Oshkosh Corp

NYSE:OSK

Earnings Call Analysis

Oshkosh Reports Strong Q3 Growth, Raises EPS Outlook

Oshkosh Corporation showcased a robust third quarter with a 21% spike in revenue and a significant leap in adjusted operating income and EPS to $276 million and $3.04, respectively. Supply chain improvements and strategic actions are propelling growth, with notable performance in the Access and Vocational segments, both achieving double-digit operating margins. Healthy product demand is underpinned by infrastructure investments and the addition of AeroTech to the Oshkosh family bodes well for future integration. With an optimistic end-of-year outlook and ongoing strong orders, the company increases its full year adjusted EPS guidance to $9.50.

A Positive Outlook for AeroTech Amidst Increasing Global Demand

The company's segment AeroTech shows a promising future with expectations of global passenger traffic growing in the high single digits over the coming years. Airport spending is anticipated to rise, driven by legislative action and the need to update aging infrastructure. AeroTech's visibility was enhanced through participation in the premier International GSE Expo, showcasing their leading technologies such as the AmpCart towable charging platform, designed to support the evolving needs of airport infrastructure. The segment's growth is also fueled by a surge in interest for electric vehicles (EVs) globally.

Impressive Third Quarter Results with Elevated Sales and Earnings

The company reported consolidated sales of $2.5 billion in the third quarter, marking a 21% rise from the previous year, driven predominantly by a 27% increase in Access sales and a substantial sales hike in the Vocational segment. Notable was the inclusion of AeroTech sales, contributing to this growth. Adjusted operating income climbed to $276 million, equivalent to 11% of sales which reflects a significant 490 basis point improvement from the preceding year. This operating income uptick was largely attributed to favorable pricing, increased sales volume, and an improved product mix. The adjusted earnings per share (EPS) saw a substantial increase, reaching $3.04, in contrast to $1.15 the prior year.

Raised Expectations for 2023 Signaling Continued Strength

Buoyed by robust performance through the initial three quarters and strong product demand, the company's outlook for 2023 is bullish. With improved supply chain conditions serving as a tailwind, the company estimates a rise in sales to $9.65 billion and adjusted operating income to $875 million, marking an upgrade from previous expectations. Adjusted earnings per share are projected to reach $9.50, a notable step up from the earlier estimate of $8 per share. These revised projections also reflect adjustments for the exclusion of non-cash amortization of purchased intangibles, enhancing both the adjusted operating income and EPS outlook for the year.

Segment-Specific Projections and Capital Allocation

In an analysis by segment, Access sales are estimated to achieve $5 billion with an adjusted operating margin of 15%, showing progress from former estimates. The Defense segment remains steady with projected sales and operating margins unchanged at $2.1 billion and 3%, respectively. The company envisions Vocational sales and margins to hit approximately $2.5 billion and 9.5%, surpassing prior expectations. A cautious yet optimistic stance is applied to corporate expenses, tax rates, and share count forecasts while capital expenditure intentions are reduced to $300 million and free cash flow is projected to amount to $250 million. Looking ahead to the fourth quarter, a modest decline in consolidated sales is anticipated, largely due to seasonal production fluctuations.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Oshkosh Corporation Fiscal 2023 Third Quarter 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.

[Patrick Davidson, executive]

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 in 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, executive]

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 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 #19 globally and #1 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% and 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'll 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'll 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 1 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 2 tracked autonomous prototypes for testing in August of 2024. The Army has announced its intent to select 1 vendor for Phase 2 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 tele-operator or leader-follower mode and allows for integration of scalable weapon system payloads to meet mission requirements. We continue to move towards 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 2 quarters. For the third quarter, we delivered 35% revenue growth, including $116 million benefit from AeroTech for 2 months of Oshkosh ownership. Vocational also delivered in 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 1 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 AMP Cart towable charging platform a mobile charging solution that supports current and future airport infrastructure. Also in the airport space, we announced 2 significant Stryker Volterra electric RF 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 4 Stryker Volterra RF 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 at 6 Stryker Volterra ARFs as well as 2 traditional Stryker RFS to its fleet. We are confident that there will be many more airports ordering our industry-leading Stryker Volterra electric ARPS in the future. Finally, we received an order from Republic Services for 50 McNelis Volterra ZSL units North America's first fully integrated 0 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.

[Michael Pack, executive]

Thanks, John. Please turn to Slide 7. We 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 Panola sales and a $181 million sales increase at vocational driven by a combination of the benefit of 2 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 3 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 noncash amortization of purchased intangibles increases adjusted operating income and adjusted EPS expectations for 2023 and by approximately $30 million and $0.35 net of tax, respectively, compared to our most recent expectations.

At a segment level, we are estimating excess 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 estimate 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 offset 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 Murphy's borough ERCB facility. I'll turn it back over to John now for some closing comments.

[John Pfeifer, executive]

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 and 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.

[Patrick Davidson, executive]

Thanks, John. I'd like to remind everyone to please limit your questions to 1 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.

[Operator]

Thank you. We will now be conducting a question-and-answer session. We ask that all callers limit themselves to 1 question and 1 follow-up. If you have additional questions, you may requeue, and those questions will be addressed, time permitting.

[Operator Instructions]

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

[Steven Fisher, analyst]

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? And any comment on sort of the price versus cost that you have embedded in that?

[Michael Pack, executive]

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 1 on -- so I think that's bottom line.

From a price/cost perspective, 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, executive]

Yes, Steve, it's John. We'll give you guidance next quarter on what we're 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 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, analyst]

And then maybe just on the vocational side, really strong orders in the quarter. I'm curious what the visibility you have on 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, executive]

Yes. We have really strong orders in the Fire & Emergency segment primarily in -- 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 '24. You'll see nice margin improvement in '24. A lot of it driven by the fire & emergency side.

[Operator]

Our next question comes from the line of Tami Zakaria with JPMorgan.

[Tami Zakaria, analyst]

Great quarter. 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 for orders for ex equipment?

[Michael Pack, executive]

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 pace. So I'd expect that our 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, analyst]

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 ramp in NGDV production in the back half of next year, how would margins look like when that volume hit?

[Michael Pack, executive]

Sure. Just in general, and this is consistent with what we've said the last several quarters that -- not going to be a lot of change in the core underlying business. We'll start ramping up at the back half of the year -- next year, but you can imagine that's going to be -- that will be lower quantities.

We'll continue to ramp up through 2025. So I would say -- I would think about defense next year, not necessarily notable incremental volume. It's really when we get to 2025 and beyond that we're going to see a more meaningful benefit to that ramp there's some gives and takes, of course, with JLTV, but we do expect some good solid profitable growth as we get into 2025.

[John Pfeifer, executive]

And Tami, it's John. I just want to point out that the defense business, the headline, as Mike has talked about, is we ramped JLTV down in '24. We ramp up the postal vehicle starting next year. in '25 and get the full production by '26. But within the defense business, there's a lot of really good programs in our defense business.

And we talked about new programs that we're bidding for that are advanced technology programs like the robotic combat vehicle. So we're going to go through a period of a couple of years to get the defense business margins on a trajectory that we all expect. But there's some really good business on the base business, about $1 billion of really healthy base business in there that sometimes gets overlooked.

[Operator]

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

[Mircea Dobre, analyst]

Yes. I'm curious if we can talk a little bit more about AeroTech. Just looking at the backlog that you disclosed there, and it's frankly quite a bit higher than what the former owner JBT reported last. So maybe you can give us some context in terms of where you're seeing demand there? Is it on fixed equipment? Is it mobile equipment? And I'm also kind of curious, from an integration standpoint, what have you learned in the first few months of ownership?

[Michael Pack, executive]

Sure. I can -- I'll start with that, and then we can -- and certainly, John can add in, just from a comparability standpoint, we're reporting backlog essentially in the same manner. So it's based on firm orders, that's not a difference of view of what represents backlog. So we are seeing strong orders and it's really across the board, and it's tied to a lot of the tailwinds that we've talked about and why the business has excited us regarding just airport growth in general.

[John Pfeifer, executive]

Yes. And Mig, talking about the integration of it. First of all, I'll go back to why we acquired AeroTech. We acquired AeroTech because it's -- it's a business that -- we've already been in the airport markets. JLG is in the airport markets or our vehicles are in the airport markets. So we've always looked at this as a near adjacency, almost right, almost even not even as [indiscernible] like right in the middle of our sweet spot.

It's all purpose-built equipment that where you have the opportunity to continuously apply technology in the form of autonomous technology, intelligence products, technology, electrification to continue to drive productivity improvement for customers. So it's kind of right in the middle of our sweet spot. That is -- so the biggest thing that we have learned, which is very positive, is culture and people can make or break any acquisition. If you get the culture right on the fit and the people right, then things go really, really well. And this is a fantastic cultural fit for us. In terms of the values of the company, how we -- how the people on both sides have embraced the acquisition the AeroTech people, the Oshkosh people, that's a really important part of a successful acquisition. And that is going extremely well, and we're really pleased and look to a very, very strong long-term future for this business.

[Mircea Dobre, analyst]

Understood. My follow-up is on the refuse business. appreciate the announcement that you had on Volterra orders. I'm curious, as you're looking at that particular customer, how you expect that EV demand to ramp up for them? And are there any other ones that are considering similar type vehicles? Maybe you can comment a little bit how that impacts margin as well from a mix standpoint.

[John Pfeifer, executive]

Yes. We're really excited about this Volterra electric refuse and recycling collection vehicle. We'll start producing and selling production units by the end of this year, like imminently, like right now. And we'll do a prudent ramp-up of production in our plant in Murphysboro, Tennessee, and we'll be doing of course, dozens and dozens of units next year, and we'll continue to ramp it from there.

But this product is not just an electric vehicle. It's a fully integrated vehicle that drives an enormous amount of productivity benefits for our customer, benefits for the driver, making it easier, safer, more productive for them at every single stop. So this is a huge amount of interest in this vehicle. It's almost a new category for the industry because it's not a body on chassis, Again, it's a fully integrated purpose-built vehicle like we know how to do. And we think this is a really strong driver of growth in margins consistently year-over-year, probably for the next 10 years. It's hard for me to say exactly what's the adoption rate going to be, but we expect it's going to be very good over a long period of time.

[Operator]

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

[Stephen Volkmann, analyst]

Maybe backing up a little bit big picture, I think one of you sort of mentioned that supply chain has improved. Can you just characterize sort of where we are now? Are you able to get sort of full production through your plants now? Or is there still some upside as supply chain normalizes?

[John Pfeifer, executive]

Well, great question, Steve, because we have definitely benefited through this year by improved supply chain conditions. But I will also say that supply chain is not back to normal. If you look at our on-time delivery, supplier on-time delivery rates right now, that's one kind of high-level metric. It's kind of around 80%. Typically, we'd expect it to be at least in the -- so it's improved a lot over the past year, but it's not back to normal.

So I think one of the important things is we've done an enormous amount of work in reengineering in resourcing, dual sourcing, using analytics and digitizing the supply chain input so we know where problems are going to be before they disrupt our plants. I think all of that is also paying a lot of dividends to us. It's been most evident in our access business to date. Our vocational business has more complexity and longer bills of material, they've made improvements because of the supply chain, no question about that. but we have a little bit more runway with, I think, the vocational business on operating efficiency as supply chain continues to improve. But we expect it to continue to gradually improve going forward as it has over the past few quarters.

[Stephen Volkmann, analyst]

Great. And that was kind of my follow-up. Maybe you answered it, but I was trying to figure out if there's additional productivity upside as we get to whatever normal looks like at some point in the future. It sounds like you're saying maybe more in vocational than in access.

[Michael Pack, executive]

That's correct. Yes. We've already -- we've seen a nice productivity benefit over the last few quarters, that access.

[Operator]

Our next question comes from the line of David Raso with Evercore.

[David Raso, analyst]

I was impressed the access book-to-bill for the third quarter was able to achieve sort of historical norms, I mean just given the supply chain normalization -- tough comps, I would have thought maybe that would be a little lower than the average we've seen historically. You made a comment about the fourth quarter book-to-bill back above 1. Can you put a little finer come on that? And usually, it's almost 1.7, 1.6, just to get a perspective on the new order flow versus what you're shipping and given I assume you're decently into those conversations already for next year, do we think the book-to-bill in the fourth quarter could be back to a more seasonal traditional above 1.5x.

[Michael Pack, executive]

Yes. I think the bottom line, David, is I think if you implied, we've said that we expect the back half of the year to be at 1:1. So if you sort of do the math around that, you can start getting to some higher book-to-bill ratios. We clearly expect it to be a tough one, David. I don't know that we've calculated it to $1.5 billion, but we definitely expect it to be fourth quarter above 1.

[David Raso, analyst]

Yes, that's the whole thing. Yes. I'm just trying to understand, it looks like the backlog at the end of the year, definitely north of $4.5 billion. I mean $4.5 billion, $4.6 billion, you exact number. And I'm just curious, at that size of backlog -- how much of that is expected to ship in '24? Obviously, the large majority, but are we already having conversations about 25. And to the extent you would actually start to put it in the backlog.

I'm just trying to understand how far this stretches out and how comfortable your customers are even willing to put something on the dotted line for 25? Nothing they can't cancel, but I'm just curious how to interpret that backlog we'll see in 3 months.

[Michael Pack, executive]

I would say, David, that generally the focus right now is on 2024. And you're right, we're way into those conversations. And really, it comes down to just the PO timing as we work through it. But we have good visibility to the year. So I think that 2025 conversations, of course, we see strong demand well out into the future. But bottom line is right now, the focus is on '24. But I'd expect, again, back with -- to our prepared remarks, we're going to be largely booked as we expect for new equipment as we exit the year. So that implies that really that's the years essentially booked.

[John Pfeifer, executive]

Yes, just to make sure it's clear. The orders we're booking now are essentially for the end of 2024 delivery. So as Mike just said, and as we said in our prepared remarks, we expect to be fully booked for 2024 in the fourth quarter. So it won't be long before we're booking orders for 2025. I guess maybe that's a simple answer to your question.

[Operator]

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

[Unknown Analyst]

Good morning, everyone. This is actually Christian Gil on for Steve Barger. My first question is on your capacity across all segments. I know you aren't guiding to '24, but what is the average capacity utilization of your factories? And what do you think the upper limit on revenue for all the segments combined is? And then where are you tightest on capacity? And is there currently a capacity expansion plan?

[John Pfeifer, executive]

Well, I mean, I'll kind of give you some general ideas. We're essentially at full capacity in a lot of our facilities. And so that's why you see us announcing manufacturing capacity expansion. We've got a few of them going on. We've done a lot of work in existing factories. We had a JLG event with many of our -- of you in August where we showcased Shippensburg factory of the future.

You saw a lot of investments we're doing to improve our throughput. But in addition to that, we've got a new facility or a repurpose facility in Tennessee to increase output for JLG. We've got a new facility in Murfreesboro, Tennessee to do fire truck cabs and our new RCV refuse collection vehicle product. And of course, we've got the big Spartanburg plant, which is getting ready -- producing postal vehicles today and getting ready to go into production vehicles over the next several months. So we are adding capacity because we see long-term growth trends in these markets. When we look at -- we look at a lot of events that are coming together. It's a very unique thing that's happening where you have huge infrastructure bills that have been passed by the government.

You have technology transformation happening with regard to EVs and battery plants, chip plants because of the digital revolution that we continue to be in. Energy transformation -- we have geopolitical concerns causing onshoring to continue. We've got also an aged fleet. So all of these things come together, and it's a very unique thing for all of these big macro things to be coming together. And what it tells us is that there's a lot of long-term demand that is underway. And that's why we're putting more manufacturing capacity in because we know we have to meet that demand long term.

[Unknown Analyst]

Great. And then as a quick follow-up, your backlog coverage has held up really well. With all that said, do you think this level of backlog relative to your revenues is sustainable? Or do you think you'll be able to monetize some of that backlog at a quicker pace next year and in given those capacity expansions and everything you just said.

[Michael Pack, executive]

Yes. I think ultimately, what we'd expect is that over time, as productions normalize, that you will have backlog trends and order trends normalize a bit more. I think where you'll see a decrease over time is in vocational because that's where we've we see pent-up demand. And as John said earlier, we see some more -- they're a little bit later working through the supply chain challenges given the complexity of the product. So I would expect to see some normalization over time as we go through next year there.

[John Pfeifer, executive]

Yes. I mean a little bit more color on that. So you see the big backlog that we have today, it's $16 billion. As I talked about earlier, as we continue to increase capacity, we're increasing capacity not because we have a big backlog. We're increasing capacity because we see strong order rates continuing into the long-term future.

Now that will also help us to bring those backlogs into a more realistic level from a lead time perspective. So we want to provide lead times that are a little lower than we have right now with our JLG business. We want to bring our fire & emergency lead times to under a year, they're well over a year today. So that will happen as we go. But we're putting that capacity in place because we see the demand continuing long term, not just because we have a big backlog.

[Operator]

[Operator Instructions] Our next question comes from the line of Jerry Revich with Goldman Sachs.

[Jerry Revich, analyst]

I'm wondering if you could just share what you're seeing in the telematics data that you track aerials versus telehandlers, we're hearing about a different range please?

[John Pfeifer, executive]

Yes. So you're basically talking about product utilization. We see utilization of product at a very healthy level today. It ebbs and flows, right? And certainly, as you put -- as we've made progress, putting a little bit more equipment into the marketplace is certainly been needed. You might see ebbs and flows to that utilization rate.

But the utilization rate is still at a very healthy level. And our customers still need a lot of equipment. And I think that some of the customers that we have that are publicly traded, you can see that there's still a need for more equipment. There is a healthy dynamic in the market right now.

[Jerry Revich, analyst]

Well -- and maybe just to put a finer point on it sounds like the telescopic and is still extremely tight, but there is some loosening on scissors and telehandlers. Is that right? And can you comment on what you're seeing in Europe specifically? I think there are some concerns around utilization slowing there?

[John Pfeifer, executive]

I think when you say loosening, I mean, we don't see loosening as a bad thing. We're able to produce more equipment. We're able to get more equipment into the hands of our customers who are deploying that equipment. And in some cases, they're starting to replace older equipment, which is a good thing, and you see that in the used market.

So I think you'll continue to see that replacement dynamic happen over a long period of time. So the scissors and the AWPs that are the booms that are continuing to go in the market, that's it's a healthy thing. Our customers want to see that. They want to see it continue. The telehandler production, we continue to see expanded use cases for the product. And that's why we're continuing to increase our output in that segment.

[Operator]

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

[Seth Weber, analyst]

I wanted to go back to an earlier question about defense margin. I think it looks like you're penciling in something in the 6% range or so for the fourth quarter. I think I heard you say something about mix is going to be more towards parts and stuff like that. So again, I'm just trying to understand, is this 6%-ish number for the fourth quarter a good number to use going forward? Because it's -- this has been an area where margins -- a lot of us have had a hard time trying to get arms around margins for this business.

[Michael Pack, executive]

Yes. I would say the fourth quarter margin, it's mixed, but then I'd also expanded to typically in quarters that we have larger orders, particularly with JLTVs and we do expect the JLTV order we do benefit from that in the quarter. So I would say the fourth quarter is higher than what our run rate is right now, if you -- versus like a full year.

So I would say that again, we're not providing guidance yet for next year, but we're sort of still operating in the lower to mid-single digits net business. And the turning point is when we start really ramping up NGV at scale.

[Seth Weber, analyst]

That's helpful. And can you just comment, given the geopolitical events, have you seen it pick up in conversations for any international JLTV interest?

[John Pfeifer, executive]

Well, sure, we have -- I'll remind everyone while we have the DoD contract ramping down, we'll continue to produce JLTVs for international customers for the foreseeable future. Yes, there is demand there. I mean with regard to the current conflicts that are going on, I can't comment on the specifics.

But I will say that we, of course, closely monitor it. And we will always be standing ready to support the Department of Defense and our allies. I can't say more than that. other than to say, yes, of course, there is international demand for these products.

[Operator]

Our next question comes from the line of Stanley Elliott with Stifel.

[Stanley Elliott, analyst]

The past 2 years, you guys had kind of been running at an elevated CapEx number. You've done a lot to expand the footprint. Just curious if we start thinking out over the next several years, do we think the CapEx piece kind of moves back to more of what you've done historically? Or will we need kind of a continued higher level of spend to support some of the EV sort of facilities that are going to be out there?

[Michael Pack, executive]

Sure. I can take that, Stanley. I think from a CapEx perspective, certainly, last year was relatively higher with our investments, particularly in NGDV and some of our other facilities -- high this year again because of NGDV as well as our Murphysboro in Jefferson City facilities as well as some of the other capacity for fire trucks.

I would say next year, we'll be ramping up or wrapping up many of those projects, so probably still a little bit higher than typical times, but I would expect once we get into 2025 and beyond, a lot of that electrification infrastructure is going to be in place from a facilitization perspective. So I would expect that to start normalizing. Not really different than what we talked about, about 1.5 years ago at our Analyst Day that it would be higher in these first few years.

[Stanley Elliott, analyst]

And I guess because the next question would end up being kind of talk about maybe some of the longer-term plans for the balance sheet, right? You'll be approaching kind of a net debt neutral in the next 18 months to years. Do you want to carry leverage? Do you want to increase the share repurchase? Just it seems like there's going to be a lot of free cash flow generating in the next several years.

[Michael Pack, executive]

Sure. If you go back to really our targets for -- that we've talked about for capital allocation, we expect over for the foreseeable future to really operate in that 65% to 75% of our cash deployment to be going towards growth initiatives, whether M&A or investments internally. So that's going to continue to be a significant piece. I would say this year, it was -- it's obviously been a bit heavier than that with the AeroTech acquisition in Hanola and some of the investing in the NGDV facility.

But again, that's how we think about it over time. And so I think to the extent that we see -- we're going to continue to look at acquisitions and expect to be look for those opportunities. I think from a share buyback perspective, again, going back to our Analyst Day, in periods of higher M&A, you would expect less buybacks, but it's still a very important part of our capital allocation strategy. So in periods when we're less acquisitive, you would expect to see more share buyback activity. But our target leverage is still 2x or less. We're under that still. So we certainly have capacity to continue to deploy our balance sheet.

[Patrick Davidson, executive]

Thanks, Stanley.

[Operator]

Mr. Davidson, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Patrick Davidson, executive]

Great. Thanks, Christine. Thanks, everybody, for joining us today. We're very pleased to be entering the final quarter of 2023 with momentum and a very strong outlook. Please reach out to us if you have any follow-up questions, and have a great day.