Q3 2020 Oshkosh Corp Earnings Call
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Towards this goal 2023rd quarter results conference call at this time, all participants are the listen only mode. A question and answer session will follow the formal presentation.
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No. This conference is being recorded I will now turn the conference or whichever how does that day, then senior Vice President Investor Relations for Oshkosh Corporation. Thank you Mr. Davis and you may begin.
Good morning, and thanks for joining US earlier today, we published our third quarter 2020 results a copy of the release is available on our website at <unk> Dot Com today's call is being webcast and as a company by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and it's all.
So available on our website the audio replay in slide presentation will be available on the website for approximately 12 month. Please refer now to slide two of that presentation.
Our remarks ill follow including answers to your questions contains statements that we believed 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 their form 8-K filed with the FCC. This morning, and other filings we make with the FCC.
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.
All references on this call to a quarter or year, our to our fiscal quarter or fiscal year unless stated otherwise.
Our presenters today include Wilson Jones, Chief Executive Officer, John Pfeiffer, President and Chief operating Officer, and Mike Pack Executive Vice President and Chief Financial Officer. Please turn to slide three an alternate already Wilson. Thank you Pat Good morning, everyone I want to start today by sharing how proud I am hard work.
And disciplined execution, our Oscars team members have demonstrated as we manage through the current pandemic induced environment.
The underlying strength, we derived from our people first culture has been a key enabler to our success as we navigate through these challenging times.
We often talk about how we were better together and we are exhibiting that with our results this quarter.
For the third quarter, we delivered sales nearly $1.6 billion.
Adjusted earnings per share of $1.29 cents, and our consolidated backlog is up nearly 6% versus the prior year as we've controlled what we can control or responding quickly to challenges outside of our control.
Given the conditions present in our markets in the U.S. sit around the world. We believe this represents solid performance.
The duration impact.
The pandemic on the economy remain uncertain.
The resiliency of Oshkosh team members has been impressive as we responded to a variety of challenges, including changing customer demand, new working protocols and supply chain disruptions among others.
We believe our values and strength.
That's a different integrated global industrial or even more pronounced.
Versus our competitors in times like these.
We implement the temporary cost reductions we discussed last quarter. Those actions were evident that only not third quarter results, which should also benefit us as we manage through the ongoing uncertainty.
Recently, we also announced some permanent cost reductions in areas of our business most significantly impacted by changes in customer demand as a result for the pandemic.
John and Mike will discuss those actions and the related impacts intersections.
Before I turn it over to John I went to mentioned that our balance sheet and liquidity both remains strong and our board approved another quarterly dividend payment of 30 cents per share consistent with our dividend last quarter.
Also want to take a moment to congratulate John I was recent promotion to president.
Estimates, John strong leadership and dedication to people first culture.
I look forward to continuing to work with him as we laid this great team here at Oshkosh, Please turn to slide four and John will discuss each of our segments.
Thanks Wilson, Thanks for the comments and good morning, everyone.
Before I provide an update on each of our segments I'd like to provide a brief update on our operations, including our people and supply chains.
Across the company, where we are focused on maintaining the safety of our team members and preventing the spread of the virus with increased social distancing both in the offices and throughout our manufacturing facilities.
Well this can make completing work more challenging we have maintained strong efficiencies I am proud of the way our team has remained disciplined and maintaining these strict protocols.
We also successfully navigated through over 200 supplier shutdowns early in the quarter to continue production without any major supplier induce line stoppages.
This is a true testament to the focused efforts of our supply chain team, our integrated capabilities and our strong supplier partners.
Well, we've largely stabilized our operations and supply chains.
Elevated infection rates in parts of the U.S. extend production and supplier risks and we will remain diligent in our actions.
Additionally, we've carried out our return to work or return to the office actions for our team members I won't go into all the details, but about half of our office workforce physically enters our facilities for work each day with appropriate social distancing and cleaning protocols in place.
Essentially we implemented changes that enable Oshkosh team members to work from home when they need to and work in our facilities when they need to and they can do it seamlessly.
Now I'll move to our segment updates and kick it off with access equipment.
Our access equipment segment has experienced the negative impacts of the current business landscape more intensively than any other segment in our company with a year over year revenues down more than 60% in the quarter.
Despite these challenges our team rally quickly with aggressive steps to reduce production at the factories and to lower our cost resulting in solid adjusted decremental margins of just under 20%.
And and adjusted operating income margin of 8.4%.
This performance is impressive given the significant declines in access equipment markets in North America, Europe, and other parts of the world.
On our second quarter call, we discussed temporary manufacturing closures in the segment during the third quarter.
And with market recovery timing still uncertain, we shut down production for the month in July and we will have two weeks shutdowns in both August and September.
Wilson mentioned that we also have taken some permanent actions to reduce our costs, particularly in this segment.
We announced the closure of our many US Romania facility at the end of June which will occur over the next 12 months.
We remain committed to the EMEA market and we'll be able to serve it more efficiently from our existing global manufacturing footprint, including plants in France in the UK.
In addition to the facilities rationalization, we also reduced our office staffing in the segment with a modest workforce reduction.
Our simplification framework has been an important enabler for our ability to deliver robust margins throughout the business cycle as well as relocate production. So that we can operate with improved logistics and customer service levels.
While Corbett 19 is impacted access equipment markets around the world, we're staying flexible and nimble in our approach to managing them business. However, given the uncertainty around the broader economic recovery, we are not in a position to provide an industry or oshkosh specific outlook.
Look at this time.
We know that access equipment will come back, but we do not currently have a timeframe.
We will control, what we can and make the right decisions that we believe will facilitate our success when demand returns.
We are further encouraged by the age of access equipment fleet.
Particularly in North America that we expect will be a positive demand driver in future quarters.
Finally, just as we discussed last quarter our facility in China is back online and we retain our positive outlook for this market as demand is returning.
Our team in China has plenty of experience in both the demand and supply sides of the market and we remain very bullish on our prospects for long term growth in China.
Please turn to page five and I'll discuss our defense segment.
Our defense segment performed well in the quarter as the team continues to ramp up the JLTV program, which helps provide a solid foundation for the company with a large backlog and multi year visibility.
During the quarter, we received an order for JLTV trailers that further solidifies our leadership in tactical wheeled vehicles for the U.S. Department of defense and our allies.
We continue to work with a number of foreign governments on JLTV opportunities and while we are not making any announcements today, we have a strong pipeline of opportunities and expect that we will be discussing additional international successes in future quarters.
Our defense backlog remains solid at nearly $3.3 billion up over 15% from the prior year, which provides good visibility, especially given the current environment, where the pandemic has limited visibility across many industries.
During the quarter, we announced a joint venture to manufacture tactical wheeled vehicles in Saudi Arabia.
We've been working with our partner I'll tell you Dre for the past two years to finalize the agreement.
This is part of our longer term plan to be an integrated strategic partner with his key U.S. ally for defense vehicles and lifecycle services. This is an important milestone for our international defense activities.
Before I wrap up my comments on our defense segment I want to congratulate both our production you ADW team members in Oshkosh, and our leaders in the business for agreeing to a new collective bargaining agreement, which provides continuous coverage through September 2027.
This is a great example of the benefits of working together and reaching solutions that provide security and peace of mind for our team members as well as continuity for our company.
Let's turn to slide six for a discussion of the fire and emergency segment.
Fire and emergency delivered a strong quarter with a 15.7% adjusted operating income margin.
Last quarter the segment experienced some challenges with the supplier issue that impacted both our shipping schedule and our margins.
This supplier issue is behind us, which paved the way for a great quarter as the team focused on operations and delivered impressive results despite lower year over year sales.
Customer travel restrictions implemented during the month during March eased midway through the third quarter. This was a positive development for the team, but given the recent increase in cobot 19 cases and states reinstating quarantines for travel we may experience.
Temporary sales headwinds in the fourth quarter.
As we discussed on the last earnings call, we expected third quarter orders to be down year over year and sequentially and that was the case remember we're coming off a quarter that was an all time record for orders and we expected there to be a pause in orders due to the pandemic.
The backlog continues to be robust providing visibility well into 2021.
Even with strong year to date orders, we will continue to monitor the pandemics impact on municipal budgets, which could impact spending on fire trucks in the future.
Please turn to slide seven and we'll talk about our commercial segment.
It's clear that customer demand for both concrete mixers and refuse collection vehicles has been impacted by the pandemic as construction work was limited and often stopped at various locations across North America over the past three months, we expected concrete mixer sales and orders.
As to slow that has been the case.
Our CV demand.
Tends to be more stable and we've seen residential trask trash collection remains strong and even elevated in some cases, but we've also seen nonresidential refuse collection slowed during the shutdown and this has had a negative impact on demand for our CBS in the current environment.
Despite these challenges commercial really came through with a solid margin quarter. This can be attributed to quick actions in a passionate culture that permeates throughout the business.
Those of you followed us for the past few years know that we're committed to simplification throughout ash cash and we began the journey a couple of years ago and the commercial segment.
As part of this journey, we're transferring concrete mixer production from our facility in Dodge Center, Minnesota to consolidate production in our other mixer facilities in North America.
The us Dodge Center will become a focused our CV operation this will reduce cost and better position, both the mixer and the RCB businesses for success in the future as they will benefit from focused facilities.
Transition will occur over the next six months for this important step in our simplification journey.
Also we recently sold our concrete batch plant business Conoco, we regularly review all of our businesses for value and strategic fit within our company. We determine that conoco was a better fit with a different owner and closed on the transaction last week. We think this will help us more effective.
We focus our resources in the commercial segment.
We appreciate the contributions from the team at Conoco and wish them all the best as they move forward with a new parent company.
Before I leave this segment.
I wanted to mentioned the ramp up of our new front discharge concrete mixer. The F series 2.0, complete with industry, leading connectivity and productivity technologies, we're pleased with customer orders and interest levels, even against the backdrop of the pandemic. We believe this reading.
Zine mixer will be a long term driver of solid performance for the company watch for new Mega trend technologies applied to this vehicle in the future.
This wraps it up for our business segments I'm going to turn it over to Mike to discuss our third quarter results and some additional comments on current business conditions.
Thanks, John and good morning, everyone. Please turn to slide eight.
During our last earnings call. We commented that we expected the third quarter to be a challenging quarter and it was however, strong execution by our teams combined with rapid implementation of cost reduction actions have allowed us to effectively manage the business and deliver solid adjusted consolidated decremental margins.
15.9% for the quarter on a significant decrease in year over year sales.
Consolidated net sales for the quarter were $1.6 billion down 33.9% from the prior year quarter, a significant decrease in access equipment sales and to a lesser extent decreases in fire and emergency and commercial sales were the primary drivers of the lower consolidated sales.
Offset in part by higher defense sales.
Access equipment sales were negatively impacted by customer push out some cancellations and lower order intake rates as a result of cobot 19, and the related shelter in place restrictions driving low levels of job site activity throughout much of the U.S. and the world.
Defense sales growth in the quarter reflected the continued JLTV production ramp and higher aftermarket parts and service sales, partially offset by lower App HPV volumes.
Fire and emergency sales were lower than the prior year quarter, primarily as result of decreased production line rates necessitated by cobot 19 related workforce availability in supply chain disruptions offset in part by a catch up of units affected by the supplier quality issue, we noted last quarter.
And commercial segment sales were lower than the prior year quarter, driven by a combination of lower demand for refuse collection vehicles and concrete mixers as well as some production disruptions both caused by cobot 19.
Consolidated adjusted operating income for the third quarter was $128.8 million or 8.1% of sales compared to $257.8 million or 10.8% of sales in the prior year quarter.
Access equipment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of the facility shutdowns during the quarter offset in part by favorable price cost dynamics lower incentive compensation expense that benefit of temporary cost reductions and lower amortization expense.
Defense operating income increased as a result of an unfavorable prior year cumulative catch up adjustment higher sales volume and the benefit of temporary cost reductions offset in part by higher warranty costs.
Fire and emergency third quarter, adjusted operating income declined due to lower sales volume and adverse sales mix largely offset by improved pricing lower incentive compensation expense and the benefit of temporary cost reduction actions.
Commercial segment third quarter operating income increased compared to the prior year quarter. As a result of the absence of inefficiencies caused by a weather related partial rough collapse in the prior year unfavorable price cost dynamics offset in part by lower sales volume.
Adjusted earnings per share for the quarter was $1.29 cents compared to earnings per share up $2.72 in the third quarter of 2019.
Third quarter results benefited by three cents per share from share repurchases completed in the prior 12 months.
Please turn to slide nine for a discussion on the remainder of fiscal 2020.
During the second quarter, we withdrew our financial expectations as a result, as the evolving impact of Cobot 19.
While we have seen stabilization in our supply chain and operations recent increases an infection rates in parts of the U.S. continue to drive potential supply chain and production risk further the cadence of customer demand in our access equipment and commercial mixer businesses remains uncertain.
As a result, we're not in a position to provide updated expectations for the fiscal year.
Last quarter, we announced decisive actions to reduce pretax cost by 80 million to $100 million.
For the year in response to the uncertainties caused by coping 19, these cost reduction actions, including salary reductions furloughs temporary shutdowns limiting travel and reducing project costs and other discretionary spending.
As a result of the outstanding focus by our teams. We now expect these temporary cost reduction measures to exceed $100 million in fiscal 2020.
As John discussed, we've also announced permanent restructuring actions in our access equipment and commercial segments, which are expected to yield combined annualized cost savings of $30 million to $35 million. Once complete we expect to begin realizing some benefits of these actions in 2021 with the full and.
Pact of these actions by 2022 as we shared with you on the last call. We established a playbook of options to respond to the pandemic with recovery trending at a slower pace permanent cost actions were prudent.
Our balance sheet remains strong with available liquidity of approximately $1.1 billion, consisting of cash of approximately $300 million and availability under our revolving line of credit of approximately $800 million at the end of the quarter.
Share repurchases remain pause during the quarter and we'll reevaluate them as we gain further clarity on the recovery of our end markets.
And the second current quarter earnings call, we discussed our target of achieving mid 20%.
Adjusted decremental margins, both on a consolidated basis and within the access equipment segment for the year, we're able to exceed those targets during the third quarter with disciplined execution and the health of our cost reduction initiatives. We expect the benefit of cost reduction activities to be lower in the fourth quarter compared to the third quarter.
Shelter in place restrictions have you.
Leading to increased expenses Nonetheless, we expect to achieve the targeted mid 20% adjusted decremental margins both in the fourth quarter and for the full year on a consolidated basis.
I'll turn it back over to Wilson now for some closing comments. Thanks, Mike we have a strong culture strong leaders at Alaska.
Revenues and earnings were down in the quarter from last year, but given the challenges we've been facing we're proud of our performance we have a strong balance sheet with ample liquidity, our defense environment see backlogs provide visibility well into 2021, and we took aggressive actions earlier during the pandemic to lower our cost. Additionally, when ups.
Cost reductions that we discussed on todays call that we believe will position us for greater success in the future.
Our team has managed production and supply chain disruptions very effectively as kept Oshkosh on the right path during these challenging times.
Reassured by our strength and resourcefulness and believe we can deliver solid sales and earnings performance over the long term.
I will turn it back over to Pat you get the Q when they started.
Thanks, Wilson I'd like to remind everybody. Please limit your questions to one plus a follow up after the 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.
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Our first question is from Jerry Revich with Goldman Sachs. Please proceed.
Yes, hi, good morning, everyone. Good morning Gerry.
Really nice quarter as you know what really stands out is getting to double digit margins in commercial in the middle pandemic. When I don't think at least my model I have you hitting double digit margins in any quarter. Historically can you just talked about the sustainability of the performance this quarter.
In this segment.
You mentioned some travel costs are going to come back but are you still in that position where price cost can drive year over year margin expansion for this business in coming quarters and expand a bit more on on the performance this quarter players.
Sure Jerry I'll take that.
We're certainly excited by the.
Great results that commercial delivered this quarter.
Certainly they jumped on their cost actions quickly and we got a nice tailwind from from price cost.
Bottom line, though is as we did benefit from some some one time items in the quarter.
This business is on a nice simplification journey, we believe it's a double digit margin business overtime, we don't see us being a sustained double digit business.
In the near term onsite and give us again, a nice quarter.
I think for those sustained double digit it's going to be a bit of time, yet as we continue our simplification journey.
Thanks, just to add to that Jerry.
The moves were making that John described in his prepared remarks, we're focusing our factories from mixer standpoint focus factor from our refuse collection vehicle standpoint, that's going to help us get to those double digit margins.
Well and that's what's interesting about that you got to double digit margins, while making decisions.
I'm wondering if you could talk about Jay LG and.
Moving around the Romanian facility is that a function of higher productivity in your other plants or is that our view on European demand can you just expand on that and I'm wondering with all the telematics that you've made 70 field for GLG can you talk about whether the utilization improvement has continued beyond normalcy.
Now into July.
Yeah, Jerry this is John.
So when we make moves on fixed costs like you've seen us do in access in Romania or in commercial with the mixer business being consolidated we're always doing that inline with our simplification journey. So so we kind of nowhere, we have simplification opportunities and we look at.
Execution based upon what we see in market conditions, we've been talking about Europe for a couple of quarters at least now in terms of our concern with the market there and.
Our ability to be able to consolidate what we produce in met many OS in other focused factories is simplification, but it's an also also an opportunity to take fixed cost out where the with a fairly weak European market.
And we think Europe, so it's always going to be an important market for us and we'll continue to serve it really well and we're confident we can serve it even more efficiently.
With that moves that we've just made with regard to utilization rate access.
Our utilization rates bottomed out kind of in April and as we got to early in June we saw improvements in utilization rates, we've talked to our customers. All the time, they give us indications on what they're seeing we don't have so our customers.
Report publicly that utilization rates were improving then we got towards the end of June in June and it very differently than the way. It started with infection rates of the virus starting go back up and that that.
Caused a pause for a lot of markets like California, Texas, and Florida, which are big big markets for us and so youre utilization rates are still up from weather when they have bottomed out.
And let's say the April timeframe, but they're not back to pre pandemic levels and I think theres, a little bit a pause going on in the market because all the reinfection rates were Sam.
Yeah I appreciate the discussion. Thank you thanks Gerry Jerry.
Our next question is from and died when with Jpmorgan. Please proceed.
Hi, Thanks, This is Sean Mcmillan on for and.
Just one clarification question, you said, you're extending your temporary shutdowns through Q4 and access those are still going to be to meet shutdowns each month.
A few through us.
So just to clarify so.
So why is the entire month and then it's two two week shutdown.
In August and September.
The same cadence as we saw last quarter.
Great. Thanks appreciate the clarification, there and then shifting gears a little bit your any backlog looks pretty solid at the end of Q3 can you update a little bit on your visibility in that segment and maybe compared to.
Yes, so our backlog at any and defense is really strong anthony's of over $1 billion backlog, our order rates for any are up nicely year to date.
Q3 is always kind of a week order quarter and with a pandemic. It was it was a little bit weak, but but year to date orders are strong backlogs, great Napanee goes well into 2021 Almond defense goes.
Even into 2022 at over $3 billion of backlog so.
Those are.
Really good anchor businesses for us as we go through a very tough climate in our other two segments access and commercial.
Great. Thanks appreciate the color I'll pass it on.
Thanks.
Our next question is from Jamie Cook with Credit Suisse. Please proceed.
Hi, good morning, and nice quarter I guess, just first question.
Can you just talk about the cadence.
Sort of sales and orders that you saw throughout the quarter. Some companies are citing that sort of June was better and then just any trends that you're seeing.
That continued what Youre seeing I guess in July is that trend continued and then my second question.
Obviously, good job on margins in sort of cost control on as we look to 2021 are there any cost that you're realizing that are now sort of structural whereas before he thought they were just sort of like discretionary. Thanks.
So let me start with the orders I think you're probably talking about the access business when one we're referring to orders.
Yes.
I'll go back to.
So the month as we came into the month of June the last month of the quarter end June finished in a in a very different place than where it started.
And.
This as the pandemic unfolded as we talked about this a quarter ago on our call. We started to see push outs and then we started to see a lot of cancellations and we included cancellations in the month of April and our previous backlog and then we still still saw cancellations, although not to the same extent in.
May and June.
Now, having considering the environment that we operate as we've been operating and with this downturn.
We're very pleased with what our orders looked like in the quarter.
And as we've come into July.
Thank what we're seeing is we're still seeing uncertainty in the market versus what we felt in early June and I. Thank again as I've said earlier, we're seeing uncertainty in the marketplace, primarily because utilization rates are not back to pre pandemic levels, yet and that.
They're not back to pre pandemic levels because of reinfection rates that are going back up, especially in those key states.
That are really important to our business.
We are seeing though which I think is a very positive with our with with the marketplace is really responsible leadership and when I say really responsible leadership I'm talking about across our customer base and access now there's a lot of mixed conditions in vertical segments with access foil is really really bad.
Add for example, whereas some other markets are a little bit different from construction in different levels of opening in different states and facilities usage.
Yet different states, but theres, a responsible fleet management going on there isn't a lot of irrational activity.
So.
And the de fleeting Thats happened is or is this the slight rational level of de fleeting. There's no wide scale de fleeting going on so we think we're in a really good position that when.
The market stabilizes that.
The entire market is going to performed very very well, we just don't know when that's going to happen.
And I can take the back half the question just looking at.
Cost actions. So as we said in her prepared remarks are temporary cost actions. This year, we expect to see exceed 100 million those costs generally come back in the future.
As you look to future years. However, we did talk about the permanent actions that that were announced over.
Over the past that past several weeks.
Full run rate by 22, that's 30 to 35 billion, we'll get about half that benefits as we look to fiscal 2001.
What we can say those were going to continue to.
Manage the business, we have our Playbooks, we talked a lot about on the last call. We're continuing to maintain those and and certainly we'll continue to monitor what market activity as we get into into next year and I will continue to be disciplined to her management approach.
Thank you I appreciate the color.
Thanks, Jamie.
Our next question is from May debris with Baird. Please proceed.
Thank you very much and good morning, everyone.
I want to stick with this last point or discussion on on cost savings.
And Mike I'm wondering if you can maybe.
Give a little better detail as to how much of the temporary cost saving contributed to Q3.
And.
Obviously, what that's going to look like in Q4, given your updated figure here and then related to that.
Thinking about fiscal 2001.
Nothing really changes from a volume standpoint, I'd demand standpoint.
Im presuming some of these temporary cost saving carry through into fiscal 21.
So if you could maybe help us kind of parse the things that I think that Debbie that'd be great. Thanks.
Thanks, Greg so from a from a cost actions standpoint.
We talk about north of 100 million.
Kind of an idea that timing and mid Q2 that that those that those kicked off we do see that Q4 cost benefits going to going to be.
Somewhat less than we saw in Q3 as I mentioned in the prepared remarks, that's really because the first half a quarter the level of economic business activity was that such a low level with the shelter in place restrictions. So.
We do expect this spending to be somewhat higher in our fourth quarter.
Jumping to we're not in a position to call next year, but I guess going back to.
My previous commentary, we're certainly managing those Playbooks then as we see that demand cadence, we're certainly going to take take it prudent action and manage the business responsibly.
So Mike.
Yeah.
Well you are implementing these sorts of action backing Q1, 20 or a good portion of Q2 20. So I guess I'm wondering are there component to the savings that are sort of programmatic that automatically reset and during fiscal year or do we just have.
Those relatively easy comps on a year over year basis, where we can still expect the benefit into fiscal 2001. This isn't about guidance. It's just about how you've kind of structure. These savings.
Yes, certainly some cost come back structurally.
Things like incentive compensation can be headwind and there's there's certain actions that that we've taken that again.
You look at things like travel and entertainment, there's so little.
Travel that was taking place.
It's those types of things again, it's really going to depend on what we see per activity. When you start comparing that year over year and it's just it's hard to call at this point and I think thats.
That's what we're going to continue to manage yes. We know we have the restructuring cost in the or that it will help us make but then it's really.
It's going to be a product of what markets is able to us obviously, if the market is goes down further or stays where it is then we'll we'll use those playbooks demands that and look at some permanent cost if we need to.
Obviously, if the market starts to pick back up and we'll be prepared to.
To use a playbook and take it back up but to Mike's for its hard for us to call how much would read through or keep going because we haven't called the market yet, it's just too early and too much uncertainty right now.
Understood that my final question.
Looking through your your inventory build here I guess I'm looking for a little more color as to what was.
We laid and maybe just some of the.
Supply chain issues that you talked about earlier.
There's some other moving pieces and how should we think about inventory progression going forward looking into next.
Couple of quarters. Thank you.
Sure related to inventory inventory is that at an elevated level at the end of the quarter.
I guess, what I'd say as you looked at the quarter back Q3 back to John's comments, you did see demand start picking up at then customers caused a bit more as infection rates increase so.
Fonts that again following our Playbooks, we took more production at access.
In the fourth quarter to really manage that.
That.
The customer demand dynamic with our inventory levels. So we've taken more action.
We have.
There's a certain extent of edits.
Call. It may be one third two thirds to some of it is we did.
By a little bit ahead.
To protect just supply chain disruption.
But the bigger factors really just the cadence of the demand.
As we look at it going forward again, some of its going to be the timing of when demand picks up at.
We're we have good inventory, we're not in a forced liquidation.
Positioned with it it aligns with the backlog, we have particularly as you look at access where you see the higher a little bit higher inventory level.
And so we're going to continue to manage it and depending again on the case that that.
That normalization now that could extend into next year. So Mig. This is John I, just want to add to mikes comments.
The cyclical business like access we always have to balance.
Our ability to reduce costs in generate earnings, which we've shown we can do and a steep downturn, we think thats, that's a really positive thing.
With our ability to come back when the market comes back because we keep saying hey, it's uncertain exactly what that timing is going to be.
But we need to and we work very carefully on positioning ourselves to come back as when it comes back it will come back pretty quickly and so my point is that that inventory as good inventory as Mike said.
And it's partly there to help us when the market turns be able to meet the demand in the market.
Got it thank you guys.
Thanks Mick.
Our next question is from Kevin Stein with Citigroup. Please proceed.
Thank you.
And just following on that sort of inventories we think about.
Access specifically.
From an order perspective given.
Your earlier comments about maybe some pause in the market how are you thinking about.
And it's kind of multiple parts here, but just thinking about year ending backlog.
Access wherever that sits in and how that.
How it will inform you in terms of.
Your your thoughts around 21, and I'm not asking for guidance and 21, obviously, but just thinking about what kind of cushing or comfort.
Your backlog may or may not give you.
As you think about also managing our kind of toggling.
Cross that the inventory levels that.
End of year.
Higher than.
Potentially you were thinking so maybe it's just the question is really comes down into backlog in what kind of.
View that that provides as you look into that the next year.
Hey, Tim My this is Mike I'll I'll try to take that one and certainly.
John John can add on.
We're going to continue to watch.
We're not call in Q4, yet we're going to at we're going to have to watch those order intake rates and it's going to be all the things we've been talking about.
From from general market conditions, but what we can say is as we watch that order cadence over the course of the quarter look at our inventory levels, we're going to that that's something that we're looking at literally on a daily basis, we're talking to our customers and we can meter that production rate, if we need to into the future and.
We're going to where it's something that again as the daily conversations so it's.
It's it's tough to call what that exact dynamics going to be at the end of the year.
But we are going to be we're going to continue to manage it and and adjust and I'd just add to that.
You've heard John say, it's good inventory, it's in the right product categories and we're okay. If we carry some of that into next year because again, it's it isn't kind of the move fairway.
The business, but I'll, just remind you too and you've watched us GLG really all of our segments had been very disciplined in their pricing. So.
We're going to we're going to be smart without inventory to were not visible as Mike said, there's no reason to be in forced liquidation mode. We have a lot of.
Positive outlook for this segment.
For this whole market, it's just a matter of timing right now so.
It is it is elevated but at this stage, we're we're working through it and obviously going into next year, if we need to take production more production out we can do that if we need to add production as John mentioned were equipped to go both ways and Thats, what we talk about our position as the team is really positioned that segment very well.
Okay got it and then maybe just at a high level at the coming back to the defense backlog.
Can you maybe just update us in terms of submit your three large.
Programs there in terms of.
What was funding levels and how we're thinking about.
Obviously, there are a little bit more visibility there just how we're thinking about the outlook for the.
Three big programs and excellent 21.
Yeah, it'd be nice to have that kind of visible in all four segments wouldn't I mean thats a.
We're really pleased that we have a defense business and foreign currency business that can provide us with what we call a longer porch versus some of the short reports businesses that we we have put.
We're in good shape in defense as you mentioned slow over 3 billion backlog.
If you think about the programs, we can take ethics TV the heavies into 22.
We can except.
JLTV orders and deliveries into early 2005, and FMTV to the new program goes into 26. So three solid will vehicle programs really the main tech will vehicle programs today for our us military.
In good shape the acquisition objective for JLTV hasn't changed.
Still 49004, the army and 15390 I think for the Marine Corps. So we like that that acquisition objective is holding.
Some of the timing is slipping a little bit but.
We really really liked where we are and as you've heard us talk about now we're starting to get some momentum internationally that could help us later in 2001, but definitely entered into 22 when JLTV.
Draws down just a little bit in 22, so good shape on all three of those programs. We would expect probably some extensions with FH TV. It's a proven program. So we certainly would expect that that we continue on past 22, but most yet to be determined.
Got it thanks, thanks for the time.
Thanks, Tim.
Our next question is from Stephen Volkmann with Jefferies. Please proceed.
Hi, Good morning, guys, Hey, Steve.
Couple of quick clarifications, it sounds like you're going to be shut down and access for about 50% of the fourth quarter is that basically the same as the what you were in the third quarter.
Yes, Thats correct right.
Okay, Great and then I would assume you have fantastic visibility into the fourth quarter for defense, but I know that sometimes those margins can bounce around or whatever anything for us to keep in mind relative to the fourth quarter and defense.
I would just say consistent with what we've talked about in the past.
It's it's a high single digit business it can vary from quarter to quarter, but I would.
And again I would just look at.
At.
That high single digits, and assume that would be beyond that in that territory.
Okay, Great and then just one longer term one Wilson I know you were kind of right in the middle of the fire around the global financial crisis.
Pun intended on the fire and emergency side and I know that.
That business ended up.
Declining fairly meaningfully post the GFC.
And I'm curious, how you're thinking about the current state of affairs in the world relative to what we saw back there and I know you called out in your prepared remarks that there could be some pressure there, but I'm just curious as you look out over the next two or three years do you think this is a similar kind of a trajectory to what we saw post GFC or is there some mitigate.
Moving circumstance.
Yes, I want to be careful Stephen Colbert the trajectory, but what I would tell you is that I believe is different now versus back then we had the residential housing crisis right and today residential is not great, but its you know there theres housing starts and.
So that gives us hope that we can keep those tax receipts going in that way I think the other thing too is we watch our distribution channel and and that helps us with our confidence and just this past.
Nine months, we've seen six of them invest in new facilities.
So I think that and then you look at the fleet age fleet age is still elevated in for foreign currency and as you know it's kind of emotional issue.
City, a fire truck doesn't work and so usually get some priority. So we think things are a little different today, but again I want to be careful because.
As you know there are always last in last out and we're going to learn more over the next couple of quarters with their order patterns to see if some of that's going to happen.
I believe some cities or are going to debate that because of just what's going on not just with with covance. Some of the social unrest things that are going onto so.
More to come on that but I don't where we sit today I think the differences we've still got some housing and we didnt have it back down.
Fair enough good point, okay. Thank you.
Thanks, Steve.
Our next question is from Courtney, Yes, no vis with Morgan Stanley. Please proceed.
Hi, Thanks for your question guys.
Maybe can you just comment a little bit on the dynamic that you are seeing between.
Europe and the you asked it sounds like.
Most of your more conservative comments about the exit rate in in June had been related to the key accounts in the U.S.
Yes, I seen any differences and utilization between Europe and the last and then you talked about this push outs.
And cancellations of orders.
Any discrepancy there.
I think that the European market.
As similar based on what we're seeing right now is very similar to what we reported a quarter ago, we were trying to a quarter ago way or San we don't know if we're going to be a V shape or a U shape or an l. shape in different markets around the world.
I'm sorry in the U.S., but but we did say we know China's going to be of B and indeed, it's been a movie and we think that year. The European recovery is going to be much slower just because of the macroeconomic.
Indicators that we see in Europe.
More than anything and so we plan.
That is indeed, what we're seeing as we continue to believe it will be a slower recovery in Europe and.
That's what led us to make some of the fixed cost actions that we reported.
And in terms of our simplification journey and how we're going to serve the European market going forward.
Yes.
Our expectation with you the north American markets going to recover quicker than yes in Europe.
But again to be determined to be determined but the timing as to be determined.
Okay got you and then I appreciate there's been a lot of conversations at the cost action. The actions you guys have had taken but just in terms of that.
More than hundred million that you're anticipating this year. How soon is there any framework you can give us.
When we're thinking about how those costs will roll back in either when you stop doing the temporary shutdowns or when you reach a certain.
Sales recovery just to kind of help us think about in the margin trajectory into 2021.
Yes, again, I think not in a position that call 2021, it it's really going to come down to as we said earlier that the volume and demand signal that we're seeing in the access and commercial markets and that's that we have we're ready.
To respond based on what we see so we have optionality and I think you'll you'll see our actions will align with.
With that demand now again some of these measures.
Do come back sort of structurally next year because there they are temporary in nature, but again, we're going to continue to manage those.
Those playbooks, we're going to be disciplined and we have if we see softness we have the opportunity for further permanent.
Permanent actions.
Okay great.
Thanks Cordoning. Thanks.
Our next question is from Nicole Deblase Us with Deutsche Bank. Please proceed.
Yes, thanks, good morning, guys.
Clinical.
So I kind of want to try to dig into that margin question a different way.
Can you just remind us and a normal recovery what you guys had seen in the past with respect to incremental margins and I guess.
Based on what you're doing this time to me it feels like the same playbook that Oshkosh always follows and so I don't see why incrementals would be different than they've been in past cycles, but.
Any perspective, you have on that.
I guess I can start and certainly.
Wilson Wolf and Ken can add ad.
Based on some more historical perspective, but I guess are.
Again, we're going to manage the businesses responsibly, but we're we're in a different place today than when we were going into the great recession for instance, the simplification playbook that we've deployed.
With great success at access at fire and emergency is allowing us to really manage the decrementals that we're seeing today are very different than they were in the great recession and.
Again, we're going to have some temporary cost headwinds when we come back up but we're going to manage that responsibly and we will.
We'll deliver responsible are we believe will deliver responsible margins on the way back up yes, the call I'll just jump into a little more color on that.
Your.
Shushed playbook I wouldn't argue with you the.
Not similar but I can tell you we've really enhanced.
A lot more simplification I can't remember when we first met and you started covering us, but going back a bit or 15 years and I remember.
We struggled on the incremental decremental side of back then.
We weren't we didnt have the foundation back to them that we have today and what I mean by that is a culture. That's working together, we have a people strategy and.
The cost reductions that you've heard us talk about.
Everybody participating.
And whether they're segment like defense was running well, but they still participated in cost reductions to support this different integrated global industrial I look at the simplification that we've been talking about and we've really mature not just with process, but products. The facility rationalization, we're constantly studying on how we can.
Can be more.
Efficient and effective in our marketplace and again, all about creating creating value, but the flexibility and the way. We're nimble today I can tell you 567 years ago, we didn't have that and again, it's a credit to our teams and how they have really work together. They have embraced this people first culture and it's showing in our.
Results and so I think from the decremental standpoint, it exceeded my expectations, Mike talked at the last call somewhere mid Twentys, maybe low twentys, but to see where we came in and how fast are teams took those costs out that's what gives us confidence that as we go into 2000.
One.
We can move fast if we need to I hope, we don't have to hope, we move and move up but we're going to have to wait and see how the markets are recovering four we do that but I would just say the probably the playbooks when you first met us.
Foundations are here, but we've added lot enhance them a lot to get to where we are today and again I think if you go back in time, you see a big difference and how we've had managed the incrementals and decrementals compared compared to the past.
Paul This hadnt yet.
Supply chain and operations, just faster moving better information better decisions heads up more connected with our supply base. Those are builder of some of the attributes that showed in managing 240 suppliers that were right. We're out out of business for a while in how we kept our lines going there that was a real credit to our supply chain.
Yes, I mean listen you guys really showed and your Decrementals. This quarter, that's very clear and then just maybe one very quick follow up from the have already taken enough time the commitment to the mid Twentys decrementals in the fourth quarter does that also reflect any access segment as well.
Yes.
Thanks I'll pass on.
Thanks, Michael.
Our next question is from Mike Schmidt.
He with Colliers Securities. Please proceed.
Good morning, guys, Hey, Mike Thanks.
Yeah. So just my follow up on access just kind of heavy out here. So if it's the exact same production schedule as far as when you're shutdown when you're open.
Fourth quarter.
Is there any chance you could see a quarter over quarter increase in topline.
Fourth quarter over the third quarter.
You know mix improvements or changes.
Any increased production you've got.
I guess just.
Operational changes over the last couple of months or do you think will be somewhat flat in the fourth quarter. If it's the exact same opening and closing schedule.
Hey, Mike It really comes down to where we're staying close to our customers, it's really going to depend on on on that demand signal our customers.
As they continue to manage through it that the ability to to pull to pull orders up a bet. If they're seeing an increased demand signal from their customers or push it out of bed and that's that's really comes down to why.
We're not making the call on Q4, it's that.
That that fluidity that we're seeing and that demand signal.
Okay great.
Then secondly, I think it's about time asked about it I wanted to ask about the about the U.S postal service contract out there.
It's over $6 billion, one of the fine with.
The bids would do about two weeks ago at several hundred thousand vehicles.
I guess.
I was hoping the other bigger than kind of sounds like there is a bit about lid on what the U.S. gas is allowing.
The barriers to kind of stay.
And but they have at least in France was that they are bidding. So I guess first even furniture bidding on that deal and then secondly can you tell us.
How you would produce the product notes and outside chassis, but like what's the still they will you actually up 50. These.
For truck, then and under what second we will they be under if you would actually when the contract.
Yes, I'd like to be able to give you all that information, but I can only give me a little bit.
For the some of the reasons you mentioned when you when you at Cowen just ask your question. So I will tell you that we did submit a proposal for the U.S.P.S. program. We did it just a couple of weeks ago, formerly went in.
We don't have a specific date, yet as to when we're going to hear back from the postal service.
But we believe we could find out as early as the end of the calendar year, but we may not find out until sometime in calendar year 2021.
That that I know you all of it more information that's about all I can tell you.
That's all I'm allowed to tell you really I think you know running onto disclosure Mike.
Okay. Okay. That's all I can follow up offline. Thanks, so much guys.
Thanks, Mike.
Our next question is from Seth Weber with RBC capital markets. Please proceed.
Hey, guys. Good morning, Thanks for joining the call going.
Maybe just a bigger picture question.
You know Wilsons slide in your prepared remarks, you talked about fleet access fleet age as a potential as a as a tailwind that you see.
And then ventral tailwind I guess is that something you're hearing from the rental companies because.
You know the fleet Utilizations, obviously, low I think the rental companies have gotten a little bit smarter about how they are using fleet and stuff I mean do you.
Is that a message that you're hearing from the rental companies that that fleet age is going to kind of cause it pretty.
Caused a replacement cycle or is that just your kind of internal assumption. Thanks.
Yes.
Good question, we as you know we have really good relationships with all of our rental customers and lot of good information shared that helps us with ourselves in inventory operation planning process.
When you look at.
Their fleet ages, if you remember when 12 13 and 14, that's when the market really started to come back and and we hit peak there it into 14.
Lot of machines purchase back then.
Now those were getting into the seven year eight year cycle, and there's still a routine turn of those.
You're right some of that those machines aren't being utilized as much so they could extend that some.
But we still believe that that replacement cycle is there it's just the timing of it.
If markets start to recover as you know.
Well the ways are good customer friends grow market share is with new machines, and so we think thats still in play and again some of the information that we do have it tells us that there are lot of older machines that are going to need to be replaced its just as you know so we can't call the timing of that right now we.
Forward to doing that someday, but we can't right now as Seth as John I'll, just add to that we here.
They in French comes from our customers, but it also comes specifically from data we know they most opportune time in terms of residual value to replace fleet is between seven and eight years.
And.
It can be pushed out a little bit, but the economic equation really falls off if you push it out too much.
A lot of Israel data driven.
Sure.
Okay. I. Appreciate you guys that this is the points as we usually give you a hard time about getting on our rental customer friends about buying.
[laughter] time times or Jayson.
Yes.
I appreciate it guys. Thank you very much.
The rest of back to figures.
Our next question is from David Rasco with Evercore. Please proceed.
Hi, Thanks for taking my call I apologize I got kicked off the call earlier. So I may have missed this but I wanted to push a little harder on access seasonally.
Normally the fourth quarter sales are down 10% to 20% from the third quarter.
But given the extended shutdowns.
But at the same time, you also have a little inventory to ship that of and your customers don't take a lot of iron in September a bit in August and July's already upon you should we be expecting the normal and the 20% sequential decline.
Threeq to Fourq Q on access.
I know, it's been an abnormal year, so thats why the questions more relevant the normal on trying to use normal seasonality.
I wish I wish the word normal was was something we could use these days.
Yes.
I think the bottom line as yet you can't look at this is a normal year I think it's again, it's when you're dealing with.
These lower levels activity I think some of the prior year Comstock fairly apply so I think it we're going to continue to.
Talk to our customers stay close.
We have had the inventory respond to their third demand certainly need and we're going to we're going after just can continue to manage and see on fewer than that.
We're certainly prepared to respond to what those needs are.
But given the seasonality or buying in your again, you've already done in July.
Are you, implying the down 10 to 20.
It should be better because threeq. So I'm just trying to baseline that because you must have enough visibility the least had a comment about versus normal seasonality above or below.
So we don't comment.
In the quarter were in we've always said away from it, especially now and you know this that this market.
As well or maybe the most at times.
It starts and stops so fast and.
No black our position because of the inventory we do have we know if some things open up some of these states lists some of the restrictions that are there and you get some more construction going on we think that could be good for us, but again, we don't know.
We're not.
So what we're doing is controlling what we can and as you saw the teams that started in the quarter managing costs down and delivering some really good decrementals.
The margins are great I guess some of the way think about it when you speak of an aging fleet.
And if you think about current volumes versus where you believe from your conversation to your customers, where his replacement demand or if you want to project on on next year, where do you think current volumes are versus replacement demand.
Hi, I don't know that we could answer that.
[music].
When we when we sit down into the negotiations they give us an idea of how much fleet, thereby expansion how much fleet, they're buying for replacement, but as you know a lot of that kept that has been pulled back. This year. So we're probably not as current on they are buying is it for real.
Placement or is it for expansion.
There's not a lot of expansion today.
From our vantage point, so I would mean that some of this replacement, but I'd hesitate to try to call that from a percentage standpoint, yes.
Add to.
Our customers are being very careful right now.
And being very responsible in managing their capex through a severe downturn.
And the good the good thing.
Within that as we watch the fleet in the size of the fleet and fleet managers throughout our entire customer base, we see as they are being very carefully analyzing their assets and they'll recommend the sale and then in a very early fashion, but.
So so there's a slight change in fleet sizes, but theres no significant change in the overall fleet side and we think that's a positive sign we just don't know again.
The timing of when indicators are going to move the market back to normal seasonality in normal conditions.
Yes, I mean, that's what we're trying to figure out of course in a downturn all the big guys can aged fleet a bit.
Just curious if you were getting some insight of ready on.
We can age this year, but all else equal next year, we're not looking at age anymore.
And us if were below replacement today Theres. Some built in growth for next year, just going back to replace that they see.
Aging.
But look I know the orders are down materially right now so it's not easy to.
Forecast 21 up at this stage. So we're just trying to put some parameters around it. So I appreciate the time. Thank you so much.
The Inc.
And our final question is from Steve barge with Keybanc capital markets. Please proceed.
Good morning, guys. Thanks for a push in the call.
Sure Steve.
You said there were still deferral requests in May and June for access so.
Can you tell us what percentage of the 557 million in backlog there has a from delivery date in Fourq, you and what is scheduled to ship and 21.
Sure I'll pick that Steve.
Generally we'd expect.
A majority of it would be deliverable in the next per.
But in general obviously, it's kind of back to the commentary we add it's just hard to know there is that just as we saw only to defer and the previous quarter, there's that opportunity in Q4 again it comes down to market activity.
Infection rate and just what happens I think you've been looking at what happens with schools. This fall and whether people are.
Whether that create side economic headwind. So we're just going to continue to monitor at credits.
We're.
We're monitoring ideally basis.
Okay, and just based on the decremental comments it sounds like you expect a sequential decline in excess margin. Even if revenue were sequentially up did I am I reading that right.
I guess, what we've said as some of those temporary cost actions. We there were more heavily weighted in the quarter that could be I'm just in total could be a headwind.
Versus Q3, so a lot of extends that that our range has has bumped up on those temporary cost measures.
There was a decent chunk of that Q3.
Yes, and not trying for guidance here, but you know as I think about the comments about commercial not staying double digit and costs and other segments starting to come back as I'm working through the model based on your comments. It seems like Threeq you could be peak EPS for the or am I reading that wrong do you expect a big variance one way or the other as you go into Fourq you.
I'm not in a position to make a call again, a lot of it it's going to come down to the volume in activity and not in Q4, but again, we're going to depending on what that activity levels were going to say stay disciplined.
Cost management standpoint, as we manage through it.
Alright, Thats really change yes. This is just.
It's really change you follow this newly access business normally you know we can manage its you know on a quarterly basis and then when things tightened up we go to a monthly basis will now literally they've got customer decisions changing daily on delivery dates orders things like that and so thats why its so hard for us are really define.
Q4, because our bills visibility is not near what what it normally would be and I'm sure you understand why with what's going on yes for sure.
Thanks very much.
Hey, Steve Thanks.
Yeah, Hi, endeavor today's session I would like to turn the call back over to Wilson Jones for closing remarks.
Thank you operator, thanks for joining us today, everyone just want to say, please stay safe and healthy as we get through these challenging times together, we certainly look forward to speaking with you on a virtual conference on the next earnings call take care.
This concludes today's conference call you may disconnect your lines at this time and thank you for your participation.