Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

So for those of you that don't know me, I'm Nicole DeBlase. I cover Multi-industry Electrical Equipment and Machinery Group here at DB. So next up, we have Oshkosh. Very pleased to introduce John Verich, who is Treasurer and SVP of Corporate Development. John has been with Oshkosh for over 20 years and in his current role for 2 years. For those who don't know, John. And then we also have who everyone knows, Pat Davis.

Davidson.

Been a long day. I've only known you for what, 15 years now.

The cold weather in Wisconsin, which we appreciate.

That's right. That's right. We drove JLTV. That was fun. So I think did you guys want to make a few opening remarks before we get started.

Yes, we could.

And then we'll go ahead and dive into the fireside chat from there.

All right. So we do have the forward-looking statement that was up there a minute ago. Of course, everything we say might change a little bit, but we're going to do our best to be as sort of clear and transparent as possible. Thanks for having us today. Those of you listening on the web, we do have some slides on our website. So we've got a lot of technology woven throughout our businesses. You can see the kind of key points here that we look to favorable market dynamics I think, a strong and resilient business that can perform in strong periods. And when there's challenges, programmatic M&A is something that has come in with our CEO John Pfeifer over the last several years. And John Verich here with me today will probably talk a little bit about that. We did announce a Bolton acquisition 2 weeks ago, part of our Access segment. It's a Spanish company called AUSA. They make some rough train forklifts, some dumpers and some smaller telehandlers that complement our product line. But just to give you a little bit of background on us, we've got strong and #1 position with our different brands and our products across the board. This is kind of a fun slide here, a broad range of end markets, right? We've got communications, construction, fire emergency, defense. And in all these sort of rough tough applications for our equipment and supporting the people that do the work that's most challenging. And if we can get them home safely, whether it's a construction work or whether it's a troops out on the battlefield, whether its someone collecting garbage which is fairly dangerous suppression. We want to make sure that our equipment is there, ready to go and provides them with the uptime and the quality and reliability that they need. So that said, there is a little bit of a highlight with AUSA. I would say we did report a strong first quarter and raised our guidance. With that as a backdrop, it's probably a good idea to turn it over to Nicole for the Q&A.

All right. Yes, let's do it. So maybe let's just start with, John, you're attending today because it was a bit of a surprise. Mike Pack, who's Oshkosh's CFO, is transitioning to a new role leading vocational, I guess, maybe can you guys give us some color on that decision and why Mike has decided to take on this new role?

Absolutely. So Mike spent about 8 years with the prior segment, it was Fire & Emergency, which kind of forms the heart of our Vocational segment. Mike was the Vice President of Finance there. Back when he took the role, he was -- the margins were kind of 1% to 2%. They're very low. And they took on the sort of 80%-20% simplification approach. And over time, instilled a lot of discipline and kind of drove the business towards much higher margins, really low teens, probably 14%, 15% by the time Mike became our CFO. So it's that success that he had with the Fire & Emergency segment that allowed him to become our CFO. He's very driven. He is very -- is kind of an operations pusher, if you will, very -- I guess I'd say a motor head. He's done in the shop floor a lot, and he knows the people in the segment. He's got a very good reputation with them and it's no secret that he was always a strong successor for that position. So Jim Johnson did great job for us, retiring at the end of June. Mike will take over. There is a search has been initiated for his successor, could be somebody internal, could be somebody external. It probably feels a little more like it will be external, but we want to make sure we get the right person for the role.

Okay. And in the meantime, Mike is still going to fill in as CFO.

Yes. Yes. In fact, John and I were just talking with them before we came here yesterday. He's very strong management by walking around right and very active things. So I think that will be very effective in that vocational role.

Okay. And you're talking about how he's like a real pusher with margins when he is running or within Fire & Emergency, do we kind of read that as there's a lot of margin opportunity within vocational, and that's perhaps why he was the guy to take that role?

I would say that, yes, there is great opportunity there. And we know with our throughput. We're looking to increase that. We've got a strong backlog with a lot of pricing in it. We certainly during the kind of early days of COVID and following in '21 and early '22 when inflation was very elevated. We raised prices and there's a lot of that pricing is in the backlog and kind of working its way through. But anything that we can do to increase the velocity that it flows through, frankly, will be part of our performance. So kind of better performance faster.

Okay. Okay. Makes sense. We'll return to vocational a little bit later. I want to talk about Access first. So I guess, where do you guys think we are in the equipment rental CapEx cycle? Like are we -- I hear a lot of concern from investors.

I might ask you that same question, where are we right?

At last you are right. Get them here. I guess the concern is we're nearing a peak but you've got all the stimulus activity that's maybe still kind of ramping into next year. So I guess like if you guys were to look at your own analysis of replacement or what you're hearing from your customers, are there any signs of slowing or still really good?

So demand is very strong. It was maybe [indiscernible] a year ago. It's still very strong today. So in relative terms, has it come down? Yes, it has a bit. As we and other OEs are delivering equipment. But we're not seeing any signs of de-fleeting. We're not seeing any of the indications that would say, hey, there's some kind of weakness there. Again, I think we're seeing more normal kind of environment, more normalizing. We were, I think, very direct on our earnings call, we talked about orders where we expected lower orders in the first half and really the first probably 3 quarters of '24 because basically, '24 is already in backlog for Access, right? So if we look at '25, we expect really probably the fourth quarter when we -- when those orders start to flow through. So for everybody listening today or everybody in the room. We do expect lower orders in the June quarter and September quarter but that's because '24 is already in the books and '25 is what our customers are looking at. I would say we're biased positive. When we look at '25, it's too early to call and we're not guiding yet. However, could it be up a little bit? Could it be down a little bit? It doesn't feel like it would be extreme either up or down. And we're certainly going to manage the business to drive good performance as best we can.

Okay. And part of that order pattern is kind of just returning to normal seasonality?

Right. Normal seasonality. Generally, December and March tend to be the book-to-bill ratio. Quarters greater than 1. June and September, generally, we're shipping a lot, not taking a lot of orders, those book-to-bill ratios are lower than one.

Sure. Okay. Got it. Let's talk about capacity in the industry. This is another concern I hear from investors quite a bit is several Access industry participants are in the process of adding capacity, and you guys are doing some of that as well. I guess we've heard concerns could this be happening at peak. Could it put pressure on industry pricing? Doesn't have the potential to kind of create challenges in the years to come. What -- I'm sure you guys get that question a lot, like what's your response?

So our brands, JLG and SkyTrak are, frankly, the strongest brands in North America. And demand is stronger than supply, everything we make, we can sell, right? So we are in the purpose of repurposing a facility in Jefferson City, Tennessee. It has been doing defense, weldments and fabrications where take the Defense segment is moving out of that facility, and it's going to be doing a telehandler manufacturing. And at some point in time, there will be a cycle, right? We will see some weakness. But when we're looking out over the next 5 and 10 years, we know the telehandler capacity will be higher. Demand will be higher, and we want to be the ones to supply that. So we get a look at virtually every deal that's out there. And again, with our strong brands, we want to make sure that we're strong in the marketplace and earn and retain a fair share and then some.

Okay. And I guess same question with the contract that you guys have with Caterpillar that's expiring at the end of this year. I think the question is around what's going to happen with that. We feel that with that capacity, if it were to come out, you could fill that way?

We can utilize that capacity for JLG or Skytrak brand telehandlers.

Not a problem to selling the unit. Okay. Got it. Perfect. So also, as you talk to access customers, are you seeing any discernible difference in the level of demand for NRCs versus IRCs, like anything interesting happening from a mix perspective?

Yes. Good question. It's really strong across the Board. Both independents and national rental companies. In fact, we mentioned on our first quarter earnings call that one of the national rental companies kind of getting to your comment and ours on normal seasonality coming in. They had some orders that were expected to be delivered in February, March, and they said, "we really want these in the spring when we can put them to work" so that they're not kind of sitting around in the winter time, not being put to good use. So that did create frankly a situation where there was greater shipments for independent rentals in Q1. We expect that to kind of reverse here in the second quarter. And generally, the second and third quarters tend to be a little higher for national rental company shipments versus independent. But across the Board, the independents are strong as are the nationals in terms of equipment and what they're looking for.

Okay. Okay. Got it. The one weak spot in Access has been Europe. I guess, are you guys seeing signs of a bottom or any signs of green shoots there or still kind of weak?

Yes. With Europe, you're correct. North America has been strong. Europe has been a little bit soft. I don't know that it's getting softer, but it's been soft for a little while now. John do you have any thoughts on with AUSA, the acquisition there. I think their business in Hinowa that Northern Italy there, I think both of them have had fairly strong domestic demand.

Certainly, a little softness in Europe, but what we like about the acquisition is the opportunity we have here in North America to leverage our existing distribution channel and really amplify their sales that they've done in the U.S. historically by leveraging our channel.

And I guess as you brought it up, I wanted to talk about AUSA, like what attracted you to the business? And I guess, like from the product perspective, what are they bringing to the portfolio?

Yes. So part of our strategy for access is to continue to diversify the portfolio. And number one, that helps us build resilience into the business because as we all know, there are some ups and downs in the traditional AWP and telehandler business. So what we're going to do is really expand into a couple of different areas. One is agriculture, leveraging our products in that space but also specialty applications, specialty construction equipment, specialty vocational applications such as vegetation management and things like that. When you look at both Hinowa and AUSA, they really fit that specialty equipment category. And when you line up all of their products together, they complement each other. And when you line them up against JLG's existing products, they also complement those. So it really gives us the opportunity to further expand our product offering. And again, number one, leverage that distribution channel back here in the U.S.

Because they don't have a ton of sales in the U.S., right?

Right.

Right.

Okay. Got it. And then I know it's really small for you guys, but anything on what you're seeing in China?

China for us is an Access market. About the same as it has been. It's kind of bifurcated. You've got locally made generally lower price, lower feature versus some of the Western brands that come in higher quality, higher reliabilities. So we have a very strong facility in Tianjin, China that supplies some of our international markets. But for us, in terms of sales in the Chinese AWP market, no real changes.

Okay. Okay. Margins in Access were really strong in the first quarter, 17%. But you guys have embedded sequential margin contraction during the rest of the year in your guidance. I guess can we just talk through, could that be maybe some Oshkosh conservatism versus the factors driving a step down from the 1Q performance?

So I mentioned the national rental company and independent rental company mix. That was a big contributor to a really a very strong Q1. So as that reverses, we'll feel a little bit of that in the second quarter. That's a little bit of a drag. I would say that we are increasing our new product development spend and that impacts the margin in the second, third and fourth quarters. And there's one other driver here losing that train of thought a little bit on it. Those are 2 of the big ones, I think, really the NRC/IRC mix.

Price cost not, right?

Price cost is positive. We've had some benefits from freight. Price cost itself is kind of neutral to probably slightly positive.

For the full year.

Yes.

Each quarter.

Yes.

Did you cover NPD spending?

I, did. Yes.

I don't know what we're forgetting it. It does seem like the big one.

Yes, I thought there was one more, if I can remember it before the end.

We'll come back to it. Okay. Let's maybe talk about Defense for a little bit. So maybe you could refresh us on the path of JLTV ramping down versus the NGDV ramping up. And I guess, like what is the impact from a revenue perspective as we look at like '24 versus '25?

Sure. So JLTV, Joint Light Tactical Vehicle. This is a program that we won back in 2015. We always knew it would be recompeted. We did not win the recompete. And to have won it, we basically would have either lost money may be broken even. So it's not an attractive program for us. As we exit that here in '24, the revenue in '24, we're expecting somewhere a little more than $700 million contribution from that. The Next-generation Delivery Vehicle or NGDV, and we'll talk a lot about that, I'm sure, from -- for the U.S. Postal Service, that will be ramping from quarter 1, 2, 3 and 4 in 2025. So it should be a little north of $700 million, so it actually should kind of fill that hole a bit. So kind of really nicely. And at a little stronger margin.

Yes, I was going to say, does that help the margin met?

Yes. A little higher margin for the NGDV. NGDV into 2026, frankly, should be -- we're looking at more than $1 billion in that year and a little bit higher margin as well.

And that's where you'll be at run rate, right?

Yes. Yes.

Okay. Got it. And just maybe stepping back and thinking about the margins within Defense, they've been low for a few years now. You've had a lot of these annoying cumulative contract adjustment. Do you guys see, if you kind of look out over many years -- a path back to like a high single-digit margin within Defense?

Yes, we do. We really do. So with 2024, where we are now. There are some tactical wheeled vehicle contracts that we won before the inflation of the pandemic, right? And they don't have robust EPAs. And we're kind of living with higher input costs but fixed prices. And a lot of Defense companies have had that issue, right, where contracts that were many years in duration, but didn't have the assumptions of much higher inflation that came following the pandemic. So -- these -- the contracts, FMTV and FHTV were working with the DoD now and hope the next probably 1 year, 1.5 years or so, we expect those to be completed. And we should start to see some improved performance on the margin side in the back half of '25 and then continue more so in '26 when both programs have new contracts with I think a little more effective economic price adjustments as well as pricing that's built off of current costs, not costs from 2019 with older expectations.

Right. Yes, that makes sense. And you guys are like there's no risk of losing FMTV? FHTV?

We're negotiating with them right now for sole source. We've -- FMTV2 is one that we supply. In the future, things could change. But over the next time horizon next 3, 4 years, it's -- it will be a sole source contract with us.

Okay. Okay. Perfect. And then I guess any other major developments that you'd highlight with Defense programs. I know that you've been talking about wanting to get into more like the combat part of DoD. What's the status of that like any new developments?

Yes. So there is a program called Robotic Combat Vehicle. And we're one of the finalists there. I believe there's 4 and there's going to be a down select in the next, I believe, 6 to 9 months or so, give or take a little bit, where they will down select it 2 and eventually it will become a winner. That's several years out until it's revenue, probably '26, '27 time frame in there. I could find out the exact date, if anybody is interested. I just don't recall right now, program that could be kind of $1 billion, maybe $1.5 billion depending on where the quantity is going. That would be over several years but it's a nice contract and would leverage some of the strengths we have with our Pratt Miller subsidiary, which is part of our Defense segment.

Right. And isn't the idea that some of these combat programs would probably come with higher margin as well?

Yes. Yes. Tactical wheeled vehicles generally have been lower margin and the military DoD is kind of focused in some other areas in terms of funding. And that's where there's better revenue opportunities as well as better margin opportunities.

Okay. Okay. Got it. And then Last Mile, so now that you've gotten in with the USPS and produced this amazing vehicle that they're excited about. How big of an opportunity could Last Mile be? And how focused are you guys on that relative to what you're doing with DoD?

Yes. So Last Mile Delivery very attractive. Of course, we need to make sure we execute the U.S. Postal next-generation delivery vehicle or NGDV. We have been ramping that very slow. We're building this year units. We have started to ship some of the internal combustion engine units to the Postal Service here in June. We'll ship some battery electric units later this summer, maybe early fall. And this program essentially replaces all the old Grumman LLV units, which were built back in the 1980s, right? So they're slow, inefficient. They've put a lot of maintenance and repair dollars into them and they need to be replaced. There's no air conditioning. They don't get very good fuel mileage. So after Postal Service is done is we won the competition to supply that next-generation delivery vehicle for quantity up to 165,000 units. It's a 10-year contract. And initially, the indication by the postal service was about 10% battery electric, 90% internal combustion or ICE. They did get some funding from the Inflation Reduction Act. They got $3 billion for electric charging infrastructure as well as ordering a higher percentage of battery electric. So that 10% number went up to 75% on the initial order and that's great. We will be building those out over the next several years and the reason I bring this up, we want to execute on this program extremely well. And we need to focus on the things we can control and do that first and look at other opportunities as they come. And we are talking with the other last mile delivery, commercial, I guess, participants, the names that we all recognize. There's -- I think with the recent sort of challenges with some of the start-up companies, there's certainly the customers and the suppliers are kind of reevaluating where things are in terms of what they're looking for because there's sort of a mindset of everything has to be electric. Well, maybe it does, maybe it does, and we certainly can do either or. But it is a very attractive sort of business opportunity for us. And we think that our next-generation delivery vehicle is a strong indicator of what we can do in that space. We would have to do some modifications. We can't just take the NGDV and...

Sell it to everyone.

Right, right. So but that's fine. We wouldn't expect to that iconic vehicle and the iconic look, it's postal service, and you're going to start to see it in neighborhoods all across the U.S. over the next couple of years.

Okay. Okay. Got it. Maybe let's in the last 10 minutes or so talking about Vocational and maybe some capital allocation stuff, too. So on Vocational, how would you describe current customer trends within Fire & Emergency and Rescue. I guess, the backlog is really long in Fire & Emergency. Is the new order activity and what you're hearing from customers still off to very positive?

So demand remains strong. However, backlogs are extensive, and that can sometimes be a little bit of a suppressant enthusiasm in them is bigger. So it's really incumbent upon us to continue to drive improvements in our throughput and kind of work into that backlog and bring that down. Normally with the process cities and towns in the United States, and there's about 32,000, 33,000 cities that will have fire stations and such. The lead time is maybe 6, 9, 12 months, right? And it kind of lends itself well because oftentimes for custom fire trucks, there are modifications and firefighters might come in mid through the build and ask for some changes, right? And we want to make the vehicle they're looking for and that complexity, managing that complexity and managing it effectively is part of us being a leader in driving success. But it kind of comes at the price of longer lead times. So we want to get through that so that a lead time of 2, 3 years, which is unrealistic, isn't the new norm. We need to knock that down so that it's something more manageable.

Makes sense. And refuse demand?

It's very strong. In particular, we haven't really talked much about electrification, and I was going to mention that earlier on. But the themes and the trends that we see with electrification, they don't have to be everything electric overnight. Over the 3, 5, 7, 10 years for us, it's a very strong business, whether it's the NGDV for U.S. Postal, whether it's an electric Volterra ZSL Refuse Collection Vehicle or Volterra Fire Truck and even AeroTech, which we should probably talk a bit about, the airports are going battery-electric and zero emissions. So AeroTech is our acquisition that we closed on last August and a great business and there's some lead acid battery applications now, but there can certainly be more on the lithium ion side. Let me just mention on Volterra ZSL. It's really a productivity vehicle. So it's purpose-built. It's an integrated chassis, custom chassis by Oshkosh built from the ground up. And we've got a large customer of ours out West is running 2 of the units in Arizona. This is fully electric and it actually very -- it's designed ergonomically as well for the 5% up to 95th percentile in terms of both male and female and sizes and such. And the drivers are very happy. And one of the things that the Refuse collection companies look at is they do have high turnover with their drivers. And if they can have stronger retention, that's better for them in their operations. So with an electric refuse collection vehicle that has higher productivity and frankly, it's a better working environment for the drivers. The waste collection companies are very happy. We're starting to ramp these up over the next year or so in Murfreesboro, Tennessee as part of our vocational segment. It's a real big long-term opportunity for us.

Are you actually hearing a lot customer interest in Refuse and -- like the Refuse and the Fire & Emergency electric vehicles?

We do. I would say it's probably a little stronger in refuse collection. For fired apartments, maybe some of the coastal cities are more progressive cities, if they want to be zero emissions and really kind of carry that flag. They're interested in electric. Firefighters want great technology. They want to be able to respond in any situation, especially if it's a fire and get their job done. And if we can provide them with the tools that do that, they're going to be happy. Obviously, for many years, it's been an internal combustion engine, but you're seeing battery electric. And I think it will be a little slower adoption rate. I think refuse collection will go a little bit faster.

Okay. Okay. Makes sense. And then you mentioned AeroTech part. It seems like you guys have been really happy with the acquisition. How it going -- how is the business growing organically? Like can you give us a sense?

Yes, yes. John, do you want me to turn that over to you or?

Go for it.

So yes, with AeroTech, we're very happy with the integration progress. The synergies that we've committed to aren't overly heroic, if you will. We are looking about $20 million in year 3 and that's on a $700 million-plus business. We're already at double-digit adjusted operating income margins. There's strong demand. They're the market leader in jet bridges and ground service equipment at the airport. So any of you that maybe came in on a flight, hopefully, it was a JetWay brand, which is the brand that AeroTech has. They've got about 70% market share in North America. You're seeing airport upgrades everywhere, right? Dallas-Fort Worth, Kansas City just announced. We were talking with an investor from Omaha, not Berkshire Hathaway, but so many helps. And they mentioned the new Omaha airport, right? So the opportunities are out there, whether it's electrification or not, air passenger traffic, air cargo again, even though the pandemic put a kink in things, if you look back historically, these are nice kind of steady growing numbers. And people are traveling and they're going to continue to travel. And you need these airport upgrades, you need bags handle, you need docking time. So when an airplane comes in, we've all been on the plane when it's landed and it takes them a while to maybe get the door open and have the jet bridge there. And looking at using autonomous functionality and technology to get that jet bridge closer and do it faster and save the airlines time. So they call us -- faster in and out. And as soon as they can get that door open, it's better for their productivity and their turnaround and their customer relations. So it's real strong.

Yes, that makes sense. And would that business also be able to take advantage of some of the stimulus spending that's going towards airport infrastructure? Or would that not apply to AeroTech?

I think they benefited to some extent. I'm not certain how specific. But I would say that -- if there's airport improvements going on, chances are we're going to probably be selling some additional equipment, whether it's fixed in place like a Jet Bridge or if it's on wheels and mobile and moving around. Let me give one more comment and that is Aircraft Rescue Firefight Units yes, ARFF units. These are the large generally yellow emergency response vehicles, you see at the airport. You don't want to see it coming towards your plane, right, with the flashes. You want to see it parked. And we've got a zero-emission battery electric unit that has won some pretty big contracts already. There's a brand-new airport coming up to speed in 2026 in Sydney, Australia. Paris' third airport our CEO, John Pfeifer, mentioned this, on our last earnings call, the airport in Paris has ordered 4 of these units actually. And for us to have sales into Continental Europe has been kind of a big deal. In general, there's more home-based manufacturers have an advantage. So us coming in as the American company from the outside, we really got to have a strong product to win that. But we're very excited about, again, the zero emission vehicles because airports, they want to be leaders in reducing their carbon footprint. So it's a real strong offering for us -- from us, and I think you're going to see more of it.

Very exciting stuff. I didn't ask audience. Are there any questions out there? We got one here.

I guess my question would be going back to Defense and now looking at Europe, you guys expanding in the Europe. European softness side, it seems like there is a real concerted effort to build up the militaries. Are you seeing an opportunity to maybe expand the Defense business into Europe with a more compelling presence?

There's definitely demand for equipment, as you say, and certainly for NATO countries to increase their spending to the 2%. In some of the NATO countries, if there's a home manufacturer, it's generally more nationalistic and it's probably not going to be us. But in countries where there might not be a manufacturer that competes with some of the defense vehicles that we make. We've had some good success in Belgium, for example. Certainly, outside of NATO in the Middle East with Israel, any U.S. allies, we've seen increased inquiries as well. I would say that NATO countries, there's a number of Eastern European countries NATO. And obviously, with Russia-Ukraine war that there's been interest there. And we have had some increased shipments. I would say the domestic U.S. Department of Defense, whether it's Army or the Marine Corps tend to be a much larger customers though in terms of the sort of impact our performance.

Maybe I'll end with one last one, which is a capital allocation. You guys have been really active on the M&A front in the past few years, much more than you have historically. So I guess, is the M&A pipeline is still active. Should we expect more of this like Bolton?

Yes. I'd sort of refer you back to our 2022 Investor Day, where we sort of pivoted from a capital allocation priority perspective. Number one, we want to maintain a strong balance sheet. We want to invest in the business. But historically, leading up to that point, we were very heavy on share repurchases in terms of a capital allocation lever. But really, since that point, we've been really focused on growth investments. So we'll continue to invest in the business through Cap-Ex and NPV, but also want to continue to look at programmatic M&A, things like AUSA, things like Pratt Miller. I don't think you'll expect us to do anything transformational. But as you look at the capital we generate over time, we're looking to deploy upwards of 30% plus of that to programmatic M&A. We look at a lot of different opportunities over the course of the year. It's a low percentage business. We just get one and a few weeks ago, as Pat mentioned, as we talked about and we'll just continue to do that.

Awesome. Well, thanks, John. Thanks, Pat Davidson.

Thanks Nicole DeBlase. Great to see you. Thanks, everyone.

Thank you.