Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

From Oshkosh, which have been great and loyal supporters for this conference over the years. We appreciate that. With the company today, directly to my right, Mike Pack, who is the CFO. He's probably coming up right around 2 years, I think, right?

Yes.

And then to his right, Pat Davidson, who heads up IR, who has been at Oshkosh for longer than 2 years. Good. So we'll have a good discussion. And I think, Mike, maybe you want to take us out, go over a couple of remarks, and then we'll jump into Q&A. And if anyone has questions, either here or online, just -- there's directions online, just submit them and I'll see them and I'll get those answered. So over to you, Mike.

Great. Thanks a lot, Tim. And really happy to be here today, and have the opportunity to talk to you about Oshkosh Corporation. We have a lot of exciting things going on in the company. Really, if you look at our purpose at Oshkosh, it's really to save -- serve the everyday hero that perform critical work in our communities. And that may be a construction work or working 185 feet up in the air, firefighters, our soldiers and more recently, now postal carriers. And we're very excited about the recent Postal Service contract when we had about a year ago now. Our strategy is really summarized by 3 words: innovate, serve and advance, and I'll break those down a bit for you. First of all, on the innovation front, we're really a technology industrial company. If you look at a lot of the innovation we've had in our businesses, we have significant capabilities around electrification, autonomy, active safety and intelligent products, among others. And we have a heavy theme of being serial innovators and launching -- continuously launching new products in all of our businesses. And that's really going to continue to be a big growth driver in our business going forward. The second area of our strategy is serve. That's really serving to support those who rely on us with a relentless focus throughout the product life cycle. So that's your aftermarket parts. Of course, we want to continue to drive aftermarket parts and service, which are always a great margin opportunity. But as we get into more intelligent products, it's going to become more new streams of revenue and so on, really leveraging the technology and software solutions that can help make work more productive for our customers. Finally, and certainly not least, advance. We're advancing into new markets, and you see no better example of that than in our defense segment. Our defense segment is now in the last mile delivery vehicle space with the Next Generation Delivery Vehicle program, which will be a multibillion-dollar, decade-long program, really modernizing the postal fleet. There'll be a significant component of that will be electrified over time. And to the extent that we're delivering battery -- or excuse me, internal combustion engine vehicles, in the early part of the contract, we can convert those. So really excited about that new space. We'll continue to look for new adjacencies, new geographies to really apply our innovative solutions. Moving on a little bit about our businesses. We expect that calendar 2022 is going to be a very solid year. It is going to start off a bit challenging as we talked about on our recent earnings call. We do have some price cost headwinds similar to our most recent quarter. We will get past that as we get into our second fiscal quarter, really returning to more normal margins in the back half of the year. We see very strong demand really across all of our businesses. And really, in our largest business, access equipment, we believe we're at the beginning of a multiyear growth cycle. So longer-term prospects are very strong for our businesses. Breaking down a little bit more on access. A few things really give us excitement about that business. As we look at that business, fleet ages are aged among our customers' fleets. That's going to continue to drive demand. Utilization rates of equipment remain high. And ultimately, we keep seeing new use cases for the equipment. So we're excited about that. Our defense business, as I mentioned, we're now in last-mile delivery. We're also getting into other adjacencies with our recent MCWS Stryker program that will really start kicking in from a revenue perspective in 2023. Fire & emergency segment, we continue to be the leader in municipal fire apparatus here in the United States as well as airport rescue firefighting vehicles. We see some nice dynamics in that business, robust backlogs, and that's been a perennial great performer from a margin perspective over the last, call it, 5-plus years. And last but not least, our commercial segment in the refuse collection space as well as concrete mixers, great dynamics there. A lot of great work taking place in this business. This business has had a bit lower margins than some of our other businesses, on a great journey to double-digit margins, which we expect to achieve over the next few years here. So with that, I guess I'll just wrap up my comments on the capital allocation front. We have a very strong balance sheet. We're focused on growth, and our strong balance sheet really affords us some nice opportunities. We're going to continue to drive organic growth, like you've seen with some of our recent program wins. We also have some capacity expansion opportunities like in our fire & emergency segment. So that will continue to be a capital allocation priority. Again, that innovation and organic growth. We've grown our dividend in the past 8 years plus by 8 -- or by 10% plus. And I think you'll continue to see us active in the M&A markets. We've not done a lot over the last decade or so, that amped up this past year. We bought Pratt Miller. Made some strategic investments in some technology companies. Expect to continue to see us more active on the M&A front, again, to help fuel growth. And of course, share buybacks will always remain an important part of our capital allocation philosophy. And we've been -- we're pretty active in the fourth calendar quarter and expect to remain active this year. So with that, I'll turn it back over to you, Tim, for the Q&A.

Good. Yes. It was interesting in going through the new strategy that John and team have rolled out. And it seems like definitely much more of a kind of innovation and technology focus. And there's certainly some key kind of mega growth drivers that you're kind of angling towards. But I'm curious on electrification, specifically, I imagine every segment probably can be touched somewhat by electrification. But where do you see the earliest and most obvious adopters in terms of an electrified portfolio?

Sure. I would say, definitely in our access equipment segment. And really if you look back in the access equipment segment, we've been electrifying products in that segment for nearly 2 decades. Now obviously, the level of technology that's being integrated, really moving away from traditional lead-acid batteries to lithium ion is sort of the next step in innovation. We've done that with our DaVinci Scissor Lift. But really, electrification not only is great for the environment, but it does expand use cases, for some of the equipment, really introducing the ability to put a DaVinci Scissor Lift in a clean room and not have to worry about hydraulic leaks and so on. But we expect to continue to see further adoption in that business. A lot of excitement around our refuse collection business. You look at the duty cycle of a refuse collection vehicle, frequent stopping, you get the benefits of regenerative braking, the very -- the fixed routes, going back to central collection points or emptying points that you can get a booster charge if you need one. So we see a lot of momentum around that. We've already delivered some with some of our third-party chassis OEMs. So we continue to see momentum in that space. And of course, fire & emergency, we have our Volterra products out on the road now. Our first municipal fire pumper has been operating now for 6, 9 months in Madison, Wisconsin, working very well. And the level of interest around the United States in that product is very, very high. So while it's not going to be a light switch, we see that, once we launch that product in that '23, '24 time frame, that demand should be quite strong for that product.

So how do you think about -- obviously, a lot of investment in expense goes into developing these products. And I get scissors have been electrified for a long time. But as you get into potentially more on-road applications, there is more -- potentially more issues related to maintenance and repair because it's not just a scissor that's lifting someone 8 feet in the air. So how do you think about, a, the -- your ability to extract the appropriate economics on those products relative to a traditional diesel product?

Sure. So out of the gate, I would say that we view particularly in this -- the early implementer phase opportunities from a margin perspective that generally, we would expect that our electrified products will have stronger margins, and we see that continuing into the future on that initial purchase. While it does require or change somewhat the maintenance requirements over time, that's something that will be a core part of it. I would also say as we -- with electrification is going to come other elements over time, whether it's autonomy or moments of autonomy, other intelligent product applications from a real-time data analytics maintenance perspective. So I think it's going to allow us, as we have more intelligent products out in the field, to be able to really be partner with our customers on the next level, to be thinking ahead of them, to get any repair components to them, to make sure that we're maximizing that uptime. So while some of the maintenance requirements will change over time, we see some nice opportunities there. And I'd also say that we do expect to see, over time, more recurring revenue models and so on, as some of these intelligent products can be launched into our products, situational awareness type products and other -- many other examples as well.

That sounds like a good discussion for an Analyst Day, probably. So maybe jumping around here, but just on more -- thinking more of a P&L impact, and the scenario you laid out is very much consistent with pretty much how everyone is viewing it, i.e., tougher first half and then you presume to get some cost relief in the back half of the year. And there are some inputs where we can look at what steel prices have done and make reasonable kind of extrapolation on that. But what other -- and I know pricing comes into play, but what are the other major cost buckets for you? Is the assumption that you see some relief there? Or is the operating assumption, just the comps get easier?

So a couple of things. Price is a very important component. So if you look at -- that we start the year with a fairly significant price cost headwind, we said similar to the fourth calendar quarter, which was about 90-plus million. So that we start the year there. That starts getting meaningfully better in our second quarter. And it's really as we've implemented in our non-defense businesses, 10%-plus price increases. So we'll start really seeing that as we get into the second quarter. That's going to be a big improvement right from the start. A couple of other things then. You look to the input cost side, we do have more visibility around steel, which is a meaningful component. So not only do we have very favorable cost locks from a steel perspective but we're seeing spot rates decrease in the market. So we see opportunity there. We've been through our annual negotiations with our suppliers. So we do have visibility to what those costs are for other components. And of course, we've gone through our raise cycle with our workforce. So we have a good view of the -- a lot of the manufacturing input costs at this point. So a lot of it's really going to come down to -- the margin in the second half of the year, it's really going to be that delivery cadence, the volume that we're able to deliver depending on how quickly supply chain can improve. But we are expecting a lot of this inflation to continue through the back half of the year, and we price for that appropriately.

Got it. Just on the supply chain, that obviously, has come up in pretty much every discussion. And what we've heard yesterday and the early part of today from companies in and around industrials, whether it's transports or others that a lot of pressure in the first part of the year, COVID -- Omicron-related absenteeism, but maybe we have seen a little bit of easing in that. And I don't know how much you want to get into the real short term, but is that -- anything that you'd kind of weigh in, in terms of just higher level, started off the year, but maybe some signs of...

Yes. I think a couple of things we're looking at there. Number one, I think with Omicron, that is -- that was a reality -- I think a lot of our suppliers, with the trends in infections across the country, saw a 20%-plus absenteeism in their facilities. We saw that in some of our facilities. Now that as the wave is passing, we're seeing back-to-more-normal absentee levels. So that's a sign that we certainly look at. And of course, we hope that there's not going to be another wave of something else or a new variant, but I would say that's certainly a good sign. We've seen pockets of improvement, I would say, but it still is very much -- can vary from region to region. Our assumption for the year is that it's going to be sort of a slow improvement over the course of the year, but it's not going to be a light switch situation. We're going to continue to watch another area of supply chain is really the logistics environment. Logistics was a huge challenge. Still continues to be a challenge. But I would see -- I believe there's been some improvement there. And so I think there's glimmers of improvement, glimmers of hope there. But again, our plan is not based that we're going to be back to normal by the end of the year.

Got it. Yes, yes. Makes sense. Maybe going into some of the segments more specifically. And you made a comment about access in that, seeing greater uses of the product. And you can certainly see that a lot of the -- as you've expanded the reach and the capacity on telehandlers has grown that they've just become more ubiquitous at the job site. And if you look over time, access unit deliveries have -- cycle to cycle, have grown. But the industry is now potentially getting closer to -- it's just a more mature product. So do you think that can still hold in terms of this cycle will be higher than the next in terms of delivery? Or -- and again, the macro will obviously play to that, but just what are your views on that?

Yes. We definitely believe that, number one, we're at the beginning of a multiyear growth cycle right now. When you look at what our revenue guide is towards the top end, you're starting to get back to similar revenue levels to prior peak. Now albeit the unit count is a bit lower because obviously, pricing levels are higher now at this point. But we believe there's growth opportunity. We do believe that this peak could exceed the previous peak. Those use cases, it's interesting because it's -- with each new cycle, you do continue to see the new use cases. I think you look at places like using telehandlers in agriculture, they've been doing it for years in Europe while there's an opportunity in the United States to continue to grow that application. I think we talked about some of the data centers and so on being able to use -- and clean rooms being able to use our equipment in it, where you wouldn't have been able to in the past. And so -- and just in general, safety consciousness continues to add use cases. I think there's still an untapped opportunity over time using in more -- in home applications and so on. And we've seen some momentum in low-level access, we call it. So we expect to continue to see new use cases. And again, that gives us confidence that we can continue to grow cycle over cycle.

Got it. And obviously, as the product has matured, the role of replacement demand becomes larger. And prior to -- I mean, going back 2 cycles ago, the last peak we saw in unit terms was in '15. And the first trade cycle will, of course, vary owner to owner. But typically, between booms and scissors, teles can be different. But kind of that 8 to 10, is that a normal -- is that what you guys have seen in terms of that normal...

Yes. Generally, I'd say, yes, in that 7- to 9-year range. I think so, pretty similar. And really, what we saw happen, the pandemic with the strong purchases in the time frame you referenced back in that '14, '15 time frame, that really is driving -- those fleets now are aged. And you would have expected that even in '20 and early 2021 that we would have seen stronger replacement, but obviously, the pandemic hit. So now you come out of the pandemic, you have very high utilization rates. The fleets have further aged. So that's creating a replacement dynamic. And that has legs for a few years. It's going to take a few years for the fleet to be refreshed. And of course, with the strong utilization rates, there's opportunity for fleets to grow as well.

You've talked about the expectation that just as units theoretically grow, but that you also expect to be able to improve your margins at the peak of each cycle. Does the -- a 2-part question. One is -- we'll see if this persists, but we're in a different regime from an inflationary standpoint. Does that limit at all your ability in terms of -- does it make you -- not reconsider, but does it make that meaningfully more challenging? Should this continue? Or is your expectation you can get pricing off...

No. We're absolutely focused on improving our margin cycle over cycle and absolutely believe that's possible. I would say that as we exit even this year, we're going to obviously be at pretty strong run rates by our implied guidance from a volume standpoint. And we're going to be back to what we would call pretty typical margins for that volume level. So even coming off the back end of the year, we believe we're going to have strong margins that put us into -- again, into the double digits. So we absolutely strive to improve our margin cycle over cycle and believe that remains the -- really our target and possibility.

Got it. And a likely benefit maybe in next year or maybe the year after, but we're looking at some fairly significant uptick in terms of infrastructure spending. And is there a way -- and obviously, it will touch Oshkosh more than just access. But is there a way to think about -- I don't know, if you can even do it, maybe a rental company customer -- rental company customers have, but $1 of infrastructure spending equates to x in terms of what it does to you guys? Is there...

It's -- that one is tough. So we generally know that when we spend -- when there's more infrastructure spending that benefits not only our access equipment segment, but really ends up having a spillover impact through all of our businesses, I guess, with the exception of perhaps defense. The timing ends up -- by the time -- since we're a couple of steps removed, it tends to -- so it's -- what I view that is the infrastructure spending is it's another variable, that positive variable that we look at when we talk about this multiyear growth cycle that you have. You have the fleet age, you have the high utilization, you have the use cases, and then you add the infrastructure. And I think it's just another data point that gives us confidence as we go forward that we're going to continue to see the stronger demand over the next few years.

I think -- it's a separate point, but we keep hearing about it, construction industry that's short labor. And I was reading an email earlier that -- from one of the trade associations said that the industry workforce faces worker shortage of 650,000 people in 2022. So another question, not for Oshkosh, but is -- can the industry handle that? Meet that from a just worker availability issue? But anyways, switching to fire & emergency, I'm curious, you -- if you look at going back over a long period in the mid-2000s, U.S. industry shipped like over 5,000, I believe fire trucks, kind of reset the financial crisis and has been in that 3,500 to 4,000 range ballpark over the last several years. Is -- you've announced that you're expanding capacity in the Appleton, I believe. Is that a function of your view on the market size and its potential going forward? Or is that just a -- is that more of a throughput issue? What's the logic there?

There's a couple of drivers. I would say, first of all, with a bit of pause, during the pandemic with buying, I think there is some uncertainty. And we even signaled some uncertainty on our earnings calls around what would happen to municipal budgets. Well, they were quite resilient through the pandemic. Number one, with housing prices remaining strong and that market remaining strong, property tax receipts for many communities around the United States were very strong. Then you add on top of that, to the extent some, communities did have challenges or as COVID assistance money to communities. So municipal budgets, I would say, are in pretty good shape. And then you combine that with aged fleets. The fleet is -- fire apparatus around the U.S. is 15-plus years old. That's on the higher end of the spectrum of what they like to see. So I think that -- you have that replacement demand tailwind there that will continue for -- really for the foreseeable future. So I think there's a good setup. We did see a little bit stronger market conditions over the last rolling 12-month period of around that 5,000 units. So -- and that is the first time we saw that since the -- pre-Great Recession. So that was another great thing to see. So from a capacity standpoint, we believe we've been able to continue to gain some share in that business, particularly in our core products, custom aerials as well as custom pumpers. That's really the core of our business. So I think between share gain as well as our continued innovation in that space, that's really created a high demand. If you look at the revenue we've generated in the business over the last few years, despite the market being down, we've been able to deliver higher revenue levels. And we have sort of pre-pandemic. So that's certainly been aided by -- again, by those market share gains and the innovation that we've been able to bring to the market.

Interesting. And then on the -- you mentioned the Volterra platform. I think you have obviously for trucks, I think ARFF vehicles, you've implemented that as well. A, the response to that? And then, b, I know you mentioned Madison, but what is the -- what's kind of the appetite of your typical municipality in terms of -- is there pressure that they're getting from a sustainability angle? Or -- and I'm just curious what the appetite would be.

It's certainly -- there's, I guess, what I would call the greener communities. You would -- we're definitely seeing more of a push from city councils and communities to be greener, particularly when you're thinking about larger vehicles that are idling for an extended period of time in some cases. So that's certainly an aspect. And I think what Volterra has shown is that you can meet the duty cycle of a -- required of a fire apparatus and still be greener. And I think that's -- I think the reaction to Volterra, we expected it to be strong. I would say it's been stronger even than we expected. It won't be adopted overnight, but I think more and more communities over time, you'll see that push. And I think with the favorable response from Madison, that's creating more and more interest among the firefighters that this truck can really perform well out in the field.

Interesting.

Yes. The Volterra, Tim, has done over 1,200 kind of calls, and it's probably higher than that now. That was a number from a couple of weeks ago in Madison. Portland, Oregon is next. There's a lot of communities that are interested. Then as Mike mentioned, on the ARFF side, these aircraft firefight units, the airports wanting to be zero emissions greener globally, that's a very strong demand. And that's a very exciting business for us, has been, and I think that will continue on the EV side.

Yes. And we see, particularly in Europe with our -- our ARFF product is a bit more globally oriented. And so there's a lot of interest in Europe for the product where there is a higher, probably early, adopter from an EV technology perspective.

Interesting. The question coming is pretty specific here. Has the battery supplier for your BEV natural gas DV been selected? I don't know if you want to disclose that, the ratio of BEV versus ICE?

On NGDV?

Yes.

We have not -- we don't have the order yet. We do expect an order at some point. So we'll have more visibility of that. I guess over time, though, we fully expect that more and more of the fleet will be electrified. And of course, we can do any mix, including and convert in our internal combustion. We've not announced -- we haven't really talked a lot about our suppliers on NGDV. It is an Oshkosh-built product. So we have leading suppliers on the battery front. We've been pretty open that we work with a number of battery providers, and that varies based on applications and so on. We have an investment in Microvast as an example, but that does not mean that we're using Microvast batteries in that. So batteries are an area depending on the use case, we will be working with a variety of providers over time.

Got it. Any other questions in here or -- go ahead, I'll repeat it.

With the situation in [indiscernible] priority shipping?

Sorry, what contract?

On defense, with the Ukraine and Russia and all that, are you seeing any kind of chatter or any kind of new contracts or some priorities shifting?

It's obviously -- good question -- oh, yes, the question was if we've seen any shift in demand requirements with the recent situation in the Ukraine with Russia. We have not -- it's obviously early days. And these programs take time. And obviously, from a technical wheel vehicle perspective, we've continued -- we're constantly building and delivering vehicles. So nothing at this time to report.

But you have -- with NATO allies, you have -- what is the timetable in terms of export agreements? And what it...

We -- yes, we're very active. With NATO allies, we have a larger contract. We talked about with Belgium. We do have units over in Eastern Europe as well. Those -- some being delivered as we speak, some over the next year or 2. So -- and that will be -- we continue to be in negotiations with a number of allied nations on requirements for that. So nothing new there to report, but that does -- and thanks, Tim, that does continue to be an important part of our JLTV program, that international component.

Got it. A big question coming out of the stub period that I was getting was just on -- sticking with defense in terms of -- margins there can be lumpy, but they're a little bit lumpier there. And it's not a segment that we would normally think of in terms of -- just given the cost-plus nature, that you wouldn't have as much volatility from a margin perspective. So maybe...

Yes. So what I would say is, number 1 on defense, we've always said, you really need -- with our contract accounting, you really need to look at it over a 1-year period as sort of the minimum time frame because you are going to have, based on contract accounting, some volatility. So we did have a JLTV order in the quarter. I would say that the mix was a little lower on the aftermarket kit side that put some pressure on that cumulative catch-up adjustment as well as material cost. So there are a few things that factored into that. I guess importantly though, as you look at our guidance for next -- for 2022, we expect to recover there to the extent that the 7% operating margin we guided to is a bit lower than it has been. One item that I pointed out on the earnings call is we have about 100 basis points of SG&A costs sort of that we're carrying related to these new programs, that we're starting up, that are a headwind to margins that -- but for those programs, you wouldn't have it. So once we start delivering revenue under those programs, it's no longer a headwind. So I would say just from a year perspective, that's one of the sort of slight anomalies as we're wrapping up. But again, I think -- I go back to this past quarter, some material cost headwinds, but a lot of it was really the phenomenon around our cumulative catch-up adjustments and do not expect that to be a recurring situation.

Got it. And one of the obviously big opportunities for you on the -- is the USPS contract. Can you help us in terms of -- I mean, there is a mile-wide range in terms of the deliveries there. And when will that get solidified or narrowed down under this IDIQ contract? How does that work?

Sure. Well, the minimum quantity under it is at 50,000. And just to level set, at 50,000, this is a good program regardless if it's 50,000 or 165,000-plus. So that's sort of on a base level. But if you look at the size of the postal fleet, the postal fleet of the vehicles are replacing -- that 140,000 to 150,000, those vehicles are 30 to 40 years old. So they need to be replaced. So I think the opportunity for more than 50,000 is quite positive. A lot of it comes down to funding and timing for the Postal Service. I would say that's the biggest variable. I think -- certainly, if the funding is there, I'd expect that the Postal Service will continue to purchase beyond the 50,000. And I think we'll continue to get more clarity around that in the coming months and quarters. Again, I think we had mentioned on the earnings call, we do expect our first delivery order coming up in the not so distant future here.

Got it. You mentioned earlier the Stryker award, that you unseated a pretty strong incumbent player there. What do you bring to the table in some of these? And have you altered your -- kind of your bidding strategy on these various programs? Because it's outside of where you've historically played.

So yes, it's really interesting because while it's outside of it, in the Stryker program, it's all about integration. And we're -- that's one of our core competencies in the defense business, that we're really good integrators. And that contract award would not have been possible without our acquisition of Pratt Miller. Pratt Miller was formerly our partner and now sort of is a third party, but they were instrumental in that win. And with the capabilities -- their engineering capabilities, integration as well as other technological capabilities, that's really a force multiplier for us to be able to get into more of these adjacencies. So there's other opportunities that are out there that we're working on very closely with Pratt Miller, examples like the Robotic Combat Vehicle-Light. And there's programs like that, that they bring additional skill sets to the table. We're also actively involved -- we're in the digital design phase for the OMFV program. That's another program that we could certainly be a disruptor in. But we're very excited about these adjacencies we have, to really take some of our core competencies, combined with Pratt Miller's and start pursuing additional opportunities here.

Good, good. Less than a minute left, but maybe just close on the balance sheet. Just the cash on hand has continued to kind of build and it was almost $1 billion at year-end. What's the -- just the plan there with 30 seconds to go, in terms of utilization of the balance sheet, in a net cash position? So what's the thought there in terms of...

Sure. We do not expect to stay forever in a net cash position. We're going to put that cash to work. We're obviously focused on organic growth and we'll continue to invest in capacity expansions like we have at fire & emergency. We're investing in Next Generation Delivery Vehicle. But beyond that, we continue to grow the dividend. We've been strong buyers of our stock. We were in the stub period. We expect to continue this year. And certainly, M&A is going to be an important part of our growth strategy going forward. We truly believe we're going to be programmatic acquirers over the next 5 to 10 years because we believe there's opportunities out there to enhance our capabilities with technology and adjacencies that can help grow our business and really put that capital to work.

Perfect. Perfect. Thanks, guys. Thanks for your time.

Great. Thanks a lot.

Thank you.