Oshkosh Corporation (OSK) Earnings Call Transcript & Summary

Greetings, and welcome to the Oshkosh Corporation announces agreement to acquire JBT's AeroTech Business conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to our conference call. Earlier today, we issued a press release announcing our plans to acquire JBT Corporation's AeroTech business. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation also on our website. 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 on April 27, 2023 with our first quarter earnings report and other filings we make with the SEC, including the 8-K we filed this morning announcing this transaction. We disclaim any obligation to update these forward-looking statements. 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 will turn it over to you, John.

Thanks, Pat. Welcome, everyone, and thank you for joining us today as we discuss our planned acquisition of the AeroTech business from JBT Corporation for a purchase price of $800 million or $720 million net of the present value of expected tax benefits associated with the transaction. AeroTech is a business that we've been interested in for some time and will become part of our Vocational segment upon closing the acquisition, further broadening our presence in an end market with what we believe are strong secular tailwinds. And of course, supporting aviation is not new to us as we've been delivering our vehicles and aerial work platforms to airports for many decades. AeroTech is a leading provider of aviation ground support products, gate equipment and airport services. They serve a diverse group of blue chip commercial airlines, airports, air freight carriers, ground handling and military customers, many of whom are also current Oshkosh customers. AeroTech has some of the most trusted brands in the industry, with systems in the field that serve approximately 75% of air travelers at U.S. airports and load approximately 70% of the world's overnight express packages. AeroTech's equipment is found at airports all over the world, and chances are almost certain that everyone listening today has walked through one of their jetway boarding bridges. They also have leading positions with cargo loaders, de-icers, tractors and tugs, to name a few. We show some images on the slide that highlight these products. AeroTech is a leader in a growing market in the early stages of an investment cycle. The air transportation support market has rapidly recovered from the COVID-induced trough during the pandemic. We saw air travel nearly halt across the globe. Moving beyond that extreme set of circumstances, AeroTech is expected to benefit from many secular tailwinds for the air transportation industry. Global passenger traffic is expected to grow in the high single digits over the next several years, and infrastructure spending is expected to accelerate with legislation and aging infrastructure. We have seen this recovery in recent quarters and performance is normalizing to levels more in line with pre-COVID levels from 2019. We expect AeroTech's second half 2023 EBITDA to be about $40 million, which translates to $80 million on a full year expected run rate basis, approaching its 2019 performance. We expect further EBITDA growth to approximately $95 million in 2024. Turning to Slide 4. We think it's important to outline the magnitude of the tailwinds that we believe are driving the industry's resurgence and long-term growth trajectory. Global passenger volumes are on pace to return to pre-pandemic levels as we exit 2023, and that growth is expected to continue over the long term with an approximately 9% annual increase through 2027. Passenger and air cargo fleets are each estimated to increase by 3% annually over the next 2 decades. Approximately $25 billion of the government's Infrastructure Investment & Jobs Act has been authorized to fund airport growth and maintenance. For example, DFW, one of the busiest airports in the world, recently announced an agreement with American Airlines to upgrade and improve its facilities with capital investments valued at $4.9 billion. And Salt Lake City International is in the midst of upgrading its Concourse A, which includes additional gates and other improvements. And to support this meaningful growth, ground support equipment investment is needed, especially given the elevated fleet age of existing ground support equipment across the world driving high maintenance costs. We also expect to benefit with the transition from diesel to electric power for these products. Turning to Slide 5, this transaction unites AeroTech's highly-engineered product offerings with the strength of Oshkosh's portfolio and technology ecosystem. We share similar technology priorities across several key areas: electrification, autonomy and active safety, as well as connectivity and intelligent products. Together, we can leverage best practices, technology and R&D from each other to advance our shared objectives while capitalizing on opportunities from increased sales. Specifically, our combined platforms will enhance our ability to service the aviation industry as investments accelerate, with the move from diesel to electric for ground service equipment that I highlighted on the last slide. And of course, there are additional benefits from integrating autonomy and connectivity into our airport product offerings. Please turn to Slide 6. Adding AeroTech to our company supports our Innovate, Serve, Advance business strategy by expanding our portfolio of products in an attractive adjacency with a company that is the clear leader in its space. As we discussed at our Investor Day last year, our M&A strategy is focused on three key priorities: technology build-out, category expansion into near adjacencies and life cycle businesses. In addition to the adjacent markets it serves, AeroTech has strong technology capabilities and offers a robust mix of aftermarket parts and services revenue. In short, this transaction checks all the boxes of our M&A strategy. We believe AeroTech will further broaden our end markets and add a growth channel to our Vocational segment. AeroTech's purpose-built products are closely aligned with Oshkosh technology focus areas, and we see significant opportunities to scale AeroTech's platform as the air transportation industry continues to recover, including opportunities for additional bolt-on acquisitions in the future. On Slide 7, we've outlined what we believe are some of the key benefits of the acquisition. The primary takeaway here is that this transaction is about entering an adjacent end market with a business that makes equipment that fits squarely within Oshkosh core capabilities and is aligned with our strategic priorities. AeroTech will allow us to enter a strong and growing sector supported by powerful sustaining tailwinds, further enhancing the overall resilience of our business. We believe uniting AeroTech's highly-engineered product offerings with the strength of our portfolio and technology ecosystem will pave the way for further product innovation, enhancement and expansion across our businesses. The transaction is accretive to our financial profile, and AeroTech's large installed base and service contracts will drive meaningful recurring revenue and create a platform to further enhance these capabilities across Oshkosh's portfolio. Lastly, AeroTech's electric ground support equipment and autonomy capabilities will support our sustainability initiatives while improving the safety, quality, efficiency and longevity of our products. I'm going to turn it over to Mike to discuss details of the transaction.

Thanks, John. Please turn to Slide 8. We are acquiring AeroTech for $800 million on a cash-free, debt-free basis. The net purchase price is $720 million when adjusted for the present value of expected tax benefits of approximately $80 million. This represents approximately 9x EBITDA on an expected 2023 second half run rate basis of approximately 7.2x EBITDA, including expected run rate synergies. Given the complementary nature of our businesses, we are targeting annual run rate commercial and cost synergies totaling approximately $20 million for AeroTech by the end of year 3 following close. We anticipate the transaction will be accretive to Oshkosh's earnings per share within the first year following close and deliver returns on invested capital in excess of 10% within the third year following close. We have ample capacity to finance the transaction through a combination of cash on hand and our revolving credit facility. We expect to maintain our strong balance sheet with a debt-to-EBITDA leverage ratio of approximately 1.5x at transaction close, well under our target leverage ratio of 2x. Given our expected strong cash flows and our disciplined cost structure, we expect that borrowings and a revolver associated with this transaction will be repaid within 12 months following close. The transaction is expected to close in the third quarter of 2023, subject to customary closing conditions that include regulatory approval. Please turn to Slide 9, and I'll hand it back to John for wrap-up comments.

We are confident that this transaction is an excellent opportunity for Oshkosh, one that we believe will drive significant value creation as we enter a new, attractive, adjacent end market through the addition of a proven leader with a strong financial profile. We believe the transaction structure will also allow us to maintain our strong balance sheet, providing us with the flexibility to continue to invest in our business and advance our strategic priorities. We look forward to working with the AeroTech team to integrate the business and deliver significant benefits for customers, employees and shareholders. With that, I'll turn it back to Pat, and we look forward to your questions.

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stanley Elliott with Stifel.

Congratulations. I guess for starters, can you talk about -- you mentioned 9x on the purchase price. You look at -- the other press release implied something different than that. Is there a way to kind of help us kind of close the gap between those two?

Sure. Stanley, this is Mike. We're looking at it really on the business we're buying right now is operating at that 9x level, really looking at factoring in that tax benefit and looking at the back half of the year, and we'd essentially be closing the transaction in the back half of the year. I believe other multiples may be more backward looking, and certainly, the business was with -- coming out of the pandemic, margins were a bit lower and volume was a bit lower.

Okay. Great. And then on the synergy side, the $20 million or so, what are the real synergy buckets here? Is that just operational cost out? And then maybe talk to what you all potentially could see on kind of sales synergy side?

Yes. Thanks, Stanley, and thanks for the question. This is John. I'll take that question. So I want to bring everyone back to the purpose of our company and what we do. I mean we deliver for people in our communities that do really tough work, whether that's a vocational vehicle or equipment, and that's exactly what this acquisition is all about. It's right in our sweet spot of what we know how to do using our technology to advance in electrification and autonomous operation, those types of technologies. And we see the synergies, when we talk about $20 million in synergies, of course, there's a little bit of G&A. There always is with any acquisition. But it's really about supply chain synergies, manufacturing synergies. We're not talking about consolidating plants. We're not talking about doing that. But we are talking about enhancing operating capability and where we can find operational synergies with [ 80-20 ] simplification and those types of processes that we use. There's also commercial synergies, though. We've been operating in this market or similar markets, and we see opportunities from a commercial perspective as well. That's kind of how I'll answer that question.

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

Congratulations on an interesting acquisition. I just wanted to follow up on Stanley's question about the multiple differential and the implied growth. I know you said the margins were a bit lower and the volumes were lower. Can you provide just maybe a little bit more detailed bridge between the, I guess, roughly $54 million that's implied and the $95 million of EBITDA that you have for 2024?

So the way I would do that is if you look at the -- so their EBITDA on the next 12 months basis should be greater than $80 million, is what we're expecting. We expect back half, really, the past 6 months of the year to be at $40 million, so you're really at that $80 million run rate. So you just see -- you see a little bit of a -- you see about a $15 million step up. We start seeing -- so volume is continuing to improve a bit. We have some -- there's more pricing coming online there as well, as well as some of the synergies start hitting next year, so that's really what we expect. So $40 million in the back half of the year, for this year annualized, that's greater than $80 million. You look to next year, it's $95 million.

Okay. And then in terms of integration risk, I guess, what experiences can you draw on to give some confidence that you have a solid integration plan to mitigate any risk? I guess, Hinowa and Pratt Miller were a fair bit smaller, so I'm not sure if there are kind of good examples of risk mitigants.

Yes. So I'll answer that question. With any transaction, there's always a bit of risk. This is a transaction that we made for growth, taking our strength and our capabilities into a market that we're familiar with, but in the new categories that we have not heretofore participated in. So that is a different risk profile than making an acquisition when you're acquiring for scale. We are not acquiring for scale, we're acquiring for growth. So clearly, there are some risks, but I do think that the acquisitions that we've made with Pratt Miller, with Hinowa, they're good experiences for us to draw on in terms of how you integrate an acquisition, making sure you take care of customers first and foremost, making sure you take care of people first and foremost. That essentially helps to make sure that you're minimizing any risk that might come out of a transaction like this. So we feel very, very confident that we've got a good relationship already with the AeroTech people and we'll continue to build relationships as we go forward, and that will all help us minimize risk as we go forward. But I think the biggest thing I can say, again, is this is an acquisition for growth. It's not a big acquisition for scale where we're disrupting every operation that AeroTech has. That's not the case here.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Congrats. Just wanted to first ask about on the third slide you guys have. It says that about 40% of the revenues in the business are recurring. Just trying to understand what's in that recurring bucket? Like if it's truly recurring, and how defensive that was during the pandemic?

Yes. That was -- it's about 40% of the revenue. It's very defendable, so it's made up of about -- of a big services business, but it's also made up of aftermarket parts for the whole goods. And the services business is a bigger piece of that 40% versus the aftermarket parts and accessories for the whole goods, that supports the whole goods. But this was a business that was -- actually remained the most healthy during the pandemic for AeroTech as it went through the pandemic, which kind of goes along with common sense. It's usually what does happen in the downturn is the aftermarket and the services business stays healthy versus the whole goods. That's certainly what they saw, and we believe this is a very defendable part of the business. One of the things we like a lot about AeroTech's business is 40% recurring revenue services business. Adds a lot of value for the customer.

Okay. Got it. And then just with respect to the competitive landscape, I mean, it seems like AeroTech has pretty significant market share. But like how does the rest of the competitive landscape look? Like are there a couple of other big players? Is it very fragmented?

Well, it's a global market, number one. This is a very global market, and it's one of the things we like about it because it's not just a good market in the U.S. It's definitely a good market in the U.S., a lot of investment in airports across the United States, but it's also a lot of investment happening around the world. And this -- we have a global market and a global competitive set, so to speak. But it's more of a fragmented competitive set versus an aggregated competitive set. That's what I can say about it.

Our next question comes from the line of David Raso with Evercore ISI. Our next question comes from the line of Jerry Revich with Goldman Sachs.

John, I'm wondering if you could just talk about the overlap in distribution for you folks with the products that you mentioned at the beginning of this call. To what extent this help provide a single stop offering for you folks? And are there any additional products that would fit in that you don't currently have given that combined offering?

Yes, good question. So we serve the -- this segment today with primarily our airport rescue and firefighting vehicles, that's the [indiscernible] product. We also serve it with aerial work platforms. I mean if you go to any airport in the world, you will see aerial work platforms. A lot of times, you see our cream and orange aerial work platforms. It's almost hard to walk through an airport without seeing one. So we serve the market today. We serve it through different channels. As you know, we serve through the rental companies, and we serve the RF markets through different channels. So there's different channels today that AeroTech uses versus the channels that we use with our -- for aerial work platforms. So there is not a lot of channel overlap with this transaction. That's what I can tell you. But we do understand the customer, we understand the user. We understand what they need, and AeroTech clearly has a very comprehensive understanding of that and what technology is needed to continue to advance.

Okay. Super. And can I ask you, on the core products, are there any FAA regulations that help drive the [ moat ] in any of these product lines? And can you talk about the length of backlog? Is this similar to foreign [ emergency ] versus commercial? Just a little bit of context on the product, please?

Yes, there are regulations. I can't go into the specifics of it that help drive demand, but let me just talk about the backlog. Of course, the whole goods business, about 60% of the business is whole goods. Those -- that's a backlog business, and the backlog is very elevated at the present time, and we expect that the strong order rates are going to continue for the foreseeable future. About 40% of the business is services and aftermarket parts. That is not a backlog business. That's a recurring business, which we like a lot, again. But the 60% of the business that does operate as a backlog business and the backlog is elevated today.

Our next question comes from the line of Mike Shlisky with D.A. Davidson.

In the past, JBT, you said that there's some seasonality in this business with, I believe, the earlier part of the year, sometimes a bit lower than later in the year. So how confident are you that the [ $40 million ] run rate in the back half of the year on an EBITDA basis is sustainable into the first half of next year?

Sure. I can take that one. If you look at it, I think certainly, there's a couple of pieces to it. There's -- volume is continuing to increase with the demand and the strong backlog so that's a tailwind, and we have good visibility to what the delivery time frames of that backlog is. So that's number one. Number two, I think that's -- if you do think about it, yes, the back half of the year tends to be a bit stronger. So if you think about it, our exit rate, that's why I'd say if you look at $95 million of EBITDA next year, it really sort of implies the next 12 months run rate's around or is greater than $80 million. It does imply a little more strength in the back half of the year. So that is correct. But ultimately, that is certainly factored into our view of $95 million of EBITDA next year.

Okay. Okay. Got it. And then parts of your Vocational business have been a bit challenged from an operating margin standpoint the last year or 2, maybe some of [ the reasons ] why you made the segment in the first place. Does AeroTech have interesting strategies? I mean they're looking at 11.5%, call it at the midpoint, operating margin outlook for this year. Is there anything that they're doing that could be brought to some of the more challenged Oshkosh businesses to help that group's margin improve? Or are they going to be very much in their own envelope, in their own silo when they join your portfolio?

That's -- I think it's a really good question, and I think it certainly will go both ways. AeroTech operates really well in their markets, and I think that they'll -- we'll mutually able to improve each other's businesses as we go forward with integration. And we already know where their -- some of those significant points of leverage are with regard to supply chain, and the supply chain is going to go both ways. We can help AeroTech with supply chain and they can help our other Vocational businesses with supply chain. So it's going to go both ways.

Our next question comes from the line of Chad Dillard with Bernstein.

So I was hoping you guys could just give us some color on what the long-term revenue growth algorithm is for AeroTech? And maybe just a little bit more detail on how it builds up between, I guess, replacement versus new demand, electrification? Any color you can give on just how you're thinking about that over the longer term?

Yes. Just from a growth profile, we expect, just given the strong dynamics that John highlighted in his prepared remarks, we expect a high -- mid- to high single-digit growth rate further revenues really from 2023 through the next -- really, for the foreseeable future, certainly well beyond 2027. So we see strong dynamics there. And I guess, just talking about -- Chad, what was -- I missed the other -- the second part of your question?

Yes. I mean if you can like break it out, replacement demand versus new? And I think the electrification is probably like one component in there. If you can just talk about how that layers in to build up to that, I guess, mid- to high single-digit growth rate?

Yes. With the strong outlook for -- so there's certainly aged infrastructure at airports. You see a lot of upgrading activity going on, so that's certainly a driver. But you also see that there's terminals being added, so I would say the growth rate is really well split between replacement and growth.

Got it. That's super helpful. And just following along, just on margins. Just how to think about that over the medium term, particularly as you do layer in more electrification in the product mix?

Yes. We believe that this is a business -- and obviously, there's a bit of a drag we'll have of amortization in that sort of the early years here, but we expect that this is going to be a double-digit operating margin business in the next few years that we see it is a good margin profile business. Obviously, you're seeing the strong EBITDA growth that it's having. So we expect this to be nicely accretive to our -- both our Vocational segment and the company as a whole.

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

I wanted to just follow up on that last question. The mid- to high single-digit growth rate you guys are kind of factoring, does that include -- like how much of that is dependent on federal stimulus dollars? Or is that -- do you feel like that's purely just commercial spend?

I mean certainly, their outlook has -- there is a benefit of those federal dollars, but that's certainly not what's driving all the growth. It's really the growth of air transportation. I don't know if -- even this morning on the news, they're talking about the demand for travel that was seen over the Labor Day weekend and how that's expected to continue to grow, and so I think the dynamics are strong there well beyond the federal funding. So I would say it's certainly more so -- it's an extra benefit that the federal funding is there, but it's really the air transportation or the number of passengers being carried that are driving that number.

Yes, Seth. I was going to say the same thing. I don't think we can overemphasize that enough. This isn't just driven by they're going to spend $25 billion in some of the federal infrastructure spending. This is driven by demand for air travel and air cargo for the foreseeable future. And you listen to it all the time, whether you listen to the commercial airlines talk about it or you listen to some of the other commercial operators talk about it, this is an industry that's growing because customers are pushing growth.

Got it. And then just a follow-up. Can you just give us any color on the manufacturing footprints? And why wouldn't there be some opportunity there to either consolidate or just cross-pollinate from a manufacturing perspective?

Yes. So I'll just -- they have a nice footprint of manufacturing operations. I'll give you the two highlights. The main operation is in Orlando, Florida, and the other main operation is in Ogden, Utah. There's other operations beyond that in Mexico and other places in the world, but those are the two biggest operations, Orlando and Ogden. And so you might say why are we not talking about bigger consolidation? Well, number one, all of our facilities are full, and we're producing as fast as we possibly can and trying to expand square footage just to make enough municipal fire trucks and aerial work platforms and so forth. So that's why we're not talking about a lot of consolidation.

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

Congratulations. Maybe point of clarification here. On the $95 million of EBITDA in 2024, I'm curious, do you assume that margins for AeroTech revert back to prior, call it, pre-COVID peak, so roughly 14%? How do you think about that? And maybe longer term, where do you see the true margin potential of this business? I appreciate the $20 million of synergies that you outlined. I'm curious if this figure really mostly applies to the mobile equipment component of the business where you would seem to have decent overlap as opposed to maybe the airport services and the fixed equipment side?

So Mig, just from an EBITDA margin perspective, we would expect that as we get into next year, they are pretty much -- we're getting close as we exit this year to the pre-pandemic margins. We expect to essentially be there in 2024, certainly at the back half of 2024. And certainly, as synergies come online, we expect that the margin profile of the business is going to be as we get out into sort of 2025, '26, beyond what it was prior to the pandemic. Again, leveraging the benefit of those synergies.