Oshkosh Corp Q1 FY2021 Earnings Call

Greetings, and welcome to the Oshkosh Corporation Fiscal 2021 First Quarter Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our first quarter 2021 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months, 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 other matters 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 those forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to a 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 3 and I'll turn it over to you, Wilson.

Thank you, Pat. Good morning everyone. Our performance in the first quarter demonstrated the perseverance and disciplined execution of our team. Just like everyone listening today, Oshkosh team members are navigating the challenges brought on by COVID-19 and once again I’m proud of the hard work and efforts of our people. As I did last quarter, I want to give a shout out to all 14,000 plus members and our dedicated suppliers that have consistently stepped up during this difficult period to continue serving our customers. For the first quarter, we delivered sales of nearly $1.6 billion and adjusted earnings per share of $1.13, both of which exceeded our expectations. Much like I said on our last call, we’ve controlled what we can control, responding quickly to the challenges outside of our control. It’s no secret that our operations in Wisconsin face challenges related to significant COVID-19 spread all over this fall, particularly in the counties where our primary Defense and fire truck facilities are located. This shows elevated levels of absenteeism for us and similar challenge for our suppliers. Our people have done an exceptional job of adapting to changing situations where flexibility and resiliency have helped to keep us moving in the right direction. Going forward, we may face further challenges with absenteeism in our facilities with those of our suppliers. We may also face broader supply chain execution risk as the economy rebounds, so daily focus remains critical in the weeks and months ahead. During the quarter, we announced our intent to acquire Pratt Miller which closed on January 19. Pratt Miller’s technology and capabilities are a great fit with our company and John is going to share more about this in his remarks. Revenue was softer than prior year in our Access Equipment and Commercial segments, consistent with our comments last quarter. As expected, we are seeing improvement in our Access Equipment segment on a sequential basis as the decline in sales is moderating. Compared with last quarter, we are more confident in a second half recovery, although our precise timing and magnitude are still uncertain. And of course, our overall outlook is bolstered by the visibility we have with our Defense and Fire & Emergency segments, which both have backlogs that extend into 2022. Please turn to Slide 4 and I’ll pass it over to John.

Thanks, Wilson and good morning everybody. Before I get started, I want to take a moment to thank Wilson for his unwavering leadership and commitment to this company over the course of his 16 years with us. A little over 5 years ago he became our CEO and has been an outstanding leader and motivator for our entire company around the globe. He has been responsible for driving dramatic improvement in our culture and he is a true leader in all aspects. Wilson has been a great mentor for me and the entire leadership team at Oshkosh. We have a strong leadership team as well as a highly engaged and motivated workforce. So I am confident in our future and wish him all the best. While Wilson will be with us through the end of the quarter, this will be his last earnings call, so I wanted to recognize his outstanding contributions and thank him for his service.

Thank you John.

Let’s get started with our segment updates with Access Equipment. Since our last earnings call, we have seen improvements in our major markets versus expectations, led by North America, where we’ve had favorable negotiations with key customers for calendar 2021 equipment needs. Given the current environment for the Access Equipment market, we are pleased with the orders our team at JLG booked in the first quarter and are very encouraged with a strengthening backlog. We also benefited from some late first quarter orders and deliveries, as some customers had available capital they deployed late in the calendar year. We remain confident that this segment will return to year-over-year growth beginning in our third quarter as rental companies begin to refresh their aging fleets. JLG ran its production facilities at reduced rates during the first quarter as we discussed on the last call. We are gradually ramping up our manufacturing rates and expect to exit the second quarter at more typical production levels. Our operations and supply chain teams have managed this difficult process very effectively. And it shows in the strong adjusted decremental margins we've been delivering throughout the pandemic. We've kept expenses low during a time of lower demand and lower production and I am confident in our ability to perform in a difficult environment. Going forward we're closely monitoring steel prices that have continued to rise and will be a cost headwind later in the year. Our global supply chain team is working diligently to manage this important raw material. We are also very excited about our recent formal launch of the revolutionary new all-electric DaVinci scissor lift. With zero hydraulics and zero emissions, the DaVinci AE1932 scissor lift represents the next generation of electrification and elevates our position in the access industry once again. DaVinci’s innovative design reduces energy consumption by up to 70% compared to a traditional scissor lift as JLG continues to push the innovation envelope. We are very encouraged by the strong customer response we've had for this outstanding new product. Please turn to Slide 5 and I'll discuss our Defense segment. Our Defense segment kicked off 2021 by overcoming significant operational challenges caused by the pandemic. Early in the fall, Wisconsin and more specifically, our local area was in the national spotlight for high levels of Coronavirus spread. The intensity of the spread in this region drove high absenteeism in our workforce and with many of our suppliers, which made it very difficult to plan and execute operations for much of the quarter. I'm proud of our team as they responded effectively to these issues to deliver solid results during the quarter, including a 10% increase in sales and continued to be a reliable source of vehicles and aftermarket support for our U.S. government customer. In recent weeks, we have seen improvement in absenteeism. During the quarter, we received another large JLTV order valued at more than $900 million that included units for several international customers. We continue to believe that the international portion of our JLTV business will be meaningful over the next several years. This JLTV order also contributed to our large quarter-end backlog that provides outstanding visibility in 2021 and beyond. As Wilson mentioned, in mid-December, we announced plans to acquire Pratt Miller, a well-respected technology and innovation company that provides outstanding capabilities with robotics, autonomous and connected systems and electrification among other strengths including a rich motorsports heritage. We've worked with a team at Pratt Miller for many years, so we already have a great partnership. Leveraging our speed and agility in addition to their functional strengths will help us in our new product development roadmaps going forward. They will be part of our Defense segment. But other Oshkosh segments will also benefit from their expertise. We believe that Pratt Miller will have an important impact on our company going forward. The U.S. Defense budget was recently signed and contains funding for our FMTV, FHTV and JLTV programs that supports our goals and objectives. It's important to note that the budget action appropriated an additional $86 million in funding for FMTVs, and $55 million for FHTVs that we supply for the U.S. Armed Forces. Let's turn to Slide 6 for a discussion of the fire and emergency segment. Fire and Emergency performed well during the quarter and has continued to make the right investments and innovative technologies and dealer development that have supported their consistent success. Additionally, you've heard us talk about the benefits F&E has generated in recent years with its focus on simplification, which is reflected in the solid operating margin performance. Similar to our Defense segment, F&E experienced high absenteeism and supplier challenges during the quarter as a result of COVID-19. They worked hard to deliver strong results in the face of some significant challenges as they improved operating margins to 12.8% in the current year quarter. The segment finished the quarter with a robust backlog of $1.2 billion, up over 9% from the prior year. Orders in the quarter were lower year-over-year as we expected, largely due to the pandemic. Of course, we continue to monitor tight municipal budgets and spending that we've discussed in the past, as we believe that the North American fire truck market may experience some pandemic-related softness. Finally, Fire and Emergency made a big announcement a little over a week ago as they introduced the all-new redesigned global Striker, the world's most capable ARFF unit. The airport products team has taken the market-leading Striker and made it even better by upgrading the cockpit with improved ergonomics, updated safety systems and intuitive vision systems. We've also increased cab visibility while modernizing the styling. And we encourage you to check out our website to learn more about this exciting new truck. Please turn to Slide 7 and we'll talk about our commercial segment. Our commercial segment continues to make progress on simplification initiatives and driving improvement throughout its business from design to manufacturing to sales to product delivery. You may recall that we implemented a focused factory strategy last year that included relocating our rear discharge concrete mixer business to London, Ontario, as well as divestment of a non-core business. We are pleased with our progress to date and the relocation project remains on track. But it's been more challenging due to the pandemic, particularly with regard to travel. I'm proud of our team's ability to adjust and achieve solid results during the move. As expected, volume was impacted in the quarter due to the pandemic as some customers delayed purchases, and OEM chassis availability was constrained. However, customer demand is starting to normalize for our CVS and mixers from this recent volatility. We expect some continued choppiness as these markets rebound but backlog is consistent with prior year levels and trending up. As I've mentioned in prior earnings calls, we're pleased with customer demand for our all-new S-Series 2.0 Front Discharged Concrete Mixer. The ramp-up is continuing and we expect revenue growth for the business in 2021. We continue to integrate innovations and technology into our products and remain on track to deliver several electric RCV units working with our OEM partner for a key U.S. customer in 2021. We will talk more about this opportunity later in the year when we plan to ship these groundbreaking electric RCVs. This wraps it up for our business segments. I'm going to turn it over to Mike to discuss our first quarter results and some additional comments on current business conditions.

Thanks John and good morning everyone. Please turn to Slide 8. We delivered a solid start to 2021 with sales and adjusted operating income higher than our expectations. Consolidated net sales for the quarter were $1.6 billion, down 7% from the prior year quarter. The decline was driven by decreases of 22% in Access Equipment sales and 13% in commercial sales, partially offset by increased sales in both the Defense and Fire & Emergency segments. Access Equipment sales continued to be impacted by lower customer demand as a result of COVID-19. However, the year-over-year rate of decline has moderated compared to Q3 and Q4 of 2020. As John mentioned, we did achieve higher sales in the quarter versus our expectations as several customers deployed more capital than previously expected near the end of December. Defense sales increased in the quarter as a result of higher aftermarket parts and service sales. Fire and Emergen cy sales increased due to higher aircraft rescue and fire fighting truck shipments, and commercial segment sales were down and lower RCV sales as customers have remained cautious in deploying CapEx during the pandemic and due to the absence of concrete batch plant sales this year as the business was divested in the fourth quarter of 2020. Consolidated adjusted operating income for the first quarter was $104.6 million, or 6.6% of sales compared to $109.1 million, or 6.4% of sales in the prior year quarter. Access Equipment adjusted operating income declined on lower sales, unfavorable manufacturing absorption due to plant facility shutdowns during the quarter and unfavorable price-cost dynamics as a result of the prior year benefit of price-protected sales. This was offset in part by the benefit of favorable spending as a result of the ongoing global pandemic, lower intangible asset amortization, and favorable product mix. Defense adjusted operating income increased as a result of more favorable cumulative catch-up adjustments, favorable mix, and higher sales volume, partially offset by increased new product development spending. Fire and Emergency operating income increased in the current year quarter primarily as a result of increased sales volume and the benefit of lower spending as a result of the COVID-19 pandemic. And commercial segment operating income decreased due to lower sales volume and unfavorable material costs offset in part by lower spending. Adjusted EPS for the quarter was $1.13 compared to EPS of $1.10 in the prior year. First quarter 2021 results benefited from a discreet tax benefit of $0.09 per share related to a favorable resolution of a tax audit. Please turn to Slide 9 for a discussion on the remainder of 2021. We're pleased with a solid start to the year including strong consolidated adjusted decremental margins of 4% in the first quarter. While we faced significant workforce availability challenges in Wisconsin affecting both our Defense and Fire & Emergency segments, our teams were resilient and persevered through the challenges we faced to deliver higher sales in both segments compared to the prior year quarter. The pandemic has and will likely continue to drive variability in our businesses as infection rates evolve around the country, creating challenges for our customers, our suppliers, and our operations. Further, we expect higher steel costs to introduce additional headwinds for the back half of our year. As a result of the dynamic environment and moving variables, we are not providing quantitative expectations for 2021. At this time, we're pleased with our annual negotiations with our key Access Equipment customers over the past several months. We're also experiencing higher demand for Access Equipment in the first quarter versus our expectations. We expect that the second quarter of 2021 will be down versus 2020, and the third and fourth quarters will return to year-over-year growth. We now expect that the second half growth will be sufficient to yield growth on a full-year basis for the segment. However, the magnitude of the expected full-year sales growth in Access Equipment is uncertain and remains highly dependent on the ongoing evolution of the COVID-19 pandemic and the trajectory of recovery as vaccines increase and become available. In this segment, we're planning one week shutdowns per month in U.S. factories to start the second quarter as we align production with customer requirements. This represents an increased production rate versus the first quarter when we were shut down for approximately two weeks per month. We expect the segment to return to normalized production levels as we exit the quarter. And our commercial segment demand is improving for RCVs and concrete mixers while our strong backlogs in Defense and Fire & Emergency provide good visibility for the year. During our last earnings call, we discussed an $85 million pre-tax cost headwind we expect to face in 2021, consisting of $120 million of temporary cost reductions in 2020 returning in 2021, offset by approximately $35 million of permanent cost reduction benefits. Looking at the second quarter, we will face year-over-year headwinds of about $25 million from a combination of last year's temporary cost reductions offset by the benefit of permanent cost reductions we previously announced. We're also forecasting higher second quarter spending levels, particularly in Access Equipment as we ramp up for the expected second half recovery. As we look to the back half of the year, we are closely watching steel prices, which have increased even more rapidly over the past several weeks than earlier in the fall. We expect to start seeing the impact of higher steel prices in the third and fourth quarters. However, the magnitude and duration of the inflated costs are unknown at this time. Our balance sheet remains strong, further strengthened during the past quarter, with solid working capital improvements yielding available liquidity at the end of the quarter of approximately $1.7 billion, consisting of cash of approximately $900 million and availability under a revolving line of credit of over $800 million. We believe our strong liquidity will continue to provide flexibility as demonstrated by our recent cash acquisition of Pratt Miller. While we are not providing quantitative financial expectations today, we strive to provide more detail later in the year and we have better visibility to the trajectory of the pandemic, the timing of deliveries in the Access Equipment segment, and the evolution of steel prices. I'll turn it back over to Wilson now for some closing comments.

Thanks Mike. We just announced a solid quarter to kick off 2021 and once again controlled costs and managed our operations, allowing us to deliver higher adjusted earnings per share on lower sales compared to the prior year quarter. Challenges remain, including rising steel prices and the potential for further challenges as a result of the pandemic that has lingered much longer than anyone wants. We believe we're in a great position to take advantage of opportunities to deliver sales and earnings growth as our markets recover. As John mentioned, this will be my last earnings call, and I just wanted to say that I've appreciated working with all of you who have participated with our company. I'm proud of the engaging dialogue that we've had over the years, whether it's on one of these calls, a conference, a trade show, or even during a visit here at Oshkosh for one of our investor events. I'm even more proud of our people and the leadership team we have in place at Oshkosh. And I want them to know it's been an honor to work with all of them these past 16 years. I'll be working closely with John and the team to ensure a smooth transition over the next couple of months. And I'm confident that the Company is in good hands with John Pfeifer leading the way backed by a very strong leadership team. I'll turn it back over to Pat to get the Q&A started.

Thanks, Wilson, and thanks for your leadership over the years and for making these calls a little more enjoyable. We all know they are a lot of work. Anyway, let's get started everybody. I'd like to remind you please limit your questions to one plus a follow up and after that 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. Our first question comes from David Raso with Evercore. Please go ahead with your question.

Hi, good morning. And Wilson, best of luck and congratulations John. My question is about the Access margins trying to think through the impact of steel. Can you give us some sense of how much steel you have contracted out for the second half based on whatever internal estimates you have for your Access revenues? There, you'd have at least some somewhat understandable inflation adjusters, but your comment about uncertainty around that impact? How much is the steel for the revenue we're expecting will have to be purchased on the spot market, just trying to get a sense of how much exposure you have to rising steel prices for the back half?

Sure. David, Good morning, this is Mike. I'll just start with steel. The team is managing it well. You know that all obviously we are seeing inflated prices right now, while it's early to be able to specifically identify it to a specific segment. What we believe at this time is it's a $10 plus million headwind. If it continues to increase, obviously, it could be higher than that. We're continuing to manage it, though, and we're going to see the impact in the later third quarter into the fourth quarter.

And the $10 million was a total company for the full year, but it's concentrated in Q3 and Q4? Is that the way...

Correct.

An estimate it's mostly in Access, but again, that's total company. So if we think of what we would at least assume to be normal incrementals, and then, say, for Access, they get 70%, 80% of the steel hit, is that a fair assumption? Because when I look at the mix, you would think you have a tug-of-war of better mix of AWP over tele's, but then you have a little bit of that natural when the cycle starts the negative customer mix, right? But again, is that a fair way for The Street to think about it, normal incrementals? And then at this stage, a $8 million-or-so kind of steel hit, $7 million still hit to Access in the back half?

I guess, first of all, maybe we should just level set on the incrementals and decrementals. We had, we had very strong decrementals in the first quarter. And while we're always striving in that 20% to 25% range for access on a consolidated basis. We've been talking about in my prepared remarks as well as last quarter. We do have the cost headwinds, the $85 million. And that's there's obviously a meaningful piece of that. And that really hits, Q2 through Q4. So that's certainly a meaningful impact to factor into that incremental or decrementals. And then you add steel into that equation as well. So I think there's more moving pieces there than just the steel factor.

That's helpful. And in my follow up, John, your vision for the Company, the portfolio. How do you think of the strong cash flow and balance sheet as you take the reins starting next quarter?

Yes, so let me first just kind of wrap up the question about access. The mix side of it. I think you're right. We do expect to see favorable mix on the product side with more booms, just looking at the age of the fleet that's out there. And the booms are more aged than other products. So that's certainly something I'll confirm. I think on the customer mix, though, it's been pretty consistent between the NRCs and the IRCs recently in terms of demand. I'm not so sure that it won't stay consistent, because we're kind of seeing the activity across both the small independence as well as the big customers that we have. Now, back then to your main question on our go-forward vision, our strategy. I will tell you that we've got a great balance sheet. And we've got a disciplined capital allocation strategy. And that's going to include both returning money to shareholders, but it's also going to include growth. And we're in a great position right now because of the balance sheet. And that affords us to do both. If you've seen us make one acquisition just recently, yes, I think you'll see us do more to use the strength of our balance sheet to drive growth. I think you're going to see us put a lot of investment continuously in innovation and new programs and new technologies to leverage new technologies to continue to accelerate our business. And you'll also see us continue to, as I said, do some acquisitions that are really growth-oriented acquisitions. They're either going to be in acquiring businesses, because they have capability and technology we that we need, or it could be in adjacent near-adjacent categories that we think enhance our core business. So we feel pretty good about our capital plan. We feel pretty good about our balance sheet and our ability to responsibly execute it going forward.

Thank you very much. I appreciate the time.

Thanks.

The next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. Congratulations on a great quarter, and congratulations Wilson and John. My first question is about the Access Equipment Business. I would like to understand more about the steel cost challenges and the $10 million impact that the entire company will experience. Specifically for Access, how are you approaching pricing this year? Could you provide some insight? Additionally, when discussing growth, I believe you focused on the U.S. markets, but I would like to know what trends you are observing in Europe and China. Lastly, do you have any updates on the postal service bid? Has the timing changed? Also, with the current administration's push for more electric vehicles, does that alter your prospects? Thank you.

Great. Thanks, Jamie. This is Mike I'll start. Just talking about first of all with Access. As John mentioned in his prepared remarks, we're pleased with how the annual negotiations have gone from an Access Equipment perspective. And, as always you know us well. We've remained disciplined from a cost price perspective that we've talked about the headwinds that we're facing related to steel that it's early, so we're going to continue to manage that. So I think overall, that's what we're seeing from it from a pricing perspective. I guess in terms of the postal service, John?

Let me discuss Access. First, I want to highlight our global business and Access. I'd like to start by mentioning the U.S. market. We are very pleased to have exceeded expectations in Q1, which is a testament to the team at Access for navigating through a challenging period. We've successfully concluded most of our annual contract negotiations with customers, and we are happy with the outcomes. In essence, we've observed a shift in the U.S. market towards a more positive sentiment, indicating a recovery and greater focus on fleet replacement, which we view as a positive trend. Our backlog is robust and improving in the U.S., and we feel optimistic about it. Throughout the pandemic, we've seen a reduction in downturn from 60% in the third quarter to 40% in the fourth quarter, and now we're down just over 20%. We believe the conditions are favorable to support growth in the industry during the latter half of the year. Regarding international markets, Europe's recovery is lagging behind the U.S.; we believe it has hit bottom but does not show much momentum for immediate growth. Meanwhile, Asia is performing well, particularly in China, where the market has rebounded rapidly. As previously mentioned, it remains a significant growth opportunity for us. We are expanding our facility in Tianjin, China, and we lead the high-end AWP market there. We anticipate maintaining a strong and profitable long-term position in China, despite local competition and margin pressures on lower-end products, which we do not intend to compete against. We are committed to growing profitably and will remain disciplined in our approach. As for the postal service question, we are eager to hear the outcome, which we expect by the end of this quarter, with March as our target. We have submitted a strong, comprehensive bid that addresses all of the U.S. postal service's needs. We are prepared to meet any changes under the current administration's preferences regarding propulsion types. We remain hopeful for positive news by the next earnings call.

Okay, great. Thank you very much.

Thanks, Jamie.

Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning and Wilson, best wishes. Just curious how broad is the second half revenue growth that you guys expect. Is it across all segments? And what would you say are the most important things that need to happen in order to deliver that second half expectation of growth?

One of the reasons we are not providing guidance is that we are facing a range of variables. In the first quarter, we have observed stronger signs of recovery in the second half at Access. This recovery seems robust enough to lead to growth for the full year. However, predicting beyond that is challenging. It largely depends on how quickly vaccines are distributed and how fast the economy begins to recover. These are factors we are monitoring closely, as there is a range of possibilities. In addition, both Defense and Fire & Emergency sectors have strong backlogs that support full-year growth. The unpredictability lies in a couple of areas. First, we faced significant absenteeism challenges in the first quarter for Defense and Fire & Emergency, which the teams managed excellently. However, there might be more challenges as the pandemic evolves and potentially affects our suppliers. While our supply chain partners have been performing well, we could encounter headwinds in the latter half of the year. The broader economic recovery and the ability of the supply chain to keep up will also be crucial as we look toward the second half. Overall, in those two segments, the support is evident, and Commercial is showing a similar outlook to our perspective on Access at this time.

Okay, great. And then just wanted to pick up on the comments about M&A. Just curious if there's any particular segment that is weighted towards, and how would you frame sort of the size of the deals that you're considering?

We have a structured approach that we refer to as an always-on pipeline, which involves regularly assessing potential targets across all segments. We have strong confidence in our four core segments and see opportunities for growth in each. Our focus is on identifying targets that will support that growth. When it comes to the size of targets, we are primarily considering smaller bolt-on or tuck-in acquisitions that can foster expansion into new product categories, technologies, or enhance our aftermarket offerings. While I wouldn't rule anything out completely, we are not actively pursuing large, transformative deals, as we believe the significant opportunities in our M&A strategy lie elsewhere. Expect to see us execute consistently as we move forward.

Okay, thanks very much.

Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.

Hi, good morning, guys. So just want to understand some of the puts and takes from the cost side in the first quarter. I think you called out COVID-related production issues and absenteeism. Certainly qualify, what impact it had on a quarter? I mean it looks like SG&A been a great spot to an extent from some of the temporary cost tailwinds and reversing and then I know, you talked about the $85 million of headwinds, the balance of the year was $25 million happening in the second quarter, but we'll have to get a sense for how that balances out in the back end of the year.

Sure, yes, we're very pleased with the first quarter results. The teams did an outstanding job executing. So first of all, just on the execution side. We did see extra challenges with absenteeism as I mentioned a few minutes ago in our fire and emergency Defense segments. They did an outstanding job managing through it. It probably negatively impacted their volume of business a quarter, but we really didn't see it from a labor performance standpoint reading through. In fact, I call on our fire and emergency team did an outstanding job and actually delivered the best labor efficiency in our Appleton facility in the last decade plus, so great job by the team. Looking at some of the other drivers, we did see favorable spending in the quarter. Some of it was really environment-related pertaining to COVID. So I think, if you look at it, a chunk of that is was expected because of our permanent reductions, about $8 million. Those that 35 million permanent reductions hit our first quarter as a favorable item. The remainder of the cost spending benefits, I would say about half of them that we saw in the quarter are sort of remain. The other half are really more timing-related that we'll see spent later in the year. So I think that's an important point. We did see the favorable with contract adjustment and our Defense segment with the large JLTV order. So that was great news to see that order come in further strengthening our backlog. And of course, we had the tax benefits in the quarter. So as we look forward to the second quarter, I think it's a few important items. I think, number one, we do expect that that spending is going to be up particularly as we talked about ramping up for the second half of the year, that's going to drive higher spend levels. We did see also a positive cumulative contract adjustment in the second quarter of last year, so that will be a headwind as well. So those are a few of the things that we're monitoring just as we move forward.

Like Defense from prior year in Q2, CCA?

Yes, I mentioned that we had a favorable cumulative contract adjustment in the first quarter of this year, which will present a challenge as we compare to the second quarter. We also experienced a similar adjustment in the second quarter of last year, making this a year-over-year comparison challenge.

That's all. And then just second question. In access. Can you talk about your expectations for pricing in 2021? Do you expect positive growth and price realization in access?

We are assessing it from a net cost perspective. At this early stage in the year, we have maintained our pricing discipline and have made progress in our negotiations. As we look towards the latter half of the year, we anticipate an $85 million net cost challenge, along with ongoing management of steel costs. These are the key factors influencing our incremental and decremental margins for the remainder of the year.

Thanks. I’ll pass it on.

Our next question comes from the line of Ann Duignan with JPMorgan. Please proceed with your question.

Good morning. Congratulations to both of you, Wilson. I would like to ask about your backlogs in each segment and how much of that backlog contains cost inflation clauses. Are those prices fixed, or do you have inflation clauses in any or all of those backlogs, particularly comparing Defense and Commercial sectors?

Ann, certainly as you go through the businesses that you look at our Defense segment, we tend to have we have long-term contracts, both on the supply side and so that you can kind of they're not. So that’s sort of that Defense segment. If you look at really our other segments, it varies by contracts. But again, just go back to my previous comments that we've looked at all of the inputs, costs, labor, all the materials beyond steel, and we've remained cost discipline from a price cost dynamic. Again, it comes down to what happens with steel and a little bit of that right now is unknowable. We're doing a good job managing it. We're not going to see because of a lot of the management work we've done. We're not going to see it until much later in the year. So we're going to continue to see how it evolves that. But that is not the price cost is not the biggest driver beyond the aforementioned items for the rest of the year.

But I think, Mike, we've always had inflationary clauses in our Defense programs. They're built in and we bid them over an annual period of time. So the Defense backlog does have those clauses in there, Ann.

Okay, I was just going to ask you for clarification on that. So thank you. I appreciate that. And then, perhaps, again on the $900 million contract, can you just give us some more color in that? Was that already in your $2 billion expectation for revenue for this year? Or is it incremental? And when would you expect to see those being shipped? And how much was international versus domestic? Just some general color on that contract? And whether it's incremental to what you had guided to at the beginning of the year?

We'll have to remind you about one plus two. I appreciate your interest in providing additional details here.

Yes, I think, Ann a lot of those, a lot of those orders will be delivered in future years in 2022 and beyond.

It’s all in 2022 and beyond.

Yes, that's. So I guess that's, that's the first point. We certainly appreciate the ongoing confidence. And so this order was aligned with our expectations and further supports just that ongoing view that Defense is a two plus billion dollar business in the future.

And we haven't really broken out Ann the exact international numbers, but we're up to eight different countries now that have FMS cases that we've taken orders on. So we're, we're lacking how the international business started development with JLTV. And we have had those eight in. Yes, so Ann a bigger perspective, kind of looking at the whole scope of the JLTV program. So the acquisition objective, the U.S. Army at about 50,000 units, the U.S. Marine is at about 15,000 units. Now, that's over multiple years, most of that still has yet to come. Now, of course, we're going to read, they're going to re compete that in 2022. We know that. We've been preparing for it for a long time. We've actually been preparing for the re compete since we won the original contract. They've got what I'd call commitments to us and that big acquisition objective to date of about 23,200 units. And when they place orders on that, that's typically on those commitments is where they're being placed on. But there's a long way to run with this program and more orders to come.

Great. And I just finally, a real quick follow up on the steel. Are you more concerned about steel prices, or the potential lead? There just isn't the availability of steel? Which is the biggest concern?

I would say at this point, Ann, we do have good visibility, and we're working closely with our suppliers there. So it's more a pricing issue at this point than availability.

Okay, appreciate that. Thank you. I'll get back in line.

Thanks, Ann.

Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Hi, good morning, everybody. And Wilson, thanks for putting up with us over the years, much appreciated. But my question is about the Defense margin cadence. My assumption is that this first quarter was probably the high point for the year. Mike, I think you mentioned both the catch up on the contract, but also some positive mix on service and parts. So any color on what we should be thinking relative to Defense margin as the year progresses?

Yes, I think consistent with what we've talked about in the past, you really need to look at it over the course of the year. And we're still confident in what we've talked about in the past. It's a high single-digit business, you will see variation quarter-to-quarter. I think that the piece that we're obviously watching is just what happens if you from a supply chain perspective, and that, depending on the volume that we've seen a particular quarter that certainly could have had a bit of an impact. But they did a really nice job. We saw a nice aftermarket mix in the quarter and that certainly was nice to see and great work by the team.

And a quick follow-up when you get an order like you did this quarter. I think you get to spread your fixed costs over a longer production run. Does that mean that the margin that you booked going forward will be, 10, 20, 30 basis points higher than it was, before you get that order, is that the way the accounting works?

We're constantly looking at what we're seeing out there. And certainly we did, we did see a benefit to what we might see a modest improvement there. It's not that I would say it's not as it's at, we're getting more and more units out there. So obviously earlier in the contract, when you're getting a nearly a billion dollar order, it has a bigger impact versus once you have many more units under contract, and it certainly does help with that additional cost spread.

Yes, I was going to say essentially what you said is correct.

Great. Okay. That's one and a follow-up. See.

Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.

Great. Thank you. And congratulations to Wilson and John again. And Pat, don't underestimate yourself; you also make these calls enjoyable. The question is regarding F&E, which is becoming increasingly important to Oshkosh's bottom line. I think it would be helpful to get some insights. Perhaps Wilson or others could elaborate on what you’re hearing from F&E dealers and their customers? There seem to be significant challenges related to municipal and state budgets, but that doesn’t always directly affect your equipment spending, and there is often a delay. It would be helpful if you could provide more insights on how this might evolve in that segment, considering the potential budgetary pressures. Thank you.

Yes, I'll address that. First, I want to emphasize that the culture at F&E is outstanding, and we view culture as essential. We have excellent people, innovative ideas driving our segment, efficient operations, and our simplification process serves as a model for the entire company. Additionally, we boast the best dealer network in North America. When you bring these elements together, they form a very robust business. We are confident in our ability to keep driving performance moving forward. Looking back at the Great Recession, the market for our fire and emergency products was significantly larger, over 5,000 units. However, during the recession, it dropped sharply by 40% to around 3,000 units and has not fully recovered since, hovering in the low 4,000s, about 4,100 or so. Despite this, we have been growing throughout that period and are now larger even in a smaller market, achieving strong profitability. I would describe our situation as growing and thriving, and we have also gained market share. We anticipate continuing our execution. Regarding the current market, we do expect some budgetary constraints in municipal spending but believe it won't be as severe as the Great Recession, given the absence of a real estate crisis, which significantly affects municipalities. While there are some budgetary pressures, the strength of our business today and the high priority of fire trucks as essential equipment gives us confidence. The fleet is aging, and our backlog remains strong, extending well into 2021. We did notice some softening in orders during our first quarter, which we anticipated due to the pandemic. Nonetheless, I fully plan to continue operating this business in a healthy manner.

And that's great color, John. Tim, what I would add just one other tidbit. I think, I started out in fire emergency so I know all the dealers very well and I've had a lot of fun calls the last few weeks wishing me well in my retirement and talking to a lot of them. One thing that really jumped out at me is the majority of math that I talked to they're investing in their business. They're either they're adding building service capabilities, last cycle services addition to their just, I've watched them really mature over the years, and they run a sophisticated business these days. And it's been fun to watch. And they're not wavering on those investments. They, to John's point, they don't see from their conversations with fire departments because it is such a priority in the community and the fleet, they just is to our favor there. They're not hearing a lot of negative button useful spending, they're still holding the priority in the majority of municipalities with fire truck budgets.

All right. Very good. We'll leave it there. Thanks a lot.

Thanks.

Our next question comes from the line of Mike Shlisky with Collier Securities. Please proceed with your question.

Hey, good morning, guys. And Wilson, best wishes to you.

Thank you.

I wanted to maybe ask a quick question on Pratt, on Pratt Miller. That company, they are playing in a few adjacent spaces beyond just the defense they're in industrial cleaning, and other areas that don't the cost currently plays in? Do you have any plans to maybe organically grow what Pratt Miller already does into anything larger? Or do you plan to exit anything that they're doing? It's not related to your four segments? And perhaps more broadly, I guess why buy them in the first place? And couldn't you just keep on paying them through a contract or as an external provider?

So I'll take that question. We really like this acquisition. Pratt Miller, as I said, in my prepared remarks, we've had a long-standing relationship with them. And when you have a long-standing relationship with a potential company to acquire, it makes you feel a lot better about acquiring it, because there's a cultural fit. And there's a strong cultural fit of innovation between what we do at Oshkosh and what Pratt Miller does. So we're really, really pleased with this. Now, there's two, I'm going to give you two primary reasons why we made the acquisition. Number one, we believe that Pratt Miller gives us a higher probability of Defense program wins going forward in adjacent spaces that we want to grow in with the Department of Defense. So that's number one. And number two is they are an enhancer to our technology development. One of the most incredible things about Oshkosh Corporation is our capability to develop technology, whether it's electrification or autonomy, we've been working on autonomy for a long time. We've been working on electrification for a long time. We really like what Pratt Miller does in those spaces. And it allows us to enhance our ability to apply it to specific use cases is the best way I can describe it. You mentioned industrial cleaning. So that sounds like a strange thing. And industrial cleaning is interesting, but it's not the industrial cleaning that interested us. It's the automation behind the industrial cleaning that was so interesting, and their ability to take automation and apply it to a specific use case. That's why this is such an interesting application. So it's not industrial cleaning. It's the automation that's behind the industrial cleaning. And by the way, they're big into motorsports. We intend to continue to grow and develop all aspects of their business as it is today, including motorsports. We think motorsports give it a great culture of speed and agility. And there is a lot of technology that they developed for motorsports, in mobility and safety systems that are very directly transferable to lots of our different segments. So a lot, a lot of good that comes with our acquisition of Pratt Miller.

Got it? Thanks. That's great color. I also want to ask a quick follow up on another question about the USPS contract. Your opinion is based on the Ford Transit, I believe, and we've gotten since this last quarter, we just announced we just heard the announcement of the new Ford e-transit coming out here in 2021 so you comment that you can address whatever the USPS’s needs are as far as powertrain. Is it as simple as just substituting the Transit for the e-Transit or do you have to have a special reopening on the contract and new approval to kind of make that switch?

So there's limited things that I can say about this program, not because I don't want to but because we're under a pretty tight confidentiality with the USPS. We don't have to reopen anything to address the needs that as they evolve with the contract. I really can't comment on the Transit van, because of confidentiality, but I can say that we don't need to go back and have some arduous task of reopening an agreement if the contract goes one way or another, we will not have to do that.

I think the foundational statement there is we furnished program vehicles that meet their current and future needs. I think that's the best way to leave it, Mike.

Okay, I'll leave it there. Thanks so much, guys.

Thanks Mike.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Yes, thanks, guys. I appreciate you squeezing me in. And good luck to Wilson in retirement. So I guess maybe starting with SME. Just think about moving into some period of time where revenues could be a bit more challenged. I'm trying to tie that back to what you guys have done with respect to simplification? And how like the margin performance could be different in a future downturn versus what we've seen in the past. So I guess, it's a little cross-cycle relative last time F&E faced a difficult revenue environment. Do you think there's room for decremental margins to look much better because of what you've done from a margin perspective?

Yes, Nicole, you’re absolutely correct. If we reflect on the Great Recession, we faced challenges with our margins. However, the simplification process we have undertaken has truly transformed the business; we are essentially a different company now. We believe we can maintain double-digit performance even during periods of lower volumes. This transformation is the result of our comprehensive efforts in managing simplification across all aspects of the business.

Got it. Thanks. And then just for my follow-up, hearing investor concerns about the medium-term impact of the new administration on Defense spending. And how we would dovetail that with how durable the JLTV program is, I guess over the next several years, you know, if you guys see any risks to that?

We do not see any specific risks when you consider the previous administration to the new administration. We really do not. Tactical, wheeled vehicles are a fundamental part of how the Department of Defense operates, and how it how it executes. And if they will continue to be a fundamental part of how the Department of Defense operates and executes. We've had a relationship for a long time. It was very successful when President Biden was Vice President, Biden. And so we don't see this as being a big change for us as we go forward.

Okay, that's clear. Thanks.

Thanks, Nicole.

Our next question comes from the line of Courtney Yakavonis with Morgan Stanley. Please proceed with your question.

Hi, congratulations again Wilson and John. I wanted to revisit the comments regarding sales and the quality of the sales outlook. You mentioned that Access, Defense, and F&E are supportive of full-year growth. Could you help us understand the situation with Commercial? You indicated that the backlog appears relatively similar to last year, but it seems to be trending upward. Can you provide some qualitative insights on what we should expect for the Commercial sales outlook this year?

Yes, I'll address that. We're seeing that the backlog is consistent with last year, which is a positive indication. Orders have improved sequentially. Year-over-year, there appears to be a slight decline in orders, but if we exclude the divestment of Conoco, we actually observe some order growth in the first quarter compared to last year. It's important to note that last year’s first quarter was pre-pandemic for us, adding to the positive outlook. We are noticing improvements in the commercial segment, particularly in refuse collection and mixture markets. Residential construction, which significantly influences commercial business, is currently strong and expected to remain favorable throughout 2021 and into 2022. This is another positive macroeconomic indicator that enhances our outlook compared to a quarter ago.

Okay. Great. That's helpful. And then just two quick follow-ups. On the steel $10 million headwind. Was that gross or net of pricing? And I think previously, you guys have taken surcharges when you've seen outsized steel inflation. So is that being contemplated at this point? And then on the Defense side, with the contract, the $900 million, can you just comment at all about the margins on that? I think it's FMTV contract, so I imagine it's pretty similar to the DoD margins. If you can just comment at all?

The steel. That's right now, we're talking about that as a headwind at this point. It's very early yet. And we're going to continue to watch what steel evolves. We're going to manage this in a disciplined manner. The team's been all over it already, and is quite frankly done a great job in mitigating the risk through a number of tools we have in our really in our toolbox that we've met. We manage through this a few years ago while and we'll do that again. We're not, we're not making a call today on surcharges we're going to we're continuing to manage it in a disciplined manner. And, I think, again, it's what it's going to come down to over the course of the year just watching what that cadence is. I think once we start getting a bit more of a supply and demand equilibrium that we do believe that steel could start coming down.

Oh, sorry. Margin on Defense. Sorry, which program was that again?

$900 million, over…

Oh, the $900 million. That's, again, that's under the broader contract. So it’s pricing that's consistent. And as we had a question earlier, you get the natural benefit of expanding the total number of units out there. So you get, you'll get a small margin improvement over the remainder of the contract because of that, and that is reflected in that cumulative catch-up adjustment as well that we recognize in the quarter.

Thank you. We have no further questions at this time. Mr. Jones. I would now like to turn the floor back over to you for closing comments.

Thank you, operator and thanks to everyone for joining us today. We really appreciate your interest in the Oshkosh Corporation. I know I can speak for John, Mike, and Pat that they'll look forward to speaking with you in the near future, at a virtual conference or another earnings call. And everybody stay healthy out there. Let's work together to get through this. Take care.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.