Oshkosh - Q4 2020
October 29, 2020
Transcript
Operator (participant)
Good morning, this is the operator. We apologize for our technical delay, and we hope that you have endured the, the wait. Please accept our apologies. We'll begin the conference now. Greetings and welcome to the Oshkosh Corporation Reports Fiscal 2020 Fourth Quarter and Full Year Results. At this time, all participants are in 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 VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
Patrick Davidson (Senior VP of Investor Relations)
Good morning, and thanks for joining us. Earlier today, we published our Fourth Quarter and Full Year 2020 Results. 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, so please refer now to slide 2 of that presentation. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.
These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or year are to a fiscal quarter or fiscal year, unless otherwise stated. Our presenters today include Wilson Jones, Chief Executive Officer, John Pfeifer, President and Chief Operating Officer, and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to slide 3, and I'll turn it over to you, Wilson.
Wilson Jones (CEO)
Thank you, Pat. Good morning, everyone. I continue to be very proud of the hard work and disciplined execution of Oshkosh team members as we continue to work through the challenges brought on by the COVID-19 pandemic. We've talked about it before, but it bears repeating. Our people first culture has been a key driver for our strong results in the face of adversity. Proud Oshkosh team members and their commitment to our strong culture allowed us to overcome significant headwinds this past year, including uncertain customer demand, supplier delivery interruptions, workforce availability issues, and many others. A big shout out to all 15,000 of our team members and our dedicated suppliers that have worked hard and stepped up during this difficult period to continue meeting our customers' needs.
As a reminder, our fourth quarter call is always a little different from our other quarterly calls, as I'll review both the quarterly highlights and the full year results before turning it over to John and Mike. For the fourth quarter, we delivered sales of nearly $1.8 billion and adjusted earnings per share of $1.30. Much like I said, regarding our third quarter performance, we've controlled what we can control while responding quickly to challenges outside of our control. This is important as we were able to grow adjusted operating income in our Defense, Fire & Emergency and Commercial segments over the prior year, while achieving consolidated adjusted decremental margins of 19%. In our largest segment, Access Equipment, we delivered 23% adjusted decremental margins during a quarter where revenues were down nearly 40%.
John will go into more specifics on the segments, but the Access Equipment markets in North America and Europe remain soft, and the timing of recovery remains uncertain. We are encouraged by utilization data that is approaching pre-pandemic levels and believe the market is stabilizing. We'll be paying close attention to rental industry metrics as well as engaging in annual purchase discussions with our customers over the next few months. Finally, we are announcing a 10% increase to our quarterly cash dividend to $0.33 per share. This is our seventh consecutive annual increase and reflects the confidence we have in our business model and the longer-term outlook. Please turn to slide four for a discussion of the full year.
There's no doubt that 2020 has been one of the most memorable years in recent history, as the global pandemic has created disruptions of significant proportions, and I'm proud of the efforts and results that our people were able to deliver. For example, our Access Equipment segment overcame a nearly $1.6 billion year-over-year sales decline to deliver an impressive 8.5% full year adjusted operating margin. Our fire and emergency segment delivered two consecutive quarters of record adjusted operating margin percentages to end the year. Our commercial segment posted a decade-plus high full year adjusted operating income margin of 7.5%, and Defense successfully executed our ramp-up of the JLTV program, despite a host of headwinds brought on by the global pandemic.
All these represent significant accomplishments in the midst of the pandemic and demonstrate our strengths as a different integrated global industrial. We ended the year on a high note with solid performance in the fourth quarter. During the year, we executed a combination of company-wide, temporary and permanent cost reductions, and Mike will talk about how these actions will impact our cost structure in 2021 in his section. I also want to call out some of the great work our teams have been doing regarding corporate responsibility with a focus on ESG. We don't typically talk about ESG metrics on earnings calls, but our efforts to reduce greenhouse gas emissions and energy usage, excuse me, along with our team member engagement and safety performance, are among many areas that we believe help differentiate Oshkosh from other companies.
We continue to earn recognition from agencies that track and evaluate company performance for these important non-financial measures, and we believe they further underscore our commitment to excellence, long-term value, and sustainability. Before I turn it over to John, I wanted to highlight that our balance sheet and liquidity remain strong, and we believe we will have opportunities to use our balance sheet to grow shareholder value in the future. Please turn to slide five, and I'll pass it over to John.
John Pfeifer (President and COO)
Thanks, Wilson, and good morning, everybody. Wilson mentioned the pandemic, and I'd like to provide an update since several of our facilities, including our headquarters, are located in the region of Wisconsin that is currently experiencing some of the highest rates of COVID-19 spread in the nation. Across the company, we've been focused on maintaining the safety of our team members and preventing the spread of the virus, and we have a good track record in doing that. However, the recent resurgence is creating some workforce availability and supplier delivery challenges. It's as important as ever that we maintain strong safety procedures that meet or exceed CDC guidelines. Of course, this is challenging, as many of us are experiencing pandemic fatigue. But like Wilson, I'm proud of our team members and our ability to stay focused and effective. Let's kick off our segment discussions with Access Equipment.
We've been closely managing our Access Equipment business during a time of significant double-digit sales declines, while still delivering strong adjusted decremental margins and impressive overall adjusted operating margins. In fact, we've been able to set a new benchmark for financial performance during an industry downturn. We appreciate the efforts and performance our team members have delivered during these times. Our positive fourth quarter results are significant, considering the low demand for Access Equipment, which has resulted primarily from lower equipment utilization, leading to lower CapEx spending by rental company customers in North America and Europe. Sales for the quarter were down nearly 40% and we're therefore continuing to operate our facilities on reduced schedules. We've taken both temporary and permanent cost reduction actions in the business as we weather the storm. We believe this is a responsible approach.
It's important to emphasize that we have continued to invest in the business, as JLG is the innovation leader in the industry, and we remain confident in the long-term outlook for this business. We look forward to future product innovation releases as a result of our continuing investment. We're carefully balancing our cost reductions with the ability to ramp up when the market recovers. Through the first quarter, we'll keep production lower by operating our U.S. facilities for approximately 50% of the available production weeks. We will make decisions for the remainder of 2021 as conditions evolve and our customers share their plans. We are keeping our workforce engaged to be able to meet demand when the market returns. We are also staying in close communication with our suppliers, as they are key to our ability to ramp up when the market comes back.
We know that fleets in North America are aging, with the aerials in the 55-month average age range, according to the latest data, and we believe this elevated figure bodes well for future demand. The bottom line for North America is that we are confident in the recovery for the Access Equipment market, but the specific timing of the recovery remains uncertain. For the first half of the year, we expect lower year-over-year sales. We are early in our discussions with our rental company customers, and we expect to gain more clarity on the second half of the year before our next earnings call. Finally, just as we discussed last quarter, China's economy continues to recover, which we believe offers an opportunity for double-digit sales growth in the region for the foreseeable future. Please turn to slide 6, and I'll discuss our defense segment.
Our defense segment performed well in the quarter, but has been dealing with workforce availability issues that I mentioned earlier, as the pandemic is having a notable effect on our ability to schedule people and production. Despite these challenges, which we experienced more intensively late in the fourth quarter and continued to experience earlier this month, our operations teams have delivered solid results for our U.S. government customer and grew revenues in the year by more than 11%. Our successful ramp-up of the JLTV program throughout the year led the way and provides a strong foundation as part of our large backlog in the segment. Our team was happy to receive an expected order for 322 JLTVs from the Belgian Ministry of Defense in October.
The contract with our NATO ally, valued at more than EUR 115 million, further demonstrates the success we are having with the world's best light, protected tactical wheeled vehicle. We expect to begin shipping the vehicles in 2023, and we expect to announce more international JLTV orders in 2021. We competed against an incumbent competitor to win this order, and we believe it demonstrates the superior cost and performance characteristics of the JLTV product... I want to comment on the recently enacted continuing resolution, or CR. It used to be rare that the government required a CR to fund spending, but over the last 10-12 years, CRs have become the norm. Our programs of record remain funded under the CR, so it does not present an issue for 2021.
Let's turn to slide 7 for a discussion of the Fire & Emergency segment. Fire & Emergency delivered an all-time record for quarterly adjusted operating income of 16.4% in the fourth quarter. Our team's performance at F&E has been nothing short of phenomenal as they have navigated through supplier issues, customer travel restrictions, and other operational challenges, many of which were brought on by COVID-19. The simplification philosophy that F&E adopted several years ago, along with state-of-the-art product innovation, provides the framework for the team to run its business at such a high level. We are exiting the year with a strong backlog, supported by a record order year of nearly $1.3 billion, despite the negative impacts of COVID-19. Aged fire truck fleets, combined with the availability of new technologies, underpin our favorable long-term outlook for the F&E market.
That said, tight municipal budgets may constrain demand in the near term. Fire and Emergency is ready for the challenge with a market-leading lineup of high-quality, custom, and commercial fire trucks and ARFF units. We continue to invest in new technologies, such as our Fotokite Situational Awareness System and alternative powertrain options that you'll hear more about in future quarters. Please turn to slide 8, and we'll talk about our commercial segment. Our commercial segment has continued to drive improvement throughout the year, despite headwinds caused by the pandemic. The team delivered strong margins and higher year-over-year adjusted earnings in the fourth quarter, despite lower revenues. Our commercial team posted its highest full-year adjusted operating income margin in more than a decade.
This is particularly impressive given the market impacts from COVID, when construction was halted in many areas of the country and shelter-in-place restrictions temporarily reduced demand for waste collection at businesses earlier in the year. Much of our recent success stems from simplification efforts and disciplined cost management, as well as the ramp-up of our new S-Series 2.0 Front Discharge Concrete Mixer, which is driving a lot of excitement and helping us win new customers. On our last call, we announced restructuring plans to transfer rear discharge concrete mixer production from Minnesota to Ontario, Canada, as the team simplifies the business with a focused factory approach. I'm pleased to report that the transition is progressing according to schedule, and we anticipate a successful completion over the next several months. We believe this will put us in a prime position to drive sustained margin improvements.
Before I leave this segment, I want to mention our commitment to electrification as a way to reduce greenhouse gas emissions and provide our customers with options as they plan their fleets. Early in the fourth quarter, there were numerous announcements of plans for electric RCVs in the U.S. market by some companies. We are proud to be working on electrification solutions across all of our businesses at Oshkosh. This is particularly true for RCVs, as we are partnering with a chassis OEM to deliver five electric RCV units to be used in Boise, Idaho, in the summer of 2021. I'd like to close with a comment about the culture and positive mindset we see from the team at Commercial.
They've been working very hard, driving business and operational improvements, and their efforts and dedication to task are second to none, and we can see it in their results. This wraps it up for our business segments. I'm going to turn it over to Mike to discuss our fourth quarter results and some additional comments on current business conditions.
Michael Pack (EVP and CFO)
Thanks, John, and good morning, everyone. Please turn to slide 9. Strong execution allowed us to deliver 19% adjusted decremental margins on a consolidated basis and 23% adjusted decremental margins at Access Equipment in the fourth quarter. Consolidated net sales for the quarter were $1.8 billion, down 18.7% from the prior year quarter. A 39% decrease in Access Equipment segment sales was the primary driver of the decrease. Access Equipment sales were negatively impacted by lower customer demand, primarily as a result of COVID-19. As John mentioned, our customers have remained cautious with equipment purchases in light of uncertainty surrounding the pandemic and associated softness in non-residential construction activity.
Consolidated adjusted operating income for the fourth quarter was $124.1 million, or 7% of sales, compared to $203.1 million, or 9.2% of sales in the prior year quarter. Access Equipment segment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of plant shutdowns during the quarter, offset in part by the benefit of COVID-19-related temporary cost reduction actions. Defense segment adjusted operating income increased as a result of improved product mix and higher sales volume, partially offset by less favorable cumulative contract adjustments and higher engineering and proposal spending in the current year quarter.
Fire and Emergency segment operating income increased in the current year quarter as a result of improved price-cost dynamics and improved absorption, offset in part by lower sales volume. In Commercial segment, fourth quarter adjusted operating income increased due to lower spending in response to the COVID-19 pandemic and favorable material costs, offset in part by adverse product mix and lower sales volume. Adjusted earnings per share for the quarter was $1.30, compared to EPS of $2.17 in the fourth quarter of 2019. Fourth quarter results benefited by $0.02 per share from share repurchases completed in the prior 12 months. Finally, we generated strong free cash flow during the quarter to drive full year free cash flow of $238 million. This is a solid accomplishment during a year where we saw rapid declines in customer demand, which put pressure on working capital.
Please turn to slide 10 for a discussion on 2021. The COVID-19 pandemic has continued to drive uncertainty in the cadence of customer demand in both our Access Equipment and Commercial segments. Conversely, strong backlogs in our Defense and Fire and Emergency segments provide good visibility well into 2021. However, as John mentioned earlier, recent spikes in COVID-19 infection rates are creating workforce availability and supply chain issues, particularly in Wisconsin, where a significant portion of the production occurs for our Defense and Fire & Emergency segments. The situation is causing production and labor efficiency risks for these two segments, and is also likely to impact final truck inspections by customers in the Fire & Emergency segment. Taking these factors into account, including the ongoing uncertainty of the pandemic, we're not in a position to provide quantitative expectations for 2021 at this time.
We are actively engaged in discussions with our key customers in the Access Equipment and Commercial segments to understand the requirements for 2021, but we do expect softer year-over-year demand in the first half of 2021 compared to 2020. Demand for Access Equipment remains uncertain for the second half of the year, but we expect to have better clarity during the first quarter earnings call as we gain further insight into the trajectory of the pandemic and our customer requirements for 2021. At Access Equipment, we are implementing two-week production shutdowns per month in the United States in the first quarter of 2021 to better align production with customer requirements. In the second quarter of 2020, we implemented decisive actions, which reduced our 2020 pre-tax costs by approximately $120 million. The reductions were evenly split between three areas. First, salary reductions and furloughs. Second, incentive compensation.
And third, project travel and other discretionary spending. As we previously discussed, these cost reductions were largely temporary in nature, and we expect them to return to our expense run rate in 2021. Additionally, we discussed permanent cost reduction actions during our last earnings call in the Access Equipment and Commercial segments, totaling $30-$35 million once complete. We expect these actions will benefit 2021 by approximately $20 million. Recently, we implemented additional permanent cost reductions totaling $15 million for 2021, which reduced corporate and segment operating expenses. So we expect to benefit from a total of $35 million of permanent cost reductions in 2021, growing to $45-$50 million by 2022. The return of costs that drove the temporary cost reductions in 2020 will be a headwind to margins in 2021.
However, we are continuing to manage our business in a disciplined manner and will respond to the ongoing uncertainty with our playbooks. Our balance sheet remains strong, with available liquidity of approximately $1.4 billion, consisting of cash of approximately $600 million, and availability under our revolving line of credit of approximately $800 million. We expect a modest increase in capital expenditures to approximately $120 million in 2021. While we are not providing quantitative financial expectations today, we expect to provide them later in the year. With that, I'll turn it back over to Wilson now for some closing comments.
Wilson Jones (CEO)
Thanks, Mike. We just completed a year in which we delivered nearly $5 of adjusted earnings per share in the midst of a global pandemic, and we believe we are in a great position moving into 2021 with our strong balance sheet and cash position. Our Defense and Fire & Emergency backlogs provide visibility well into 2021, and we took aggressive actions early during the pandemic to lower our costs. Our culture at Oshkosh is strong, and we have an outstanding group of leaders and team members who have effectively managed production and supply chain disruptions and kept Oshkosh on a positive path since the pandemic began. We can't let up, as the threat is still with us, but I'm reassured by the strength and resilience of our people and believe we will deliver solid sales and earnings performance over the long term.
I'll turn it back over to Pat to get the Q&A started.
Michael Pack (EVP and CFO)
Thanks, Wilson. I'd like to remind everybody, please limit your questions to one plus a follow-up, and after the follow-up, we ask that you get back in queue if you'd like to ask additional questions. Operator, let's please begin the question and answer period of this call.
Operator (participant)
Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that the line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we call for questions. The first question is from Nicole DeBlase, Deutsche Bank. Please go ahead, ma'am.
Nicole DeBlase (Analyst)
Yeah, thanks. Good morning, guys.
Wilson Jones (CEO)
Morning.
Michael Pack (EVP and CFO)
Morning.
Operator (participant)
Morning!
Nicole DeBlase (Analyst)
So maybe just starting with a follow-up on the temporary cost, structural cost discussion that was helpful color. But I guess, you know, how do we think about that with respect to cadence throughout the year? Because if we have, you know, a situation where revenues are down in the first half, and then maybe we have the potential to turn positive in the second half, doesn't get so easy. Does that mean that those temporary cost actions don't really start coming back until the second half of the year? Just trying to think through that.
Michael Pack (EVP and CFO)
Nicole, this is Mike. So I'll walk you through that. So, in total, the temporary costs are $120 million. Really, those three buckets that I talked about in the pre-prepared remarks, you have really two-thirds of it as compensation-related items. Those come back. That last bucket, which is about a third of it, is your more discretionary spend type items. We expected in our fourth quarter that third bucket, the discretionary items, would be a bit higher in the fourth quarter. Indeed, we did see that. So largely, we could see some benefit of in that sort of third bucket early in the year, with the pandemic still weighing on us.
So that those will be, you know, those costs will be coming back right away in the beginning of the year. I guess we started benefiting from the $120, just from a cadence perspective, about a quarter of the benefit was in our second quarter. We had about 25% of it also in our fourth quarter, leaving about 50% of the benefit was in our third fiscal quarter. So that's a bit of the cadence to the $120. Just as we look at Q1, we do have a few headwinds for Q1. You know, we've mentioned in the prepared remarks that Access is shutting down production about half of the available weeks in North America.
That's gonna create an absorption headwind for us when you compare to last year. If you look back at our earnings call last year in Q1 as well, we had a pretty sizable price benefit on some price protected backlog and access as well. So that will be a headwind in Q1. But again, the net headwind with the cadence of the permanent and temporary reductions is about $85 million.
John Pfeifer (President and COO)
This is John, just a little bit more color on the temporary to permanent. So, you know, you might ask, well, why wouldn't we convert all the temporary to permanent cost reductions and take more permanent costs out? And the simple answer is: we believe the market's coming back, and we have to balance how much cost we take out with what we expect to happen in the foreseeable future, and we wanna make sure that we're ready for that market to come back.
Nicole DeBlase (Analyst)
Okay, got it. That's really helpful color. Thanks, guys. And then for my follow-up, totally understand the lack of visibility in a lot of your businesses next year, particularly Access. But Defense is traditionally a business where you do have a little bit more visibility, on the next year outlook. So maybe you could characterize expectations for Defense in 2021, if possible.
Michael Pack (EVP and CFO)
Yeah, with Defense, you know, you see the strong backlog. That gives you a view. Now, some of that would be deliverable in future years, 2022 and beyond, but it gives you an idea of the opportunity and the customer requirements for the next year. So that's gonna give you—That backlog is gonna give you a pretty good idea of what the top-line opportunity is there.
Wilson Jones (CEO)
What-
Michael Pack (EVP and CFO)
Oh, go ahead.
Wilson Jones (CEO)
I was just gonna say, Mike, and we've always, we've always talked about a run rate in Defense, Nicole, of around $2 billion. And so, I mean, we're public about that. So to your point, yeah, it is one of the... Nothing's easy, right, during this time, but that's an easier one to see from a visibility standpoint, that it's around at least a $2 billion run rate.
Michael Pack (EVP and CFO)
What we're just managing through in that business is, with COVID, the cadence of that becomes a bit uncertain just with the supplier challenges and workforce availability that we're managing through.
Thanks, Nicole.
Operator (participant)
We have a question from Mig Dobre, Robert W. Baird. Please go ahead, sir.
Mircea Dobre (Analyst)
Thank you, and, good morning, everyone. Hopefully, you're all healthy here in Wisconsin. I guess my question, excuse me. I'm looking to clarify your comment on cost. Are you essentially saying that the two-thirds that is compensation related resets back to that pre-cost cutting run rate as early as Q1 of fiscal 2021?
Michael Pack (EVP and CFO)
That's correct, Mig.
Mircea Dobre (Analyst)
Okay. So it's the discretionary spend that, you know, almost by definition, you can control and maybe you can tweak as the year progresses.
Michael Pack (EVP and CFO)
You know, certainly we're gonna continue to watch the pandemic, and it's that third bucket. Certainly, there's some things in there that can be managed. Again, what we saw in the fourth quarter, though, the benefit in that third bucket was lesser than it was in the third quarter. We had signaled that in the last call. We were anticipating that with as economic activity started picking up, we did have some more of that spending. And one important point is, you know, particularly in the fourth quarter, we've continued to spend on new product development, so that's been a, that's certainly been an area of focus as well, and that's an area that we certainly don't wanna cut as we're managing through this.
Wilson Jones (CEO)
Mig, I would just add that if you've followed us for years, and I think you're seeing we certainly believe that we've set a new benchmark for performance. But along with that, we know we have to be realistic and manage the business for the recovery. And if we don't get that recovery, then obviously our playbooks, we have other levers that we can pull in that playbook. But we still, I think Mike talks a lot about cautiously optimistic, and we are. And again, we're cautiously optimistic, but in a positive way, because there's a lot of positives going on with our defense backlog, our fire and emergency backlog. Our refuse is always a good base for us to work through.
So, you know, adding all that, and then we're still investing in the business. We're actually increasing our NPD, our new product development, in 2021. You know, our balance sheet. So, you know, we're, we're cautiously optimistic, but we're very positive and, and really think we're well positioned, for the recovery when, when, when it does come.
Mircea Dobre (Analyst)
Absolutely. Thank you for that color, and I would agree. I think your fiscal 20 performance has been excellent. I guess my follow-up question has to do with the balance sheet. Just kind of looking through inventory, I'm kind of curious here, you know, inventory is still, I would say, pretty robust. How are you thinking about working capital and inventory specifically going forward? And what sort of progress do we need to see in Access Equipment, specifically, over the next, call it, couple of quarters? Thanks for that.
Michael Pack (EVP and CFO)
Thanks, Mig. Yeah, on inventory, one thing out of the gate, inventory is up year over year. That is definitely not all access, and I think that may be an assumption there. Access is up somewhat. We're continuing to balance that production with customer requirements. So, that will continue to merge over the course of the year. The other big piece of it is we've made some conscious decisions with the pandemic to invest in safety stock to keep our lines running. And this is, when I say safety stock, this is stuff that's gonna imminently be used in our production of our trucks to keep our lines running. And I think in a lot of regards, it's been helpful as we've navigated through that.
So that certainly is a meaningful component of the increase. So, we feel good where we're sitting from an inventory perspective right now.
Mircea Dobre (Analyst)
Can you give us a sense, though, for any sort of expectation for fiscal 2021 in terms of this line item? I'm presuming it will come down at a point in time.
Michael Pack (EVP and CFO)
Yeah, I mean, overall, it will continue to decline. It would be our expectation over the course of the year, by the end of the year, I should say. So obviously, there you get into timing, with as we see orders and so on, and whether stuff shift in the, you know, in the third quarter or fourth quarter. So there could be some timing aspects, but over the course of the year, we'd expect that inventory to continue to come down.
Mircea Dobre (Analyst)
Okay, thank you.
Wilson Jones (CEO)
Thanks, Mig.
Operator (participant)
We have a question from Ross Gilardi, Bank of America. Please go ahead, sir.
Ross Gilardi (Analyst)
Good morning, guys. Thank you.
Wilson Jones (CEO)
Hey, Ross.
Mircea Dobre (Analyst)
Morning.
Michael Pack (EVP and CFO)
Morning.
Ross Gilardi (Analyst)
Good morning. Yeah, I mean, I was just wondering if you could talk a little bit more about, you know, decremental margin expectations, you know, for the overall company, particularly in Access for the first half, just going through all these puts and takes and your, you know, your, your, your shutdowns and, you know, the movement on, on, on costs, et cetera. I mean, can you actually sustain, you know, a 20%-25% decremental as you, particularly as you try to, you know, eat into some of that inventory in the first half?
Michael Pack (EVP and CFO)
Sure. Certainly, you know, we always strive, as we've talked about, to deliver responsible decremental margins, and we target that mid-20s over the longer term. We are gonna have some headwinds in the first quarter, in particular, when you look at Access. And that's, again, a couple things that are driving that. We had, with the lower production absorptions, a meaningful impact there, as well as that price benefit that I mentioned when Nicole asked the question. We had some price-protected backlog that's not, that we benefited from last year. That's not recurring. So those are a couple of headwinds, just early in the year.
And, what we did say is, particularly in the first half of the year, we do expect the volume to be down, as a company, but also, that certainly applies to Access. So that's what I'd say at this point. Again, our decremental margins remain a very strong focus, and we're gonna strive to deliver responsible margins.
Ross Gilardi (Analyst)
Just, you know, the conversations with some of your larger rental customers. This is one for you, you know, Wilson. But, you know, is the tone shifting at all? I certainly understand that they're being very tight on CapEx and being very careful. URI took up its CapEx, you know, very marginally for the year. It seemed like more of a year-end adjustment. You know, H&E's talking about, you know, pick up in warm starts, you know, into next year. I'm just wondering if the tone is shifting at all, or does it just still feel like these guys are gonna be as absolutely as frugal as possible in the next year?
John Pfeifer (President and COO)
Hey, this is John. I'll try to give you some color on that because we talk to our customers, both the big national rental companies and all the independents on a regular basis, and we're just in the early stages of our annual negotiations with them. You know, what we're seeing and what we're hearing is that utilization has come back up. So that's a really good sign, and we also see that in our telematics data, that utilization has come up. We're also seeing that there's been a little bit of trimming of fleets, a little de-fleeting, depending on the end segment that they're serving. But for the most part, fleets have stayed pretty good in terms of the size. That's a very positive sign.
I think that what we've all been dealing with is this continuing pandemic, which is creating uncertainty in terms of when we're gonna start seeing enough positive signs of stabilization where we start to see some CapEx be released. I think that we would expect that they are carefully monitoring the fleets. They're doing what they should be doing in terms of prudent management of fleets.
But we also know that the average age of a boom right now in the market in the U.S. is 55 months, and there's an aging amount of fleet that's gonna need to be replaced. We see that as something that's gonna be a catalyst to demand. And the question is not if. It's really a question of exactly what quarter that's gonna happen in. We believe the first 1-2 quarters of the year will continue to be a little bit weak, and we'll start to see some positive signs probably in the back half of the year. We just can't pin it down quarter by quarter, which is one of the reasons we're not providing the guidance.
Wilson Jones (CEO)
You know, the only color I would add, and John, that, that's spot on, is the conversations I've been around Ross. The good news is most of our big customers agree that the market is stabilizing, and I think that's a good first step. Obviously, we are concerned about that second if there's gonna be a second COVID wave. Again, we're monitoring that very closely. But, what I think worries them a little bit is their fleet age, and it's getting... You know, it's aging. And so, I agree with what John said. It's not a matter of if, it's when. And right now, we're leaning that that would be in the back half of this fiscal year for us.
Ross Gilardi (Analyst)
Thank you, guys.
Wilson Jones (CEO)
Thanks, Ross.
Operator (participant)
Next question is from Seth Weber, RBC. Please go ahead, sir.
Brendan Shea (Analyst)
Hi. Thanks. Good morning. This is Brendan on for Seth. I'd like to ask about access. Was there any change in kind of the competitive landscape in the quarter, given the lower demand, you know, competitors maybe giving, you know, pricing concessions to drive market share? Or just anything sort of out of the normal for how the competitive landscape shaped up?
John Pfeifer (President and COO)
Thanks for the question. This is John. So on the pricing front, you know, we've maintained a positive price-cost equation for the year. We're very careful and very disciplined in how we manage our pricing. You know, we are the market leader, and we'll stay disciplined. We have not had a problem staying disciplined as we've gone throughout this significant downturn. So we think that that's a very positive thing. Of course, we got a strong balance sheet. Mike talked about that. All the inventory that we have is good current inventory. We're not in any kind of a forced selling position, so we expect to continue to manage this in the same way going forward.
Wilson Jones (CEO)
I think the only thing I would add there is we have seen some irrational pricing internationally. But I think in North America, it's always a competitive environment, and it always has been. But if there has been some irrational behavior, it's really been more on the international front.
Brendan Shea (Analyst)
Okay, thanks. And then you noted tight municipal budgets might constrain short-term at F&E. Is there anything additional that you could give there, any more color for what you're hearing on those budgets?
John Pfeifer (President and COO)
So I'll give you a little color on it. First of all, F&E's got a really strong backlog. 2020 was an all-time record order year for F&E, which has led to that really strong backlog. So we feel really good about our position there. There's also an aging fleet, and has been for a little while now in the F&E market, which certainly bodes well for the future of the market. Now, gonna happen with municipal spending, we think that state budgets are probably a little bit more stressed than municipal budgets. There are, you know, property tax receive the biggest driver to municipal budgets, and there has not been a significant property valuation problem in the marketplace. There's a little stress caused by hospitality tax receipts and things, of course.
So I think that we're watching that. We think, for the long term, we feel great about this market. That'll put a little bit of pressure on 2022, maybe. It'll be kind of the aging-aged fleets and our strong position in the market against some potential squeeze on municipal budgets. But remember, fire and emergency equipment is the highest priority for municipalities. It's not something that they like to cut when they are forced to trim their spending. So, that's the kind of color I'll give you on that.
Thanks, Brendan.
Brendan Shea (Analyst)
Thank you.
Operator (participant)
The next question is from David Raso, Evercore. Please go ahead, sir.
David Raso (Analyst)
Hi, thanks for the time. Just so we can help quantify it a little bit, the first half of the year being down in access, should we think of normal sequential trends from here for the next six months as your customers get a better feel for how they really want to proceed for their calendar 2021, because if that's the case, the first half of the year, access sales are down, you know, roughly 20%-25%. The follow-up would be the type of conversations you're having, while there's a lot of variability, no doubt, looking out into the June and September quarters, are they at least giving you a framework that could allow the full year to feel like an up year? Again, I know it could change, but the June quarter has a very easy year-over-year comp.
So again, just trying to level set that first half decline and what you're hearing, can we pull back out of that hole in the second half of the year to be up for the full year? Thank you.
Michael Pack (EVP and CFO)
Hey, David, this is Mike. I'll start and John will talk about just the ongoing outlook. I think right now, you know, we again expect the first half of the year to be down. I'm not calling the exact percentage right now at this point. I would point to, as Wilson mentioned, and we had both in his prepared remarks and minutes ago, we do see our market stabilizing. We saw some stabilization in year-over-year changes from Q3 to Q4. We expect some stabilization, but we expect it to be down, and that's, you know, and I think there's a range of scenarios in there.
So, we're continuing to manage it and stay close to the customers. In terms of the cadence towards the back end, I'll turn it over to John on that.
John Pfeifer (President and COO)
Yes, David, I think what we're gonna see is, in terms of the quarterly year-over-year decline, it's gonna continue to moderate near term. When I say near term, the next one to two quarters, it'll continue to moderate from where it's been the last quarters. You know, can we see the back half come back to where we see full year-over-year growth? It's possible. I wish I could give you—we had more, you know, a level of confidence where we could give you guidance on that, but it's certainly within the realm of possibility that that will happen.
And we're paying close attention to that, and if we get to a point one quarter from quarter, we can provide guidance, that'll be the best case scenario, 'cause it'll mean things have stabilized enough where we can really give you the clear outlook on the year. Within the realm of possibility.
Wilson Jones (CEO)
Yeah, I think. Just to add a little bit more on the conversations I've had, David, is, you know, there are projects out there. We need some confidence in construction. And I think if you look at the projects that are pent up, Dodge Momentum, ABI, those are trending up a little bit. We're watching those very closely. But I think what everyone's doing, and I'm sure you are too, is cheering for an infrastructure bill. You know, an infrastructure bill, I think, creates a lot of confidence. Even though it might not have a total initial impact in the back half of our year, it's gonna give people confidence that there's gonna be projects available, and I think that creates some momentum in projects that won't related to infrastructure spending.
So I know most of our big customers are certainly for that, and then they're also kind of leaning the way we are, that seasonally, you know, when spring, there should be a lot of construction opportunities out there. Will we be past the pandemic is the big question.
John Pfeifer (President and COO)
Yeah, recently we've seen the Architectural Billings Index go from 40 to 47, so that's a nice jump, a positive jump. 47 is still not a great number, so we kinda need to see where it trends from here.
David Raso (Analyst)
And if we don't get a bill, just to make sure we level set a bit on where the replacement demand is greatest when it comes to mix, because with an infrastructure bill, you know, I think it's obviously a little bit easier to see the growth next year pretty comfortably. But let's say we just get a middling kind of market. When you speak to the age of the fleet, do you see the greatest replacement demand on the bigger booms? Is it the scissors? Is it a bread and butter 60-footer? I'm just trying to get a sense of if we can assume a big top line, what kind of mix, just serving replacement.
John Pfeifer (President and COO)
Well, so I'll tell you, I won't go product line by product line or size by size, but certainly booms is in the product line that we talk about most when we talk about the positive dynamics in terms of fleet age. Booms are aged in the market. Replacement is needed in the near future, and that's the primary driver, David.
David Raso (Analyst)
All right. Thank you very much.
Wilson Jones (CEO)
Thanks, Dave.
John Pfeifer (President and COO)
Thanks.
Operator (participant)
We have a question from Courtney Yakavonis, Morgan Stanley. Please go ahead.
Courtney Yakavonis (Analyst)
Hi, good morning, guys.
Wilson Jones (CEO)
Hey, Courtney.
Courtney Yakavonis (Analyst)
I'd like to follow up on the conversation on inventory levels in Access. I think you mentioned they were up slightly, year over year, but can you just help us kind of gauge where your access inventory levels are, you know, versus the last trough in 2016, so we can kind of get a better sense of how much longer you might need to underproduce?
Michael Pack (EVP and CFO)
I guess we don't necessarily break down Access. There, our inventory levels are up year over year, certainly, and obviously, we had a very rapid decline in demand. And obviously, we have a greater international presence than we have if you looked at China and so on. So that probably puts some general upward pressure on inventory. But overall, from an inventory perspective, again, I think it's up somewhat from last year. I think we're comfortable with where it's at. We're not in a forced selling position with it. The inventory is current items that we're selling that is good inventory.
So, we're comfortable with our continued management of our production schedules and in Q1, and we have optionality getting further into the year as well. So we're gonna continue to manage it, but we're comfortable over the course of the year that our inventory is gonna come down.
John Pfeifer (President and COO)
Yeah, and Courtney, I'd even say that the inventory that we have in Access, not only is it current inventory, it's there by intent. We know that we need some inventory to meet the market as it rebounds when that happens, and that's one of the primary reasons it's there.
Courtney Yakavonis (Analyst)
Gotcha. I think you mentioned that utilization trends had improved through from I think previously you had said that they were down, you know, high single digits. Can you just give us a sense of what you're seeing from your telematics data in terms of where utilization is, and, you know, the maybe monthly sequential performance?
John Pfeifer (President and COO)
Yeah, our utilization in terms of the so we look at it year-over-year because there is seasonality in the business, and so we want to see what's utilization now versus where it was a year ago. We think that in terms of our telematics data that utilization is very close to where it was last year, so that means adjusted for seasonality. Now you have certain end markets that are different from others, right? So you wouldn't say that in oil and gas, but you would say that in other end segments. For the most part, our rental customers tell us that they're seeing nice improvement in utilization data.
And I think what they want to see is that it's sustained and that it's really continuing to stabilize because we're still in the middle of the pandemic. And I think that that's the dark cloud that causes everyone to say, "Hey, we got to really make sure this is stabilized, before we make big CapEx moves.
Courtney Yakavonis (Analyst)
Gotcha, thanks. And then just lastly, appreciating, you know, that you mentioned defense sales, you know, tend to run that run rate of $2 billion a year. I think there were a couple of headlines, you know, that the army was planning to buy more JLTVs than currently contracted. Can you just help us kind of make sense of how big that could be, and what that means, for the next couple of years?
John Pfeifer (President and COO)
Yeah, some really nice things happening with the JLTVs. Specifically, we got—First of all, we got the order from Belgium. That was for 322 units, about a $120 million-$130 million dollar order. That's a big order because we took it away from an incumbent, and that's not a region, that Benelux region, where we have been historically strong. So that just really does showcase that this is a from a cost and a performance standpoint, it's the new benchmark. And we believe it's a sign, and there'll be more orders to come from international countries in 2021 that we'll be happy to tell you about when they happen.
With regard to the U.S. Army, you know, they, they initially contracted us with 16,901 units. There was a, what they call a, J&A, which is, a justification and approval process that approved over 6,200 units being added to that. So that brings our contract to 23,163 units, and that's certainly... And now I'll tell you, we were expecting that that would happen. That was not necessarily a surprise, but it's just a continuing positive indicator that this JLTV program is a strong, strong program for the U.S. Army, the Marines, and, and many of our allies around the world.
Wilson Jones (CEO)
Thanks, Courtney.
Operator (participant)
We have a question from Felix Boeschen, Raymond James. Please go ahead, sir.
Speaker 15
Hey, yeah, thanks for taking my question, everybody.
John Pfeifer (President and COO)
Sure.
Felix Boeschen (Analyst)
Hey, I'm curious if you could maybe flesh out demand in the international markets for your access segment a bit more. We've talked about the U.S., and I think you mentioned China was still relatively strong. But just curious if you could maybe flesh that China comment out a bit more and how you're thinking about Europe/the rest of the world, just with COVID cases on the rise.
John Pfeifer (President and COO)
Yeah. So China is now over 5% of our revenue in terms of its size. It is continuing to grow rapidly. You know, it went into this COVID-induced downturn first, and but it was also the first and the quickest to come out of it. And so the market in China is pretty healthy, and we expect it's going to continue to be a long-term growth market for us. The European markets continue to be really tough. Very, I'd call it, even a bit behind the U.S. market in terms of where our utilization rates are and where our customers are in terms of their willingness to increase CapEx. So Europe's going to continue to be under some pressure for a few quarters, yet, we expect.
Felix Boeschen (Analyst)
Okay. Very helpful. I appreciate it.
John Pfeifer (President and COO)
Thanks, Felix.
Operator (participant)
We have a question from Jerry Revich, Goldman Sachs. Please go ahead, sir.
Jerry Revich (Analyst)
Hey, yes. Hi, good morning, everyone.
John Pfeifer (President and COO)
Morning.
Jerry Revich (Analyst)
Can we talk about fire and emergency? So, you know, in the last downturn, the peak to trough sales decline was, you know, over 30% for you folks. But, I'm wondering if you could expand on the differences that you see in this cycle, talk about the market share momentum that you have in the order book. And, also, can you just expand on your comments on lower capital stock, if you, if you don't mind?
John Pfeifer (President and COO)
Yeah, Jerry, I'll give you some color there. So this downturn and the last downturn where you talked about the 30% peak to trough, are two totally different downturns in our view.... The last downturn that you're referring to was the Great Recession. It was a real estate-based collapse, and the real estate and property tax collapse is what really forced the market to come down from, say, I think it was 5,000 units down to, you know, the low 3,000s. And it's now come back into the low to mid 4,000s in terms of the, the annual market size. This downturn in the pandemic, it's not a real estate-based problem. It's not a macroeconomic issue. It's a pandemic issue. It's, you know, we're gonna see, at some point, continuing better therapies and, at some point, a vaccine.
And we believe that we have a stronger position than we've ever had in the history of our company in F&E. We've got better dealers than we've ever had in the history of our company at F&E. The innovation we put into the product, the cost with which we're able to operate because of simplification, we believe that puts us in a really good position. You know, I'll acknowledge there could be a little bit of municipality spending pressure, but we still feel like we'll be able to to move through that, without too much impact to our business if it happens in 2022, for example.
Jerry Revich (Analyst)
Okay, thank you. And then, you know, on the commercial segment, you folks have made really strong strides from a margin standpoint. Obviously, you're not giving guidance for 2021, but I'm wondering, what's your level of confidence that you can continue to expand margins year over year as you have some good operating momentum exit in the year post the restructurings, even with the incentive comp headwinds that you outlined for the company as a whole?
John Pfeifer (President and COO)
Yeah, we so I can't say enough. I mean, I'll say this about the whole company, the access team, in terms of their ability to manage through a very rapid decline in the last few couple of quarters. The F&E team has just been doing a phenomenal job. The defense team, managing that JLTV launch with all this COVID disruption to the workforce, and the commercial team is no different. They've really done a great job continuing on their simplification journey. They're continuing to put building blocks in place as we speak, as they focus on mixers in one site and RCVs in another. There's probably the most headway for margin expansion in this, no surprise, and we expect that margin expansion will continue. We feel like we're going in the right direction with our commercial business.
Michael Pack (EVP and CFO)
I think, Jerry, I think the big thing with commercial for next year, and that's we're not able to make a call yet on their top line, and I think that's really gonna determine where that margin ends up for the year. Certainly what I'd expect is through the actions we've taken in that said business, we're gonna have very solid incrementals or decrementals, whichever direction that ends up going.
Jerry Revich (Analyst)
Thank you.
Michael Pack (EVP and CFO)
Thanks, Jerry.
Operator (participant)
As a reminder, if you wish to ask a question, please press star one on your telephone keypad. That's star one. We have a question from Chad Dillard, Bernstein. Please go ahead, sir.
Chad Dillard (Analyst)
Hi, good morning. Can you hear me?
Michael Pack (EVP and CFO)
Good morning. Yes.
Chad Dillard (Analyst)
Yeah, I'm asking a question on Chad's behalf. So could you talk about the level of quoting activities you are seeing in fire and emergency compared to a year ago?
John Pfeifer (President and COO)
Well, I will just say that we had an all-time record order year in 2020, so I think that's the best indication of quoting activity that I can provide. Now, orders came down a little bit in the fourth quarter. That's, so that's...
Wilson Jones (CEO)
As we expected.
John Pfeifer (President and COO)
Yeah, not unexpected. We had a massive order rate in the prior quarter, so it coming, I should say, our Q2, we had a massive order quarter. So we thought that it would come down a little bit. It always comes down in Q3, and we thought it'd be a little bit light in Q4. But I don't think there's any abnormality to our quoting that's happening in F&E today. Our business is looking pretty healthy.
Chad Dillard (Analyst)
Great. And the follow-up is on the $85 million of half when you were talking about, that is in addition to the sort of the temporary cost coming back, right? Or, or is that, that already-
John Pfeifer (President and COO)
No.
Michael Pack (EVP and CFO)
Yeah, the 85... I'll quickly walk through that because it's an important point. So we benefited by $120 million of temporary cost actions in 2020. Those, the $120 million comes back into our expense run rate in 2021. What we do pick up, though, is a $35 million benefit of a permanent actions we've taken, and those permanent actions grow to $50 million by 2022.
Chad Dillard (Analyst)
Got it. Thanks.
John Pfeifer (President and COO)
Thanks.
Operator (participant)
We have a question from Ann Duignan, J.P. Morgan. Please go ahead, ma'am.
Ann Duignan (Analyst)
Hi, thank you. Most of my questions have been answered by now, but in your discussion of lower sales year-over-year, half one, can you just walk us through the different segments and what you're contemplating there? I know we've spent a lot of time on access, but what about the other segments?
Michael Pack (EVP and CFO)
You know Ann, we are not breaking it down by segment either. Obviously, I think we have, again, with the backlogs and fire and emergency and defense, to give you an idea of the opportunity for the year. The challenge we're facing right now is just with the pandemic. We are facing some workforce availability challenges here in Wisconsin, in the fire and emergency and defense segments. If you look to the fire and emergency segment, when the pandemic first started, and we had the shelter-in-place restrictions, it was tough for their customers to come in to pick up fire trucks. That's an important part of that process. We do have some level of concern that could be a headwind early in the year.
So that's really what's holding us back from being able to provide a little bit more clarity on that, because I think we could see some movement of that volume around between quarters.
John Pfeifer (President and COO)
Yeah, it's really an operational thing. I mean, if you look at the backlogs for defense and fire and emergency, they're really, really healthy. It's a question of how much is COVID gonna impact us in terms of our ability to get product out the door?
Ann Duignan (Analyst)
Yeah, and that's why I asked the question, because, I, I was curious, looking at the strength of the backlogs versus the comment that total sales will be down first half, so I just wanted to dig a little deeper, and I appreciate that it's not, visibility is not great right now. Just as a follow-up on the electric vehicles in commercial, you noted that you have 5 trucks going to customers for testing. Have you lost a significant amount of market share or, or orders because you weren't prepared with, electric vehicles? I mean, somebody has won those huge orders that have been announced in the recent three to six months.
John Pfeifer (President and COO)
Hey, I'm glad you brought that up, Ann.
Michael Pack (EVP and CFO)
Exactly!
John Pfeifer (President and COO)
Great question. We have not lost ground. We have not lost market share because of electrification. We look at ourselves as being out front on electrification. We have an enormous amount of work happening in electrification. And when you look at those Boise units, they'll be some of the first actual units on the market, actually for sale in the refuse collection industry. When you talk about huge orders, you're talking about companies that are talking about orders at some point in the future. Some of these companies have never made an RCV before in their history. Some of them have never even made a truck before in their history, so the question as to whether or not they can actually do it, I think is a valid question. But we are out on the forefront in electrification.
Michael Pack (EVP and CFO)
Thanks, Ann.
John Pfeifer (President and COO)
Thanks, Ann.
Michael Pack (EVP and CFO)
Operator?
Operator (participant)
There are no further questions at this time. I'd like to turn the floor back over to Wilson Jones for closing comments.
Wilson Jones (CEO)
Well, I want to thank everyone for hanging in there with us today. Apologize for the technical difficulties. I think it was a major outage going on up in New Jersey. So again, I want to thank you for hanging in there with us. Encourage you all to stay safe and healthy as we work through these challenging times. We certainly look forward to speaking with you on a virtual conference or on our next earnings call. Take care, everyone. Thank you.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.