Oshkosh Corporation (NYSE:OSK) Q4 2023 Earnings Call Transcript

Oshkosh Corporation (NYSE:OSK) Q4 2023 Earnings Call Transcript January 30, 2024

Oshkosh Corporation beats earnings expectations. Reported EPS is $2.56, expectations were $2.17. 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 Fiscal 2023 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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, sir. You may begin.

Pat Davidson: Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 2023 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 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.

John Pfeifer: Thank you, Pat, and good morning, everyone. I’m pleased to announce a strong finish to 2023, with significant year-over-year growth in revenue and earnings in the fourth quarter, leading to a full year adjusted earnings per share of $9.98. For the fourth quarter, we grew revenue by 12% and adjusted operating income by 54%, leading to an adjusted operating margin of 9.7% and adjusted EPS of $2.56. Demand for Oshkosh products remains robust, and we are pleased with strong order activity in the quarter, which led to a record backlog of $16.8 billion and confirmed our previous expectation that we would largely be booked for 2024 as we enter the year. I’ll provide more details on demand by business in our segment updates.

Importantly, we believe Oshkosh is well positioned for long-term growth supported by significant investments in market-leading technology, solid market dynamics in key end markets, strong visibility provided by our backlogs and the ramp-up of next-generation delivery vehicle production as well as the benefits of strategic acquisitions like AeroTech and Hinowa that we completed this past year. During the quarter, we were named to the Dow Jones Sustainability World Index for the fifth straight year. Companies must be rated in the top 10% of their peer group for sustainable business practices to be considered for the index, and we were rated in the top 2% of our global industrial group by Dow Jones. This is a particularly meaningful accomplishment because it demonstrates that we’re driving profitable growth in a sustainable way, which is good for our people, good for the communities in which we work and live, good for the environment and good for our shareholders.

Please turn to Slide 4 for a review of our full year highlights. I’m pleased with our outstanding performance in 2023 as our teams persevered to overcome the impacts of supply chain constraints and inflation to deliver for our customers. We believe the actions we have taken over the past several quarters to operate successfully in a constrained environment will enable us to perform as a more resilient company well into the future. I want to take this opportunity to thank our 17,000 team members for all of their contributions that drove our strong performance. Moving to full year 2023 results, we grew revenue by 16.6% to $9.7 billion and grew adjusted operating income by 129% to $909 million leading to adjusted earnings per share of $9.98. In addition, we announced several important new products during the year, including the revolutionary new all-electric Volterra ZSL refuse and recycling collection vehicle.

We are investing in new capacity across the company to support continued growth, including Spartanburg, South Carolina for NGDV, Murphysboro, Tennessee for Volterra ZSL production; and Jefferson City, Tennessee for increased telehandler capacity. We also expanded into the growing airport and air transportation passenger support markets with our recent acquisition of AeroTech. As a result of continued strength in our end markets, robust backlogs, strong fourth quarter performance and our positive outlook, I am pleased to announce that we are initiating full year 2024 adjusted EPS expectations to be in a range of $10.25. We also raised our quarterly dividend by $0.05 per share to $0.46 per share, representing an increase of 12.2%. This is the tenth consecutive year that we have announced a double-digit increase to our cash dividend.

Our dividend growth reflects our robust cash flow generation as well as the board’s confidence in the strength of our business and our ability to continue to drive profitable growth into the future. Please turn to Slide 5, and we’ll get started on our segment updates. I’m very pleased with our exceptional execution at Access in 2023. The team delivered another quarter of strong performance with year-over-year revenue growth of 7.1% and adjusted operating margin of 14.4%. These strong results led to a full year revenue growth of over 25% and a 15% adjusted operating margin, representing an impressive 700 basis point improvement. Importantly, we believe there are opportunities to continue to grow the Access business over time. Demand for aerial work platforms and telehandlers remain strong, supported by infrastructure investment, mega projects and industrial onshoring projects, as well as elevated fleet ages.

Our orders for the fourth quarter exceeded our expectations at $1.7 billion. This yielded a 1.5 book-to-bill ratio for the fourth quarter, leading to a 1.1 book-to-bill ratio for the second half of the year, also exceeding our expectation of 1.0. With 2024 largely booked and supply chains and product availability normalizing, we expect order patterns to also normalize. Therefore, we expect 2025 booking activity will largely occur during the second half of 2024, which is reflective of more typical seasonality in a healthy Access Equipment environment. As such, we expect order activity to be lower in the first half of the year compared to 2023. As we’ve discussed in the last few calls, we are expanding telehandler capacity to support strong market dynamics and the significant opportunities we see in the North American agricultural market for our telehandlers.

We expect this capacity expansion to help us better support our customers, as well as drive further growth and strong financial performance. Work to repurpose our Jefferson City facility to telehandler production is progressing well. We expect the project to be complete in 2024 and build rates will increase as additional production lines come online. Please turn to Slide 6, and I’ll review our Defense segment. Our Defense team delivered an exceptional quarter with an adjusted operating margin of 10.6%. The strong results were driven by JLTV orders in the quarter, which included a favorable mix of trucks and kits. Domestic JLTV production will conclude in early 2025, but we believe we will continue to have opportunities to supply JLTVs to foreign allies through the direct commercial sale process in 2025 and beyond.

Oshkosh already has a great reputation among international customers who view our JLTV as the right solution to meet their protected mobility requirements. In addition to JLTV orders in the fourth quarter, we announced a contract valued at up to $342 million over a five-year period to deliver Medium Equipment Trailers or MET. The MET is a six-axle trailer designed to be pulled by the Oshkosh Enhanced Heavy Equipment Transporter with the ability to haul payloads up to 60 tons. We are scheduled to deliver the first trailers for testing in May 2024. Before I leave the Defense segment, I’m happy to report that the USPS’ next-generation delivery vehicle program is progressing well. We have been building test in the valuation units and remain on track to move into low rate production in April 2024.

Production is expected to ramp up throughout 2025, and with plans to achieve full rate production in 2026. Let’s turn to Slide 7 for a discussion of the Vocational segment. Our Vocational segment also delivered strong year-over-year revenue growth in the fourth quarter of 26% primarily driven by the benefit of $176 million of AeroTech sales. We are particularly pleased with Vocational’s full year adjusted operating margin of 9.7%, a 230 basis point improvement over the prior year. We are starting 2024 from a position of strength, and we expect improving supply chains, and strong pricing and backlog to support a solid 2024. With strong order rates and backlog, we continue to increase capacity for our municipal fire trucks to improve throughput at Pierce to support high demand.

We are confident that the investments we have been making in new products and production capacity will drive strong earnings growth in this segment. The AeroTech integration is progressing well, and the team delivered a strong finish to the year. We believe that robust demand and solid execution have positioned AeroTech for meaningful growth in 2024 and beyond. Passenger air traffic has rebounded to be in the range of pre-pandemic levels, and our outlook is positive. Our view for AeroTech is further bolstered by a strong, new product pipeline and ongoing synergy opportunities. Our team continues to build on its with international airports that are seeking to reduce their carbon footprint. During the fourth quarter, we booked key Striker Volterra electric ARFF orders with the Japan Ministry of Defense and Paris’ Le Bourget airport.

These revolutionary, new battery-powered ARFF units support lower carbon emissions in a responsible and sustainable manner, while delivering superior performance. When you combine these Volterra ARFF orders with our Pierce Volterra fire trucks and McNeilus Volterra ZSL refuse and recycling vehicles, you can understand why we are so enthusiastic about the long-term potential for our customers to electrify their fleets. With that, I’m going to turn it over to Mike to discuss our results in more detail and our expectations for 2024.

Mike Pack: Thanks, John. Please turn to Slide 8. Consolidated sales for the fourth quarter were $2.47 billion, an increase of $263 million or 12% over the prior year quarter. The increase was primarily driven by the benefit of $176 million of AeroTech sales in the Vocational segment, which was acquired in the third quarter of 2023, as well as improved pricing. Defense sales were also up in the quarter versus the prior year as a result of strong orders in the quarter, which drove a positive cumulative catch-up adjustment. Adjusted operating income increased $84 million over the prior year quarter to $240 million or 9.7% of sales, a 260 basis point improvement versus the prior year. The improvement in adjusted operating income was largely driven by favorable price cost dynamics, favorable mix, favorable cumulative catch-up adjustments at defense and the benefit of AeroTech results, offset in part by higher incentive compensation and SG&A expenses.

Adjusted operating income exceeded our most recent expectations primarily due to stronger results at Defense. Defense adjusted operating income benefited from stronger JLTV orders at a better mix, which led to more favorable cumulative catch-up adjustments. Defense also benefited from international drug commercial sales at favorable margins. Our strong adjusted operating income led to adjusted earnings per share of $2.56 in the fourth quarter versus $1.63 in the prior year. As expected, free cash flow was strong in the quarter, leading to full year free cash flow of nearly $275 million. Please turn to Slide 9 for a review of our expectations for 2024. We expect growth to continue into 2024. Demand is strong for our products as evidenced by our $16.8 billion backlog at December 31, 2023, and supply chain conditions have improved which we believe supports our outlook for growth.

On a consolidated basis, we are estimating 2024 sales and adjusted operating income to be in the range of $10.4 billion and $990 million, respectively. We are estimating adjusted earnings per share will be in the range of $10.25. At a segment level, we are estimating excess sales and adjusted operating margin to be in the range of $5.2 billion and 15%, respectively. Included in this margin expectation is an approximately $20 million increase in new product development investments versus 2023. Turning to Defense, we expect sales of $2.1 billion for the year. We expect adjusted operating margin to be in the range of 2.5%, down from 4.3% in 2023. We expect NGDV first year production ramp-up costs combined with increased NPD investments will total approximately $35 million.

We also expect an unfavorable product mix. As a reminder, NGDV production is expected to ramp up throughout 2025, and we expect to operate at full rate production in 2026. As such, we expect NGDV to be a meaningful contributor to defense sales and profitability in 2025 and beyond. We expect 2024 Vocational sales and adjusted operating margin will be in the range of $3.1 billion and 11%, respectively, representing solid growth in both sales and margin versus 2023. Our expectations include the full year benefit of AeroTech results, which are expected to contribute approximately $420 million of incremental sales versus 2023 at a double-digit adjusted operating margin. Our expectations also include an increase of approximately $15 million for Murphysboro start-up costs.

Our estimate of corporate expenses is approximately $180 million, in line with 2023 with higher new product development investments expected to largely offset lower incentive compensation costs. We expect a tax rate of approximately 24.5%, an average share count of approximately 66.2 million shares and CapEx of $300 million. We expect free cash flow of approximately $425 million, representing solid growth versus 2023. Looking to the first quarter, we expect adjusted EPS in the range of $2.25, which is up versus the prior year, but down versus the fourth quarter as a result of lower expected results for defense. We expect Access and Vocational sales and adjusted operating income to both be up sequentially versus the fourth quarter. As supply chains and production throughput continue to normalize, we expect a return of more typical seasonality in our Access and Vocational segments with the second and third quarters expected to be our highest quarters for sales and earnings.

I’ll turn it back over to John now for some closing comments.

John Pfeifer: We delivered strong results for both our fourth quarter and full year 2023 and our $16.8 billion backlog is a new record. Our positive outlook for 2024 is built on a strong foundation of demand, and we continue to invest in both new products and new capacity that we expect will drive continued profitable growth. We are in the process of integrating AeroTech into the company, and we are already seeing the considerable value it brings. And our USPS NGDV program is progressing well, and we will be starting low rate production in April. This is an exciting time for Oshkosh and we are confident that we will continue to drive growth and deliver enhanced shareholder value. Okay, Pat, let’s get started with Q&A.

Pat Davidson: Thanks, John. I’d like to remind everybody, please limit your questions to one plus a follow-up, and please stay disciplined on the follow-up question. After that follow-up, we ask that you get back in queue if you’d like to ask additional questions. Operator, please begin the question-and-answer period of this call.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre: Thank you. Good morning, everyone. I figured we would start maybe with Vocational. I appreciate all the detail on AeroTech, but maybe you can put a finer point on fire and refuse, how you think about growth specifically for those verticals, what’s embedded in the guidance? And I’m sort of curious, is there anything else in the supply chain at this point that is preventing you from sort of really accelerating the volume or production in fire? And yes, let’s start there.

Mike Pack: Sure. First of all, just talking a bit about Vocational overall with the sales growth that based on my prepared comments, ultimately the biggest driver of the volume increase north of $400 million, or about $420 million of that is related to AeroTech with the balance really being between fire and refuse. Now, the other piece to keep in mind there is, we did divest the rear discharge concrete mixer business. So that does decrease about revenue, about $50 million, so really organically about $150 million of revenue growth. I would say right now that we certainly have more capacity coming online Mig, and that’s going to help us. I think where our throughput is improving as supply chains improved in Appleton, which is our Pierce – largest Pierce plant.

We’ll have more capacity coming online. Over the course of the year with Murfreesboro, Tennessee, that will also be supporting our electric refuse collection vehicle production. So I would say right now there are some capacity constraints. Certainly, if supply chain improves, that will help.

John Pfeifer: Yes. Just a little bit more color Mig, on the fire and emergency business, when you look at our backlogs, we’ve got really strong backlogs across our businesses, but the strongest backlog we have, when you measure it in terms of how many months of backlog do we have is in the fire and emergency business, I means backlog is years. And so we’re continuing to increase capacity. This – you asked about supply chain. Supply chain is a lot better today than it was a year ago or a year and a half ago, but it’s still not perfect. Its – our on-time delivery is still kind of in the low-80s, I would say. So, we still have some constraint with supply base, but it is a lot better. I think more of the issue is getting to just continuing to prudently add capacity like Mike mentioned down we’re going to put fire trucks down in Murfreesboro because we’ve got the ability to do that alongside the electric refuse and recycling vehicles.

But both of those segments, fire and emergency and environmental refuse and recycling collection are really strong segments, strong demand. Both have a lot of desire for new electrified platforms, which we’re going into production with as we speak on both. So there’s a lot of optimism long-term in those businesses for us.

Mig Dobre: Understood. Then if I may follow-up on your comments here, if we’re sort of looking at what’s embedded in terms of volume for fire in 2024, is there any volume growth or is that still sort of on the come in 2025, 2026 as your adding capacity? And also, can you comment at all on margins here where we are relative to either prior peak or however you want to frame it? Thank you.

Mike Pack: Sure. I would say that from a volume perspective, there is a step up in volume and – in fire and emergency, but I would say its more backend loaded. And I – so we would expect that as we get into future years, we’ll see further step ups there. In terms of margins, I think we’re quite pleased with the progress we’re seeing. So we’re underlying. You have the strong fundamental margins in the fire truck business. We’ve talked a lot about the pricing we’re getting, and really and that that price cost dynamic is back to pretty much normal in 2024. We do have more price coming after that. So I would say that’s strong. We’re continuing to see strong margins growing in refuse and recycling. And AeroTech, of course, is already delivering double-digit adjusted operating margins, so guides 11%.

We’ve talked about the Vocational we viewed as a segment that can be 12% plus. So we see further runway in the future for the margin progression of this segment.

Mig Dobre: All right. Thank you.

John Pfeifer: Thanks, Mig.

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

Jerry Revich: Yes. Hi, good morning, everyone. I’m wondering if you could just talk about the puts and takes around excess equipment, margin outlook for 2024, really strong performance in 2023, and essentially guided to up 10 basis points on some modest sales growth. But logistics costs, I believe have been declining for you folks in that line of business. So I’m just trying to understand, is that some conservatism baked in the guide early in the year, or are there discrete headwinds that we should be keeping in mind relative to the strong performance in 2023?

Mike Pack: Yes. I would say ultimately the outlook for access pretty straightforward. I think we have a $200 million of revenue growth. And one thing to keep in mind is we’re adding capacity in that segment as well with Jefferson City. So supply chain is not normal. That could provide some uplift. But more importantly, we’re operating closer to capacity. So the uplift in volume is, until we have more capacity coming on online is somewhat limited. So we see that revenue growth from an incremental margin perspective, I would say we’re seeing pretty normal incrementals read through. I would say the one adjustment is pretty much the higher NPD that I referenced in my opening comments of about $20 million. So – and there’s a little bit of mix.

I would say the mix is modestly less favorable, but that’s not really the biggest driver. I think if you really adjust for that NPD, you’re really seeing a pretty normal incremental margin reading through. And again, as that capacity comes online later in the year, we see some further volume opportunities for the future.

John Pfeifer: Hey Jerry, I’ll just add to that because you mentioned input costs and you specifically mentioned freight, you’re correct. There’s been some relief in terms of freight costs. But when you look at the total input cost where our businesses take access equipment in this case, while it’s really good that inflation has come way down, if you look at the totality of it, we’re not seeing deflation. So you can pick out one input cost like freight, and say, yeah, well, freight’s come down. But when you look at the total of everything, really good that inflation has come way down, but it hasn’t gone into deflationary territory.

Jerry Revich: Super. And I appreciate the color. And then your defense sales outlook was pretty robust for 2024 versus our numbers. I’m wondering, could you just flesh out the anticipated ramp up in international JLTV sales, how much that’s contributing and prospects for that to continue into 2025. And maybe expand on the contribution of the USPS contract over the course of this year and into 2025?