Q2 2021 Oshkosh Corp Earnings Call
Greetings and welcome to the Oshkosh Corporation fiscal 2021 second quarter 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.
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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.
Good morning, and thanks for joining US earlier today, we published our second quarter 2021 results a copy of the release is available on our website at Oshkosh Corp. Dot 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.
The available on our website the I D.
The replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide two 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've described in our form 8-K filed with the SEC. This morning.
The 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.
All references on this call to a quarter or a year or two hour of fiscal quarter or our fiscal year unless stated otherwise 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 three and I'll turn it over to you John.
Yeah.
Thank you Pat and good morning, everyone. We're happy to announce outstanding second quarter results highlighted by sales of $1.9 billion and adjusted earnings per share of $1.48, both of which exceeded the prior year and our expectations.
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Demand across the company and particularly in our access equipment segment has come back stronger and faster than we expected of as a result of positive vaccination progress and the confidence that that brings to the marketplace.
Our production rates are back to pre pandemic levels across the company and our 14000 dedicated team members continue to do an exceptional job of rapidly adapting to changing situations as we recover from the pandemic.
Companies across the globe are facing significant supply chain challenges of the economy rebounds, including a global semi conductor shortage record of high steel prices and resin shortages from the deep freeze in Texas back in February our.
Our supply chain team members on third party suppliers of work hard to maintain production, but supply chain disruptions will likely remain of risk. We will continue to manage for the duration of two of 2021.
In addition to our strong second quarter performance. We received some great news on February 23rd when we were notified that we won the next generation delivery vehicle program with the United States Postal service I am very proud of the efforts of our team over the past several years the comp culminated in this.
Storage win which supports president Bidens goal to electrify the federal fleet with zero emission vehicles and create new sustainable manufacturing jobs in America.
Our defense segment will supply the postal service service with as many of zero emission battery electric vehicles or Bev units that they desire as they upgrade their fleet to be increasingly sustainable. This award is the latest accomplishment in our 25 years of continuous innovation and electric draw.
<unk> and Bev engineering I will discuss this exciting contract win in more detail a little later.
We are also proud to be included in the S&P Global sustainability yearbook. Once again in 2021 inclusion in the yearbook highlights top 15 performance for Oshkosh, and our industry category and underscores our commitment to creating a more sustainable future and culture that is centered.
On a safe and inclusive workplace.
Additionally, we have pledged to further reduce greenhouse gas emissions and energy consumption as we continue to make investments in technology, including the development of battery electric products in all of our businesses.
I'm also pleased to announce our expectations for 2021, adjusted EPS to be in the range of $6.35 to $6.85 as we return to our practice of providing quantitative guidance, Mike will share more details in his section.
Yeah.
Let's turn to slide four and get started on our segment updates with access equipment.
The improvements we started the C. In our markets back in December and January following positive vaccine news rapidly accelerated over the past few months and helped drive the strong performance we are reporting today.
Revenue increased by six 5% over the prior year, leading to a solid adjusted operating margin of over 11%. We previously expected of returned to growth in the second half of the year. So we are pleased to be ahead of schedule of these strong results would not be possible without the access teams discipline.
The execution through the pandemic, which has enabled the business to quickly respond to changing customer demand, particularly in North America.
Orders were also strong leading to a solid backlog of $1 $5 billion for this segment up 80% versus last year.
Since most forecast project nonresidential construction to be down in 2021, we have we believe replacement demand is driving access equipment sales growth as we've discussed for the past several quarters fleet ages are elevated throughout the North American market and we believe the need to rip.
Place these age fleets with us will be a significant driver for new equipment sales in the coming quarters. We are further encouraged the demand has returned for a broad cross section of customers not just the largest and most visible rental companies. This is important as we believe it signals of healthy and robust.
The market.
As we noted on the last earnings call J L. Gs of U S production facilities returned to full production levels in March while the threat of absenteeism in our operations has significantly decreased due to lower COVID-19 infectivity rates and robust contact tracing we are closely managing supply chain challenge.
Is that could impact production in the second half of the year.
As part of the coalition of American manufacturers of mobile access equipment. We also took action during the quarter against some unfair competition practices by foreign companies in the United States. We believe this is good for the long term health of the industry.
Steel prices remain at record highs and we took further actions during the quarter to mitigate the risk, including additional cost locks on portions of our plans steel purchases as well as price increases for new units ordered beginning in early March.
<unk> like we experienced in 2018 when steel cost increased significantly there will be of lag in the benefit until we work through orders that were in our backlog prior to the price increase.
I'd also like the share some good news on our Tianjin China facility construction is largely complete for our expanded operations and we expect the began shipping product out of the new capacity. Later. This year. This is an important step in our long term strategy to drive profitable growth in China, and other Asian markets.
Please turn to slide five and I'll review, our defense segment.
We're proud to be the supplier of the next generation delivery vehicles for the United States Postal service recall that this competition has been a rigorous five year process in our World class Engineers really stepped up to the challenge to provide the postal service with the vehicle that meets or exceeds all of their current.
And future needs. The program covers the purchase of 50000 to 165000 units over 10 years as part of the postal Service's plan to significantly modernized their delivery fleet with improved safety reliability sustainability cost efficiency in them.
Much better working experience for our nation's postal carriers.
Our offering provides the postal service with both zero emission Bev units and fuel efficient low emission IC units with the option of delivering any combination of up to 100% of either model. The vehicle design also provides the postal service with the flexibility of convert.
Ice units to bevy of units in the future we expect to begin delivering production vehicles in the second half of calendar 'twenty 'twenty three.
We are also pleased with the progress of integrating integrating Pratt Miller into the company. Following the close of the acquisition in January we.
We look forward to leveraging their speed agility and expertise as we intensify our innovation focus across the company.
Now some of the team are listening to our call today, and we welcome them to the Oshkosh family.
Our operations team at defense continues to work hard to deliver the J L. T vs. F. M T V's and F. H T V's that support our U S armed forces.
During the quarter, we established a new production line for a portion of our volume the new production line incorporates industry, leading technology to further optimize the manufacturing process, we did experience higher onetime costs and onetime inefficiencies during the quarter as part of the move which supports the law.
Long term success of the segment.
Before we leave the defense segment I'm pleased to announce that the National Advanced mobility consortium has selected the Oshkosh defense and our partner S. T engineering to participate in the prototype phase for the U S. Army's cold weather, all terrain vehicle or C. A T V. The <unk>.
A T V is a new program for tracked vehicles that operate in Arctic conditions and are designed to replace the small unit support vehicles that have been in service since the early 19 eighties. We believe the program represents another solid opportunity in the adjacent products space for our DIFM.
Fence business.
Let's turn to slide six for a discussion of the fire and emergency segment.
The fire and emergency segment delivered another quarter of outstanding performance with both strong sales growth and an operating income margin over 15% last year, we face the significant supplier challenge combined with customer final inspection limitations of the pandemic struck but the team.
Recovered quickly and continues to deliver industry, leading performance. We've also moved pass concerns we had discussed surrounding absenteeism and our operations have returned to pre COVID-19 levels.
We often talk about the strength and capabilities of our strong Pierce dealer network. Despite the pandemic our dealers of continued to increase investments in their sales and service networks demonstrating their commitment to customers. We believe this is the type of commitment that ensures sustainable success going forward.
The segment finished the quarter with another solid backlog of $1 $3 billion basically on par with last year's all time record.
Orders on the quarter were lower year over year as we expected largely due to the pandemic related impacts as we've said previously we will monitor municipal budgets and we believe that the North American fire truck market will decline modestly over the next few quarters as a result of the pandemic. However, we don't build.
This will be much of an impact on the long term success story that we are building with our fire <unk> emergency business.
And as and as Mike will discuss our outlook for this business in 'twenty 'twenty. One is strong please turn to slide seven and we'll talk about our commercial segment.
Our commercial segment delivered a solid quarter with higher operating income on lower sales, our simplification and innovation strategy. In this segment is working which gives us confidence that margins can continue to improve over the long term.
During the quarter, we continue to make excellent progress on our focused factory approach of transitioning mixture of production, the London, London, Ontario, I want to commend the team on their efforts as it hasnt been easy due to cross border travel restrictions with Canada. As a result of COVID-19. We're also making great progress on building.
The high flow refuse collection vehicle line in Dodge Center, Minnesota, leveraging the space freed up from the move of mixers. This modernization and automation investment brings added capacity and efficiencies as part of our strategy.
Moving to our markets, we're seeing solid recovery in quote and order activity for mixers and refuse collection vehicles as business improves as we move beyond the pandemic. We believe the reopening of the U S is driving increased refuse collection and construction is picking back up again as evidenced by our higher year over year.
Backlog, we believe these trends will continue as we work through 2021.
As you might expect supply chains also pose risks in the commercial segment for instance, the availability of third party chassis from truck manufacturers as a result of semiconductor and other component shortages is an issue that we're managing closely and it could have some impact on our deliveries in the back half of <unk>.
'twenty one our supply chain teams are doing a great job of responding to these challenges and keeping our production lines running and we are staying vigilant.
We remain on track to deliver the electric refuse collection vehicles, we talked about last quarter to our customer in Boise. These units will provide valuable insights on opportunities and challenges when babs are used on a daily basis for refuse collection. The development of these products as the.
Part of our long term electrification journey across the company that we believe will generate significant benefits for our customers and the environment. This wraps it up for our business segments I'm going to turn it over to Mike to discuss our second quarter results and expectations for the remainder of 2021.
Thanks, John and good morning, everyone. Please turn to slide eight we delivered a strong quarter that well exceeded our expectations as the quarter unfolded demand increased sharply in the access equipment segment, leading to consolidated sales of $1 $9 billion $92 million higher than the prior year an approximate.
$140 million above our expectations the growth over the prior year was driven by a 29% increase in fire <unk> emergency sales and a six 5% increase in access equipment sales offset in part by a modest sales decrease in the defense segment.
Access equipment.
Sales increased due to improved market demand in Asia, and North America last year of demand was negatively impacted late in the second quarter as the COVID-19 pandemic drove shelter in place restrictions around much of the globe debt.
Defense sales decreased in the quarter due to lower F. M TV sales and lower cumulative catch up adjustments as we received a ph T V and J L. T V contract awards in the second quarter last year offset in part by higher at the HDD sales and Pratt Miller sales for a portion of the quarter. Following its acquisition in January.
Fire <unk> emergency sales increased as a result of both higher fire truck and art vehicle sales in the prior year fire truck sales were negatively impacted by the combined effects of COVID-19 related customer travel restrictions and the supplier quality issue that impacted our truck delivery schedules.
Our sales benefited from the delivery of vehicles under two multiunit contracts in the current year quarter and commercial segment sales were down primarily due to lower refuse collection vehicle demand caused by the COVID-19 pandemic and the impact of divesting our concrete batch plant business in the fourth quarter of 2020.
Offset in part by an increase in concrete mixer volume.
Front discharge concrete mixer sales were muted in the prior year as the new S series, two point out was still ramping up.
Consolidated adjusted operating income for the second quarter was $143 $3 million or seven 6% of sales compared to $133 $6 million or seven 4% of sales in the prior year quarter.
Access equipment adjusted operating income increased as the result of higher sales volume lower spending as a result of the COVID-19, pandemic and improved product mix offset in part by higher incentive compensation expense.
Defense adjusted operating income decreased as a result of unfavorable cumulative catch up adjustments as well as costs and labor inefficiencies associated with the startup of the new manufacturing line during the quarter.
Fire <unk> emergency operating income increased in the current year quarter, primarily as a result of the increased sales volume favorable price cost dynamics improved product mix and improved manufacturing performance.
And commercial segment operating income increased due to lower product liability costs lower spending as a result of the COVID-19, pandemic and lower warranty costs.
Adjusted earnings per share for the quarter was $1.48 compared to adjusted earnings per share of $1.25 in the prior year.
Please turn to slide nine for a discussion of our expectations for 2021.
We are pleased with our solid performance in the first half of 2021 as well as the improved visibility we have for the second half of the year, which has positioned us to once again provide quantitative expectations. We have solid backlogs in all four segments and I've seen a significant reduction in COVID-19 related absenteeism as John said.
We face supply chain risks for the remainder of the year just like most companies around the globe our supply chain teams have done an outstanding job of keeping our manufacturing lines running however, it is possible that supplier shortages could interrupt production in the back half of the year.
Our expectations that follow assume no major production interruptions as a result of supply chain shortages.
On a consolidated basis, we are estimating sales of 7.75 to $7 $95 billion compared to $6 $9 billion in 2020.
We are also estimating adjusted operating income of 610 million to $655 million compared to $496 million in the prior year and adjusted EPS of $6.35 to $6.85 compared to adjusted EPS of $4 90 for.
For <unk> in 2020.
At the segment level, we are estimating access equipment sales of $3, one $5 billion to $335 billion, a 25% to 33% increase compared to 2020, we expect growth to be led by North America, Although we expect sales growth in most regions as the world comes out of.
Of the pandemic.
We are estimating that access equipment adjusted operating margin will be 10, 5% to 11.25% included in our expectations isn't on approximately $30 million net headwind from elevated fuel prices that we expect will primarily impact the fourth quarter, we believe the headwind will be.
Decrease in 2022, as we begin to more fully realize the benefit of pricing actions implemented in the second quarter. The full year impact of last year's temporary cost reductions returning to our expected run rate. This year has declined versus prior expectations due to lower spending in the first half of the year as travel trade shows and other.
Discretionary spending have returned slower than anticipated.
Turning to defense, we are estimating 2021 sales of approximately $2 $5 billion, an 8% increase compared to 2020. This estimate includes increased G. L television production and the benefit of Pratt Miller of sales backlog remains robust at $3 $5 billion, providing solid visibility.
<unk> into 2022.
We are estimating our defense operating margins will be approximately 8% consistent with our comments over the past several years of high single digit operating margin percentages.
This estimate reflects higher new product development spending manufacturing inefficiencies associated with the start of the new production line and the lower cumulative catch up adjustments compared to 2020.
We expect fire and emergency segment sales will be approximately $1 $2 billion roughly $90 million higher than 2020. The increase in revenue was primarily due to a return to more normal production and customer deliveries as the interruptions due to COVID-19 decline.
We expect operating margin in the fire and emergency segment to increase to approximately 14% as a result of increased sales volume.
We are estimating sales of approximately $925 million.
In the commercial segment down slightly from 2020 as a result of the prior year sale of the concrete batch plant business and we're expecting operating margins for the segment of approximately 7% margins will be impacted the second half of the year. In this segment as a result of the rapid increase in steel costs as well as disruption.
On the.
Ply of third party chassis.
Similar to access equipment, we expect this unfavorable impact of wane as we begin to realize the benefits of price increases in early 2022.
We estimate corporate expenses will be $150 million to $155 million, an increase of $25 million to $30 million as a result of the return of higher incentive compensation levels.
We estimate the tax rate for 'twenty, one 2021 will be approximately 22% and we were estimating an average share count of $69 3 million shares.
For the full year, we are estimating free cash flow of approximately $650 million, reflecting the expected the strong year of cash generation. We also estimate capital expenditures will be approximately $120 million.
Looking at the third quarter, we expect consolidated sales to be up approximately 40% over the prior year with access equipment and defense up most significantly we expect commercial sales to be up high single digits as our markets rebound and fire <unk> emergency sales are expected to be essentially flat last year we.
Fitted from approximately $60 million of temporary cost benefits in the third quarter. This will be of headwind to incremental margins during the quarter as our spending begins to return to more typical levels in the third quarter. This year with increased business activity.
I'll turn it back over to John now for some closing comments.
We just announced the great quarter, and we have a strong outlook for the remainder of the year with expected growth in revenue adjusted operating income and adjusted earnings per share compared to 2020.
We expect to exit the year on a strong position as we look forward to the next several years supply challenges remain but we believe we are on a great position to take advantage of the many opportunities open to us through the recovery as we continue to innovate serve our customers and advance our company going forward.
I'll turn it back over the path to get the Q&A started thanks, John I'd like to remind everybody. Please limit your questions to one plus a follow up and we need to be disciplined on that follow up question. 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 peer.
<unk> of this call.
Thank you we will now be conducting the question and answer session.
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On the please while we poll for questions.
Thank you. Our first question comes from the line of Ken <unk> with Citi. Please proceed with your question.
Thank you and good morning first question is just.
Hopefully you could provide a bit more color on the.
On the access backlog both in terms of product mix.
In terms of the split between.
Awp's on Kelly's and then.
What the debt.
I think of as much.
3% price increase that was announced back in early March.
Can you give us momentum.
Even if its the ballpark kind of a range as to what does that apply to you on in terms of the $1 billion of half dollar backlog.
I'll start with that please thank you.
Sure.
So good morning, Tim first of all just.
Just as we look at the product mix over the course of the year, you'll see that we are going to be a little if you look at past history, we're gonna be a little heavier weighted to AWP is similar to the mix that we saw this quarter I think from a year over year perspective, the the comp was a little unusual because some of our customers continue to take a take telehealth.
<unk> as we entered into the pandemic. So that that's really what we're expecting over the course of the year as we go to the price adjustments. Indeed, we did adjust price that was effective we did that early March its effective for new orders after that point in time. So we are going to have a cost price headwind.
And access to the tune of about $30 million.
Largely going to be in our fourth quarter and that's on a net basis on by the time, we start getting into next year, we'll see that that will allow that will begin to neutralize that headwind.
Tim It's John I'll, just add a little bit to Mike's a response you know the two fastest growing markets right now are the U S and China.
And both of those are weighted towards awp's versus tell of handlers. The U S. Because the AWP fleet, which is large as aged and it needs to be replaced and so we're seeing that start to happen and in China. It's really all it's mostly in AWP market in China, So as that market.
For us to grow faster than others that also pushes up awp's versus tell of handlers.
Okay. Thank you that makes sense and then and John just a quick one on the balance sheet.
Avi comfortably in the net cash position.
$650 million of free cash flow is a pretty big number. So just maybe update us in terms of of your priorities. There. Thank you.
Yeah sure. The you know on we feel great about our balance sheet, right and and it gives us a lot of Optionality as we go forward, we'll always be paying attention of returning mountain to returning money to shareholders.
The consistent dividend payer and Opportunistically, we'll look at share buybacks, but but more importantly, we look at the Optionality of how we can continue to invest in our business.
We're in you know you saw us make the acquisition of Pratt Miller, I think youll see us make some more bolt on tuck in type acquisitions that help us facilitate growth going forward, but you'll also see us continue to make investments.
Organically you know we won the postal contract well that didn't happen without investment we had to make upfront investment to do a lot of design and development work.
To be able to win that program and so you'll see us continue to make a lot of organic investment and how that manifests itself more on the opex side of it but it's still investment that we make in the future. So we like our balance sheet and we've got a lot of Optionality and.
You'll see it happen on both returning money to share, though you'll see the use of it in terms of both returning to shift to shareholders and growing the business through investments hey, Thanks, a lot of time.
Our next question comes from the line of Mig <unk> with Baird. Please proceed with your question.
Thank you and good morning, everyone.
So maybe sticking with with this concept of investment and your your guidance clean balance sheet I think John I heard you talk about the the development happening across all your segments or something that you are targeting across all your segments.
I want to hear more about that.
And how that plays into this investment dynamic internally in the company and I'm also curious if you're if you're thinking about capital deployment through M&A to help you in any way to to build out of your capabilities here.
Well. The simple question is yes, we're thinking about capital deployment on M&A to build out our capabilities. You know we gotta do we use the most advanced technology to develop our products. You know we're heavily involved on electrification today, we are of vault involved in autonomous programs today.
Intelligent product programs today more sophisticated mobility systems, which are important the most of our end markets are.
So we've got to continue the two.
Develop that technology that takes organic investment, but it also takes some investment and in and.
Inorganic moves.
Miller added a lot to us in terms of their ability to rapidly develop.
The robotics and rapidly develop.
US electrification that enhances our own already strong capability to do that.
So innovation is a big part of part of it we got to continue to advance innovation. If we're going to continue to expand our number one positions in all of these end markets that we serve but we also you know when you look at the fleet of machines and vehicles that we have on the marketplace. It's in the millions that are in use today.
And we think that we can continue to make moves to wrap our arms around our customers and make sure that those that that equipment is as productive as it possibly can be and make sure. We're really supporting them strongly in the lifecycle of the product I think.
That will require some additional investment inorganically.
And then there isn't there is new categories that we know we can get into that of right inside our wheelhouse that'll drive growth. We did the U S. Postal service organically, that's a new category last mile delivery for us organic investment a big win but Theres also some inorganic stuff that's in our wheelhouse, but I think youll probably.
See us make some moves and so it's a little more color Meg for Ya.
That's helpful. Thank you for that and then my my follow up here just a clarification on the equipment. So when you're when you're saying that going into the fiscal 'twenty, two youre going to be more balance on price cost standpoint, it might do to sort of understand that the price increase that you put through in March is enough to bring you to that debt.
Balance status in the 'twenty two or.
Or are there a subsequent price increases that will be required in order to get you there.
We do thank you for that.
Sure.
Really where we're continuing to watch steel and obviously, that's the biggest driver and if we need to make additional adjustments of well right now based on what what we've.
What we've done we believe it brings us back to balance if you look back the 2018 were through a similar environment with rapid steel increases and there was always a bit of of lag when you come into it based on backlog position, but.
So this is not new but yeah. That's that's really the plan and we're going to continue to monitor it and that of course, if we need to take additional action we will.
Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Hi, good morning, guys.
Aren't going to go back to access here as well Jon and can you just give us your sort of big picture thoughts over the next few years relative to where you think where on the cycle does this replacement cycle will have legs here and.
Are you at one point due to the margin close to 15% in that segment is there any reason you couldn't get back to that just how are we thinking sort of more medium term here.
Yeah.
Thanks for that question I think that's a good question certainly very timely as we've started to really recover and we've started to recover earlier than the write off right.
With growth in this past quarter. So we believe that we're entering a multi year growth cycle in access equipment.
We absolutely expect to achieve and exceed the prior peak revenues and you remember of the prior peak revenues was not too long ago. It was little over 4 billion, we absolutely expect to to exceed that.
The the access equipment it real.
<unk> continues to expand the.
The I mean I'm talking about the application of access equipment continues to expand its more versatile it's used in different applications.
Not just construction, we're continuing to see wider usage of the equipment, we think that bodes well for it.
Of course, there is the fleet age you know there's a there is on aged fleet in the U S. A that is gonna that alone the replacement of that aged fleet and will drive a lot of that multi year of growth rate.
I think that we our team at access has done a phenomenal job of positioning.
Jay algae to really take advantage of this multi year growth cycle, we've done a lot of simplification on our operations that have been the that's really helped US just recently and will help us going forward.
It includes some facilities rationalization that we did during the pandemic, we've developed new benchmarks for our performance and we've really positioned the business to exceed and get the past prior year peak levels now whether or not we can get the 15%. That's a question Mark I think youll see us get.
Two and maybe exceed the prior peak.
Margin performance.
And our goal is is of course for every peak to be higher than the other than the last peak.
We're what we're really proud of is the performance that we're able to deliver on this past downturn.
We think we're really redefined our ability to perform in the downturn in our we believe that we're headed to a new peak.
So that's a little color on it for you.
I appreciate all of the detail there and then for my follow up on the.
I think you ask your follow up right I mean on access.
Alright bye.
Sorry to come down heavy handed there, but we need to keep moving.
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning of nice quarter, I guess two questions. One on access you talked about the 3% pricing increase in March is there any concern that there was sort of a pulse of Florida or have you seen order trends continue after you announced the price increase.
So that's my my my first question and then I guess my second question any help.
Help you can provide on just the postal service award just how to think about a framework for earnings it is accretive to margins in any investment required. Thanks.
Sure.
First of all of just in terms of of the order patterns. You know, we I think right now the rig.
The order patterns that we've seen of reflective of of replacement demand the fleet age and utilization rates being strong out in the marketplace. So I think it's certainly worked to extent that that customers saw the those trends, obviously focused on getting the orders and but I don't know that there's we don't necessarily believe.
But there was a bubble there.
Just jumping to the the postal service postal services on a great program.
We're very excited about it it's a similar to our other.
Other large government contracts, we havent heard of defense segment. It will be contract based accounting, we start deliveries of production vehicles on the back half of of 2023, we will have some revenue over the next.
Couple of years, leading up to that for some of the the early deliverables as we go through the ramp up phase of that on from an investment standpoint, we expect the investment of about $300 million for capital and tooling I think importantly that that investment very closely aligns with our milestone.
You might have like a quarter lag here and there, but generally it's going to be supportive of you.
Youre not going to see a big cash flow impact.
The impact from quarter to quarter burst of sort of baseline model you may have had in the past.
Let me just add for the postal service you know the this is.
Where we're really proud of this win all.
This really delivers the U S postal service.
The ability to modernize their fleet.
<unk> solves a lot of problems for the postal service and it delivers the postal carrier of a vehicle that is better than anything that they could ever have ever imagined.
It's designed in a lot of.
Productivity safety and performance features.
It allows the postal service to electrify its fleet over the course of the contract and make it zero emission.
The directly in line with president of items objectives.
And so it's you know first and foremost this is great for the postal service on the postal carrier, but it's also great for Oshkosh Corporation and its great for our shareholders and that's what I can tell you about that's the that's what I can tell you about the margin on it.
Okay.
Our next question comes from the line of David Raso with Evercore. Please proceed with your question.
Hi, good morning.
For the access implied second half.
I was just curious that the implied sales guide in the second half of 76%.
And to an earlier question. It also sounds like that's what the pretty solid mix toward AWP. So you would normally think of the incrementals.
On that kind of growth you know say at least 30% to 35%.
But the way you're guiding of around 19 that that's about a $90 million to $130 million of extra cost and then obviously, we all appreciate what's going on with the supply chain of input cost but.
The $90 million to $130 million, you only said it steel at $30 million.
Of the headwind.
So I'm just trying to what is that extra 62 of 100 million or is there some on.
Understandable conservatism baked into what were the costs on logistical issues could be it just seems like a really big GAAP.
Hey, David This is Mike Yeah. The the big piece, that's missing you got the $30 million for steel the other big piece of those temporary costs coming back that's really <unk>.
<unk> has the biggest piece of that just the company we have about.
We have 60 million reversing the next quarter in Q3.
Of about 10 million call it of a permanent benefits, we're benefiting from that quarter. So it's about a 50 million dollar headwind there a big chunk of that is in access because they were obviously most impacted so that's really the other piece. We do as you look at the guidance. There's supply chain is lumpy. So I think we do have some.
We don't have a you know a broad shut down for an extended period of time factored in but theres. Some lumpiness that will face the back half of the year. So that's factored in as well.
So the net cost back is $50 million for the company and three Q in let's say access is more than half that does that repeat in the fourth quarter is that how we get closer to the GAAP I referenced youre going to of a theres a theres a cost impact in the fourth quarter you have the the $30 million of up of steel and access.
There is another.
Kind of reversal of those temporary cost of call. It 20 of $25 million in the fourth quarter as well so and again have you ask us.
Great. Thanks, David.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
John I'm wondering if you could just touch on your supply of your heat map and.
Talk about or are there any other supply chain components that you folks are monitoring closely.
Beyond.
Electronics can.
Can you also just touch on how.
Much labor capacity you folks have as we think about what production should look like into 'twenty two.
Yeah, Jerry good morning.
Supply chain.
I I would call that the most front and center of risk that we have right now on supply chain, it's been a risk because we've gone through the pandemic because we had so many suppliers that shut down due to due to shelter in place orders and whatever else happen, we're able to get through that not easily our supply chain teams are phenomenal Oh, we've got enterprise wide people that are.
<unk> engaged in working with our suppliers and we've got a lot of long term suppliers. The go out of their way to make sure that they do on what we know.
To get to.
So what we need so recently of course, we've had summit semiconductor issues now semiconductors is not of tier one supplier to us it's of tier two and of tier three supply. So what that's done is that's created some problems with chassis delivery because of the chassis manufacturers, where we make commercial products on a third party chat.
They have slowed in some cases.
So that's manifest itself as as a constraint what we do to combat that we work with the chassis suppliers of course, but we also sometimes have to reshuffle. Our production we do more of our custom built a chassis to make sure that we're absorbing our production to get through those types of problems all of the other air.
Area that we've had some difficulty anna's win with resin supply that's mostly because of the problems that they had down in Texas in the middle of February there.
There's a variety of.
Of the.
Constraints that come up this is very different from the way it was in the middle of the pandemic. When everybody was just shutting down now it's isolated cases that we have to pay attention to.
And I think what's happened is everybody slowed down.
Last year for six or more months and now everyone's heating back up in that type of shock to the.
For the manufacturing base is always very difficult to get through so you know I think we're going to continue to wrestle with supply issues in discrete cases, probably for the next few quarters.
The good news is we got really good people they know they've been they've done this work before.
And we'll continue to work our way through it.
Okay. Thank you and then on defense can you say more about adding the additional production line.
Because you are pretty mature point for for the major product lines can you just talk about the efficiency gains that you're targeting and just flesh out that move a little bit more please.
Yeah, we are put in of new production line here in Oshkosh in one of our facilities are this is the most advanced production line that we have on our defense segment. It drives a lot of productivity and a lot of quality control and into the production line and it drives into the production.
<unk> really industry for point all of our digital manufacturing capabilities.
We don't want of hat, we want every tool in the facility to be connected.
We are one.
One of them make sure that we're using robotics and automation, where it makes sense to use robotics and automation and you see that in this new production line. It took some investment to get there as we expected some onetime investment that's one of the headwinds that defense had in this past quarter.
But we're very pleased with where we are today and it's a really really nice operation that's going to be very important too to take defense into the future on the next few years.
Yeah.
Our next question comes from the line of Ann Duignan with Jpmorgan. Please proceed with your question.
Hi, good morning, everybody.
My questions have been answered, but I am curious and back in 2018, I believe that you introduced.
The price increase Paris not the.
For the price increase and so on.
I'm just curious this time around given that you've introduced price increases day does.
Does that mean that you expect that.
The price inflation in steel is permanent.
Permanent and here to stay or can you just explain the rationale for tariffs versus price increase.
Sure.
They were surcharges I think right now we are reviewing them as adjustments.
And this as we've talked about access, but we've really taken action on all of our our nondefense businesses.
So it you know it.
It's something we're going to continue to evaluate it and see what the market's view of that debt obviously.
We're focused on what that price cost dynamic goes in and we are we believe that.
Once we get through the backlog that we had at the time of the increase that we will start we'll start seeing the benefit of that we start seeing some benefit of that in the the fourth quarters for that $30 million, we talked about at access which is really $45 million.
For the company as a whole.
He gets to reduce.
Next year.
Okay. Thank you that's the last sorry, I meant to say surcharges on tariffs and the.
Then.
Talking about the terrorists, maybe I was thinking about my follow up question and that's the petition that the industry has filed against on.
Mobile equipment and some of assembly from China can you just explain the rationale for that and the impact of it has on your customers I mean, clearly some of these buying that equipment. They are your customers.
And then do you hear any backlash against the <unk>.
And the Chinese domestic market and retaliation.
Yeah. Good morning, Ana, It's Jon I'll I'll answer that question and give you a little color on it we have not had any backlash domestically in China.
Remember, we produced domestically in China, we employ a lot of people in China, we export from China. So what we do in China is very good for the Chinese economy.
So we don't really expect backlash in China, a lot of kind of emphasize what this is all about we are we are free traders, but we're also fair traders and we are open to competition.
When we and when I say, we I'm really talking about the industry. Because this was an industry that stood up when we see unfair trade practices that we think are damaging we're going to speak up about it and that's what we did.
We're pleased that the U S. ITC had a unanimous five O vote, which basically means the case is going to proceed.
You know well.
I'll just highlight that fair competition were opened the fair competition, we always have been on we always will be and that keeps the comparator and industry competitive and it keeps the vibrant and I'm talking about equipment makers rental companies and end users. You know we have to continue to innovate for those rental companies and the end users.
On innovation is the lifeblood of the healthy industry and certainly unfair trade practices undermine that.
So the entire ecosystem would be harmed if unfair trade practices are permitted to continue and that's why we stood up and said hey, this unfair trade practices stop again it wasn't just us. It was the end of it was the industry that said that as the leader of that J L. G is.
We are interested in the health of the overall ecosystem.
And that's what this is about.
Thanks Ann.
Our next question comes from the line of Nicole the place with Deutsche Bank. Please proceed with your question yes.
Thanks, Good morning, guys.
Good morning.
One of them just a quick good morning, just a question on seasonality I think normally three Q. It's typically the best quarter of proposed segment income of AD revenue and I think you guys sort of really good job of telling us kind of the puts and takes at the margin line, but I guess, maybe thinking about the revenue path from here is there any reason why.
Revenue would dive.
Diverged from the almost that normal seasonal trend the way the third quarter is the best of the year.
Yeah.
Thanks Nicole.
The backlog is pretty robust.
Right now I think you'll see you'll see similar type of revenue numbers between the two quarters, we talked about being up approximately 40%.
Year over year, so that kind of gives you an idea of where we think that the third quarter is going to be and you can kind of back into the fourth quarter. I think the main thing right. Now is just in terms of of just timing if we up from the supply chain.
<unk> or interruptions, you could have a little bit of volume that shifted between the two quarters, but right now we believe that both both quarters are going to be pretty robust.
Okay got it that's helpful. And then follow up on fire <unk> emergency I know the outlook for Europe is a pretty big deceleration in the second half.
But I guess, what I'm trying to understand as I understand conceptually whats going on all of the municipal budgets on the concern there, but your backlog because of all kind of at record levels. So maybe you could help us understand the assumption for free.
Fire and emergency and in the second half.
Yeah, I'll just try to give you an overview of what's happening in fire and emergency and we're paying very close attention to it quarter by quarter.
You know, we do expect the there in the near future it could be some quarters of a little bit softer order activity you did see some of that in Q2, our orders were healthy in Q2, but they were down from where they were a year ago.
We've got a very strong culture, and F&I of innovation and of simplification and that's allowed us to continue to perform even when market conditions are soft and that manifests itself typically in and market share gains and we've got a really strong dealer network.
That's the kind of the the foundation of the business Great dealer network, great people innovation on simplification of the.
Market is really kind of ebbed and flowed on an annual basis between 4040 600 units for about a decade.
And we're simply expecting that the market in this fiscal year will be a little lower than than it was last year now going forward in 2022.
It's possible that the the recent stimulus that went through did provide relief to municipalities.
It's very possible that that relief could help municipal spending around fire and emergency is that typically is a priority investment for municipalities and there is an aged fleet. So we're watching it very closely because all of that all of that stimulus spending is fairly new so we're paying attention to how that's going to.
Pack the market. So I'd say, the worst case of little soft for a few more quarters. The best cases, the stimulus spending helps out and it stabilizes or grows a little bit, but we'll continue to perform regardless of Nicole specific to the second half revenue I would just say that I recall last year, we had that's the.
The flyer interruption.
Our supplier quality challenge and also it was difficult for customers to come in so we saw a lot of volume slipped from the second quarter.
Really ended up back half of the year. So I think that's another thing is you're just as you're backing into what revenues or that's something to consider and then in that business. If you look at the implied incrementals.
Our decrementals the.
You really need to remember we are going to have some temporary costs coming back on that business as well our mix of slightly is slightly unfavorable as while we have a few of our we have some more commercial.
Chassis products versus aerials and that doesn't so that's another factor in the second half.
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Thanks, Good morning, I, just wanted to ask about the postal service contract in terms of the process for giving you noticed to proceed can you start working on that $482 million upfront engineering contract already or do you need to see some other type of approval.
Oh no. We're moving forward. It's full steam ahead, Oh, we've got the agreement with the U S. Postal service the signed it's executed and we are moving forward with the.
Developing and getting ready for production and production starts in 2023 of them and we feel really really good about our plan.
So I want I want to make sure that I emphasize.
That we won this program it was a five year process and we want this fairly well.
We know how to compete for government programs. That's one of the things we know how to do we want it fairly and we want it because we have the best solution for the U S. Postal service on the U S. Postal carriers. So that's why we wanted our solution was the best.
And that's why we're so comfortable with it.
And it does meet all of the zero emission.
Our objectives of the President Biden has laid out are we allow the postal service to fully electrified and make their fleet zero emission over the life of the contract.
And all of this even as ahead of California's timeline of being zero emission by 2035. We're ahead of that so the this is full steam ahead.
Great if I could just ask a follow up on access there's obviously some puts and takes two of the margins later in the year as discussed before but how quickly do you think you could see the incrementals return to closer to 25% would that maybe not be until the second half of next fiscal year or could it be.
Sooner than that thank you.
You know I guess I would just say is the the back half of the European cracked for some of these the the temporary costs coming back on the steel headwinds you're basically there. So because we're you know we're on the were right around that 20% right now is what what youre seeing in the back on the.
In that back half. So I think those are really the factors I think.
It's too early to call next year, but generally as we've said we strive to be.
And that in that mid twenties range and I think we talked a lot about the price cost dynamics and the timing of of on getting back to a balance with steel so I think that I.
I think of those are the things we're continuing to watch.
Our final question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.
Yeah. Thanks for squeezing me in guys. Steve just basically asked my question on the postal service, but just given all of the noise out of D. C. Like is there going to be some final reaffirmation of review the reward kind of once and for all.
If the mix was the shift more to E V would that potentially shift out of the delivery timing just because of all of the charging infrastructure on all the other stuff that needs to happen for the postal service the have a much bigger.
The fleet earlier on the game than previously envisioned.
Yeah, Great question I'm glad you asked that question. So I want to make a kind of clarify this the U S. Postal service program funding is not subject to approval from Congress.
<unk>.
So you know there is always some remote risk the Congress could exert some influence on the award but that would be unprecedented and it would have really no basis, because we provided the absolute best solution for the U S. Postal service on it does what everybody in Congress wants I think.
Which is electrified and makes the fleet zero emission over the life of the contract and the discussion in Congress recently that the comp that you've heard has really not been about changing the contract its been about getting you know.
Increasing the rate of introduction of electric vehicles, we can do a 100% of electric vehicles from day one.
They said to us of the U S. Postal service came to US Tomorrow on said, we've got the funding to do 100% electric from 'twenty to 'twenty three we can do it.
So we're ready to go at it we're going to work hard with the postal service. It's about how quickly we can they can get the infrastructure up and running the recharge of electric vehicles, but that will not delay of this program.
Okay, and then just the to the independents in general get their orders in in time like if you just look the collectively the smaller independents in the market are there a lot of the smaller fleets not gonna get their full or fuller allocations and time for our construction season, just the reason I ask that if that's the case could we see the real Capex recovery.
For a lot of at least the smaller independents, not really even starting until fiscal 'twenty two.
What what we've seen is that really across the broad spectrum of our customers. The the large nationals as well as the independent behaving very similarly to where were expecting a pretty balanced mix over the course of the year from a from a buying perspective.
Thanks Ross.
Mr. Viper I would now like to turn the floor back over to you for closing comments.
Hey, Thanks for joining us today, everyone just want to say stay safe stay healthy as we continue to work hard and anticipate a more positive environment as we get through this pandemic, we all see the light at the end of the tunnel and the economy continues to strengthen we certainly look forward to speaking with you on.
On a virtual conference or or are at the very least debt on our next earnings call of a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.