Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good morning and thanks for tuning into Deutsche Bank's Industrials Conference. For those of you who don't know me, I'm Nicole DeBlase, the lead analyst for both the multi-industry and machinery sectors at DB. I'm very pleased to introduce Oshkosh for our next presentation. We have CFO, Mike Pack and Pat Davidson, who runs IR. The format of today's presentation will be fireside chat. But before we get to that, Mike does have a few opening remarks. Now for the audience, please feel free to submit any questions that you have in the chat window. It's just below our faces on the page, and I'll be monitoring that and we'll ask any questions anonymously on your behalf. So with that, I'll go ahead and pass it over to Mike.

Great. Thanks a lot, Nicole. And good morning, everyone or good afternoon as it may be. Appreciate everyone's interest in Oshkosh. At Oshkosh, our purpose is to make a difference in the lives of those everyday heroes that really build, serve and protect the communities around the globe. And really, when we look at those everyday heroes, it's everyone from construction workers working at heights up to 185 feet in the air to firefighters, to our troops, to essential workers that build our nation's roads and collect our rough use and recycling materials. And more recently, the postal carrier, and we'll certainly talk a little bit more about the Postal Service as a wonderful client of ours. Our strategy is really summarized by 3 words: innovate, serve and advance. First, innovation. We're really an industrial technology company. We have significant capabilities around electrification, autonomy and intelligent products. And really, our innovation has been a key enabler over the years for us to really drive our market leadership positions in the industries we serve. Second, serve. We're focused on serving and supporting our customers throughout the product life cycle. And finally, advance. We're advancing into new markets, adjacencies as well as geographies around the world. And a great example of advancement is really moving into the postal service or last mile delivery space. We operate in 4 business segments. Access equipment is our largest segment. You'll recognize it by our JLG brand of boom lifts, scissor lifts and telehandlers. We're really the global market leader in that space. Second, our Defense segment. We're the leader in the United States in tactical wheeled vehicles. We deliver everything from light, medium and heavy tactical wheeled vehicles. And more recently, we've been expanding into some other adjacencies. We're known well in Oshkosh Defense for our joint light tactical vehicle, which is really the #1 tactical wheeled vehicle in the market right now. Now we're moving into other categories like the last mile delivery. Our defense team has done a great job really ramping that program up, bidding it, and we have a great solution for the postal carrier. If you look at the NGDV program or next-generation delivery vehicle program it's really going to allow the postal service to electrify their fleet over the next decade. And we can provide really any mix of battery electric or low emissions internal combustion engine, vehicles to the postal service with the ability to convert those over time. So as we ramp up the program, it may be a bit heavier weighted towards internal combustion. Over time, that weighting will continue to increase towards battery electric. And again, we do expect them to also convert products over time. Our third segment is our Fire & Emergency segment. We're the market leader in municipal fire apparatus through our Pierce brand. We also build aircraft rescue firefighting vehicles through our Oshkosh brand. And certainly, last but not least, our commercial segment. We build rear and front discharge concrete mixers through our McNeilus, London and Oshkosh brands as well as McNeilus brand refuse collection vehicles. Just a little bit about the current state of our businesses. Like many companies right now, we're facing significant supply chain challenges as well as logistics. We do believe some of the cost pressures that we've been seeing will begin to moderate. We are in the process of switching from a traditional -- or a fiscal year to a traditional calendar year. So we were a September 30 year-end. We will now be a December 31. So we're in a bit of a transition period, which we call the stub period right now over this 3-month period of time. So now as we look to that calendar year, we do expect that -- we'll have some cost pressures in the first part of the year, but very much moderating over the course of the year. We have strong backlogs in all of our businesses; really believe we're at the beginning of a multiyear growth cycle in our non-defense businesses. And if you look at our defense business, with the adjacent program wins, we really view that as a growth platform in the coming years. While revenues will be down a bit, we expect next year, in 2022, we do believe that as postal service comes online and some of our other adjacent program wins, we will see revenue growth in that business. And last but not least, we have a disciplined capital allocation approach. We recently increased our annual dividend rate by 12%. It's the eighth consecutive year of a double-digit increase. And over time, you're going to continue to see a strong combination of accretive M&A in coming years as well as share buybacks, all with a focus on driving shareholder value. So with that, I'll turn it back over to you, Nicole, for the Q&A.

Great. Thanks for that, Mike. So I'm going to start with some of the current dynamics that we're seeing out there and then switch to some of the longer-term story for Oshkosh. So it's been a few since you reported your September quarter earnings.

Yes.

And clearly, a very dynamic environment. So I guess, can you update us on anything with respect to the supply chain situation? And what I'm trying to understand is, if it's getting -- if there's signs of stabilization, we've heard that from a few companies during the conference?

Yes. I think it's definitely varies by area. I think I would say, holistically, we should continue to see improvement with supply chains as companies continue to ramp up, hopefully, infection rates with Delta start moderating. We haven't seen a dramatic shift there by any means yet, but I think there's certainly some indicators that could start helping. Certainly, as we've manage through the pandemic, we now have multiple sources of supply that should start helping as we get into next year. Logistics is still very much a challenge. I would say Logistics, we have not seen the progress maybe in other categories of supply, I would say, ocean freight and inland freight still continues to be a bit challenging. Again, it's something that we would expect it's not going to improve overnight, but our expectation is, hopefully, over the course of 2022, it'll begin to improve. I think 1 area that we'll continue to watch very closely is commercial chassis or third-party chassis. We do use those chassis pretty heavily in our commercial business as well as, to a lesser extent, our Fire & Emergency and access businesses with our access being the Jordan line of wreckers and flatbeds. So we'll continue to monitor that. But it's still very dynamic at this point.

Yes, totally understood. Then I guess like as you've moved your way through this unprecedented time of supply chain challenges, do you think that there's any key learnings with respect to changes that need to be made in Oshkosh's manufacturing footprint or the way you've configured the supply chain to deal with anything like this in the future?

Certainly, there are definitely some good learnings out of it. Number one, we are broadening our supply chain to include multiple sources of key components. I think that's been – so certainly in the spirit of simplification over time, in many cases we have reduced the number of suppliers by expanding it, not only to have multiple sources of supply, but some further geographic diversity of that. We believe that's going to help over time. That's been a big focus. If you look at our access equipment business, John talked about this a bit on the earnings call, we've actually redesigned virtually all of our products to accept higher capability microprocessors. By doing that, those chips are more available. And so it's something we work closely with our suppliers. So on our proprietary products, chipset, while there certainly have been some challenges with it, that's certainly helped keep our production lines by making those changes. And I think just generally from a geographic perspective, we have made some changes where generally we've been pretty resilient from hiring employees and being able to get the talent we need. In places that are a bit more challenged, though, we have consciously move some product lines between facilities where labor is more available. So a number of things that we've been focusing on that should help us in the long term.

Okay. Great. Got it. And the other big hot topic right now, price cost. So I think you noted on the most recent earnings call that you expect a $75 million to $85 million price/cost headwind in the stub period. I guess with respect to your hedging, the way the pricing starts to come through, is that likely to be the quarter that faces the worst of the price cost headwinds? Or how do we think about the magnitude into the first half of your new calendar 2022?

Sure. So what we expect to see is we do see it in that $75 million to $85 million range in the stub period. First quarter, we expect to see similar levels. It starts getting meaningfully better in the second quarter. And it really aligns with the pricing levels that are in our backlog. So each -- as time passes, more and more of the products that we're delivering are going to have the higher price levels. We've done 3 price increases in most of our businesses over the last 6 to 9 months. And so we start seeing that price really start benefiting. As we look at the cost side of things, obviously, it's been positive. We've seen over the last 3 weeks that hot-rolled coil has begun to stabilize a bit from a price perspective. Obviously, still at historical levels, but good to see that trend turning. We are seeing some opportunities for locking steel prices in really for that, which will benefit us in the back half of the year. Certainly not all of our quantities, but it's -- but that should provide some benefit as well. So that's really, as we talk about the cost/price dynamics of being largely cost price neutral by the third calendar quarter, it's really all of those factors that are driving that scenario.

Got it. Okay. And just a point of clarification. Is it possible that you could be price/cost neutral for the full year? Or is that going to be too challenging based on how you're starting out '22?

I would say we expect net-net to be negative for the year. We do expect that we will start getting some of it back, particularly in the fourth quarter, but it's not likely to be the magnitude of the headwinds. Of course, we do expect that demand is going to remain solid. So I think some of the -- some of those tailwinds we expect to carry into 2023.

Sure. Because the goal here is to be neutral over time. So it just might take some time to get back.

Correct. And over time, we really experienced this. And obviously, it's to a much bigger magnitude this go around. But we did see and when we -- when steel tariffs came into play in that '18 time frame, we did see a benefit coming out of it in '19. And obviously, the magnitude of this is higher, but we do expect over time to see the benefit come back.

Okay. Okay. Makes sense. And I guess when we think about the whole price/cost dynamic, is it then fair to say, I mean, I know it's very early to be thinking about '22 -- but in that normal like 25% incremental margin range that you tend to target, is that just let's not even say that, that's in the cards this year because of price/cost? Or is that still potentially an aim?

Well, it is a bit messy just because of the dynamics we have in the back half of this year. And so we'll have the cost inflation will be coming off of, we'll start the year with cost inflation in the back half. Obviously, things will be moderating. So that's certainly going to be a tailwind on the back half of the year from the incrementals or decrementals perspective. An easier way to look at it, maybe just what are the all-in margins. So I'd say we'll be challenged in the first quarter as you might expect with the cost/price headwind still at those peak levels. We should start seeing some meaningful improvement in the margins in the second quarter. Really, the back half of the year, assuming that we continue to see supply chain improve and so on, we do expect that you'll see more typical margins at the revenue levels we'll be delivering at in the back half. So I think it does set us up when we get into a period of normalcy, really, over time I'd expect us to be in that 25% incremental, decremental range.

Okay. Thanks for that good clarification. So I want to move on and talk about more fun stuff. So infrastructure bill is the big news this week. We finally got it passed after waiting for a year. I guess what's been your reaction to it? And the big question I have is, is it more likely that this becomes like a calendar 2023 revenue help because it takes time to get the money through the system?

I think that's a good way to look at it because with getting $1 trillion out into the marketplace as it cascades through, it is going to take time for these projects to ramp up. So the way we look at it, any time there's investment in infrastructure, that's going to be a tailwind for our businesses. Everything from our aerial work platforms to our concrete mixers. And if you're building cities and growing, it helps refuse and it helps our Pierce fire trucks eventually. So we view it as a positive. Hard to size sitting here today exactly what that means. But we view it as just one more tailwind. So if you look at our -- at really many of our noncommercial or our commercial businesses, nondefense, we see aged fleet. So you look at Access. We're still at peak fleet ages. So that's going to remain a tailwind really for the next couple of years. Utilization rates are very strong, and that's not different than what we're seeing in the commercial business as well. So you add that need to replace fleet combined with strong utilization, that's really going to help fuel the growth side of the equation on top of it. So that's why I think I had mentioned in my opening remarks, we really view that we're at the beginning of a multiyear growth cycle. And again, the infrastructure bill is certainly going to be 1 more data point that helps support that.

Got it. Thanks, Mike. And that's a good lead in. I actually have kind of a broad question from an investor here. What are the key secular growth drivers for the business over the next 3 to 5 years?

I would say definitely start with number one, the replacement because, again, whether it's -- we talk a lot about aged fleets and access, but you also see the strong demand and strong order activity in Fire & Emergency. Those fire apparatus are getting aged out in cities; average year is 15 years plus right now. So that's going to be a good driver. Again, as commercial construction starts rebounding, that's going to be another tailwind because obviously, commercial construction, at least over the last year has been a bit more depressed, yet we're still seeing those strong utilization rates. And I think there's certainly going to be a trend with electrification. And it's not going to be a light switch in our industries. But as fleets are electrified and products are electrified, I think that is going to be a tailwind over time. Not going to happen overnight, but over the next -- I think that could be a strong trend over the next decade, really.

And on that topic, I mean, if we look across your businesses, is there anything that would be challenging to electrify maybe defense comes to mind? But how do you -- do you see a path to electrification across the whole portfolio?

Yes, we do. And I think while defense may be a later adopter, I think there will be opportunities over time even in that segment. If you think -- if you're in the tactical wheeled vehicle space. But more broadly, I would say, obviously, within the Defense segment with our postal contract win, that's going to be a huge driver. And we truly believe that that fleet is going to be electrified over the next decade. While they may buy some internal combustion engines initially as some percentage as the infrastructure is put into place within the various postal depots, we would expect to see some ramping of that activity as well as conversion activity. So that's really exciting. Last mile delivery is just a great space for the use case. There's a lot of interest in refuse collection vehicles. We delivered a few refuse collection vehicles with our -- with a third-party chassis OEM to Boise, Idaho this past year, but there's a lot of interest in that. Again, the use case with those defined routes are great for electrification. And of course, if you look at access and access that I think while there's some infrastructure requirements as you look at work sites and so on, we expect to continue to see adoption there. So -- and really, the area that we thought could be a little bit more of a lagging area would be fire apparatus, but we've seen tremendous response to our Volterra series of trucks that we've launched. And I think -- there -- we have a unit that's on frontline duty in Madison, Wisconsin, performing very well. And it's showing that that application can work really well with no compromises, and we're seeing a lot of interest in that. So if we look across the broad range of our products, we see while the adoption rate may be different depending on the product, we see strong tailwinds over time in adoption.

Got it. Very interesting part of the story. Okay. Maybe focusing a little bit on access. So you talked to a multiyear replacement cycle, we totally agree with that. With where you are right now, we've seen some pretty eye-popping CapEx guidance numbers from some of the big national rental guys as they've talked about 2022. You're in the midst of your annual negotiations. I guess when you look at 2022, how far booked out are you at this point? Like is there still room for more CapEx to be booked for 2022? Or is backlog pretty full?

Well, certainly, what we see is, and we exited the year with pretty robust backlog at the end of September. And of course, we've continued to have booking activity. As we look at it, there's -- certainly, there's room. And as we look at it just to the -- in terms of mix, we do expect that while publicly, there's a lot of discussion on the large nationals. The market is very, very robust for our independent rental company customers as well. So they're still going to be a very important part of our revenue next year. And I would expect that we'll see a pretty similar mix. If you look over time, generally, it averages out about 50-50 between the nationals and the independents. That can sway plus or minus 10%. So I would expect next year, we were a little heavier weighted to the nationals in 2021, that could be the case, but not dramatic. It's really within sort of the typical trends that we've seen over a long period of time.

Okay. Got it. And I know pricing negotiations are never an easy topic, but would you say that as you've been talking to your national rental customers, there's been a little bit more understanding about the current inflationary environment and maybe a little bit more receptiveness to pricing increases?

So I would just say, since we -- we're over double-digit price increases. We went to that in -- that final increase was in the April time frame. We are implementing the price increases without exception. So nobody likes price increases, but I would say that our customers understand the commodity environment and the cost environment and the pricing's sticking.

Okay. Good to hear. Just outside of North America, I feel like we spent so much time talking about the North America access market, but you have a good global foothold as well. Does Europe have similar replacement cycle dynamics as what we're expecting for North America?

Generally, Europe has lagged a bit. And generally, their fleets tend to be a bit more aged than North America. Nonetheless, there is a replacement dynamic. We're seeing strong demand in Europe. I would say it's not at the pace of North America right now. But we see -- we certainly continue to see opportunity for replacement there. And certainly that as commercial construction rebounds there as well will be an opportunity. If you look to the Asian market, specifically China. With the recent challenges they've had in their housing market or the real estate market, I should say, it's probably a bit slower than it was. And John talked about that on our earnings call, but still very robust because the other dynamic is use cases and adoption continue to increase in the market. So while their -- while it may have slowed in the near term, we don't think that's necessarily going to be a long-term phenomenon.

Okay. Understood. And then with respect to margins, if we go back into history, there was a point in time when access was a mid-teens margin business. Is there any reason why you couldn't get back there in the ongoing up cycle?

Sure. We're always striving to improve our margins. And it's always that there's a few things that we look at is what's the mix of the products because different products have tend to be a greater percentage of the volume over time and you can have some regional mix dynamics. But again, we're always focused on improving our margins. And there's again, cycle over cycle, we'd always strive to improve our margins. And I think that's -- there's certainly an opportunity, particularly as we look back to that '19 time frame, from a margin standpoint, we believe that's absolutely possible to get back in that range.

Okay. Great. Let's move to defense. So there's obviously been a lot of headlines about JLTV shipments pushing to the right versus the prior schedule. How should we think about the impact of that to you guys, like revenue in, say, 2022? I guess, is this just a push out of shipments? Or has the program actually been potentially sized down?

Actually, just to start with the end of your comment. The program has not been downsized at all. The acquisition objectives remain the same: 49,000 units for the Army, just north of 16,000 for the Marines. And it's -- this happens from time to time in these long-term tactical wheeled vehicle programs. They still remain very foundational to essentially the mission of our troops and the armed services. So we do see a bit of a push out. We did expect and continue to expect that our JLTV revenues were at peak levels. In 2021, they will be lower next year. We do believe that our foundational programs still create a $2 billion-plus business. So we continue to believe that to be the case. And then really, as we start seeing postal service, we'll start delivering those units in the later in 2023. And certainly, we'll see further ramping in 2024. MCWS starts ramping up. So those adjacent programs will start kicking in. So we do look at defense as a growth business. Obviously, it's just going to be a bit lower as we transition to some of these other product categories.

Got it. And I just had an investor question on the topic of the JLTV recompete. What -- how -- what's the status of that?

Sure. We expect that the winner should be announced based on the current schedule in the back half of calendar year 2022. As we look at us in the competition, we've been through these competitions many times in the past and have been successful. I would say, we're -- with being the incumbent, we're -- we obviously know the product well. These are not automobiles. They're quite complex to manufacture with the armor and so on and the technology that are in them. And we certainly have that know-how. So we have the facilities, the know-how, the workforce in place. We've incurred the investments already. So we believe we're very well positioned in it. Of course, we're never going to be overconfident going into it, but we believe we're well positioned today to win that program.

Are there any examples of times where you've lost a recompete where you are the incumbent?

I'd have to go -- I do not believe that we have. Pat, do you have...

Yes, I don't recall any, Nicole. I think as our former leader once said once you get a contract, you give it a bearhug. And we like to stay very close to the customer. So...

Because really, the program that we've had the longest is the family of heavy tactical vehicles. And we've had that...

Yes, 40 years.

Yes, for 40 years. So it's -- we've continued to -- we won the FMTV a couple of rounds of that. So pretty long -- or a pretty good track record of retaining programs once we win them.

And even with FMTV, that was a 5 year contract, and we've had it for more than 10 years. It's going to be going on 11, 12 and again...

And then we won the FMTV A2 program.

Got it. Okay. Clear. And then international, JLTV, remind me, when does that start to kind of move the needle from a revenue perspective?

So we have smaller quantities in -- that we delivered even in 2021, and we will in 2022. We'll have bigger deliveries in 2023 with that larger Belgium contract. Those will largely be delivered in 2023. And we'll -- and again, we're continuing to work with a number of allied nations on programs. It's -- these programs just take time and -- but really, we have a very active pipeline of about a dozen international customers that we're working with.

Okay. Understood. And I mean you have a lot going on here. The USPS ramp is probably the most near term. When we think about that $2 billion base of revenue and all of the new potential platforms that are cascading in, at what point do you think that this business can really start to grow above that $2 billion level again?

I think that -- well, and I think I would say right now, we're really a $2 billion plus. So just to clarify that. As we go forward, I think 2023, so could start growing. I think 2024 is a year, though, that we'd look to as -- because you'll be at a higher pace of USPS production. MCWS is fully implemented at that point in time. So I would say that certainly, by 2024, we should start seeing some more meaningful growth.

Okay. Make sense. And maybe moving over to Fire & Emergency. So I mean at one point, everyone was concerned about this business slowing post-COVID because of municipal budgets, backlog has continued to grow. I mean what's the latest here? Like can this be at a Fire & Emergency grow like towards its normal growth rate in 2022?

Yes. We -- first of all, we have a very robust backlog. And you said it right, we were concerned. It was -- with the pandemic, it just was not clear how well the municipalities would fare. Well, I think one of the keys was that property values stayed very resilient and those property tax receipts were likewise resilient. And so I think -- and then you add some care -- a bit of Care Act backstopped to some municipalities and that demand is very, very strong. So I think we saw a little bit of a pause for a period. We see that coming back. Again, with those aged fleets, we think that remains a tailwind in that business. I think right now, we have the opportunity to continue to grow the Fire & Emergency segment. We're actually -- we talked about on the earnings call, we're actually going to be adding some capacity to build additional units that won't be online immediately at the beginning of 2021 -- or excuse me, 2022, a bit towards the back end of it. So we remain very bullish about that business about its ability to continue to organically grow.

Great. And from a margin perspective, I mean we've been on an impressive margin improvement journey in Fire & Emergency for some time with simplification. I guess where do you see Fire & Emergency on that journey? And at some point, is there like a feeling to how high margins can go?

Certainly not. I think we -- while we won't continue to improve at the -- a few years back, we were improving 200 to 300 basis points a year. So I don't necessarily expect to see that at that rate. But I do think with the simplification, the innovation we keep bringing to the market with things like Volterra, those are all things that can continue to drive margins. And certainly, by expanding capacity, I think really we're able to make some modest capacity expansions there and get some meaningful impact from that from a volume upside. So we're not -- the journey is not done in that business, and Jim Johnson, our segment President and team continue to do an outstanding job.

Great. And lastly on commercial. So I think concrete mixers has been strong, resi construction has definitely contributed to that. Is the expectation that, that can stay strong?

Yes. We do see similar phenomena to the access equipment business that we are seeing strength in concrete. As -- and I think we also see that with infrastructure that can certainly help. I think there's elevated fleet ages in concrete as well. So I think that's an opportunity. And I also say then sort of switching to refuse collection, we're seeing strength there as well. There was a bit of pause, I would say, during the pandemic in terms of buying habits. I think there was a bit of caution, and I think that's somewhat subsiding. I think the challenge that we're going to continue to work through over the course of really in the shorter term in 2022 is just chassis availability. I think right now, with the reliance on the third-party chassis, I think they're a lot of the chassis OEMs already booked out for the year in terms of what their capacity is. So that's something we'll certainly keep our eye on over the course of the year. It's -- again, we believe this is certainly a shorter-term issue that we'll be managing through and will return to normalcy there with better availability over time.

Got it. And do you still view commercial as a 10% margin business over time?

Absolutely. And we've seen some nice strides. And I think if it -- eventually we'll get to a normal year, but it was great to see them have a record operating margin in the last 10 years. And obviously, they've faced some fairly significant price cost headwinds. What we really like to see though is a lot of the simplification work they've done with the focus factories, moving rear-discharge mixers to our London, Ontario facility, really dedicating our Dodge Center Minnesota facility to refuse collection vehicles, that is dramatically improving our efficiency and will continue to do so over time. So that's going to be a great opportunity just for the teams to be able to focus on those specific products. It's really very much the type of playbook we executed in the Fire & Emergency segment over time and we're -- they're hitting all the milestones. So this is a business that should be double digits in the next few years here.

Okay. Got it. And we have 1 minute, so I'm going to ask 1 last quick question. So you guys have talked about stepping up M&A efforts. And I think you've been pretty clear about where the priorities lie. Could you do or are you interested in a bigger deal potentially? Or is this pretty much going to be a bolt-on strategy?

I would say never say never if there's the right opportunity. But our -- clearly, our focus right now is more bolt-on type acquisitions with a key focus on technology where we could advance our products with core technologies, and you saw that with our Pratt Miller acquisition, life cycle, and I would say everything from aftermarket to connected products, where there's accretive revenue streams that those services can provide and also provide our customers with great benefits. And I would say the last is sort of that near adjacency category. So the technologies that we have, where can we apply those technologies to other product categories.

Got it. All right. Well, we'll go ahead and wrap it up there. Mike and Pat, thank you so much for participating today. I really enjoyed the conversation.

Very good. Thanks a lot, Nicole.

Yes. Take care.

Thanks. Have a good day.