle is no exception. It meets all the requirements of the Postal Service. And really, we can deliver 100% battery electric from day 1 of the contract, and we start delivering in 2023 or internal combustion or any combination thereof. And the beauty of it is, is under a single platform with a high level of commonality, we can convert ICE units to be at a future date. So that's -- that does provide a lot of flexibility to our customer. Certainly, there is going to be -- there's infrastructure needs and so on with the Postal Service. But because it's purpose built from day 1 to have that flexibility of powertrains, it makes it a very flexible approach and very easy for us to build either. As we think about it, this type of vehicle can be used in other applications and last-mile delivery with some modifications or really to meet that end user's needs. So we believe this could be just the beginning of us getting into that last-mile delivery space. Of course, we're not going to get ahead of our skis. We're going to deliver really well on this contract for our U.S. Postal Service customer, but we're excited about the longer term opportunities. And again, it's another pretty significant leap forward for us in the electrification space.

In some of the initial release, the number of trucks was pretty wide, 50,000 used, I think it was like 150,000, maybe 175,000 used. Why is it so different? Is that dependent upon whether it's electric or whether it's a combustion engine? Just curious or is it just kind of being sorted out as we speak?

Right now, the fleet that it's replacing, so the Postal Service has over 200,000 vehicles in its fleet today. The current vehicles that it's replacing, the LLVs are -- have been in service for a long time. There's about 150,000 of those or a bit more. So you would expect that over time, there's going to be a bigger need. Those will all need to be replaced because they're all 30-plus years old in many cases. So generally, the needs there. I think a lot of it comes down to timing, funding, those types of things. So I think that's why you see the wider range. It's not as -- I really don't believe it's because of the powertrain aspect of it. Certainly, I think the funding is there over time, I'd expect towards that. The range we have, you're correct, Stanley. It's in that 50,000 to 165,000 units. So we expect that, again, because there's a lot that need to be replaced, we'd expect to the extent there's funding, it would trend towards higher numbers.

Plus the service piece and the replacement...

Absolutely. Yes. And that's certainly a long piece because these are a meaningful piece. These vehicles are going to be in service for a long time, similar to the current fleet. So when you're talking vehicles out there for 20 years, that after sales support becomes a very meaningful piece over time.

You all may be the only sub 10x EBITDA multiple electric vehicle maker on the market right now. I'm just kidding. See, let's switch gears, though, is in -- talk about the defense business, right, the MCWS systems business or win, I guess, rather the other day, a little bit of different from what you guys have done in the past. But I mean you're a top 10 provider to the Department of Defense, the largest wheeled vehicle manufacturer. It seems like the scope is increasing within that. I know you guys have had a great track record of delivering vehicles on time and under budget, but would love to learn a little bit more about that as an opportunity.

Yes. So as we've been talking about, whether it's Postal Service or MCWS, our ability to deliver on large-scale government style contracts is a core competency. And if you look at the common element of a lot of the products we built, they're purpose built, and we have great integration capabilities. And I think that's -- MCWS fits right in that wheelhouse. The other great thing about MCWS is we recently made an acquisition of Pratt Miller. And Pratt Miller was really instrumental in our win of MCWS. It does broaden -- Pratt Miller broadens our capabilities from an integration, engineering know-how perspective getting into some other programs like MCWS. So I think you'll see us continue to pursue other adjacencies. We have MCWS. I think we're working on the Cold Weather All-Terrain Vehicle. We'll know in a little over a year. We should know what the outcome of that is. We're down to 2 competitors on that product. That's an attractive vehicle used in cold water -- or excuse me, cold weather missions. And then longer term, there's the OMFV program, which our partner, Hanwha, has been talking about a bit to which, over time, could replace the Bradley fighting vehicle. So again, it's our integration abilities. You pick up some great skills with -- and capabilities with Pratt Miller. And so we just see that there's some great opportunities to continue to expand into other adjacencies with some attractive margin opportunities.

In Pratt Miller, I mean, when you read the release, it seems very much like an enhancement of an R&D platform for you all, right, prototyping, some additional effect, enabled background and then in some relationships, that kind of the way to think about that business, how it's expanded?

So I almost think of it twofold. I think in the shorter term, they have some capabilities on a program like MCWS. So I think there's the immediate play there that it allows us to get into some programs would another -- would otherwise be able to compete in because they bring a skill set. As we look longer term, their capabilities from an electrification, autonomy perspective, connected solutions and many of which have come out of their rich racing heritage, those will continue to help us from an innovation standpoint, not only in the defense segment, but our initiatives in other segments as well. So that's why as we look at Pratt Miller, does a lot of great things for us beyond just these core programs upfront. It's really very much about the future as well.

And I'm going to jump around here, but it seems like a good time to talk about the balance sheet, right? I mean you're in a net cash position. You've got $650 million of free cash flow that is kind of targeted for this year. Got a lot of projects lined up. How are you all going to be from a capacity situation to be able to manage all of this additional growth that you have coming down the pipe?

Yes. Stanley, if you look over the last several years, I think coming out of the Great Recession, We focused a lot on a lot of the self-help opportunities. We've really driven some robust margin improvement in our fire & emergency segment, radically changed how we can operate our access equipment business down -- during a severe downturn, able during the pandemic to deliver high single digits even when we saw $1 billion drop in our revenues. So now what we see though is with our continued focus on innovation, there's an opportunity for us to continue to grow here. And I think there's opportunities in that growth, not only organically with many of the new product development projects and adjacencies we're talking about, but also inorganically. So I would expect that we are going to be more acquisitive over time. We're not looking for big transformational acquisitions like JLG. But I think a steady stream of bolt-on Pratt Miller type acquisitions is much more in the cards. And it's really -- the target is going to be areas where we can drive profitable growth, maybe an innovation play, so products that we can or innovations that would integrate well with our products. Second area would be near adjacencies. So again, like the Pratt Miller's ability to compete on a MCWS program, or if there's a life cycle services benefit. So whether it's a software connected product solution or more core aftermarket type distribution capabilities. So that's really the 3 buckets we're looking at, but really focused on more consistent M&A activities of bolt-on style acquisitions.

You definitely get a sense from listening to conference calls and hearing you and John talk about kind of reinvigorating the growth side of the equation for Oshkosh. And it seems like a lot of different things that you're looking at. You mentioned kind of the life cycle piece. And I think you touched on it briefly, but more parts in aftermarket is something everybody is always trying to push. But then also there was like a software component, if I heard you correctly. Maybe a little bit more about that, that seems interesting.

Sure. Yes. And I think more of these opportunities are going to emerge over time. But I think there -- we do see retrofit opportunities over time with some of these solutions. Now a good example is in our commercial segment, we've rolled out FLEX Controls for our concrete mixers. And what FLEX Controls do is it monitors the batch quality of concrete, because one of the biggest costs that concrete haulers face is batch spoilage. You might imagine, concrete hardens in a drum or you have to dispose of it if they can't pour that concrete and that they have a real costly mess on their hands, and it happens fairly frequently. So one of the solution -- and today -- historically, there's no way for the driver or operator to really monitor, how is that batch holding up? Is that -- is there enough water in it and so on that you mitigate that risk? Well, we've developed controls that really sense what that batch quality is so you know if you're needing to add water, if there's other issues with it and it dramatically reduces the risk of that batch spoilage. Now we've rolled it out on our new products, but the benefit is you can also retrofit other products that are out in the field with this technology. So that's the type of area that there's a technology you can retrofit into existing products. It provides a good benefit to our customers and should be -- provide some nice returns over time.

One thing that we've picked up, there's certainly a different cadence to the level of visibility, I think you'll have in your -- across your portfolio now versus even 5 years ago, right? Talk about the benefits there and what that allows you to do from a cycle planning perspective in terms of capital. And then maybe remind some of the investors some of these long-tail projects you have in the works.

Sure. We love the visibility we have because our access equipment business with construction cycles can be a bit more cyclical. But you contrast that with our fire & emergency segment where we typically have a backlog that's around a year. So likewise, at defense, we exited last quarter with over a $3.5 billion backlog. So that provides you visibility well out into the future. So the benefit is we're going through the pandemic. These are critical products with these businesses with the large backlog. Fire & emergency was operating at full steam ahead throughout the pandemic as well as defense. So then you're managing the risk or the volume impact was to a smaller portion of the business. So we certainly love that. But I think having that understanding that you have the stable base allows you to make capital allocation decisions for the long term, understanding that you're going to have generators of cash flow out there. And then you add on top of it how we manage access through the cycle. And as we continue to grow the aftermarket and life cycle services opportunity, that creates additional stability as well. So we really like our mix of businesses and the visibility it gives us. It gives us flexibility.

Yes. No doubt. No doubt. And speaking of access, it was impressive that we're already looking at double-digit margins, again, just 1 year removed from a global pandemic. But can you talk about the replacement cycle? That seems to be something that's very topical across the investment community about how long is this going to take? Or when is it going to come to pass? And would love to kind of get your thoughts to the extensions you have.

Sure. And coming out of the -- or actually coming into the pandemic, we expected last year to be fairly robust year, not record levels like 2019, but we expected that replacement demand to start kicking in just because fleets were starting to get more aged, and we measure that a couple of different ways. Overall fleet ages, which we believe that the fleet back around our most recent fiscal year-end was about 55 months, which is definitely one of the higher data points we've ever seen, if not the highest, combined with a pretty large population of equipment, particularly out in the North American market in that 7 to 9 years old. So now you fast forward, we get -- we start coming out of the pandemic. That fleet has aged further. There was not massive deep leading at all. The fleets largely stayed intact throughout the market, and the fleets only age from there. And now you see the increased utilization activities. So I think what that -- what we're seeing now is it's ripe for that replacement demand, and that's certainly what we're hearing and seeing from our customers. It's going to take a little while for that to refresh the fleet. So we'd expect pretty solid next couple of years. And really, this is all in an environment where nonresidential construction is still depressed somewhat compared to 2019. So at some point, particularly if there's an infrastructure bill or we get further removed from the pandemic as that nonresidential construction starts picking up, that could become an additional tailwind. So we look forward, we think there's some pretty attractive opportunities in access equipment market.

Yes. It would seem like that we're looking at several years with pretty good growth, at least in the North American rental channel and plus the adoption piece. One last one on the AWP market. We have the -- pardon me. Competition has increased within the space. What are rental channels customers value? And what does Oshkosh doing to maintain and kind of expand that market position?

Sure. I think a few things our customers value. Number one, innovation is a big deal. And I think being the first to market with things like DaVinci, it matters a lot. So I think being an innovation leader, I think the reliability of our equipment at residual values over the life of it, having that great source of aftermarket parts that they get the next day. I think it's all those things combined really make a big difference to our customers.

Perfect. Well, Mike, with that, we are getting close to being out of time. So thank you very much. I appreciate your time here today, and thanks, everyone, for tuning in.

No problem. Thanks a lot, Stanley.