All right. So for those that don't know me, my name is Felix Boeschen, Senior Machinery and Trucking Analyst here at Raymond James. Today we have Oshkosh presenting as the company CFO, Mike Pack. We also have Pat Davidson, who heads up the investor relations efforts. Mike Pack, I was hoping you guys could just give a brief intro on Oshkosh, who you are, what you do, and we'll kind of jump into a quick fireside chat after that.
Sure. Sounds good. Well, good morning, everyone, and really appreciate you all coming here today, and your interest in Oshkosh Corporation. We truly have a lot of exciting things going on in the company right now that I'm pleased to share. So just starting off, because this is a more of a generalist conference, I did want to give a little bit of background on the company. So at Oshkosh, our purpose is to make a difference in the lives of people, really who are doing some of the most difficult jobs in communities around the world. So think about firefighters or construction workers working at great height, refuse collectors, and Postal Service carriers, as well as soldiers. Our strategy is really summarized in three simple words: innovate, serve, and advance.
To dig into each one of those, we're really an industrial technology company, and under that innovation lane. So if you, if you look at our, our company, we have significant innovation streams going on around electrification, autonomy, connected products, intelligent products. And we're leveraging analytics heavily, both in telematics and helping providing solutions to our customers, as well as in our own, in our own businesses, as well as digital manufacturing. So that's really the innovation chain. Looking at serve, you look at serve as really taking care of the equipment that we're providing to customers throughout the total life cycle. So you think of aftermarket parts and service and the growth lanes around that. But in today's environment, you think more broadly than that, even looking at new revenue streams that come from connected products. And so we see opportunities there. And finally, advance.
Advance, we're really looking at both moving into new product categories. We did that recently with our venturing into last-mile delivery with our, our U.S. Postal Service win. But we're also doing it through M&A, moving into new adjacent product categories, as well as new geographies with, with some recent bolt-on acquisitions that we've had in the company. We, we operate in three segments. We, our largest segment is the Access Equipment segment, and I'll talk a little bit more about each of the segments in a moment. We have a Defense segment, as well as a Vocational segment. The one thing I will mention about the Vocational segment, that is a new segment, for this year. We've historically had four segments. It's really the combination of our fire and emergency segment, as well as our, our commercial segment.
We combine the two because of synergy opportunities from a technology perspective, manufacturing perspective, as well as we see vocational as a growth platform for M&A, and other adjacent product categories as we look out into the future. I'm talking a little bit about where we're at as a company today and recent performance. We had a very strong Q4 in general. 2022 was a challenging year, particularly in the first half of the year due to inflation. In our access equipment business, we largely caught up from a price-cost perspective, as we got to the back half of the year. So we exited the year on a strong foot. And we're seeing very, very strong demand across our businesses. And so that's very exciting for us.
Right now, as we look at 2023, the major thing that we continue to battle through on a daily basis is really supply chain. With our strong demand right now, we are constrained not by demand, but by the ability to get parts, to produce at the quantities we want. Now, the good news is supply chain has shown some improvements, but it's something that we think it's gonna be a continuous process throughout the year. Diving into our segments a bit more, as I had mentioned, access is our largest segment. It's their main focus area is aerial work platforms and telehandlers. We also are in the towing and recovery industry as well.
We are seeing great momentum in that business with strong demand, strong market fundamentals with, not only aged fleets, but we're also seeing a large number of mega projects, $400+ million projects that are taking place with all of the investment in infrastructure throughout the, the country. So that's, that's something that we continue to expect very strong demand in that business going forward. We exited the year with a, with a $4.4 billion backlog at, at the end of the year. So that's really a record for that business to exit a year. Our defense segment is our second segment. Historically, it's been a tactical wheeled vehicle focus, business. We've, we've since migrated into other categories. We're getting into combat vehicles with our, more recent Stryker MCWS program, as well as last-mile delivery.
We have, we will be supplying the postal service with their next generation of delivery vehicles. That program will really start ramping up in 2024. You'll see recent news. One large tactical wheeled vehicle program that we've historically had is a Joint Light Tactical Vehicle program. We did lose the rebid for the JLTV A2 contract. It is in the news. There's a press release that came out yesterday. It is something that we're protesting, and I won't talk more about it right now. I know Felix will ask a couple of questions on that. But certainly happy to talk about that a bit more in a bit more detail. And then last but not least, again, the vocational segment. The vocational segment is really the combination of our fire and emergency segment.
So think about Pierce brand fire trucks, as well as Oshkosh brand airport rescue firefighting vehicles. So this is a legacy segment that has had very strong margins in more recent times. A little bit delayed right now due to municipal contracts and fighting through inflation. But we expect that as we exit 2023 into 2024 with significant pricing and backlog, really strong demand in that business, as well as it joins our refuse collection vehicle business with that.
The really exciting news that we have in the refuse collection vehicle space is that we, a couple of weeks ago, we launched the really the world's first ever fully integrated custom chassis electric vehicle for the refuse collection industry, partnered with a number of our largest customers in that really to understand what their needs are in the world of electrification and how the product could meet their needs. Very excited about that product. It's something that will be ramping up over the next several years. A lot of excitement there. We really see this vocational segment as a growth platform for us going forward, opportunities to get into new adjacencies in the vocational market, as well as natural synergies from a manufacturing perspective, as well as technology.
With that, it's a little bit about the company, and I'll turn it over to Felix, and we can start diving into the Q&A.
Perfect. Thank you. You kind of teed this up for me, right? But the big news yesterday was obviously the protest around the JLTV. You know, could you maybe take a step back, explain to us how big is JLTV today? You know, when is the wind down supposed to happen? What led you to protest?
Yeah. So JLTV, if you look at our defense segment, about a $2 billion segment today, based on our guidance for 2023, we did talk about in our analyst day targets that in 2025, we expected it to be closer to $3 billion, and that's really with the ramp up of the postal service vehicles. So if you look at the size of the public announcement, around the size of JLTV2, and it being a 10-year deal, you it's sort of in that $800 million-$1 billion range of annual revenue, really no impact to us until 2025. But as you mentioned, Felix, it is something that we're protesting because on really, it's something as we looked at it and got the debrief, we see significant risk to our customer, both from a financial, technical, as well as manufacturing capability perspective on it.
That's really why we're protesting the award.
So, you know, maybe help us understand how, how long does the protest period usually last? And I know you have some dedicated manufacturing space specifically for the JLTV. So maybe help us understand if the protest were to be unsuccessful, what, what would happen? How can you react?
Yeah. So, couple things. First of all, typically protests, they go through the GAO. It's typically about a 100-day process. So that's what we expect, in this case. In terms of the facility, we have a dedicated 300,000 sq ft facility. Now, if you look at the need that we have for capacity and the growth that we're seeing in other areas, we recently added about 1 million sq ft facility in Murfreesboro, Tennessee, for the Vocational segment where we're gonna be working on some of our electrified products, including Volterra and our ERCV. So, 300,000 sq ft of manufacturing facility can be very useful to us. So that's something that, obviously, we can find opportunities for that over time. And we have a couple of years to really work through that.
And then, you know, maybe just rounding out, but obviously Defense has had some margin pressures, you know, throughout the last couple of quarters. And, you know, in this bid, it did seem like pricing mattered. So maybe talk to us about that. You know, how do you go about this protest? How do you think about long-term margins within Defense?
Yeah. So, what's important to us is we need to make sure that we're driving margins that are acceptable both to us and to our shareholders. And, historically, our tactical wheeled vehicles have been sort of a mid to high single-digit operating margin. And, you know, that's, so ultimately something more at a commodity-type margin is just not gonna be acceptable to us and to our shareholders. So, the key is ultimately with low prices, we wanna make sure we're deploying capital to things that are gonna drive higher returns. So, that's something certainly as we look at it, obviously we have the know-how. We've been building these. We're facilitized. So, you know, theoretically, we have significant investment that's been made in this historically. So something obviously we're working through as part of the protest.
And then, you know, you mentioned the long-term targets that you have out there. And correct me if I'm wrong, but, you know, as this is happening, the post office has actually ordered more vehicles from you, and they actually have ordered more of an EV mix. So, so maybe help us understand, you know, to what degree in your out year targets, even if you were to not win the protest, how much of that could be backfilled by maybe better than expected post office revenue?
Yeah. What, what I would say is just in general, I'd probably look at it more as a company in total. Obviously, a lot of opportunities for demand. We talked about the strong demand dynamics in all of our businesses. And you're right, in the, in the postal business, obviously stronger mix, really moving from a pretty low percentage of battery electric to 75%. So certainly there's, there's revenue dollar benefit from that. And, and of course, when we look at 2025, there was a billion-dollar range in our revenue there as well. So, there's certainly opportunities over time to, to, to fill in that gap.
Maybe on the post office contract, you know, I think you're on track for production late this year from a start perspective. Maybe help us understand two things. You know, one, how quickly do you think that business ramps into 2024? And then secondly, you know, with the, with the EV mix much higher today than, you know, at, at original contract award time, you know, how does that change the margin profile of that contract for you?
Sure. A couple things. Really, well, our facility will be ready this year, and we'll do some limited production activity, but really it's not material this year, as we said on the last earnings call. The ramp up in earnest is really in 2024. A little bit of impact just with some of the mix changes with the customers, but really it's a 2024 ramp. So you'll start seeing that ramp throughout the year. Then you get into 2025, we'd expect more quantities. And we've said in the past that 2025 will still not be our peak production year. Likely, as you get into 2026, 2027, you'll see even higher quantities. So that, that's really the ramp-up schedule. The way it is a large contract, like other similar to other defense contracts. So we'll recognize revenue on the contract over time.
So what that means is every dollar of cost we recognize or incur, we'll recognize revenue on that. So the margin will be, effectively the margin dollars, or excuse me, the margin percentage is the same for the entire contract, whether BEV or ICE. What happens though is obviously with the selling price being higher and more content in the BEV, you end up with more revenue. So that's gonna drive higher revenue dollars over the course of the contract.
Got it. I was hoping we could talk about the Vocational segment, obviously a newly created segment. Maybe first of all, can you touch on the rationale behind that? And then you did mention the word synergies. So could we maybe talk about what exactly that means?
Sure. So as we, so a couple things, we see a tremendous opportunity and what our core competency and really what our core competency is, is building purpose-built vehicles with high levels of technology in them. And so we like to provide those premium products to, to customers that really value that, that technology and total cost of ownership. So first of all, we didn't see a strategic fit. So we, we have now divested of our rear discharge concrete mixer business, which is really focused on, on leveraging third-party chassis. So now we're focused on really purpose-built vehicles. You see that with the recent launch of our, our ERCV. So now if you think about that, there's, there's synergies on many different levels in Vocational. Number one, you have general cost synergies.
So we'll start seeing cost synergies as we get into the back half of this year and we work through the transition services agreement, for the, the exit of, rear discharge mixers. And then as we look forward, we see opportunities from a technology perspective. You look at our fire truck business where, we have our Volterra line of electric fire trucks. Now you have the ERCV. There's an opportunity to collaborate from an engineering perspective. And in fact, the, the leader of the engineering program for our ERCV is heavily involved over the, the past couple of decades and, in our fire business, so understands custom chassis really well. So that's a real synergy. We see a facility opportunity with our Murfreesboro, Tennessee facility, to build, products together. Again, similar because they're custom chassis and, you're dealing with electrification, you know, also piggybacking on our Volterra.
We also see it as a growth platform. It's kind of a broad name with Vocational. So you can start thinking about the technology we have and what customers value and what other areas or adjacencies in the Vocational space that we can apply that technology and know-how to and see sort of a natural synergy. We very much see it as a growth platform as well.
So maybe we can talk a little bit more about the electric refuse vehicle you announced. And maybe could you maybe compare how, you know, how is it different versus what you do in ICE today, right? And then, you know, I think if I go back a couple of years, you did try to build on third-party electric chassis as well. So maybe help us understand the decision to do it custom now.
Sure. So, and I, again, a lot of similarity from what we've learned over the years with custom fire apparatus versus a commercial fire apparatus. And when a commercial is essentially buying a third-party chassis and mounting one of our bodies on it. But ultimately there's limitations with third-party chassis because in many cases they're used for multiple duty cycles. So you start thinking of our ERCV and you get into a traditional RCV cab, they're typically a cab-over design. You have an engine next to tunnel next to you, kind of cramped in space. So you look at it, the E chassis, and essentially it's a walkthrough. You can have a steering wheel on both sides. So ergonomics are significantly better. Then you talk about it's all an integrated unit. So you start thinking about safety and sensors and maintainability. Everything's connected.
So with that connection creates opportunity from a maintenance perspective, from a status, from a safety perspective, very much like we see with our custom fire trucks, really helping the productivity of the user. So that's what's very exciting to us versus, so it just gives us a lot more flexibility in what we do to make it specifically for that use case.
Got it. That's helpful. Before we go to access, I wanna talk about the fire truck business a little bit because what's fascinating to me is you really grew that business from a low single-digit margin business up until the mid-teens and then kind of the supply chain snafu happened. So, so, so maybe help us understand, you know, A, how, how are supply chains right now specifically for your fire truck business? And then B, your backlog is so robust. Maybe talk to us about when you think some of that pricing actually flows through the model.
Sure. You're spot on. Demand is very, very strong in that business. And we did see lower margins the past year really due to two items. First of all, throughput was lower with supply chain. You think about a custom fire truck, there's a lot of parts in the trucks. And we talked about on-time delivery metrics over the course of the last year. And then at parts of last year, we were in the 60s, like 65% on-time delivery. Very difficult building, having steady throughput in that, in that situation. So we've seen improvements, but, and this is really holistic to all of our, to access as well. We really need to see those on-time delivery metrics get back into, you know, that call it the high 80s to low 90s to really have a meaningful impact.
Mike, just to highlight there, that's for suppliers inbound, right?
Correct. Yep. Yep.
So us receiving the materials.
Good point. Good clarification, Pack. So, you know, we are seeing improvements, so that's good. But that's certainly the inefficiencies and the lower volume certainly are impacting margins. The other piece, which is also significant, is we've implemented significant price in our fire and emergency segment, upwards of 30% price increases, on certain models over the last couple of years. So if you look at, and, and those trucks are in our backlog now. So you can see we have some, we have a, we have some price coming online in 2020, in 2023. But if you look at it, there's a significant bump in price in 2024. That's in our backlog. And obviously inflation is, and it's, you know, it's, it's material.
What we would expect is, and we've said this on our earnings call, we'd expect to get back to more traditional type margins on fire trucks as we get into 2024 with that pricing. But nothing structurally changed in that business. The reason why we have this leg from a pricing standpoint is you can't reprice municipal contracts because there's performance bonds on them. So that creates some, obviously some complexity with it. But again, we're, you know, we've obviously implemented significant price increases and believe we'll be back to more traditional margin levels as we get into 2024.
We got a couple minutes left. Let's talk about the access business.
Sure.
I think when you first, you know, sort of gave a bit of an overview about Oshkosh, you talked about demand outstripping supply. And, you know, what I'm curious about is what you're seeing in the aerial in the access business today. You know, when we talk to investors, there's certainly some consternation around maybe the construction cycle. So could you, could you maybe talk about that?
Yep. Yeah. I would say, you know, historically, if you think of access where it has been somewhat cyclical, you, if you see a slowdown in residential construction, that, that may lead to a downturn eventually to non-residential construction, and then which ultimately impacts the industry. The dynamics have changed. So there's a couple things that make this a unique environment. Number one, fleets are very aged and they aged during the pandemic. The pandemic would've been a big replacement cycle. Then you come out of the pandemic and there's really high demand. So, it's been a challenge, for particularly you add into supply chain into the mix to, to for those fleets to be refreshed. Then on top of it, I, I mentioned mega projects.
There is a, if historically, you know, sort of mid-teens % of equipment was deployed to these large $400 million-plus projects; it's double plus that today. These Mega Projects aren't going away anytime soon. You start thinking about the various infrastructure investments the government's made. Many of those projects are starting to ramp up. You talk about the CHIPS Act, and a lot of other activities. So we see these Mega Projects as having legs for multiple years. And so that's another strong demand driver of demand. I'd say the other area that we're seeing benefit as well is historically Access Equipment's been heavily tied to construction markets. And that, while that's still the case, it's less so today.
That's as you're seeing more use cases using equipment in clean rooms like with our DaVinci scissors and other areas. That's certainly helping as well. So we see our outlook right now for demand remaining strong.
I think your backlog in access goes into 2024 at this point. And so can you maybe talk about how you're approaching pricing? Has that changed at all in past years? You know, I'm kind of trying to think about it like the fire truck business in a way where your backlog's very stretched and we're still catching up. So maybe talk about that a little bit.
Yeah. So we've changed, that's an area that we've changed a lot. Number one, we continue to prudently hedge commodities. We typically will not hedge 100% though, just because you do have some market dynamics. But a lot of times we'll hedge, you know, aluminum steel probably, you know, around, we'll benchmark around half of it. So you certainly we're always focused on maintaining the cost side. Pricing can't be ignored though. And what we, what we did really for the first time ever is we were working over the past year as we started repricing, because inflation was coming from so many different directions. And that really changed the dynamic of the business really in our view forever. That when we do see these highly inflationary times, we, we can and do have the ability to reprice with our, with our contracts.
So that's something that you even see going into, as we started going into 2023, we're continuing to see some inflation headwinds on highly engineered components despite the fact that steel is starting to come down. Labor certainly continued to increase. So we actually repriced again at the beginning of 2023, adding an additional 3.5%. So that's something we're gonna continue to watch both the cost side and manage the revenue side with pricing.
You obviously put out some guidance for 2023. You know, I guess what I'm curious about is you did say earlier that supply chains are somewhat easing.
Mm-hmm.
Maybe talk to us about what's embedded in the guide on the supply chain perspective, because as I think about your implied revenue growth, you should get some price rollover. So maybe talk to us a little bit about what's assumed in there.
Sure. I think you really have to look at by segment. So Defense is down just due to demand. So that's a bit of a, that takes volume consolidated down a bit versus the prior year. From a supply chain perspective, again, we need to see some consistent metrics approaching suppliers delivering to us in that 90% range. So while it's improving, we need to see more improvement. So we have baked in, you know, some modest improvement in supply chain over the course of the year because we don't believe that there's gonna be a light switch event where it's suddenly gonna improve. But we do expect that it's gonna improve over the course of the year. So that's really what's driving the revenue guidance that you're not seeing significant unit growth.
It's much more the price reading through because again, we're assuming that supply chain, which is really the limiting factor, is gonna hold back the revenue side from growing.
And I know this is a smaller piece of the access business, but could you touch on what you're seeing internationally? You did acquire a European company. I know you have a bit of a China exposure as well. If you could just talk about both of those geographies.
Sure. International, particularly in Europe, I would say not as strong as U.S., but definitely fairly robust. China, I think now coming, sort of now that they're getting through the COVID period of time, we think we see things picking up there a bit, certainly not to the level again of North America though. Overall conditions pretty positive overall though internationally.
Okay. Then, you know, at your investor day, you did talk about M&A as being a focal point. Couple of questions there. You know, when you think about capital allocation broadly, could you maybe review how you think about, you know, dividends, buybacks versus M&A and your holistic approach to that?
Sure. So, really, we have a strong focus that investment in growth is gonna be a significant component. If you look at, we had some pie charts really breaking it down in our analyst day presentation, but about 65%-75% is gonna be, we expect, to deploy towards M&A and organic growth initiatives. So that's gonna be a huge focus area. But importantly, we expect that we're gonna continue to buyback shares and, we have a long history of increasing our dividend even with a recent 11% increase. So, dividends and continuing to increase the dividends as well as doing prudent buybacks will continue to be part of our capital allocation strategy. And in years with what you'd expect is in years with more organic investment in M&A, you'll probably see somewhat less buybacks and sort of vice versa.
We only have a minute, but I did wanna ask you just about M&A broadly and how you evaluate targets versus maybe end markets you wanna play in. You know, in the last couple of years, three deals come to mind, Pratt Miller, Maxi-Métal, and Hinowa. Can you talk about, are those the type of deals investors should expect out of you? Maybe just broadly talk about that.
Yeah. Yeah. I would say that clearly the focus is trying to find good opportunities for both on acquisitions in the growth adjacent, in the areas that we're focused on. So think of areas to enhance technology sort of at or get into an adjacent, near adjacency. Pratt Miller sort of checked both of those boxes. Hinowa frankly does as well. Or, again, geographies. So you look at Maxi-Métal expanding our exposure for fire trucks into Canada. So I think those are, so I look at technology focus areas, near adjacencies, and if they're aftermarket or life cycle exposures as well would be areas we're excited about.
That takes us to 30 minutes, Mike Pack. Thank you very much. Appreciate.