Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Okay. Well, good morning. Thanks for joining us. My name is Larry Stavitski. I'm on the machinery team here at Wells Fargo, and we're delighted to have Oshkosh presenting today. We have CFO, Mike Pack; and Pat Davidson, who heads Investor Relations. So really appreciate you guys joining us on stage today.

Thanks for having us.

Pleasure is all ours. If you'd like to start with a couple of opening remarks and...

Sure. So I just thought I'd give a quick overview on Oshkosh. We have a lot of exciting things going on in the company. And just to level set before we get into the Q&A, but just to give you a little bit broader overview, if you look at the purpose of our company, our purpose is really to make a difference in the lives of people doing some of the toughest jobs in our communities. So think of construction workers or maintenance workers working at height, refuse collectors, firefighters, soldiers, and the list goes on. And so our products are really purpose-built products that make those folks' lives safer and more productive. So that's really our purpose, which we view as a very powerful purpose. Looking at our strategy, you can summarize it with 3 simple words: it's innovate; serve; and advance. And I'll talk briefly about each one of those. Think about innovation, there is not a single product line or segment in our business that we're not focused on electrifying products right now. Adoption is not going to be overnight on those products, but we're -- whether you're in our JLG business where we make aerial work platforms and telehandlers, that business has been electrifying products for a couple of decades, but that's continuing to expedite and advance with really the conversion of lead-acid batteries to lithium ion as well as moving away from hydraulic cylinders to more linear actuators. So a lot of changes there. We have electrification taking place in our vocational segment with both fire trucks and refuse collection vehicles. And certainly, in our Defense segment, one of our exciting programs is the next-generation delivery vehicle for the Postal Service which 75% of those vehicles are going to be fully electric. So a lot of exciting electrification initiatives, a lot of work around autonomy taking place in our businesses as well, as well as intelligent and connected products. So that's really the first pillar of our strategy of innovate. Next is really serve. So we're focused on taking care of our customers through the product life cycle. So that's not only exceptional aftermarket parts and services and extremely reliable equipment, but it's also, as we think about the 21st century moving into connected products, getting into new revenue streams with connectivity and new offerings that will, over time, create more recurring revenue models and new revenue streams. So that's a huge focus area. We'll talk a little bit about it more, but we're doing a -- we just announced a couple of weeks ago that we're doing an acquisition of JBT's AeroTech business and the airport support business. That's a business that we really liked. About 40% of their business is in that aftermarket space. So it's a lot of recurring revenue and resiliency through ups and downs of the economy over time. So serve is certainly important, and we see more opportunities even in our traditional businesses to grow aftermarket parts and services over time. Then the last and certainly not least is advance. We look at advance a couple of different ways. Advance is really moving into new geographies and product adjacencies. And you can do that both organically or inorganically. Organically, we've -- the Postal Service contract is a great example. We're able to leverage our internal capabilities to really drive a new product category that was ultimately successful in the program, and we're very excited about that program ramping up really in 2024, a bit more so in 2025 and 2026. If you look on the inorganic front, we've been more acquisitive. We recently announced, I mentioned the AeroTech acquisition, but we're interested in really acquisitions that can leverage technology that we're developing for our other products. AeroTech is a good example of that, a lot of overlap with electrification autonomy initiatives we have. You think of products that are -- again, create safety and productivity for people doing tough jobs. Again, AeroTech sort of checks that box as well. So that's another way, more of the inorganic path. And we expect to continue to be active in that front as well. And of course, with acquisitions and even our own organic activities, we want to continue to increase our exposure internationally. Moving on to our segments, really operate in 3 segments. Our largest currently is Access Equipment. Access is really in the aerial work platform. So think boom lifts, scissor lifts, telehandlers that really -- telescoping -- telescopic forklifts, think about those products in that way. That's a business that has very strong demand dynamics right now with aged fleets, a lot of nonresidential construction activity taking place, including a lot of large mega projects. Moving to our vocational segment. It's a newer segment for us. We previously had a Fire & Emergency segment, which was predominantly fire trucks as well as aircraft rescue, firefighting vehicles you would see at airports. So we combined -- as well as our Commercial segment, we combined those really into a single segment, understanding that a lot of the trajectory from an innovation perspective with electrification, again, it's -- there's a lot of overlap there and a lot of synergies. So we combined those -- really announced it at the beginning of this year. It's going well, and that AeroTech acquisition is really falling into that new vocational segment. And last but not least, our Defense segment, I had mentioned previously, next-generation delivery vehicle rolls up under that segment. Our core competency of our Defense segment is managing very large programs with government or government type customers. And so it fit really well into that business. And we did see -- the other place that we're -- the predominant space that we've been in, in that business over time is in tactical wheeled vehicles. We certainly have seen a shift over time of defense funding priorities going to more weapons and combat vehicle-centric investments, aircraft and so on. So understanding that, that's one of the reasons we started getting into -- that's fine, some adjacencies around other product categories like next-generation delivery vehicle -- fixed that. So that's -- that will be an area that you'll continue to see as a theme. We're also in the combat vehicle space, in -- somewhat in adjacency now with the Stryker MCWS program, we won about 1.5 years, 2 years ago. So a lot of exciting things happening in our Defense segment, too, even while defense -- while defense spending and tactical-wheeled vehicles decline to that. Just real quickly before I turn it over to Larry, capital allocation, huge focus. We had Analyst Day about a year ago, we talked about our capital allocation priorities. A few big focus areas, we talked a lot about driving growth through both organic investments as well as inorganic. We expect to deploy about 65% to 75% of our capital to those growth type objectives. And you certainly see that over the course of the past couple of years. But what's also important is we view returning cash to shareholders as very important as well. So that's going to continue to be a meaningful part of our capital allocation strategy going forward as well. So with that, I'll turn it over to Larry, and we can hopefully dive into a few of these areas a little bit deeper.

Great. Great. Thank you, Mike. Now the economy is top of mind for a lot of investors, obviously. And on your first quarter call, you mentioned construction activity, industrial project activity has been fairly -- pretty solid. Has anything changed since your first quarter? Any kind of rundown that you can give us in terms of what the landscape looks like?

Yes. Demand continues to be very strong. And we see it really on a few different fronts. Number one, you look at nonresidential construction indicators, continue to be very solid. And that's certainly bolstered by the large number of mega projects out there. You think about the automotive manufacturers adding electrification capacity, battery capacity, chips capacity. A lot of the onshoring activities that are taking place throughout supply chains, so all those things are bolstering these mega projects. And there's a pretty significant portion of the fleet now is deployed to these large mega projects. And these aren't projects that are going to be done overnight. And quite frankly, a lot of the infrastructure spending is not at full pace yet. So that's only going to add to the demand picture. So we see robust demand in that nonresidential construction arena for the foreseeable future. And of course, you add on to it, particularly in our Access Equipment segment, fleet ages are quite aged right now. And even as we highlighted some of those metrics a year ago at our Analyst Day, it really hasn't improved over the course of the past year just because of some of the supply chain constraints and the high utilization rates that we're seeing of equipment.

Okay. Interesting. Now you mentioned infrastructure projects. Have you seen that faucet start to turn on? Or do you expect that kind of in the out -- later years?

It started, and we don't always have 100% visibility to this since we're a step removed. But generally, what we're seeing is, yes, that activity is starting to pick up. But I would still say it's more at its infancy, that that's still going to be a growth driver. A lot of the projects taking place right now out in the industry had already started and are really, again, back to the -- sort of the onshoring and electrification initiatives and some of the warehousing that's been added across the country. That's really been the larger driver, but that's -- we expect that infrastructure is continue to be a growing tailwind in the mix of those projects with time here.

Okay. Interesting. Now your nondefense backlog is about $8 billion as of 1Q. Can you talk to the viability of that backlog? There's been some, obviously, challenges in the industry with the time delivery. Can you just talk to your backlog and the composition of it?

Sure. So within that, there's certainly a -- we have strong backlogs in really all of our segments. Access is north of $4 billion as of the end of last quarter. So very strong demand in line with the comments I just made. And supply chain is still -- right now, if supply chain improved at a faster pace, we could deliver more equipment because demand really supports it. So we expect the backlogs to stay quite robust. Now I think as supply chains improve, you may not always have a -- historically, you may not have a book-to-bill ratio of 1:1 every single quarter, but we expect that demand to continue to be strong. And you could, over time, as supply chains normalize, start seeing a little bit more normal order patterns in terms of times of the year. But at this point right now, we're filled for the year, and we're already booking as we talked about on our last earnings call into 2024.

So no real cancellations or order pushouts related to macro concerns or interest rates?

Certainly not. You always have some gives and takes, but really, demand is strong, and we're seeing that order activity follow suit.

Okay. And then your expectations on price cost heading into '24, if you could talk to that a little bit.

Sure. So in Access -- and I'll really break that down into our different segments. So in Access, we're largely price cost positive this year. So price is really not a drag at this point, to the extent that we're not quite at -- you look back to Q1, not quite back to our prior peak margins. It's really -- we're not producing at the same levels we were back in 2019 quite yet because of some of the supply chain constraints. But as we start seeing that supply chain continue to improve, we believe we can certainly meet and exceed prior peak margins. And so I think that's -- so cost price is in good shape there, but we're going to continue to monitor it. As you know, over the course of the past year, we've had -- we have done a fair amount of repricing of backlog, which was really a newer phenomenon for us that we would expect to continue to monitor that and price accordingly going forward. If you look at vocational, vocational, because we can't reprice fire truck backlog because of performance bonds, we have a lot of pricing that is coming online very late this year and into next year, so I think double-digit prices from where we're at today. So even with prices -- or excuse me, even if supply chain doesn't come back to fully normal by the end of the year, we expect that vocational can be back into double-digit margins as a complete segment next year, just with that pricing dynamic of that additional pricing coming online that's currently in our backlog.

Yes. You talked about 10% plus margins from the 8% or so you're expecting...

Correct. Yes, yes. And it's -- again, it's a pretty notable step. And we've made some further changes in that business. We've really moved to quarterly price increases as we're -- we're booking backlog out into the later 2025, 2026 time frame now. And we're very much -- because there's more limitations on ability to reprice, we're really booking units in smaller chunks on a quarterly basis and then making those pricing adjustments. And that really, as we see the price coming online, we see that being a solid double-digit business.

Great. And the supply chain, you mentioned it's still an issue. I mean what are the expectations towards the end of the year in your parts availability, the components? Chassis and axles were a problem for you guys for a couple of quarters ago. How is that shaping up?

Yes. I would say that, as we talked about earlier in the year that we expected that it wasn't going to be a light switch getting better, and that we would -- we talked about in Q1, supply chain was better than what we had expected going into the year. I would say that it continues to improve at a -- not a rapid pace but at a steady pace. So I think when -- as we get through this quarter, I would expect that our on-time delivery metrics, which we talk about typically in our earnings calls, for JLG should be -- and our other businesses should be -- should see some progress. I think it's a situation where if we continue to see progress, I think we're going to be -- we exit the year in a much more normal place, maybe not completely back to normal, but much more normal than where we entered the year. So I think it's -- as we look to it, look out into the future, we see -- we have some optimism around 2024 and that steady progression.

Okay. Great. Now going back to the acquisition, the AeroTech acquisition, you guys talked about in vocational. I guess talk about -- talk to this acquisition and how it kind of fits into the new vocational segment. What are your expectations as the segment evolves? And any color there?

Yes. We're really excited about the AeroTech acquisition. It's really a business that we've been interested in for a fairly long period of time. In fact, prior to becoming the CFO, it was really a business that the segment president at the time, Jim Johnson, now the vocational segment President, and I were very interested in, call it, 4, 5 years ago. We liked the business because it overlaps with a lot of our focus areas so much. Number one, we participate at airports. And while there's not always exact overlap of customers, we're calling upon airports, we understand the environment. So there is that benefit. If you look at the products, we specialize in making purpose-built products that make work easier and more productive for people doing tough jobs, and it really fits the theme of our focus and purpose as a company. A lot of the technology that's being implemented into their products, we're really on the same pace with what we're doing from an electrification, autonomy perspective as well as connected products. So we expect to see a lot of overlap, both directions where we're able to leverage technologies they've developed on connected products, vice versa, we can help advance some of the products that they've started. So we believe a lot of technology synergy and overlap, again, the customer and -- it's just -- it's a great business and will fit well with our -- with vocational. The other thing we like about the airport space is, it's not a -- minus the pandemic, which was sort of a -- hopefully a once-in-a-lifetime type event where air travel declined rapidly, all projections are that global air traffic are -- is going to continue to improve and grow. Same for global transportation and packages. And that all bodes well for the AeroTech business and airports in general. We also think there's an opportunity, there's -- we have a pretty strong North American presence with that business or [ will ]. There's an opportunity. It is somewhat of a fragmented market. So there could be some opportunities for some bolt-on, tuck-in acquisitions in that space over time as well.

Got you. And the recurring revenue opportunity...

Yes, absolutely. That's -- I mentioned it earlier in that serve category. But you look at their business, about 40% of it is really -- doesn't really necessarily go through their backlogs. So you look at that business, it has about a year backlog for their core products. But about 15% of their business being aftermarket parts and then about 25% percent of it being recurring services on longer-term service contracts really creates a nice stable revenue stream that -- so again, all those things, it's just not a typically -- or particularly cyclical business, which we really like.

Right. And you mentioned adding tech and adjacencies via M&A. I guess can you talk a little bit about the M&A pipeline today as you see it and...

Sure. So you look at -- I think a good example of what we're interested in is really what we've been doing over the last couple of years. So you look at rolling back the clock, about 2 years ago, we acquired Pratt Miller. We acquired Pratt Miller into our Defense segment because they had capabilities around electrification, autonomy, really leveraging a lot of their skill sets that they've developed through bracing -- automotive bracing. And that's been a great acquisition. It was instrumental in us winning the Stryker MCWS program. They're already having a huge impact in helping our other businesses with our -- with some of our technology initiatives. So that's a good example of it helped us get into an adjacency, but also contributing technology. You look at Hanwha, which we did earlier in the year, which was a longtime partner of JLG, it allows us to not only expand our presence in Europe with a really good business with solid margins, but it allows us to get into some adjacent spaces there. They have some products in the vegetation management space as an example as well as some smaller tractor vehicles and so on, which are some good products that really expand our capabilities that we see an opportunity to leverage more globally. So it's another example where, again, there's -- it's a very near adjacency, but also allows you to get into some other categories and again, leverage some of our technology and then most recently with AeroTech. So you really see us looking at those themes of including -- or expanding aftermarket exposure, expanding our recurring revenue exposure, international as well as leveraging technology in those near adjacencies that we're really looking at those on all of our acquisitions. So going forward, I would expect very similar themes where we're looking at those acquisitions that we believe can drive strong value for our shareholders in those categories.

Okay. And you mentioned at your Investor Day last year, you issued '25 -- 2025 targets. Has anything changed other than the JLTV recompete? You guys are protesting that, which we can get into later. But anything else -- has anything else changed that will alter your view on '25 targets?

Yes. So JLTV, we were not -- it actually did come out yesterday that we were not successful in the protest. So that -- so again, we've been planning that -- typically with protests, it's -- odds are typically low. But as we've talked about, look, we have so many growth drivers in our business that something -- you're going to have gives and takes when you have long-term targets. But as John talked about on our last earnings call, we're still firmly committed to those -- our Analyst Day targets with EPS really in that $11 to $13 range. So if you think about it, certainly, JLTV is a bit of a headwind. We talked about it. It's about $800 million to $1 billion of revenue. Conversely, I'd say that our mix on NGDV is more electric or BEV than what our previous expectations were. So that's a bit of a beneficial tailwind. And now, of course, with the AeroTech acquisition, that's going to be certainly beneficial as well. So we remain committed to them. You look at, as we talked about, vocational returning to double-digit margins next year. And we looked at what our Analyst Day targets are around that, we expect them to be sort of where we do for Analyst Day next -- or really sort of approaching those levels. And we obviously see the good trajectory that Access is on. And the big piece then is as we start ramping up the next-generation delivery vehicles, which we'll start delivering vehicles at scale in the back half of next year, but 2025 is going to be a big ramp-up year. So that's going to be a meaningful driver on top. So those are really the things we're looking at and why we still remain committed to those targets.

Okay. Great. Any questions from the audience so far? No? Okay. Go on. You're transitioning about 500 square feet of telehandler capacity to your Jefferson City facility and your expanding capacity for the NGDV. Can you talk to the progress of those capacity enhancements? And are there any other opportunities for you with the other areas of the business?

Yes. Yes. Very exciting just from a demand perspective. We talked about, first of all, in the postal front, we're going to be producing those units in about 1 million square foot facility in South Carolina. And that facility is -- it's the Spartanburg area. So great area that -- BMW is located in that area. So there's a great supply chain in that area, and there's great work for us. So we're very excited to be in that area. The facility looks great. It's largely complete. So very much on or ahead of track or ahead of plan to get the facility ready for production. So the exciting thing with ramping up a lot of larger programs over time, we're able to -- the individual that really ramped up our facility for JLTV previously is really ramping up that facility. So we have a person that stood up massive facilities routinely in the past, but really, really manages the risk of those types of standouts that, that -- those are great skill sets to have on board. So that's progressing well. Yet the other facilities in Jefferson City, Tennessee former defense facility, we're transitioning that to telehandler capacity. So there's really a need for telehandlers, particularly as we continue to see opportunities to expand telehandlers more into the ag space in the United States. That capacity will be quite useful. So that's in the process. We're just starting that conversion right now. JLG does have a couple of lines set up in the facility. And over the next, call it, 9 months, the remaining portion of that facility will be changed over to telehandler production. Generally, the other capacity project that we have going on right now is related to our electric refuse collection vehicles in our vocational segment, which we announced about 1.5 months ago. So customer reception of those has been absolutely outstanding. A couple of our large customers talked publicly about acquiring those units. They'll be early adopters of it, which we're very excited about. So the plan there is that those will be built in Murfreesboro, Tennessee. The great thing there is it's about 1 million square foot facility as well. And clearly, we have a long backlog on the fire side. So we're going to leverage the capacity and workforce availability in that Murfreesboro, Tennessee area as well to help our fire emergency -- or on the fire truck side benefit from some additional capacity. So a lot of exciting things happening on the capacity front, really maximizing the leveraging of all of our facilities to make sure we're filling them up.

Right. Right. Right. Got you. Okay. Now digging into the segments a little bit. You mentioned Access Equipment. You mentioned the aged -- age fleet and tailwinds there. Are there any concerns from rental customers who have gotten a little bit more comfortable operating aged fleet and they're a little more reluctant to replace that aging fleet?

That's definitely not what we're seeing right now. We continue to see -- and really, there's not been -- they've been sort of forced to operate at a little bit more aged fleets just because of equipment availability. But this is something that, as we talk to our customers, they're highly focused on continuing to refresh fleets over time. And again, you look at all the other strong demand dynamics. And if you look at -- in particular, you look at these large projects, they want new equipment on the work sites. And so that certainly helps as well. So again, we believe that aging is just one more dynamic that's going to continue to fuel the strong demand in the whole JLG space or Access space.

Okay. Great. And how much of -- you're projecting low double-digit revenue growth for access this year, how much is that price versus volume?

Yes. So the lion's share of that right now is price. And what we said going into the year, supply chain's been -- was a bit unpredictable last year. I think going into the year, we expected to see more improvement in 2022. So coming into this year, our belief is that while we expect to see improvement, it's hard to say what pace that, that was going to be at. So our approach was -- is that we expect sort of slow steady growth over the course of the year. And however, we stand ready to the extent that supply chain is -- improves, that will deliver more equipment. And we did see in the first quarter, we did see stronger deliveries, a bit better supply chain dynamics than what we expected. And I think the good news is that we continue to see progress in that front. So it's something that we'll continue to evaluate. But I think right -- going into the year, our view with that uncertainty around the pace of improvement, it was more price-driven versus volume-driven.

Okay. Right. Your op margin guide is about 11.5% for the year, and that suggests a pretty large incremental. How should we think about '24 incrementals? Should we think about returning more to that 20%, 25% range that you'd see in a normal operating environment?

Yes, you're spot on. So what we would expect is you're going to see we're lapping some lower margin quarters in the first 2 quarters when we had the larger price/cost headwinds. Even in the back half of the year, you'll start to get to more normal incrementals. But I think you're spot on really looking at it going forward as volumes added in 2024. I'd really look at it as where we exit this year, you would expect to see sort of that -- yes, the 20% to 25%, and again, a little bit dependent upon what mix ends up being. But in general, that's what we would expect.

Okay. Have you seen any evidence of new or increased competition from lower-cost manufacturers?

Competition is always present. I think in the United States, we took -- us as well as other competitors banded together. We did see some unfair competition. So we're all for competition, but it's got to be fair. So there were some duties and tariffs on predominantly Chinese equipment being imported into the U.S. So that -- so really not -- at this point, it's obviously something we'll continue to monitor. There's -- again, there's -- particularly in Europe and I would say in Asia, that competition's prevalent. Our focus, though, is you win by having superior aftermarket service and support and reliability and continuing to innovate. You stay ahead on the innovation curve, that's where -- that's where -- that's really going to drive the demand over time. So that's really our response. And that's really what we do on all of our businesses. We don't really compete on a price basis. We're typically at or above where the competition is from a pricing perspective, and that's -- and that we tend to attempt to offer more technology or capability with our equipment with higher resale.

Total cost of ownership...

Correct. Absolutely. Yes.

Got you. And you mentioned the JLTV recompete contract, the outcome was -- yesterday that was announced. I guess, how are you thinking about kind of filling that void going forward and other -- you mentioned MCWS program. What other programs that you're looking forward to in the future that can kind of mitigate the loss...

Yes. I think we're looking at it not just as -- we're looking at it as a company in total. So I think there's certainly programs -- adjacent programs like MCWS. There's programs like the robot -- robotic combat vehicle that we're in the competition for, OMFV and so on. We'll continue to look at those programs and pursue some of those adjacencies. And we've had, again, some nice adjacent wins. But I think, first of all, with the -- we have the changeover in Jefferson City, Tennessee, so that's a piece of it. They were certainly building componentry for defense for the JLTV. So that's really -- that facility is being consumed. Then we have about a 350,000 square foot facility in Oshkosh. And if you think about the capacity needs that we've had as a business over time and some of the ads I just went through a few minutes ago, that's not a large facility for us to very productively redeploy. So I think we have a lot of options that we're going to continue to -- continue to explore. And certainly, there's a great workforce there, and we have the ability to certainly leverage those. Pierce is right up the road in that Wisconsin area that we're located. So we see a lot of opportunities there. And we don't see by the time we get to 2025 that we'll have a fixed cost drag that we're dealing with at that point.

Okay. Any questions from the audience? We're almost up against the half hour. Okay. I guess if you could talk about second quarter a little bit. You're kind of expecting flat sales and earnings sequentially because of the supply chain and all that. Is that a little bit of conservatism because you did mention Access in the first quarter kind of -- supply chain loosened up, is a little better than expected. Are you guys kind of a little bit conservative in terms of that guide with what's going on with the supply chain in terms of your expectations for a little bit loose -- more loose conditions there?

Again, we'll continue to still -- typically, the last month of quarters tend to be pretty big just in terms of -- particularly this time of the year. So certainly, we'll see where we end up. But I would just say, in general, I go back to my earlier comments that I think in general, we've continued to see some slow, steady improvement in supply chain. And I think over time, that should benefit volume as we continue to progress through the year. So we'll -- it's something we'll continue to watch. We're watching those on-time delivery metrics on a daily basis. So -- and again, I think it bodes well as we -- particularly as we get into next year, I think we could be in a -- even versus sitting here today, in an even a much better situation. So I think there continues to be progression there, I'd say.

Okay. Great. With that, I think we'll leave it there. And thank you, Mike, and thank you, Pat, so much for your participation. We really appreciate it.

Great. Thanks a lot, Larry.

Thanks, Larry.