Oshkosh Corporation (NYSE:OSK) Q1 2024 Earnings Call Transcript

Oshkosh Corporation (NYSE:OSK) Q1 2024 Earnings Call Transcript April 25, 2024

Oshkosh Corporation beats earnings expectations. Reported EPS is $2.89, expectations were $2.26. Oshkosh Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Oshkosh Corporation First Quarter 2024 Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Patrick Davidson: 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. 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.

John Pfeifer: 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 provides 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 and 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 are transitioning the facility throughout 2024 as Defense Fabrication Work moves back to Oshkosh. 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. We look forward to a long and successful partnership with the U.S. Postal Service as we modernize their fleet over the next 10 years. As a reminder, we expect to increase vehicle production throughout ’24 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. We are also the supplier for the Stryker Medium Caliber Weapon System, a program which has contributed to the diversification of our Defense business beyond tactical wheeled vehicles.

And we are in the midst of the Robotic Combat Vehicle development program which demonstrates our broad technical capabilities in autonomy, connected vehicle systems and mobility among others. 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 — 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. Demand remains solid for our McNeilus refuse and recycling collection vehicles. Customers are enthusiastic for our purpose-built electric Volterra ZSL zero-emission vehicles and test vehicles are performing well in the field. As you know, we will be ramping up production of these units at our factory in Murfreesboro, Tennessee. And earlier this month, we completed our first preproduction pilot unit in the facility, representing an important program milestone Customers are excited by the opportunity to reduce their carbon footprint while realizing an estimated 14% improvement in total cost of ownership.

We look forward to the WasteExpo show in 2 weeks where we will showcase these game-changing vehicles and their key features. 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.

Michael Pack: 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 3 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 operating income exceeded our most recent expectations primarily due to higher volume at Vocational, favorable customer mix at Access and lower spending.

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.

Compared to the first quarter, we expect customer mix to moderate new product development spending to increase for the remaining quarters in 2024. 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. Increased chassis availability and improved price cost dynamics are contributing to the improved outlook. 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. With that, I’ll turn it back over to John now for some closing comments.

John Pfeifer: 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, 1 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.

A – Patrick Davidson: Thanks, John. [Operator Instructions]. Operator, please begin the question-and-answer period of this call.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Stanley Elliott with Stifel.

Stanley Elliott: 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?

Michael Pack: 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 cost, so it will be — about — between that and NPD, we said last quarter about a $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 with that will start to follow. And 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.

John Pfeifer: 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’s others as well. Those are — the margins 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. 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.

Stanley Elliott: 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 kind of 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?

John Pfeifer: Yes. Well, I think on the electrification front, we’re kind of in our infancy. A lot of the electrification that’s in the airport markets today with the ground service equipment is really lead acid. So kind of the old-fashioned electric, and 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. And that’s what the — that’s kind of what the AmpCart does. 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 there as well as in the electrification space. But in electrification for ground service equipment, we’re really, really early, early innings for that.

Michael Pack: And Stanley [indiscernible] and orders, we’re seeing really strong order intake in that business, and we expect that to continue for the reasons you mentioned.

Operator: Our next question comes from the line of Jamie Cook with Truist.

Jamie Cook: I guess just two questions. One, just the margins for Access equipment in the first quarter were exceptional at 17%. I think based on the guide, it implies your margins for the remaining 3 quarters would be below, I mean, prior year. And I’m just trying to understand why that would be the case with — it looks like based on your guide, the top line should be — the top line growth should be better than what we saw in the first quarter? So if you could help me on that. And then, John, I guess the question specifically for you with Postal Service starting to ramp more significantly this year and next year. Can you just talk about conversations you’re having with customers around opportunities on last mile delivery? I’m wondering whether we can start thinking about adding more of — benefiting from the Postal Service win and expanding your market share in last mile delivery?

John Pfeifer: Sure. Thanks, Jamie. I’ll let Mike start with the Access question and then I’ll go on the Postal question.

Michael Pack: Sure. On the Access margins, as I mentioned in my prepared remarks, we did see a favorable mix in the first quarter. That was certainly a driver of the margin. We also did see — we talked about on the last call expecting to see higher new product development spending of about $20 million for the year. We also have roughly $10 million of Jefferson City, Tennessee start-up costs. A lot of those are really going to — those costs are going to be largely occurring in the next 3 quarters. That mix moderates. So that’s really — it’s really a mix and the timing of that spending that’s driving the margin difference.

John Pfeifer: 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. I think everyone knows it. 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. And I think in the future, we may have some other things to talk about. But right now, we are really focused on this — making sure the U.S. Postal Service is very successful with this modernization.

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

Jerry Revich: 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?

Michael Pack: 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. And we’re still — we’ll continue to benefit from the segment synergies to bring the segment together, AeroTech synergies, as you mentioned, we have pricing and backlog. We have a lot of exciting new products coming out that will be margin and enhancing. So 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.

John Pfeifer: And Jerry, just in general, I’ll tell you, we really have an outstanding outlook for our Vocational segment. I’d say that long term. 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.

Jerry Revich: And John, can I ask on the U.S. postal truck, you had mentioned in your prepared remarks on track to exit ’25 at the full production run rate. Can you update us on what the anticipated mix is at full production between EV and ICE as we exit ’25?

John Pfeifer: Yes. It’s interesting, they’ve continuously — as I probably said before, they’ve continuously increased the mix towards battery electric vehicles, which we think is great, and the Postal Service wants. So they’re about — so for the first 50,000 units, they’re going to do about 75% battery electric and about 25% internal combustion. When we go beyond that, so that will take us in the first few years of the program. Beyond that, I expect — we don’t know for sure, but I expect they’ll yet even increase the battery electric even more, maybe even go to 100%. But this is going to be mostly zero-emission battery electric vehicles. And reminding you, this is the first time that the Postal Service or anyone in last mile delivery has had a purpose-built vehicle, adding the productivity benefits that we’re adding with this vehicle. So it’s really a big step forward for the entire industry.

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

Mircea Dobre: 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?

John Pfeifer: Yes. So I’ll — Mig, it’s John. I’ll start. Mike may want to add a few things to my comments. A lot we talk about Defense going through a big transition and Defense is going through a big transition. We still have production of JLTVs through 2024. So when we get into 2025, and by the way, in 2024, we’re in production today with the NGDV, the postal truck. But that’s low rate production through 2024, and it starts to really increase in 2025. So as you get into 2025, JLTV for the domestic JLTVs goes out of production, but we’re ramping 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. Giving you a little bit higher perspective of what’s happening in the Defense world.

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 — of 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. We’ve also won some smaller combat vehicle programs and are buying for other combat vehicle programs. These are high priority for the DoD. So the margins are good. and we’ve got an improving international landscape in terms of lots of countries that are increasing their Department of Defense spending as a percent of their GDP. That’s also a bit of a good outlook for improving the defense side of the business.

But ’25 is the year where it really changes from JLTVs to NGDV.

Mircea Dobre: And just to follow up on this, to be clear, we shouldn’t expect some sort of a material drop in revenue or maybe yet another decline in operating income in 2025 in Defense?

Michael Pack: 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 — we’ll start returning to growth next year and 2026 should be, you’ll see a meaningful step-up even from there.

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