Oshkosh Corporation (NYSE:OSK) Q4 2022 Earnings Call Transcript

Oshkosh Corporation (NYSE:OSK) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Greetings, and welcome to the Oshkosh Corporation Fiscal 2022 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Pat Davidson: Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 2022 results. A copy of the release is available on our website at oshkoshcorp.com. Today’s call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call, and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended December 31, 2021. All comparisons to the prior year are to the 12 months ended December 31, 2021.

Our presenters today include John Pfeifer, President and Chief Executive Officer; and Mike Pack, Executive Vice-President and Chief Financial Officer. Please turn to Slide 3 and I’ll turn it over to you, John.

John Pfeifer: Thank you, Pat, and good morning, everyone. We delivered strong earnings growth in the quarter, both sequentially and compared with the prior year. For the quarter, we reported revenue of $2.2 billion, highlighted by year-over-year sales growth in all four segments, leading to adjusted earnings per share of $1.60. Strong sequential improvement over adjusted EPS of $1.12 in the third quarter and even stronger improvement over the prior year quarter. Importantly, we delivered another quarter with a double-digit operating income margin in Access Equipment of 10.8%, which is a record margin for the fourth calendar quarter. Demand remains solid and we finished 2022 with strong orders and a record consolidated backlog of more than $14 billion.

We are continuing to prudently invest in capacity in all of our segments to take advantage of long-term demand trends. We also continue to invest in exciting new products, including our growing stable of purpose built electric vehicles that we expect will charge future growth. Our EPS results for the quarter were lower than our expectations of approximately $1.86 caused by two factors. First, the mix of aftermarket parts in our December JLTV order in the defense segment was less favorable than our expectations. And second, Access Equipment deliveries, while strong were lower than planned. We have several important highlights during the quarter. In November, we announced an agreement to acquire Hinowa S.p.A., an Italian manufacturer of compact crawler booms, as well as other tracked equipment and a long-time partner of JLG.

I’m proud to announce that we are closing on this acquisition today. Hinowa brings innovation leadership with lithium-ion powered equipment that supports our expansion into adjacent markets. We believe this acquisition is an outstanding growth platform and provides expanded manufacturing capabilities in Europe. Hinowa represents another attractive bolt-on acquisition in line with our disciplined approach to M&A that supports our commitment to grow shareholder value. Additionally, we were once again recognized for our strong sustainability practices by being named to the Dow Jones Sustainability World Index for the fourth consecutive year. We were also named one of America’s Most Responsible Companies by Newsweek, a recognition of our commitment to our core values and excellent corporate citizenship.

Please turn to Slide 4 for a recap of 2022. We grew revenues by just over 4% in 2022 compared to the prior year, delivering adjusted EPS of $3.46. Adjusted EPS was lower than the prior year, largely due to manufacturing inefficiencies associated with supply chain disruptions and unfavorable price/cost dynamics, including unfavorable cumulative catch-up adjustments in our Defense segment. Our teams have made significant progress combating inflationary pressure by implementing multiple price increases over the past year and persevering through supply chain disruptions. These actions enabled us to more than triple our adjusted operating income from the first half to the second half of the year, providing us with important momentum as we expect to significantly grow revenue and earnings over the next few years.

Our outlook remains consistent with our Investor Day presentation based on strong market drivers and our innovative products, including USPS Next Generation Delivery Vehicle and electrified products including the Volterra line of electric fire trucks, as well as our pioneering DaVinci all-electric scissor lifts. We believe these products will be important drivers of growth as we move toward 2025 and beyond. In addition to Hinowa, we also acquired or invested in other businesses during 2022 that will facilitate growth in the new product categories and adjacencies. These include CartSeeker with its patented AI-based recognition technology used on refuse collection vehicles, Robotic Research, a global leader in autonomous mobility and Maxi-Metal, a Canadian leader in fire truck manufacturing headquartered in Quebec.

As we look to 2023, we expect the continued execution of our innovate, serve, advance, growth strategy, price cost management and strong tailwinds supporting our business will allow us to drive significant improvement in our earnings compared with 2022. We are initiating 2023 earnings per share guidance in the range of $5.50. While demand remains very robust, we expect that supply chains will continue to constrain revenue during the year. Mike will provide more details in his section. Finally, we are pleased to announce an increase of $0.04 or 10.8% to our quarterly dividend rate today. This is the ninth consecutive year that we have announced a double-digit increase to our cash dividend. Before we talk about our segments in more detail, I wanted to discuss an exciting change to our business segments.

Please turn to Slide 5. This morning, we are forming a new Oshkosh Corporation segment called Vocational. We are combining our Fire & Emergency and Commercial businesses, which all design, develop and manufacture purpose-built vocational vehicles for people in our communities who do tough work. By combining these businesses, we expect to drive enhanced efficiencies across the board while better leveraging our scale and technology development at an accelerated pace. We believe the Vocational segment will also serve as a platform for further organic and inorganic growth opportunities in several important end markets. We expect that the Vocational segment will initially be a $2 billion plus revenue segment with the opportunity to grow organically at a high-single digit compound annual growth rate to near $3 billion with 12% plus operating margins in the next few years.

We are also announcing that we’ve entered into a definitive agreement to divest our rear discharge concrete mixer business. We expect to complete the sale by the end of the first quarter. This will enable us to focus on attractive end markets that value technology and innovation and will drive higher margins overtime in our new Vocational segment. Going forward from today, our businesses will be aligned in three segments: Access, Defense and Vocational. The Vocational segment will be led by our current Fire & Emergency segment President, Jim Johnson. Jim and his team have successfully transformed the performance of the Fire & Emergency segment over the past decade, and I am excited for our talented teams in both segments to come together as a force multiplier for future success of the Vocational segment.

We look forward to sharing more details in the coming quarters. Please turn to Slide 6 and we’ll get started on our segment updates with Access Equipment. Our Access team delivered solid performance in the fourth quarter with a double-digit operating income margin and 620 basis point year-over-year margin improvement. Supply chain challenges limited our production output, but we have seen some improvements, particularly in December as supplier on-time delivery metrics climbed above 70% for the first time in several months. While this is still well below our historical level of 90% plus on-time delivery, it represents improvement. The team at Access made progress by qualifying additional suppliers, dual sourcing and leveraging alternate sourcing strategies.

The team resourced more than $270 million of parts in the past year with plans to do more in 2023 to further improve supply chain performance. We also continue to implement changes to our products and processes to improve both output and manufacturing efficiencies. Demand remains very strong for our market leading JLG products driven by strong utilization rates, elevated fleet ages and the large number of mega projects underway across the United States. In fact, the percentage of Access Equipment in rental fleets deployed the mega projects, which are generally defined as projects with a value of $400 million or more has more than doubled over historical levels. We expect that mega projects, including factories for EVs, batteries and chips as well as non-residential projects such as data centers and healthcare facilities will continue to contribute to strong demand for our equipment for the foreseeable future.

We ended the quarter with a record backlog of nearly $4.4 billion. Fourth quarter orders were strong once again at $1.55 billion, and we continue to have visibility to demand well beyond our current backlog. Please turn to Slide 7 and I’ll review our Defense segment. The Defense segment continues to engage in a significant number of new business opportunities, as well as current programs. During the quarter, we received two separate contract awards for JLTV I, valued at a total of $645 million. The first award was for domestic requirements, while the second included several hundred units of foreign military sales, many of which will be bolstering the tactical wheeled vehicle fleets of Eastern European nations. The DoD’s announcement date for the JLTV II contract has been pushed back from late January and we expect an award decision this quarter.

The JLTV has been a foundational product for our Defense segment, and we are confident that we can deliver even more value to our customer in the future. In December, our Defense team was selected to produce Eitan Armored Personnel Carrier hulls for the Israeli Ministry of Defense under a contract expected to be valued at over $100 million. This is another key adjacent program win for our team similar to the Stryker MCWS and NGDV programs that demonstrate the success of our offerings and programs beyond tactical wheeled vehicles. I’ll close out my comments on our Defense segment with an exciting update on our progress with the USPS’s NGDV program, which allows for delivery of up to a 165,000 vehicles over the 10-year duration of the program.

In late December, both the USPS and President Biden made important announcements that express the Postal Service’s intention to increase the number of units in initial order from 50,000 to 60,000 units and increase the percentage of battery electric vehicles to approximately 75%. This change will enable the USPS to electrify their fleet at a faster pace. We are actively engaged with our customer to formalize the contract modifications to reflect the change. This is great news for the USPS, communities across our country and our company. We believe we are well positioned to supply the increased percentage of BEV units and continue to expect a significant ramp up of production in 2024 and 2025. Let’s turn to Slide 8 for a discussion of the Fire & Emergency segment.

Our Fire & Emergency segment made progress to improve output as indicated by fourth quarter sales that were up approximately 21% sequentially and approximately 37% versus the prior year quarter. While production output remains constrained by current supply chain dynamics, the improvement in production outputs and deliveries is encouraging. The improvement was driven by higher supplier on-time delivery metrics as well as the benefit of operational improvement initiatives. Our operating margins remain below typical levels for Fire & Emergency due primarily to supply chain impacts on production as well as the time lag in realizing the benefits of our significant price increases with municipal customers. We remain confident that we will return to strong double-digit margins as production output increases and we realize a greater portion of the price increases we have implemented.

Demand for municipal fire trucks has remained very high bolstered by aging fleets and solid municipal budgets. Order rates have remained strong, leading to a record $2.9 billion backlog, which provides us with good visibility and supports our outlook for higher margins over the next two plus years. Our lead times have extended beyond our optimal timeframes. But we believe the actions we’re taking to improve parts supply as well as our capacity expansions, including robotic painting in Appleton will help us increase output as we move through 2023 and into 2024. I had the opportunity to participate in our Pierce Annual Dealer Meeting this past month. I continue to be extremely impressed and inspired by our dealers. They are continuing to make significant investments in parts and service capacity to support our customers and drive growth.

We believe these investments are critical to our long term success as the population of Pierce fire trucks in the field continues to grow. Please turn to Slide 9 and we’ll discuss our Commercial segment. Commercial sales increased by 34% to nearly $283 million versus the prior year, despite persistent third-party chassis and component constraints limiting production. We expect that chassis and other materials will remain a significant constraint in 2023 as well. We’ve previously highlighted the success we’re having with our first refuse collection vehicle automated high flow line in Dodge Center. We are beginning to work on our second high flow line, which is expected to go live in the second half of 2023. Our high flow lines leverage integrated automation to drive improved quality, shorter build cycle times, lower direct labor hours and increased manufacturing efficiencies, all of which are expected to drive higher operating margins.

As we previously discussed, we see significant opportunities in electrification, automation and other advanced technologies, particularly in the RCV space. We expect to continue to make meaningful investments in new products and manufacturing facilities over the next several years. We look forward to sharing more details overtime. With that, I’m going to turn it over to Mike to discuss our results in more detail and our expectations for 2023.

Suwin/Shutterstock.com

Mike Pack: Thanks, John. Please turn to Slide 10. Consolidated sales for the fourth quarter were $2.2 billion, an increase of $412 million or 23% over the prior year quarter. All segments contributed to the sales increase, led by Access Equipment, which was up by $241 million, or 29% versus the prior year. The consolidated sales increase was driven by increased sales volume and higher pricing to offset the impacts of inflation, particularly at Access Equipment. Fourth quarter consolidated sales were approximately $70 million lower than our most recent expectations, largely driven by lower volume at Access Equipment. Moving to adjusted operating income, we implemented an inventory accounting method change in the fourth quarter, moving the approximately 80% of our inventory that had been valued at LIFO to FIFO.

The FIFO method of inventory valuation results in better matching of revenues with expenses since it more accurately reflects the current value and physical flow of inventory. FIFO also aligns our inventory valuation methodology with the majority of our peers and results in a consistent inventory valuation method throughout Oshkosh. Current and prior year adjusted operating income amounts have been restated on a FIFO basis. Adjusted operating income increased $111 million over the prior year quarter to $153 million, or 6.9% of sales, representing a 460 basis point improvement versus the prior year. The improvement in adjusted operating income versus the prior year was largely driven by improved price cost dynamics and increased volume versus the prior year, particularly at Access Equipment, partially offset by production inefficiencies.

Adjusted earnings per share was $1.60 in the fourth quarter versus $0.36 in the prior year. Our adjusted earnings per share was lower than our most recent expectations as a result of lower volume at Access Equipment and a less favorable mix of aftermarket parts in our December JLTV order. Now let’s turn to our outlook for 2023. Please turn to Slide 11. We’re estimating consolidated sales and operating income will be in the range of $8.4 billion and $530 million, respectively. We are estimating EPS will improve to be in the range of $5.50, representing significant growth versus adjusted EPS of $3.46 in 2022. Included in our expectations is the EPS impact of approximately $0.80 related to incentive compensation costs returning to typical levels and increased new product development investments of approximately $0.30.

Demand remains strong as indicated by order intake of $3.3 billion in the fourth quarter, leading to our record backlog of over $14 billion on December 31, 2022. Our guidance reflects modest supply chain improvements in 2023, but we expect that supply chain impacts will continue to limit our revenues and contribute to production inefficiencies during the year. At a segment level, we are estimating Access sales and operating margin to be in the range of $4.2 billion and 11% respectively. The expected 300 basis point improvement in operating margin versus 2022 is driven by the full year benefit of improved pricing and a modest volume increase. We expect supply chain dynamics remain a limiting factor of more significant revenue growth as demand remains very robust.

Turning to Defense. We are estimating 2023 sales of approximately $2 billion, or roughly $140 million lower than 2022. As previously discussed, we anticipated that revenues would be down in both 2022 and 2023. Importantly, we expect that revenues will begin to grow in 2024 as the USPS NGDV production begins to ramp up. We’re estimating our defense operating margin will be approximately 4%. We expect lower sales, unfavorable product and aftermarket mix and NGDV related pre-production operating expenses to account for the mid-single digit operating margin. We also expect margins will improve, as new programs ramp up in 2024 and beyond. Moving to our new Vocational segment. Our guidance includes the combination of our former Fire & Emergency and Commercial segments and reflects the planned divestiture of our Rear Discharge Concrete Mixer business during the first quarter of 2023.

We expect Vocational sales will be in the range of $2.2 billion, which is roughly flat to the combined revenue of the Fire & Emergency and Commercial segments in 2022 despite the approximately $150 million sales impact of our planned divestiture of our rear discharge mixers. Similar to Access, demand remains very strong, but our revenue is expected to be constrained in 2023 by supply chain dynamics. We expect the operating margin in the Vocational segment will be approximately 7.5% reflecting the impact of constraint output manufacturing inefficiencies due to supply chain dynamics, the impact of price protected orders and higher new product development investments. Municipal customer orders in our backlog to be delivered in 2024 were booked with significantly higher prices and we expect them to drive meaningfully improved margins in the future.

We also expect margin benefit overtime from the integration of our two segments into Vocational. We estimate corporate expenses will be approximately $170 million versus $141 million in 2022 driven by a return of incentive compensation to typical levels and increased investments in growth initiatives and new product development. We estimate the tax rate for 2023 will be approximately 25% and we are estimating an average share count of 65.7 million shares. For the full year, we are estimating free cash flow of approximately $300 million, which is impacted by a higher than typical capital expenditures of approximately $350 million as we complete the NGDV facility in South Carolina and invest in manufacturing capacity as well as new product development initiatives throughout the company.

Recall that organic investment is a top capital allocation priority for us. Looking to the first quarter, we expect consolidated sales to be in the range of $2.1 billion, down approximately $100 million versus the fourth quarter. We expect a lower revenues compared to Q4 2022 will be driven by the timing of deliveries in our Access and Vocational segment as well as lower sales at Defense. We expect EPS will be around $1 reflecting lower sales, unfavorable order mix in the Defense segment and the return of incentive compensation cost to typical levels when compared to the fourth quarter of 2022. We expect that the first quarter will be the lowest quarter of the year for EPS based on these factors. I’ll turn it back over to John now for some closing comments.

John Pfeifer: We delivered significant sequential improvement in earnings and strong overall performance in the quarter. We are also making investments that will drive future growth, supply chain dynamics remain our most significant challenge and we are taking actions to drive higher output overtime. We believe the fact that fundamentals in our end markets remain very strong and we expect to deliver robust earnings growth in 2023. Okay, Pat, back to you.

Pat Davidson: Thanks, John. Excuse me, I would like to remind everyone to please limit your questions to one plus a follow-up and please stay disciplined on that follow-up. Afterwards, after your follow-up we ask that you get back in queue if you’d like to ask additional questions. Operator, please begin the question-and-answer period of this call.

See also 10 Recent Spinoff Companies Hedge Funds Are Buying and Dividend Kings and Artistocrats List.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Nicole DeBlase: Yeah. Thanks. Good morning, guys.

John Pfeifer: Good morning, Nicole.

Nicole DeBlase: If you could just start with the outlook for Access. So I think the revenue guide implies kind of like 6% full year growth. Can you just talk about what you’re embedding for price versus volume and maybe how that relates to what you’re hearing from your rental customers going into the year?

Mike Pack: Sure. I guess from a revenue guide perspective, I think foundationally, there’s limited volume increase. A lot of it is just benefiting from the full year of run rate. We did implement an additional price increase of 3.5% on the first of the year, that’s incremental to where we were in the fourth quarter. So right now, again, obviously, we have very, very robust demand right now. Supply chain is really the constraining factor from revenue being higher. So that’s really what we’re going to be continuing to watch over the course of the year is what transpired the supply chains.

John Pfeifer: Yeah. And I’ll just emphasize that, Nicole. Our revenue and Access is not constrained by the order rate. We’ve got really strong dynamics in the market. You saw the healthy backlog continuing to grow really strong orders, it’s entirely supply chain driven in terms of how much we can produce and ship in 2023.

Nicole DeBlase: Understood. That’s really helpful. Thanks. And then maybe just shifting to Defense. I guess, I was a little bit surprised by the 4% margin outlook in ’23. It sounds like that’s mostly mix. I guess, like, how — what is the timeframe or how possible is it that this segment could return to more of a normal high-single digit margin cadence? Thank you.

Mike Pack: Yeah. So our expectation is that again, that because of the lower volume that we had last year and again this year combined with the mix, that’s certainly creating a headwind. And obviously, we have had some impacts of inflation there. So I think, as we look to the future, as we get into 2024 and Postal Service as well as other significant programs continue to ramp up, we expect those margins to begin to return to more typical levels, aided by the additional volume. One other thing that I did forget to mention, we do have that still have about 1% drag in 2023, similar to what we had last year. Just related to NGDV SG&A that’s not capitalized before the program starts. So down — we expect to be down this year, should begin to grow.

And of course, as we look at new programs as well, with the economic price adjustments, particularly as we look at programs like JLTV II, over time, those will — those should offer more protection than we’ve had against inflation.

Nicole DeBlase: Thank you. I’ll pass it on.

Pat Davidson: Thanks, Nicole.

Operator: Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.

Mike Shlisky: Yes. Hello. Good morning and thanks for taking my questions. John, one of your comments about Access were about the U.S. market. I was wondering, if you can update us on how conditions are internationally for Access going into 2023?