Greetings, welcome to the Oshkosh Corporation reports Fiscal 2021 Fourth Quarter and Full Year Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our fourth quarter 2021 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 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 we highlighted in our business update on October 8th, 2021, we are changing our fiscal year to the calendar year. The October to December 2021 quarter will represent an abbreviated fiscal year or Stub period to facilitate the transition to our first full calendar year, which will begin on January 1, 2022. This change should provide us with better visibility as our planning and reporting cycles will be aligned with those of many of our customers and suppliers. As a result, all references on this call to a quarter or year in 2021 or before, or to a fiscal quarter or fiscal year, unless stated otherwise. All references to 2022 or later years as to a quarter or a year or two, a calendar year. 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.

Thank you, Pat and good morning, everyone. As we discuss our fourth quarter and full year results, I want to provide some color on the current business environment. It's clear that we're in a unique period of time with robust customer demand for our market-leading products, while facing one of the most challenging global supply chain, logistics and workforce availability environments in decades. These factors are limiting production and also contributing to manufacturing, labor inefficiencies. At the same time, we're facing significant material costs inflation. We view these challenges as temporary, and we believe we are taking the right actions to position our company for success as we emerge from the current environment as a stronger, more resilient business. Some examples of the actions include implementing multiple price increases in the last several months in our non-defense segments to mitigate cost inflation, redesigning many of our JLG products to accept higher capability microprocessors, which are produced in higher quantities by chip makers to reduce our risk of shortages, shifting production within our existing facilities to better align with labor availability, and we're undertaking a rigorous qualifying process to identify and engage hundreds of new suppliers to drive a more robust supply chain for key materials and components. Our long-term outlook is attractive based on strong market fundamentals, strategic program wins and a comprehensive offering of innovative new products, that will drive continued market leadership. With this backdrop, we reported 15.6% higher revenues on sales growth in our Access Equipment, Defense and Fire & Emergency segments. This led to fourth quarter adjusted earnings per share of $1.05, slightly above the estimated range included in our October 8th business update. The modest increase was driven by a lower effective tax rate. And we continue to our commitment to responsible capital allocation with…

Thanks, John and good morning, everyone. Please turn to slide nine. As John highlighted, we faced significant supply chain and logistics disruptions in the fourth quarter, well beyond our experience in the third quarter. We also experienced meaningful material cost inflation. Recall that we account for inventory in last-in, first-out basis, so the additional cost escalation we saw on purchases in the fourth quarter negatively impacted price cost dynamics, particularly at Access Equipment. We previously expected a consolidated year-over-year price cost headwind of $35 million in the quarter. The actual price cost impact increased to approximately $60 million. Supply chain disruptions, unfavorable price cost dynamics, and labor constraints all contributed to fourth quarter financial results significantly lower than the expectations discussed on our third quarter call. Consolidated sales for the fourth quarter were $2.06 billion or $279 million higher than the prior year, representing a 16% increase. The consolidated sales increase was driven by a 37% increase at Access Equipment, a 5% increase at Defense and a 10% increase that Fire & Emergency, partially offset by a 6% decrease in Commercial. Access Equipment sales increased by $230 million over the prior year quarter due to improve market demand led by North America. As the impact of the pandemic has waned, the sales increase was lower than our prior expectations by approximately $130 million, largely due to the previously mentioned supply chain disruptions. Defense sales increased in the quarter due to higher JLTV sales, as well as the benefit of Pratt Miller sales, which we acquired in the second quarter, partially offset by lower FMTV and international sales. Fire & Emergency sales increased in the quarter and higher ARFF deliveries, and Commercial sales were down on lower package sales. Consolidated adjusted operating income for the fourth quarter was $104.2 million or…

We just completed a challenging quarter and expect those challenges to remain for the next few quarters. However, we believe we're taking the right actions as we manage through this period position ourselves for success as supply chains improve. We also won significant programs in 2021 and are committed to driving long-term profitable growth as we innovate, serve, and advance the company. Before I turn it back over to Pat for Q&A, I want to thank all 15,000 Oshkosh team members for the hard work and sacrifice they go through every single day to help our company be successful. Okay. Pat, back to you.

Thanks gents. I'd like to remind everybody, please limit your questions to one, plus a follow-up and we need to be disciplined on the follow-up question. Afterwards, 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.

Thank you. [Operator Instructions] Our first question is from Felix Boeschen with Raymond James. Please proceed.

Hey, good morning, everybody.

Good morning.

Good morning.

Hey, just curious if you could talk about maybe directionally how you think the new fiscal year shades out from a price cost perspective over time. I know you said $75 million, $85 million headwind is Stub and then price cost parody by the end of 2Q. But just wondering if we think that $85 million headwind gets slightly better by quarter as sort of pricing flow then, or just generally how much visibility you have that are giving a large backlog and clearly still some supply chain issues.

Sure. Thanks, Felix. I can take that one. First of all, just the levels that, everything that we're currently booking in North America has double-digit price increases in it since the beginning of 2021. So, I think that's just a good backdrop as we think about the backlog. From a quarterly cadence, you're correct. We see about $75 million to $85 million in the Stub period. As we look to the first quarter expecting similar levels to that based center backlog, we do see in the second quarter that starts getting meaningfully better. And you should start seeing our margins start normalizing. And then as we said, by the second quarter, we should be largely priced cost neutral.

I think the end of the second quarter.

Excuse me, by the third quarter, we should be largely price cost neutral.

Okay. That's helpful. And then, John or Michael, I not sure who this is best for, but the model is growing up, obviously substantial amount of free cash and cash has grown on the balance sheet. I know you guys have talked about M&A in the past as a focal point. So, maybe just curious if you could touch on that environment and how you would think about uses of cash or the right amount of cash on the balance sheet outside of M&A going forward. I'll leave it there.

Yeah. This is John, Felix. I'll talk about that because we're pretty focused on our capital plan and we do have a lot of cash on our balance sheet and we've generated a lot of cash. We're always going to be returning cash to shareholders. I've talked a little bit about share buybacks and increasing our dividends. But we're also making investments organically in terms of technologies and new product developments, and how we grow the business over time. And we've got a constant pipeline of inorganic moves that we're always looking at. But we're very, very prudent about how we look at those moves. We know exactly where we think we should be making moves and you've seen us do some smaller moves. Boise Mobile was a great move, but a smaller move. We did the acquisition of Pratt Miller, which is a fantastic acquisition a few quarters ago. That's leading to a lot of really positive growth opportunities for our company. So, you'll continue to see us active. But as you know, the M&A environment today is very frothy. And so, we're pretty prudent about -- hey, we want to look at where we can make moves that are going to make meaningful differences to how we grow the company over time. And we're careful, but focused on it. So, I think you'll see us continue to make a few moves inorganically.

And Felix, one other thing I just add, we did step up our repurchase activities in the quarter. I would expect that to continue perhaps even somewhat more robust level into the Stub period. So, that's -- it's sheer buybacks as well as our increased dividend that we talked about today will also remain important parts of our capital allocation strategy.

Very helpful. Thank you.

Our next question is from Stanley Elliott with Stifel. Please proceed.

Hey, good morning, everyone. Thank you all for taking the question. I'm curious on the EV commentary. I mean, you got a lot of prototypes and units in the field across all the different segments. Are we still looking at kind of a 2023, 2024 period of commercialization? Is there an opportunity to accelerate that? I mean, you mentioned kind of a frothy M&A environment. Just curious how you think about that, given the interest levels we're seeing.

Yeah. EV is a long-term strategy for us. When we look at our markets, we think that EVs will gradually be put into the market over the next 10 to 20 years. There are certain segments where we're already commercializing, mostly Access today where we're commercializing things like all electric, aerial work platforms. If you look at F&E, it's more of a 2023 where you'll see much more commercialization of these EV vehicles, that we put into the market recently, and the U.S. Postal Service, of course, will start shipping EV vehicles in 2023 as part of that program. So, I think, we've already started it now in some segments. I think 2023 is a certainly a year where you'll see a lot more actual product being released for sale and shipment and it'll -- but it'll continue to gradually increase with every year that goes by for the next 10 to 20 years as fleets gets electrified. And that's good for us, because this offers economic benefit to our customers. This is a lot of value created with these EVs and so it's good for us. From a margin standpoint is great for our customers in terms of giving them a better economic solution.

Great. And then, in terms of the Access, you mentioned North America strength, what's happening over in China? I mean, that's been a great growth market for you all. Curious what's happening if some of the things with the property markets has kind of curtailed some of the growth opportunities there, just curious how that shaken out.

Yeah. China is -- has -- the Access Equipment segment in China has slowed a bit, as China's economy has slowed a little bit, but it's still a very robust market. And one of the biggest -- it will be one of the biggest markets in the world. It's already the biggest construction market in the world. So, while it's slowed a little bit, we're still very bullish on China. We've got great operations there, incredible people there who do a great job addressing the marketplace. But it has slowed a little bit over the past year.

Pretty good. Thanks and best of luck.

Our next question is from Jerry Revich with Goldman Sachs. Please proceed.

Hi. Good morning, everyone.

Good morning.

John, can you talk about coming through and exiting this post-COVID environment, how are you thinking about potential structural changes to the supply chain, or a price protection that you give customers and orders going forward? Any significant changes in the business model that you're thinking through, as a result of what we learn, call it, in the COVID and post-COVID environment so far.

Yeah. Jerry thanks for the question. So, we've been doing an enormous amount of heavy lifting in our supply chain capabilities. We have qualified literally hundreds of new suppliers to both dual source and/or just improve our resiliency of supply, because of some of the disruptions we've seen. So, we've looked at it not just in the short-term, but more of a opportunity of let's really take a look at the supply chain and make sure that we're building it for the future, not just looking at it for what do we need next quarter, but what do we need for the next five years as we continue to grow the business? So, a lot of heavy lifting, and that's why we've qualified hundreds of new suppliers. We've also done a lot of work digitally connecting our supply chain to give us more visibility than we've had in the past, so that we know where we have opportunities and we know where we have issues quicker. We've been doing a lot of reengineering of components, which helps facilitate better supply. While I talk to them about opening commentary redesigning all the chips for Access, which gave us much better supply of chips. So, there's a lot of heavy lifting has been done. If you look at the price cost issue that we're currently wrestling with and we talk about we will come out of this as we get through Q2. We built really fast, strong backlogs in the Access Equipment segment earlier -- started earlier in 2021. And as those backlogs built, we were also seeing really strong -- stronger than usual material cost inflation. And when we'd book -- and when we'd book orders, we'd have a forecast for what material costs inflation would be. And then a month later, those forecasts were much higher than they were, when we booked a bunch of backlogs a month before. And that's what created the pinch that we're in right now, but we are competent. So, if you go back in time, should we have been doing more locking than we were doing? Probably. We probably should have. As we look at it going forward, we're being much more aggressive with making sure as we are building backlog today, and we're building backlog at full price today. We're very competent in what we're doing. And it's -- we're protecting ourselves as we go more prudently based on what we see with material costs as we go forward. So, that's what gives us the confidence to say that, as we get into Q2, we'll start to see nice improvement there.

And John, on that note, as we think about the next time the demand environment accelerates like this, will you have the capability to lock-in costs when orders are accelerating? Is that a function of the work you've done on qualifying expanding the supply base? So, is the expanded use of any futures or other instruments? In other words, the type of demand recovery, it's pretty easy to match those two, but what about the next time we have the type of demand cycle we're looking at now? Are the systems in place to allow you to match in that type of environment?

Yeah. Jerry, the work we're doing now is particularly on the cost side, trying to lock-in costs either with price locks or with suppliers as we see -- have healthy order rates and backlog building, that's where we've put the most focus with regard to how we're operating. And certainly the environment we're in right now is further unique because you see the escalation, but the level of disruption, whether it's logistics or even obtaining components, not just in our industry, but across industries, I think is certainly been a unique adder to sort of the situation that often many other companies are facing right now.

Thanks Jerry.

Good discussion. Thanks.

Our next question is from Stephen Volkmann with Jefferies. Please proceed.

Hi, good morning guys. Thanks for taking my question. I'm wondering if we can just go back. You talked a lot about the price cost trajectory. That was very helpful, but you also talked about a lot of other sort of near term pressures with labor availability and parts availability and productivity resulting from those. Can you just talk us through sort of like you did on price cost? How does that play out sort of in the Stub period and then into 2022, do you think?

Sure. Really that -- as we look at the Stub period, when we -- while we're not providing explicit guidance, we're talking about it qualitatively. We don't expect a meaningful change in supply chain at this point in time, so we are expecting that we're going to face those labor inefficiencies And so on that we faced in the quarter and of course, we know the cost side of it. Well, we've certainly not providing guidance yet for 2022. And there are a lot of moving pieces. We do believe over time, supply chains going to get better and a labor situation. Exact cadence of that is not clear. Hopefully as we approach that July -- or excuse me, that January earnings call, we'll start to have better visibility to that. But I think if you look at the biggest factors that we're facing right now, it's really this cost price dynamic. And I think that's where we have visibility and that's what gives us confidence that we should start seeing a return of normalcy to our margins as we exit the second quarter, really more so in the third quarter next year in the fourth quarter.

Yeah. And Steven, a little bit bigger picture. If you look at where we are in this supply chain disruption period, we've done a lot of really good work with our supply base. Our supply base has improved in its ability to keep pace with our production forecast. Now, we still have problem areas. We talked about chassis. Chassis is an example of a fundamental supply concern. But for the most part, we've had a lot of suppliers make nice improvements in their ability to produce. We still see huge challenges in the logistics side of things, not only high costs, but really the lead times and the predictability of being able to -- for domestic freight, for ocean freight, and the predictability of it's one of the biggest challenges. It's really the long lead times and hard to predict lead times in terms of when we can get supply in the door. And when we're running the way we're running that becomes a challenging, it becomes a little bit unpredictable. So, we still have a ways to go on the logistics front, but we have made improvements in the overall ability of our supply base to keep up.

Okay. That's helpful. Thanks. And then, related to that, I saw your inventories didn't look like they were up much sequentially. I would have thought maybe you would have some partially built equipment sort of sitting around, waiting for parts that could ultimately be shipped out, but maybe that's not as big a deal as I might've thought, just anything happening there.

From a concentration perspective, we're definitely seeing higher raw materials and whip levels. Our finished goods are definitely at lower levels. I think what you're seeing is, is really the supply of parts in the fourth quarter certainly was not at the levels that we wanted to see and that ultimately impacted sales. I think you're still seeing some supply chain availability dynamics reading through those inventory numbers.

Thank you.

Thanks, Steve.

Our next question is from Mig Dobre with Baird. Please proceed.

Thank you and good morning everyone. I'm just trying to maybe put a little finer point here and understanding all the moving pieces on your price cost commentary. If we're looking at the orders that you've taken into the quarter in Access Equipment, so a little over, call it, $1.8 billion. Is it fair to say that these orders are going to convert to revenue in the second quarter of 2022 or maybe even beyond, and is this ordered batch that you've taken this quarter considered to be priced cost neutral? Related to this too, I'm curious as to what your cost assumptions are in this comment that your price cost neutral. Do you actually bake in current spot prices for raw materials, or is it that you're expecting that raw materials are going to moderate? It's kind of a lot here, but hopefully you can address.

Yeah. So, first of all, speaking to the backlog and we're not going to break down different price levels that we've had multiple price increases. So, if you look at the breakdown of our backlog, there's several price levels. Obviously that's the most recent pricing actions we took were more like the middle of the fourth quarter. So, there are certainly orders booked in the fourth quarter that weren't at that third price level yet. So what we see again, it did very much aligns with the commentary have before. We'll be largely shipping the backlog over the next two and a half quarters that that's out there. So you have obviously, again, the $75 million to $85 million headwind in the Stub period, that inventory's in backlog today. Likewise in the first quarter, we should see similar levels of cost price headwind, and then it gets meaningfully better. So we really start getting the benefit of those pricing increases as we managed through the second quarter of next year. And that's why we said really coming out of the second quarter or in the third quarter, largely back to cost price neutral. From an assumption standpoint, of course, we're looking at what our current costs are. And obviously, we have much better visibility today as we work through our -- with our suppliers and understand where costs are at. We're not seeing the rapid increase of steel anymore, while it's still obviously at a very, very elevated level. I think the good news is we are seeing locks available in areas like hot rolled coil for meaningfully lower than what current spot rates are. And that's consistent if you look out on many of the published fuel curves, that it is expected to tail off, albeit still at very elevated levels versus historically. So, those are all things that we're looking at. It's not just steel though. We're looking at all components from -- and our pricing decisions from labor to rubber components to aluminum, to commercial chatter, third-party chassis. So, we're looking at it holistically, Mig.

And Mig, just to emphasize, our order rates are really healthy. The market is really healthy. And all of our orders recently and healthy percent of our backlog is at our full price level. And that's across -- if I look at Access alone, right? All of our commercials that come up in double-digits because of the material costs inflation. If I look at Access alone, independent rental companies, national rental companies, new order rates across are all at the price level. That gets us to where we need to be in terms of that price cost equation.

I see. And maybe to go back to the sort of process question that Jerry was asking earlier. I mean, look, at skeptics, what's going on here would be -- could be that -- there's some flaws in a process given what's been happening this year and your performance relative to peers, right, in terms of how the order intake was managed relative to cost inflation, and then also some of the disruptions that showed up maybe sooner for you than it'd been at half for others. And I guess I'm wondering here is you're sort of running an analysis, looking back beyond qualifying additional suppliers, which would you talked about, are there some procedural things that you think you're going to implement going forward? So that investors can gain some level of confidence that structurally, you can sort of become a better business next cycle or through the cycle as these headwinds eventually dissipate. Thank you.

I think the answer to your question as an emphatic. Absolutely, yes. We are -- it was kind of a -- it was an unusual period, I'd say from March, April through where we were in, let's call it, September in terms of how fast that backlog built along with how much cost escalation got away from everybody almost. I mean, there's a forecast just kept changing constantly. So, you thought you were okay with a certain cost level and then the forecast would change. And we just kept seeing it escalate and escalate and escalate, but absolutely we will learn and we will put more specific practices in place. So that in the future we're more protected from this type of a rapid buildup of backlog in the event, that there's also a rapid cost escalation that goes with it.

Yeah. And when we're talking about the forecast, we're looking at really those fuel curves that are published out in the marketplace. I think if you roll back the clock to the February timeframe, when we're already starting to book meaningful orders, there is a view that field is going to be elevated for a few months and come down, which is not dissimilar to other cycles what's happened. We obviously saw a very different trajectory in this case. And so, those forecasts that came -- that were published, that companies across the globe are looking at obviously that view continue to increase and push out longer. So, again, I think we're definitely dealing with some unique factors that we haven't seen in other recoveries. And again, it's -- you look at how we manage through the pandemic. Obviously, delivered solid results through that. And what we're dealing with right now is the short term in nature. And we certainly see light at the end of the tunnel as we exit the second quarter.

And Mig, I'll just emphasize, this a few -- we don't like what we're going through at all. We will learn from it. It's a few quarters of disruption for us. We are answering what we believe is a multiyear cycle in Access Equipment. We are completely competent in our ability as we go through a multiyear growth cycle to deliver for our customers and to deliver for our investors. We're very confident in our ability to do that in spite of this short-term issue that we're in.

Thanks, Mig.

Thanks for the comments. Good luck.

Our next question is from Chad Dillard with Bernstein. Please proceed.

Good morning, everyone. This is Brandon on for Chad. Quick question. So based on conversation in the backlog right now, what are you guys expecting in terms of customer mix next year in terms of like rental -- national rental companies versus the independent rental company?

Yeah. I can take that one. That's the mix -- first of all, just backing up, we saw pretty similar mix, year-over-year. This year, slightly heavily more weighted towards the nationals each last two years, so that it over 50%. But we expect similar mixes going forward. We don't expect a major mix shift there.

Cool. And then one follow-up, how should we think about for Defense the top line in 2022, and then how it goes into 2023? Can we expect to see some growth in the business in 2023 on top of the USPS?

Sure. As we look at 2022, as we've been saying over the last couple of years, we do expect that JLTV volumes are going to be lower. That is going to put downward pressure on Defense's revenues. And obviously -- and really, as we think of 2022, we're not going to see much of any USPS revenue. We'll have some medium caliber weapons system revenue. We'll start seeing a build of that in 2023 with a more robust in 2024, and really tied to the ramp up of USPS, which will happen in the back half of 2023.

Brandon, the way -- this is John. The way to look at our Defense business. it's really a growth business. Today, it's primarily tactical wheeled vehicles and that's a great base business for us. Tactical wheeled vehicles tend to go through cycles where they're growing and then cycles where they're not growing. But there are critical and during programs for the Department of Defense. Why do I say this is a growth business? It's a growth business because we are winning adjacent programs that are material in nature, and that are going to that wheeled drive growth from say the second half of 2023 or 2024 onward. It's programs like the MCWS program, more importantly, the United States Postal Service program. These are big programs driving growth, and we're competing for a lot more. So having this business where it got this base of tactical wheeled vehicles that we know how to execute on, plus adding incremental program wins that drives a growth business over the next three to five years.

Great. Thank you all.

Thanks.

Our final question is from Tim Thein with Citigroup. Please proceed.

Great. Thank you. And Mike, a good reminder earlier in terms of the LIFO accounting. I certainly think that's at least played some role in the difference in terms of some of the near term performance versus peers. But just quick question, John, just to continue along that last train of thought, in terms of the growth prospects for Defense, how do you -- or how should we think about that in the context of some of the recent press reports about potentially some larger cuts to JLTV volumes. I'm sure there's a timing aspect of that, but maybe you can just kind of update us on your thoughts there. Thank you.

Yeah. So, here's how I think about JLTV. The recent presidential budgets would indicate that 2022 volumes will be down, and 2023 will likely be down. These programs go through their ups and their downs. What's -- the thing that we always focused on is the Army's acquisition objectives still is about 50,000 vehicles. I think it's precisely 49,900 vehicles. And then, the U.S. Marines went from 5,000 and increased it all the way up to 15,000 or 16,000 units. Now to date, we've shipped about 13,500 units. So, you can see in terms of the long-term objective for the Army and the Marines, the two biggest customers, we still have a long way to run with these programs. These programs for JLTV -- this JLTV program will go well into the 2040s, beyond 2040. And that's why I say this is a great base business. There's going to be up here and there's going to be down years based on presidential budgets and priorities and so forth, and what's happening around the world. But these are fundamental programs for the Army and the Marines to operate. And it's a great base business. And then we build on top of that some of these other program wins that we're getting and it's -- and that's why our Defense business is a really nice growth platform for us as a company. But we focused on the Army's acquisition objective long-term, that 50,000 units and the Marines acquisition objective. That's what we focus on, knowing that there'll be ups and downs from year-to-year.

Got it. Okay. In interest of time, I'll just leave it there. Thank you.

Thanks, Tim.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks. So thank everybody for joining us today. Appreciate your interest in Oshkosh Corporation, and wish everyone a safe and healthy next quarter.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.