Oshkosh Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 15 speakers on the call.

Operator

Greetings, and welcome to the Oshkosh Corporation Fiscal 2023 Second 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, Investor Relations for Oshkosh Corporation.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and thanks for joining us. Earlier today, we published our 2nd quarter results. A copy of the release is available on our website atoshkoshcorp.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.

Speaker 1

Please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions, Contain statements that we believe to be forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward looking statements. These risks include, among others, matters that we have described in our Form 8 ks 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.

Speaker 1

Our presenters today include John Pfeiffer, President and Chief Executive Officer and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to slide 3, and I'll turn it over to you, John.

Speaker 2

Thank you, Pat, and good morning, everyone. I'm pleased to report another quarter of strong results for Oshkosh Corporation with significant growth in revenue, Operating income and adjusted EPS compared to last year. For the Q2, we grew revenue by 17% And operating income by over 200%, resulting in adjusted EPS of $2.69 These results were notably higher than our expectations entering the Q2 as a result of improving supply chain conditions And the benefit of our actions over the past several quarters to improve our production resiliency in a constrained supply chain environment. We are also pleased that both the Access and Vocational segments delivered double digit operating margins in the quarter. We continue to book healthy orders for our products and innovations and closed the quarter with a consolidated backlog of $15,000,000,000 Strong demand is supported by ongoing robust non residential construction metrics, infrastructure spending, Mega projects and solid municipal budgets.

Speaker 2

During the quarter, we announced our plans to acquire the AeroTech business from JBT Corporation. We are pleased to tell you that the transaction closed today, and we'll talk more about AeroTech in a few moments. In mid July, we published our 10th annual sustainability report, which highlights our commitment to Sustainable future as we strive to reduce emissions as well as our carbon footprint, while making a positive impact on the lives of our team members, In the Q2 and our expectations for continued momentum into the second half of twenty twenty three, I am pleased to announce that we are raising our full year adjusted EPS expectations to be in a range of $8 Significantly higher than our previous estimate of approximately $6 Over our longer term planning horizon, we expect Further growth in both sales and margins driven by numerous positive factors, which include improving supply chains, Benefits from price cost, especially in the vocational segment, bringing new capacity online, Introducing new products and innovations, ramping up production of the United States Postal Services next generation delivery vehicles, and realizing benefits from acquisitions. Please turn to Slide 4, and we'll get started on our segment updates. Our access team delivered breakthrough performance in the quarter as a result of improving supply chain conditions and the benefits of our many operational initiatives For the first time in more than 18 months, representing continued improvement from the Q1.

Speaker 2

That said, we still have some ground to cover to Our normalized level of greater than 90%. The improved production throughput combined with stronger price realization Grew a 36% year over year revenue increase and an operating margin of nearly 16% in the quarter. Demand for access equipment remains healthy and we expect it to continue as we have discussed over the past several quarters. Mega projects, infrastructure spending, strong non residential construction metrics, expanding use cases, Our innovative products and aged fleets are all contributing to this demand. Orders in the quarter were $1,300,000,000 representing a Seasonally strong book to bill ratio of approximately 1:one with quarter end backlog of nearly $4,400,000,000 Currently, we have approximately 50% of our 2024 in backlog, and we are working closely with our customers slot units for the balance of 2024 production.

Speaker 2

Our visibility to strong demand for 2024 extends well beyond our current backlog, And we continue to expect healthy demand dynamics and access for the foreseeable future. Work has also begun on the conversion of our 500,000 Square Foot facility in Jefferson City, Tennessee to expand access equipment production. Over the next 12 to 18 months, We'll be investing approximately $120,000,000 in this modern facility to expand telehandler capacity. The facility previously produced weldments and fabrications for our Defense segment. This expansion And our Factory of the Future modernization activities in Shippensburg, Pennsylvania provide us with meaningful capacity additions To meet strong demand for our equipment and support our market entry into the agricultural sector with purpose built ag telehandlers.

Speaker 2

Please turn to Slide 5, and I'll review our Defense segment. As expected, Defense quarterly revenues were down versus prior year in line with customer requirements. We expect operating income improvement in the second half of the year with anticipated contract awards And a richer aftermarket mix. In June, we learned that our JLTV follow on contract protest Was denied by the Government Accountability Office. As a reminder, we are still building JLTVs and will continue to do so through the end of 2020 or under the current contract.

Speaker 2

Beyond 2024, we will continue to build JLTVs for international customers As well as JLTV's specialty applications. These, of course, are smaller quantities. From 2025 onward, we will continue to deliver on many solid programs of record in the defense segment, including FMTV, FHTV, Stryker MCWS and multiple trailer programs as well as international contracts that extend well into the future. Long term, we expect that these programs will provide a $1,000,000,000 plus revenue base at mid to high single digit operating margin. The USPS' next generation delivery vehicle program is progressing and our Spartanburg facility is nearing completion.

Speaker 2

We are currently building and testing design certification vehicles and are on track for a production ramp up in the second half of twenty twenty four. This key program will support a return to profitable growth for defense in 2025. Let's turn to Slide 6 for a discussion of the vocational I'm pleased to highlight that our Vocational segment delivered year over year revenue growth and exceeded 10% adjusted operating income margin for the quarter. Much like our Access segment, we are seeing improved supply chain metrics, But conditions have not yet returned to typical levels, so production output remains constrained. As a reminder, we have notably higher pricing in our backlog For fire trucks to be delivered in 2024 and beyond, which will enhance margins as we enter next year.

Speaker 2

We continue to execute on both Product and manufacturing innovations to drive continuous improvement in refuse and service vehicles as well. Demand for Pierce Fire Trucks continues to outpace supply resulting in elevated backlog and we're working diligently to increase our capacity. We believe our facility expansions in both Appleton, Wisconsin and Murfreesboro, Tennessee will help us increase output over the next year. Customer response to our new fully integrated 0 emission McNelis Volterra ZSL Electric refuse collection vehicle is very high. We expect to deliver 2 units for customer evaluation before the end of the year, And low rate production vehicle deliveries will start in 2024.

Speaker 2

We expect to begin ramping up from there over the next several years. Moving to slide 7, the biggest news in vocational is our acquisition of JBT's AeroTech business, which closed today. We already serve the airport market with ARFF vehicles and AWPs. We look forward to welcoming the great team at AeroTech into the Oshkosh family and capitalizing on opportunities for new attractive revenue streams as we expand our participation in this market. AeroTech is a leading provider of aviation ground support products, Gate Equipment and Airport Services were some of the most trusted brands in the industry.

Speaker 2

They serve approximately 75% of air travelers at U. S. Airports and load approximately 70% of the world's overnight express packages. In short, AeroTech's equipment is found at airports all over the world. They also operate a strong aftermarket parts and service business With recurring revenues comprising approximately 40% of total revenues on an annual basis.

Speaker 2

Our combination unites AeroTech's highly engineered product offerings with the strength of Oshkosh's portfolio and technology ecosystem. We share similar innovation priorities across several key areas electrification, autonomy and active safety, As well as Connectivity and Intelligent Products. Together, we believe we can leverage best practices, technology and R and D to advance our shared objectives, while capitalizing on opportunities from increased scale. We believe AeroTech is poised to benefit from numerous secular tailwinds for air transportation, which is in the early stages of an investment cycle. Global passenger traffic is expected to grow in the high single digits over the next several years And infrastructure spending is expected to accelerate with legislation and aging infrastructure.

Speaker 2

In fact, Approximately $25,000,000,000 of the government's Infrastructure Investment and Jobs Act has been authorized to fund airport growth and maintenance. With that, I'm going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2023. Thanks, John. Please turn to Slide 8. Consolidated sales for the Q2 were $2,400,000,000 an increase of $347,000,000

Speaker 3

or 17% over the prior year quarter. The increase was primarily driven by a $351,000,000 or 36 percent increase in sales at Axis as well as a result of higher sales volume and improved pricing. Sales meaningfully exceeded our expectations as a result of higher production output, particularly at Access, driven by improved supply chain conditions as well as the benefit of operational actions we have implemented over the past several quarters. Adjusted operating income increased $161,000,000 The improvement in adjusted operating income was largely driven by higher sales volume and favorable price cost dynamics, particularly at Access, offset in part by higher incentive compensation costs. Access delivered very strong results in the quarter With a 15.9 percent operating margin.

Speaker 3

Adjusted operating income significantly exceeded our prior expectations as a result of higher sales volume, Stronger price realization and favorable mix. Adjusted earnings per share was $2.69 in the second quarter versus $0.49 in the prior year. The strong result is particularly noteworthy given we are still facing a constrained supply chain environment. We have not yet begun delivering the substantially higher priced orders in Vocational's backlog, which we expect to drive notable margin improvement in 2024 and beyond. Now let's turn to our outlook for 2023.

Speaker 3

Please turn to Slide 9. Over the past few quarters, we have reiterated that demand is strong, but our financial results were limited by supply chain conditions, While our prior guidance assumes modest improvements during 2023, we shared that if supply chain conditions and production throughput improve at a faster pace, We could deliver meaningfully higher financial performance. This is exactly what occurred in the Q2. We expect the strong second quarter sales and earnings momentum To continue into the second half of the year and beyond, yielding a substantially better outlook for 2023 than our prior expectations. On a consolidated basis, we are estimating 2023 sales and adjusted operating income to be in the range of $9,500,000,000 And $750,000,000 respectively, up from our prior expectations of approximately $8,650,000,000 and $570,000,000 respectively.

Speaker 3

We are estimating adjusted earnings per share will be in the range of $8 up from our prior estimate of adjusted EPS in the range of $6 and prior year adjusted EPS of $3.46 At segment level, we are estimating Access sales and operating margin to be in the range of $4,900,000,000 and 14% respectively, up from our prior estimate of sales and operating margin of $4,400,000,000 11.5%. Turning to defense, we expect sales and adjusted operating margin to be in the range of $2,100,000,000 3% respectively for the year. We expect vehicle orders to drive improved results in the second half of the year. We expect 2023 vocational sales and adjusted operating margin Will be in the range of $2,500,000,000 7.25 percent respectively versus our prior expectations of sales And adjusted operating margin of approximately $2,200,000,000 8%. To be clear, the reduction in operating margin is a result of the initial purchase accounting and deal amortization related to the AeroTech acquisition.

Speaker 3

This updated guidance includes the AeroTech business for 5 months, including sales of approximately $300,000,000 and an immaterial amount of operating income, again, because of initial purchase accounting and deal amortization. We continue to expect that AeroTech Will be accretive to operating income and EPS in 2024. Our vocational expectations also reflect Higher new product development spending and facility ramp up costs for the Voltera ERCV program in the second half of the year versus the first half of the year. Our estimates for corporate expenses, tax rate, CapEx and average share count remain generally in line with our prior expectations. Our expectation for free cash flow is now approximately $200,000,000 down from our prior estimate of $300,000,000 The change is driven by a combination of anticipated higher receivables at year end resulting from higher sales as well as the timing and amount of NGDD related startup investments compared to prior expectations.

Speaker 3

Looking to the Q3, we expect consolidated sales to be up modestly versus the Q2, primarily as a result of AeroTech sales. We expect earnings per share to be in the range of $2.15 which is lower than the Q2 as a result of increased interest expense On a revolving line of credit facility associated with the AeroTech acquisition and lower interest income as a result of lower cash balances As well as product mix and Volterra ERCD facility spending in the vocational segment. I'll turn it back over to John now for some closing comments.

Speaker 2

We delivered a strong second quarter as a result of better than expected supply chain and production throughput. We're executing well and are increasing capacity in our Access and Vocational segments. Our backlogs are robust and demand continues to be strong. And we just closed on the company's most significant acquisition in more than 15 years. Finally, we raised our expectations for 2023 significantly and Expect that our strong momentum will carry into 2024.

Speaker 2

This is a very exciting time for our company, and we are confident we're taking the right steps

Speaker 1

Thanks, John. I'd like to remind everyone to please limit your questions to 1 plus a follow-up and please stay disciplined on the follow-up question. 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.

Operator

Thank you. We will now be conducting a question and answer session. If you have additional questions, you may re queue and those questions will be addressed time permitting. A call formation tone will indicate your lines in the question Our first question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Speaker 4

Hi, good morning. Thank you so much. Excellent results. So I have two quick questions. The first one is on the backlog, which continues to climb.

Speaker 4

So can you give us some color on what price versus volume impact was on the growth of that backlog number?

Speaker 3

Tammy, you mean on new bookings during the order or during the quarter?

Speaker 4

Correct, correct.

Speaker 3

So what I would say is, in general, again, Pricing on we've talked a lot about on the vocational segment that we have that strong pricing and backlog that we're still not Realizing the full benefit of, expect to realize that in 2024. Because as we look at the rest of the company, Again, continue to expect solid pricing in there. And again, we expect to continue to deliver strong margins going forward and the pricing is commensurate with that.

Speaker 4

Got it. And second question on AeroTech. Can you remind us of the cadence of the $20,000,000 synergy savings that you expect by And how much that should accrue to, let's say, the gross margin line versus the SG and A line?

Speaker 3

We haven't really it's really going to be sort of a steady flow over the next couple of years. I think, certainly some impact. I think the way to think about AeroTech This year we'll have we'll get through the initial purchase accounting. We'll have to go through a step up in basis of inventory. But When we look to next year, we think it's going to be about a $700 plus 1,000,000 revenue business, would expect around $0.40 of EPS accretion, Understanding that there is going to be some interest income or expense impact embedded in that $0.40 And solid double digit EBITDA margins is what we're thinking about for next year and we would expect improvement Beyond that, as we get more synergy benefits.

Speaker 2

Yes, Tammy, it's John. I'll just add a little bit more color. So we said that we're going to get about 20,000,000 Synergies as we go forward and that comes from G and A synergies. Of course, that's with Anytime you make an acquisition, you're getting those types of synergies. That will come sooner than later.

Speaker 2

Then we've got supply chain synergies. We've got channel related synergies. That'll take just a little bit longer. So I think you'll see this unfold over 2 or 3 years.

Operator

Our next question comes from the line of Mig Dobre with Baird.

Speaker 5

Congrats on a very good quarter. My question is on vocational and on the fire business specifically. You commented on demand exceeding Supply for fire trucks, maybe you can give us a little more context as to how you see that progressing if you look at 2024. And for fire specifically, this is where I know you had quite a bit of supply chain challenges. How are you seeing that progressing?

Speaker 2

So, I'll talk a little bit about that, Mig. So we see the demand for our fire trucks continuing For the foreseeable future, and that is primarily due to a couple of things. It's due to the fact that municipal budgets are healthy, And they're prioritizing things like critical fire trucks in their fleets. They're also prioritizing fire trucks because they want new technology. So we've got a lot of municipalities that are lining up for things like Our electric Volterra fire trucks.

Speaker 2

So the second thing that's driving it though is aged fleet. We've talked about this for a little while, but there's a significantly aged fleet of fire trucks across the country. So that's another reason we expect demand to be strong for the foreseeable future. So we continue to see a really strong backlog that gives us the confidence Industry 4.0 things with automation in our facilities that we haven't had in the past to improve throughput. And we're doing it in Murfreesboro, Tennessee in a brand new state of the art plant, where we're going to do, some production for fire trucks as well, which should allow us To deliver fire trucks faster, and that's good for us.

Speaker 2

It drives really good healthy growth.

Speaker 5

Understood. Then my follow-up on defense. I appreciated the comment that The remaining programs give you some visibility in $1,000,000,000 worth of revenue. I'm sort of curious as to how you're thinking about Any restructuring or any adjustments that you need to make to your existing footprint or cost base in order to be able to deliver that mid single digit to high single digit margin range And that revenue, thank you.

Speaker 2

Yes. So I'll kind of give you the main context of what's going on in defense. So I'll take you back a few years and some We've talked about this a little bit. We've known for a while that tactical wheeled vehicles are under pressure from a Department of Defense budgetary standpoint. So we've said, hey, we've got to Move into some adjacencies like combat vehicles and like last mile delivery vehicles for the government.

Speaker 2

And, well, combat may not be as big as last mile delivery. These are really important programs for the future of our defense business. Now if you go To the current business, the FMTV, the FHTV, the Stryker MCWS, that's as we said, that's all going to provide over $1,000,000,000 of base And we'll deliver mid to high single digits on that business. So as I talked about in my prepared remarks, We've already converted one defense operation to access equipment. We'll be producing JLTVs in the current plant Through the end of 2024.

Speaker 2

So it remains to be seen exactly what the outcome of that operation We're a healthy growing company. We have a need for more capacity, and we'll let you know how we're going to Change the business as we go forward when the time comes.

Speaker 5

Thank you. Good luck.

Operator

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

Speaker 6

Hi, good morning guys. I wanted to ask about the access margin, which is obviously very impressive. It sounds like there's still, John, I think you mentioned something like 75% on time deliveries from suppliers. Normal is more like 90%. So I'm guessing there's still some kind of productivity inefficiencies in that 16%.

Speaker 6

Is there any way to think about What that would look like if supply chain was normal?

Speaker 3

Hey Steve, I'll start with that and if John has anything to add So bottom line, it was a very good quarter. I think couple of things, I think to understand the quarter. First of all, obviously, we're From a volume throughput perspective, we saw improvement. We had a very, very strong mix in the quarter too and that certainly benefited Our margin in the quarter, the mix the next two quarters while very solid is not quite the same level. We did have a lot of Large booms in it.

Speaker 3

I would say while on time delivery metrics are still not back to historic norms, a lot of activities We've done are really having a big impact, including carrying a little bit more inventory, and that is helping. So we're starting to see that manufacturing labor efficiency come back. So I think there's certainly continued opportunity, but I think Great, great mix, great results for the quarter and excited to continue the momentum. So Steve, I'll just add A

Speaker 2

little bit to that, a little bit of a shout out to the Axness team. We've been in a really constrained environment for Quite some time now and we have had enormous amounts of effort to Determine how we can operate more efficiently in a constrained supply chain environment. A lot of engineering hours have gone into this, working with our supply base to figure it out. We've gotten a lot of improvement in efficiency because of that work. But I think that that access team would be the first ones

Speaker 6

Great. Okay. That's what I thought. And then the related follow-up, I think you said 50% of Access in 2024 is in backlog already. Just any commentary on sort of price cost expectations on that part that's already in backlog?

Speaker 3

Yes. I would say overall, we're sort of back in that price cost balance. We were behind Obviously, for this past year, it had challenges. So that's in balance. You see the strong margin this quarter.

Speaker 3

So And really focus on the margin next year and the comments that John and I just made, we expect strong margins to continue in the future for Access.

Speaker 6

Super. Thank you, guys.

Operator

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

Speaker 7

Thank you. Good morning. Just to continue on that thought. Just on excess pricing in the Q1, I believe it was up Kind of low teens. Is the revised guidance for this year, does that and the expectation like most And others that year over year change moderates as we go through the year.

Speaker 7

Did that change in tandem with The revised full year revenue guidance for Access?

Speaker 3

No. I think to the extent where we got some more Where price was a bit of a driver this quarter is because our volume was higher. So with more volume comes more price. But yes, we were still I think ultimately, we're largely there from what we've implemented from a pricing perspective. There was an access, so there was still some lag even In the Q1, so I think really this is the pricing that we see right now is what we expect for the balance of the year.

Speaker 7

Okay. Okay. And then, Mike, maybe just, I guess, a bit more big picture, just on vocational. And a lot of talk about The pricing you have in the backlog, but and you layer in there are a lot of moving pieces as we go into 'twenty four as AeroTech ramps up. You have the full year with the mixers out of the portfolio.

Speaker 7

It's a lot of these factory inefficiencies that have been a headwind presumably We're less than a headwind. Any kind of handholding you'd give? I know it's early, but just as kind of a guidepost to think about Okay. So margins in 2024? Thank you.

Speaker 3

Yes. We're not going to provide guidance as you said yet at this point, but I think the things to look at, So you have the sort of the base or not the legacy vocational business, if you will. We talked about the strong margin profile we expect next In that business, with the pricing coming online, so and certainly supply chain improves, we would expect volume to increase. So that's Similar to what we talked about last quarter, we see some strong dynamics. And then you bring on the great AeroTech business that we're very excited about.

Speaker 3

And that's going to be a business that we expect again is going to be solid Mid double digit type EBITDA margins, we will have a burden of some amortization that plays Into the margin profile in the segment, but that's really some data on how we view next year.

Speaker 2

I think what's and what's really exciting about this vocational business is some of the investments we've made in the products. You look at the electric Volterra fire trucks, the airport rescue and firefighting vehicles, which are electrified. You look at the new Electric refuse collection and recycling collection vehicles, there's innovations on IMT's product. This is going to drive Really strong growth for years into the future. And we're just we're in inning 0 On these new products, it's really exciting.

Speaker 5

Good stuff. Thank you.

Speaker 1

Thanks, Tim.

Operator

Our next question comes from the line of David Raso with Evercore. Please proceed with your question.

Speaker 5

Hi, thank you. Sorry for

Speaker 8

a little minutiae modeling question here, but Just trying to figure out the vocational margins, the second half of the year, right? They're down to 5.6 After 9.2% in the Q1, and I understand the acquisitions weighing on that, including maybe some amortization from the deal. But Just zooming in, I'm trying to figure out why the Q3 EPS declines as much as it does sequentially. So there's Embedded, what interest expense are you assuming in the model here so we can get there? And then the Q4, the implied EPS is similar to the first quarter on similar sales.

Speaker 8

And base case, you would think the margins will be better on similar sales Q4 versus Q1, right, given all the supply chain and so forth. But again, vocational is weighing it down. So there's a lot there. But I guess, A, can you help us with the interest expense? And B, am I looking into vocational margins correctly in the second half?

Speaker 8

And then C, the third thing is access. The Q4 is when a lot of the rental companies have the big decline in their CapEx year over year. So maybe if you can help us a little bit with the cadence of access, Maybe better help us understand the Q4 with access. There's a lot there. I apologize.

Speaker 8

Okay.

Speaker 3

I'll try to remember everything, but I'll If I forgot something, let me know. So I guess number 1 from an interest expense, think about The borrowings on our revolver in that $5.50 to $5.75 range will carry interest on that. I would expect some pay down over the course So that's essentially what we'd expect and obviously closed today. So I think that's as we look, that is I think the Really the 2 biggest bridging items or 2 bigger bridging items from Q2 to Q3 is looking at interest expense, But conversely, we've been carrying cash balances, so there's also interest income that we're not going to see at the same levels. That's going to carry into the Q4 as well.

Speaker 3

So I would say that's sort of the background there. As we look to vocational, I think certainly we're going to be picking up amortization and we just closed today, so We need to get through the valuation and the purchase price allocation. But the key things that we know is we're going to have some depreciation and amortization On that volume, we also know the nuance of purchase accounting is that you typically are going to have a step up in basis of inventory That's on hand, particularly finished goods. We believe that finished inventory levels or inventory levels in general are going to be a bit higher Than our previous expectations. So there's a step up in basis that's just sort of a temporary phenomenon that plays into the margin.

Speaker 3

We also said and really finally, We're making, as John said, some significant investments in the segment for our electrification efforts. So We do see higher spending sequentially in the back half of the year on the McNeil's ERCV product, Both for the new product development effort as well as for getting that facility ready for production. So those are really the big moving pieces. In terms of the volume in the Q4, it literally and we've signaled this on previous calls, it completely comes down to in this very strong demand environment, The number of production days you have in the quarter and with the holidays, there's fewer production days and that's what drives it, Is it fewer production days and then as well as the other items that we've talked about?

Speaker 8

And was that an Seth's comment, because essentially your backlog is so large, you would argue, we don't need much by way of orders to ship well and access in the Q4. But obviously some of the rental companies are saying, look, we don't want to take as much in the Q4 as we did last year. So I'm just trying to level set everybody The cadence for

Speaker 9

accident That doesn't have anything to do with

Speaker 3

it. It's purely everything that we produce right now, we're shipping With the exception of stuff that's in transit on the water between our facilities essentially. So it's really a function of fewer production days yields Lower revenue, it has nothing to do with demand or delivery cadence to our customers.

Speaker 8

Thank you very much.

Speaker 3

And by the way, that comment, all the comments Apply both to access. It also applies to vocational and defense. There's just simply fewer days. With fewer production days, you have less manufacturing absorption. So there's all the implications of just and that's typical.

Speaker 3

We typically see that In our Q4.

Speaker 8

Thank you.

Speaker 1

Thanks, David.

Operator

Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Speaker 10

Yes. Hi. Good morning, everyone.

Speaker 11

Good morning. Good morning, Jerry.

Speaker 10

I'm wondering if we could just talk about the margin opportunity in fire and emergency. So pre COVID, You folks are running mid teens margins on the way to high teens. And I'm just wondering with the price increases that you have in backlog, are we back at that path In 2024, Mike, or how are we thinking about getting back to the levels of outstanding performance that you folks were at pre COVID?

Speaker 3

As we look at that, and we're not I guess for core fire trucks, we've talked about it. And The margin, there's no reason why our products don't get back to pre pandemic levels with the pricing we have. We need to get to that higher price backlog and As supply chain continues to improve, we'll get the throughput. So, and then we've talked a lot about the AeroTech Impacts and so again those strong EBITDA margins will have less some D and A that will be or depreciation and amortization That will be present. But again, we're very confident as we've said in our Analyst Day targets and so on that this is A business that over time is a solid double digit segment.

Speaker 3

And so we're excited about the growth prospects.

Speaker 10

Super. And you folks have some great analytics with your telematics installed base. I'm wondering if you could just tell us for AXIS equipment, It seems like the used equipment inventories are tighter than for other equipment categories. Can you tell us what the utilization numbers look like Year over year in terms of operating hours per unit in North America and Europe, are we at a point where that's Flat to up year over year or can you just give us context on what you're seeing in the data?

Speaker 2

Well, what I can tell you is that the metrics are Still healthy in terms of utilization metrics. We pay very, very close attention to it. Now one thing that I think you may notice is last year At this time, we were under the industry. I'm talking about the whole industry, but certainly us, JLG, we were under a constrained environment. So We were really not able to ship as many products to our customers as they wanted.

Speaker 2

This year, The industry is doing a better job of getting products into the hands of customers because customers need the product. So You would see a little bit of normalization happening and that's a really good thing. It's a good thing because it means that Our customers can continue to grow their fleets because they need to grow their fleets, but it's also a good thing because you'll start to see A gradual replacement of older fleet. And I think you're starting to hear some customers talk about that. But even with more fleet coming into the market right now this year versus a year ago, the utilization metrics Are still very healthy and I think you hear that in remarks from our customers as well.

Speaker 10

Super. Thank you. Thanks, Jerry.

Operator

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question. Yes, thanks. Good morning, guys.

Speaker 11

Good morning. Good morning, Nicole.

Speaker 12

Maybe just with the supply chain, that was obviously a source of upside for you guys this quarter from a volume perspective. What have you embedded in the second half? Like have you embedded continued progress on supply chain with constraints reducing? Or have you kind of like flatlined, I guess,

Speaker 3

At this point, Nicole, it's similar to what we've done in our previous guide. Our expectation is that it's largely Similar to how we exited this quarter and then it really comes down to the number of production days that we have in the subsequent quarters to the extent that we're Veering

Speaker 12

volume. Okay. Got it. Makes sense. And then on price cost, can you just talk about like is this quarter Are you seeing kind of the pinnacle of price cost tailwinds from a margin perspective?

Speaker 12

Or is the price cost tailwind that you expect in the second half of the year comparable

Speaker 3

The one thing I would say, first of all, just to caution, it's a price cost Year over year is favorable, but it's really in balance again. So it's not, so that the extent that we were behind last year, now we're It's neutral. I would say, similar in most of our businesses that we should see similar price cost dynamics through the remainder of the year with the exception A portion of a vocational with the fire trucks that there's still more pricing to come More meaningfully next year that to get them back into full balance.

Speaker 12

Thanks. I'll pass it on.

Operator

Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.

Speaker 13

Hey, guys. Good morning. I wanted to ask about defense margin, a couple of questions. The I guess your full year guide implies second half kind of ramps back to that mid single digit range, I think. And then I guess I'm just trying to understand whether you changed your kind of medium term margin guidance.

Speaker 13

Now it seems like now you're kind of mid to high single digits. Is that a moderation from before? And is that just purely a reflection of JLTV going away? And does that include the USPS ramp? Thanks.

Speaker 3

Sure. First of all, just From an expectations perspective, as we said in prepared remarks, our expectation is we do have we do expect some orders in the back half of the year That will help that will generally produce positive estimates at completion or EAC or CCA adjustments. So that's a bit of the improvement. We also have a stronger aftermarket mix in the back half of the year. So there is some mix And orders at play there.

Speaker 3

I think that in terms of just the mid to high single digits, That is just what you would consider the tactical wheeled vehicle or sort of a core defense business excluding NGDB, NGDB is, obviously a big multi $1,000,000,000 program that's additive, but just isolating That's just the defense piece of that, it's $1,000,000,000 plus. That's not we're not saying that's really post JLTV. So think Sort of 2025 and beyond is how you should think about that $1,000,000,000 plus at mid to high single digits.

Speaker 13

Okay. That's helpful, Mike. Thanks. And then just on the access strength, can you just give us any regional color as to what's going North America, we assume is strong, but any trends that you'd call out in Europe or China? Thanks.

Speaker 2

Sure. I mean, we've seen actually pretty healthy growth rate globally. I think maybe domestic China is one area that we haven't seen growth. We've seen a little bit of contraction. But everywhere else in Asia has been really strong.

Speaker 2

Europe has been really, really strong for us, surprisingly perhaps. But we see continued strength across the access markets Going forward, I can't stress that enough. We pay attention to a lot of metrics and We work really closely with our customers and our customers are much are really good at forecasting what's happening In the markets, if you look at the aggregate of non residential construction metrics and we don't just look at it for this year and next year, we look at it over 5 years And it's really, really healthy. The Dodge Momentum Index is still up at a high level, and the ABI is above 50 still. Those are all very positive indicators, and we all know about the CHIPS Act and the IRA and Some of these other bills that have been passed that are spawning these mega projects, it's all pointing to continued Healthy growth in the access equipment markets for the foreseeable future.

Speaker 3

Got it. Thank you, Jeff.

Operator

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

Speaker 14

Thanks. Good morning. Just to follow-up on that, maybe can you just talk about how broadly the orders in the Access business We're spread around the customer base in North America. I think there's some concern that some of the larger customers are perhaps a bit more Cautious based on some of their CapEx messages for later this year, and maybe the rest of the industry Is going to add too much fleets. I guess I'm curious what was the breadth of the orders in the quarter and kind of your reaction to the

Speaker 3

What we're continuing to see is very strong demand and that's With the large our larger customers as well as independent rental companies, so solid mix of orders Across the board in the quarter, but I think it's even beyond just the orders we had in the quarter, Steve. We have really good visibility to requirements even beyond our what's actually booked and we'll continue to book those orders through the back half of the year. So our visibility demand is very, very solid for next year is what I can say.

Speaker 2

Yes. And I'll just add to that. I don't think you see too much fleet in the market. I think it's just the opposite. I think the reason you see The used market and the condition that it's in, it's because there's so much demand for equipment that our customers who have aged fleets Can't really replace that fleet.

Speaker 2

So they're not selling off any of their old fleet because they need it. Mhmm. So they haven't even started Just barely, maybe just barely started fleet replacement. So I don't think that there's too much fleet in the marketplace.

Speaker 14

Okay. And you may have addressed this in some of your earlier comments about pricing, But there's obviously some messaging from some bigger customers last week about reversing surcharges And discounting pricing for next year. I guess I'm curious what's your reaction to the suggestion that pricing will come down next year And maybe if we're starting at a margin percentage of close to 16%, it doesn't matter so much at this point, but I'm just kind of curious what your

Speaker 2

So first of all, I'll tell you that we've got really, really strong demand for our products. I mean, we're booking orders for the second half of twenty twenty four right now. We've never had this kind of Really good visibility in access in the past. So the market is very strong and the demand is very strong. Now with regard to pricing, we're always open And we are always bear with our customers on how we price our products.

Speaker 2

But I want to make just make sure To make a specific point is that input costs are still very, very elevated. When you look at it in aggregate, input costs are very elevated. You see inflation moderating recently, but we haven't seen PPI and other metrics Deflating. We haven't seen deflation. Now you can pick at one thing here or one thing over here that you may have seen some relief on.

Speaker 2

But overall, input costs are very elevated. We've got good demand, but we'll always be open and fair with our customers how we price our product.

Operator

Our next question comes from the line of Steve Barger with KeyBanc.

Speaker 9

John, you sound great on And you just took this year's guidance above where consensus is for next year and not far below 2025. And you've alluded to a lot of this, but without getting into numbers, can you talk about how you're thinking about a multiyear growth path from this updated guide? Or Should we be thinking about a flattening out at some point from a high level as we think out 5 or 6 quarters? Just trying to gauge your ability to grow from here.

Speaker 2

Yes. So first thing I'll mention, Steve, is as we look at the quarter we just reported, We're very, very pleased with it, but we are not surprised with it. I mean, what's happening in this quarter, we knew what's going to happen. It's just happening a little bit faster than we had previously forecasted it would happen, but we always knew this performance was there. And that's why we never ever came off our 25 Analyst Day guidance.

Speaker 2

We always maintained that, yes, this is what we See achieving in 2025, and we still see that today. So we still see a lot of tailwind in our business. We talked about Demand in the access segments, not just in North America, it's really nice global demand. But then we've got the vocational business, Which is really just starting to pick up momentum and we see the opportunities to drive big margin improvements in 2024 with that business, A lot of new product. We've got new acquisitions from Hinoa to, to AeroTech, which are going to provide benefits for us.

Speaker 2

The postal contract comes online next year. So these are all reasons why We never came off 25. We believe the 2025 guidance is appropriate for our business.

Speaker 9

Understood. That's great color. Thanks. And then when you get to run rate production on the Volterra, How will that margin compare to a traditional RCV? And where do you think the mix of electric versus ICE goes over time, not just for Volterra, But for any product where you have an electric option?

Speaker 2

Well, I think it's going to be different depending on the end market. So For example, I'll give you an example with the Postal Service because that's been relatively public. The Postal Service started with only 10% Of their orders, bev units versus ICE units. Now, a very short time later, They're at 75% bev units versus ICE units, right from the beginning. So they've accelerated it dramatically before we've even produced And delivered Unit 1.

Speaker 2

I think but some markets will be a little bit slower. The fire there's a lot of customers extremely interested in our fire and emergency Fire trucks that are Volterra, but the average fire truck stays in the market close to 20 years. So that will run the growth that that will drive will run for a long time. There's also a lot of interest in our RCV products. And so that's going to run for a long time.

Speaker 2

It's kind of hard to predict just how fast Fleets will electrify, but I will tell you that every time we put an electric unit into the market, It's a higher price point. There's good total cost of ownership for our customers, and there's really healthy

Speaker 10

margins on these products.

Speaker 2

Steve, one other

Speaker 3

Steve, one other exciting thing. I think if you start thinking about the ERCVs, You really need to almost think of them more like our Pierce Custom Buyer Trucks where, you know, in a lot of cases, we're not actually buying the chassis, but now we're going to be participating as we As volume ramps knows and really the entire truck, including our Purpose built chassis, so that's you see the margin profile and the opportunity that we see on fire trucks historically and that's We view it very much in a similar vein.

Speaker 9

Understood. And just a follow-up to my first question to confirm, The EPS range for $20.25 was $11 to $13 Is that right?

Speaker 3

Yes, that's right. Got it. Okay. Thanks so much. Thanks, Steve.

Operator

Mr. Davidson, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Speaker 1

All right. Thanks, Christine. Thank you for joining us today, everybody. We're pleased with a very strong first half of twenty twenty three and that our operations and Supply chain metrics are continuing to improve. Before we end the call, I'd like to highlight our plans for a field trip to meet with Access Segment Management and tour our JLG in Shippensburg, Pennsylvania on August 23.

Speaker 1

For investment professionals who are interested in seeing our world class manufacturing operations up close

Operator

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.

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Key Takeaways

  • Oshkosh delivered Q2 revenue up 17%, operating income up over 200% and adjusted EPS of $2.69, surpassing expectations on improved supply chain and production throughput.
  • The Access segment achieved 36% year-over-year revenue growth with a 15.9% operating margin, ended Q2 with nearly $4.4 billion backlog (50% of 2024) and is investing $120 million to expand telehandler capacity.
  • The Defense segment reported year-over-year revenue decline as planned but anticipates improved H2 earnings from contract awards, aftermarket mix and a USPS vehicle production ramp starting late 2024.
  • The Vocational segment delivered >10% margins, maintains elevated fire truck backlog, will start 2024 low-rate electric refuse vehicle deliveries and closed the AeroTech acquisition to expand aviation ground support offerings.
  • Management raised full-year 2023 guidance to $8.00 adjusted EPS (from ~$6.00), expects $9.5 billion in sales and affirmed long-term 2025 targets on continued supply chain improvement and volume growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Oshkosh Q2 2023
00:00 / 00:00