Oshkosh Corporation (NYSE:OSK) Q3 2023 Earnings Call Transcript

Oshkosh Corporation (NYSE:OSK) Q3 2023 Earnings Call Transcript October 26, 2023

Oshkosh Corporation beats earnings expectations. Reported EPS is $3.04, expectations were $2.19.

Operator: Greetings, and welcome to the Oshkosh Corporation Fiscal 2023 Third Quarter Results Conference Call. At this time, all participants are in 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 third quarter 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. In connection with the AeroTech acquisition, we are now excluding amortization of purchased intangibles and calculating adjusted operating income and adjusted EPS for all periods presented, which is highlighted in the appendix. 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 report another quarter of strong results for Oshkosh Corporation with significant year-over-year growth in revenue and earnings. For the third quarter, we grew revenue by 21% and more than doubled adjusted operating income and adjusted EPS to $276 million and $3.04, respectively. We are continuing to gain momentum as supply chains improve, and we are benefiting from the many actions we’ve taken over the past several quarters to drive revenue and earnings growth. In particular, both the Access and Vocational segments posted double-digit adjusted operating margins in the quarter, leading to a consolidated adjusted operating margin of 11%. Importantly, we expect further opportunities to grow revenue and earnings as supply chains continue to improve, as we continue to integrate our recent acquisitions, and as we benefit from higher pricing in the vocational backlog over the next year and return to pre-inflationary price cost dynamics.

Demand for Oshkosh products continues to be healthy, and we’re pleased with the pace of orders, as infrastructure spending, mega projects, and solid municipal budgets continue to bolster demand. We expect that 2024 will be largely booked as we exit 2023, including expected strong orders in the fourth quarter for our Access segment. This is our first quarter with AeroTech as part of the Oshkosh family, and we are pleased with our integration progress to date. We will share some highlights in a few moments when we discuss the Vocational segment in greater detail. During the quarter, we were named to Newsweek’s 2023 list of the World’s Most Trustworthy Companies, ranking number 19 globally and number one in the U.S. in the vehicle and components services category.

This award reflects our exceptional track record over the last century of doing business the right way and supports our purpose of making a difference in people’s lives. It is a testament to how Oshkosh team members embrace and live our core values. As a result of continued strength in our end markets, strong third quarter performance, and our positive outlook, I’m pleased to announce that we are raising our full year adjusted EPS expectations to be in the range of $9.50, up from our most recent estimate of approximately $8, or $8.35 when you adjust our most recent estimate for the impact of amortization of purchased intangibles. Please turn to Slide 4 and we’ll get started on our segment updates. Our Access team delivered another quarter of strong performance with year-over-year revenue growth of 27% and an adjusted operating margin of 17.6%.

Notably, we grew revenue in all major global regions. Our positive results stem from excellent operational execution as well as continued investments in products and technologies. As we have discussed over the past several quarters, demand for Access equipment has remained healthy. The strong demand environment is driven by the large number of mega projects, infrastructure investments and industrial construction projects across the U.S. and the globe. Demand is also benefiting from expanded use cases and aged fleets that need to be refreshed. Again, we expect these drivers to continue for the foreseeable future. Orders in the quarter were solid at $932 million, leading to a backlog of nearly $4 billion. Further, we believe our visibility to demand extends well beyond our current backlog as we are actively working with customers to slot the remainder of 2024.

As such, we expect that 2024 new equipment sales will be substantially booked as we exit 2023. We hosted an investor field trip to JLG in August and many of you had the opportunity to see firsthand JLG’s leading innovations and visit our factory of the future in Shippensburg where we have invested in technology and automation to improve our manufacturing processes, support our customers and position the business for success well into the future. We are also investing in our Jefferson City, Tennessee facility to accelerate production of JLG telehandlers. We are already shipping telehandlers from the facility this year and expect to continue to ramp production throughout 2024. With strong market dynamics and ongoing investments in innovation, we expect to better support our customers as well as drive further growth and strong financial performance.

I will close Access with a thank you to Frank Nerenhausen for his many years of dedicated service and outstanding leadership to our company and particularly his last 11 years leading JLG in the Access segment. We wish Frank all the best in his well-deserved retirement. We have a world-class leadership team at Access and we are pleased to welcome Mahesh Narang, who is a perfect complement to our strong team in leading the segment forward. Mahesh is an accomplished executive with extensive global and industrial experience. He and Frank will be working closely over the next few months to ensure a smooth transition. I am confident that Mahesh will build upon the exceptional work and strong momentum underway at Access and we look forward to benefiting from his deep knowledge and experience.

Please turn to Slide 5 and I will review our Defense segment. Defense revenue in the quarter was down compared to the prior year as expected. Nevertheless, we delivered stronger operating income in line with expectations. We expect the fourth quarter will be strongest of the year as a result of anticipated contract awards and a richer aftermarket parts mix. We received good news from the U.S. Army during the quarter as we were selected to compete in Phase I of the robotic combat vehicle program. Our approach leverages our Pratt Miller team as well as our partner KINETIC to offer a mature and proven solution with demonstrated durability and flexibility, while incorporating new technologies to meet the demands of an evolving battlefield. We expect to deliver two tracked autonomous prototypes for testing in August of 2024.

The Army has announced its intent to select one vendor for Phase II full system prototype design and build in late 2024. In late September, we were pleased to receive a $40 million contract award for ROGUE Fires, our unmanned ground vehicle that leverages the JLTV’s extreme off-road mobility, payload capacity, and advanced autonomous vehicle technologies to support ground-based anti-ship missile operations. The unmanned technology associated with ROGUE Fires allows the vehicle to operate in teleoperator or leader-follower mode and allows for integration of scalable weapons system payloads to meet mission requirements. We continue to move toward the production phase of the USPS’ next generation delivery program and are currently building and testing design certification vehicles.

We will deliver vehicles beginning in mid-2024 with production ramping to full rate in 2026. And lastly, as part of our focus on profitable growth and disciplined portfolio management, we sold our snow removal equipment business in July. This action allows us to better focus on growing our core business. Let’s turn to Slide 6 for a discussion of the Vocational segment. We’ve been building strong momentum in our Vocational segment over the past two quarters. For the third quarter, we delivered 35% revenue growth, including $116 million benefit from AeroTech for two months of Oshkosh ownership. Vocational also delivered an adjusted double-digit operating margin for the second straight quarter with margin of 11%, including a solid contribution from AeroTech.

Improved supply chain and operational execution enabled our strong results. We expect further improvement as we return to our planned production levels and benefit from stronger pricing in our backlog in 2024 and beyond. Turning to AeroTech, we are pleased with our integration progress since the close of the transaction on August 1st and expect it to be a meaningful contributor going forward. Our outlook for AeroTech is strong as global passenger traffic is expected to grow in the high single digits over the next several years, and airport spending is expected to accelerate with legislation and aging infrastructure. In late September, AeroTech participated in the International GSE Expo, which is the airport ground support equipment industry’s premier event.

This show was a great opportunity for us to display our industry-leading technologies, such as the AmpCart towable charging platform, a mobile charging solution that supports current and future airport infrastructure. Also in the airport space, we announced two significant Striker Volterra electric ARFF orders during the quarter as interest in EVs continues to grow around the globe. The new airport under construction in Sydney, Australia, placed an order for four Striker Volterra ARFFs to service the airport and support its carbon neutral sustainability initiatives. And in September, long-time customer Dallas Fort Worth International Airport issued a purchase order to add six Striker Volterra ARFFs as well as two traditional Striker ARFFs to its fleet.

We are confident that there will be many more airports ordering our industry-leading Striker Volterra electric ARFFs in the future. Finally, we received an order from Republic Services for 50 McNeilus Volterra ZSL units, North America’s first fully integrated zero emission electric refuse collection vehicle. We are confident in the long-term attractiveness of fully integrated EVs for the refuse collection industry. With that, I’m going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2023.

Mike Pack: Thanks, John. Please turn to Slide 7. Consolidated sales for the third quarter were $2.5 billion, an increase of $443 million, or 21%, over the prior year quarter. The increase was primarily driven by a $280 million, or 27%, increase in sales at Access as a result of higher volume, improved pricing, and the benefit of Hinowa sales, and a $181 million sales increase at Vocational driven by a combination of the benefit of two months of AeroTech sales totaling $116 million as well as the benefit of higher volume and improved pricing. Adjusted operating income increased $149 million over the prior year quarter to $276 million, or 11% of sales, a 490 basis point improvement versus the prior year. The improvement in adjusted operating income was largely driven by favorable price cost dynamics, higher sales volume at Access and Vocational, and improved mix, offset in part by higher incentive compensation costs.

As previously noted, current and prior year adjusted operating income excludes amortization of purchased intangibles, which has been highlighted in our GAAP to non-GAAP reconciliations in the appendix. Adjusted operating income exceeded our most recent expectations as a result of favorable mix, lower spending at Access and Vocational, and favorable price cost. Also excluding amortization of purchased intangibles had the effect of increasing adjusted operating income by $10 million during the quarter versus our most recent expectations, which equates to $0.11 of adjusted EPS net of tax. Adjusted earnings per share were $3.04 in the quarter versus $1.15 in the prior year. Now let’s turn to our outlook for 2023. Please turn to Slide 8. We expect the strong performance we delivered through the first three quarters of 2023 to continue.

Additionally, demand for our products remains strong and supply chain conditions are improving. Based on these factors, we are increasing our expectations for 2023. On a consolidated basis, we are estimating 2023 sales and adjusted operating income to be in the range of $9.65 billion and $875 million, respectively, up from our most recent sales and adjusted operating income expectations of approximately $9.5 billion and $750 million, respectively. We are estimating adjusted earnings per share will be in the range of $9.50 up from our most recent estimate of adjusted EPS in the range of $8 per share. The exclusion of non-cash amortization of purchased intangibles increases adjusted operating income and adjusted EPS expectations for 2023 by approximately $30 million and $0.35 net of tax, respectively, compared to our most recent expectations.

At a segment level, we are estimating Access sales and adjusted operating margin to be in the range of $5 billion and 15% respectively, up from our most recent estimate of sales and operating margin of $4.9 billion and 14% respectively. Turning to Defense, we continue to expect sales and adjusted operating margin to be in the range of $2.1 billion and 3% respectively for the year. We expect 2023 Vocational sales and adjusted operating margin will be in the range of $2.5 billion and 9.5% respectively versus our most recent expectations of sales and adjusted operating margin of approximately $2.5 billion and 7.25%. The exclusion of amortization of purchased intangibles increases adjusted operating margin expectations by approximately 75 basis points versus our most recent expectations.

Our estimates for corporate expenses, tax rate, and average share count remain generally in line with our most recent expectations. Our estimates for CapEx has decreased by approximately $50 million to $300 million, while our expectations for free cash flow increased by approximately $50 million to $250 million. Looking to the fourth quarter, we expect consolidated sales will be down versus the third quarter by approximately $50 million due to fewer production days in the quarter as a result of several holidays. We also expect a few notable mix shifts. Access revenue is expected to be down by approximately $150 million due to fewer production days, while Defense is expected to be up as a result of the timing of aftermarket parts deliveries.

Vocational is expected to be roughly flat as an additional month of AeroTech sales largely offsets the impact of fewer production days. We expect adjusted earnings per share to be in the range of $2.10, which is lower than the third quarter as a result of the lower sales, unfavorable manufacturing absorption due to fewer production days, higher investments in NPD and facility ramp-up costs and Access related to the Jefferson City telehandler facility, and in Vocational related to the Murphysboro eRCV facility. I’ll turn it back over to John now for some closing comments.

John Pfeifer: We delivered strong results in the third quarter and continue to make progress with supply chain and production throughput. Demand is robust, and we are investing in capacity and new products that we expect will drive profitable growth. We are in the process of integrating our accretive AeroTech acquisition, and we are already seeing the considerable value it brings to our company. Once again, we are meaningfully raising our expectations for 2023 as our investments in operations and product technologies are paying off with our transition to a more resilient business. This is an exciting time for Oshkosh, and we are confident we are taking the right steps to drive growth and deliver enhanced shareholder value as we move forward with positive momentum. Okay, Pat, let’s get started with the Q&A.

Pat Davidson: Thanks, John. I’d like to remind everyone to 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. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may requeue, and those questions will be addressed, time permitting. [Operator Instructions] One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Steven Fisher: Thanks. Good morning and nice quarter. You mentioned being sold out for Access in 2024 by year-end. Can you maybe just clarify what the implied volumes are at that sold-out levels? Is that higher volumes in the plan next year? Any comment on sort of the price versus cost that you have embedded in that?

Mike Pack: Yes. I guess the bottom line is we’re not providing guidance yet for next year, but obviously based on all of our commentary, our view and outlook is strong. So I would take that into consideration. So you would expect that the book-to-bill ratio to achieve that’s going to be strong in the quarter well above one-to-one. So I think that’s bottom line. From a price-cost perspective, you know, we’re delivering very strong margins across our business. And I think the bottom line is we would expect that we continue to deliver strong margins in our business. We’re going to continue to monitor inflation. Ultimately, we’re continuing to get more volume through our facilities. That’s certainly helping from an absorption standpoint and just a manufacturing efficiency standpoint. So as we look forward to next year, we see continued strength in our margins.

John Pfeifer: Yes. Steve, it’s John. We’ll give you guidance next quarter on what we are going to – what we expect for Access in 2024. But suffice it to say, the market is strong, and our customers are doing well. Our customers have equipment needs and that – and long-term equipment needs I’m talking about. So stay tuned, and we’ll give you an update, but we’ve got a healthy outlook for sure.

Steven Fisher: Okay. And then maybe just on the Vocational side, really strong orders in the quarter. I’m curious what the visibility you have on the orders is from here and where you see perhaps more momentum in the next few quarters? Is it on the fire apparatus side or on the refuse collection side?

John Pfeifer: Yes. We have really strong orders in the fire and emergency segment primarily and – but strong orders across the entire Vocational business. I mean if you look at the AeroTech business, which is a new business for us, we’ve only had it for a couple of months, that’s a market that we’re seeing long-term growth as well. But you’ll see a lot of improvement continue in that segment in 2024. You’ll see nice margin improvement in 2024, a lot of it driven by the fire and emergency side.

Operator: Thank you. Our next question comes from the line of Tami Zakaria with J.P. Morgan. Please proceed with your questions.

Tami Zakaria: Hi. Good morning. Great quarter. Thanks for taking my questions. So my first question is similar to what Steve asked. Since you have some visibility into next year, given orders are going to be pretty much booked by the end of this year for 2024, what kind of pricing do you expect to get on 2024 orders for Access equipment?

Mike Pack: Yes, Tami, I think if you look at – so our pricing very much correlates with what we’re seeing for inflation. So we had very significant price increases really over leading up to the beginning of this year over that 18-month period prior. With certainly, inflation continues, but it’s at a more moderate case so I would expect that our pricing will follow suit with that. So, again aligned with inflation and again we don’t view price cost as a headwind going into the future.

Tami Zakaria: Okay, great. Perfect. And then my second question is on Defense. What is the outlook, how should we model Defense margins going forward, especially since you expect a ramp in NGDV production in the back half of next year, how would margins look like when that volume hits?