Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

All right. Good morning, everybody, and welcome to day 2 of the Jefferies Industrials Conference for the machinery sector. We're going to kick off this morning with Oshkosh. Very pleased to welcome Matt Field, the CFO; and Pat Davidson, who looks after Investor Relations to the podium here. So we'll have a few minutes of opening comments, I think, from Oshkosh. We'll do a little bit of a fireside chat with me, and then we'd love to have any questions from you guys that might be interesting as well. So with that, welcome, guys, and let's kick it off.

Thanks for having us, Steve. So for those who don't know Oshkosh well, we're roughly $11 billion revenue company. We've got about 18,000 employees globally. We're a global industrial technology company, providing machinery that's custom-built for people who do the hardest jobs. Our strategy, which we outlined at Investor Day, which was in June, which is all up on our website. I suggest people take a listen, watch all the videos because we spend a lot of time on them, and they're actually quite good. But it's innovate, serve and advance, which focuses on innovation for people to do the toughest jobs, serving them throughout their life cycle, so parts and accessories and then advancing into new adjacent categories, but also increasing our capacity, which we'll talk about today, I'm sure. We're also focused not just on the here and now, but shaping the future because if you think about the industries we serve, neighborhoods, airports as well as job sites, they all have challenges, and we all experienced those. Everyone here probably flew in or maybe you drove in, but I can guarantee everyone who attends this conference flies at some point. How often have you sat on that plane waiting for that jet dock to come out and meet the plane? And you're 30 minutes early, excited, you're going to make your connections and then all of a sudden, you're 30 minutes late because that nobody was at the jet dock. One of the solutions we have is an autonomous jet dock. So our AeroTech division, which is part of our Vocational segment has developed an autonomous jet dock, which takes the jet dock almost all the way to the plane and then you just need someone to move the last couple of inches because you know everything about the plane. You know the size of the plane, you know which one it is, how high the door is, where the door is. And so you can use AI and technology to support that. So focus on solving those jobs, whether that's the airport, the neighborhood of the future or the job site of the future. We do have 3 segments. So I'm sure we'll be talking about all 3 today. But first and foremost is the Access segment. That builds equipment that helps people get at heights on the job site. So that's booms, scissors where you go vertically and telehandlers, which help you move materials. You'll see them on job sites all over the world. We saw a couple here in New York when we were walking around in meetings yesterday. Second is the Vocational segment. Here, we build fire trucks, refuse vehicles, airport products. Those are the key things. We have a number of other products, but those are the key segments, and we've been in this business for a significant amount of time. Oshkosh is 108 years old, but I was talking with Jeff Trelka, our VP of Finance for this segment just yesterday. Pierce, which is the #1 fire truck brand in the United States, is even older than Oshkosh. So they've been making fire trucks since they were probably pulled by horses. But -- so that's our second segment. And our third segment is the Transport segment, where we have both the next-generation delivery vehicle for the U.S. Postal Service, but also vehicles for the Department of Defense. And so we've been providing vehicles for the Department of Defense for a few decades now, primarily focused on medium and heavy tactical wheeled vehicles as well as export opportunities for our light tactical wheeled vehicle, which we used to build for many years. We do see this as a growth business. So at our Investor Day, we shared our 2028 targets. I'm sure everyone in the room has read them exhaustively and modeled them. We do have substantial growth between now and 2028, 7% to 10% annual compound growth rate for revenue. We increased our operating income from roughly 10% to 12% to 14%, so 200 to 400 basis point growth there. And we almost double our EPS from our guide this year as of the second quarter of $11 per share to $18 to $22 per share. Last but not least, we're focused on cash flow. So we'll increase our cash conversion to about 90-plus percent through the cycle of 2025 through 2028. So that's a quick wrap up. We think that's a compelling investment thesis. Certainly, externally, it was well received. I think we've gotten a lot of positive feedback on Investor Day, recommended if you haven't seen it, read through the slides, watch a couple of videos. In particular, if I had to point one highlight real out, it would be the vocational video, which does a nice job outlining why the capacity expansion that we'll talk about today and we focus on in many of our discussions is very possible because if you love assembly plants, which I definitely do, you get a good sense for what a high flow line is that we installed in McNeilus, which is our refuse vehicles compared to the bespoke customized production of a Pierce fire truck, where every vehicle is a snowflake, but there are opportunities to improve our capacity. So with that...

Great. Let's kick it off. We are on a webcast here this morning. So when that is the case, I always like to give companies the opportunity if there's any sort of recent developments that you think we all should be aware of. One question that we've been getting all through this conference is relative to tariffs and especially the additional 407 line items that are covered under Section 232 now. So is there anything sort of -- in terms of an update you'd like to provide?

That's a great question. It's one we've been getting quite a bit. So if you think about our business, really strong businesses, but one thing about how we build, we do have a lag, generally speaking. I think we've certainly talked about this on our calls. I know many industrial companies talk about this. When we buy our materials, they go into inventory, obviously, we then build the product and sell it. In any of our Univar segments, we're working through backlogs. But generally, that inventory to sell cycle is more than a quarter for us. And so because these tariffs -- these extension of tariffs, I guess, went into effect mid-August, I really wouldn't expect any material impact on the third quarter. We'll start seeing that in the fourth quarter. We're still evaluating the magnitude of that because unlike most tariffs or the ones we've been working through most recently, those are on direct materials. And so you have your kind of Tier 1 and moderate visibility to Tier 2. These are very nuanced tariffs. And these are on the steel components within something you buy. And so you've really got to start digging into all your bill of materials and try to figure out how does that compute. So we're still working through the computations on that. So no specific announcements, but that's how investors, how people should think about it for Oshkosh specifically.

And do you think these tariffs or any of the other noise that's in the world right now are causing any change in activity at the customer level? Are they trying to buy ahead? Are they sitting on their hands, waiting to see how it plays out? Just how does it work from a demand perspective?

Well, I wish I knew exactly. So we have 3 very distinct segments. And so we see tariffs, we see the economy kind of flow through our business differently by segment. And so I'll start with the smallest first. In the Transport segment, our customer is the U.S. Postal Service and the Department of Defense. So no impact on their demand, on their need for product, on their cycles. So no impact there. And by the way, for those who are not familiar with the nuances of DFARS and defense contracting, you don't pay tariffs on defense products, so for what it's worth, which kind of makes sense because you're collecting money that they're going to pay back to you. So it's like circular. But anyway, I digress. So the second is the Vocational segment. Vocational segment largely you're selling to municipalities and airports. Again, long arc investments in communities and airports. So limited impact from near-term gyrations from uncertainties around tariffs. So 2 of our segments really are largely noncyclical. They have a little bit of a cycle, but the sign wave, the amplitude is very low. The third segment is the Access segment. It is our largest segment, but reducing in its impact as vocational grows, as transport grows again, which I'm sure we'll talk about. But the Access segment really supports construction. That's the big business there. And as everyone is familiar, construction, the metrics are a bit mixed right now. So we've got really strong demand from data centers, really strong demand from mega projects, but some of the nonresidential construction is still weak. Interest rates, while I think the consensus is probably 2 cuts this year coming later than what we thought early in the year. That industry is holding up better than candidly I would have expected, but that's probably where you see more uncertainty, more delays of projects from what we're kind of seeing in the data and reading.

Okay. Great. All right. With that out of the way, let's talk a little bit about the segments. And I want to actually turn things a little on their head and start with Vocational rather than -- so that's, I think, your biggest backlog business. And I think you probably have, at this point a couple of years of visibility. You talked about some capacity additions that you're doing. Just talk about why that business -- why is demand so strong in that business? And what are you doing on the capacity side?

Yes. So much like many businesses, you look at the age of fleet, and there's definitely the need to replace aged products. But then there was a unique factor. I think COVID hit a lot of industries differently. For us, in fire apparatus specifically, the CARES Act funding pushed a lot of funding into municipalities. And then the run-up of property prices that followed COVID also made municipalities flush with money. And so those 2 factors really drove demands for refreshing the fire truck fleet. And so if you think about that took the number of orders we took up substantially. And this was an industry-wide phenomenon. And so that built this backlog. So traditionally, if you think about it, if you ordered a fire truck traditionally, you'd wait about 12 to 18 months for a fire truck. And just so you guys know what happens when you order a fire truck, typically, you put a deposit down. So about 30% of our orders were getting deposits. Well, with this spike in demand, you had this surge in orders. And there was no massive way to expand capacity because, as I said, the production of a fire truck is really almost bespoke. It's -- I grew up in automotive industry, and it's kind of like automotive in the kind of 30s. And for good reason, it's not like it's actually an assembly plant from the 30s, but there's good reasons for it. But it is much more a unique construction job shop if you will, in the areas. And so you couldn't ramp up capacity to meet that. So now you've got backlog. So if you place an order for a custom fire truck today, you might be getting that in '28 and '29. And so you're having a much longer lead time, which we don't want. It's not something we want. The customers don't want it. And so what we're doing is we're doing really intelligent capacity expansions, looking at bottleneck, investing in those to have more flexible manufacturing. A great example, and again, I recommend the video we have because pictures tell a thousand words, and I don't know what videos tell, but it's more. Investing in robots, so we used to have people who would go in and sand these big cabs before we could paint them. Now we've got robots that do that. It's more ergonomic because now we can take that person and have them doing something where they're not just standing like this all day, but it's also faster. And so investing in these smart capacity actions that allow us to address that backlog faster is probably the #1 priority. Certainly for Vocational, it's a great investment for the company. So it's high on my priority list as well.

I think the first time I visited that plant, the plant manager was very excited to tell me that he had 60 or 70 different shades of red that you...

Yes. I think it's more than that. I don't know if higher now. It's -- I think it might be like 100 or something. It's a crazy paint...

So yes, about specific builds. Anyway, so you talked about how COVID and various government funding has helped the fire cycle. But that's the question I get sometimes is, are we at the peak of the fire cycle?

That's a great question. It's a question we get too. And so what -- the way I think about this is there's an ambient level of demand because you have fire trucks that are maturing, you have new communities coming on stream and so you need new fire trucks in new communities, obviously. So that's kind of your base level of your base water level of demand. And then you had this -- sorry, this peak in orders. And so unlike every other industry, the industry for fire trucks is actually orders and not deliveries. And so what that does is that increases the level of need on top of that ambient level of demand. And so as you work through that backlog, I think it will go up and then come back down to the normal levels. Even if it dips a little bit, it won't dip that much because it just hasn't historically dipped that much. And so it will normalize. And that's why when we think about capacity, it's really this intelligent kind of prudent capacity actions as opposed to putting up a whole new plant for new trucks, it's really making sure you're building in more efficiency, which can benefit us for the longer term; because, a, it's more difficult to get skilled workers. It become even more difficult in the future. So it's kind of future-proofing. But b, it allows us to take opportunities for growth where we see it.

So let's segue just slightly because the refuse business has also had a nice run here. And what's kind of driving that?

So again, it's municipalities, it's growth as people move further out, as people relocated during COVID, but also the age of the fleet, again, driving demand for refuse vehicles. And so if you think about refuse vehicles, they basically come in 3 types. So there's the front loaders for picking up, commercial waste. There's the side loaders, which is what many of us would see in neighborhoods. And then there's the rear loaders that you use when you just got bags on the street like you do in New York. And so you can't really swap those out. So as communities grow, they need a specific type of product. And so we're very focused on providing that. There's also technology upgrades that people are focused on, whether that's safety features, whether that's efficiency features. So we've invested heavily in technology to allow, let's say, a faster side loader, we invented a ground-up electric refuse vehicle. So it's -- if you think about for those of you who live in neighborhoods with side loaders that stop every 5 to 10 feet and they're diesel and they make a ton of noise at 4 in the morning, like my old life, electric is quiet. And so it's much more efficient, no fumes in your neighborhood, no noise as they rev up to go 10 feet. And they're designed so they can make every cul-de-sac turn. And so you don't have them doing 3-point turns on cul-de-sac, so no beeping. So really great vehicle, ergonomic, all sorts of wonderful things I can talk about. But there are opportunities, I think, as people think about tech refresh and refuse as well, which isn't necessarily where we all wake up in the morning, we think new technology and refuse vehicles, but there's a lot of exciting opportunities there.

Okay. Great. Let's segue to Access now. That's a business that's been a little bit weaker in the most recent history. Where do you think we are in that cycle?

So yes, we guided with the second quarter earnings, we guided to a revenue of $4.4 billion, and that's down about 15% off last year. I think last year, we'd all agree, was probably a peak for that segment. So what we see is really twofold. One is unique to us, but two is more macro. One, we used to build telehandlers for Caterpillar. They've decided to in-source that. It was a 20-year contract that ended last year. And so that's part of the headwinds for us on a year-over-year comp basis. But overall, it's really just weaker construction and uncertainties on construction project, as we talked about earlier. So I think certainly, we're in a down cycle. How that shapes up for next year, it's too early to tell. I think like many people, I've got my magic 8 ball and shaking it twice a day and looking at what the indicators say, look at Dodge Momentum Index, it's still quite strong, a lot of good projects, some projects on pause. You look at the manufacturing trends about reshoring and some of the needs there that have been accelerated with this administration. I think that's a great opportunity. And then you look at some of the resurgence on nonresidential construction with lower interest rates, that could be a good tailwind. So you kind of have pluses and minuses as you look forward, whether this is a trough or whether it's a 2-year down cycle.

Okay. I talked to another access supplier yesterday, I forgot the name. And they were talking about how the business from their perspective that the large national rental companies were still ordering sort of relatively stabley. I don't know if that's a word, but that the independents had really sort of dried up. And so in a lower interest rate environment that they would expect those to come back and that might be sort of a catalyst. Would you agree with that? Is that right...

I think broad brush strokes, that's right. So if you think about the nationals of United and the Sunbelt of the world, they are public companies. So luckily, they talk about their capital plans and how their businesses are shaping up publicly. So we get good visibility through that. And then obviously, we talk to them privately, but I can't talk about those conversations. But then -- and they do a lot of the big national projects for the major construction firms because these are big relationships. And so you know this better than I do, candidly. But -- so they service these big mega projects and the larger hospitals and what have you. But then that cascades down, local contractors use local independents, but then you have the smaller projects that works you'll see locally. So I think that is the weaker segment without getting into nonresidential commercial real estate, which is probably the weakest of the week. But certainly, lower interest rates, we believe, and certainly the consensus seems to be, will help those smaller projects gain traction again, which should help some of the independents. We did see really strong independents last year into early this year, but I think that could be a tailwind if we get lower interest rates.

So how do you handle pricing in this segment because demand is obviously not great. but you're seeing a fair amount of inflation and tariff costs, et cetera. So how do you sort of handle pricing against a weaker demand backdrop?

Yes. Luckily, we've got a really experienced team in the Access segment. They've seen multiple cycles. And so they manage this very effectively. We did see pricing headwinds, incentives in the first half of the year as we had some of the down cycle dynamics we discussed. I think that's normal for this cycle. I've gone back a lot of cycles to look at historic norms. It's within what you would see traditionally. What's important for people to think about and what our team is incredibly good at is managing, adding value and the ability to meet customer needs because we are a large player in this segment. And the ability to -- if they need booms, we can get them booms. And so that long-term relationship is critically important. The other piece is we have a really strong back-end service business for them and supporting them on the service side. And why that's important is because top line pricing is one factor, but the residual value and service on the back end is another critical factor in the equation of our customers as well. It's important in our equation, but it's also important for our customers. And so managing the upfront top line and then making sure you maintain a strong residual and strong back-end support are important. And then the other piece I would be remiss in the Access segment leadership would chastise me afterwards if I didn't highlight is the additional value added from things like ClearSky and some of the other technologies that they put in the product that make them more sticky. And we see people who use that technology appreciating our product even more. So it's differentiating yourself. It's being responsible on your top line pricing, managing the back end, so you add value at the end as well. So that's the whole equation that the team manages.

Okay. Great. And maybe the sort of follow-on on that is there has been some capacity addition. You guys have added a little, others have added a little. There's even been some sort of non-U.S. guys in Mexico or Canada. So how do you view sort of the supply-demand balance in aerials at this point?

Yes. Great question, Steve. So when you think about capacity addition, there's really 2 benefits. So in Access, the benefit of capacity for us is, one, it allows us to provide more product to more people as demand recovers. But the other thing it did is by pulling specifically telehandlers into a Jefferson City facility. It allowed us to take what was a defense facility, utilize it for building a telehandler production. But even more important, by pulling telehandlers out of some of our other assembly plants, it gave us capacity to build ultra booms and high-reach booms, which there's still tremendous demand for. And so it's really a kind of multidimensional capacity add that we work through as we brought on capacity. So really pleased with the capacity. It allows us to flex a bit more than we could before, allows us to be a little more nimble, although that's kind of contrary to what people think when you talk capacity, but really, really good utilization of our existing facilities with those actions.