Oshkosh Corp

NYSE:OSK

Earnings Call Analysis

Oshkosh Ends Fiscal 2023 with Strong Growth

Oshkosh Corporation concluded 2023 with substantial growth, increasing revenue by 12% and adjusted operating income by 54%, which yielded an adjusted EPS of $2.56. The robust demand for their products led to a fourth quarter with robust order activity, resulting in a record backlog of $16.8 billion, setting them up with a nearly fully booked 2024. Looking ahead, Oshkosh anticipates a full year 2024 adjusted EPS of $10.25 and has increased their quarterly dividend by $0.05 to $0.46 per share, marking a 12.2% rise and the tenth year of double-digit dividend growth.

A Stellar Financial Performance Leading into 2024

Oshkosh Corporation concluded 2023 on a high note, exhibiting significant growth in both revenue and earnings for the fourth quarter, thus cementing a year of strong financial results. Revenues rose by 12% while adjusted operating income leaped by a remarkable 54%, achieving an adjusted operating margin of 9.7% and an adjusted earnings per share (EPS) of $2.56 for the quarter. This performance was underpinned by robust demand for Oshkosh products, as reflected in a record-breaking backlog of $16.8 billion, providing clear visibility for the year ahead and beyond.

Strategic Investments and Acquisitions Fueling Growth

The company's ongoing investments in market-leading technology and strategic acquisitions like AeroTech and Hinowa have not only positioned Oshkosh for sustained growth but also augmented its full-year revenue, with revenues up 16.6% to $9.7 billion. These initiatives delivered a remarkable 129% increase in adjusted operating income to $909 million, culminating in a full-year adjusted EPS of $9.98. The recent purchase of AeroTech adds considerable value and capability in the airport and air transportation support markets, setting Oshkosh up for further expansion and solidifying its status as a leader in sustainable business practices—evidenced by its place in the top 2% of the global Industrial Group by Dow Jones for sustainable practices.

Electrification Strategy Showing Promising Signs

Oshkosh's forward-looking strategy includes a strong emphasis on electrification. The notable orders for Stryker Volterra electric RF units from the Japan Ministry of Defense and Paris' Le Bourget Airport underscore the company's commitment to sustainable innovation. These cutting-edge, battery-powered units help lower carbon emissions and highlight the potential for Oshkosh's customers to electrify their fleets, indicating an energetic outlook for the company's role in the future of eco-friendly transportation solutions.

2024 Outlook: Anticipated Growth and Investment

Building upon a successful 2023, Oshkosh has set forth an ambitious yet achievable target for 2024. The company is forecasting continued growth, with estimated sales around $10.4 billion and an adjusted operating income of approximately $990 million. The adjusted EPS expectation is set within the range of $10.25, indicative of the company's confidence in its business strategy and market position. This is supported by a planned increase in capital expenditures to $300 million, with an anticipated rise in free cash flow to roughly $425 million. The first quarter of 2024 is expected to generate an adjusted EPS in the range of $2.25, speaking to Oshkosh's positive momentum as the new fiscal year begins.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the Oshkosh Corporation Fiscal 2023 Fourth Quarter and Full Year Results Conference Call. [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 fourth quarter and full year 2023 results. A copy of that release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation.

Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update those -- 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 announce a strong finish to 2023, with significant year-over-year growth in revenue and earnings in the fourth quarter, leading to a full year adjusted earnings per share of $9.98 since. For the fourth quarter, we grew revenue by 12% and adjusted operating income by 54%, leading to an adjusted operating margin of 9.7% and adjusted EPS of $2.56. Demand for Oshkosh products remains robust, and we are pleased with strong order activity in the quarter which led to a record backlog of $16.8 billion and confirmed our previous expectation that we would largely be booked for 2024 as we enter the year. I'll provide more details on demand by business in our segment updates.

Importantly, we believe Oshkosh is well positioned for long-term growth supported by significant investments in market-leading technology, solid market dynamics in key end markets, strong visibility provided by our backlogs and the ramp-up of next-generation delivery vehicle production as well as the benefits of strategic acquisitions like AeroTech and Hinowa that we completed this past year. During the quarter, we were named to the Dow Jones Sustainability World Index for the fifth straight year. Companies must be rated in the top 10% of their peer group for sustainable business practices to be considered for the index, and we were rated in the top 2% of our global Industrial Group by Dow Jones. This is a particularly meaningful accomplishment because it demonstrates that we're driving profitable growth in a sustainable way, which is good for our people, good for the communities in which we work and live, good for the environment and good for our shareholders. Please turn to Slide 4 for a review of our full year highlights.

I'm pleased with our outstanding performance in 2023 as our team's persevered to overcome the impacts of supply chain constraints and inflation to deliver for our customers. We believe the actions we have taken over the past several quarters to operate successfully in a constrained environment will enable us to perform as a more resilient company well into the future. I want to take this opportunity to thank our 17,000 team members for all of their contributions that drove our strong performance.

Moving to full year 2023 results, we grew revenue by 16.6% to $9.7 billion and grew adjusted operating income by 129% to $909 million leading to adjusted earnings per share of $9.98. In addition, we announced several important new products during the year, including the revolutionary new all electric Voltera ZSL refuse and recycling collection vehicle. We are investing in new capacity across the company to support continued growth, including Spartanburg, South Carolina for NGDV, Murphysboro, Tennessee for Volterra ZSL production; and Jefferson City, Tennessee for increased telehandler capacity.

We also expanded into the growing airport and air transportation passenger support markets with our recent acquisition of AeroTech. As a result of continued strength in our end markets, robust backlogs, strong fourth quarter performance and our positive outlook, I am pleased to announce that we are initiating full year 2024 adjusted EPS expectations to be in a range of $10.25. We also raised our quarterly dividend by $0.05 per share to $0.46 per share, representing an increase of 12.2%. This is the tenth consecutive year that we have announced a double-digit increase to our cash dividend. Our dividend growth reflects our robust cash flow generation as well as the board's confidence in the strength of our business and our ability to continue to drive profitable growth into the future. Please turn to Slide 5, and we'll get started on our segment updates.

I'm very pleased with our exceptional execution at Access in 2023. The team delivered another quarter of strong performance with year-over-year revenue growth of 7.1% and adjusted operating margin of 14.4%. These strong results led to a full year revenue growth of over 25% and a 15% adjusted operating margin, representing an impressive 700 basis point improvement. Importantly, we believe there are opportunities to continue to grow the access business over time. Demand for aerial work platforms and telehandlers remain strong, supported by infrastructure investment, mega projects and industrial onshoring projects as well as elevated fleet ages.

Our orders for the fourth quarter exceeded our expectations at $1.7 billion. This yielded a 1.5 book-to-bill ratio for the fourth quarter leading to a 1.1 book-to-bill ratio for the second half of the year, also exceeding our expectation of 1.0. With 2024 largely booked and supply chains and product availability normalizing, we expect order patterns to also normalize. Therefore, we expect 2025 booking activity will largely occur during the second half of 2024, which is reflective of more typical seasonality in a healthy access equipment environment. As such, we expect order activity to be lower in the first half of the year compared to 2023.

As we've discussed in the last few calls, we are expanding telehandler capacity to support strong market dynamics and the significant opportunities we see in the North American agricultural market, for our telehandlers. We expect this capacity expansion to help us better support our customers as well as drive further growth and strong financial performance. Work to repurpose our Jefferson City facility to telehandler production is progressing well. We expect the project to be complete in 2024 and build rates will increase as additional production lines come online. Please turn to Slide 6, and I'll review our Defense segment.

Our defense team delivered an exceptional quarter with an adjusted operating margin of 10.6%. The strong results were driven by JLTV orders in the quarter, which included a favorable mix of trucks and kits. Domestic JLTV production will conclude in early 2025, but we believe we will continue to have opportunities to supply JLTVs to foreign allies through the direct commercial sale process in 2025 and beyond. Oshkosh already has a great reputation among international customers who view our JLTV as the right solution to meet their protected mobility requirements.

In addition to JLTV orders in the fourth quarter, we announced a contract valued at up to $342 million over a 5-year period to deliver medium equipment trailers or MET. The MET is a 6-axle trailer designed to be pulled by the OshKosh enhanced heavy equipment transporter with the ability to haul payloads up to 60 tons. We are scheduled to deliver the first trailers for testing in May 2024. Before I leave the Defense segment, I'm happy to report that the USPS' next-generation delivery vehicle program is progressing well. We have been building test [indiscernible] units and remain on track to move into low rate production in April 2024. Production is expected to ramp up throughout 2025, and with plans to achieve full rate production in 2026. Let's turn to Slide 7 for a discussion of the vocational segment.

Our vocational segment also delivered strong year-over-year revenue growth in the fourth quarter of 26% primarily driven by the benefit of $176 million of AeroTech sales. We are particularly pleased with vocationals full year adjusted operating margin of 9.7%, a 230 basis point improvement over the prior year. We are starting 2024 from a position of strength, and we expect improving supply chains and strong pricing and backlog to support a solid 2024. With strong order rates and backlog, we continue to increase capacity for our municipal fire trucks to improve throughput at Pierce to support high demand. We are confident that the investments we have been making in new products and production capacity will drive strong earnings growth in this segment.

The AeroTech integration is progressing well, and the team delivered a strong finish to the year. We believe that robust demand and solid execution have positioned AeroTech for meaningful growth in 2024 and beyond. Passenger air traffic has rebounded to be in the range of pre-pandemic levels, and our outlook is positive. Our view for AeroTech is further bolstered by a strong new product pipeline and ongoing synergy opportunities. Our team continues to build on its with international airports that are seeking to reduce their carbon footprint.

During the fourth quarter, we booked key Stryker Volterra electric RF orders with the Japan Ministry of Defense and Paris' Le Bourget Airport. These revolutionary new battery-powered ARP units support lower carbon emissions in a responsible and sustainable manner while delivering superior performance. When you combine these Volterra RF orders with our Pierce Volterra fire trucks and McNeilus Volterra ZSL refuse and recycling vehicles, you can understand why we are so enthusiastic about the long-term potential for our customers to electrify their fleets.

With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2024.

[Michael Pack, executive]

Thanks, John. Please turn to Slide 8. We Consolidated sales for the fourth quarter were $2.47 billion, an increase of $263 million or 12% over the prior year quarter. The increase was primarily driven by the benefit of $176 million of AeroTech sales in the vocational segment, which was acquired in the third quarter of 2023 as well as improved pricing. Defense sales were also up in the quarter versus the prior year as a result of strong orders in the quarter, which drove a positive cumulative catch-up adjustment. Adjusted operating income increased $84 million over the prior year quarter to $240 million or 9.7% of sales, a 260 basis point improvement versus the prior year.

The improvement in adjusted operating income was largely driven by favorable price cost dynamics, favorable mix, favorable cumulative catch-up adjustments at defense and the benefit of AeroTech results, offset in part by higher incentive compensation and SG&A expenses. Adjusted operating income exceeded our most recent expectations primarily due to stronger results at Defense. Defense adjusted operating income benefited from stronger JLTV orders at a better mix, which led to more favorable cumulative catch-up adjustments. Defense also benefited from international drug commercial sales at favorable margins. Our strong adjusted operating income led to adjusted earnings per share of $2.56 in the fourth quarter versus $1.63 in the prior year. As expected, free cash flow was strong in the quarter, leading to full year free cash flow of nearly $275 million. Please turn to Slide 9 for a review of our expectations for 2024.

We expect growth to continue into 2024. Demand is strong for our products as evidenced by our $16.8 billion backlog at December 31, 2023, and supply chain conditions have improved which we believe supports our outlook for growth. On a consolidated basis, we are estimating 2024 sales and adjusted operating income to be in the range of $10.4 billion and $990 million, respectively. We are estimating adjusted earnings per share will be in the range of $10.25. At a segment level, we are estimating excess sales and adjusted operating margin to be in the range of $5.2 billion and 15%, respectively. Included in this margin expectation is an approximately $20 million increase in new product development investments versus 2023.

Turning to Defense, we expect sales of $2.1 billion for the year. We expect adjusted operating margin to be in the range of 2.5%, down from 4.3% in 2023. We expect NGDV first year production ramp-up costs, combined with increased NPD investments will total approximately $35 million. We also expect an unfavorable product mix. As a reminder, NGDV production is expected to ramp up throughout 2025, and we expect to operate at full rate production in 2026. As such, we expect NGDV to be a meaningful contributor to defense sales and profitability in 2025 and beyond. We expect 2024 locational sales adjusted operating margin will be in the range of $3.1 billion and 11%, respectively, representing solid growth in both sales and margin versus 2023.

Our expectations include the full year benefit of AeroTech results, which are expected to contribute approximately $420 million of incremental sales versus 2023 at a double-digit adjusted operating margin. Our expectations also include an increase of approximately $15 million for Murphysboro start-up costs. Our estimate of corporate expenses is approximately $180 million, in line with 2023 with higher new product development investments expected to largely offset lower incentive compensation costs. We expect a tax rate of approximately 24.5%, an average share count of approximately 66.2 million shares and CapEx of $300 million. We expect free cash flow of approximately $425 million, representing solid growth versus 2023.

Looking to the first quarter, we expect adjusted EPS in the range of $2.25, which is up versus the prior year, but down versus the fourth quarter as a result of lower expected results for defense. We expect access and vocational sales and adjusted operating income to both be up sequentially versus the fourth quarter. As supply chains and production throughput continue to normalize, we expect a return of more typical seasonality in our access and vocational segments with the second and third quarters expected to be our highest quarters for sales and earnings.

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

[John Pfeifer, executive]

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

Okay, Pat, let's get started with Q&A.

[Patrick Davidson, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Mig Dobre with Baird.

[Mircea Dobre, analyst]

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

[Michael Pack, executive]

Sure. First of all, just talking a bit about vocational overall with the sales growth that based on my prepared comments, ultimately, the biggest driver of the volume increase north of $400 million or about $420 million of that is related to AeroTech with the balance really being between fire and refuse. Now the other piece to keep in mind there is we did divest the rear discharge concrete mixer business. So that does decrease about revenue about $50 million. So really organically, about $150 million of revenue growth.

I would say right now, we certainly have more capacity coming online Mig, and that's going to help us. I think we're -- our throughput is improving as supply chains improved and Appleton, which is our peers -- the largest peers plan we'll have more capacity coming online over the course of the year with Murphysboro, Tennessee, that will also be supporting our electric refuse collection vehicle production. So I would say right now, there are some capacity constraints. Certainly, if supply chain improves, that will help.

[John Pfeifer, executive]

Yes. Just a little bit more color, Mig, on the fire & emergency business. When you look at our backlogs, we've got really strong backlogs across our businesses, but the strongest backlog we have when you measure it in terms of how many months of backlog do we have is in the fire & emergency business, I mean backlog is years. And so we're continuing to increase capacity. You asked about supply chain. Supply chain is a lot better today than it was a year ago or 1.5 years ago, but it's still not perfect. It's -- our on-time delivery is still kind of in the low 80s, I would say. So we still have some constraint with supply base, but it is a lot better I think more of the issue is getting to just continuing to prudently add capacity like Mike mentioned that we're going to put fire trucks down in Murphysboro, because we've got the ability to do that alongside the electric refuse and recycling vehicles. But both of those segments, fire & emergency and environmental refuse and recycling collection are really strong segments, strong demand. Both have a lot of desire for new electrified platforms, which we're going into production with as we speak on both. So there's a lot of optimism long term in those businesses for us.

[Mircea Dobre, analyst]

Understood. Then if I may follow up on your comments here, if we're sort of looking at what's embedded in terms of volume, for fire in 2024. Is there any volume growth? Or is that still sort of on the common '25, '26 as you're adding capacity? And also, can you comment at all on margins here where we are relative to either prior peak or however you want to frame it?

[Michael Pack, executive]

Sure. I would say that from a volume perspective, there is a step up in volume and in fire and emergency, but I would say it's more back-end loaded. And I -- so we would expect that as we get into future years, we'll see further step-ups there. In terms of margins, I think we're quite pleased with the progress we're seeing. So we're underlying, you have a strong fundamental margins in the fire truck business. We've talked a lot about the pricing we're getting and really that price cost dynamic is practice much normal in 2024. We do have more price coming after that. So I would say that's strong. We're continuing to see strong margins growing in refuse and recycling and AeroTech, of course, is already delivering double-digit adjusted operating margin. So guide's 11%. We've talked about the vocational, we viewed it as a segment that could be 12% plus. So we see further runway in the future for the margin progression of this segment.

[Operator]

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

[Jerry Revich, analyst]

I'm wondering if you could just talk about the puts and takes around excess equipment margin outlook for '24, really strong performance in '23 and essentially guided to basis points on some modest sales growth, but logistics costs, I believe, have been declining for you folks in that line of business. So I'm just trying to understand, is that some conservatism baked in the guide early in the year? Or are there discrete headwinds that we should be keeping in mind relative to the strong performance in '23?

[Michael Pack, executive]

I would say ultimately, the outlook for access is pretty straightforward. I think -- we have a couple of hundred million of revenue growth. And one thing to keep in mind is we're adding capacity in that segment as well with Jefferson studies. So supply chain is not normal, that could provide some of less but more importantly, we're operating closer to capacity. So the uplift in volume is until we have more capacity coming on online is somewhat limited. So we see that revenue growth from an incremental margin perspective, I would say we're seeing pretty normal incrementals read through. I would say the one adjustment is pretty much the higher NPD that I referenced in my in my opening comments of about $20 million. So -- and there's a little bit of mix. I would say the mix is modestly less favorable, but that's not really the biggest driver. I think if you really adjust for that NPD, you're really seeing a pretty normal incremental margin reading through. And again, as that capacity comes online, later in the year that we see some further volume opportunities for the future.

[John Pfeifer, executive]

Jerry, I'll just add to that because you mentioned input costs and you [indiscernible] mentioned freight. You're correct. There's been some relief in terms of freight costs. But when you look at the total input costs, for our businesses, take access equipment in this case. While it's really good that inflation has come way down as we look at the totality of it, we're not seeing deflation. So you can pick out one input costs like freight and say, yes, well, freights come down. But when you look at the total of everything, really good that inflation's come way down, but it hasn't gone into deflationary territory.

[Jerry Revich, analyst]

Super. I appreciate the color. And then your defense sales outlook was pretty robust for '24 versus our numbers. I'm wondering could you just flesh out the anticipated ramp-up in international JLTV sales, how much that's contributing and prospects for that to continue into '25? and maybe expand on the contribution of the USPS contract over the course of this year and into '25.

[Michael Pack, executive]

Sure. I think next year -- I think -- what I would say is there's a couple of moving pieces. I think from a revenue standpoint, we had a little bit of volume pushed out of the fourth quarter to next year that bolster next year a bit. And I think ultimately, with our -- just our production rates, that's really sort of the result of where we're ending up from a revenue perspective. I would say right now, going in international is sort of flattish. You have some gives and takes. We had a large -- we had larger Belgium deliveries. We'll have other international deliveries this year. So that's international is probably not the biggest mover there.

Postal Service is a smaller portion of the revenue this year. So there will be a ramp-up. I did mention in prepared remarks from a margin standpoint really between start-up costs as well as a bit higher NPD, about a $35 million headwind when you think about that year-over-year. I think the very important part, though, is as we look at NGDV, 2025 a big ramp-up year and 2026, we expect to be at full rates, that's going to become a very significant revenue contributor and margin contributor in 2025 and 2026.

[Operator]

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

Our next question comes from the line of Angel Castillo with Morgan Stanley.

[Angel Castillo Malpica, analyst]

I was wondering if we could actually unpack the order commentary a little bit more, maybe in particular, looking at the kind of 1Q dynamic, I think historically -- or you've talked about a return to normal seasonality if I'm not mistaken, just kind of billings in the first quarter typically pick up pretty materially versus the fourth quarter, kind of to the tune of kind of 30%. So can you talk about the pickup that you've kind of embedded in guidance in terms of earnings growth for access equipment. That's where I'm referring to that 30%. So is that generally what you expect in terms of billings for the first quarter. Can you give us more color as to how to think about volumes kind of sequentially there?

[Michael Pack, executive]

I think there's -- yes, trying to unpack, I'll kind of talk about the volume first and then we can talk about the seasonality of orders. We did see in the -- in our prepared remarks that we do expect volume to be up somewhat for access and vocational from -- sequentially from Q4 to Q1. But I think just with the return -- with more normalcy with production throughput, supply chains getting better. I think you are going to see some more typical type seasonality with our highest quarters really being from a revenue and profitability perspective, our second and third quarters with the first quarter and the fourth quarter being a bit lower. So that's fairly typical. So I would expect some volume step up there. You're probably a little rich at 30%. But that's what we're thinking about.

And then in terms of -- I'll let John talk about just order cadence.

[John Pfeifer, executive]

Yes. So Angel, talking about orders. So right now, with our Access Equipment segment, we're still in a very unusual time. It's not normal for us to go into a year. We're in early 2024 and be fully booked for the whole year. And that's the position that we're in. So when we talk with our customers, the big publicly traded customers that we have as well as all the thousands of independent customers that we serve, we're really expecting to go -- start to go back to a normal order cadence. We're starting to see more equipment replacement in 2024, which is a good thing. -- because equipment needs to be replaced. The fleet age is old. And our customers are indicating that they want to go back to kind of a normal AOP cycle, meaning we really talk at the end of the year about what the following years orders are going to look like.

So we expect that season -- it has not been normal seasonality in orders in the past couple of years, but we do expect normal seasonality to come back into the market, which may mean that we don't have huge orders in Q1, but we'll continue to see healthy orders long term because we continue to expect the market to perform beyond 2024, into '25 and '26 because of all the market dynamics that are in play. So that's what I'll say about that.

[Angel Castillo Malpica, analyst]

That's very helpful. And then maybe switching over to the free cash flow guide, pretty material step-up here kind of year-over-year. So can you just talk about kind of the puts and takes as to what's driving the improvement? And how should we think about that versus maybe your longer-term targets that you had set out at past Investor Days for kind of 2025 and beyond.

[Michael Pack, executive]

Yes, yes. So a good solid step up. I would say, I would expect generally working capital -- some working capital decrease, particularly at -- in our Defense segment, that's certainly going to be a benefit with some of the timing of our programs in billings and collections around that, particularly as JLTV, the domestic program winds down. CapEx is still going to be at a somewhat elevated level about $300 million, which is a bit lower than last year. I would expect as we get into in 2025. As I've said on previous calls, I would expect a step down. And I think the other driver is we've had some significant investments beyond just the CapEx element of it and our NGDV program. So that's certainly going to be another benefit as we look year-over-year. But I think as cash flow as we continue to benefit from the ramp-up of our new production capacity. CapEx normalizes a bit more. I would expect that you should see continued progression there from a cash flow perspective as we look beyond 2024.

[Operator]

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

[Charles Albert Dillard, analyst]

So my question is actually on access equipment. So part of the price increase over the last couple of years came from surcharges due to higher input costs. Will some of those costs maybe rolling back or kind of like staying steady. Like how are you -- are you having conversations about rolling that back with some of your customers?

[John Pfeifer, executive]

Chad, as I talked about just earlier, when you look at the totality of our input costs, we're not seeing deflation. So that's the position that we're in right now.

[Charles Albert Dillard, analyst]

Got it. Okay. And then just sticking with access. Can you just talk about the mix independents versus nationals this year versus '23. And can you talk about like what you're seeing from like a regional standpoint for that segment?

[Michael Pack, executive]

Sure. I would say from a mix perspective, it was generally for the first 3 quarters of the year is a little bit stronger nationals versus independents, a bit more balanced than in the fourth quarter. I would say if you wait together the year we expect fairly similar dynamics. Going into next year, I would say maybe a little bit of customer mix next year. I think the bigger thing is I think there are some product shifts a little bit of a boom and telehandler mix shift. But again, not the biggest piece of the dynamics going forward. So I think that's really what we're seeing at this point from a mix perspective. So next year, probably -- or 2024, a little bit heavier weighted towards the nationals versus independents.

[John Pfeifer, executive]

But I mean, when you look at -- we say when you look at the mix between the NRCs and the IRCs, maybe a little bit, but it's pretty balanced. If you look back to '23, pretty balanced between the NRCs and the IRCs. We expect that relative balance to continue going forward. If you look at our business regionally around the world, in 2023 for access equipment, every region of the world had really nice growth. Every region of the world had really nice growth in 2023. We go into 2024, we expect continued long-term health in the North American market, which is our biggest market because of all the dynamics we talk about. If we look around the world, we do expect some weakness in Europe. I think probably whatever industry you're in, in Europe, people are expecting a bit of weakness in 2024. And -- but the other regions of the world, we're continuing to see relatively healthy market conditions that we're addressing.

[Operator]

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

[Tami Zakaria, analyst]

So my first question is, I think you mentioned you booked [ Stryker ] Volterra orders with the Ministry of Defense in Japan and also an airport in Paris. Are you able to size the 2 opportunities? How much in sales do you expect from these contracts at run rate? And could the order size or contracts become bigger over time? I'm just trying to size the opportunity for this product line in overseas markets.

[John Pfeifer, executive]

So I think the meaning of the orders that we won. These are airport orders. There are airport rescue and firefighting vehicles, the electric vehicles that we put into the market, brand-new platform for us. I think the meaning of it is, is that we've never had orders from these countries and these places before. We've never had orders from airports in France. I don't know that we've ever had orders from airports in Japan. Australia is looking at orders from us as well. The new product innovations we're putting into the market, in this case, in electrification are very desirable products and they're very notable products and they're going to drive nice share gains for us. So this airport rescue and firefighting market is one of our smaller end markets that we serve. So it's not a gigantic market, but they're very, very profitable products.

And I think the bigger meaning is that we're putting electrified products into the municipal fire market. into the environmental market with refuse and recycling vehicles. We've got the NGDV, which is an electric vehicle for the last mile delivery and specifically the United States Postal Service. I think it's just an indication of the power of some of the new products as we get them into the market. And one of the first ones that we took to market was this airport rescue and firefighting vehicle, and that's why we highlighted this.

[Tami Zakaria, analyst]

Got it. That's very helpful. And then my second question is, just wanted to understand the first quarter guide for the Defense segment a bit better. you're expecting defense earnings down sequently, does that include any cumulative cost adjustment negative impact from that versus 4Q? Or is it apples-to-apples or without that adjustment, do you expect the core earnings to be down sequentially?

[Michael Pack, executive]

Yes. What -- Tammy, what we benefited from was positive cumulative catch-up adjustments in the fourth quarter, essentially, you're spreading -- we received more JLTV orders for the domestic program. That's really the last order for domestic. You're spreading more costs over more units, and that's why you get a positive cumulative catch-up adjustment. So that does not recur. So we would not expect any meaningful cumulative catch adjustments foundationally in the first quarter. So that's really the big difference from Q4 to Q1.

[Tami Zakaria, analyst]

Got it. So the core earnings should be somewhat similar to the fourth quarter and the first quarter?

[Michael Pack, executive]

Yes. I would think that just generally our -- because of -- in general, we would not expect because of these large orders creating cumulative catch-up adjustments. I would -- I don't know that defense earnings will move around quite as much from quarter-to-quarter this next year?

[Operator]

Our next question comes from the line of Tim Dean with Citigroup.

[Timothy Thein, analyst]

Question on going back to vocational and more specifically, just on AeroTech. Can you maybe speak to what you're seeing there from just the integration as well as if you look at $730 million or so in revenues is quite a bit above what we would have thought. I don't know if that was a wrong expectation or what, but maybe just speak to kind of just order activity and then ultimately, your thoughts around the synergy expectation for '24.

[John Pfeifer, executive]

Yes. So it's John. I'll answer this question. We feel even better today about AeroTech than the day that we closed on the acquisition. We love the end market. We already understood a little bit about the end market because of some of the other products we have already been supplying into the airport marketplace. Now we're a much bigger player in the airport end market in terms of ground service equipment. But this is a growing market, what we believe it's going to be in long-term secular growth. We see our position is really strong. We see the fit between the technology that AeroTech has already been working on with our technological capabilities.

So you're going to see a lot of autonomous functionality continue to come into that market, which is what our customers, the big airlines and the airports want -- you're going to see electrified product on runways more in the future than you do today in terms of lithium ion electrification, but this business has really great people. It's got a great culture. It's a good cultural fit with us. And we just feel really strong about it and strong about the growth opportunities that we can get. And I can -- the -- from a synergy perspective, the real power behind the synergies is behind the technological synergies. Of course, there's other synergies we get in terms of operating capability and that sort of thing. But the real powerful synergy long term is the technological synergies that are so strong with us in AeroTech.

[Operator]

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

[Seth Weber, analyst]

A quick question. I think what I heard in the remarks was $35 million of profit headwinds in the Defense segment for 2024 related to the new NGDV ramp and stuff like that. I guess is that correct? And how should we think about that number as we go into 2025 as your production starts to ramp, does that $35 million headwind start to come down? Does it go away? I'm just trying to think through the defense margins for the next couple of years.

[Michael Pack, executive]

Yes. Yes, you quantified that correctly at $35 million. That's really a first year phenomenon. So once you're ramping up, I would expect that as we sort of flip to next year into 2025, there's going to be meaningful growth in revenue from NGDV and then 2026 is going to be sort of full rate production. That's a program we've talked a lot about. It's going to be -- it's a great good solid margin program. So that -- it's really just a first year phenomenon when you're kind of working through that low rate production, which is going to start in April.

[Seth Weber, analyst]

Okay. That's helpful. And then just on the -- your comment about on access, I think you said $20 million of new product development. I'm just trying to conceptualize, like is that the new normal going forward? And I'm just trying to think through like our incremental margins structurally closer to 20% versus 25% that we used to think about -- like is this a business that you're just going to be throwing more money at big picture like is this going to be an annual kind of step-up that we're going to see going forward? Or is there something unusual here that's triggering this big inquiries.

[Michael Pack, executive]

No, I wouldn't normally -- I think that it's -- I think if you look at earlier last year in particular, I think we're probably more at that run rate for NPD right now. Earlier in the year, though, there was -- with supply chain challenges, there's a lot of focus on battling through supply chain challenges and so on. So I would -- I truly -- I think the way to think about access margins is the 20% to 25% incrementals. It varies a bit based on product mix. have your boom that's going to be generally higher. Some other products could be slightly lower. So I think right now, it's really sort of the math equation that revenue is up about $200 million. And it just so happens with NPD being up, that ends up being about 10% of the incremental.

[Operator]

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

[David Raso, analyst]

After the first quarter guide, you're implying the rest of the year has down earnings year-over-year. And I'm just trying to understand if you could break up the $80 million of new product development, the investments you spoke of between access, vocational and defense. What's the cadence of that throughout the year? Just so we get a sense of how you're thinking about the rest of the year after 1Q being down. I also know the interest expense will be higher obviously driven a bit by AeroTech. What is the interest expense number for the full year as well?

[Michael Pack, executive]

Yes. I would say -- now keep in mind with interest, there's 2 dynamics because we had about $800 million of cash last year. So we were earning about 5% on that early in the year. So I would look at interest as being a $35 million headwind year-over-year. So I think that's certainly a good question on your part there that is a driver. The NPD is fairly spread over the course of the year. So there's not a big dynamic. I think if you were to look at all the quarters, what I would expect is that you're going to see the 2 highest quarters are going to be the middle 2 quarters I think we do certainly have start-up expenses related to defense. So that comes into play as well. and that's sort of over the course of the year. So I don't really see a step-up necessarily in NPD or those start-up costs will be sort of the heavy in the second quarter as well. So that's how I think...

[David Raso, analyst]

The interest expense and Mike, on an absolute level, you're thinking of it for the full year around $100 million? That's the net interest income and a whole...

[Michael Pack, executive]

So net-net, I would say -- net-net, I would expect that net interest expense is going to be up about $35 million versus prior year.

[David Raso, analyst]

Okay. So '23 was net $53 million-ish. It's like $85 million, the net of those 2 line items, interest expense and interest income, right? That's the comparison. The $35 million of those 2 net. Correct? Just I just want to make sure I'm modeling that correctly.

[John Pfeifer, executive]

I think that's correct.

[Michael Pack, executive]

Yes, you're right there. You're right.

[David Raso, analyst]

Okay. And real I'm curious, the backlogs are impressive and how far they go out. I assume you're starting to have some conversations about [ '25 ] for the access business. Just curious, obviously, folks are aware yourself and others are adding capacity. Any conversation impact from these capacity additions? I mean, we know the players in Mexico and what they're looking to add and not saying historically, they've penetrated the rental companies significantly, but maybe they're now getting around the import tariffs and so forth with the base in Mexico. So just curious, what are the early conversations like with that capacity potentially coming out.

[John Pfeifer, executive]

Well, I'll answer this is, John, David. I'll answer that question. When we look at the capacity we're adding in Jefferson City, Tennessee, It does a lot for us, and it does a lot for our customers. And we need that capacity, and we study this very carefully, and we study it carefully even with our customers. I'm going to say that, first of all, with regard to telehandlers, JLG has not really had significant inventory of telehandlers in probably a decade. So when we make a significant investment to expand capacity, there really is a rigorous process that we use before we make any commitments. And we survey the market, our customers desire to have our brands in their fleets. And we will also always build in our ability to pivot if there is a market issue that arises. We don't see a market issue on the horizon at all.

We understand the competitive dynamics, but we also understand our position in the market and what our customers' desire is for our product and their fleets. And then we talk -- that includes our new ag end market. that we're already serving today, and we see the significant opportunity that we have with the channels that we're serving there. So we feel that we have a very prudent well-thought-out capacity plan for access equipment. And that capacity, by the way, doesn't just help us with telehandlers. It also helps us with booms where we need more capacity because it frees up boom capacity for us in other places. So this is a well-thought-out plan. We have to have the capacity to continue to meet the needs of the market, which we expect to continue to grow. And that's in spite of whatever the competitive dynamics that we see alongside us as we continue forward.

[Operator]

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

[Michael Shlisky, analyst]

Just I was curious why has the USPS told you about their readiness for receiving the first NGDV and the higher run rates in 2025 and 2026. I guess I'm asking with respect to whatever EVs are sold, their kind of readiness on the infrastructure for charging and then more broadly, the ability the driver training and the mechanic training I'm just kind of curious to see how confident you are that when you're ready [indiscernible] to actually take the vehicle?

[John Pfeifer, executive]

Yes. Great question. This is John. I'll answer it. we work really closely with the United States Postal Service including myself and the postal [indiscernible] general. I mean we're very connected. We know where they are planning to put the verse vehicle, the first vehicles. We know what their readiness is. We are planning to work very closely with the United States Postal Service to onboard vehicles and mentioned, training and making sure that things go really well in the early days. We talk about our slow ramp. We start production in a couple of months, and we talk about our slow ramp Part of that slow ramp is because together with the United States Postal Service, we want to make sure right from the beginning, we really get this right.

And then we start to increase production more significantly in 2025. to get to full rate production in 2026. That's all well thought out together with the Postal Service to make sure that we're putting vehicles where we're ready to put vehicles and where the postal service is ready to put vehicles. So we feel like we've got a really good solid plan and the Postal Service is really leading the way on their development of being ready to take vehicles.

[Michael Shlisky, analyst]

Okay. Great. And just to follow up on defense more broadly. Can you comment on the bidding pipeline you've got for various contracts? Has that grown over the last 12 months? Do you feel like there's actually fewer opportunities out there? And maybe as a question there just about the NGDV. Are there any non-military vehicles that you're looking at over the next couple of years as well, whether it's private fleets or et cetera, for delivery.

[John Pfeifer, executive]

Sorry, when -- the first part of your question, that was related to last mile delivery vehicles, I think, is that right?

[Michael Shlisky, analyst]

No, I was actually asking more broadly about the defense bidding pipeline in general, and then I was also asking if you comment specifically on any private sector that you have in the pipeline, maybe after 2026.

[John Pfeifer, executive]

Yes. Okay. So first of all, in our defense business, our core defense business, we've got a really solid foundation of programs, and this includes our core product of [indiscernible] wheel vehicles of over $1 billion. And this is a good portfolio of businesses. I'm talking about post JLTV really, but that includes JLTV for international customers. We have been investing a lot in winning programs in the combat space, which is really important for us because that's the priority for the Department of Defense. So that -- it's a place where we can showcase our capability and our technology and earn good margins while we do it. So when you look at that, we won the Stryker vehicle that's considered a combat program, where we won a prototype award for the RCV, which is robotic com vehicle. That's a big program. And we've won some other smaller programs as well. When you add them all up, it's really a healthy book of business. And it's at a healthy margin level.

When you look at some of those combat vehicles, the margins are better than our core technical wheel vehicle program. So as we go forward, our core defense business without the DoD's contract for JLTV is a little bit smaller, but it's still a really healthy book of business for us, and we expect it to continue to be so. And we'll continue to buy for, and we'll continue to win some combat programs along the way, which really help to enhance that business.

[Operator]

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

[Steven Fisher, analyst]

I'm just curious how much visibility to margins do you think you have at this point in access in 2024? What could move it? I mean if you're sold out and presumably, with the view that you're sold out, I imagine you can lock in much of your costs for the year. So how much of those costs do you have locked in. And what could still move the margins from here?

[Michael Pack, executive]

I think you're spot on from a cost perspective. We -- from a lock perspective, we have pretty meaningful locks on steel in place, particularly the hot-rolled coil, some contracts in place on plate as well. There's we'll obviously continue to watch inflation, which is still present, as John said, that's moderated. So I think it really comes down to production throughput supply chain, those types of things, things that you would expect in a typical year because we have -- because of the great visibility we have. So overall, we'd say that during the year, we feel as though we have pretty good visibility to our margins.

[Steven Fisher, analyst]

Okay. Great. And then you have a $12 EPS midpoint target out there for 2025. Granted, it was introduced almost 2 years ago in very different conditions. I guess I'm curious how you're thinking about momentum in vocational and to some extent, in defense. I mean it seems like there's going to be some debate about access direction for 2025 for a while, or maybe you would disagree with that. But I guess I'm curious at the moment, do you think you have enough positive momentum in your, say, non-access businesses or even in general, just to hit your 2025 targets?

[John Pfeifer, executive]

Well, the simple answer to your question is yes. I mean, we have continued to stand by our 2025 guidance. When you look at our business, we're a bit capacity constrained in 2024. But when you look at our business and what we're going to continue to do beyond 2024 and the health of the end markets, we would -- we believe that and firmly believe that access is in a great position. The markets are strong. We talk to our customers all the time about what to expect beyond 2024. We -- when you look at some of the dynamics happening, we expect that to be a really good year as well in the Access Equipment segment. But then you look at all the other end markets that we're serving, you look at the material ramp in postal service vehicles in 2025. We look at the continued expansion of our vocational business in 2025 -- we've always have never wavered from our 2025 long-range guidance that we have provided.

[Operator]

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

[Nicole DeBlase, analyst]

Maybe just first question on location all another really strong quarter of order growth there. Anything on like the underlying businesses and the drivers of that strength?

[John Pfeifer, executive]

Is there anything -- I'm sorry, I missed your question. Is there...

[Nicole DeBlase, analyst]

Yes. Just trying to understand like if you drill down to the key drivers of vocational like the individual businesses, where the order strength is coming from is it kind of across the board?

[John Pfeifer, executive]

Yes. Okay. I'm sorry. I just -- I maybe just missed misinterpreted your question. Sure, there's a lot of really healthy dynamics. Long term, look at the Fire & Emergency segment. The fleets in the Fire & Emergency segment are aged, and you couple that with really healthy municipal budgets, that's continuing to propel municipalities across North America to continue to upgrade their fleets. And then when you add to that some of the new technology that we're coming out with the Volterra electric municipal fire truck, that's going to continue to propel the market for, we believe, many years into the future as there's a lot of municipalities around the country that are really actively wanting to electrify their product. And when they electrify with our product, this is not just a sustainability initiative. This is a performance improvement. And it's a total cost of ownership improvement for municipalities and their fire fleets.

You look at the environmental services business with our electric refuse and recycling vehicles, even the traditional product that we have. This is a healthy market where our customers are all continuing to look at fleet replacement and upgrading to electric vehicles in the future. and that's what we're preparing to allow them to do. The airport markets, you look at the need for more capacity every time you hear the CEO of a major airline talk about, we need to continue to expand capacity. They're not just talking about airplanes. Every time you add an airplane to your fleet, you've got to add ground services equipment. You look at global airport expansion that's continued to go on -- projected to continue to go on for years into the future. That's all -- that all continues to bode well for our AeroTech business. So the dynamics in our vocational business are really, really solid.

[Nicole DeBlase, analyst]

John, definitely encouraging to hear all of that. And I guess just last question is capital allocation thoughts. You guys have been pretty active on the M&A front lately. How's the pipeline? And should we expect maybe a bit more of a shift away from M&A since you're integrating AeroTech this year?

[John Pfeifer, executive]

I would not say that there would be a shift away from M&A. We've got an always-on mentality. If you're really truly an acquisitive company, you have to have an always-on mentality because good M&A is a process of patients, so to speak. You really have to know where you want to acquire, and you have to be very, very patient until the right opportunity comes. And if you don't have an always on a constant mentality of paying attention to where do you want to be and what targets make sense in terms of a fit for our company, then you miss the opportunities when they arise. So it's really hard to predict when that's going to happen, but it will happen again. And our always-on pipeline will be in play for quite a while as we have a great balance sheet and we have the opportunity to continue to add value to this company by doing that.

Now having said that, we always expect to return 25% to 35% of our free cash flow to shareholders, we continue to increase our dividend that you saw today, and we'll continue to do share buybacks and we kind of weigh that together with when we have opportunities to make acquisitions. So I think that's the color that I'll add on that.

[Operator]

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

[Steve Barger, analyst]

John, to your comment on being capacity constrained this year, can you quantify the level of incremental capacity for '25 that you expect relative to the [ $10 billion ] revenue guide this year?

[Michael Pack, executive]

Certainly, there's a step-up. I guess it's kind of early to quantify it, Steve, but there's a meaningful step-up if you think about the Murphysboro facility for vocational, which is an 800,000 square foot facility or 800,000 square foot plus we're going to have post coming online next year, which is going to be a meaningful contributor. The revenue contribution is pretty small. It's going to be meaningful. And I think talking about 2025, that's going to be a meaningful contributor to profitability. And of course, we've talked about access having -- there's a lot of capacity that becomes available that you're not necessarily going to have year 1 sales on that, but we're really investing for the long term. So we see step-up opportunities there as well. So as we look to next year, we just don't see the same level of constraints that we're facing today.

[Steve Barger, analyst]

I guess, does that suggest that organic growth ex price could be like 10%? Or should we be thinking mid-single digit just to help level set how people are expecting the profitable growth commentary that you talked about in the press release.

[John Pfeifer, executive]

Yes, I don't know that I'm comfortable to give you a number right now, but let's just say, in 2025, we expect it to be a material number.

[Steve Barger, analyst]

Got it. And then just 1 quick one. John, going back to your comment on direct commercial sales for JLTV, are those predictable enough that you're building some of that into your internal model for '25 and beyond -- or is that unpredictable, meaning some years will be [ 0 ] and some years could have a material benefit?

[John Pfeifer, executive]

I don't think we'll see years that will be [ 0 ]. That's for sure. Let me just suffice it to say that those are -- that's a really good business for us. It's typically hundreds of units per year, not thousands, which would be for the DoD. But when I say that, I will say that it's not going to be surprising to hear that it's continuing to grow, that the international direct sales are continuing to grow. And I think, unfortunately, we all know why. There's unfortunately conflict in the world, and that conflict creates a desire for many countries to continue to shore up their DoD budgets. And I think that, that's why we're seeing growth in those direct sales to international customers that we have.

[Steve Barger, analyst]

And just 1 quick follow-up on that. How long is the approval process? Or is there an approval process? Or can you basically take an order and ship.

[Michael Pack, executive]

For direct commercial sales, it's largely going to be direct commercial sales that there is an approval process that it goes through.

[Steve Barger, analyst]

Understood. But is that a quick -- typically pretty quick? Or can there be months or quarters [indiscernible]

[John Pfeifer, executive]

Normally pretty straightforward. There could be certain customers where it's a little bit more involved. But normally, there's a process, but we understand the process, we know how it works, and it's pretty straightforward.

[Michael Pack, executive]

Think months, not years.

[Operator]

Mr. Davidson, I would now like to turn the floor back over to you.

[Patrick Davidson, executive]

Great. Thanks, Christine, and thanks for joining us today, everybody. We're pleased to be entering 2024 with momentum and a strong outlook. We will be participating in several analyst conferences in February and March. Perhaps we'll see you there. And please reach out to us if you have any follow-up questions. Have a great day.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.