Fourth Quarter 2000 Earnings
Conference Call
October 26, 2000
10:00 a.m. CST
Charlie:
Welcome to Oshkosh Truck's fourth quarter earnings conference call. I'm Charlie
Szews, Chief Financial Officer, and with me is Bob Bohn, Chairman, President and
Chief Executive Officer of Oshkosh Truck, who will talk with you in a few
minutes about our business outlook.
Our remarks that follow, including answers to your questions, include
"forward-looking statements" that are believed to be within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements, other than
statements of historical fact, made by us during this conference call,
including, without limitation, statements regarding Oshkosh Truck's future
financial position, business strategy, targets, projected sales, costs,
earnings, capital expenditures and debt levels, and plans and objectives of
management for future operations are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may", "will", "expect, "intend",
"estimates", "anticipate", "believe", "should", "plans", or "continue", or
similar terminology. Although the Company believes the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations are
described in a Form 8-K filed with the SEC this morning and other filings with
the SEC. In addition, except as described in the Form 8-K, the Company disclaims
any obligation to update such forward-looking statements, which may not be
updated until the Company's next quarterly conference call, if at all.
In recent years, Oshkosh Truck has stood out among industrial companies. Last
year we were one of only six industrial companies to complete a secondary equity
offering, and we were one of only eleven industrials on Fortune's list of 100
fastest growing companies in America. We came in at No. 56. In fiscal 2000,
Oshkosh again closed with record numbers, reporting net income before
extraordinary items of $14.6 million, or $0.86 per share, for the fourth
quarter. Net income was up 44% from the $10.2 million for the fourth quarter of
1999, while EPS was up 11.7% from the $0.77 per share last year. Of course, EPS
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growth was lower than net income growth due to the impact of the additional
shares issued in the company's November 1999 equity offering.
Consolidated operating income for the quarter rose 21.5% to $28.0 million from
$23.0 million the previous year on a 14.0% sales increase to $358 million.
Consolidated operating income margins reached 7.8%, a new quarterly record for
the company.
For the year, this brings sales up 13.7% to $1,324 million, virtually all from
organic growth. Operating income rose 28.7% to $98.1 million, or 7.4% of sales,
for the year while net income before extraordinary items reached $48.5 million,
a 56% increase. EPS from continuing operations reached $2.96 for fiscal 2000, a
23.8% increase even after the dilutive effects of the November 1999 equity
offering.
And, we've also boosted our outlook for next year. We're now increasing our EPS
estimates for fiscal 2001 from $3.35 per share up to $3.45 per share, an
increase of 16.6% over 2000. There are few industrial companies looking at that
kind of growth in 2001. More about that later.
Let's turn to a review of the results of the individual business segments.
Fire and Emergency
Beginning with our fire and emergency segment, sales grew 16.8% to $108.8
million in the quarter, and operating income was up 44.7% to $10.0 million.
Operating income growth was particularly strong this quarter due to the adverse
effects of an ERP installation on prior year results. Operating income margins
held flat compared to our third quarter. We had been expecting some improvement
which didn't happen because of some unexpected workers compensation and product
liability charges.
Pierce's backlog was up 6.4% at September 30, compared to prior year levels.
Pierce's order book is very strong in October and we expect backlog to continue
to improve in the first quarter of 2001.
Overall, we're quite pleased with the performance of the fire and emergency
segment in 2000. In spite of the lingering effects from an ERP installation in
April 1999 that hurt our first half results, we were able to continue to
increase our sales with 16.2% growth for the year, and we began to recover some
of our
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historic margins by increasing operating income 23.0% for the year in this
segment.
Defense
Sales in our defense segment were up 42.6% in the fourth quarter, at $107.7
million, compared to $75.5 million in the prior year. Operating income increased
66% to $13.2 million compared to $7.9 million in the prior year.
In recent years, we've seen more and more of the heavy defense truck volume move
into the third and fourth quarters, which levels out the production in our
plants. This year, we also enjoyed some international demand that boosted fourth
quarter sales and especially margins and, of course, we are now in low rate
production of our MTVR truck.
For the year, our defense segment delivered an outstanding performance with
sales up 24.0% to $276 million and operating income up 31.7% to $30.1 million,
or 10.9% of sales.
Commercial
Turning to the commercial segment, sales declined 2.7% to $141.8 million, while
operating income declined 32.4% to $9.4 million. The operating income result is
quite close to our estimates reported in a Form 8-K filing in July, but actual
sales are approximately $25 million higher than our sales estimate reported in
that July Form 8-K filing. About one-third of the sales increase was
unforecasted sales of Viking Truck, which was acquired in April 2000, and the
remainder resulted from surprising strength in our rear-discharge mixer
business. Operating income margins fell 120 basis points more than we expected
primarily due to higher workers compensation and product liability charges.
McNeilus' experience in these areas is generally quite good for being in the
heavy metal bending business and we would expect our experience to return to
traditional levels next year.
Concrete placement sales were down 8.1% during the quarter while refuse sales
were up 11.1% compared to the prior year. Our rear-discharge unit backlog was
down 6.9% compared to the prior year while our front-discharge backlog was down
36.2%. The 2000 backlog figures are ahead of September 1998 levels, which
suggests that we should be on pace for fiscal 2001 to achieve fiscal 1999 sales
levels which were 8.6% lower than fiscal 2000 results. Again, over the full
fiscal year 2001, our estimates assume that we can hold front-discharge sales
flat from 2000 to 2001 as we capitalize on the acquisition of our last dealer
in front-
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discharge, Viking Truck, and we are assuming that our rear-discharge volume will
be down 13.5% in 2001.
Our refuse backlog was down 14.8% at September 30, 2000, an improvement from
being down 21.2% at June 30, 2000. Due to shorter lead times, we are able to
operate with lower refuse backlogs than historically. We continue to project our
refuse sales to be up 10%-11% in fiscal 2001 as we continue to make inroads in
municipal accounts and as the large waste haulers resume purchases at more
historic levels.
Corporate and Other
At the corporate level, our corporate expenses declined to $4.5 million from
$5.8 million in the prior year. For the year, corporate expenses were about $3
million lower, due to a litigation settlement in fiscal 1999.
From a debt perspective, we set a target of driving our debt down to $150
million by September 30, 2000. Actual debt stood at $162.8 million at September
30, 2000, but we held $13.6 million in cash pending the closing of our
acquisition of Medtec Ambulance Corporation, which was announced on Tuesday.
2001 Outlook
Let me now briefly give you our current estimates for fiscal 2001 financial
performance before turning the call over to Bob who will describe how we will
strive to achieve that performance. Again, this information is available in
print for you in a Form 8-K filing made with the SEC today.
Essentially, we are increasing our EPS estimates from July for fiscal 2001 by
$0.03 per share with respect to the acquisition of Medtec and by $0.07 per share
with respect to new defense parts business awarded in October. This $0.10 per
share increase is spread $0.01 per share in the second quarter, $0.04 per share
in the third quarter and $0.05 per share in the fourth quarter of fiscal 2001.
Summing it up, presently, we believe that fiscal 2001 sales, assuming only the
Medtec acquisition, will approximate $1.48 billion, up about 11.8% from fiscal
2000. We believe EPS will increase almost 17% to approximately $3.45 per share,
up from our July estimates of 15% growth to $3.35 per share. Fire and emergency
sales are now expected to reach about $440 million next year, up about 12.7%.
This growth rate is down somewhat from fiscal 2000 because we believe that
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worldwide aircraft rescue and firefighting market sales in 2001 cannot remain at
2000 levels and due to one more year of limited snowfall affecting our snow plow
and blower business. Our defense sales should rise to about $410 million next
year due to a planned $115 million increase in MTVR sales as that contract ramps
up, plus higher parts sales. Commercial segment sales are expected to be down
about 4% in fiscal 2001 to about $630 million. From a planning standpoint, we
are continuing to project rear-discharge concrete mixer sales to be down 13.5%
due to rising mortgage rates and lower housing starts. We project a 10% - 12%
increase in refuse sales plus several initiatives to build our commercial parts
business will offset much of the decline in concrete mixer sales.
By quarter, we believe that these sales expectations by segment would lead
consolidated sales to be up about 15% in quarter one, 9% in quarter two, 12% in
quarter three and 11.5% in quarter four relative to fiscal 2000.
Our consolidated operating income margins are expected to improve about one-half
of a percentage point in 2001above fiscal 2000 levels. This would suggest
consolidated operating income of $117- $119 million, an increase of about 20%
above fiscal 2000. Operating income margins would start fiscal 2001 low as
historically is the case, say 6.5% in quarter one, rising about 1% in the second
quarter and another 1% in the second half of 2001.
By business segment, we believe that fire and emergency operating income will
grow nearly 40% to about $45 - $47 million in fiscal 2001 to about 10.5% of
sales. Cost reduction initiatives and recovery of ERP installation related
inefficiencies should drive the improvement. Defense operating income should
grow more modestly in 2001 to about $30 - $31 million. The company expects the
MTVR to ramp-up at lower margins and next year we expect to incur significant
engineering and bid and proposal costs to win the U.S. Army's FMTV Competitive
Rebuy program. Commercial operating income is expected to improve almost 12% in
2001 to $60 - $62 million. While concrete placement operating income is
projected to decline, we recently completed an expansion of refuse manufacturing
capacity, which was undertaken to double our refuse margins and these estimates
assume that we will achieve that margin improvement.
Corporate expenses are expected to be flat next year. And, we believe that we
will incur modestly higher interest costs next year due to higher interest
rates. On the other hand, we just amended our Bank Credit Agreement to, among
other things, reduce our borrowing spreads slightly and increase our revolver
capacity by $70 million.
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Summing it all up, we hope to drive net income up about 23% next year. Given the
dilutive effects of the November 1999 equity offering, that would drive EPS up
approximately 16.7% in 2001 to about $3.45. By quarter, we believe that EPS will
be much stronger in the second half of fiscal 2001 as MTVR sales ramp up and as
we enjoy a better mix of heavy tactical defense trucks. First half earnings will
also be significantly impacted by material bid and proposal spending on the FMTV
Competitive Rebuy program and the dilutive effects of the November 1999 equity
offering. So, we expect first quarter EPS to be up modestly about 4%; then, we
should see the rate of EPS growth increase to about 10% in the second quarter,
about 27% in the third quarter and about 22% in the fourth quarter year over
year.
Upsides to these estimates could involve improvement in MTVR margins as we turn
on full rate production. At that point, we will be more confident in our cost
reduction initiatives and have a clearer view regarding any retrofit
requirements relative to initial rate production. Upside may also arise from an
improved outlook in concrete mixer markets if the U.S. economy is indeed headed
for a soft landing. We suggest that analysts refrain from including such upsides
in their earnings estimates until we have a clearer view of the economy over the
next few quarters.
Of course, there are downsides to every estimate. Certainly, rear-discharge
concrete mixer sales could decline more than 13.5%, and we may not achieve our
targets for improvement in refuse margins and for the ramp-up of the MTVR.
From a financial position standpoint, given the Medtec acquisition and seasonal
working capital demands, we would expect borrowings to grow to $190 million at
December 31, 2000 and $210 million at March 31, 2001 and then decline to $180
million at June 30, 2001 and $145 million at September 30, 2001. We expect
capital spending in 2001 to approximate 2000 levels at $20 million.
Certainly, all these 2001 estimates are just that--estimates. And, there are
ranges to all estimates. We encourage all investors to take their own view of
our markets, and the impact of market conditions on our sales and earnings.
Bob, will now share his views on our fourth quarter performance and our 2001
outlook.
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BOB
Good morning.
Charlie's already covered the numbers in detail, so I won't repeat them, but I'd
just like to say -- we did it again. We improved net income, EPS and total
sales. We balanced a downturn in the commercial business with improvements in
our other segments. Our operations are running smoothly during two major plant
expansions, and we just announced another strategic acquisition.
Our international sales efforts came into their own this year. We saw a 98%
increase in international sales, driving the percentage of revenues generated
overseas to about 7.7% -- up from 4.4% last year and well on our way to
generating our near term goal of 10% of overall sales.
The company exceeded consensus earnings estimates for the quarter by two cents
per share. We generated EPS of $2.96 for the year, up 23.8% last year's numbers.
We delivered on our promises for fiscal 2000. And, that's led us to set some
aggressive new targets for fiscal 2001, increasing our EPS expectations to
$3.45.
Defense
Defense vehicle development and production is a competitive strength of ours,
that delivered solid sales growth throughout fiscal 2000. Aftermarket parts
sales were particularly strong, heavy truck requirements exceeded our
expectations, and cost containment efforts had a positive effect on most areas
of production.
MTVR testing was successfully completed on schedule, and we remain committed to
achieving Milestone III and full-rate production approval in December. Although
not yet finalized, a retrofit of wheel ends will be required. We had built a
retrofit into our profit plans for the contract, since this type of retrofit
activity is commonplace at the start of a major defense contract. It's designed
to bring all
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vehicles to the final production configuration. We'll conduct the retrofit
effort at a separate facility to ensure we maintain a sharp focus on new defense
truck production at our Oshkosh facility.
Within the Department of Defense, and even among presidential campaign speeches,
the vision for the future U.S. Army is a hot topic. Army Chief of Staff
Shinseki's vision for the transformation of the U.S. Army calls for a lighter,
more rapidly deployable force that is better equipped than any in the world.
Oshkosh is already playing a part in that transformation. Our HEMTTs with load
handling systems were selected as combat service support vehicles for the
Initial Combat Brigade Teams (ICBTs) at Fort Lewis, the site of the Army
transformation program rollout. And, we just introduced ProPulse electric drive
technology to the defense market at the AUSA show last week. The response was
excellent. The defense community is excited by the prospect of reducing fuel
consumption, decreasing emissions and improving reliability. This system allows
them to decrease their "logistics footprint" or the amount of people and
resources needed to keep a fleet supplied and maintained. A smaller logistics
footprint is one of the key priorities for the Army transformation initiative.
ProPulse is yet another case where our technology development capabilities will
create a competitive advantage across several markets. We are at the forefront
of electric drive development for heavy trucks and we will leverage that in our
other businesses.
Beyond that, the timing on the Family of Medium Tactical Vehicle (FMTV) proposal
has shifted. The Request for Proposal is now expected in early December, rather
than October. That gives us more time for development work prior to the intense
60-day bid and proposal. Regardless of the timing, Oshkosh remains strongly
positioned to meet the requirements of the contract and deliver prototype
vehicles within a very short time frame.
Fire & Emergency
Before I get into our acquisition of Medtec, I just wanted to mention that our
16 percent sales growth this year was split between our Appleton, Wis. and
Bradenton, Fla. operations. The Florida operation is playing an increasingly
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important role in sales growth, and we're looking to continue building sales of
more standardized apparatus to the price conscious end of the market.
Now, I'd like to tell you more about Medtec Ambulance Corporation, which we
expect to close within the next two weeks. We will be rolling the Medtec
acquisition in under Pierce in terms of operations. We're excited. We've been
considering expansion into the ambulance market for more than a year. This is
the right time and the right way to get into that market. Let me explain why:
o The U.S. population is aging, and that will be a major growth driver
for the patient transport services and the ambulance market.
o Our customers have been asking us to get into the business, so we can
provide all of their vehicles with Pierce quality and service.
o Medtec has a strong position in the ambulance market, especially in
Type I and Type III ambulances. We see excellent opportunities for
expanding sales and margins, primarily through enhanced distribution
and service, a better brand strategy, and streamlined production.
o Medtec specializes in Type I and III ambulances, the most profitable
ambulances that make up 75% of the ambulance market. These are the
larger ambulances with the most value added content. And, they
represent the fastest growing segment of the ambulance market.
o There's a growing trend in fire department purchases of ambulances, and
Type I and IIIs are the most popular among the fire service. About 40%
of all ambulance sales are already to fire departments. We see that
expanding to 50 - 60% within five years. Given Pierce's strength in
fire service distribution, we'll be able to strengthen Medtec's
distribution to the fire market.
o Service is almost non-existent in the ambulance market. We know how to
service fire and emergency customers. We're going to raise the bar
significantly, giving ourselves a competitive advantage and room for
margin enhancement at the same time. This acquisition offers us
excellent synergies, not just in terms of operations and purchasing,
but also in distribution and service.
o Medtec has a solid reputation for quality and craftsmanship. They
target the largest segment of the ambulance market with
middle-of-the-road price points and product.
o And, one final bonus, American Fire & Rescue's line of rescues is part
of the deal. This increases the breadth of our rescue offering and
provides us with a new brand for targeting the light and medium segment
of the rescue market. Pierce targets the heavy segment.
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Our purchase price is expected to be approximately $16.5 million, putting the
EBITDA multiple at 4.5 times.
Commercial
Concrete Placement
Although our concrete placement sales were up year over year, the fourth quarter
did bring an 8% dip in sales dollars. We are beginning to see evidence of the
inevitable slow down from peak levels. We, and everyone else, have been
expecting this. We continue to believe the overall reduction in orders will be
on the magnitude of 10%, bringing annual sales in line with where they were in
1999, still at very high levels. This is a realistic, sustainable level. That
being said, we have a plan to improve company performance, regardless of what
the concrete placement market is doing:
o We have upside opportunities for margins in the refuse business. And,
we have untapped potential in the municipal refuse market for improving
sales.
o The fire and emergency market has additional opportunities for market
share growth through a broader product line and improved distribution.
Plus, we've put our operating inefficiencies behind us and can focus on
margin improvement again.
o Fiscal 2001 promises to be a year of strong sales in the defense market,
with the first year of full-rate MTVR production ahead of us. And,
o Most importantly, we constantly look for ways to optimize our production
processes. Some of the inefficiencies associated with production line
start-up hit our profit during the second through the fourth quarters at
McNeilus. However, this same indexed moving production line will be
integral to our plans to improve productivity and operating income
margins in fiscal 2001.
Refuse
The market has been bearing a gradual price increase, despite the cautious
approach toward capital investment of several major haulers. Blanket purchase
orders have been replaced with consistent, smaller orders for specific
requirements. We anticipate Allied/BFI will maintain a "go slow" approach to
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purchasing during the post-acquisition phase, keeping their orders relatively
flat next year. We see Waste Management orders increasing and a modest increase
in purchasing from Republic as these companies clearly identify growth
strategies.
The municipal segment will remain a primary thrust for sales, marketing and
service strategies. Each region will continue targeting key municipal accounts,
and plan new authorized service centers to improve aftermarket support in those
regions.
Among our fourth quarter municipal customers were Birmingham, Alabama, and Waco,
Texas. We closed out fiscal 2000 with about 13.5% of total refuse sales
generated by municipalities. In fiscal 2001, we're targeting to increase that
number by another 25% or more.
Assembly is running smoothly at our facilities in Mexico, which started building
refuse bodies this year. We will use this as a launch point for sales not only
in the Mexican market, but also other South American countries, where import
duties are significantly more favorable for goods produced in Mexico.
In terms of products, our product line expansion is far from complete. We will
be evaluating recycling units and multi-purpose units for addition to the line
in fiscal 2001.
The strategies that Charlie and I have outlined will form the basis for next
year's performance targets. Expansion of defense, refuse and fire and emergency
business will be a key driver for overall sales and margins in fiscal 2001.
o We are committed to maintaining MTVR production and delivery schedules, as
these will have a major impact on profitability.
o Outlook for the fire and emergency market is good, and we intend to expand
market share through increased sales as well.
o The ambulance market holds much promise, particularly with service and
distribution improvements.
o Product line expansion, targeted sales strategies, continued emphasis on
operating efficiencies including inventory reduction are priorities for
each of our businesses.
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o The focus in refuse will be on leveraging our new production line to
enhance sales and margins.
o And, we remain focused on bringing home a major, accretive acquisition
within the next 12 months as well.
We have the plans in place to achieve our new, more aggressive target numbers
for fiscal 2001. Thank you.
Operator, please announce the question and answer period.
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