Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

All right. I'll just say let's go ahead and get started with the next presentation. So for those that don't know me, my name is Felix Boeschen. I cover some of the machinery and truckload stocks here at Raymond James. Today, we're very excited to have Oshkosh with us. We do have Mike Pack, the company's CFO; Pat Davidson, who leads the Investor Relations effort at the company. I think what we'll do is, Mike, if you could give maybe a brief 5-, 10-minute intro about Oshkosh, maybe a state of the union, sort of the key markets you play in. And then what we'll do is more of a fireside chat type of format. And again, if anybody has any questions in the audience, I'd say the more interactive, the better. And then let's take it from there.

Great. Well, good morning, everyone. Again, my name is Mike Pack. I'm joined by Pat Davidson. Really glad that you're here today. We're very excited about many things going on at Oshkosh Corporation. And ultimately, a lot of exciting dynamics in our business. And I expect that you all walk away with a deeper appreciation for the strong investment opportunity in our company. Before I get going, of course, forward-looking statements. I just want to remind everyone some of my statements will be forward-looking statements, including in the Q&A. You can refer to our 8-K we filed on January 26, 2022, for further information. So at Oshkosh Corporation, we have a strong purpose. Our purpose is really to serve everyday heroes, whether it's a construction worker working 185 feet up in the air with our access equipment, soldiers, firefighters, refuse collectors, construction workers, and now postal carriers is where the recent recipient of the next-generation postal service vehicle contract. I guess if you look at our strategy, it's really -- can be summarized by 3 simple words: innovate, serve and advance. Innovation is really our lifeblood as a company, which has really driven our #1 share positions in most of the markets we operate in. And you'll see on the next slide, we have significant innovation taking place throughout the company. You can really think of us as an industrial technology company. Serve. We serve and support those who rely on us with a relentless focus throughout the product life cycle. So life cycle services and aftermarket are a huge part of our future and our strategy. And last but not least, advance. We advance by expanding into new markets. Some examples include the last-mile delivery with the recent Postal Service win as well as some adjacent programs in our Defense segment. So we're really excited about some of our advancement opportunities. This category also includes geographic expansion. I'll talk a little bit to our strengths around technology. We're really a leader in disruptive technologies in our spaces. And that's really something that we expect will continue to fuel our growth into the future. So if you look at a few of the areas that we're focused on, electrification is a huge area. I believe that we're at the beginning of an electrification revolution throughout our industries. It's -- particularly, if you look at our Access Equipment segment, we've been electrifying products for over 2 decades. But now that's extending into all of our product categories. We're electrifying the postal fleet over time. We've launched an electric joint light tactical vehicle for the military in the last few weeks. We have electric firetrucks, including our electric Volterra Pierce pumper, which is serving frontline duty in Madison, Wisconsin. It's been successfully completed over 1,200 calls already. So that's going very well. And we're also a leader in autonomy and active safety. We've been working on autonomy programs for years with the Department of Defense. And now, that's really extending into not only full autonomy, but moments of autonomy in some of our other business segments. And we're really launching intelligent products across the company, really leveraging the capabilities of our -- around advanced analytics to provide insights to customers they've never had in the past. We're not just about our products. So we strive to be great corporate citizens. And you really see -- I'm not going to go through all of these. But we've been a six-time awardee of world's most ethical. We're on the Dow Jones Sustainability Index. We have a very strong people-first culture in our business. Really, we're nothing without our people. And we've made great strides. We're very much a destination workplace for employees. Let's get into our businesses a little bit. We have a portfolio of brands that really rolls up into 4 business segments. And again, as I mentioned earlier, all these brands are largely #1 in their market with one exception, we're #2. So we do very well in these. And again, it's really that innovation, our distribution network and so on that really is the power behind that market share. Starting with our first segment. Our Access Equipment segment is our largest business segment. It consists of, from a product category perspective, aerial work platforms. That's boom lifts and scissor lifts, help us -- workers work safely at height. We have material telehandlers for safely moving materials at height as well as Jerr-Dan tow trucks and wreckers. Access Equipment is really an exciting market right now. Great dynamics. Fleet ages are up in the market, which increases demand for our equipment. Fueled by our innovation, we do see that we're at the beginning of a multi-growth cycle, in our belief, because of high utilization and those high fleet ages. Our second defense -- segment is our Defense segment. Historically, we've been in tactical wheeled vehicles and have significant programs for light, medium and heavy tactical wheeled vehicles. Our largest programs, both Joint Light Tactical Vehicle, that's the truck on the far left-hand side. That really replaced the Humvee about 5 or 6 years ago. And great program that will be delivering products through early 2025 likely under the existing contract. We are undergoing a recompete in that right now, which we'll hear the results of later this year. Feeling good about that competition. We have robust backlogs in this business as well, which provides very good visibility. The exciting thing about the Defense business, though, is it's really been a growth platform for us now. We're getting into some adjacent programs, on the far right. We recently won the Stryker Medium Caliber Weapon System. And we also won the Next Generation Delivery Vehicle program. So if you look at our tactical wheeled vehicle business, that's about a $2 billion base business. These adjacent programs are going to add growth on top of that and I would say at profitable -- or good profitable margins. Moving to our third segment, the Fire & Emergency segment. We are the leader in municipal fire apparatus as well as ARFF trucks. Again, this is a business that has great dynamics. We have leading share. We're seeing strong demand in the market. I would say, overall, municipalities have been -- fared a bit better than we expected coming out of the pandemic. So we've had very strong demand. In fact, this is a business that we're currently adding some capacity. It's also our highest-margin business. So the great news is by adding some capacity, we can deliver more of the very highly profitable fire apparatus. We also sell ARFF trucks. Our ARFF vehicles are used at airports around the globe. And our final segment is the Commercial segment. Commercial is in waste collection, so we build refuse collection vehicles under the McNeilus brand. We also build concrete mixers, both front and rear discharge under Oshkosh, McNeilus and London brands. So we're on a great simplification journey in this business right now, really driving simplification into the business, similar to what we did in the Fire & Emergency segment. So we see some nice margin growth opportunity in this business in the coming years. So in summary, I think we have a lot of exciting things going on with our business. We're growing through innovation. We're strong generators of cash flow. We're disciplined capital allocators. And really, we have some great opportunities in the coming years to not only fuel our growth with innovation, but also drive it through inorganic growth and M&A. We have the dry powder to do so. so we expect to be programmatic acquirers over the next, call it, 5 to 10 years to really help further fuel that growth. So with that, I'll turn it over to Felix to get the Q&A started.

Yes. Hey, I was curious, maybe we start off a little bit with the current environment. I'm sure this is a question you guys have been getting all day or will be getting all day or will be getting all day but maybe just a bit of a state on the union of the current supply chains, what you're seeing out there quarter-to-date, frankly, since you reported last time?

Sure. Supply chains, I think, continue to be a challenge. I think we see pockets or situations that are getting better. Particularly at the time of our earnings call, we're in the midst of the Omicron wave of COVID. So that certainly created some absenteeism challenges, both for us and many of our suppliers. So we saw upwards of 20-plus percent absenteeism, really, in that December and January time frame. Now that that's behind us, it's not only benefiting us, but it is benefiting our suppliers. We do expect, though, that supply chain -- we believe it will get better over the course of the year. But importantly, we're not expecting it to get back to completely normal by the end of the year, that it is going to be a slow process. And really, our guidance contemplates that.

Reflects that, yes. And yes, I see a question back there, I think.

Yes.

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Yes. Certainly, there are -- I think everyone is facing some inflation, in particular -- sorry, my phone, I realize, was not silenced. We're seeing inflation -- or we saw inflation really over the past couple of quarters. We've implemented significant price increases. So we do expect that we had a challenging price/cost dynamic in the fourth calendar quarter. Expecting to see one as well in the first calendar quarter. We start surpassing that price cost headwind as we get into our second quarter really back to largely price/cost neutral in the back half of the year. I think from a commodity management perspective, we have locked in meaningful quantities of hot-rolled coil, which is one of our -- a high input cost for us or a high exposure area for us and we've locked in quite effectively there at or better than where markets and futures are sitting there. We also have -- we have exposure to aluminum, primarily in our Fire & Emergency segment. We have pretty extensive blocks there. We also do use aluminum for some of the armor in our Defense segment. That's an area that's a little bit more challenging to hedge or to lock in the price I'll note. That's something for aluminum, just with the -- because Russia has so many inputs into the aluminum market, not -- we don't buy aluminum from Russia. But some of the materials that are used for, really, processing aluminum, that is going to probably put some pressure on aluminum. And I think we saw that in the market the last few weeks. That's something we'll continue to watch going forward.

And maybe this is a really good transition. But Mike, I think you mentioned something in the last earnings call about raw materials being about $140 million to $150 million higher than baseline, call it, pre-COVID levels. And I think that, that had assumed a snapback in 2H '22. My question is really this, how should people think about 2023 from a raw material perspective? Do you claw back quite a bit of the $140 million to $150 million? Or how are you kind of thinking about it as it stands today?

So what I would say is, so that, that $140 million to $150 million price cost headwind, we're going to see -- we had about a $90 million -- $1, $1.05 of EPS headwind in our fourth calendar quarter. We expect to see something similar in the first calendar quarter. That gets meaningfully better in the second quarter. And then in the back half of the year, we're largely price/cost neutral. So we don't really have -- we're at least back to neutral in the back half. So what I would expect is next year, that would really continue on, that we would be neutral to slightly positive...

Right. So then from a year-over-year perspective, you basically lap the 1H '22?

Correct. So you're obviously going to have some unique comps year-over-year in the first half of the year. And then when you get back to the back half of the year, I would say that you would see that our incremental margins will probably be more along typical expectations for us in that low to mid-20s.

Okay. Okay. That's helpful. I wanted to switch gears maybe a little bit and talk about the post office contract. It's obviously been in the news quite a bit. Maybe 2 things. Number one, could you update us on the South Carolina facility and sort of production ramp expectations? And then secondly, this has been in the news quite a bit, but if you could comment on propulsion mix between battery electric and ICE.

Sure. First of all, production facility in South Carolina, ramp-up is going extremely well. We have about 1 million square foot facility that we're going to be producing them in. So obviously, it's such a large important program. We've actually deployed our Chief Operating Officer for the Defense segment to that location to really help and which -- great, I think it is ultimately our Defense President made a great decision there. The individual that's there ramped up our Joint Light Tactical Vehicle. Production was intimately involved in some of our other like family of medium tactical vehicle ramp-up program. So we have the right person there. So overall, going very well. We do expect to start delivering NGDVs in the back half of 2023. In terms of mix, we don't have the first quarter yet. We do expect that should be coming in the near future. It is -- it will likely be some mix of battery electric and internal combustion. I think generally, there's going to there's -- I think there's been some commentary out in the media just in terms of the pace of electrification. I think a lot of it has to do with the pace at which the Postal Service, which is really self-funded, can put the infrastructure in place for charging. So there certainly is going to be a mix of battery electric. And I would expect over the life of the contract, that percentage will continue to increase. I'd also say that the great thing about the program and our offering is our ability over the life of those vehicles to be able to convert them from internal combustion engines to battery electric. They're really purpose-built to be able -- for that swap to be very straightforward.

And you mentioned you haven't received the first order. And I know as the contract reads, I think it's a fairly wide range. I think 50,000 to 165,000 vehicles. What's the typical lead time on an order that you guys are expecting? Or how does that process work?

So once -- we'll have to see what the ultimate order is that comes in, that you'd expect that there's -- right now, there's about 140-plus thousand vehicles that are the former Grundman LDVs that need to be replaced. So those are 30 years old in many cases on average, so there's a pretty critical need. So again, I think the need exists for the higher end of the 150,000 (sic) [ 50,000 ] to 165,000. I think there will be some -- once we start production in 2023, there's going to be some natural ramp-up. And I think we'll have a little bit better idea once we get that order sort of what that full rate production is. But it will -- we do expect it to ramp up to pretty meaningful quantities really over that '24 to '25 range. So by 2025, probably at full run rate.

Okay. That's helpful. And then I'm curious, broadly, the post office isn't the only big parcel carrier in the U.S. I'm trying to understand, is this a market you guys could maybe structurally enter post the contract? And sort of what your thoughts are around maybe that competitive environment?

Sure. Last-mile delivery is a huge opportunity. Not only is it for delivery vehicles in general, but the opportunity for electrification because you have more defined routes and so on. You have vehicles coming back to central hubs, so charging is simplified from a logistics standpoint. So we think it's a huge opportunity. Our ability and really what allowed us to win the postal contract is our ability to deliver a purpose-built vehicle that has the safety features, ergonomics, everything from step pipes, to reach, to limiting back injuries, to step heights and so on. So we believe that we can continue to be a disruptor in other spaces of last-mile delivery. And that's certainly an area we're well aware of and we'll be continuing to explore as we go forward.

I'll leave that question there and wait for some news out of you guys. But you mentioned one thing in your prepared remarks that I think was interesting. You said we're going to be an acquisitive company over the next 5 to 10 years. And I'm curious if you could talk a little bit about maybe the technology changes in the market overall and if that's where you see some opportunity? Or broadly, how people should think about capital allocation at Oshkosh going forward.

Sure. So maybe foundation, I'll talk a little bit about allocation, then talk about our theme areas. So obviously, we have a strong balance sheet right now. I think there's really no doubt about that. And we have the ability to continue to be strong capital allocators. And so #1 priority is going to be where we can invest organically. And you see us doing that with NGDVs. You see that with the capacity expansion that we have going on at the Fire & Emergency segment. Those are high IRR opportunities for us that were -- that will continue to drive and see opportunities there for expansion. Number two, we've been growing the dividend now for a number of years, I believe 8 years in a row now by double digits. That's something that we strive to continue to grow that over time. And then it gets into our next priority is really -- is M&A. And when we look at M&A, we're really looking at 3 categories right now. Number one, it's technology. If there is a technology, whether it's a software, a capability that we can buy and get -- and really integrate that with our products faster than we can develop it internally, that's going to be a great capability to go and buy. And we really did that with our Pratt Miller acquisition that we did this past year. They had a lot of capabilities around electrification, autonomy, AI, robotics and a number of other areas. So it's just a great fit with our business. So I'd say technologies number -- in no particular order, is one of those themes. Second is near adjacencies. So again, there's a technology theme to this. So where we have capabilities or technologies that we believe in a near adjacency where we can apply our technologies to those products and make them better, grow share, grow profitability of those. That's another great target area for us that we'll be focused on. And really, the last one is in the life cycle services and parts and services areas. So that could be expanding aftermarket, not only services, but parts as well as recurring -- software recurring model-type themes around intelligent products and so on. We expect that there could be opportunities there as well. So we do expect to be really programmatic acquirers. We're not looking for big transformational acquisitions being steady acquirers doing 1, 2, 3 a year, really depending on availability. I think importantly, though, we also believe that we've been strong buyers of our stock over the -- really over the past decade. We believe even without continuing to allocate capital to inorganic activities that we'll continue to be strong buyers of our stock as well over time. So that's a little...

Yes. No, that's super helpful. We have maybe about 10 minutes left. I was curious if we could talk about some of the segments.

Sure.

I wanted to ask one thing about access more on the multiyear outlook. I'm really curious how you think about this replacement cycle dynamic. And maybe if you could share with us sort of the average age out there of a boom lift versus maybe optimal replacement ages.

Got it. And it's -- in terms of the exact age, it's been moving a lot. But it is quite aged compared to where our customers would optimally like those. And it's not just certain customers. It's really across the fleet, whether it's large national customer rental companies or smaller rental companies. So it's going to take a few years, just the replacement at robust volume levels to refresh that fleet. Then on top of it, you pair that with the fact that there's very strong utilization of the equipment that's out in the market, that's another great dynamic. So when you really combine that, those 2 factors as well as the increasing use cases, what we've seen in access is with each new cycle, we see more use cases. So whether it's a telehandler is now moving more into the egg space in the United States like they have for years in Europe, or using our DaVinci all-electric scissors in data center applications where there's no risk of -- where there's linear actuators and no risk of hydraulic fluid leaks and that type of thing. Those are all things that, over time, continue to help drive the market up for us. So when you combine all those factors, that's how we really see the opportunity for a multiyear growth cycle in the access business.

Yes. No, that's super helpful. I was curious if you could comment on Europe and maybe some of the international business and access in general, sort of how is it tracking there? And maybe 2 different geographies. I won't talk about China specifically. And then secondly, sort of an update maybe on Europe and if you have any exposure to Eastern Europe.

Sure. First of all, China. China is a strong and growing market in the aerial work platform space. We actually, over the past couple of years, doubled our capacity there. So we do continue to see strong growth opportunity in that market. I think their economy has slowed -- have been slowing a bit and having some challenges in their housing market. But again, this is a market that continues to grow and we think it will be growing for many years. So I think that's sort of that market. From a Europe perspective, European market, I think as many of the dynamics we're seeing in North America are similar. Maybe not quite to the same magnitude in Western Europe. As it pertains to Eastern Europe, we don't have a lot of exposure from a supply chain or a revenue perspective. However, I think with any major sort of shock to the system between fuel prices being elevated, perhaps some pressure on aluminum and other sort of flow down impacts, I think that's what we're continuing to watch very closely. And I think really all companies are watching right now. But it's going to be more indirect.

Okay. Yes. No, that's helpful. You mentioned the JLTV recompete in your prepared remarks. Can you give us an update sort of on the anticipated time line there?

Sure. So the RFP at The Street, the submission, I believe, Pat, is in April. So that's coming up soon. We expect to hear back in that -- in the fall time frame, September, October time frame in terms of that. Again, we feel like we're very well positioned in the competition. Obviously, we have the know-how. We've been building them for a long time. We've been successfully on time, on budget with a high level of quality, which is -- which a customer has been pleased with. And our ability to add technology through technology insertions and so on is also another competitive advantage. And while the eJLTV, I'd mentioned in my prepared remarks, is not a requirement of the contract, just another demonstration of the capabilities we can bring to the table. The ability to drive silently in an electric mode in combat situations or escape-type situations in conflict is something the customer is looking for. And it's something we've been working on for a while. And we're able to unveil that to the customer within the last month. So the customer is very excited about it.

And then last but not least, I wanted to talk a little bit about Fire & Emergency. I feel like this is a segment that doesn't get a lot of airtime even though it frankly should. You mentioned the facility expansion, I think, up in Appleton. Can you talk to us about the time line of that facility expansion? And then how much capacity are you adding over the next couple of years?

Yes. I was like talking about the Fire & Emergency segment. Before my current position, I spent 8 years there. And we had a we had a great journey of really taking that from a low single-digit operating margin business to a business that's really been in the mid-teens. But from a capacity expansion perspective, really, they're working on it right now. It's going to be over the course of this year. We should start seeing in the back -- in the sort of the fourth quarter, start seeing some benefit of the capacity, but it's really going to be more of a 2023 and beyond phenomenon. There's obviously ranges. We have some flexibility that we could we see 10% plus on the custom side of our business, which is not 100% of our business. But the growth in capacity there would further...

You see it more for the custom side, specifically?

Yes, it's custom so far.

Okay. Okay. And maybe remind us on the commercial mix versus custom? And to what degree is chassis supply a problem right now?

So the -- our commercials tend to be more like 10% of the business. In terms of revenue, it's a bit more from a -- they tend to have a lower selling price. Chassis, we're largely okay from a chassis perspective there. I think we have a little bit more flexibility there to the extent that there are constraints that we can we can shift the mix a bit to custom. So that's probably -- it's not our biggest exposure from a commercial chassis perspective.

Okay. And then as I think about the fire truck market, I think it's structurally decreased post the Great Recession by as much as maybe 1,000 units. Curious if you could comment on maybe the multiyear outlook from here, knowing that your backlog does seem to be at all-time records and you obviously have incremental stimulus flowing into, I think, directly municipalities.

Yes. It's -- so historically, we've looked at the North American fire apparatus market to be about a 5,000 to 5,500 unit market before the Great Recession. Post Great Recession, it's really hovered in the lower 4,000s to mid-4,000s level. More recently, we have seen it jump back up to over 5,000 units or around 5,000 units. And certainly, that's correlated to the timing of our strong backlogs and strong bookings, again, back to municipalities being more resilient through the pandemic. So we think we have a very solid outlook. We've been able to gain share in that business. And obviously, it's been very profitable share. So we're really -- we're very excited between the capacity expansion and so on to continue to grow that business.

Awesome. That takes us to 30 minutes. I'm going to say, Mike, Pat, thank you for joining us. And we do have a breakout session downstairs.