Oshkosh Corporation (Holding Company)Common Stock

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

Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 2022 results. A copy of the release is available on our website at OshkoshCorp.com. Today's call is being webcast and is accompanied by a slide presentation which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide 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 have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended December 31, 2021. All comparisons to the prior year are to the 12 months ended December 31, 2021. Our presenters today include John Pfeiffer, 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.

Thank you, Pat, and good morning, everyone. We delivered strong earnings growth in the quarter, both sequentially and compared with the prior year. For the quarter, we reported revenue of $2.2 billion, highlighted by year-over-year sales growth in all four segments, leading to adjusted earnings per share of $1.60, strong sequential improvement over adjusted EPS of $1.12 in the third quarter, and even stronger improvement over the prior year quarter. Importantly, we delivered another quarter with a double-digit operating income margin in access equipment of 10.8%, which is a record margin for the fourth calendar quarter. Demand remains solid, and we finished 2022 with strong orders and a record consolidated backlog of more than $14 billion. We are continuing to prudently invest in capacity in all of our segments to take advantage of long-term demand trends. We also continue to invest in exciting new products, including our growing stable of purpose-built electric vehicles that we expect will charge future growth. Our EPS results for the quarter were lower than our expectations of approximately $1.86, caused by two factors. First, the mix of aftermarket parts in our December JLTV order in the defense segment was less favorable than our expectations. And second, access equipment deliveries, while strong, were lower than planned. We had several important highlights during the quarter. In November, we announced an agreement to acquire Hinoa, SPA, an Italian manufacturer of compact crawler booms as well as other tracked equipment, and a longtime partner of JLG. I'm proud to announce that we are closing on this acquisition today. Hinoa brings innovation leadership with lithium-ion powered equipment that supports our expansion into adjacent markets. We believe this acquisition is an outstanding growth platform and provides expanded manufacturing capabilities in Europe. Hinoa represents another attractive bolt-on acquisition in line with our disciplined approach to M&A that supports our commitment to grow shareholder value. Additionally, we were once again recognized for our strong sustainability practices by being named to the Dow Jones Sustainability World Index for the fourth consecutive year. We were also named one of America's most responsible companies by Newsweek, a recognition of our commitment to our core values and excellent corporate citizenship. Please turn to slide four for a recap of 2022. We grew revenues by just over 4% in 2022 compared to the prior year, delivering adjusted EPS of $3.46. Adjusted EPS was lower than the prior year largely due to manufacturing inefficiencies associated with supply chain disruptions and unfavorable price-cost dynamics, including unfavorable cumulative catch-up adjustments in our defense segment. Our teams have made significant progress combating inflationary pressure by implementing multiple price increases over the past year and persevering through supply chain disruptions. These actions enabled us to more than triple our adjusted operating income from the first half to the second half of the year, providing us with important momentum as we expect to significantly grow revenue and earnings over the next few years. Our outlook remains consistent with our Investor Day presentation based on strong market drivers and our innovative products including USPS Next Generation Delivery Vehicle, and electrified products, including the Volterra line of electric fire trucks, as well as our pioneering DaVinci all-electric scissor lifts. We believe these products will be important drivers of growth as we move toward 2025 and beyond. In addition to Hinoa, we also acquired or invested in other businesses during 2022 that will facilitate growth in the new product categories and adjacencies. These include CartSeeker with its patented AI-based recognition technology used on refuse collection vehicles, robotic research, a global leader in autonomous mobility, and MaxiMetal, a Canadian leader in firetruck manufacturing headquartered in Quebec. As we look to 2023, we expect that the continued execution of our innovate, serve, advance growth strategy, price-cost management, and strong tailwinds supporting our business will allow us to drive significant improvement in our earnings compared with 2022. We are initiating 2023 earnings per share guidance in the range of $5.50. While demand remains very robust, we expect that supply chains will continue to constrain revenue during the year. Mike will provide more details in his sections. Finally, we are pleased to announce an increase of 4 cents or 10.8% to our quarterly dividend rate today. This is the ninth consecutive year that we have announced a double-digit increase to our cash dividend. Before we talk about our segments in more detail, I want to discuss an exciting change to our business segments. Please turn to slide five. This morning, we are forming a new Oshkosh Corporation segment called Vocational. We are combining our fire and emergency and commercial businesses, which all design, develop, and manufacture purpose-built vocational vehicles for people in our communities who do tough work. By combining these businesses, we expect to drive enhanced efficiencies across the board while better leveraging our scale and technology development at an accelerated pace. We believe the vocational segment will also serve as a platform for further organic and inorganic growth opportunities in several important end markets. We expect that the vocational segment will initially be a $2 billion plus revenue segment with the opportunity to grow organically at a high single digit compound annual growth rate to near $3 billion with 12% plus operating margins in the next few years. We are also announcing that we've entered into a definitive agreement to divest our rear discharge concrete mixer business. We expect to complete the sale by the end of the first quarter. This will enable us to focus on attractive end markets that value technology and innovation and will drive higher margins over time in our new vocational segment. Going forward from today, our businesses will be aligned in three segments, access, defense, and vocational. The vocational segment will be led by our current fire and emergency segment president, Jim Johnson. Jim and his team have successfully transformed the performance of the fire and emergency segment over the past decade, and I am excited for our talented teams in both segments to come together as a force multiplier for future success of the vocational segment. We look forward to sharing more details in the coming quarters. Please turn to slide six and we'll get started on our segment updates with access equipment. Our access team delivered solid performance in the fourth quarter with a double digit operating income margin and 620 basis point year over year margin improvement. Supply chain challenges limited our production output. but we have seen some improvements, particularly in December, as supplier on-time delivery metrics climbed above 70% for the first time in several months. While this is still well below our historical level of 90% plus on-time delivery, it represents improvement. The team at Access made progress by qualifying additional suppliers, dual sourcing, and leveraging alternate sourcing strategies. The team resourced more than $270 million of parts in the past year with plans to do more in 2023 to further improve supply chain performance. We also continue to implement changes to our products and processes to improve both output and manufacturing efficiencies. Demand remains very strong for our market-leading JLG products, driven by strong utilization rates elevated fleet ages, and the large number of megaprojects underway across the United States. In fact, the percentage of access equipment in rental fleets deployed to megaprojects, which are generally defined as projects with a value of $400 million or more, has more than doubled over historical levels. We expect that megaprojects, including factories for EVs, batteries, and chips, as well as non-residential projects such as data centers, and healthcare facilities will continue to contribute to strong demand for our equipment for the foreseeable future. We ended the quarter with a record backlog of nearly $4.4 billion. Fourth quarter orders were strong once again at $1.55 billion and we continue to have visibility to demand well beyond our current backlog. Please turn to slide seven and I'll review our defense segment. The defense segment continues to engage in a significant number of new business opportunities as well as current programs. During the quarter, we received two separate contract awards for JLTV1, valued at a total of $645 million. The first award was for domestic requirements, while the second included several hundred units of foreign military sales, many of which will be bolstering the tactical wheeled vehicle fleets of Eastern European nations. The DoD's announcement date for the JLTV2 contract has been pushed back from late January, and we expect an award decision this quarter. The JLTV has been a foundational product for our defense segment, and we are confident that we can deliver even more value to our customer in the future. In December, our defense team was selected to produce Aton armored personnel carrier hulls for the Israeli Ministry of Defense under a contract expected to be valued at over $100 million. This is another key adjacent program win for our team, similar to the Stryker MCWS and NGDV programs that demonstrate the success of our offerings and programs beyond tactical wheeled vehicles. I'll close out my comments on our defense segment with an exciting update on our progress with the USPS's NGDV program, which allows for delivery of up to 165,000 vehicles over the 10-year duration of the program. In late December, both the USPS and President Biden made important announcements that expressed the Postal Service's intention to increase the number of units in the initial order from 50,000 to 60,000 units and increase the percentage of battery electric vehicles to approximately 75%. This change will enable the USPS to electrify their fleet at a faster pace. We are actively engaged with our customer to formalize the contract modifications to reflect the change. This is great news for the USPS, communities across our country, and our company. We believe we are well positioned to supply the increased percentage of BEV units and continue to expect significant ramp-up of production in 2024 and 2025. Let's turn to slide eight for a discussion of the fire and emergency segment. Our fire and emergency segment made progress to improve output as indicated by fourth quarter sales that were up approximately 21% sequentially and approximately 37% versus the prior year quarter. While production output remains constrained by current supply chain dynamics, the improvement in production output and deliveries is encouraging. The improvement was driven by higher supplier on-time delivery metrics, as well as the benefit of operational improvement initiatives. Our operating margins remain below typical levels for fire and emergency due primarily to supply chain impacts on production, as well as the time lag in realizing the benefits of our significant price increases with municipal customers. We remain confident that we will return to strong double-digit margins as production output increases and we realize a greater portion of the price increases we have implemented. Demand for municipal fire trucks has remained very high, bolstered by aging fleets and solid municipal budgets. Order rates have remained strong, leading to a record $2.9 billion backlog, which provides us with good visibility and supports our outlook for higher margins over the next two-plus years. Our lead times have extended beyond our optimal timeframes, but we believe the actions we're taking to improve parts supply as well as our capacity expansions, including robotic painting in Appleton, will help us increase output as we move through 2023 and into 2024. I had the opportunity to participate in our Pierce annual dealer meeting this past month. I continue to be extremely impressed and inspired by our dealers. They are continuing to make significant investments in parts and service capacity to support our customers and drive growth. We believe these investments are critical to our long-term success as the population of pierced fire trucks in the field continues to grow. Please turn to slide nine and we'll discuss our commercial segment. Commercial sales increased by 34% to nearly 283 million versus the prior year. despite persistent third-party chassis and component constraints limiting production. We expect that chassis and other materials will remain a significant constraint in 2023 as well. We previously highlighted the success we are having with our first refuse collection vehicle automated high flow line in Dodge Center. We are beginning to work on our second high flow line, which is expected to go live in the second half of 2023. Our high-flow lines leverage integrated automation to drive improved quality, shorter build cycle times, lower direct labor hours, and increased manufacturing efficiencies, all of which are expected to drive higher operating margins. As we previously discussed, we see significant opportunities in electrification, automation, and other advanced technologies, particularly in the RCV space. We expect to continue to make meaningful investments in new products and manufacturing facilities over the next several years. We look forward to sharing more details over time. With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2023. Thanks, John.