Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Why don't we go ahead and get started? Thank you, everyone, for joining here in the room and also on the webcast. My name is Stanley Elliott. I cover a handful of machinery, industrial, construction materials and other names here at Stifel. Certainly very pleased to be here in person today. Also very pleased to have Oshkosh Corporation with us. From the company, we have John Pfeifer, President and CEO; and then Pat Davidson, who heads up the Investor Relations group there. Gentlemen, thank you very much for joining us. I surely appreciate it.

Thanks, Stanley.

John, I guess starting off at a high level, most people should be pretty familiar with you all. But is there -- how about a brief overview for some of your products, some of your end markets, just to kind of level set the conversation.

Yes. Thanks, Stanley. Delighted to be here. And for those of you from Boston, thanks for the beautiful weather. It's spectacular out there. I'll talk -- to talk a little bit about the company, I'm going to start with our purpose because I think it really defines who we are and what the culture of the business is and gives you a little bit of understanding as to our whole existence. We are -- we have a singular purpose around productivity and safety and delivering for the people in our communities, all of our communities who do the most difficult work that there is to do. The most difficult, meaning it's hard work, it's dangerous work. I'm talking about firefighters, soldiers, people who work at great height, soon to be last mile delivery operators like the United States postal carriers. And we see our whole purpose is to deliver those people that are doing that tough work, productivity so they can do their work really well and efficiently and safety while they're on the job. Every firefighter has to come home to their family every night. And one of the things that we do and how we execute on this purpose that we have, and we've been doing it for over 100 years, and something we probably don't get as much recognition for as maybe we would like is we're really a technology company as much as we are an industrial company. So we are in advanced technologies. We're leaders in electrification. We are leaders in autonomy. We have autonomous vehicles running around with the Department of Defense as we speak. We do a lot with intelligent product platforms that's kind of a new frontier of value driver to deliver curated digital solutions with all the connectivity that we have on our products that are in use in the field today. We, of course, do a lot with advanced analytics and digital manufacturing. But these technology capabilities are allowing us to deliver that purpose that I talked about, productivity and safety to these difficult jobs more effectively than we've ever been able to do before. And we're pretty excited about the opportunity that, that presents us to not only grow in our existing marketplaces, and we're seeing a lot of growth in our existing marketplaces as we apply this technology, but we're also getting into new adjacencies like last mile delivery, where we're able to take and deliver a purpose-built solution, which has never existed in last mile delivery before in a secular growth market to deliver a more powerful product. It's got better productivity, better safety and it's electrified to provide sustainable solution to communities, gives us the technology that we have, gives us the ability to get into new markets again, like this last mile delivery segment, which is driving material growth for our company going forward. And you'll see us continue to get into some new adjacent spaces as we are able to apply our technology and our purpose-built solutions to segments that allow further growth for our company. So that maybe gives you an overview of what we do.

Yes. That's perfect. And kind of keying in on the growth aspect at the Analyst Day that you've held not too long ago, looking at kind of 6% to 10% compounded growth over that duration through '25. How much of that is organic growth? How much of that is adjacency growth? Curious kind of how investors should think about balancing those two.

Yes. So if you look at that, so that growth rate, the high single-digit compounded annual growth rate that you just mentioned, that takes us to from $8 billion to $10 billion to $11 billion in 2025. That's a grounded growth rate. Most of that is organic growth. Most of it is driven in the -- either the access equipment space, it's aerial work platforms, in telehandlers or the JLG brand or the fire and emergency space, which is growing rapidly for us, and we're expanding capacity to continue to grow that Fire & Emergency segment. But there is a significant chunk that does come in 2025 from last mile delivery. So I'd say it's about 2/3 organic, 1/3 new markets for us as we get to 2025.

And you've talked about the technology a little bit more, right? I mean it is kind of sneaky. I mean everyone thought someone else is going to win the Postal Service contract and you come back and we've got electrification or even the JLTV several years ago, you had a better suspension system, you had a better engine system. Talk about some of the things that you all do day in, day out on the technology side that I think helps put the product portfolio in a different light versus their peers.

Yes. So the Postal Service is an interesting contract that we won because as I said earlier, a lot of times, we don't get recognition for the technological capability that we have as a company. And nobody had seen us at that point as a company that had deep capability and electrification. But when you look at it, we've been doing electrification for 20 years. We've done it in the Access Equipment segment for 20 years, and we've done it in the Department of Defense -- with the Department of Defense on unique discrete programs for about 20 years. So we saw the Postal Service as an opportunity to get into a new segment by doing what we know how to do, which is designing and developing a purpose-built solution but then also applying electrification to it because the Postal Service wants an electrified last mile delivery vehicle. And so it was an opportunity for us to kind of showcase those 2 capabilities to the marketplace. And today, when you look around and you see the last mile delivery vehicles that are on the road, in my opinion, they're all substandard in terms of what they allow the operator and the fleet owner to do. They don't deliver a lot of productivity for the last mile delivery carrier, and they don't deliver very much in terms of safety on the job safety, not only for the operator of the vehicle, but for the people around the vehicle, which are people in our communities. It's all of us in this room, quite frankly. And we were able to deliver a better solution that is purpose-built that delivers all those things which the industry has never seen before. And that's one of the reasons we won that gigantic program was because we just delivered a better solution than has existed to this point.

And within the electrification bucket, I mean, I think you're looking at $300 million or so kind of investment over the period of time. What sort of capabilities do you need to build out further? Is this more just kind of strengthening the bench? How should investors think about that?

So I think the thing that we have to continue to work aggressively on is really making sure that we have the software solutions that are going to be required to continue to deliver improvements over time in the way that the vehicle operates when it's electrified. The software solutions on an electrified product, whether it's battery management software, or it's software managing the entire vehicle as it operates are really important, and they're really important to continuing to deliver better and better performance. And we'll do that through downloadable upgrades as the vehicle goes throughout its life span. So that's a really important part of what we're continuing to do. In terms of the component side, we know how to -- we've done electric vehicles. You saw us very quickly come out with a Volterra electric fire truck. We very quickly came out with an eJLTV, which was something nobody thought was possible, an electric defense vehicle. What we have to do going forward is make sure that we continue to align with the best partners for the components that are required as we see acceleration of electric adoption in all markets that can take electric. The automotive industry, obviously being the showcase. And how does the supply chain keep up with that rapid increase of application of electric, that's something that we're paying very close attention to. We're aligning ourselves closely with our, for example, lithium-ion battery suppliers to make sure supply chains are secure. But that's going to be an industry-wide issue for all of us to pay attention to. It's how quickly does the supply chain keep up with how fast the world wants to electrify.

And how should investors think about pricing for these new products, right? I mean just a fire truck alone, the amount of diesel that you're consuming per year is pretty spectacular, right? How should -- but it's across the board for all your products as well. How should we think about pricing, especially when a lot of your products go into larger fleet vehicles and things like that, which tend to be more on a negotiated basis in some cases?

So electric product for -- so electric product is still new technology it sells at a higher price point. It sells at much higher margins than the product it replaces. So that's all good. It's good for us. That's not -- that's a normal situation. Typically, technology and innovation drives margins that is true with electrification. The best part about electrification is, is that there is -- and the reason we're seeing it adopted in many segments of industry much faster today is because there's total cost of ownership benefits. The costs have gotten to a point where we can go into a fleet operator and prove even at a higher price point that there are total cost of ownership benefits. And it's a lot easier to sell that to a professional fleet operator than it is to an individual consumer. So you and I are all consumers and potential buyers or maybe you've already bought an electric car. And for an individual to go through the process of justifying the additional expense of an electric car is a harder sell than it is for us to go in and show a fleet operator how they can dramatically improve their business economically by adopting electric fleets. So that's helping to drive adoption of electrification. There are a lot of performance benefits that come with electrification that you don't get with traditional internal combustion. And of course, we all know the sustainability benefits that come with electrification.

And it goes even beyond just on the product side, right? I mean you all have done a very good job of building out the services network underneath it all, right? I mean, you've got the Pierce distribution network, McNeilus, you do reman work for Defense, remain to work for the Access. Talk about building out the service component ahead of what should be the ability to service a lot of the electric vehicles and other things along those lines?

Well, I think the -- first of all, there is not as much service infrastructure required for an electric propulsion system as there is for an internal combustion system, which is one of the cost benefits that an operator, whether it's an individual or a fleet owner gets with electrification. There still is service requirement for any vehicle that's a highly engineered product. So we'll be able to leverage our -- I guess, my point is we'll be able to leverage our existing service infrastructure. Whether it's a Pierce dealer or one of our wholly owned McNeilus service centers or our JLG service channels, we'll be able to leverage our current channels to provide service for our products just as we do with internal combustion service today. To us, the electric -- the service requirement for an electric product being lower than internal combustion is not a threat because we have not been supplying the internal combustion service component to this point in time. So it's -- for us, that's not an issue in terms of how we operate our business.

And kind of switching to the intelligent products, right? A big focus on making the machines smarter, kind of help them do some automation on the side. What are some of the big project wins? Where some of the targets for the investment are going to be most noticeable?

So first of all, I'll say that I think that we -- our advantage here is -- one of our advantages as a company has always been that we've got really good customer empathy, I like to call, that's what I -- the term I use. You hear that word sometimes. In other words, we understand our customer really, really well. whether that's a soldier or a firefighter or whoever it is. We know what they go through. We do -- we know them well because our company has always been in business by designing a purpose-built solution for that specific job. So we understand what they go through. The fact that we know that gives us an advantage as we work with our customers to understand how as we connect products, digitally connect products and we take data off of products, how we can curate solutions with that data to give either the operator of the product or the fleet owner solutions that assist in product -- enhanced productivity or that assist in helping drive safer operation. And we think that that's an advantage for us. We think this is the next value frontier for us to provide these curated solutions that deliver real productivity enhancements through the curated data offerings that we can provide through connectivity solutions. So it's a new frontier for us, and we're executing it at a fairly rapid pace.

And kind of coming back to the Analyst Day, right, all of this culminates in margins improving 400 basis points from '22 to '25. You're kind of like a 25% incremental. A lot of that's market recovery in Defense and Access just from a cycle standpoint. And then some expansion opportunities within the Fire & Emergency on the commercial side. It seems like that you're really doing -- a lot of the products that we're talking about today ideally are going to continue to mix up the enterprise even above and beyond like a market recovery.

Yes. I mean when you look at our margin profiles going forward, they're really driven by -- we talk about our vitality index. And that is how quickly are we deploying technology in areas that the customer really cares about, which is where the customer is willing to pay for it. And that drives margins for us as a company. Innovation drives margins is the way we look at it. And that's helping to drive those margins. But we're also driving those margins by growing our highest margin businesses. Fire & Emergency is our highest margin business. We've got an all-time record backlog with record order rates in that business. And so we're expanding our capacity. And as we make capital investment in expanding capacity for a business like Fire & Emergency is gigantic return on invested capital and that -- we drive that through those strong margins that it delivers.

And could you touch on like fleet replacement. I mean it's -- a lot of these industries are slower grower, just on a normalized basis, right? But there's ebbs and flows within the capital cycle. But how are the fleet ages relative to historical for any of your businesses? My sense is that we're continuing to see these fleets get aged out, which would be a nice tailwind from a vitality standpoint for product adoption.

Yes. So when you look at -- I'll talk about Access Equipment because it's our biggest business. Access Equipment has a fleet age that's about -- average of about 60 months of fleet age. That is the highest it's been since we've been recording it for a long, long time. So in other words, the fleet is old in the Access Equipment world. And it's one of the reasons you see huge order rates for our JLG brand and extremely high backlogs is our channel knows that they have to renew the fleet. And they know they have to renew the fleet for a variety of reasons. But the 2 biggest reasons are: number one, the fleet -- as the fleet gets over about an average of 7 or 8 years in life, the residual value of the equipment drops off, and therefore, they lose an opportunity to monetize the fleet and renew it and their total cost of ownership equation deteriorates when they get -- when they let it get too old. The other reason is customers, our channels customers do not want old equipment. They want new equipment with the latest safety features, the latest convenience and productivity features designed in and that's what they expect the channel to deliver them. And so those 2 reasons are driving the demand for access equipment today and the reason that JLG has such strong order rates. We're taking orders now for 2023, and we're having customers trying to reserve slots for 2024. Our channel knows that they have to renew the fleet. They know it's going to take multiple years to renew the fleet. And while all this fleet renewal is happening, there's also new use cases and new applications for the equipment that we continue to find. So this is all creating multiyear growth cycle. It's an underpinning of multiyear growth cycle for the Access Equipment. And when you look at Fire & Emergency, it's not much different.

When you think about pricing on product potentially in '23, potentially into '24, has the thought process changed at all about pricing, be it with escalators or any sort of inflation hedging mechanism? Just curious how you could think about covering yourself, I guess, for those longer term.

Yes. So when we came into early 2021, order rates started to increase. And as order rates started to increase, we all know, so if the inflation rate and our material costs started to increase beyond what we were expecting. And that meant that we took backlog at price-protected levels, and we got behind a little bit in terms of pricing our product. We've caught up with that. That will manifest itself as we continue through this year. But what we've realized is that we have not been operating in times of significant inflation in a few decades. And so we've had to change our business model a little bit to where if we're taking orders that are out more than a couple of quarters, so we reserve the right to reprice based upon inflationary conditions when the product is due to be delivered. That's a new way for us to operate. But when you're in inflationary times, it's the only way that you can operate responsibly and we feel that, that's the right way to operate going forward. So essentially, it's almost -- our customers, when they're putting an order in for 2023, they're giving us an order, and they're almost reserving a production slot. And if there's been inflation between the time they place the order and when it's going to be delivered, there's an adjustment that comes to the price.

And kind of staying on kind of the current environment. How is the supply chain? I mean I think it's tough for anybody that we've talked to here lately. Are you seeing any sort of improvement? Any sort of update with there would be great.

Yes. Supply -- what I can say, first and foremost is supply chain is tough. It is continuing to be a struggle in our operating environment with every day that goes forward. We have issues that come up, of course, with electronic components and with microchip shortages, but we also have issues sometimes with wire harnesses and with even sometimes basic items like rubber hoses sometimes supplier can get behind. So we're aggressively adding to our supply base, and I mean this globally. We're adding to our supply base to try to alleviate the problem. We're going to continue to be in a constrained supply chain environment at least through the rest of the year as we see it. And we don't know what to expect yet in 2023. It's hard to forecast if we'll be -- we'll see dramatic improvement between now and when we get into 2023. But we're in a tough supply chain environment right now, and we're being as proactive as we can to add new suppliers to alleviate the problem, and we're using our scale to the best of our ability with our supply chain. But this is our #1 issue right now as a company is managing through a period of significant supply chain constraint.

John, let's maybe talk a little bit about the M&A environment, right? I mean since you've come on board, much more active in the M&A landscape, partnerships than maybe the companies that are taken in the past. At the Analyst Day, you're going to significantly increase the amount of capital going to the M&A. What are you looking for? Did you feel like that the Oshkosh portfolio lacked anything? Or is this more just kind of refreshing and broadening out the capabilities?

Yes. So I'll talk about 2 primary focus areas for our M&A, and it's mostly in areas where we see opportunity. It's not a sense of we saw that we had a significant deficiency. It's more, hey, we see opportunity in these 2 areas to engage more in M&A where we can accelerate our capability, thus accelerate our growth rate. Number one is continuing to build out technological capability. So I talked about our technological strength in electrification, autonomy, advanced analytics and connected product or intelligent products. But we have to continue to build it out. Technology advances quickly, and we align ourselves with the best partners and we go and we make acquisitions where we see we can enhance our ability in an area of autonomy or where we can enhance our ability in an area of electrification. So we just recently made a very small acquisition of a piece of technology called CartSeeker. It fits well with our autonomous capability. It allows us to give the operator of a refuse collection autonomy, autonomy when they're doing side collection of cans at residences, makes them far more productive. And when they're more productive, 1 truck can collect 20% more stops on a route, that's huge productivity gains for our customers, and that's why we make those types of acquisitions. The other area that we're making acquisitions in and we'll continue to do so is in growing our addressable categories. So a good example would be wildland fires. Wildland fires is an area that we have not been participating in significantly in the past. This is an area that due to global warming is a growth need for the Fire & Emergency industry. So we went and partnered and acquired a significant portion of Boise Mobile. Boise Mobile has a premier position in wildland fires, and as we jointly manage the business together with Boise Mobile, it gives us much better capability to serve the needs of a growing segment of the Fire & Emergency world. So those are the 2 areas. It's technology build-out and it is growing categories where we see that we have the capability to deliver better solutions.

I see. And the wildfire, I would imagine with the Pratt Miller, the JLTV technology behind that they'd love a more comfortable ride off-road.

Right. That's right.

Can you talk a little bit about capital allocation. I -- we're kind of coming up against the clock. But you guys have always generated a lot of cash, right? You're in a very enviable position, low leverage, right? How should investors think about that over the next near medium-term horizon?

So we're in a great position right now. We've got a very strong balance sheet. And as you said, we do generate cash, and we have very healthy cash flows. So when you look at us going forward, we're very comfortable with our balance sheet where it is in terms of the debt load that we have. We don't have any plans to pay off debt. We don't think we have excess debt at this time. So 100% of our cash flows will go to either investments in the business or returning cash to shareholders. So when you look at it, the rough rule of thumb would be about 75%, we'll say 65% to 75% of our cash flow will go to continuing to develop new innovations and new products as well as mergers and acquisitions activity. And about 25%, could be as much as 35% in a given year, will go to share buybacks and dividends or returning money to shareholders. But the rule of thumb is 75% investment 25% return to shareholders as we go forward, on the cash.

Perfect. Well, it looks like we're out of time. So John, Pat, thank you all very much for joining us. Really appreciate it.

Thank you.

Delighted to be here.