Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Tami Zakaria. I'm the Head of U.S. Machinery, Engineering and Construction Equity Research at JPMorgan. It is my pleasure to introduce Mike Pack, CFO of Oshkosh; and the Head of Investor Relations, Pat Davidson. For those that need an introduction, Oshkosh designs, manufactures and markets fire and emergency vehicles, specialty commercial, and defense vehicles and aerial access equipment. With that, I'll pass it on to you, Mike.

Great. Thanks, Tami, and thanks to everyone for joining us today to talk a little bit about Oshkosh. And we have a lot of exciting things going on in the company. We view ourselves as an industrial technology company. We're driven by innovation and a strong purpose of serving those who do some of the toughest jobs in our communities, whether it's construction workers or firefighters, airport, ground support workers, refuse collectors, soldiers and mail carriers. If you look at our brands, we're typically the #1 brand in all of our marketplaces. So you see the slide Patches pulled up that shows some of our core products, but leading brands in the markets we serve. As an industrial technology company, innovation is our lifeblood. If you look at across our 3 business segments, we have significant innovation projects taking place in all of our segments with a focus on electrification, autonomy and intelligent products, which is really the future. And I think what excites us is in our end markets, we view the whole electrification phenomenon as a long-term growth tailwind for the next decade plus. If you look at a little bit more about our technology, we have over 800 patents, including 250 patents in the electrification space alone. Just looking to our performance. A snapshot. We had a strong finish to last year, finishing at just shy of $10 of EPS. We expect to have another strong this year. Initial guidance was $10.25, but a lot of strong dynamics in each of our businesses. And we see a lot of growth potential over the next several years. Hitting on a couple of the dynamics we're seeing in each one of our segments starting with our largest segment, access equipment, which, as Tami mentioned, is in the aerial work platform and telehandler business. We're seeing very strong demand in that business, particularly in North America. It's really fueled by mega projects as well as this whole phenomenon of industrial onshoring or reshoring. And that's all bolstered by aged fleet. So I think more recently, you may have heard some of our customers who are typically large rental companies as well as smaller rental companies that their fleet ages have been improving a bit. But that's, I think -- to keep in mind, that's their broader fleet. In our product category, we're still seeing aged fleets. And so we see a nice tailwind for the next several years of refreshing the age of those fleets. And we, of course, continue to see strong demand. We entered 2024 fully booked which is a very unique position for the business. Typically, it's a 6- to 9-month backlog business. So to have more than a year of visibility is definitely a change in the industry and is reflective of the strong utilization and demand for the products. We are adding some capacity in this business in Jefferson City, Tennessee. It's repurposing a former defense facility. That capacity will be coming online late in the year. I think what's important about the capacity is, it's a low-cost capacity that's not adding a tremendous amount of fixed cost to our business. And as we look at capacity, we're looking out over the next decade. So we think that's going to be a great opportunity to diversify our workforce have access to more talent in another area of country. So we're excited about that as well. The other thing I want to mention is we see a great opportunity for agricultural telehandlers in the United States. That's something we've been talking a lot about over the last couple of years. And frankly, with our capacity constraints right now, we're selling them as fast as we can produce them, and we certainly believe we'd be selling a lot more if we had more capacity, which is one of the reasons why we're adding capacity. Just jumping to vocational. Vocational is an exciting business for us. It's really the combination of our former Commercial and Fire & Emergency businesses. And more recently, we added our AeroTech So we're now in airport ground support equipment. So we see strong growth and demand in those businesses. We're booking fire trucks out to 2027. So we're full for 2026 now. So we expect to continue to see strong demand in that marketplace. Strong theme around electrification, the refuse collection space. We have a great partnership with Republic where they're buying a number of our fully electric Volterra electric refuse collection vehicles over the next several years. And that's going to be, in general, a place where electrification is going to be a great decade long tailwind for us. As we think of vocational, we expect to see a nice margin progression in that segment. Last year, just shy of 10% adjusted operating margins, expect to be in the 11% range this year and would expect to be 12% plus next year as we -- consistent with what we talked about at the time of the AeroTech acquisition. And we certainly see opportunity to continue to grow the margin in that segment over time. And wrapping up just the defense or the segment scan, our defense business. Defense is going -- undergoing a number of changes right now. The first dynamic is we're going to be winding down our joint like tactical vehicle production by the end of this year, largely by the end of this year for the domestic market. That's about $700 million of revenue in our plan this year. So what's going to happen is we're going to be pretty low for postal from a volume standpoint with our low ramp this year, less than $100 million of revenue. But we expect that in 2025, that ramp up postal, postal revenue will exceed that $700 million of JLTV that's going away, and we expect that to be notably margin accretive. Ultimately, defense is going to look like a different business over the next few years. You'll have a core defense business that, as we reprice some of our core defense programs, margins will return to sort of those high single digits for that core defense business, which is about $1 billion plus of revenue by the time we get to that 2025 to 2026 time frame. And then as we think at postal on top of that, postal's going to be well north of $1 billion at full rate production in 2026. So -- and that -- we expect a good solid margin profile in that as well. So that business is really undergoing a lot of change right now. But I think importantly, we see it as a real tailwind in the next few years. Just quickly touching, before I wrap up and turn it over to questions. Thinking about capital allocation, you'll see we are investing heavily in our business with a new product developed, some facility moves as well as recent M&A activity. M&A will continue to be an important part of our strategy going forward. But importantly, we're focused more on bolt-on type acquisitions. I would say, relatively speaking, our AeroTech acquisition was a bit larger for us, yet still a bolt-on. So I would expect us to remain active over the next several years. But it seems like the sweet spot for a lot of the M&A activity is sort of in that $100 million to $200 million range. So that's -- expect to continue to see that. We do expect that some of our -- we will be starting to lap some of our electrification, other NPD investments as well as facility investments. So I would expect, as we get into 2025, we'll see a pretty meaningful downward trajectory to our CapEx spending with some of the elevated CapEx we've had the last few years. That's going to help free cash flow. So you see a step up on free cash flow this year. I would expect further meaningful shifts as we -- or step ups as we get into 2025 and beyond. So really excited about the outlook for the business. Turn it over to you now, Tami.

Awesome. Thank you so much, Mike. That was very helpful. Let me start with access equipment. There was a chart in one of the slides that showed the average age. Can you elaborate on that? What are you seeing in terms of telematics data out there, utilization rates? Is the grid replacement cycle in access equipment still to come? Or is it already underway? Are we past the peak? The reason I asked that, I think, it's pretty well known. One of the large rental customers came out with a bit of a softer outlook versus your bullish tone. How do you -- how do we, as investors, reconcile the differences in tone?

Yes. So there's a number of dynamics in there. So first of all, just starting with demand and utilization data. So utilization continues to be strong. We're seeing that utilization rates consistent with last year at this time. So that's a good indicator. I think the fact that our customers essentially booked all of 2024 before we got into 2024 was also meaningful. As we look at our customers' demand, so there's -- I think what you need to understand is that there is variation in their fleets that were just one piece of their fleets. And I would say our belief is that the equipment is relatively more aged in our category, and they're seeing relatively higher utilization rates. So to the extent that we've seen some softer CapEx numbers from some customers, we don't believe it's in our equipment space. That's just not what we're seeing. And again, it's tied to that utilization. And I think that just in terms of the timing and just other indicators of the strength, I think with the big drivers, fleet age is still elevated. As I mentioned, it's relatively more elevated, we believe, in other categories. We have some good data and Pat just pulled it up here. But if that optimal range is still in that 50-month range, we're still hovering around that 58 to 60 months. So that's going to take a period of time. Typically, in a year, we would expect that if you just look at over time, about 1/3 of CapEx is -- of our customers is tied more to growth, whereas 2/3 is replacement. Our belief is that's been largely upside down in the last few years. So -- and that's one of the reasons why despite a lot of equipment going into the market, that the fleet age hasn't come down substantially. So our expectation is, is that what we could see over the next couple of years is that, I think, that mix could shift that to more replacement versus growth. But still all signs of a healthy market. And again, it all comes back to those utilization rates, which continue to be very strong.

That's very helpful. So sticking to the same theme, I think one of the most frequently asked questions we get from investors is about capacity expansion across the industry. You've just mentioned you're raising capacity. Some of your competitors have said that. We've heard some -- we've seen some headlines about some Chinese capacity going live in Mexico. So with all of that capacity coming in, usually, when supply goes up, it's not a great set up from a pricing perspective. So how do you think about pricing for the access-driven business going forward? And also related to that, is there actually enough demand to absorb all that new capacity?

So anytime we're looking at capacity just foundationally, we're certainly aware of what others are doing. But as the market leader in our space, we win -- the capacity has come online over time, yet we've maintained and grown our share over time. And we win by innovation, having the best total cost of ownership, reliability of the equipment and ultimately the best aftermarket support in the industry, which ultimately leads to strong resale values of our equipment. So at the end of the day, we're going to continue to focus on our core of out-innovating the competition and delivering on that total cost of ownership. So I think that's foundationally how we look at it. We're looking at capacity over the next decade. I would say that the -- from a capacity standpoint, I think the other piece that -- so the capacity we're adding is really kind of getting us back to where we were prepandemic. We closed a facility in Belgium before the pandemic, and we also closed a facility in Romania during the pandemic. They just happen to not be in the right locations. So this is a great opportunity where you have a largely depreciated facility that was formerly part of our Defense, segment being able to convert over to telehandler production at really less than half of the investment we would normally need to make. So what that means is pretty limited fixed cost drag going forward. It's just not particularly meaningful. Yet we have the capacity. And frankly, if we had that capacity today, we'd be delivering more telehandlers. We're certainly not -- between the ag telehandlers and other demand poles, we could definitely be delivering more telehandlers today if we have that capacity. So that's how we're thinking about it for the long term.

Got it. That's helpful. So at telehandlers, you've been talking about that category for some time now. How would your product and go-to-market strategy differ from some of the existing players out there in the ag telehandlers market? What makes you confident that you can be successful in that category? I think you exited the category in Europe a few years ago. So why get into it now?

So that, as you mentioned with Europe, for the last few decades that telehandlers are predominantly used in an agricultural setting versus skid steers and we see great productivity that a typical farm could be added with the use of a telehandler between the attachments, the stability, the reach. And of course, it's a purpose-built product. So it's a more -- typically a more compact with a lower boom height application for a telehandler. So yes, demand has been strong. The channel is different. It's largely through ag distribution. What we like about it is that early days and early indications are it's not immediately going to be the size of Europe overnight. But as it grows, it can quickly become a $200 million, $300 million addition to revenue in the not-so-distant future. So we think it's going to be a longer-term opportunity to continue to grow, that this is not going to be switch overnight. And again, that -- so that's how we're thinking about it. And again, it's -- this capacity is going to help us really be able to deliver more faster.

That's very helpful. So let's switch to Fire & Emergency. I think we've heard you say in the past that you're booked out through probably the next 2 years, and correct me if I'm wrong. So is it normal for this segment to typically be booked out that far out? And also, along the same lines, how is the pricing expected to be given such strong demand? So any color there?

Yes. So with Fire & Emergency, so it's all part of vocational. So I'll speak to vocational in total, but I'll provide some commentary as well just on the fire piece of it because the dynamic is even a bit more unique there. Right now, demand is very strong. We're booking. So the Fire & Emergency piece is about a bit north of 1/3 of the segment. And it's -- we're booking trucks out into 2027 now, so we're largely booked for 2026. We have -- our price increase has been in the range of 40% since we started doing the more significant increases in 2021. I would say in that journey, by the time we exit this year, we're going to be sort of halfway that price. So we have a lot more price yet that will continue to come. So we expect that, in general, whether it's a fire piece of it, but just the entire business, we see a nice cadence of revenue growth and opportunity continue to grow the top line in the business. I think we've added some capacity in Pierce, Appleton that will give us some incremental benefit this year. We're focused on continuing to grow our supply chain there. We have our Murphy's borough, Tennessee facility that's coming online that's going to be building the electric refuse collection vehicles. We're going to be using that for some fire truck activities as well, namely cat fabrication and some other things over time. So we are getting more capacity. So I think what that's going to enable is strong growth over the next several years. But again, it's not going to be a light switch. From an optimal lead time, I think historically, the lead times in that business have been sort of in that 12- to 14-month range. So we're well outside of that. So there's certainly an opportunity that one of the top focus areas in vocational is throughput and continuing to work the backlog down even while market conditions continue to be very strong and new bookings continue.

Perfect. So staying on vocational. Recently, you acquired AeroTech. So just remind us what kind of sales ramp and margin ramp you expect from that specific segment, let's say, over the next 12 to 24 months?

Yes. So we picked them up at sort of -- we had 5 months of their activity in our results this past year. We expect them to be north of $700 million this year at double-digit margins. So already performing well. It's a business that has strong pricing power, tend to have a backlog there. So I would expect over time that, that business is going to be growing at sort of -- at least a high single-digit rate on the top line, which is the rate at which passenger travel is expected to grow over the next decade. And of course, you add price and so on can be additive to that. And of course, mix can come into play there. But we see nice trajectory for growth over the next several years. And of course, we're just starting on the synergies. We see great opportunity from a purchasing standpoint. I think the ability to pull them onto our raw material contracts as well as many of our other components, see a great opportunity there. Certainly, a lot of overlap in customers and so on because we're already with our airport rescue firefighting vehicles visiting airports frequently. So we just see a great synergy from a sales perspective as we go to market across the globe.

Perfect. So let's move on to Defense. I think you've mentioned the domestic production of JLTVs wind down. And you have a standing guidance for this year. So domestic JLTV winds down. And then NGDV starts ramping up. So between those 2, how should we think about the Defense segment revenues overall, let's say, for 2025?

Sure. So again, it's -- what will have -- so this year, domestic JLTV will be in the neighborhood of $700 million of revenue. What we'd expect -- and next-generation delivery vehicle is going to be less than $100 million. So we're -- we started production now, but it's a slower ramp this year then it's a -- it sort of curves up that as we exit 2025, we'll be at full rate production. So our expectation is that next generation delivery vehicle revenue will exceed JLTV -- the lost JLTV revenue next year. And of course, the margin we expect to be accretive. And then the next step is full rate production will be well north of $1 billion for next-generation delivery vehicles by the time we get to 2026 that -- and then you'd see -- we'd expect to see sort of those full run rate margins in 2026.

Perfect. And just a follow-up. Since NGDV is ramping later throughout this year, is that a margin -- is there a margin implication of that? Should it be margin accretive, dilutive?

So the way to look at NGDV because it's smaller volume this year is we have -- you have a sort of a base of operating costs that this year, the gross margin will be, I believe, positive that with the other costs will be a slight loss. That's the way to think of it this year because it's just not -- we're starting pretty early, and it's going to be a slower ramp. So where you're really going to see the trajectory is next year where that flips and we'll have -- we'll be ramping up towards that full-scale production.

Got it. And this is another question I always get from investors. Why keep NGDV in Defense? Why not group it with vocational? Is it because the NGDV margin is more comparable to Defense or there's some supply chain overlap? But why not make it vocational?

Yes. That's a great question. If you look at the NGDV contract, it's -- it really taps on a core competency of our Defense segment, which is managing very large contracts. So the team that's really developing the production facility and ramping it up is many of the same folks that worked on our JLTV programs and previously in our FMTV programs before that. So it's a core competency of being able to ramp up a large program, and that's why it fits well. While the postal service is not the U.S. government, it's sort of a quasi governmental agency. So there's certainly some contracting nuances that fit well with that business as well, as well as the nature of the revenue being over time revenue recognition and so on. So there's a number of things, but I would say it's really that project management and that ability to manage a large-scale quasi governmental contract.

That's very helpful. I want to ask one more question before opening it up to the audience. Going back to access equipment, what are your latest conversations with national and independent rental customers? Like how are conversations, 12 months out, not necessarily in the next 1 or 2 quarters, how are they planning from a multiyear perspective?

Yes. So we're already -- so again, just reemphasizing, we exited the year essentially booked for -- exited 2023 essentially booked for 2024. So what we're booking currently is for 2025. So we're absolutely having conversations with customers and what their needs are for 2025 to start shaping our production plans and so on. But because it's so early, our expectation is that you're going to see a higher bookings level in the second half of the year versus the first half. And we talked about that on our earnings call that it's -- if you roll back the clock a year ago in the, first quarter, we were still booking -- first quarter of 2023, we were still booking meaningful orders for 2023. So we're ahead in the timing of bookings this year relative, so that creates a little bit of a comp difference year-over-year. And so again, I think that -- and when you start thinking about booking, we -- when someone is booking a piece of equipment, it's -- they need to understand the model, where it's going, all the elements you need in a purchase order. So there's certainly going to be some dialing of I want a few more 80-footer booms versus 60-foot, that type of thing. Or I want it in this location versus that location. So that will continue to develop with our customers. But we're already having those conversations about, in general, how much fleet do you believe you're going to need and that type of thing. So -- to allow us to plan. And again, sitting here today, we don't have a reason to believe that next year is necessarily vastly different than what we're seeing this year from a demand perspective at this point.

Wonderful. Let's open it up to the audience. Any questions in the audience?

So if you guys can talk to any long-term themes under your radar, whether that's mega projects, onshoring, reshoring as well as electrification? And sort of any initiatives that you guys have been taking, in particular, to ride those themes over the long run?

Sure. I would split it, first of all, from a maybe hitting on technology first and then talking a bit about the markets. But from a technology, electrification, connected/intelligent products in autonomy and moments of autonomy, those are the 3 biggest technology themes I would call out in our products. And what's exciting about our product space is, we view these as like decade-long tailwinds that it's not these -- the fleets are going to switch overnight. So this is going to be something that's a continuous new demand driver as we look over the next decade. So I would say that's why we're investing in those projects because we see that long-term growth and margin opportunity with them. In terms of just general themes in the market that we're certainly capitalizing, I think, we talked about the ag telehandler theme and why we're adding a bit of capacity there. I would say, in general, the number of large projects and so on going on, healthy municipal budgets, aged fleets and many of the product categories that we're involved in including fire trucks and refuse collection vehicles, I think those are all general themes out there that give us confidence for the longer term.

Any other questions? So I have one question for you. Can you comment -- I think you just recently made an investment in an AI-powered battery software management company. Tell us about that. Why now? And how do you expect to integrate this into your product offerings?

Sure. One theme that you'll see over the last few years is us making small investments in technology companies. It's really a reflection that there are certain things that it's -- I would almost liken it to a make-buy strategy and with technology that there's a lot of things that our engineering folks can design and make sense, but there are certain things that are not necessarily exactly in our core competency to ours. And I think ultimately -- so we're trying to find those technologies that we can ultimately invest a stake in a company and essentially be able to codevelop some technology that fits well for our products. So in the case of the AI battery technology, if you think about it, it's all about being able to optimize that charge and consumption of energy, which is, again -- enhances battery life, optimizes usage and ultimately can extend ranges and so on. So it's -- I can't tell you exactly when that will be integrated into our products. But there have been a number of smaller investments like that, that we'll engage in development projects and have been quite exciting. A good example is our -- we acquired, about 1.5 years or 2 years ago, CartSeeker, which was a technology that it basically adds autonomy to the -- for side loader refuse collection vehicles to be able to pick -- identify and pick up a can, reduces training time and allows drivers to move quicker. So that's something now that being launched in conjunction with our Volterra electric fire -- or excuse me, refuse collection vehicles. So you'll see that these technologies, as we're launching new products, will be slowly integrated into them.

Staying on the M&A theme, what's the plan going forward? Are there any specific end markets you're interested in? Or -- is there any parts within your business that you think may not be relevant going forward and you may want to divest?

First of all, on the divestiture front, we're -- we did divest a few businesses over the last couple of years, rear discharge concrete mixer, we had a smaller snow business. So businesses that really do not fit the technology theme where we don't see the adaptation of technology and the growth, those would be businesses that we would look at whether there is a better owner. So we're continually looking at our portfolio, and we'll continue to take actions that we see situations where someone else could be another owner. But in terms of M&A, I would say we're highly, again, focused on more bolt-on type acquisitions. So those that we're really leveraging our free cash flow to generate -- excuse me, to finance them without -- because again, we're targeting a 2x or less leverage ratio. In terms of spaces that we're looking at, certainly, the airport ground support market is a bit fragmented when you get outside the United States. There could be opportunities in that space. You look at specialty -- near adjacent specialty equipment manufacturers like Hinowa was to JLG, and we acquired them, of course, last year. So specialty equipment that may be tied to access but maybe not necessarily have quite the same construction site goals, that's certainly interesting. And in general, in the aftermarket and life cycle support, I think we view that we have opportunities to continue to grow in that space. And certainly, sometimes, M&A can help with that. So I would say those are sort of the 3 areas.

Great. I think we have time for maybe one more question. Is there anyone in the audience with a question? Okay. So let me pose the last question. Actually, last 2 questions. One is supply chain. Is it back to normal? Where are you now in terms of on-time delivery and such? And then the next question, last question, which is the 2025 targets. How relevant are they? If not, when can we expect an update?

So first of all, supply chain. Supply chain has continued to show some improvement, though not back to normal levels, I would say, on-time deliveries more in that 85% range, whereas north of 90% would have been typical. But what I would say is that's not our constraint this year. Our constraint is more physical capacity constant, namely at access. We've sort of managed through now that we're -- you're sort of close enough that you can manage some of that difference from norm just by safety stock. So I would say continued progress, but it's not something that we're banking on that to the extent that if supply chain is pristine, you could see some upside opportunity from a volume standpoint this year. So I think that's number one. In terms of Investor Day targets, I would say what continues to be very relevant is -- and John Pfeifer, our CEO, talked about it on our last earnings call that the 11 to 13 EPS range remains very relevant. We remain committed to the targets. If you think about our guide this year coming out of the gate at 10.25, what's the difference between 10.25 and that 11 to 13. I would say the dynamics we talked about in Defense as we go from '24 to '25 continued growth and pricing at vocational are 2 of the bigger drivers that I would point to that really are going to be the drivers of that next push towards it. So very relevant, and we remain committed to them.

Perfect. I think we're out of time. Thank you so much, Mike and Pat.

Thanks.