Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

All right. We are live. Thank you very much for attending this session. And for those on the webcast, welcome. I'm Stephen Volkmann with Jefferies. I cover Oshkosh Corporation, and that's where we'll be hearing from in this half hour. Very pleased to welcome John Pfeifer, President and CEO; Pat Davidson, who looks after Investor Relations is here as well. John is going to do a few minutes of opening comments. I think he has 3 slides or something and then to do more of a fireside chat, and I would love to have your participation as well. So with that, John, Well come, thanks for coming.

Thank you, Steve. Yes. Good afternoon, everyone. I just wanted to give some opening remarks about our company and who we are at Oshkosh Corporation. So First, t start with who we are. We're a company at Oshkosh with a really powerful purpose, in that we serve -- we make a difference in people's lives. And by that, I specifically mean we make a difference in people's lives in our communities who do the toughest, most dangerous work that there is to do, but it is absolutely critical and vital work to the health and vibrancy of the communities that we all live and work in. And that is -- those people I'm talking about are soldiers, they're firefighters. They are now mail carriers for the United States Postal Service. There are people that work at great height, people that work on the tarmac of an airport for 10 to 12 hours every day, people in those situations that are critical to making things happen in our communities. And by nature, we supply critical vehicles and equipment, and we are over 100 years old. So we are clearly an industrial company, but more than that, we have over the years transformed ourselves into an industrial technology company, where we are well versed in applying technologies like electrification, like autonomous functionality all the way up to fully autonomous vehicles that are running today for the Department of Defense and intelligent connected products that we serve as digital products for our customers with advanced analytics factories to deliver productivity and safety through those means as well. So it's an exciting time and an exciting transformation that we're underway with the company. You can see that we have -- or I'll talk about some trends in our markets, which we think are very, very healthy. And there are trends that are directly related to the technology that I just talked about. So one of the biggest trends that we're delivering upon is we all know that productivity is paramount for everybody today. We have to deliver productivity, whether it's a fire station, whether it's an airport environment, whether it's a construction environment, all of these markets that we serve need productivity. They have to have productivity because the most expensive resource is scarce, and that's people. And people's time. And sometimes, we have to deliver autonomous functionality because we want to remove the danger from the operation that people are engaged with, and that's extremely important. And it's a big driver of where our customers want us to see -- to see us make meaningful improvements in how we work. On the chart, you see here, we're making investments in attractive end markets. You see in the center, that's a fully zero emission refuse and recycling collection vehicle. It's silent. But more important than its electrification that's got a lot of autonomous functionality on the vehicle. The vehicle on the right's an electric fire truck that operates in our communities. More productivity built into it and lower cost of operation for that vehicle. The vehicle on the bottom left is the new United States Postal Service delivery vehicle. It's in production. We've got vehicles delivering mail today, and that will be a long cycle to transform last mile delivery for the United States Postal Service. So we're pretty excited about that move as well. Finally, just to wrap up what we do, we are a company that generates healthy cash and we're very intent upon how we use the cash flow that we generate. So we really focus our cash in 3 different areas where we always deliver money back to our shareholders. We tend to deliver 25% to 35% of our cash flows in the form of dividends and share buybacks, returning to, to shareholders of the company. We make significant investments in innovation on the product front. I talked about the electrification, the autonomous functionality. We make investments in improving our ability to produce product. And finally, we are a corporate development-focused company. We are always engaged in how do we improve our portfolio where should we be making smart acquisitions to continue to propel the company forward in areas where we can make a significant difference. One of our latest big acquisitions, this company called AeroTech, it expanded our participation on the tarmac of an airport, allowing us to serve that market and put technologies into ground service equipment that make airlines and airport op -- airplane operators like FedEx and UPS more productive and making that a better environment to work in. So with that intro, Steve, I'll turn it back over to you for Q&A.

Great. Again, I love to have any participation from the audience here, but anticipating that will be a [ slow ] ramp. I will kick it off. And if you do have a question, raise your hand, we'll get right to you. Let's just do a quick overview, John, of the most recent quarter. Just sort of what were the highlights I guess, probably locational, but you can fill in a different one if you want. But what trends really encourage you in the second quarter?

Well, in the second quarter, we had strong performance. We had strong performance in the first quarter, strong performance in the second quarter. We've we set long-range targets a couple of years ago for 2025. And the second quarter, really was a quarter where we provided an update to our 2024 guidance, which basically said we're meeting our '25, guidance a year early as we increased our EPS expectation to $11.20 to $11.25, very high-performing access equipment business delivering 17% margins and a continuously improving vocational segment that's continuing to grow and improve its margins over time. That's where the fire truck businesses, where the airport ground service equipment businesses, environmental service vehicles, that's a really strong, continuously improving business. So we're pretty excited about that, but we've also gotten to the point where we're actually in production for the delivery vehicles for the United States Postal Service. So there was a lot of material things that happened in the second quarter. I think I will call out the one thing that people did notice, and that is while Access Equipment had another fantastic quarter, great margins in the business, incredible people in that business. We also showed that we had lower than previous year's quarter orders. So our orders are about $440 million. Some people were surprised by those orders. We were not surprised by those orders. We see the Access Equipment market returning to more normal seasonality, normal seasonality means most orders come in Q4 and Q1, not in Q2 and Q3, which are kind of the peak of construction cycles. So we still have healthy backlogs in that business. But I think there's still with many of us, a lot of questions about what's going to happen to nonresidential construction in 2025. And how is that going to impact demand for Access Equipment. So I think that, that's one of the things that people paid attention to in the second quarter.

All right. We're definitely going to get to that. I wanted to actually throw you a curve ball and kick it off with Vocational rather than Access. So...

That's great. We appreciate that.

Let's talk about Vocational -- you talked about the fire business, you talked about the electric fire truck. Where are we in the cycle for fire apparatus?

Well, so I'll go all the way back to the Great Recession, which is now a while ago. But in the Great Recession, that was a real estate fueled sharp downturn, as we all know. So it affected municipal budgets greatly because it was real estate driven and that's how municipalities get their revenue from property tax receipts. So the fire truck market dropped by 30% or so coming out of the great, and it stayed down for quite a while. Why am I mentioning that? Why does that matter? Because what happened when the market stayed down for that long of a period of time is, it meant that product was being aged. So there's an enormous aged fleet in the municipal fire truck market in North America and all of North America. And as municipal budgets have gotten much healthier over the past 2 or 3 years, probably 3 years, municipalities are now reinvesting in critical infrastructure like fire trucks. And the other thing that's happening is they want the latest features and benefits in the cab and on the fire truck itself. So we've seen the market come back and grow, grow beyond where it was even prior to its downturn. We expect that to continue because there is continued need for fleet replacement, but there's also a continued desire for technology upgrade. So as we go forward in 2027, we hit more severe diesel emissions requirements. That's going to add to the cost of a diesel-powered fire truck. We think that's another event that will continue to propel municipalities towards an electric fire truck and where we've been positioning ourselves to be ready for that trend as it comes. But we see continued positive trends in that marketplace.

And where are we now with backlogs in that business?

Our backlogs are 3-plus years still, and we'd like them to be a year.

And pricing, I think this has been a business where pricing has been a bit slow to just level [ set aside ].

Well, we have great pricing power. We're the share leader in municipal fire trucks. We have great pricing power as the leader and as the brand of -- the kind of the aspirational brand. When we say pricing takes a while to catch up, it's because we have big backlogs, and we can't do surcharges in municipal with municipal orders because we're not legally able to. So we have to burn through the current backlog to get to full rate price. So we'll see continued improvement in the performance of the business over the next several quarters as continue to move through backlog with better and better pricing.

Is there sort of a stair step or that's like just a gradual?

It [ will ] be gradual over the next 6 to 8 quarters.

All right. Good. And then on the more commercial side, tell us about the Volterra ZSL.

Yes. So Volterra ZSL is a refuse and recycling collection vehicle. This is a revolutionary product. So it starts with -- it's zero emission, it's fully electric. So the vehicle is silent. Everybody loves that about it. That also generates a lot of total cost of ownership benefits because the running costs are so much lower. But that's just the beginning of it. What we've done with this vehicle is we've designed it to be a purpose-built refuse and recycling vehicle. So what that means is there's a lot of autonomous functionality on it. It makes it more intuitive for the driver to operate the vehicle, meaning it's easier, less training. Our customers love that. The driver themselves love it because it's easier to operate. So it will lower the turnover of drivers for our customer base, but it's also got autonomous features on it. So that means every stop is quicker than it is today. Customers love productivity gains that's huge for them when we can give them big improvements in productivity. That's what this vehicle does. The industry has never seen it before. We're the first ones to make this kind of innovation. So we're really excited about the potential for the industry with this type of a vehicle coming in.

And have you talked about the price of this versus the standard refuse vehicles or the margin impact on you guys as...

Well, it's these -- we wouldn't do it if it wasn't good margin business. But what's important is for our customers to see there is a lot of value in deploying this vehicle because we get big safety benefits and big productivity benefits, and it even lowers our driver turnover. Typically, our customers will have high driver turnover. They want lower training, easier operation, low turnover. It does a lot of really good things for the customer. When you can do that, you typically can generate really healthy margins, and that's what we're doing with this vehicle.

And the TCO is lower for them?

The total cost of ownership is lower. Every time we develop an electric vehicle, the commercial market is very different than the passenger car market for electric vehicles. In the commercial market, we can prove to our customers that there -- while the price point may be higher, they're usually using these vehicles over sometimes 15 and 20 years. And so we are -- show them that there is significant economic benefits over the life of the vehicle by going electric versus going internal combustion. And that's always what typically drives the decision. If you show an economic benefit, a commercial operator is going to see it and understand it and move in that direction.

And as these things start to electrify, how does that impact sort of the service opportunity for you down the road?

Well, remember, when we serve diesel-powered vehicles today, we don't participate a lot in the powertrain aftermarket service. Usually, the engine provider does, whether that be Cummins or General Motors. So this does not impact us in terms of aftersales service because we weren't participating in the in the internal combustion service supply chain. So for us, it doesn't have a significant impact on the aftermarket.

Okay. I thought it might actually be a good guy for you over time?

Yes. We'll see.

Let's switch to Access since you talked about that. And obviously, it's sort of probably top of mind with people. One of your large customers has started to talk about CapEx for '25 being kind of at the lower end of their expectation ranges -- and just any kind of level set for us on what you're seeing from customers?

Yes. I think there's this big -- kind of dichotomy in this -- in the Access Equipment world, which is big and vast and serves a lot of different end markets, construction, the biggest, but a lot of other end markets as well. So on one hand, we've got big trends of infrastructure spending being big and spanning a lot of big projects that they need our equipment, and that's going to last for many years going forward. Data centers, chips plants, power generation, all those trends are very favorable for the industry and they require a lot of equipment. On the other hand, interest rates are higher, that's put downward pressure on general construction, [ while ] the general construction is a big industry and a big absorber of aerial work platforms. So it's a question of a balancing act. You've got really positive trends on one side and 2025 being a question mark. I don't -- I think that when our customers yesterday, it was [ Ashtab ] that said, will be on the lower end of our guidance. But they also said we're not really sure. We'll give you more information in the fourth quarter. That's the same way we feel. We're not sure how much general construction or nonresidential construction in '25 is going to impact the market. What we do know and what we do see, and I think that all of our customers would say the same thing, we plan our business out, of course, on 5-year cycles. And over the next 5-years, we see a lot of really positive developments in our business in the Access world. So we feel great about the next 5-years, whether or not 2025 is going to be a little bit down or maybe it's going to be flat. We're not quite sure yet. There's a lot of uncertainty on 2025, but I think there is a lot of certainty on the next 5-years.

Okay. And where do you see the fleet ages in Access?

The fleet and aerial work platforms, we'll talk about aerial work platforms, specifically. The data that we have shows that the fleet age is elevated. It's about somewhere around 60 months. And so we know that there will be continuous replacement of fleet as we go forward because we need the fleet to be, at an age where when fleet gets retired, it sells at the right residual value into the used market.

Okay. All right. Let's see. One of the questions I get a lot, I'm sure you do as well, is there seems to be some capacity that the industry is adding maybe to your point about the 5-year outlook, but there's always concern that we may get a little more than we need in the short term. So what are you feeling about capacity in the industry and sort of the risk that, that might bring short term?

Well, here's what we see. Our plants are full today. And when we look at our capacity today and our footprint today and we look out on that 5-year planning cycles that we're on, we see a need for additional capacity in certain areas. That's why we're expanding our Jefferson City, Tennessee capacity. It's not based upon what do we see in 2025. It's based upon what do we see over the next 5-years. And when we plan our business, we have to control what we can control. We know that JLG is a premium brand in the market. We know that we offer a lot of benefit in terms of the feature -- the productivity features, the technology we build in the equipment. So autonomous functionality, whether it's a self-leveling chassis or SkySense technology to protect an operator working at height. We know that our new intelligent products and digital products drive a healthy view for our customers on how to keep a fleet as productive and add new productivity avenues as they manage their fleets going forward. And we know that the residual values of our equipment are very predictable. We add a piece of equipment today. We know what it's going to sell for in 8 years, and that helps our -- that ability to forecast that value helps our customers manage their overall total cost of ownership. So we sell that overall outcome to our customer base. And I think most of our customers understand that. It's -- and so we plan our capacity based upon, what we see as demand for our equipment, as for the rest of the industry, it's tough for me to comment on that.

Okay. And since you mentioned it, talk a little bit about the recurring revenue opportunities as you connect these vehicles?

Yes. So we've made a lot of investment to expand and improve our capabilities in recurring revenue. By that, I mean everything from aftermarket parts and services to new digital products. So in the Access Equipment world, uptime is critical as it is on any commercial vehicle. So we have an investment in the footprint to deliver real-time aftermarket parts to keep equipment as productive and the uptime as high as possible. And that's meaningful. If you can't do that, it doesn't matter how cheap the equipment is, it's not going to be good enough for customer base. On the Digital Products or the Intelligent Products world, we have put a significant amount of investment in innovative new connectivity products which allow operators not just to connect and understand what's happening with JLG equipment, but with any equipment on the job site. And that's a significant advancement, we believe, for the industry is going to support continued productivity.

Okay. Any numbers or percentages or goals in terms of this recurring revenue over time?

We -- I can't give you any numbers, but we expect it to be a material amount of revenue for the company.

Okay. Great.

You did a great job of sort of distinguishing between the big project infrastructure side of the business and the sort of general construction side. I mean if you had to roughly size those 2 in terms of this year's revenues, let's say, just a rough help on the [ relative ] sides would be great. Yes.

So this is the way that I'll put it. The general -- so when we -- it's the general construction as well as all the different end markets that use Access Equipment. So in manufacturing, you see Access Equipment in distribution you see -- in hospitals, you see access equipment. And you walk around 2 blocks from this hotel, you'll see JLG equipment being used for maintenance and other operations. I usually mention construction because it's the biggest end market we serve, but there are dozens of end markets the equipment goes into. So if you take the aggregate of that and you measure it against kind of the big trends, the mega projects, data center construction, that the big trends would be smaller than the general market environment for Access Equipment. So really, what it is, is if nonresi -- what happens to nonresidential construction in terms of does it go down by 1%, that would be probably more than offset by some of these mega trends. But if it goes down by 4% or 5%, then that could be a different story. So it's really is bigger on the installed base versus some of these growing trends that we see. So it really depends on, does it stay flat? Does it drop a small amount? Does it drop a little bit bigger amount in terms of how much it's going to impact the industry. That's probably the best way I can describe it.

Anybody else. All right. Last question from me on Access is on the telehandler side. You sort of, on the one hand, you have an OEM contract that's kind of going to wind down. But on the other hand, you have sort of opening up a new market with agriculture and just talk about how you see that over the 2 or 3 years?

Yes. We're really optimistic about the telehandler market. We have a fantastic product line. We've been investing in our product line. We've been investing in new markets like the agriculture market, which we think is a big growth driver for that business. We can -- we sell immediately every telehandler we produce today. So every time we expand our capacity of one telehandler, we're gaining one telehandler. So in other words, the way to say it is our market share today in telehandlers is dictated by our capacity to produce. And if we have more capacity to produce, we will sell more telehandlers. And then you couple that with the new market I talked about being ag, and we feel really, really good about it. So you referenced an agreement that we have with Cat. Cat has been a great partner of ours. Cat's going to continue to be a great partner of ours. We expect to continue to serve the market and continue to work with Cat in different forms. It might be a little bit different from the agreement that we've had in -- over the past decade or so, but we'll continue to work as a partner with Cat going forward as well. So we see the market continuing to evolve in a very positive way for telehandlers.

Okay. I left 3.5 minutes for Defense. So.

Good.

You've recently won a fairly big contract, which I think is worth commenting on. So let's start there.

Yes. So you saw us, a $1.5 billion contract for our FHTV, that sense for heavy vehicle programs. What that is, is something we've been working on for a while. Typically, when you win a program with the Department of Defense, you initially get a fixed -- a firm fixed contract. And when you have a firm fixed contract, that's good because it gives you stability, it's bad if you have forecast inflation during the period of that contract. We all know, over the past 5 years, we have had unpredicted inflation during that period of time. And therefore, we have not been able to get any price relief until the contract expires. The contract expired, we're able to get sole source contract pricing. Basically, what that $1.5 billion means is it's the event that allows us to get our price caught up with the realities of inflation from the past few years. So it's a -- that's why that's an important milestone for us. We'll have another one of those in a happen in 2025 with medium-duty vehicles.

And so just to be clear, the margins sort of pre-COVID were kind of low double digits. They've kind of been low singles?

Yes. Yes, high single to low double. Yes.

So we can get back to the...

So yes, that's right. Our intent is to continue to drive this business back to where it should be, which is where it was pre-pandemic.

Okay. And any other sort of big opportunities you called out FMTV but...

Yes. FMTV. So the other opportunities in Defense that we've been working on is the Department of Defense always has its slate of priorities. And the Department of Defense is focused on near-peer threats today. That's a little bit different from the way it was focused 10 years ago. So you see -- so what you see is when they're focused on near-peer threats to us, what it means is they want technology that helps them in combat operations. That's relative to what we do. It also means a lot for aerospace and naval programs and those types of things. For us, it means they want technology to help in combat. So we won the Stryker program. That was a big deal for our company. It's a combat vehicle that improved the capability of that -- what that vehicle does, where they -- we do vehicles. We take the JLTV chassis. We adapted to an autonomous vehicle and do rogue fire vehicles for the DoD. That's a priority program. We are participating in a robotic combat vehicle, which is a futuristic program that we feel very good about. So the reason I bring these up is when you're investing in the -- within the priorities of what the Department of Defense is those are the programs that tend to get the highest visibility and the highest amount of funding from the DoD budget. And so that's where you want to be. And that's why we're shifting into that area.

Okay. And I hate to do this to you, but in 60 seconds, can you tell us what the NGDV ramp is going to look like.

Yes. So the NGDV is the new postal vehicle, revolutionary vehicle for the Postal Service, drives huge productivity gains, drives huge safety gains for the operator and the people around the vehicle. And the postal vehicle allows the Postal Service to deliver modern mail, which is e-commerce packages and participate in those revenue streams. So it goes a long way to helping financially dramatically improve the Postal Service. So your question, we're in production today. There are vehicles on the road today, delivering mail and today, we're in low-rate production. We take -- make a step change in the fourth quarter in terms of increasing production. As we go through '25, we'll continuously increase production. We'll be at full rate production in the second half or the back end of 2025. We're excited about it. The Postal Service is excited about it. This is the biggest fleet of vehicles in the world and it's really transforming delivery of mail for the U.S. market.

Perfect. Thank you guys so much. Appreciate it.