Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good afternoon. I am Jamie Cook. I'm the industrials analyst at Credit Suisse. And with us today, I'm very excited to have Oshkosh Corporation. We have John Pfeifer, who's the President and Chief Executive Officer; as well as Pat Davidson, who's Senior Vice President of Investor Relations. In terms of the format, I'm going to hand it over to John so he can give you sort of an overview of Oshkosh and what's been changing under his leadership, which is all for the positive. And then -- and we will begin the fireside chat, which I will ask questions. [Operator Instructions] So with that, I will hand the mic over to you, John. Thanks again for joining us today, and take it away.

John, I can see you as being muted and no video. Can you hear us? Jamie, are you seeing John at all?

I don't see John, I only see you.

Yes.

John is -- yes, John's muted. Can you -- oh, there he goes. Now I can see him.

There you go. I see you, John. We can see the background.

Sorry, can you hear me now?

We can hear you.

We can.

I apologize. I had to adjust something on the computer. Jamie, thank you very much. I'm delighted to be here at the conference with you. I thought I'd start by just giving a quick overview of Oshkosh Corporation and what we're all about. At a very high level, we're about $8 billion in revenue. We have 147 sites around the world and about 15,000 people. We have a very strong culture. Our culture is rooted in sustainability. As an example, we were just put on the Dow Jones Sustainability Index. We're only 1 of 4 industrials on that index. That's kind of something that designates that our sustainability programs are real and they're important to our people, and it's important to our culture. We're a very ethical company. Ethisphere lists us as one of the most ethical companies in the world. We're very proud about being transparent about the way that we operate. But overall, we're typically classified as an industrial company, and indeed, we are an industrial company. But we're also a technology company, and I think we don't get a lot of recognition for our technological capability. We've got thousands of engineers, and we work with the most advanced technology that there is. We do electrification programs, fully autonomous programs, a lot of intelligent products programs, of course. And that allows us to really fulfill the purpose that we have as a company, and that purpose is really rooted in serving people in our communities all over the world who do the most difficult work. And I'm talking about soldiers and firefighters, people that work at great height, people that work in environmental services industries. We exist to deliver productivity and safety to those people that are in our communities doing all that difficult work. Every soldier should come home, every firefighter should come home safely to their families. That brings that 15,000 of us together, and we use technology and innovation to drive improvements in how our product performs for those people that are using our product. We have a fairly simplified strategy of innovate, serve and advance. We believe that we should be constantly innovating for those -- the people that use our products. We believe that with the hundreds of thousands of pieces of equipment and vehicles that we have around the world that we should have the service capability to keep them running whether it's year 10 or the first day that they're in use the way that they were intended to be used, and we're advancing our purpose by getting into new markets and new segments to drive growth in our company. For example, the postal business. That's a new category for us. We saw the postal carriers, a last-mile delivery, as being a new person in the community that we could provide a better solution for than what they previously had, and that got us into a completely new category to deliver for that person in our community. We're very optimistic about long-term growth in our business because of our technological capability, because of our leading share positions and because of the new segments that we're able to get into with the capability that we continue to create. So that's a little bit about who we are and what we do. And Jamie, I'll turn it back over to you for the Q&A.

Great. Well, thank you again, John and Pat, for being here today. I guess the thing that interests me most since you've become CEO is this talk of sort of Oshkosh getting into sort of adjacent markets. So I guess the first question that I would have is, one, just on the postal service ward, when will we get color on what that means for financials? And how does that position you, I guess, is more of an EV play over time. And what's the opportunity on the aftermarket side, if any, with that business? And then more importantly, how does that position you to get into last mile delivery? Broader basis outside of that.

Yes. So by the way, so we have a confidentiality agreement with the Postal Service, which limits the amount of financial information that I can give you, but I can give you generalities. The postal contract is the largest fleet of last-mile delivery vehicles in North America. It might be the largest fleet of last-mile delivery vehicles in the world. So this is a gigantic award, one of the most material awards we've ever had in our history. We will be in production in the second half of 2023, and you'll actually start seeing these postal vehicles on the road in 2020 -- through the end of 2023. This is a material award also because it will -- it is good business for us. So it will improve our margins as we continue to execute this contract. Now we won this contract -- I talked about our technological capabilities. We won this contract because we understand how to build an electrified process. We've been doing it for a long time. We have not been recognized for it, but because in the past, we've always done discrete programs for the Department of Defense or maybe a unique application for the access equipment world, but there was never really the opportunity to expand electrification into a wider number of use cases because the economics weren't there. Where the economics are today, the economics are now starting to come into play where we can provide an economic benefit or a total cost of ownership benefit for our customers, and that's why you're seeing us supply it to more and more use cases even with electric fire trucks that we've introduced because those economics are there. So we've demonstrated to the world our capability in electrification by winning the postal contract. It's 165,000 units. Ultimately, every one of those units will be an electric vehicle that we supply to the Postal Service. But that postal contract, it's not just that it's an electric vehicle. There's more to it than that. We always design a product with the user of the vehicle in mind. So we studied the postal carrier in exactly what they do every day and how they can become more productive with a new vehicle than the vehicle that they have been using to this point in time. We studied everything to the detail of step heights to get into the vehicle to how we can deploy technology with surround birds-eye view cameras and auto stop sensors to prevent any accidents happening. There's a lot of thought that went into that vehicle, which is going to drive huge productivity for the hundreds of thousands of postal workers that will use these vehicles over time, and that's going to change the financial dynamics for the Postal Service. It's a big part of how the postal service will get financially healthy. And so you asked about -- so this being the largest last-mile delivery fleet in the country, of course, our intention is not to stop with the United States Postal Service. We believe we can provide the same benefit for so many other last-mile delivery fleets that are out there. This is a fantastic category to be in because we all know last-mile delivery is not going away and it will continue to grow for the foreseeable future. So it was an intent to get into this segment. We were delighted we were able to get into it organically, and we believe that we will be a leader in this segment for a long time to come.

And I guess what's the time frame for us to expect you could win potentially other -- do other work outside of just the postal service and last-mile delivery? And then I guess the other question is because this, over time, will be 100% EV. I'm wondering if there's just a scale advantage that Oshkosh would have on EV relative to your peers because you're producing at mass clients?

Yes. So I'll start with that. So our first and foremost, our priority is to make sure that we get up in production and deliver on time for the U.S. Postal Service. So that's our top priority, and so we're going into production in 2023. We'll ramp to full production by the end of 2024. I do think when you just look at last-mile delivery, we'll have a scale advantage for sure. As you look at us against the automotive world, we will not have a scale advantage, but we certainly will within last-mile delivery. In terms of when will you see us start to expand beyond the postal service, as I said, our priority is to get up and running for the postal service. So I would expect it to be sometime following '23-'24 is when you'll see some manifestations of that.

Okay. And then next question, just because the postal service is going to provide a long earnings stream, less cyclicality to Oshkosh's business. But the other potential positive, which helps us even more is sort of the JLTV recompete assuming that you guys win it. So can you help me understand how you're thinking about the JLTV recompete and sort of your positioning there? I know there's been talk of GM being interested in this award too. So just how confident are you on this? When do we hear about it? And how strategic is this to you because of the earnings stream it could create for you?

Yes. So I'll talk about this. We're #1 by far. I mean, by far and away we're the #1 tactical wheeled vehicle supplier for the Department of Defense. So we do lights, mediums and heavies. They got to move people and equipment around. We are -- we do most of that work for the Department of Defense. On JLTV, this is an enduring program. JLTV will be a program well into the 2040s. There's a long way to run. If you look at the army's acquisition objective and the United States Marines and you look at the quantities of it that they intend to procure, we're only, to this point in time, about 25% into what their overall objective is. So there's a long way to run with these programs. Now in 2022, when they say they're going to recompete it, it basically means they're going to add more units to the contract. And for the Department of Defense policies, they recompete it from time to time. And 2022 is a year, they're going to do that. They'll add about 16,500 units on contract when they recompete it. And that's adding billions of dollars to the program, is what it's doing. We are the incumbent. We design the vehicle. We have the production facility to produce the vehicle very, very efficiently with the know-how on how to produce the vehicle. This is not a simple vehicle. There is a lot of technology in this vehicle, which is why it's a long-term enduring program for the Department of Defense, and it's why we get a lot of orders from allied nations for this product. As the incumbent and as the incumbent that has been on time and delivering what the DoD needs, we're considered to be a very strong supplier for this product. We feel like we are in the best position to win the recompete, and it's our intention to win the recompete, and we feel confident that we'll win it because of that position that we have.

Okay. And then just because we are in defense, I'll stick there. One of the things, I think, in defense on your last or a couple of year-end calls, you sort of hinted that for 2022 the expectation is for sales to be down. And I guess the question is, is this business sort of challenged until 2024 when the Postal Service award kicks in and then growth accelerates? And then my last question within defense, because you talked about getting into adjacent markets again, Pratt Miller was a very strategic acquisition for you guys, sort of getting you into the OMFV market. I'm just wondering if you could sort of size that market or is that a potential offset?

Yes. So the best way to look at tactical wheeled vehicles, which is essentially the source of our revenue now for Department of Defense, that will -- or for our defense business, that will change in a couple of years. So tactical wheeled vehicles are a $2 billion-plus business for the foreseeable future, and that's a stable business for us to have. Now tactical wheeled vehicle demand with the Department of Defense tends to rise a little and fall a little based upon the priorities of each presidential budget. Based on the last presidential budget last couple of cycles, we see a drop in demand in '22 and '23 with tactical wheeled vehicles. That's normal. They go up some years and down others. The best way to look at our defense business is we've got this $2 billion-plus base of business. We know how to operate and we know how to make money with. It will go up and down a little bit over time. It's a growth market for us though because we're winning adjacent programs. We're taking our technological capability, and we're applying it to adjacent programs like the Stryker program, $1 billion program that we won with the Department of Defense. That adds growth to our ability, the postal services and other growth area. The OMFV is an optionally-manned vehicle, robotic combat vehicle that we're downselected on and still competing for. We have the technological capability to win these programs and these are material growth drivers to our business going forward. So you mentioned the size of OMFV. OMFV, which we've been 1 of 5 that have been downselected on, which means they recognize we've got the technological capability to do it and that we're a supplier that is considered capable and reliable to the Department of Defense. If we win that program, it will be the largest program in the history of our company by far. It is tens and tens of billions of dollars in size. That's how big that one program is. So just giving you an understanding of the materiality of just the one OMFV program, and there's multiple different programs that we'll compete for in this adjacency. And these adjacencies are important because they're in line with the priorities of where the U.S. Army wants to spend its money going forward. They're all about near-peer threats right now versus 10 years ago, it was all about insurgency threats. Going forward, near-peer threats, it's a little bit more about technology, autonomy, and intelligent products technologies. We know how to do -- we have the technological capability to do it, which is why we're downselected in some of these programs to compete on.

And I guess just to follow up on that because this could go 2 ways. You think about the new guy trying to get into a market and you sort of worry about what that means for the margin profile of the defense business over the longer term. But the flip side to that is you're talking about getting into areas that -- you talk about autonomous, you talk about technology. You know what I mean? Like it sounds like these will potentially be more sophisticated products versus your core business. So how does that swing your defense margins over the longer term?

Well, when you talk about technology, the more technology -- there's typically a correlation between technology and margin creation. We look at our electrification programs, we've got electrification programs in every one of our segments. We've introduced area work platforms that are fully electric. We're introducing electric fire trucks, refuse collection vehicles, the postal vehicle. When you have leading technology, you typically generate premium margins, and that -- these are good programs. They're adjacent where we know how to do the vehicle, and the technology drives -- typically drives good margin performance. I mean, that's the way to look at it.

Okay. And then I do have some more longer-term questions, but I am getting some e-mails on some shorter-term questions. So one of the questions, obviously, you're going to get the question on access in the supply chain and material costs. So are we consistent with what we said last quarter? Are you seeing sort of any signs that things could potentially be more of a tailwind versus a headwind? And I think people are just trying to understand your margins relative to the competition in the short term. Like what's driving the disparity there?

Yes. I mean, I think that, first of all, 2021 has been a very unusual year. And when I say unusual in terms of how fast the market has come back from a big drop in 2020 to 2021, I mean it has really been a V-shaped recovery, which has created some of the supply chain issues we have. Because when you go into a downturn, suppliers reduce capacity. And when demand comes back up just as fast as it dropped, suppliers get caught without enough capacity to serve that demand. So we've made a lot of progress in adding suppliers and helping their current suppliers get capacity back online. We still have to work our way through some spotty issues that we have in the supply chain. So the question about is it getting better? It certainly is not getting worse. So that's a positive thing to say. I think our supplier capacity is getting better with some exceptions with some -- still some pockets of constraint. Logistics is still really tough and unreliable, and that creates a whole different set of problems when logistics are unreliable in terms of lead times. How long does it take to get a 40-foot container from Asia? Or domestic freight is also constrained. That's still a problem we're wrestling with. So I'll talk about the -- a different problem, which is the price cost. Primarily, the margin pressure that you've seen in the near term with us, and this is a near-term problem, is price cost. So we saw our backlogs build very rapidly from about March onward of 2021, and we also saw and use third-party forecast for material costs, and those forecasts were not accurate as we went through the year. That's what put us behind on the price-cost equation. We have done 3 price increases. We're a double-digit price increase at this point in time. Our order rates are still strong with where our pricing is today. So that's why we're confident to say that as we go into -- this is a near-term problem. And as we get into Q3, we'll largely be caught up, and then that's really a function of shipping the backlog that was booked before we got into the -- got our price aligned with what real costs are with the cost escalation we've experienced. That's why we're confident to say that as we come out of Q2, we'll be largely caught up with that price cost inflation.

Okay. And then the other debate that I think investors are having is, obviously, everyone is going with putting through somewhat aggressive price increases. But like how sticky, I mean, do you think these price increases are when material costs start to normalize? Because there's the debate, are we set up for above-average incremental margins in the back half of 2022 when sort of the things normalize and the pricing is still there or the customers going to take back the price? Like, who holds the price?

So I'll tell you -- I'll give you a couple of indicators in terms of how sticky it is. Our order rates as we've increased our price because of material cost escalation, and now as I said, we're at double-digit price increases versus where we were less than a year ago, our order rates are still strong at a double-digit price increase as they were back in 6, 8 months ago. So that's one indicator of price stickiness. I mean there is a strong need for fleet renewal in the access equipment marketplace, and there's also fleet growth opportunities that our customers are seeing. And the infrastructure bill that was passed is going to put more fleet growth requirements into our customers' requirements. So that's all strong demand creation. So we feel really good about the next few years in the Access Equipment segment. We think that our customers will continue to do well. We'll continue to renew their fleets, and they'll continue to expand their fleets. So we feel that the order rates that we're seeing are manifesting that need for growth in the fleet and replacement of the fleet. In terms of what we planned with pricing, hey, we plan very prudent pricing. We're the leader in price in the access equipment industry, and we've done it prudently in line with what we've experienced in material cost escalation, and I think our customers know that. Nobody likes to see these price increases. We don't like it either. But when it's grounded in reality, overall, it tends to get accepted. In terms of your question of will we have to give it back, I mean that's not been the historical trend that we've experienced as we've gone through these types of cycles in terms of how sticky is it long term. So that's all I can say about that.

And then I guess a question, you're sitting here with a very conservative balance sheet, and then I'm thinking about sort of earnings over the longer term. To me, it implies we should be less cyclical when we think about the postal service, when we think about the JLT recompete, perhaps stronger, longer tailwinds and access equipment. Like is that the right way to think about it, Oshkosh should be less cyclical? And so if that's the case, is there a path for sort of margin improvement cycle over cycle? And then what are you going to do with all your cash, John? You have a lot of cash.

We do have a lot of cash. I will acknowledge that. When you're...

And you don't need to be as conservative as you deal with Oshkosh used to be given what's ahead.

Well, I would certainly agree with that, and that's probably one of the reasons I'm in the job that I'm in, it's always good to have a lot of cash when you go through a turbulent time in a cyclical business, which we've been through in 2020 and 2021. But we do have a lot of cash, and we will continue to generate cash going forward. I look at probably the most important thing that I do, me personally, is our capital plan and our capital deployment plan. And we have a very strong philosophy that, over time, we have to deliver return on invested capital to our shareholders. And if we can continue to deliver strong return on invested capital, we will be doing, in general, what our investors want us to do as we grow our earnings in the company. So we look at our cash, and we say, of course, we're always going to have a priority to return some of our earnings to our shareholders in the form of increasing dividends and in the form of shared items. You'll see that continue to manifest itself as we go forward, but we also see an enormous amount of opportunity to deploy that capital to expand the production capacity of our Fire & Emergency segment as an example. Our Fire & Emergency segment generates premium return on investment capital. It generates premium operating margins in the mid-teens. It's got strong demand and leading share. The best thing that we can do is expand its constrained production footprint to be able to improve throughput and continue to grow that business. That's one of the most powerful things we can do for our investors. So you'll see us do that. You'll see us continue to make investment in product development to lead in innovation, but you'll also see us do programmatic M&A work. And you'll see -- when I say programmatic, I'm talking about M&A that is, say, less than 15% of our market cap, M&A that drives growth, either it allows us to get into a new category that's adjacent where we can grow our business or it's technology that we need to grow our business. So Pratt Miller is a great example. We made that acquisition a little less than a year ago. That acquisition gave us technological capability to compete in some of the defense adjacencies that we're winning. We needed Pratt Miller to win the Stryker program, that $1 billion program. They gave us the capability to win that program. So the Pratt Miller acquisition is a -- was a really important move for our defense business and is already paying back by just the Stryker program that we won. Those are the types of areas you'll see us do inorganic moves in with our capital.

Okay. And so then, I guess, just last because I think we only have 2 minutes left, like what do you think is the biggest misconception about Oshkosh and how you think about the intrinsic value of Oshkosh relative to what the investment community thinks?

Yes. I think -- I have to say, I think, is we don't get recognized enough for the technological capability that we have. We won the postal contract. It's a huge electrification program. It's one of the biggest electrification programs that there is in the U.S. economy in total, and I think we get under-recognized for our ability technologically. And certainly, when we win a big program like that, I still think we're under-recognized for some of those wins. For us, hey, we are really encouraged with what we're able to do with technology and what we're able to do to drive growth in our business because of the technological capability that we have. It's very powerful, and we expect it to continue to be a powerful driver of our company going forward. We've got incredible engineering talent in our company, and it's exciting when you get to see up close the program work that gets done in all of our segments as a result of the engineering capability and the technological capability that we have as physical, and I think we don't get recognized enough for it.

Okay. Well, with that, we are out of time. Thank you, John. It's always a pleasure to talk to you. Thank you, Pat. And thank you for your support. I'm hoping next year, I'll see you in sunny Palm Beach versus virtually. But take care, and happy holidays. Thank you.

Thank you, Jamie.