Oshkosh Corp Q2 FY2023 Earnings Call

Greetings, and welcome to the Oshkosh Corporation Fiscal 2023 Second Quarter Results Conference Call. 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. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our second quarter 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. Please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Our presenters today include John Pfeifer, 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.

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 second quarter, 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 second quarter 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 billion. Strong demand is supported by ongoing robust nonresidential construction metrics, infrastructure spending, mega projects, and solid municipal budgets. 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 tenth annual sustainability report, which highlights our commitment to a 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, our communities, and, most importantly, the people who use our products. As a result of our strong performance in the second quarter and our expectations for continued momentum into the second half of 2023, 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 Service's 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 a breakthrough performance in the quarter as a result of improving supply chain conditions and the benefits of our many operational initiatives over the past several quarters to improve production throughput. Supplier on-time delivery exceeded 75% for the first time in more than 18 months, representing a continued improvement from the first quarter. That said, we still have some ground to cover to reach our normalized level of greater than 90%. The improved production throughput, combined with stronger price realization, drove 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 nonresidential construction metrics, expanding use cases, our innovative products, and aged fleets are all contributing to this demand. Orders in the quarter were $1.3 billion, representing a seasonally strong book-to-bill ratio of approximately 1:1 with quarter-end backlog of nearly $4.4 billion. Currently, we have approximately 50% of our 2024 in backlog, and we are working closely with our customers to slot units for the balance of 2024 production. 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 million 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. 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 2024 under the current contract. Beyond 2024, we will continue to build JLTVs for international customers as well as JLTV 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 billion-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. We are currently building and testing design certification vehicles and are on track for a production ramp-up in the second half of 2024. 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 segment. I'm pleased to highlight that our vocational segment delivered year-over-year revenue growth and exceeded a 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. 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 Murphysboro, Tennessee will help us increase output over the next year. Customer response to our new fully integrated zero-emissions McNeilus Volterra ZSL electric refuse collection vehicle is very high. We expect to deliver two units for customer evaluation before the end of the year, and low-rate production vehicle deliveries will start in 2024. 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 RF 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 with some of the most trusted brands in the industry. 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. 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&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. In fact, approximately $25 billion of the government's Infrastructure Investment and Jobs Act has been authorized to fund airport growth and maintenance.

Thanks, John. Please turn to Slide 8. Consolidated sales for the second quarter were $2.4 billion, an increase of $347 million or 17% over the prior-year quarter. The increase was primarily driven by a $351 million or 36% increase in sales at Access 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 million over the prior-year quarter to $237 million or 9.8% of sales, a 610 basis point improvement versus the prior year. 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% operating margin. 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, and 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. 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 assumed 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 second quarter. We expect 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 $9.5 billion and $750 million, respectively, up from our prior expectations of approximately $8.65 billion and $570 million, respectively. 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 a segment level, we are estimating excess sales and operating margin to be in the range of $4.9 billion and 14%, respectively, up from our prior estimate of sales and operating margin of $4.4 billion and 11.5%. Turning to Defense, we expect sales and adjusted operating margin to be in the range of $2.1 billion and 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 $2.5 billion and 7.25%, respectively, versus our prior expectations of sales and adjusted operating margin of approximately $2.2 billion and 8%. To be clear, the reduction in operating margin expectation is a result of the initial purchase accounting and deal amortization related to the AeroTech acquisition. This updated guidance includes the AeroTech business for five months, including sales of approximately $300 million 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 Volterra 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 million, down from our prior estimate of $300 million. 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 NGDV-related start-up investments compared to prior expectations. Looking to the third quarter, we expect consolidated sales to be up modestly versus the second quarter, 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 second quarter 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 eRCV facility spending in the Vocational segment.

I'll turn it back over to John now for some closing comments. We delivered a strong second quarter as a result of a better-than-expected supply chain and production throughput. We're executing well and our 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. This is a very exciting time for our company, and we are confident we're taking the right steps to build on this momentum to drive growth and enhance shareholder value. Okay, Pat, let's get started with Q&A.

Operator, please begin the question-and-answer period of this call.

Our first question comes from Tami Zakaria with JPMorgan.

Excellent results. So I have two quick questions. The first one is on the backlog, which continues to climb. So can you give us some color on what price versus volume impact was on the growth of that backlog number?

Tam, you mean new bookings during the quarter?

Correct. Correct. Correct.

In general, I would say that we have strong pricing and backlog in the vocational segment that we are still not fully benefiting from, but we expect to see that in 2024. Looking at the rest of the company, we continue to anticipate solid pricing there as well. We expect to maintain strong margins moving forward, and the pricing aligns with that.

Got it. And second question on AeroTech. Can you remind us of the cadence of the $20 million synergy savings that you expect by 2025 and how much that should accrue to, let's say, the gross margin line versus the SG&A line?

We anticipate a steady flow over the next couple of years with some impact. This year, we will manage the initial purchase accounting and a step-up in the basis of inventory. Looking ahead to next year, we project AeroTech will generate over $700 million in revenue. We expect around $0.40 of EPS growth, keeping in mind that there will be some interest income or expense impact within that figure. We are aiming for solid double-digit EBITDA margins next year, with expectations for improvement as we benefit from synergies.

Yes. Tami, it's John. I'll just add a little bit more color. So we said that we're going to get about $20 million in synergies as we go forward. And that comes from G&A synergies, of course, that's with any time you make an acquisition, you're getting those types of synergies. That will come sooner than later. Then we've got supply chain synergies. We've got channel-related synergies that will take just a little bit longer. So I think you'll see this unfold over two to three years.

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

Congrats on a very good quarter. My question is on Vocational, 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 as 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?

So I'll talk a little bit about that, Mircea. 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. So the second thing that's driving it, though, is aged fleet. We've talked about this for a little while, but there is 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 to continue to put more capacity in place. We're doing that right now. We've been doing it in Appleton, Wisconsin and doing a lot of 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 Murphysboro, Tennessee and 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. It drives really good health growth.

Understood. Then my follow-up on Defense. I appreciate the comment that the remaining programs give you some visibility in $1 billion 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 on that revenue.

Sure. I'll provide you with the main context regarding Defense. Looking back over the past few years, we've observed that tactical wheeled vehicles are facing pressure due to the Department of Defense's budget. As a result, we’ve indicated the need to explore adjacent areas such as combat vehicles and last-mile delivery vehicles for the government. While combat might not be as significant as last-mile delivery, these programs are crucial for the future of our defense operations. Currently, our businesses like FMTV, FHTV, and Stryker MCWS are projected to contribute over $1 billion in base revenue, with expected margins in the mid- to high single digits. I've mentioned in my prepared remarks that we've transitioned one Defense operation to Access equipment, and we'll be manufacturing JLTVs at the current facility until the end of 2024. The results of that operation are yet to be determined. As a robust growing company, we require additional capacity, and we will inform you about our future business changes when the time is right.

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

I wanted to ask about the Access margin, which is quite impressive. It seems like there are still issues, as John mentioned something about 75% on-time deliveries from suppliers, while the norm is closer to 90%. I assume there are some productivity inefficiencies in that 16%. Can you provide any insight on how things might look if the supply chain were operating normally?

Steve, I'll start with that, and if John has anything to add and you certainly can. So bottom line, it was a very good quarter. I think a 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 in the next two quarters, while very solid, is not quite at the same level. We did have a lot of large booms in it. 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 that I think great mix, great results for the quarter, and excited to continue the momentum.

So Steve, I'll just add a little bit to that. A little bit of a shout-out to the Access 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 the Access team would be the first ones to tell you that as the supply chain continues to open up and go from, say, 75% to 90%, they'll definitely benefit even more from that improvement.

Great. Okay. That's what I thought. And then the related follow-up, I think you said 50% of Access in '24 is in backlog already. Just any commentary on sort of price cost expectations on that part that's already in backlog?

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

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

Just to continue on that thought. Regarding Access pricing in the first quarter, I believe it increased by a low teens percentage, is that the updated guidance for this year? And like with most others, do you expect the year-over-year change to moderate as we progress through the year? Did that change align with the revised full-year revenue guidance for Access?

No. I think the slight increase in price this quarter was driven by higher volume. More volume leads to higher price. However, we are mostly aligned with the pricing strategies we have implemented, and there is still some delay from the first quarter. I believe that the current pricing we observe is what we anticipate for the rest of the year.

Okay. And Mike, looking at the bigger picture regarding vocational and considering the pricing in the backlog, there are many factors to consider as we move into 2024 with AeroTech's ramp-up. This is also the full year without the mixers in the portfolio and many factory inefficiencies that have been challenges are expected to improve. Could you provide any guidance on what to expect for Vocational margins in 2024?

Yes. We are not providing guidance at this moment. However, key aspects to consider include the Vocational business, where we anticipate a strong margin profile next year due to pricing improvements. As the supply chain enhances, we expect an increase in volume, aligning with our previous discussions on robust dynamics. Additionally, we are enthusiastic about the AeroTech business, which we project will achieve solid mid-double-digit EBITDA margins. There will be some amortization impacts on margins within the segment, but that provides insight into our expectations for next year.

I think what's really exciting about this Vocational business is the investments we've made in the products. There are the electric Volterra fire trucks and the airport rescue and firefighting vehicles which are now electrified. Additionally, we have new electric refuse collection and recycling vehicles, along with innovations in IMT's products. This is going to drive strong growth for years to come. We are just at the beginning stage with these new products, and it's quite thrilling.

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

Sorry for the modeling question here, but I'm trying to understand the vocational margins in the second half of the year, which are down to 5.6% after being 9.2% in the first quarter. I recognize that acquisitions are impacting this, possibly including some amortization from the deal. However, I'm curious about the decline in third quarter EPS and what interest expense you are factoring into your model to explain that. For the fourth quarter, the implied EPS appears to be similar to the first quarter despite comparable sales, and typically, you would expect margins to improve in the fourth quarter under similar sales conditions, particularly considering supply chain factors. However, the vocational sector is influencing this negatively. Could you clarify the interest expense and confirm if I'm assessing the vocational margins correctly for the second half? Additionally, regarding Access, the fourth quarter tends to see a significant drop in CapEx year-over-year for many rental companies. It would be helpful if you could shed some light on the cadence of Access to better understand the fourth quarter performance. I apologize for the numerous questions.

I'll do my best to cover everything, but if I miss something, please remind me. First, regarding interest expense, consider our borrowings on our revolver in the $5.50 to $5.75 range, which will accrue interest. I anticipate some paydown throughout the year. As we look ahead, the two main bridging items from Q2 to Q3 revolve around interest expense. However, we've also maintained cash balances, meaning the interest income will not be at the same level, and this will extend into the fourth quarter as well. Regarding our Vocational segment, we will begin to see amortization following today’s closure. We need to complete the valuation and purchase price allocation. Key points to note include depreciation and amortization on that volume. Additionally, due to purchase accounting nuances, we are likely to see a step-up in the basis of the inventory we have, especially for finished goods, leading to inventory levels that may exceed our previous expectations. This step-up in basis is a temporary situation and will impact margins. Lastly, as John mentioned, we are making significant investments in our electrification efforts within this segment. We anticipate increased spending in the latter half of the year on the McNeil's eRCV product, both for new product development and preparing the facility for production. These are the main factors to consider. In terms of volume for the fourth quarter, it ultimately hinges on the number of production days available during this period. With the holidays approaching, we anticipate fewer production days, which is a key driver alongside the other factors we've discussed.

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

I'm wondering if you could just talk about the margin opportunity in fire & emergency. So pre-COVID, you folks were 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 the levels of outstanding performance that you folks were at pre-COVID?

As we consider the situation, for core fire trucks, we've discussed the margin, and there's no reason our products can't return to prepandemic levels with our current pricing. We need to tap into that higher price backlog. As the supply chain keeps improving, we'll see increased throughput. Additionally, we've mentioned the impacts of AeroTech. Again, those strong EBITDA margins will be accompanied by some depreciation and amortization. However, we're confident, as we've stated in our Analyst Day targets, that this is a business with solid double-digit growth potential over time. We're excited about the growth opportunities ahead.

Super. And you folks have some great analytics with your telematics installed base. So I'm wondering if you could just tell us for access 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? And 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?

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. This year, the industry is doing a better job of getting products into the hands of customers as 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 fleets. And I think you're starting to hear some customers talk about that. But even with the 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.

Our next question comes from Nicole DeBlase with Deutsche Bank.

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 constraints reducing? Or have you kind of like flatlined, I guess, what you've seen in the second quarter?

At this point, Nicole, 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 bearing volume.

Okay. Got it. Makes sense. Can you discuss whether this quarter represents the peak of the price-cost tailwind from a margin perspective? Or do you expect the price-cost tailwind in the second half of the year to be similar to what you've experienced or what you observed in the second quarter?

I want to caution that while the year-over-year price-cost situation is favorable, it has reached a balance. We were lagging last year, but now we're more neutral. In most of our businesses, we expect to see similar price-cost dynamics for the rest of the year, except for a part of the Vocational segment involving fire trucks, where there will be more significant pricing adjustments next year to restore full balance.

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

I wanted to ask about the Defense margin. A couple of questions. Your full-year guidance implies that the second half will return to that single-digit range. I'm trying to understand if you have changed your medium-term margin guidance. It seems like now you are looking at mid- to high single digits. Is that a decrease from before? Is it just a result of the JLTV program ending? And does that include the USPS ramp?

Sure. First of all, from an expectations perspective, our expectation is that we do expect some orders in the second half of the year, which will generally lead to positive estimates upon completion or adjustments. This contributes to a bit of improvement. We also anticipate a stronger aftermarket mix in the latter half of the year, with orders playing a role in that. Regarding the mid- to high single digits, this reflects what you would categorize as the tactical wheel vehicle or core defense business, excluding NGDV. NGDV is a significant multibillion-dollar program that adds to our work. However, focusing exclusively on the defense segment, it amounts to over $1 billion. It's important to note that this isn't necessarily post-JLTV, so consider this $1 billion-plus in the context of 2025 and beyond when thinking about those mid- to high single digits.

We've observed a healthy growth rate globally, although domestic China has experienced some contraction. Conversely, other areas in Asia have performed strongly, and Europe has exceeded our expectations in terms of growth. We anticipate continued strength in the Access markets moving forward. We closely monitor various metrics and collaborate with our customers, who are adept at forecasting market trends. When we analyze the aggregate of nonresidential construction metrics over a five-year span, the outlook remains robust. The Dodge Momentum Index is at a high level, and the ABI is still above 50, both of which are encouraging signs. Additionally, recent legislation like the CHIPS Act and the IRA indicates that mega projects will contribute to sustained growth in the Access equipment markets for the foreseeable future.

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

Can you share insights on how widely the orders in the access business were distributed among the customer base in North America? There seems to be some concern that larger customers may be more cautious due to their Capital Expenditure messages for the rest of the year, and that the rest of the industry might be overestimating fleet additions. I'm interested in understanding the range of orders from the last quarter and your thoughts on the industry's potential for excessive fleet growth.

We are witnessing very strong demand from both our larger customers and independent rental companies, leading to a solid mix of orders this quarter. However, it's not just about the orders we've secured in this quarter; we also have excellent visibility into future requirements that exceed our current bookings, and we will continue to secure those orders in the latter half of the year. Our demand visibility for next year is exceptionally strong.

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 in 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. So they're not selling off any of their old fleets because they need it. 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.

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 curious what your reaction to that is.

We've seen exceptionally strong demand for our products and are currently booking orders for the latter half of 2024. This level of visibility in Access is unprecedented for us. The market and demand are robust. Regarding pricing, we aim to maintain fairness and openness with our customers. However, it's important to note that input costs remain significantly high overall. While inflation has shown some signs of moderation recently, we have not experienced deflation. Although there may be minor instances of relief, input costs continue to be elevated. We have strong demand but will consistently strive to be fair in our pricing strategy.

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

John, you sound great on visibility right now. 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 five or six quarters? Just trying to gauge your ability to grow from here.

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 would happen, but we always knew this performance was there. And that's why we never came off our 25 Analyst Day guidance. We always maintain that, yes, this is what we see achieving in 2025. And we still see that today. So we still see a lot of tailwinds in our business. We talked about demand in the Access segment, 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 products. We've got new acquisitions from Hinowa to AeroTech, which are going to provide benefits for us. 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.

Understood. That's great color. 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?

I think the situation will vary by end market. For instance, the Postal Service, which has been quite public about their transition, started with only 10% of their orders being battery electric vehicles (BEV) compared to internal combustion engine (ICE) vehicles. Now, shortly after, they have reached 75% BEV units versus ICE units, showing a significant acceleration before we've even begun producing and delivering units. Some markets may take longer to transition. There is considerable interest in our fire and emergency vehicles, particularly the Volterra fire trucks, but these trucks typically remain in service for around 20 years, meaning the growth potential will extend for a long time. Additionally, there’s strong interest in our electric refuse collection vehicles (eRCVs). It’s tough to predict the pace at which fleets will electrify, but I can say that each time we launch an electric unit, it carries a higher price point. Our customers benefit from a favorable total cost of ownership, and we maintain healthy margins on these products.

Steve, another exciting aspect is that when considering the eRCV, it's important to think of it similarly to our Pierce custom fire trucks. In many instances, we're not simply purchasing the chassis; instead, we will be involved in the entire truck as we increase volume, which includes our purpose-built chassis. You can see the margin profile and the opportunities we’ve historically experienced with fire trucks, and we perceive eRCV in a comparable way.

Understood. And just a follow-up to my first question to confirm the EPS range for 2025 was $11 to $13, is that right?

Yes, right.

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.

All right. Thanks, Christine. Thank you for joining us today, everybody. We're pleased with a very strong first half of 2023 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 factory in Shippensburg, Pennsylvania on August 23. Investment professionals who are interested in seeing our world-class manufacturing operations up close and have not yet made plans to attend, please reach out to Victoria or myself, and we'll be happy to get you the information. Thanks, everybody, and have a great day.

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.