Oshkosh Corp Q1 FY2024 Earnings Call

Greetings, and welcome to the Oshkosh Corporation First Quarter 2024 Results Conference Call. Please note that 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 the 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.

Good morning, and thanks for joining us. Earlier today, we published our first quarter 2024 results. A copy of that release is available on our website at oshkoshcorp.com.

Thank you, Pat, and good morning, everyone. I'm pleased to announce another strong quarter with year-over-year growth in revenue and earnings. This solid start to 2024 is a testament to our Innovate, Serve, Advance strategy and the hard work of our people as we continue to launch new innovative products and technologies while adding capacity for several of our businesses. For the first quarter, we achieved an 80% increase in adjusted operating income, leading to an adjusted operating margin of 10.8% and adjusted EPS of $2.89. These results were led by outstanding business execution across our segments and supported by the benefit of acquisitions. We continue to focus on execution. Importantly, we're driving improvements in our businesses, contributing to strong performance in the quarter and supporting our positive outlook for the remainder of the year. We are also focused on becoming a more resilient company throughout the business cycle while driving long-term growth, and we are confident we're making meaningful progress. Our confidence is fueled by several key factors, including significant investments in market-leading technologies that we expect will drive demand for the next decade and beyond; robust backlogs that provide strong visibility; the ramp-up of several new innovative products, including Next Generation Delivery Vehicles and the benefits of strategic acquisitions such as AeroTech. Based on our first quarter results, along with solid execution and healthy demand for Oshkosh products, we are raising our full year outlook for adjusted EPS to be in the range of $11.25 per share. Notably, our current expectations place us within the range of our Investor Day target of $11 to $13 per share a year early and demonstrates our ability to continue to drive accelerated growth and shareholder value. Please turn to Slide 4, and we'll get started on our segment updates. Our team at Access is performing well. For the quarter, Access grew revenue by 3.7% and delivered an adjusted operating margin of 17%. We continue to invest in new products and technologies, including Moments Of Autonomy and ClearSky SmartFleet, our next-generation IoT platform, enabling 2-way real-time communications that we believe will contribute to long-term success in the access market. Last quarter, we told you that we expected customer order timing to begin normalizing leading to lower orders in the first half of 2024 relative to both the prior year and the second half of the year, given that 2024 was largely booked as we entered the year. This remains the case although healthy orders of $940 million in the first quarter exceeded our expectations. We continue to expect that the majority of 2025 orders will be booked in the second half of 2024, particularly in the fourth quarter, which more closely aligns with historical order timing. Demand for aerial work platforms and telehandlers in North America continues to be solid, supported by infrastructure investments, mega projects and industrial onshoring projects as well as elevated fleet ages. Moving to operations and supply chain. Our team continued to make progress with supplier on-time deliveries in the first quarter, which were in the 85% range. The combination of improving supply chain deliveries and our continuous improvement initiatives is contributing to increased throughput in our manufacturing facilities. We are progressing well with our plans to repurpose the Jefferson City, Tennessee facility for telehandler production. We expect a meaningful ramp in telehandler production capacity in the facility for 2025 which will help us capitalize on demand for our equipment. Importantly, we believe there are many opportunities to continue to drive growth and strong performance at Access over time. Please turn to Slide 5, and I'll review our Defense segment. As we have discussed, 2024 is a significant transition year for our defense segment as we are winding down production of domestic JLTVs during the year. Simultaneously, we will be ramping up production of the U.S. Postal Services Next Generation Delivery Vehicle or NGDV. This month, the first NGDV units came off the production line in Spartanburg, South Carolina. Our team has spent a tremendous amount of time planning and executing this program launch, and I'm pleased with our progress. As a reminder, we expect to increase vehicle production throughout 2024 and 2025 and exit 2025 at full rate production. We continue to support many defense programs, including the FHTV and FMTV programs. We are working on contract extensions for both of these programs with plans to complete the extensions over the next several quarters. Finally, I want to share an outstanding technical achievement that our teams recently accomplished with the United States Army. We successfully completed airdrop testing of our low velocity air drop or LVAD FMTV A2 cargo truck at Fort Liberty in North Carolina. Essentially, the program allows the vehicle to be parachuted from a plane and operational on the ground within 30 minutes. We expect to begin receiving orders for LVAD units in 2025. Let's turn to Slide 6 for a discussion of the Vocational segment. Our Vocational segment delivered strong year-over-year revenue growth in the first quarter of 37% including the benefit of $176 million of sales at AeroTech, which we acquired in the third quarter of 2023. We continue to invest in electrification programs as well as autonomous functionality to enhance ease of use and productivity for our customers. Given strong demand for fire trucks and our extended backlog, production throughput continues to be a meaningful opportunity for the foreseeable future. Moving to AeroTech. We're pleased with our integration progress to date and the business is performing well. Strong financial performance, robust customer demand and exciting new products like the AmpCart mobile charging station, which supports sustainable operations at airports, all highlight the reasons we are so pleased with this acquisition. With that, I'm going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2024.

Thanks, John. Please turn to Slide 7. Consolidated sales for the first quarter were $2.54 billion, an increase of $276 million or 12.2% over the prior year quarter. The increase was driven primarily by the benefit of $176 million of AeroTech sales in the Vocational segment as well as increased volume in all three segments and the benefits of improved pricing. Adjusted operating income increased $124 million over the prior year quarter to $275 million or 10.8% of sales, a 410 basis point improvement versus the prior year. The improvement in adjusted operating income was largely driven by improved price-cost dynamics, favorable mix, increased volume, and the benefit of AeroTech results. Adjusted earnings per share was $2.89 in the first quarter versus $1.63 in the prior year. During the quarter, we repurchased approximately 130,000 shares of common stock for a total of $15 million. Please turn to Slide 8 for a review of our updated expectations for 2024. With our strong start to the year, we are revising our full year outlook. On a consolidated basis, we are estimating 2024 sales and adjusted operating income to be in the range of $10.7 billion and $1.075 billion, respectively, which are up from our prior expectations of $10.4 billion and $990 million, respectively. We are estimating adjusted earnings per share will be in the range of $11.25 versus our prior estimate of $10.25. At a segment level, we are estimating Access sales and adjusted operating margin to be in the range of $5.4 billion and 15.5%, respectively, up from our prior expectations of $5.2 billion and 15% due to improved production throughput and improved sales mix. Turning to Defense. We continue to expect sales of approximately $2.1 billion and an adjusted operating margin of approximately 2.5%. We expect Vocational sales and adjusted operating margin will be in the range of $3.2 billion and 11.5%, respectively, up from our prior expectations of $3.1 billion and 11%, respectively. Our estimate of corporate expenses is approximately $190 million, an increase of $10 million versus prior expectations as a result of higher incentive and stock-based compensation expense versus previous expectations. Our expectation for tax rate is now 24%, a modest decrease versus our prior expectations of 24.5%. Our expectation for share count is now 65.8 million shares. And finally, our expectations for CapEx and free cash flow remain unchanged. Looking to the second quarter, we expect adjusted EPS in the range of $3 per share, which is up versus the prior year and the first quarter. We expect sales to be up approximately 15% versus the prior year, inclusive of the benefit of AeroTech sales.

We continue to focus on execution, supporting our customers and empowering our people as we grow and strengthen our business. We raised our expectations and now believe we can achieve our Investor Day targets for 2025 revenue and EPS, one year earlier than we originally expected, which is a testament to our team and our strategy. We are investing in new products and deploying technologies that support our customers and keep our company at the forefront as leaders in our industries. This is an exciting time for Oshkosh, and we look forward to continuing to execute our growth strategy to drive shareholder value. All right, Pat, let's get started with the Q&A.

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

Can you talk, I guess, maybe a little bit of more of a longer-term question for you. I mean there's a number of kind of EV next-gen programs out as you're moving kind of through this preproduction phase into more of a meaningful revenue generator. It sounds like that will be more into early 2026. Just to clarify that. And then how should we think about this from a margin perspective from you all? Is it similar gross margins, but higher gross profit dollars? Just trying to get a framework for how this could evolve?

Sure. Stanley, I can take that one. Just thinking about the ramp of NGDV. So what we talked about this year is we're going to have some startup costs, so it will be about $0.35 drag. As we get into next year, there's going to be a pretty significant ramp of volume. So we're going to start getting the margins, and those will start to follow. By the time we get to 2026, we'll be at full rate production, well north of $1 billion of revenue from the program. And then you'll see those good solid margins. And what we've talked about from a margin perspective, really on that program, is to be better than our traditional tactical wheeled vehicle margins.

Yes, and Stanley, that Mike just commented on the NGDV for the U.S. Postal Service. That's our biggest electrification program. But we have electrification programs in other segments as well. You look at our Vocational segment, with the electric fire trucks, the electric airport rescue firefighting vehicles, the electric refuse and recycling vehicles, and there are others as well. Those are all healthy margins. The adoption rate is different based upon the end market, but these will all provide healthy long-term growth drivers as over time, we see municipal fire stations, and we see our customers in the refuse and recycling segment upgrade fleets to better, more modern vehicles over time. So we look at it as a long-term move for us. It's not something that's going to happen overnight in some of these other segments.

That's great. And then, I guess, we hear a lot about stimulus for construction and other sorts of things. But there's a considerable amount allocated for airports, too. Can you talk about kind of within the AeroTech portfolio, how much more product do you need to potentially get refreshed? It sounds like you have some mobile charging stations coming down the line. Just curious kind of how you see that business ramping and evolving now that you have maybe a little more R&D firepower to put behind it?

Yes. We are in our infancy in electrification. A lot of the electrification that's in the airport markets today with the ground service equipment is really lead acid. We're going to continue to move that to lithium-ion, thus the AmpCart, because you have to have a way to repower vehicles efficiently on the tarmac of an airport. I think our AeroTech people have been doing a phenomenal job with autonomous functionality for cargo loading and other applications, and we're going to continue to accelerate it in the electrification space. But in electrification for ground service equipment, we're really, really early.

And Stanley, we are seeing really strong order intake in that business, and we expect that to continue for the reasons you mentioned.

I have two questions. First, the margins for Access equipment in the first quarter were outstanding at 17%. Based on your guidance, it seems that margins for the remaining three quarters will be lower compared to the previous year. I'm trying to understand why this would be the case since it appears that top-line growth should be better than what we experienced in the first quarter. Could you clarify that for me?

Sure. Thanks, Jamie. I'll let Mike start with the Access question and then I'll go on the Postal question.

We experienced a favorable mix in the first quarter, which significantly contributed to our margins. As mentioned in our previous call, we anticipated an increase in new product development spending of approximately $20 million for the year. Additionally, we have around $10 million in start-up costs related to Jefferson City, Tennessee, which will mainly occur over the next three quarters. This shift in mix and the timing of our spending are the primary factors affecting the difference in margins.

Yes. And with regard to last mile delivery, Jamie. So first of all, I want to say that we are intensely focused today executing the NGDV program for the United States Postal Service and modernizing their fleet. We just went into production, started to produce vehicles, and I want to make sure to make this clear. This is the largest fleet of last mile delivery vehicles in North America, probably in the world. So there's no bigger opportunity that we could execute on than the one that we've already got. And it will drive really nice growth for us for a long time. Of course, we're talking to many other service providers in last mile delivery. But we're one step at a time. We're going to make sure we make the NGDV successful.

I wanted to ask in Fire & Emergency. Obviously, not a reportable segment anymore, but pre-COVID that business ran in the mid-teens margins. And I'm wondering if you can comment, given the pricing that's in backlog? What's the potential for that business to go into the high teens in this cycle with not only pricing but also logistics costs normalizing? Can you just talk about the opportunity there, please?

Sure. We're very excited about the progress we're seeing in Vocational. We talked about when we combined the segments that it could be a $12-plus billion segment, operating margin with over $3 billion of revenue, reiterated that with the AeroTech acquisition. And you see the great progress we're making on that with our quarterly results and also our outlook. We believe we're just at the beginning of our journey to continue to drive enhanced margin opportunity in this segment, and see a lot of opportunity there.

And Jerry, just in general, I'll tell you, we really have an outstanding outlook for our Vocational segment. We've got healthy markets, we've got really good backlog, strong demand. We continue to execute on long-term opportunities with technology application. We think this is a really healthy, stable business for us. Yes. It's interesting that they have consistently increased the focus on battery electric vehicles, which we believe is beneficial and is what the Postal Service desires. For the initial 50,000 units, they plan to have about 75% battery electric and approximately 25% internal combustion. Looking ahead, while we cannot say for certain, I anticipate they will likely boost the proportion of battery electric vehicles even more, potentially reaching 100%.

Maybe you can help us think through the cadence in Defense. I mean there's a lot going on here. You have the JLTV program that's winding down. You have NGDV that's ramping up. So as we're thinking about the cadence of revenue through the year and what's implied in the guidance? And what kind of carries into 2025? Can you help us understand this dynamic here? How we should think about revenue? And then also associated with this, what should happen with margins here as NGDV ramps up?

Yes. Mig, it's John. I'll start, and Mike may want to add a few things to my comments. There's a lot to discuss regarding the Defense segment as it undergoes a significant transition. We are still producing JLTVs through 2024. In 2024, we are currently in production with the NGDV, the postal truck, but that is low-rate production until 2024, after which it will significantly increase in 2025. Once we reach 2025, production of the domestic JLTVs will cease, but we will be ramping up the production of the postal NGDV. So we expect that the revenue we create in '25 through the Postal NGDV will exceed what we have gone out of production with on NGDV in terms of revenue. Defense will continue to drive better margins as they get to sole-sourced contracts for many of the vehicles that we have today. And that allows us to reset price to the realities of where—what inflation has done to input costs. So that, as we get those sole-source contracts over the next 18 months, that's a good thing for the margins in the defense business.

No, that's not our expectation. Again, we would expect the revenue. There's about $700 million of domestic JLTV revenue we expect this year. We expect NGDV to be greater than that next year. So really, we should return to growth next year, and 2026 should see a meaningful step-up even from there.

I wonder if we could go back to the Access margin. I'm just trying to think about how the year progresses here. Starting off as strong as you are, but obviously, having to come down to meet your full year guidance. Is that sort of a step down and then sort of flattish for the remaining three quarters? Or do we kind of trend down and the exit rate might be significantly lower? I'm just trying to think about that cadence.

No, we certainly don't see growth slowing in that business at this time. There is strong demand. As we mentioned in our last call, there is definitely more seasonality to our deliveries as they have normalized. I expect our strongest quarters to be the second and third quarters, and then the fourth quarter is likely to be lower as we enter the winter months. This will return us to a more traditional cadence. As we see within the month, you see more activity as you're approaching the springtime. So certainly, March from a shipment standpoint is typically more robust. So it's really just a return of seasonality. And again, I think the big drivers— the mix was a big driver this quarter. And then I think the timing of some of those investments I mentioned before factor into it as well.

I just want to talk about your CAT telehandler supply partnership. That should be ending, I believe, at the end of this year. So can you talk to your expectations for renewal of that relationship beyond 2025? And then just any potential implications from a price or profitability perspective?

Sure. Yes. Good to hear from you, Angel. So I want to first say, CAT's been a long-term partner of ours, and they've been a great partner. I'm not going to comment on the contract specifically. What I will say is that JLG is the premier provider of telehandlers in the industry. And if we had more capacity, we would be shipping a lot more telehandlers today. We are really paced by the capacity that we have. So that's why we're increasing capacity. We see new markets opening up. That's one of them. That is a real opportunity today and will continue to grow over time. So we expect that we will continue to grow our share and our revenue in the telehandler marketplace for the foreseeable future.

I would say right now, it's early in the year. And I think exiting—we have a little bit more working capital exiting the first quarter. So that's something we're going to continue to monitor throughout the year. But it is something that certainly we expect to be a good strong free cash flow generator. And so really, it comes down to timing in a lot of cases with working capital.

So I have two quick questions. One is the strength in Vocational, excluding AeroTech, can you comment on the price versus volume growth you saw in the quarter?

Yes. We're certainly seeing the benefits of improved price-cost dynamics. You'll see in the Q that it is really the biggest driver in the quarter, about $30 million of our operating income year-over-year benefit was really price-cost, which is what we expected, and that's going to continue to be a nice strong driver as we look into the future.

Got it. That's very helpful. And then on Access equipment, I think orders were down, but still better than what you initially expected. But could you provide some color on orders in North America versus Europe or other regions?

Yes, Tami. Access has been running at a really healthy clip, and we expect that to continue due to all the demand drivers that we talk about regularly. With regard to the global outlook, U.S. is our biggest market, of course, and the U.S. is really healthy. When you look at our guide, you see that we're going to increase our revenues for the year in the high single digits, I think 8%, 9% in terms of the revenue growth. The orders across the globe are positive and healthy. The only area that has turned not so good is Europe. Our European business this year is down and we'll continue to invest in Europe for the long-term future. But Europe is the one outlier for us today when you look at the global market. Asia is doing well. South America, Latin America is doing well. That's kind of the global outlook.

Maybe just on Vocational. You talked about price-cost being a big factor there. I guess you guided to 11.5% margin for the full year. I know that's up versus prior guidance, but it does imply like a step down versus what you achieved in the first quarter. So can we just talk about the puts and takes there going from Q1 to the rest of the year?

Sure. I would say very similar, Nicole, to Access. The timing of some of the investments we're making in the business are occurring more Q2 through Q4 so Murfreesboro, Tennessee, some of the other new product development spending, some of our integration costs. We had a bit in Q1. So we talked about that a minute ago, but there's more for the rest of the year.

So my questions on order cadence and recognizing that you've already booked out '24. Like how should we think about orders over the next couple of quarters? Is it more typical seasonality? Are you going to see more of the '25 orders in the fourth quarter? Just trying to think through that.

So right now, when customers place orders, they are primarily placing orders for units they're going to receive in 2025. And so it makes it very difficult on our customers to have such— in the Access equipment market when we have such big backlogs and therefore longer lead times. So that's why we're saying, and we talk with our customers all the time about this, and when is the best time for them to be placing orders for the future. And right now, as we're booked out through in '24 and into '25, they're focused on finishing up their 2024 and then starting to order for 2025 a little bit later in the year.

As you get closer to volume ramp on the postal truck and you've gotten obviously a little more familiar with the BEV production process. Can you give us an update where you're comfortable thinking about profitability for that program?

You want to answer it, Mike?

Yes. I would say, David, our view hasn't changed. I think ultimately, we said by 2026, we'll be at full rate production, we would expect stronger margins in our traditional tactical wheeled vehicle margins. This year, we'll have some start-up costs, so it's not—and volume is relatively low. So next year, we see a really strong ramp, so it's going to be between that.

Thanks, Christine. And thanks to everybody for joining us today. We're pleased with our strong start to 2024. We look forward to speaking with you at a conference or one of the trade shows where we will showcase our technology and mobility. Please reach out to us if you have any follow-up questions, 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.