Oshkosh Corporation (OSK) Q3 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Oshkosh Corporation Reports Fiscal 2020 Third Quarter Results Conference Call. 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 your host, 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 third quarter 2020 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 it's also available on our website. The audio replay and slide presentation will be available on the website for approximately 12 months. Please refer now to slide two of that presentation. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or year are to our fiscal quarter or fiscal year, unless stated otherwise. 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 three and I'll turn it over to you, Wilson.

Thank you, Pat. Good morning, everyone. I want to start today by sharing how proud I am of the hard work and disciplined execution our Oshkosh team members have demonstrated, as we manage through the current pandemic-induced environment. The underlying strength we derive from our people-first culture has been a key enabler to our success, as we navigate through these challenging times. We often talk about how we are better together, and we are exhibiting that with our results this quarter. For the third quarter, we delivered sales of nearly $1.6 billion, adjusted earnings per share of $1.29, and our consolidated backlog is up nearly 6% versus the prior year, as we controlled what we can control, while responding quickly to challenges outside of our control. Given the conditions present in our markets in the U.S. and around the world, we believe this represents solid performance. The duration impact of the pandemic on the economy remain uncertain, but the resiliency of Oshkosh team members has been impressive, as we responded to a variety of challenges, including changing customer demand, new working protocols and supply chain disruptions, among others. We believe our values and strengths as a different, integrated global industrial are even more pronounced versus our competitors in times like these. We implemented the temporary cost reductions we discussed last quarter. Those actions are evident, not only in our third quarter results, but should also benefit us as we manage through the ongoing uncertainty. Recently, we also announced some permanent cost reductions in areas of our business most significantly impacted by changes in customer demand as a result of the pandemic. John and Mike will discuss those actions and the related impacts in their sections. And before I turn it over to John, I wanted to mention that our balance sheet and liquidity both remained strong, and our Board approved another quarterly dividend payment of $0.30 per share, consistent with our dividend last quarter. Also I want to take a moment to congratulate John on his recent promotion to President. It's a testament to John's strong leadership and dedication to a people-first culture. I look forward to continuing to work with him, as we lead this great team here at Oshkosh. Please turn to slide four and John will discuss each of our segments.

Thanks, Wilson. Thanks for the comments, and good morning, everyone. Before I provide an update on each of our segments, I'd like to provide a brief update on our operations, including our people and supply chains. Across the company, we are focused on maintaining the safety of our team members and preventing the spread of the virus, with increased social distancing, both in the offices and throughout our manufacturing facilities. While this can make completing work more challenging, we have maintained strong efficiencies. I am proud of the way our team has remained disciplined in maintaining these strict protocols. We also successfully navigated through over 200 supplier shutdowns early in the quarter to continue production without any major supplier induced line stoppages. This is a true testament to the focused efforts of our supply chain team, our integrated capabilities and our strong supplier partners. While we've largely stabilized our operations and supply chains, elevated infection rates in parts of the U.S. extend production and supplier risks, and we will remain diligent in our actions. Additionally, we've carried out our return to work or return to the office actions for our team members. I won't go into all the details, but about half of our office workforce physically enters our facilities for work each day with appropriate social distancing and cleaning protocols in place. Essentially, we implemented changes that enable Oshkosh team members to work-from-home when they need to and work in our facilities when they need to and they can do it seamlessly. Now I'll move to our segment updates and kick it off with Access Equipment. Our Access Equipment segment has experienced the negative impacts of the current business landscape more intensively than any other segment in our company with year-over-year revenues down more than 60% in the quarter. Despite these challenges, our team rallied quickly with aggressive steps to reduce production at the factories and to lower our costs, resulting in solid, adjusted decremental margins of just under 20% and an adjusted operating income margin of 8.4%. This performance is impressive given the significant declines in access equipment markets in North America, Europe and other parts of the world. On our second quarter call, we discussed temporary manufacturing closures in the segment during the third quarter. And with market recovery timing still uncertain, we shutdown production for the month of July, and we will have two-week shutdowns in both August and September. Wilson mentioned that we also have taken some permanent actions to reduce our costs, particularly in this segment. We announced the closure of our Medias, Romania facility at the end of June, which will occur over the next 12 months. We remain committed to the EMEA market and will be able to serve it more efficiently from our existing global manufacturing footprint, including plants in France and the U.K. in addition to the facilities rationalization, we also reduced our office staffing in the segment with a modest workforce reduction. Our simplification framework has been an important enabler for our ability to deliver robust margins throughout the business cycle, as well as relocate production so that we can operate with improved logistics and customer service levels. While COVID-19 has impacted access equipment markets around the world, we are staying flexible and nimble in our approach to managing the business. However, given the uncertainty around the broader economic recovery, we are not in a position to provide an industry or Oshkosh specific outlook at this time. We know that access equipment will come back, but we do not currently have a time frame. We will control what we can and make the right decisions that we believe will facilitate our success when demand returns. We are further encouraged by the age of access equipment fleets, particularly in North America, that we expect will be a positive demand driver in future quarters. Finally, just as we discussed last quarter, our facility in China is back online, and we retain our positive outlook for this market as demand is returning. Our team in China has plenty of experience in both the demand and supply sides of the market, and we remain very bullish on our prospects for long-term growth in China. Please turn to Page 5, and I'll discuss our defense segment. Our defense segment performed well in the quarter as the team continues to ramp up the JLTV program, which helps provide a solid foundation for the company with a large backlog and multiyear visibility. During the quarter, we received an order for JLTV trailers that further solidifies our leadership in tactical wheeled vehicles for the U.S. Department of Defense and our allies. We continue to work with a number of foreign governments on JLTV opportunities. And while we are not making any announcements today, we have a strong pipeline of opportunities and expect that we will be discussing additional international successes in future quarters. Our defense backlog remains solid at nearly $3.3 billion, up over 15% from the prior year which provides good visibility, especially given the current environment where the pandemic has limited visibility across many industries. During the quarter, we announced a joint venture to manufacture tactical wheeled vehicles in Saudi Arabia. We have been working with our partner, Al-Tadrea, for the past two years to finalize the agreement. This is part of our longer-term plan to be an integrated strategic partner with his key U.S. Ally for defense vehicles and life cycle services. This is an important milestone for our international defense activities. Before I wrap up my comments on our defense segment, I want to congratulate both our production UAW team member in Oshkosh and our leaders in the business for agreeing to a new collective bargaining agreement which provides continuous coverage through September 2027. This is a great example of the benefits of working together and reaching solutions that provide security and peace of mind for our team members as well as continuity for our company. Let's turn to Slide 6 for a discussion of the Fire & Emergency segment. Fire & Emergency delivered a strong quarter with a 15.7% adjusted operating income margin. Last quarter, the segment experienced some challenges with a supplier issue that impacted both our shipping schedule and our margins. This supplier issue is behind us, which paved the way for a great quarter as the team focused on operations and delivered impressive results despite lower year-over-year sales. Customer travel restrictions implemented during March, eased midway through the third quarter. This was a positive development for the team, but given the recent increase in COVID-19 cases and states reinstating quarantines for travel, we may experience temporary sales headwinds in the fourth quarter. As we discussed on the last earnings call, we expected third quarter orders to be down year-over-year and sequentially and that was the case. Remember, we are coming off a quarter that was an all-time record for orders and we expected there to be a pause in orders due to the pandemic. The backlog continues to be robust, providing visibility well into 2021. Even with strong year-to-date orders, we will continue to monitor the pandemics impact on municipal budgets which could impact spending on fire trucks in the future. Please turn to Slide 7, and we'll talk about our commercial segment. It's clear that customer demand for both concrete mixers and refuse collection vehicles has been impacted by the pandemic. As construction work was limited and often stopped at various locations across North America over the past 3 months, we expected concrete mixer sales and orders to slow. That has been the case. RCV demand tends to be more stable and we've seen residential trash collection remains strong and even elevated in some cases, but we've also seen nonresidential refuse collections slow during the shutdown and this has had a negative impact on demand for RCVs in the current environment. Despite these challenges, commercial really came through with a solid margin quarter. This can be attributed to quick actions and a passionate culture that permeates throughout the business. Those of you that have followed us for the past few years know that we are committed to simplification throughout Oshkosh and we began journey a couple years ago in the commercial segment. As part of this journey, we are transferring concrete mixer production from our facility in Dodge Center, Minnesota to consolidate production in our other mixer facilities in North America. Thus, Dodge Center will become a focused RCV operation. This will reduce costs and better position both the mixer and the RCV businesses for success in the future as they'll benefit from focused facilities. The transition will occur over the next six months for this important step in our simplification journey. Also, we recently sold our concrete batch plant business, Con-E-Co. We regularly review all of our business for value and strategic fit within our company. We determined that Con-E-Co was a better fit with a different owner and closed on the transaction last week. We think this will help us more effectively focused our resources in the commercial segment. We appreciate the contributions from the team at Con-E-Co and wish them all the best as they move forward with a new parent company. Before I leave this segment, I wanted to mention the ramp-up of our new front discharge concrete mixer, the S Series 2.0 complete with industry-leading connectivity and productivity technologies. We're pleased with customer orders and interest levels, even against the backdrop of the pandemic. We believe this redesign mixer will be a long-term driver of solid performance for the company. Watch for new megatrend technologies applied to this vehicle in the future. This wraps it up for our business segments. I'm going to turn it over to Mike to discuss our third quarter results and some additional comments on current business conditions.

Thanks, John, and good morning, everyone. Please turn to Slide 8. During our last earnings call, we commented that we expected the third quarter to be a challenging quarter and it was. However, strong execution by our teams, combined with rapid implementation of cost reduction actions allowed us to effectively manage the business and deliver solid adjusted consolidated decremental margins of 15.9% for the quarter on a significant decrease in year-over-year sales. Consolidated net sales for the quarter were $1.6 billion, down 33.9% from the prior year quarter, a significant decrease in access equipment sales and, to a lesser extent, decreases in fire & emergency and commercial sales were the primary drivers of the lower consolidated sales, offset in part by higher defense sales. Access equipment sales were negatively impacted by customer pushouts, some cancellations and lower order intake rates as a result of COVID-19 and the related shelter-in-place restrictions driving low levels of job site activity throughout much of the U.S. and the world. Defense sales growth in the quarter reflected the continued JLTV production ramp and higher aftermarket parts and service sales, partially offset by lower FHTV volumes. Fire & emergency sales were lower than the prior year quarter, primarily as a result of decreased production line rates necessitated by COVID-19 related workforce availability and supply chain disruptions offset in part by a catch-up of units affected by the supplier quality issue we noted last quarter. And commercial segment sales were lower than the prior year quarter, driven by a combination of lower demand for refuse collection vehicles and concrete mixers as well as some production disruptions, both caused by COVID-19. Consolidated adjusted operating income for the third quarter was $128.8 million or 8.1% of sales compared to $257.8 million or 10.8% of sales in the prior year quarter. Access equipment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of the facility shutdowns during the quarter, offset in part by favorable price cost dynamics, lower incentive compensation expense, the benefit of temporary cost reductions, and more amortization expense. Defense operating income increased as a result of an unfavorable prior year cumulative catch-up adjustment, higher sales volume, and the benefit of temporary cost reductions, offset in part by higher warranty costs. Fire & emergency third quarter adjusted operating income declined due to lower sales volume and adverse sales mix, largely offset by improved pricing, lower incentive compensation expense, and the benefit of temporary cost reduction actions. Commercial segment third quarter operating income increased compared to the prior year quarter as a result of the absence of inefficiencies caused by a weather-related partial roof collapse in the prior year and favorable price cost dynamic, offset in part by lower sales volume. Adjusted earnings per share for the quarter was $1.29 compared to earnings per share of $2.72 in the third quarter of 2019. Third quarter results benefited by $0.03 per share from share repurchases completed in the prior 12 months. Please turn to slide nine for a discussion on the remainder of fiscal 2020. During the second quarter, we withdrew our financial expectations as a result of the evolving impact of COVID-19. While we have seen stabilization in our supply chain and operations, recent increases in infection rates in parts of the U.S. continue to drive potential supply chain and production risk. Further, the cadence of customer demand in our access equipment and commercial mixer businesses remains uncertain. As a result, we're not in a position to provide updated expectations for the fiscal year. Last quarter, we announced decisive actions to reduce pretax cost by $80 million to $100 million for the year in response to the uncertainties caused by COVID-19. These cost reduction actions include salary reductions, furloughs, temporary plant shutdowns, limiting travel and reducing project costs, and other discretionary spending. As a result of the outstanding focus by our teams, we now expect these temporary cost reduction measures to exceed $100 million in fiscal 2020. As John discussed, we have also announced permanent restructuring actions in our access equipment and commercial segments, which are expected to yield combined annualized cost savings of $30 million to $35 million once complete. We expect to begin realizing some benefits of these actions in 2021, with the full impact of these actions by 2022. As we shared with you on the last call, we established a playbook of options to respond to the pandemic. With recovery trending at a slower pace, permanent cost actions were prudent. Our balance sheet remains strong with available liquidity of approximately $1.1 billion, consisting of cash of approximately $300 million and availability under our revolving line of credit of approximately $800 million at the end of the quarter. Share repurchases remain paused during the quarter and we will reevaluate them as we gain further clarity on the recovery of our end markets. On the second quarter earnings call, we discussed our target of achieving mid-20% adjusted decremental margins, both on a consolidated basis and within the access equipment segment for the year. We were able to exceed those targets during the third quarter with disciplined execution and the help of our cost reduction initiatives. We expect the benefit of cost reduction activities to be lower in the fourth quarter compared to the third quarter as shelter-in-place restrictions have eased, leading to increased expenses. Nonetheless, we expect to achieve the targeted mid-20% adjusted decremental margins, both in the fourth quarter and for the full year on a consolidated basis. I'll turn it back over to Wilson now for some closing comments.

Thanks Mike. We have a strong culture with strong leaders at Oshkosh. Our revenues and earnings were down in the quarter from last year, but given the challenges we've been facing, we're proud of our performance. We have a strong balance sheet with ample liquidity. Our defense and fire & emergency backlog provide visibility well into 2021 and we took aggressive actions early during the pandemic to lower our costs. Additionally, we announced permanent cost reductions that we discussed on today's call that we believe will position us for greater success in the future. Our team has managed production and supply chain disruptions very effectively and has kept Oshkosh on the right path during these challenging times. I am reassured by our strength and resourcefulness and believe we can deliver solid sales and earnings performance over the long term. I'll turn it back over to Pat to get the Q&A started.

Thanks, Wilson. I’d like to remind everybody, please limit your questions to one plus a follow-up. After the follow-up, we ask that you get back in queue if you’d like to ask additional questions. Operator, please begin the question-and-answer period of this call.

Thank you. [Operator Instructions] Our first question is from Jerry Revich with Goldman Sachs. Please proceed.

Yes, hi, good morning, everyone.

Good morning, Jerry.

Really nice quarter. What really stands out is getting to double-digit margins in commercial in the middle of the pandemic when I don't think, at least in my model I have you hitting double-digit margins in any quarter historically. Can you just talk about the sustainability of the performance this quarter within this segment? You mentioned some travel costs are going to come back. But are you still in a position where price costs can drive year-over-year margin expansion for this business in coming quarters and expand a bit more on the performance this quarter, please?

Sure, Jerry, I'll take that. We're certainly excited by the great results that commercial delivered this quarter. It was – certainly, they jumped on their cost actions quickly, and we got a nice tailwind from price cost. Bottom line, though, is we did benefit from some onetime items in the quarter. This business is on a nice simplification journey. We believe it's a double-digit margin business over time. We don't see us being a sustained double-digit business in the near term. So I think it was, again, a nice quarter. But I think for the sustained double-digits, it's going to be a bit of time yet, as we continue our simplification journey.

And I think just add to that, Jerry. The moves we're making that John described in his prepared remarks, where we're focusing our factories from a mixer standpoint and a focus factor from our refuse collection vehicle standpoint, that's going to help us get to those double-digit margins.

Well, and that's what's interesting, the fact that you got the double-digit margins while making these decisions. And I'm wondering if you could talk about JLG and decision around the Romania facility, is that a function of higher productivity in your other plants? Or is that a view on European demand? Can you just expand on that? And I'm wondering with all the telematics that you folks have in the field for JLG, can you talk about whether the realization improvement has continued beyond normal seasonality into July?

Yes. Jerry, this is John. So when we make moves on fixed costs, like you've seen us do in access in Romania or in commercial with the mixer business being consolidated, we're always doing that in line with our simplification journey. So we kind of know where we have simplification opportunities, and we look at execution based upon what we see in market conditions. We've been talking about Europe for a couple of quarters, at least now in terms of our concern with the market there. And our ability to be able to consolidate what we produce in Medias in other focused factories is simplification, but it's also an opportunity to take fixed cost out with a fairly weak European market. And we think Europe is always going to be an important market for us, and we'll continue to serve it really well, and we're confident we can serve it even more efficiently with the moves that we've just made. With regard to utilization rates at Access, utilization rates bottomed out, kind of, in April and as we got to early June, we saw improvements in utilization rates. We talk to our customers all the time. They give us indications on what they're seeing. We even had some of our customers report publicly that utilization rates were improving, then we got towards the end of June and June ended very differently than the way it started with infection rates of the virus starting to go back up and that caused a pause for a lot of markets like California, Texas and Florida, which are big, big markets for us. And so utilization rates are still up from when they bottomed out in, let's say, the April time frame, but they're not back to pre-pandemic levels. And I think there's a little bit of pause going on in the market because of all the reinfection rates that we're seeing.

I appreciate the discussion. Thank you.

Thanks, Jerry.

Our next question is from Ann Duignan with JPMorgan. Please proceed.

This is Sean McMahon [ph] on for Ann. Just one clarification question. You said you're extending your temporary shutdowns through F Q4 in Access. Those are still going to be two-week shutdowns each month as F Q3 was?

So just to clarify, so July is the entire month. And then it's two week shutdown in August and September. Same cadence as we saw last quarter.

Great. Thanks. I appreciate the clarification there. And then shifting gears a little bit, your F&E backlog looks pretty solid at the end of F Q3. Can you update a little bit on your visibility in that segment and maybe compare it to defense?

Yeah. So our backlog at F&E and defense is really strong. F&E is over $1 billion backlog. Our order rates for F&E are up nicely year-to-date. Q3 is always kind of a weak order quarter. And with the pandemic, it was a little bit weak. But year-to-date, orders are strong. Backlog is great in F&E. It goes well into 2021 and defense goes even into 2022 at over $3 billion of backlog. So those are really good anchor businesses for us as we go through very tough climate in our other two segments, Access and Commercial.

Great. Thank you. Appreciate the color. I'll pass it on.

Our next question is from Jamie Cook with Credit Suisse. Please proceed.

Hi, good morning. Nice quarter. I guess just first question. Can you just talk about the cadence of sort of sales and orders that you saw throughout the quarter, some companies are citing that June was better. And then just any trends that you're seeing that continued. What you're seeing, I guess, in July, if that trend continued? And then my second question, obviously, good job on margins and cost control. As we look to 2021, are there any costs that you're realizing that are now structural, whereas, before you thought they were just sort of like discretionary? Thanks.

So let me start with the orders. I think you're probably talking about the access business when we're referring to orders. I'll go back to for the month, as we came into the month of June, the last month of the quarter, June finished in a very different place than where it started. And as the pandemic unfolded, and we talked about this a quarter on our call, we started to see push outs, and then we started to see a lot of cancellations. And we included cancellations in the month of April in our previous backlog. And then we still saw cancellations, although not to the same extent in May and June. Now having -- considering the environment that we've been operating in with this downturn, we're very pleased with what our orders look like in the quarter. And as we come into July, I think what we're seeing is we're still seeing uncertainty in the market versus what we felt in early June. And I think, again, as I said earlier, we're seeing uncertainty in the marketplace, primarily because utilization rates are not back to pre-pandemic levels yet. And I think they're not back to pre-pandemic levels because of reinfection rates that are going back up, especially in those key states that are really important to our business. We are seeing, though, which I think is a very positive with our -- with the marketplace is really responsible leadership. And when I say really responsible leadership, I'm talking about across our customer base and access. There's a lot of mixed conditions in vertical segments with access oil is really, really bad, for example, where some other markets are a little bit different from construction in different levels of opening in different states and facilities usage at yet different states. But there's a responsible fleet management going on. There isn't a lot of irrational activity. So and the defleeting that's happened is a slight rational level of defleeting. There's no wide-scale defleeting going on. So we think we're in a really good position that when the market stabilizes that the entire market is going to perform very, very well. We just don't know when that's going to happen.

And I can take the back half of the question, just looking at our cost actions. So as we said in our prepared remarks, our temporary cost actions this year, we expect to exceed $100 million. Those costs generally come back in the future. As you look to future years. However, we did talk about the permanent actions that were announced over the past several weeks at full run rate by 2022, that's $30 million to $35 million. We'll get about half of that benefit as we look to fiscal 2021. What we can say, though, we're going to continue to manage the business. We have our playbooks. We talked a lot about on the last call. We're continuing to maintain those. And certainly, we'll continue to monitor what market activity is as we get into next year and we'll continue to be disciplined in our management approach.

Thank you. I appreciate the color.

Thanks Jamie.

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

Thank you very much and good morning, everyone. I want to stick with this last point or discussion on cost savings. And Mike, I'm wondering if you can maybe give us a little bit of detail as to how much of these temporary cost savings contributed to Q3 and obviously, what that's going to look like in Q4, given your updated figure here. And then, related to this, as I'm thinking about fiscal 2021, if nothing really changes from a volume standpoint or a demand standpoint, I'm presuming some of these temporary cost savings carried through into fiscal 2021. So if you could maybe help us kind of parse these things out, I think that would be great. Thanks.

Thanks, Mig. So from a cost action standpoint, we talked about north of $100 million. You kind of have an idea of the timing in mid Q2 that those kicked off. We do see that Q4 cost benefit is going to be somewhat less than we saw in Q3, as I mentioned in the prepared remarks, and that's really because the first half of the quarter, the level of economic business activity was at such a low level with the shelter-in-place restrictions. So we do expect the spending to be somewhat higher in our fourth quarter. Jumping to – we're not in a position to call next year. But I guess going back to my previous commentary, we're certainly managing those playbooks. And as we see that demand cadence, we're certainly going to take a prudent action and manage the business responsibly.

But, Mike, I mean, look, you weren't implementing these sorts of actions back in Q1 2020 or a good portion of Q2 2020. So I guess I'm wondering, are there components to these savings that are sort of programmatic that automatically reset when you enter a new fiscal year? Or do we just have those relatively easy comps on a year-over-year basis, where we can still expect the benefit into fiscal 2021? This isn't about guidance; this is just about how you kind of structure these savings.

Yes. Certainly, some costs come back structurally. Things like incentive compensation can be a headwind. And there's certain actions that we've taken that, again, you look at things like travel and entertainment, there's so little travel that was taking place. So it's those types of things. Again, it's really going to depend on what we see for activity when you start comparing that year-over-year, and it's just – it's hard to call at this point. And I think that's what we're going to continue to manage.

Yeah. We know we have the restructuring cost in the year that will help us, Mig. But then, it's really – it's going to be a product of what market is available to us. Obviously, if the market is – it goes down further or stays where it is, then we'll use those playbooks to manage that and look at some permanent costs if we need to. Obviously, if the market starts to tick back up, and we'll be prepared to use the playbook and take it back up. But to Mike's point, it's hard for us to call how much would read through or keep going, because we haven't called the market yet. It's just too early and too much uncertainty right now.

Understood. Then my final question, looking through your inventory build here. I guess, I'm looking for a little more color as to what was related maybe to some of the supply chain issues that you talked about earlier, versus some other moving pieces? And how should we think about inventory progression going forward-looking at the next couple of quarters? Thank you,

Sure. Related to inventory, inventory is at an elevated level at the end of the quarter. I guess what I'd say is, you looked at the quarter back Q3, back to John's comments, you did see demand start picking up, but then customers paused a bit more as infection rates increase. So in response to that, again, following our playbooks, we took more production at access out in the fourth quarter to really manage the customer demand dynamic with our inventory levels. So we've taken more action, we have -- there's a certain extent of it. It's -- call it, maybe 1/3, 2/3, some of it is, we did buy a little bit ahead to protect just supply chain disruption. But the bigger factor is really just the cadence of the demand. As we look at it going forward, again, as some of it is going to be the timing of when demand picks up. But we have good inventory. We're not in a forced liquidation position with it. It aligns with the backlog we have, particularly as you look at access, where you see the higher -- a little bit higher inventory level. And so we're going to continue to manage it and depending again on the case that normalization of it could extend into next year.

So Mig, this is John. I just want to add to Mike's comments. With a cyclical business like access, we always have to balance our ability to reduce costs and generate earnings, which we've shown we can do in a steep downturn. And we think that's a really positive thing. With our ability to come back when the market comes back because we keep saying, hey, it's uncertain exactly what that timing is going to be. But we need to, and we work very carefully on positioning ourselves to come back because when it comes back, it will come back pretty quickly. And so my point is, is that, that inventory is good inventory, as Mike said, and it's partly there to help us when the market turns be able to meet the demand in the market.

Got it. Thank you guys.

Thanks Mig.

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

Thank you. And actually, just following on that issue of inventory as we think about access specifically, from an order perspective given your earlier comments about maybe some pause in the market, how are you thinking about it's kind of multiple parts here. But just thinking about year-ending backlog in access, wherever that sits and how that or how it will inform you in terms of your thoughts around '21? And I'm not asking for guidance on '21, obviously, but just thinking about what kind of cushion your comfort backlog may or may not give you, as you think about also managing or kind of toggling across the inventory levels that may end the year higher than potentially you were thinking. So maybe it's just – the question is, how it really comes down to backlog in what kind of view that provides as you look into the next year? A – Mike Pack: Hey Tim, this is Mike. I'll try to take that one. And certainly, John can add on. We're going to continue to watch, we're not calling Q4 yet. We're going to have to watch those order intake rates, and it's going to be all the things we've been talking about just from general market conditions. But what we can say is as we watch that order cadence over the course of the quarter, look at our inventory levels, we're going to -- that's something that we're looking at literally on a daily basis. We're talking to our customers, and we can meter that production rate if we need to, into the future. And we're going to -- it's something that, again, is a daily conversation. So, it's tough to call what that exact dynamic is going to be at the end of the year, but we are going to be -- we're going to continue to manage it and adjust.

And I'd just add to that, Tim, you've heard John say it's good inventory. It's in the right product categories. And we're okay if we carry some of that into next year because, again, it is in kind of the middle of the fairway of the business. But I'll just remind you, too, and you've watched this, JLG, really all of our segments have been very disciplined in their pricing. So, we're going to be smart with that inventory, too. We're not -- as Mike said, there's no reason to be in force liquidation mode. We have a lot of positive outlook for this segment, for this whole market, it's just a matter of timing right now. So, it is elevated, but at this stage, we're working through it. And obviously, into next year, if we need to take production -- more production out, we can do that. If we need to add production, as John mentioned, we're equipped to go both ways, and that's what we like about our position is. The team has really positioned that segment very well.

Okay, got it. And then maybe just a high level, going back to the defense backlog. Can you maybe just update us in terms of some of your three large programs there in terms of funding levels and how we're thinking about? Obviously, you've got a little bit more visibility there, just how we're thinking about the outlook for the three big programs into FY 2021.

Yes. It'd be nice to have that kind of visible in all four segments, wouldn't it? I mean that's -- we're really pleased that we have a defense business on a fire & emergency business that that can provide us, what we call a longer porch versus some of the shorter porch businesses that we have. But we're in good shape in defense. As you mentioned, a little over $3 billion backlog. If you think about the programs, we can take FHTV, the heavies into 2022. We can accept JLTV orders and deliveries into early 2025 and the FMTV A2, the new program, goes into 2026. So, three solid tactical vehicle programs, really the main tactical vehicle programs today for our U.S. military in good shape. The acquisition objective for JLTV hasn't changed. It's still 49,000 for the Army and 15,390, I think, for the Marine Corps. So, we like that, that acquisition objective is holding. Some of the timing is slipping a little bit. But we really like where we are. And then -- and as you've heard us talk about, now we're starting to get some momentum internationally. That could help us later in 2021, but definitely into 2022 when JLTV draws down just a little bit in 2022. So, good shape on all three of those programs. We would expect probably some extensions with FHTV. It's a proven program. So, we certainly would expect that, that would continue on past 2022, but that's yet to be determined.

Got it. Thanks for the time.

Thanks Tim.

Thank you, Tim.

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

Hi, good morning guys.

Hey Steve.

A couple of quick clarifications. It sounds like you're going to be shut down in access for about 50% of the fourth quarter. Is that basically the same as what you were in the third quarter?

Yeah, that's correct. Right.

Okay, great. And then, I would assume you have fantastic visibility into the fourth quarter for defense, but I know that sometimes those margins can bounce around or whatever. Anything for us to keep in mind relative to the fourth quarter in defense?

I would just say, consistent with what we've talked about in the past, it's a high single-digit business. It can vary from quarter to quarter. But I would – and again, I think I would just look at that high single digits and assume it would be in that territory.

Okay, great. And then, just one longer-term one, Wilson. I know you were kind of right in the middle of the fire around the global financial crisis. Pun intended, on the Fire & Emergency side. And I know that, that business ended up declining fairly meaningfully post the GFC. And I'm curious how you're thinking about the current state of affairs in the world relative to what we saw back there. And I know you called out in your prepared remarks that there could be some pressure there. But I'm just curious, as you look out over the next two or three years, do you think this is a similar kind of a trajectory to what we saw post GFC? Or is there some mitigating circumstance?

Yeah. I want to be careful, Steve, in calling the trajectory. But what I'd tell you is that I believe is different now versus back then. We had the residential housing crisis, right? And today, residential is not great, but it's – there's housing starts. And – so, that gives us hope that we can keep those tax receipts going in that way. I think the other thing, too, is we watch our distribution channel, and that helps us with our confidence. And just this past nine months, we've seen six of them invest in new facilities. So I think that – and then you look at the fleet age, fleet age is still elevated in Fire & Emergency. And as you know, it's kind of emotional issue in a city, if the fire truck doesn't work. And so it usually gets some priorities. So we think things are a little different today. But, again, I want to be careful because, as you know, they're always last in, last outs and we're going to learn more over the next couple of quarters with their order patterns to see if some of that's going to happen. You have to believe some cities are going to debate that, because of just what's going on, not just with COVID, but some social unrest things that are going on, too. So more to come on that, but I don't – where we sit today. I think the difference is we've still got some housing, and we didn't have it back then.

Fair enough. Good point. Okay. Thank you.

Thanks Steve.

Our next question is from Courtney Yakavonis with Morgan Stanley. Please proceed.

Hi. Thanks for the question, guys. Maybe can you just comment a little bit on the dynamics that you're seeing between Europe and the U.S.? It sounds like most of your more conservative comments about the exit rates in June have been related to the case counts in the U.S. Are you seeing any differences in utilization between Europe and the U.S. and then you talked about those push-outs and cancellations of orders, any discrepancies there?

I think that the European market is similar. Based on what we're seeing right now is, very similar to what we reported a quarter ago. We were -- a quarter ago, we were saying, we don't know if we're going to be a V-shape or U-shape or an L-Shape in different markets around the world -- I'm sorry, in the U.S., but we did say we know China is going to be V, and indeed, it's been V. And we think that the European recovery is going to be much slower just because of the macroeconomic indicators that we see in Europe, more than anything. And so we plan -- that is indeed what we're seeing is we continue to believe it will be a slower recovery in Europe. And that's what led us to make some of the fixed cost actions that we reported in terms of our simplification journey and how we're going to serve the European market going forward.

I think our expectation with the North America market is going to recover quicker than Europe.

Yeah.

But again, to be determined.

To be determined. Well, the timing has to be there. Yeah.

Okay, got you. And then I appreciate there's been a lot of conversations about the cost actions you guys have taken. But just in terms of that, more than $100 million that you're anticipating this year, how should -- is there any framework you can give us when we're thinking about how those costs will roll back in either when you stop doing the temporary shutdowns? Or when you reach a certain sales recovery just to kind of help us think about the margin trajectory into 2021?

Yeah. Again, I think not in a position to call 2021, and it's really going to come down to, as we said earlier, that the volume and demand signal that we're seeing in the Access and Commercial markets and that's -- we have -- we're ready to respond based on what we see. So we have optionality. And I think you'll see our actions will align with that demand. Now again, some of these measures do come back structurally next year, because they are temporary in nature. But again, we're going to continue to manage those playbooks, we're going to be disciplined, and we have -- if we see softness, we have the opportunity for further permanent actions.

Okay, great. Thanks.

Thanks Courtney.

Thanks.

Our next question is from Nicole DeBlase with Deutsche Bank. Please proceed.

Yeah, thanks. Good morning guys.

Hi, Nicole.

So I, kind of, want to try to dig into the margin question a different way. Can you just remind us in a normal recovery, what you guys have seen in the past with respect to incremental margins? And I guess, based on what you're doing this time, to me, it feels like the same playbook that Oshkosh always follows. And so I don't see why incrementals would be different than they've been in past cycles. But any perspective you have on that?

I guess, I can start and certainly, Wilson can add in based on some more historical perspective. But I guess, our -- again, we're going to manage the businesses responsibly, but we're in a different place today than when we were going to the Great Recession, for instance. The simplification playbook that we've deployed with great success at Access, at Fire & Emergency is allowing us to really manage the decrementals that we're seeing today are very different than they were in the Great recession. And again, we're going to have some temporary cost headwinds when we come back up, but we're going to manage that responsibly, and we will deliver responsible or we believe will deliver responsible margins on the way back up.

Yeah. Nicole, I'll just jump in with a little more color on that. And your -- Oshkosh playbook, I wouldn't argue with you that it's not similar, but I can tell you, we've really enhanced it, a lot more simplification. I can't remember when we first met and you started covering us. But going back I've been here 15 years. And I remember, we struggled on the incremental/decremental side back then. We weren't -- we didn't have the foundation back then that we have today. And what I mean by that is a culture that's working together. We have a people strategy. And the cost reductions that you've heard us talk about, everybody participated and whether segments like defense was running well, but they still participated in cost reductions to support this different integrated global industrial. I look at the simplification that we've been talking about, and we've really matured, not just with process, but products, the facility rationalization. We're constantly studying on how we can -- can be more efficient and effective in our marketplace. And again all about creating the value, but the flexibility and the way we're nimble today, I can tell you, 5, 6, 7 years ago, we didn't have that. And again, it's a credit to our teams and how they have really worked together. They've embraced this people-first culture, and it's showing in our results. And so I think from the decremental standpoint, it exceed my expectations. Mike talked at the last call, somewhere mid-20s, maybe low 20s, but to see where we came in and how fast our teams took those costs out. That's what gives us confidence that as we go into '21, we can move fast if we need to. I hope we don't have to. I hope we move and move up, but we're going to have to wait and see how the markets are recovering before we do that. But I would just say the -- probably the playbooks, when you first met us, foundations are here, but we've added a lot, enhanced them a lot to get to where we are today. And again, I think if you go back in time, you'd see a big difference in how we have managed the incrementals and decrementals compared to the past.

This supply chain and operations, just faster moving, better information, better decisions, heads up, were connected with our supply base. Those are some of the attributes. - Wilson Jones: That's showed in managing 240 suppliers we were out of business for a while and how we kept our lines going there. That was a real credit to our supply chain teams.

Yes. I mean, listen, you guys really showed it in your decrementals this quarter. That's very clear and then just maybe one very quick follow-up for me. I've already taken enough time. The commitment to the mid-20s decrementals in the fourth quarter, does that also reflect in the access segment as well?

Yes.

Thanks. I will pass on.

Thanks Nicole.

Our next question is from Mike Shilsky with Colliers Securities.

Good morning guys.

Hey Mike.

So I just want to follow-up on access, just kind of hit me out here. So if it's the exact same production schedule as far as when your shutdown and when you're open in the fourth quarter. Is there any chance we could see a quarter-over-quarter increase in topline in the fourth quarter over the third quarter? Are there any mix improvements or changes, any increased production you've gotten. I guess, some of your operational changes over the last couple of months? Or do you think it will be somewhat flat in the fourth quarter if it's the exact same opening and closing schedule?

Hey Mike, it really comes down to -- we're staying close to our customers. It's really going to depend on that demand signal. Our customers, as they continue to manage through it, they have the ability to pull orders up a bit, if they're seeing an increased demand signal from their customers or push it out a bit. And that's that really comes down to why we're not making the call on Q4. It's that the fluidity that we're seeing in that demand signal.

Okay, great. And then secondly, I think it's about time I asked about it. I wanted to ask about the U.S. Postal service contract out there. It's over $6 billion. You're one of the finalists. The bids were due about two weeks ago. It's over 100,000 vehicles. I guess I've talked about the other bidders and kind of -- it sounds like there's a bit of a lid on what the USPS is allowing the bees to kind of stay, but they can -- but they've at least confirm to us that they are bidding. So, I guess, first, can you confirm that you're bidding on that deal? And then secondly, can you please tell us how you would produce the products and outside chassis, but like what facility will you actually up-fit these four trucks in and under what segment will they be under if you were to actually win the contract?

Yes, I'd like to be able to give you all that information, but I can only give you a little bit for some of the reasons you mentioned when you just asked your question. So, I will tell you that we did submit a proposal for the USPS program. We did it just a couple of weeks ago. It formerly went in. We don't have a specific date yet as to when we're going to hear back from the Postal Service. But we believe we could find out as early as the end of the calendar year. But we might not find out until sometime in calendar year 2021. That -- I know you want a little bit more information. That's about all I can tell you, that's all I'm allowed to tell you really.

Yes. I think you know we're on a non-disclosure, Mike.

Okay. Okay, that's fair. I can always follow-up offline. Thanks so much guys.

Thanks Mike.

Our next question is from Seth Weber with RBC Capital Markets. Please proceed.

Hey guys. Good morning. Thanks for keeping the call going. Maybe just a bigger picture question. Wilson, the slide in your prepared remarks, you talked about fleet -- access fleet age as a tailwind that you see an eventual tailwind, I guess. Is that something you're hearing from the rental companies because the fleet utilization is obviously low? I think the rental companies have gotten a little bit smarter about how they're using fleet and stuff. So, I mean, do you -- is that a message that you're hearing from the rental companies that fleet age is going to kind of cause a pretty -- cause a replacement cycle or is that just your kind of internal assumption? Thanks.

Yes, Seth, good question. We as you know, we have really good relationships with all of our rental customers. And a lot of good information shared that helps us with ourselves and inventory operation planning process. And when you look at their fleet ages, if you remember, when 2012, 2013 and 2014, that's when the market really started to come back, and we hit peak there into 2014, a lot of machines purchased back then. Now those are getting into the seven-year year cycle and there's still a routine turn of those. You're right, some of that -- those machines aren't being utilized as much, so they could extend that some. But we still believe that that replacement cycle is there. It's just the timing of it. If markets start to recover, as you know, a lot of the ways our good real customer friends grow market share is with new machines. And so we think that's still in play. And again, some of the information that we do have tells us that there are a lot of older machines that are going to need to be replaced. It's just, as you know, Seth, we can't call the timing of that right now. We look forward to doing that, but someday, but we can't right now.

Yes. Seth, it's John. I'll just add to that. We hear the information comes from our customers, but it also comes specifically from data. We know the most opportune time in terms of residual value to replace fleet is between seven and eight years. And it can be pushed out a little bit, but the economic equation really falls off if you push it out too much. A lot of it's real data-driven.

Sure, sure. Okay. I appreciate guys.

This is the point, sir, where we usually give you a hard time about getting on our rental customer friends about buying the fleet.

Times are changing. I appreciate it, guys. Thank you. Have a great rest of the day.

Thank you, Seth.

Our next question is from David Raso with Evercore. Please proceed.

Hi, thank you for taking my call. I apologize, we got kicked off the call earlier. So I may have missed this. But I wanted to push a little harder on Access seasonally. Normally, the fourth quarter sales are down 10% to 20% from the third quarter. But given the extended shutdowns, but at the same time, you also have a little inventory to ship out of. And your customers don't take a lot of volume in September or bid in August and July is already upon you. Should we be expecting the normal 10% to 20% sequential decline, 3Q to 4Q on Access? I know it's been an abnormal year. So that's why the question is more relevant than normal on trying to use normal seasonality.

I wish the word normal was something we could use these days, David.

I know.

I think the bottom line is, yeah, you can't look at this as a normal year. I think -- again, it's -- when you're dealing with these lower levels of activity, I think some of the prior year comps early applies. So I think it's -- we're going to continue to talk to our customers, stakeholders. We have the inventory to respond to their demands or needs. And we're going to have to just continue to manage and see where they end up, but we're certainly prepared to respond to what those needs are.

But given the seasonality you're buying and you're -- again, you're already done with July. Are you implying the down 10% to 20%? It should be better because 3Q was so low? I'm just trying to baseline it because you don't have enough visibility to at least have a comment about versus normal seasonality above or below?

So Dave, we don't comment in the quarter we're in. We've always stayed away from especially now, and you know that this market as well or maybe been less at times, it starts and stops so fast. And back our position because of the inventory we do have, we know if some things open up, some of these states lift some of the restrictions that are there and you get some more construction going. We think that could be good for us. But again, we don't know -- we're not in control of that. So what we're doing is controlling what we can. And as you saw, the teams did a nice job in the quarter, managing costs down and delivering some really good decrementals.

The margins are great. I guess another way to think about it, when you speak of an aging fleet, and if you think about current volumes versus where you believe from your conversations with your customers, where is replacement demand? Or if you want to project on next year, where do you think current volumes are versus replacement demand?

I don't know that we could answer that. The -- when we sit down and do the negotiations, they give us an idea of how much fleet they're buying for expansion, how much fleet they're buying for replacement. But as you know, a lot of that CapEx has been pulled back this year. So we're probably not as current on what they are buying, is it for replacement? Or is it for expansion? There's not a lot of expansion today from our vantage point. So I would lean that some of it with replacement. But I'd hesitate to try to call that from a percentage standpoint.

Yes. I would add to it, our customers are being very careful now and being very responsible in managing their CapEx to go through a severe downturn. And the good thing within that is, we watch the fleet and the size of the fleet and complete managers throughout our entire customer base, we see as they're being very careful about analyzing their assets, and they'll recommend a sale in a very early fashion. So there's a slight change in fleet sizes, but there's no significant change in the overall fleet side. And we think that, that's a positive sign. We just don't know, again, the timing of when indicators are going to move the market back to normal seasonality and normal conditions.

Yes. I mean, that's what we're trying to figure out. Of course, in a downturn, all the big guys can age their fleet a bit. I was just curious, if you were getting some insight already on. We can age this year. But all else equal, next year, we're not looking to age anymore. And thus, if we're below replacement today, there's some built-in growth for next year, just going back to replacement if they cease aging. But, look, I know the orders are down materially right now, so it's not easy to forecast 2021 up at this stage. So we're just trying to put some parameters around it. So I appreciate the time. Thank you so much.

Thanks, David.

Thanks.

And our final question is from Steve Barger with KeyBanc Capital Markets. Please proceed.

Good morning, guys. Thanks for pushing the call.

Hi, Steve.

You said there were still deferral requests in May and June for access. So can you tell us what percentage of the $557 million in backlog there has a firm delivery date in 4Q? And what's scheduled to ship in 2021?

Sure. I'll take that, Steve. Generally, we'd expect a majority of it would be deliverable in the next quarter [ph], but in general, obviously, it's kind of back to the commentary we've had. It's just hard to know. There is that -- just as we saw relate to defer in the previous quarter, there's that opportunity in Q4. Again, it's going to come down to market activity, infection rates and just what happens, I think even looking at what happens, what schools this fall of whether people are -- whether that creates economic headwinds. So we're just going to continue to monitor it. And it's -- we're monitoring on a daily basis.

Okay. And just based on the decremental comments, it sounds like you expect a sequential decline in access margin, even if revenue were sequentially up. Am I reading that right?

I guess, what we've said is, some of those temporary cost actions, they were more heavily weighted in the quarter. So that could be just in total, could be a headwind versus Q3. So a lot of -- to the extent that our range has bumped up on those temporary cost measures, there was a decent chunk of that Q3.

Yes. And not trying for guidance here. But as I think about the comments about commercial not staying double-digit and costs in other segments starting to come back. As I'm working through the model based on your comments, it seems like 3Q could be peak EPS for the year. Am I reading that wrong? Do you expect a big variance one way or the other, as you go into 4Q?

We're not in a position to make a call. Again, a lot of it is going to come down to the volume and activity in Q4. But again, we're going to -- depending on what that activity level is we're going to stay disciplined from a cost management standpoint as we manage through it. It's really -- yes, just one.

It's really changed. You've followed us and you newly access business. Normally, we can manage it on a quarterly basis. And then when things tightened up, we go to a monthly basis. Well, now, literally, they've got customer decisions changing daily on delivery days, orders, things like that. And so that's why it's so hard for us to really define Q4 because our visibility is not near what it normally would be. And I'm sure you understand why with what all gone on…

Thanks very much.

Thanks Steve.

We reached the end of our Q&A session. I would like to turn the call back over to Wilson Jones for closing remarks.

Thank you, operator. Thanks for joining us today, everyone. I just want to say, please stay safe and healthy as we get through these challenging times together. We certainly look forward to speaking with you on a virtual conference or on the next earnings call. Take care.

This concludes today's conference call. You may disconnect your lines at this time, and thank you for your participation.