Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

We will move onto our next presentation. Welcome to the 45th Annual Raymond James Institutional Investor Conference. We thank you for being here. I'm Brian Alexander. I'm the Head of Research at Raymond James. I'm not an industrials analyst, I'm not a machinery analyst, and you should all be thankful for that. We do have a new analyst joining us in April. His name is Tim Thein. You might have recognized him from another firm, and he's on garden leave. So I'm pinch-hitting, and it's my pleasure to introduce Oshkosh. We've got Mike Pack, CFO, who's going to present for about 15, 20 minutes. We'll move to Q&A and Pat Davidson, Senior VP of IR here as well. So, with that, I'll turn it over to Mike.

Great. Well, welcome, everyone. I'm glad to see so many faces here and appreciate everyone's interest in Oshkosh Corporation. So Oshkosh Corporation is -- we view ourselves as an industrial technology company, driven by innovation and a strong purpose of serving everyday heroes in our community, whether it's firefighters, construction workers who work at great height on a daily basis, refuse collection, professionals or mail carriers and now more recently, those individuals that take care of our airports with ground support. Our products, we're highly focused on building purpose-built vehicles. And as I said, innovation is truly the lifeblood of our company. Sorry, I'm going to close this. I could hear him better than I could hear myself. So innovation is our lifeblood, and we have electrification, autonomy and intelligent products, key new product development initiatives going on in all of our 3 business segments. I'll talk a little bit about those as I get further into the presentation as I cover our segments. And just to demonstrate the level of technology we have in the company, we have over 800 patents that are active today, and we have over 250 in the electrification space alone. If you look at our business, we're in a time of very strong market dynamics across all of our businesses. We're also been -- we've also been bolstering the company through programmatic M&A. We have a strong new product development pipeline and a record $16.8 billion backlog in our company. So all these things really have us converging on a path of accelerated growth. If you look at where we finished, we had a very strong 2023, finishing at -- with our -- the fourth quarter with our revenue up in the quarter by 13%. Our EPS was up by 57% to $2.56. And that's all in the heels of a very strong year, where we delivered $9.98 of adjusted EPS over $6 ahead of where we were in 2022. And that's just the beginning because as we look at 2024, we see strong dynamics continuing into 2024. Our initial guidance for the year is over -- about $10.4 billion of revenue, growth of nearly 10% in our operating income and adjusted earnings per share expectation in the range of $10.25, so solid growth. What I thought I'd do next is hit on the dynamics on each of our 3 segments because each has some really exciting developments and -- but in some cases, a bit unique to each other. So starting with Access. Access is our largest segment. The brand that's most familiar to folks is JLG. It's -- we make aerial work platforms for people working at great height as well as telehandlers and a number of other products for working at height. If you look at Access, we're seeing very strong demand dynamics in that business, and it's really being fueled by a few key factors. First of all, there's aged fleets. And our customers are primarily rental companies. So they're focused on refreshing those fleet ages. We see strong demand tailwinds driven by the industrialization or reindustrialization or onshoring that's taking place throughout the country. In fact, if you look at the level of industrial onshoring, we have 3 projects as a company alone. You look at these industrial projects, there's a lot of JLG equipment at them, and we're certainly not alone. There's a large number of mega projects that are taking place throughout the country. And where this has really read through for us is giving us unprecedented visibility in our Access Equipment business. Historically, our Access Equipment business will operate with like a 6- to 9-month backlog. So the unique aspect right now is we just exited 2023, and we are essentially booked for 2024. So we have 12- to 15-month backlogs that we're operating with, which is just a very different scenario, which allows us to plan, and it's certainly exciting. We're continuing to see growth opportunities in that business. We've talked a lot about the move into agricultural telehandlers as a growth opportunity. They've been using agricultural telehandlers and -- in Europe for many decades, and now we're really seeing the opportunity to grow that in North America. And we're also adding some capacity in that in our Access business in Jefferson City, Tennessee, that will help out with the telehandler capacity over the long term. Switching to our Vocational segment, we're really excited about our Vocational segment. We're in a strong growth mode. There's really 3 key businesses that are the largest pieces of it. Over 1/3 of the business is fire trucks. Our fire truck business is we're booking -- okay. About 1/3 of the Vocational Segment is our fire truck business, namely our Pierce's fire truck business. We're booking fire trucks out into 2027 now. So we're seeing very strong demand dynamics in that business. Other large business we have is -- in the refuse collection space with our McNeilus brand refuse collection vehicles. And more recently, we joined the airport support -- ground support equipment industry with our acquisition of JBT's AeroTech business, which is going to contribute about $700-plus million of revenue and double-digit margins for our business in 2024. So a lot of excitement taking place in Vocational. All the businesses in Vocational have significant electrification initiatives. We have our Volterra fully integrated electric refuse collection vehicles. You've heard -- you've seen perhaps a bit of press about that Republic Services, one of the largest waste collection providers in the United States has a -- is buying 50 of those in 2024 alone. So they're already -- they already have a few of those prototypes out in the street. We're very excited about the electrification and that great use case in refuse collection. We have electric fire trucks and RF trucks as well. Those are -- RF trucks are airport rescue firefighting vehicles. So what we see with electrification in Vocational is it's not going to be overnight. We don't expect to see 90% of fleets electrified by 2030. But what we see is this is a very long-term dynamic tailwind for this business. So a lot of excitement there. And again, the AeroTech acquisition, we've now had that business since August 1, seeing great opportunities for synergy, not only on the cost side from a materials perspective but also from an engineering collaboration perspective, a lot of the same electrification and connected product focus areas that they've had and that we've had. We're able to join forces on those and not duplicate efforts. Switching to our Defense segment. Our Defense segment is a very dynamic -- in a dynamic time at this point. Historically, we've been in the tactical vehicle business. It comprised our $2-plus billion of revenue in the business. We are going through a transition. So one of our larger programs, the joint light tactical vehicle program, domestic production will be winding up (sic) [ winding down ] by the end of this year in 2024. What did I say? Thank you. Thanks, Pat. Winding down. So then that will be transitioning out. We'll still be delivering a number of international units over time in that business. If you look at our other programs, we still have a number of other core programs in what we call our core Defense business. We expect that core Defense business to still be $1 billion plus of revenue at sort of high single-digit operating margins over time beyond the joint light tactical vehicle program. The same time as JLTV is winding down, there is a ramp-up patch. That ramp-up is the next-generation delivery vehicle for the Postal Service. So it's a great program. We're going to be delivering up to 165,000 units to the Postal Service. We're going to start at low quantities this year. So it's really not going to drive revenue and profitability this year. We're going to see a very steep ramp-up as we move into 2025. And as we exit 2025, we're going to be at full rate production, delivering over 15,000 units a year and well north of $1 billion of revenue. So the way to think about Defense is you have $700 million, $800 million of JLTV revenue that will be sort of wrapping up at the end of this year, and then we had this well north of $1 billion revenue, a pulse that will start ramping up at scale in 2025 and continue to grow into 2026. The great thing is, as we move into last-mile delivery, we see other opportunities in that space. And of course, we expect that the margin profile of last-mile deliveries will be stronger than our tactical wheeled vehicles. Just a couple of other items to hit on before we move to Q&A. I thought I'd touch on capital allocation. We have a strong balance sheet. We view ourselves as programmatic acquirers. This is on the heels of a period of time where the company had not been particularly acquisitive for more than a decade. We've done a number of acquisitions over the last few years. Most notably, this past year, we deployed about $1 billion of capital to the combination of AeroTech and Hanwha. I talked a bit about AeroTech already. Hanwha is a nice specialty equipment business based out of Italy. That's a part of our Access Equipment business that's been a long-time partner with them. Pat has a slide up here that shows a bit of the history of some of the M&A activity that we've had taken place. So I would say, it's also important to note that we've continued to take a hard look at our portfolio. And those businesses that can't contribute strong double-digit margins over time, we have divested of those. And particularly, you look at businesses where they don't value technology to the same level as some of our core markets, those are areas that you might have seen us take some action. And we'll continue to look at our portfolio of companies as we do over time. Also from a balance sheet perspective, and we do expect to -- or from a capital allocation perspective, we have been -- continue to grow our dividend. We've done that for the 10 straight years at a double-digit percentage, really to give indication that we expect to be a strong cash flow generator over time. That demonstrates our confidence in that. We do expect to deploy about 65% to 75% of our capital to growth-oriented initiatives. So that would be your internal research and development and organic growth opportunities as well as M&A. Importantly, though, we expect to continue to have a solid balance of returns to shareholders with dividends and share repurchases comprising about 25% to 35% of our -- the capital that we'll allocate. And certainly, in years that were more acquisitive like this past year, you'd expect less buyback activity. But our targeted leverage ratio is 2x or less, and we're well under our targeted leverage ratio, which means we certainly have capacity to still be buyers of our stock. I guess that final thought, we do expect to be a strong cash generator this year that we're going to see a nice step-up from last year. I will say that our CapEx with some of our organic growth initiatives has been a bit higher the last couple of years with our postal plant capacity expansion at our Jefferson City, Tennessee facility for telehandlers for JLG as well as our new plant in Murfreesboro, Tennessee, which will be used to produce a combination of some fire trucks and related components as well as our electric refuse collection vehicles. So expect to have another higher CapEx here at about $300 million this year, which is as well ahead of maintenance CapEx, we should see a step down in that as we get into 2025. So with that, I very much appreciate the opportunity to share a bit about us Oshkosh, and we can open it up to Q&A.

Thanks, Mike and great job handling the presentation without slides for a few minutes, that was...

No problem. I had no idea what was going on but...

So maybe just picking up on the portfolio changes, Hanwha, you talked about AeroTech. You divested your snow and rear discharge concrete mixer businesses. So when you think about the portfolio going forward, are you at an optimized level? How do you think about the portfolio? Any major changes that you think you still need to make going forward?

No. We like the mix of our businesses right now. Again, we're going to continue to always look at those businesses. But we do expect to be programmatic acquirers as we move forward in the future. We have an always-on M&A approach. So I would anticipate you'll continue to see bolt-on acquisitions. I would say our AeroTech acquisition at around $800 million was a bit higher in value than some of the others. Still -- we still view it as a bolt-on but probably a little bit bigger on the end of the scale. But we see opportunities in the airport ground support market. We entered that with AeroTech. It's fairly fragmented outside the United States. So there could be some roll-up opportunity in that space. Certainly, we have interest in increasing our life cycle and aftermarket services opportunities, maybe some opportunities there as well over time. See us in the specialty equipment area at Access with our Hanwha acquisition. So as we look at specialty equipment, we see it as an opportunity that may have a bit different cycle dynamics than pure construction in Access that it can help as you go through construction cycles. So a few areas that you could certainly see. We've done some acquisitions or investments in the technology space as well. So there could be some opportunities there as well. So we'll continue to look but the goal is to make smart moves and continue to look at whether we're the best owner for some of our core businesses as well.

How should investors think about the cyclicality of the overall business and whether any of your segments kind of naturally counterbalance each other over a cycle?

Yes. So I think, ultimately, if you look at Defense, we talked about sort of the core Defense business being $1 billion plus, and then you add in postal. We'll be repricing a number of the contracts there. So I would expect a meaningfully higher margin profile there. So in general, that there will be a good solid foundation for the business. Going forward, I think it -- again, not particularly cyclical. If you switch to our Vocational segment, Vocational, not particularly cyclical, we're booking fire trucks out into 2027. So we see good solid stability there. And in Access, which is our business that tends to be a bit more cyclical, we've been highly focused on really optimizing that portfolio to ultimately be able to -- and I would add into there as well our agricultural telehandlers, that we see there's an opportunity to continue to deliver stronger margins throughout the cycle there.

Can you talk about the competitive and market share dynamic right now in work platforms business? The market is growing strong, as you say. So are you -- what does that mean for pricing? And are you growing faster than the market?

Sure. Yes. From a -- we remain the market leader for aerial work platforms. So we're seeing -- continuing to see strong demand there. Certainly, we've had significant price increases to combat inflation, and we're at -- we're delivering very strong margins there, expect to do so. Again, this year, that's indicative of strong pricing discipline. From a demand perspective, I think the one place that we probably have seen a bit of share decline is in the telehandler space, and that's frankly why we're adding some capacity. We're typically the first call market leader for equipment. And frankly, if we had a bit more telehandler capacity, we'd be delivering more of them. So that's one of the reasons we're adding a bit of capacity, strong overall dynamics.

Hopefully, I can squeeze in two. The first, just building on the Access question. So you guys have a strong position in that business. But when I think of selling into kind of a rental market, that sounds kind of a tough business to me. So kind of can you talk about how you've established a strong position in what I kind of would view it -- would be a tough market dynamic.

So I would say that our rental company customers are -- have been great customers. They have -- I think they're providing us -- we have better access to -- or better visibility. I think ultimately, we're delivering strong margins and seeing the growth. But one of the areas that, again, with that, certainly, it's less about the rental companies and more about market dynamics that if you have slowing market conditions, that can create cyclicality. So our focus for the businesses, as I've mentioned earlier, that we can -- when volumes are lower, if you're -- if we're selling into more specialty equipment applications, selling more into repair maintenance applications as well as now we're expanding our telehandlers for North America into telehandlers for agricultural and applications and with that different cycle than construction and really a different end customer. So to the extent that we continue to focus on these areas, I think the [long and short] is we see an opportunity to deliver double-digit margins throughout a cycle even at the trough. And I think that's -- a lot of the things we're doing is really to focus on that resiliency throughout the cycle.

And second, if I could, you talked about margin targets. Do you have -- when you're requiring do you have ROE hurdles as well do you think about?

Yes. We're -- typically, as we're looking at M&A, we're looking at ROIC is that over a 3- to 5-year horizon that we're in the sort of the mid- to high teens as a baseline.

As Pat has taught us over the years, you're a relatively capital-intensive business. And you've had a recent period in which you've had to invest in new product development and so on and so forth. Can you talk about capital requirements going forward, aside from some of the capacity expansions that you're doing to increase telehandler capacity and so forth? And why you're actually going about increasing telehandler capacity, for example, or it might it not be better to keep the market tighter for longer?

Sure. First of all, just from a capital intensity, if you actually go back over the last decade, we -- at a time when our maintenance CapEx was probably $100 million or slightly less, we were typically only investing a bit north of $100 million for quite a while. I think the last 3 years has definitely been -- different in that, and it's really these capacity additions. So that's why you saw last year, $325 million a year, nearly $300 million 2 years ago in 2022 and this year is going to be around $300 million. I would expect going forward that we should -- I'm not saying we're going to step down to maintenance CapEx, which is probably in that $130 million-$140 million range now that I do think that we'll see it step down meaningfully as we go to 2025. In terms of the capacity expansion at Access, I think it's a good opportunity to clarify. So number one, we're the market leader, and we're not going to concede share to others. And frankly, we've not been able to meet our customers' needs based on what they want from us. So I think that's one reason. Number two, the capacity we're adding is quite economical in the grand scheme of things. The reason being is we're really converting an old -- it's not an old -- it's a former Defense facility that's actually a very nice facility in Jefferson City, Tennessee, so largely depreciated. We're converting that over to telehandler production and actual investment we're having to do to get that capacity is fairly minimal. So it's not adding an extraordinary amount of fixed cost to the business going forward. We also talked about ag telehandlers. Right now, as we've launched those ag telehandler models, we're selling them as fast as we can produce some. We need to produce more of them, and we'll see more demand there. So there's a few dynamics. I think the other important note is we did trim capacity during the pandemic, if you look at it on a global basis, we shuttered our Romania facility, which is just not in the optimal location. So we lost capacity there. We also lost some capacity in Belgium prior to the pandemic. So if you look at it over history, we're not necessarily going to end up being higher than where we've been historically.

I'm curious with the loss of the JLTV contract, if that has changed the long-term strategic emphasis of Defense. I know you have postal lumped into Defense, but it's obviously different than building tactical wheeled vehicles. How has that perhaps changed the long-term positioning of Defense for you?

Yes. I would say, in general, if you look at that core Defense business that's left, it's going to be a smaller business but more resilient. So I think focusing on continuing to deliver those core products, which ultimately, we have the investments in place. We expect better margins, strong return on invested capital on it. I think we're strategically looking at some adjacencies within defense. You look at the robotic combat vehicle. You look at our Stryker MCWS program. So there's some programs that start getting into the combat space where there tend to have better margins where we can compete well. So I think ultimately, that's a focus. It's -- run it well as a smaller business, deliver stronger margins and compete in places that makes sense. And of course, with last-mile delivery, we see a huge opportunity there, not only with the Postal Service, but also with other customers over time.

How significant do you think the learning curve is on the post office contract and not just the EV side but on the ICE side as well?

From a learning curve perspective, I think ultimately, we've been delivering vehicles that go over the road for many decades. So we're familiar with the homologation process. A number of our engineers have also -- have automotive backgrounds, including our Chief Technology Officer has been -- a number of large automotive OEMs as well as other equipment manufacturers. So we feel very good about the -- about where we're at on the program. We've been through largely all the testing. We have prototypes that are out in the field, and we're ramping up production. The facility is, again, what Don Bent one of our longtime great employees who also set up our JLTV facility set up that facility there as well. So we feel as though we're well positioned, and we'll hit the ground running. I think that the other piece of it, too, is there's a -- the way the program steps up, you're at pretty low-rate production really to match our customers' needs in fielding the units, but then it ramps up fairly quickly in 2025. So we're not at full rate production immediately. There's sort of an 18-month ramp-up period of time, too. So that certainly always derisks a ramp-up.

And Fire, you talked about having trucks out to 2027.

Yes.

I heard competitors, peers talk about, hey, pricing is up 35% to 40% versus pre-COVID, how much visibility does that give you to margin expansion there?

Yes. I would say that if you look at Vocational in general, the -- historically, the fire business has been sort of a mid-teens business leading into the pandemic, that there is strong pricing there. You see a nice step-up with the benefit of pricing coming through this year. We were at just shy of 10% operating margin last year. We expect to be in the range of 11% this year. I would expect in 2025 consistent with what we talked about at the point of the AeroTech acquisition that we'd be at 12-plus. And so -- and we see further growth opportunity from there. So we expect that the margins are going to continue to expand. And in the long term, we view that Vocational really will have our best through-cycle margins of all of our businesses.

Mike, maybe just close with -- when you talk to investors and analysts, what do you think are the least appreciated or least understood parts of the story that you want to convey?

Sure. Yes. I think ultimately, the amount of technology that we're launching and the leadership that -- I think there's a reason why you see us as at the #1 share positions and a lot of our products were not -- our products aren't -- that we sell and manufacture aren't commodities, that technology, that after-sales support are critical. I think the great dynamics we have in Vocational that being a long-term growth story with great secular tailwinds. The ramp-up of the postal contract and just the transition of Defense is going to be a strong growth and margin start over the next few years and Access is continuing to deliver. So in summary, I think that the business has a great future ahead of it.

Well, thank you very much. There is a breakout session downstairs. Appreciate it.