Greetings, welcome to the Oshkosh Corporation announces agreement to acquire JBT's AeroTech Business conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.
Thank you. Good morning, everyone, and welcome to our conference call. Earlier today, we issued a press release announcing our plans to acquire JBT Corporation's AeroTech business. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation also on our website. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.
These risks include, among others, matters that we have described in our Form 8-K filed with the SEC on April 27, 2023, with our first quarter earnings report, and other filings we make with the SEC, including the 8-K we filed this morning announcing this transaction. We disclaim any obligation to update these forward-looking statements. Our presenters today include John Pfeifer, President and Chief Executive Officer, and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I will turn it over to you, John.
Thanks, Pat. Welcome, everyone, thank you for joining us today as we discuss our planned acquisition of the AeroTech business from JBT Corporation for a purchase price of $800 million, or $720 million net of the present value of expected tax benefits associated with the transaction. AeroTech is a business that we've been interested in for some time and will become part of our vocational segment upon closing the acquisition, further broadening our presence in an end market with what we believe are strong secular tailwinds. Of course, supporting aviation is not new to us, as we've been delivering ARFF vehicles and aerial work platforms to airports for many decades. AeroTech is a leading provider of aviation ground support products, gate equipment, and airport services.
They serve a diverse group of blue-chip commercial airlines, airports, air freight carriers, ground handling, and military customers, many of whom are also current Oshkosh customers. AeroTech has some of the most trusted brands in the industry, with systems in the field that serve approximately 75% of air travelers at U.S. airports and load approximately 70% of the world's overnight express packages. AeroTech's equipment is found at airports all over the world. Chances are almost certain that everyone listening today has walked through one of their Jetway boarding bridges. They also have leading positions with cargo loaders, de-icers, tractors, and tugs, to name a few. We show some images on the slide that highlight these products. AeroTech is a leader in a growing market in the early stages of an investment cycle.
The air transportation support market has rapidly recovered from the COVID-induced trough during the pandemic, which saw air travel nearly halt across the globe. Moving beyond that extreme set of circumstances, AeroTech is expected to benefit from many secular tailwinds for the air transportation industry. Global passenger traffic is expected to grow in the high single digits over the next several years, and infrastructure spending is expected to accelerate with legislation and aging infrastructure. We have seen this recovery in recent quarters, and performance is normalizing to levels more in line with pre-COVID levels from 2019. We expect AeroTech's second half 2023 EBITDA to be about $40 million, which translates to $80 million on a full year expected run rate basis, approaching its 2019 performance. We expect further EBITDA growth to approximately $95 million in 2024.
Turning to slide four, we think it's important to outline the magnitude of the tailwinds that we believe are driving the industry's resurgence and long-term growth trajectory. Global passenger volumes are on pace to return to pre-pandemic levels as we exit 2023. That growth is expected to continue over the long term, with an approximately 9% annual increase through 2027. Passenger and air cargo fleets are each estimated to increase by 3% annually over the next two decades. Approximately $25 billion of the government's Infrastructure Investment and Jobs Act has been authorized to fund airport growth and maintenance. For example, DFW, one of the busiest airports in the world, recently announced an agreement with American Airlines to upgrade and improve its facilities with capital investments valued at $4.9 billion.
Salt Lake City International is in the midst of upgrading its Concourse A, which includes additional gates and other improvements. To support this meaningful growth, ground support equipment investment is needed, especially given the elevated fleet age of existing ground support equipment across the world, driving high maintenance costs. We also expect to benefit with the transition from diesel to electric power for these products. Turning to slide five, this transaction unites AeroTech's highly engineered product offerings with the strength of Oshkosh's portfolio and technology ecosystem. We share similar technology priorities across several key areas: electrification, autonomy, and active safety, as well as connectivity and intelligent products. Together, we can leverage best practices, technology, and R&D from each other to advance our shared objectives, while capitalizing on opportunities from increased sales.
Specifically, our combined platforms will enhance our ability to service the aviation industry as investments accelerate, with the move from diesel to electric for ground service equipment that I highlighted on the last slide. Of course, there are additional benefits from integrating autonomy and connectivity into our airport product offerings. Please turn to slide six. Adding AeroTech to our company supports our Innovate. Serve. Advance. business strategy by expanding our portfolio of products in an attractive adjacency with a company that is the clear leader in its space. As we discussed at our Investor Day last year, our M&A strategy is focused on three key priorities: technology build-out, category expansion into near adjacencies, and lifecycle businesses. In addition to the adjacent markets it serves, AeroTech has strong technology capabilities and offers a robust mix of aftermarket parts and services revenue.
In short, this transaction checks all the boxes of our M&A strategy. We believe AeroTech will further broaden our end markets and add a growth channel to our vocational segment. AeroTech's purpose-built products are closely aligned with Oshkosh technology focus areas, and we see significant opportunities to scale AeroTech's platform as the air transportation industry continues to recover, including opportunities for additional bolt-on acquisitions in the future. On slide seven, we've outlined what we believe are some of the key benefits of the acquisition. The primary takeaway here is that this transaction is about entering an adjacent end market with a business that makes equipment that fits squarely within Oshkosh core capabilities and is aligned with our strategic priorities. AeroTech will allow us to enter a strong and growing sector, supported by powerful, sustaining tailwinds, further enhancing the overall resilience of our business.
We believe uniting AeroTech's highly engineered product offerings with the strength of our portfolio and technology ecosystem, will pave the way for further product innovation, enhancement, and expansion across our businesses. The transaction is accretive to our financial profile. AeroTech's large installed base and service contracts will drive meaningful recurring revenue and create a platform to further enhance these capabilities across Oshkosh's portfolio. Lastly, AeroTech's electric ground support equipment and autonomy capabilities will support our sustainability initiatives while improving the safety, quality, efficiency, and longevity of our products. I'm gonna turn it over to Mike to discuss details of the transaction.
Thanks, John. Please turn to slide eight. We are acquiring AeroTech for $800 million on a cash-free, debt-free basis. The net purchase price is $720 million when adjusted for the present value of expected tax benefits of approximately $80 million. This represents approximately nine times EBITDA on an expected 2023 second-half run rate basis, or approximately 7.2 times EBITDA, including expected run rate synergies. Given the complementary nature of our businesses, we are targeting annual run rate commercial and cost synergies totaling approximately $20 million for AeroTech by the end of year three following close. We anticipate the transaction will be accretive to Oshkosh's earnings per share within the first year following close, and deliver returns on invested capital in excess of 10% within the third year following close.
We have ample capacity to finance the transaction through a combination of cash on hand and our revolving credit facility. We expect to maintain our strong balance sheet with a debt to EBITDA leverage ratio of approximately 1.5 times at transaction close, well under our target leverage ratio of two times. Given our expected strong cash flows and our disciplined cost structure, we expect that borrowings on our revolver associated with this transaction will be repaid within 12 months following close. The transaction is expected to close in the third quarter of 2023, subject to customary closing conditions that include regulatory approval. Please turn to slide nine, and I'll hand it back to John for wrap-up comments.
We are confident that this transaction is an excellent opportunity for Oshkosh, one that we believe will drive significant value creation as we enter a new, attractive, adjacent end market through the addition of a proven leader with a strong financial profile. We believe the transaction structure will also allow us to maintain our strong balance sheet, providing us with the flexibility to continue to invest in our business and advance our strategic priorities. We look forward to working with the AeroTech team to integrate the business and deliver significant benefits for customers, employees, and shareholders. With that, I'll turn it back to Pat. We look forward to your questions.
Thanks, John. I'd like to remind everybody, please limit your questions to 1, plus a follow-up. The queue is very full, so please stay disciplined on that follow-up. Afterwards, if you want to ask another question, please get back in the queue, and we'll answer as many as we can during the time allotted. Christine, please begin the question and answer period of this call.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Good morning, everybody, congratulations. I guess for starters, can you talk about, you mentioned nine times on the purchase price. You look at the other press release and implied something different than that. Is there a way to kind of help us kind of close the gap between those two?
Sure. Stanley, this is Mike. We're looking at it really on the business we're buying right now is operating at that nine times level, really looking at factoring in that tax benefit and looking at the back half of the year. We'd essentially be closing the transaction in the back half of the year. I believe other multiples may be more backward-looking, certainly the business was with coming out of the pandemic, margins were a bit lower and volume was a bit lower.
Okay, great. On the synergy side, $20 million or so, what are the real synergy buckets here? Is that just operational cost out? Maybe talk to what you all potentially could see on kind of sales synergy side.
Thanks, Stanley, and thanks for the question. This is John. I'll take that question. You know, want to bring everyone back to the purpose of our company and what we do. I mean, we deliver for people in our communities that do really tough work, whether that's a vocational vehicle or equipment. That's exactly what this acquisition is all about. It's right in our sweet spot of what we know how to do, using our technology to advance in electrification and autonomous operation, those types of technologies. We see the synergies. When we talk about $20 million in synergies, of course, there's a little bit of G&A. There always is with any acquisition, but it's really about supply chain synergies, manufacturing synergies.
We're not talking about consolidating plants, we're not talking about doing that. We are talking about enhancing operating capability and where we can find operational synergies with 80/20 simplification and those types of processes that we use. There's also commercial synergies, though. You know, we've been operating in this market or similar markets. We see opportunities from a commercial perspective as well. That's kind of how I'll answer that question.
Perfect. Thanks so much.
Okay. Thanks, Stanley.
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Thanks, congratulations on an interesting acquisition. Just wanted to follow up on Stanley's question about the multiple differential and the implied growth. I know you said the margins were a bit lower and the volumes were lower. Can you provide just maybe a little bit more detailed bridge between the, I guess, roughly $54 million that's implied and the $95 million of EBITDA that you have for 2024?
The way I would do that is, if you look at the, their EBITDA on a 12-month basis, should be greater than $80 million, is what we're expecting. We expect back half, really the back six months of the year to be at $40 million. You're really at that $80 million run rate. You just see, you see a little bit of, you see about a $15 million step up. We start seeing. Volume is continuing to improve a bit. We have some. There's more pricing coming online there as well, as well as some of the synergies start hitting next year. That's really what we expect. $40 million in the back half of the year for this year. Annualized, that's greater than $80 million.
You look to next year, it's $95 million.
Okay. Then in terms of integration risk, I guess, what experiences can you draw on to give some confidence that you have a solid integration plan to mitigate any risks? I guess, Hinowa and Pratt Miller were a fair bit smaller, you're not sure if they're kind of good examples of risk mitigants.
Yeah, I'll answer that question. You know, with any transaction, there's always a bit of risk. This is a transaction that we made for growth. You know, taking our strength and our capabilities into a market that we're familiar with, but into new categories that we have not heretofore participated in. You know, that is a different risk profile than making an acquisition when you're acquiring for scale. We are not acquiring for scale, we're acquiring for growth.
Clearly, there are some risks, but I do think that the acquisitions that we've made with Pratt Miller, with Hinowa, they are good experiences for us to draw on in terms of how you integrate an acquisition, making sure you take care of customers first and foremost, making sure you take care of people first and foremost, that it essentially helps to make sure that you're minimizing any risk that might come out of a transaction like this. We feel very, very confident that we've got a good relationship already with the AeroTech people, and we'll continue to build relationships as we go forward, and that will all help us minimize risk as we go forward.
I think the biggest thing I can say again, is this is an acquisition for growth. It's not a big acquisition for scale, where we're disrupting every operation that AeroTech has. That's not the case here. Thank you very much.
Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.
Yeah, thanks. Good morning, guys, and congrats.
Thanks, Nicole.
Just wanted to first ask about on the third slide, you guys have it says that about 40% of the revenues in the business are recurring. Just trying to understand what's in that recurring bucket, like, if it's truly recurring?
Yeah.
How defensive that was during the pandemic. Thanks.
Yeah, that was. It's about 40% of the revenue. It's very defendable, so it's made up of about a big services business, but it's also made up of aftermarket parts for the whole goods. The services business is a bigger piece of that 40%, versus the aftermarket parts and accessories for the whole goods, that supports the whole goods. This was a business that actually remained the most healthy during the pandemic, for AeroTech, as it went through the pandemic, which kind of goes along with common sense. That's usually what does happen in a downturn, is, the aftermarket and the services business stays healthy versus the whole goods. That's certainly what they saw, and we believe this is a very defendable part of the business.
It's one of the things we like a lot about AeroTech's business, is this 40% recurring revenue services business. Adds a lot of value for the customer.
Okay, got it. Thanks. just in, with respect to the competitive landscape, I mean, it seems like AeroTech has pretty significant market share, but like, how does the rest of the competitive landscape look? Like, are there a couple of other big players? Is it very fragmented? Thank you.
Well, it's a global market, number one. This is a very global market and that's one of the things we like about it, 'cause it's not just a good market in the US, it's definitely a good market in the US. A lot of investment in airports across the United States, but it's also a lot of investment happening around the world. This is, we have a global market and a global competitive set, so to speak. It's more of a fragmented competitive set versus an aggregated competitive set. That's what I can say about it.
Thank you.
Thanks, Nicole.
Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question. David Raso, your line is live. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone. John, I'm wondering if you could just talk about the overlap in distribution for you folks with the products that you mentioned at the beginning of this call. You know, to what extent does this help provide a single stop offering for you folks? You know, are there any additional products that would fit in that you don't currently have given that combined offering?
Yeah, a good question. We serve this segment today with primarily our airport rescue and firefighting vehicles. That's the ARFF product. We also serve it with aerial work platforms. I mean, you go to any airport in the world, you will see aerial work platforms, and a lot of times you see our cream and orange aerial work platforms. It's almost hard to walk through an airport without seeing one. We serve the market today. We serve it through different channels. As you know, we serve through the rental companies, and we serve the ARFF markets through different channels. There's different channels today that AeroTech uses versus the channels that we use with our for aerial work platforms. There is not a lot of channel overlap with this transaction. That's what I can tell you.
We do understand the customer, we understand the user, we understand what they need. AeroTech clearly has a very comprehensive understanding of that and what technology is needed to continue to advance.
Okay, super. Can I ask you, on the core products, are there any FAA regulations that help drive the moat in any of these product lines? You know, can you talk about the length of backlog? Is this similar to fire and emergency versus commercial? just a little bit of context on the product, please.
Yeah. On the, there are regulations, I can't go into the specifics of it, that help drive demand. Let me just talk about the backlog. Of course, the whole goods business, about 60% of the business is whole goods. Those, that's a backlog business, and the backlog is very elevated at the present time, and we expect that the strong order rates are going to continue for the foreseeable future. About 40% of the business is services and aftermarket parts. That is not a backlog business. That's a recurring business, which we like a lot again. The 60% of the business that does operate as a backlog business and the backlog is elevated today.
Thanks.
Thanks, Jerry.
Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.
Yes. Hey, good morning. Thanks for taking my question. In the past, JBT has said that there's some seasonality in this business, with, I believe, the early part of the year, sometimes a bit lower than later in the year. How confident are you that the $40 million run rate in the back half of the year, on an EBITDA basis, is sustainable into the first half of next year?
Sure, I can take that one. If you look at it, I think certainly there's a couple pieces to it. There's volume is continuing to increase with the demand and the strong backlog. That's a tailwind, and we have good visibility to what the delivery time frames of that backlog is. That's number one. Number two, I think if you do think about it, yes, the back half of the year tends to be a bit stronger. If you think about it, our exit rate, that's why I'd say if you look at $90 million-$95 million of EBITDA next year, it really sort of implies in the next 12 months run rates around or is greater than 80. It does imply a little more strength in the back half of the year.
That is correct. Ultimately, that is certainly factored into our view of $95 million of EBITDA next year.
Okay. Okay, got it. You know, parts of your vocational business have been a bit challenged from an operating margin standpoint the last year or two. That may be some of the reasons why you made this the segment in the first place. Does AeroTech have interesting strategies? I mean, they're looking at 11.5% call it, at the midpoint operating margin outlook for this year. Is there anything that they're doing that could be brought to some of the more challenged, OSK businesses to help that group's margin improve? Or are they gonna be very much in their own envelope, in their own silo when they join your portfolio?
I think it's a really good question, and I think it certainly will go both ways. You know, AeroTech operates really well in their markets. I think that they'll, that we'll mutually be able to improve each other's businesses as we go forward with integration. We already know where there some of those significant points of leverage are with regard to supply chain. The supply chain is gonna go both ways. You know, we can help AeroTech with supply chain, and they can help our other vocational businesses with supply chain. It's gonna go both ways.
Thanks.
Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.
Hi, good morning, guys. I was hoping you guys could just give us some color on what the long-term revenue growth algorithm is for AeroTech. Maybe just a little bit more detail on how it builds out between, you know, I guess, replacement versus new demand, electrification, any color you can give on just how you're thinking about that over the longer term.
Just that from a growth profile, we expect, just given the strong dynamics that John highlighted in his prepared remarks, we expect a high, a mid to high single digit growth rate, further revenues really from 2023 through the next, really for the foreseeable future, certainly well beyond 2027. We see strong dynamics there. I guess just talking about... Chad, what was I missed the other, the second part of your question?
Oh, yeah. If you can kind of like break it out, you know, replacement demand versus new and, you know, I think, you know, electrification is probably like one component in there. If you can just talk about, you know, how that layers in to build up to that, I guess, mid to high single digit growth rate.
Yeah. With the, with the strong outlook, there's certainly aged infrastructure at airports, so you see a lot of upgrading activity going on. That's certainly a driver, but you also see that there's terminals being added. I would say the growth rate is really well split between replacement and growth.
Got it. That's super helpful. Just, you know, just following along, just on margins, just how to think about that over the medium term, particularly as you do layer in more electrification in the product mix.
Yeah, we believe that this is a business, obviously there's a bit of a drag we'll have of amortization in the sort of the early years here. We expect that this is gonna be a double-digit operating margin business in the next few years, that we see it is a good margin profile business. Obviously, you're seeing the strong EBITDA growth that it's having. We expect this to be nicely accretive to both our vocational segment and the company as a whole.
Great. Thank you.
Thanks, Chad.
Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.
Hey, guys, good morning. I wanted to just follow up on that last question. The mid to high single digit growth rate you guys are kind of factoring, like how much of that is dependent on, you know, federal stimulus dollars, or is that, you feel like that's purely just commercial spend?
I mean, certainly their outlook has, there is a benefit of those federal dollars, but that's certainly not what's driving all the growth. It's really the growth of air transportation. you know, I don't know if, you know, even this morning on the news, they were talking about, you know, the demand for travel that was seen over the Labor Day weekend and how that's expected to continue to grow. I think the dynamics are strong there, well beyond the federal funding.
Yeah.
I would say it's certainly more so it's an extra benefit that the federal funding's there, but it's really the air transportation, or the number of passengers being carried that are driving that number.
Yeah, Seth, I was gonna say the same thing. I don't think we can overemphasize that enough. This isn't just driven by they're gonna spend, you know, $25 billion in some of the federal infrastructure spending. This is driven by demand for air travel and air cargo for the foreseeable future. You listen to it all the time, whether you listen to the commercial airlines talk about it, or you listen to some of the other commercial operators talk about it. This is a industry that's growing because customers are pushing growth.
Got it. Thank you. Then just follow up, can you just give us any color on the manufacturing footprint? You know, why wouldn't there be some opportunity there to either consolidate or just, you know, cross-pollinate from a manufacturing perspective?
Yeah. Well, they have a nice footprint of manufacturing operations. I'll give you the two highlights. The main operation is in Orlando, Florida, and the other main operation is in Ogden, Utah. There's other operations beyond that in Mexico and other places in the world, those are the two biggest operations, is Orlando and Ogden. You might say, "Well, why are we not talking about bigger consolidation?" Well, number one, all of our facilities are full, and, you know, we're producing as fast as we possibly can and trying to expand square footage just to make enough municipal fire trucks and aerial work platforms and so forth. That's why we're not talking about a lot of consolidation.
Got it. Okay. Thank you, guys. I appreciate it.
Thanks.
Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.
Thank you. Good morning, and congratulations. Maybe, a point of clarification here on the $95 million of EBITDA in 2024. I'm curious, do you assume that margins for AeroTech revert back to, you know, prior, call it pre-COVID peak, so roughly 14%? How do you think about that? Maybe longer term, where do you see the true margin potential of this business? I appreciate the $20 million of synergies that you outlined. I'm curious if this figure really mostly applies to the mobile equipment component of the business, where you would seem to have decent overlap, as opposed to maybe the airport services and the fixed equipment side.
Mig, just from an EBITDA margin perspective, we would expect that as we get into next year, we're getting close as we exit this year to the pre-pandemic margins. We expect to essentially be there in 2024, certainly, at the back half of 2024. Certainly as synergies come online, we expect that the margin profile of the business is gonna be as we get out into sort of 2025, 2026, beyond what it was prior to the pandemic, again, leveraging the benefit of those synergies.
I'm sorry, can you comment on the breadth of the synergies? Is it across all verticals, or is it concentrated in mobile?
Um, there-- It's-
I'd say A better way to say it's concentrated in whole goods.
Okay.
The 60% of the business that makes whole goods is where there's synergies from supply chain. You know, we buy similar things in our other businesses, for example. It's mostly on the whole goods, Mig.
Okay. My follow-up, fixed equipment is a little bit of a different business than what you sort of normally operate with, and I'm kind of curious as to how you think about this portion of the AeroTech business, more broadly in the context of your portfolio, and what that might signal in terms of where you might be taking the portfolio next. Maybe the same thing with airport services. That's a little bit different, too, and I know that JBT has put quite a bit of emphasis on this service component of the business and sort of growing it and trying to enact some margin lift out of it.
As you've kind of done your examination of this portion of the business, where do you see potential for services, maybe two, three, four years down the line? Thank you.
First of all, I'll say, you know, whether it's the Jetways or it's the ground service equipment, this is purpose-built equipment that moves. It's all equipment that moves and requires movement to do its work, and it all takes autonomous operation and a lot of it electrified operation going forward, versus diesel-powered, to work. Designing and developing that type of purpose-built equipment to make it easy to use, productive, and safe, and that's our sweet spot. That's what we do.
... 40% of the business that's services and aftermarket. We really like the services business, one of the things we like so much is we want to learn from how AeroTech operates in that space, that we can potentially use that as a synergy for our other businesses. I really can't go beyond that at this time and on this call, in terms of exactly where we might apply that to other end markets that we serve, that's one of the attractive things about this business to us.
Okay, good luck. Thank you.
Thanks, Mig.
Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.
Hi, thank you. Hopefully you can hear me this time.
Yep.
Question about the margins of what you're acquiring. When I see 40% recurring revenue, and you notice service is a big, a decent piece of that. If that part of the revenues is even doing, you know, a fairly modest margin, EBIT for that kind of revenue stream, say even 15%, sort of implies the whole goods aren't making any money at the EBIT level. On slide 11, when you show $36 million of EBIT for July through next June, is there a deal amortization weighing that number down, and how much is it? I guess dovetails into that is, are the whole goods products losing money currently? We're talking EBIT level.
Yeah. First of all, the DNA is separate from the OI. I would say that, no, we're not. The, the whole goods have solid margins, and I would say across the board, the margin profile is solid of all the products. These are very long-term service contracts. They're not short term, and the pricing really reflects that. I guess I would leave it at that. No, they're making strong, solid margins across the board.
The $36 million on slide 11, distinct from DNA, it says operating income.
Correct.
Does that have some deal amortization weighing that number down? If so, how-.
Oh, absolutely. Yeah, right below it, there's $44 million of DNA, which is largely related to the deal.
Okay.
I would say.
How much is deal amortization?
That's a good question, David. The deal DNA is about $40 million, is what we're expecting now. Of course, a lot of the reason we're talking about EBITDA on the call is because we have to go through all of our purchase accounting still, and obviously, we have estimates there at this point. Yes, deal DNA is absolutely weighing on it. And legacy depreciation is not particularly significant there.
Just to be clear, just a little of the amortization, the depreciation, obviously, some accounting, but.
Yep.
The depreciation comes over. The actual deal amortization, just so I get a sense of that $36 million X, the deal amortization. Are you saying it's $60 million-$70 million X? I'm just trying to isolate the.
No, no, no.
Yeah. Can you please?
So the-
Deal amortization.
On that reconciliation that you're looking at on page 11, you're looking at AeroTech operating margin of $36 million, then there's depreciation and amortization of $44 million. $40 million of that is related to the deal.
Okay. I'm just trying to figure out what you really think the EBIT run rate is, because, again, if 40% of this company is recurring revenue-
Well.
Unless we're saying because of long-term contracts, it's not high margin recurring revenue.
It's-
I'm just trying to make sure...
David, this is not like 20%. It's not 20% margins. It's in line with the margins of their whole goods.
Okay. All right, there isn't much of a gap between recurring and.
Correct.
Good sale.
Yeah.
Okay, terrific. The backlog. Can you help us a little bit when you say a sizable backlog? Can you obviously quantify it would be great or some sense relative to-
The last data point that's public from AeroTech's release is we're in the essentially in the high $400s. If that's again, the services business is not really carried in the backlog. There's contracts for it, so it's recurring. That's, that gives you an idea of the magnitude. Certainly, there's products that are going out for a year.
Terrific. Thank you so much.
Thanks, David.
Our next question comes from the line of Tami Zakaria with J.P. Morgan. Please proceed with your question.
Hi, good morning. Thank you so much for taking my question. I have a quick one, and I'm sorry if I missed this, but the $20 million synergies, is there a cadence to that we should be aware of, or does it come ratably over the next three years?
I would say that it will largely be in place in year three, so think 2025. Certainly it'll be coming online, and there's some things will be faster than others, so it may be a bit lumpy, but I think essentially as we're exiting, or as we get into sort of middle of 2025, we'll be at that run rate.
Got it. Going back to the competitive landscape question that Nicole asked, what is the long-term TAM, total addressable market do you see for this business? What are, in your view, what are one or two key competitive advantages of JBT's AeroTech business over, let's say, some of its private peers?
I don't have the exact TAM in front of me, Tami, but so AeroTech is a leader in its business for a variety of reasons. Number one, they've got a great footprint, and they've got great product.
... and they've got great customer relationships across the board for delivering product, but they also have that strong services business, both services as well as aftermarket, parts and accessories, that really allow them to wrap their arms around their customers and serve them really, really well. I would say those are the two primary drivers of why they have leading market share in this industry. They've got good competitors in the industry as well, some really good European competitors, specifically. Not just European, but some that I think of. They're a business that, you know, it's performed because they've got great footprint, they've got great performance, they've got good product, good designed product, continuously improving those designs. That's why this is a good business.
Got it. If I can ask a follow-up. Basically, the reason for my question is: How easy would it be to, let's say, win over a contract from that AeroTech has right now? Is the competition mostly on price? Is it a combination of price and service level? How sticky is the customer base?
The customer base, I think, is very, very sticky, provided we continue to perform. This is not a specific price-only business. If it were, I think you'd see much more of a low-margin business. I mean, the margins in this business are pretty healthy because customers are, you know, willing to pay for differentiated performance. There's also a capacity element to it as well. You have to have the capacity to be able to produce and deliver the quality product. That's what I'd say.
Got it. Thank you so much.
Thanks, Tami.
Our next question comes from the line of Steve Barger with KeyBanc. Please proceed with your question.
Hey, thanks. Good morning. When you look back at past trends, what percentage of new airport construction or expansion funding goes to air transportation support products? Is there a predictable pattern there?
I don't think I have enough data.
There's certainly a high correlation, but there's not like a very fixed, you know, like a fixed metric, Steve.
Can you give us an idea?
You really just need to look at it as a correlation, that when you see investment in it, if you're adding, if you're adding new terminals, you're upgrading terminals, there's gonna be jet bridges and new equipment that are coming with it, is how I would look at it. It, it very much aligns with it.
Would you think a terminal expansion results in single digit millions of revenue or tens of millions of revenue? Just trying to frame up the opportunity, given the funding environment and the growth drivers that you're talking about.
Yeah, I think-
It might be an opportunity for us.
Yeah, I mean, ultimately, there's certainly gonna be opportunities. I think it varies wildly. If you're looking at a DFW project, it's obviously, it could be much larger. I think there's a lot of variables. Depends whose equipment they have in there. It's, you know, these terminal expansions can be billion-dollar projects, and so there's and this is just one piece of it. Again, I think what you need to really focus on is the trends, that as air transportation traffic is increasing, that's driving demand, and that's a tailwind for the business.
Got it. Then, can you talk about normalized CapEx as a percent of revenue and, or, you know, historical free cash flow conversion, any kind of metrics there?
You know, we'll continue to provide more detail over time. This is a business that, from a CapEx perspective, it's not a high CapEx business. You know, there could be some opportunities over time as we look at opportunities with a that have strong returns. In general, it's a lower percentage of revenue. I would say that generally think of it in that, you know, that $10 million-$15 million range of typical capital for a year. I'd say early on, as we're ramping up systems and pulling them over, it'll be a little bit higher.
Because they're, you know, generally, they're cash conversions, good in the business, not different than what we'd see in some of our other businesses. You have projects that do take place, but they're nowhere near the magnitude of what we see in parts like Defense, if you will.
Great. Thank you.
Thanks, Steve.
Our next question comes from the line of Michael Feniger with Bank of America. Please proceed with your question.
Yeah, guys, thanks for squeaking me in. As you broaden your end markets, the aerospace side is viewed as longer cycle, particularly coming out of this pandemic. Is there a view, just with access, are you seeing that the construction side could be slowing? Does this provide you more diversification in a potential recession, given the outlook for this business over the next few years?
Well, I will say, you know, that this business has characteristics to it which shows really healthy resilience in the face of a recession. Part of that's because of that 40% of the business is services and aftermarket. Another part of it is, you know, the absent of pandemic, which of course impacted many industries, absent of pandemic, the whole goods market tends to be less cyclical as well than some of the other markets that we're in. It's, you know, it's almost similar to municipal fire trucks. We like those characteristics of it. We like that it's right in our sweet spot, but it's also these are adjacent categories that show resilience over time. That's one of the things we really like about this acquisition.
Great. Just to shift, you know, to electric from diesel, some of you guys talk about with your other segments, does this business require more investment than the other vocational areas? Is it further along the road than other vocational sides? Does that shift change that service component at all, which is 40% of the business as some of this equipment becomes electrified? Thank you.
It does not shift the services and the aftermarket at all. I'll say AeroTech's done a nice job already with electrifying some of these products, a really nice job. We think that combining our strengths in this area, we can continue to take it even further in terms of the electrified performance of the product. That's a, that's a nice synergy for us going forward on the electrification front. We do not expect that when you look at the makeup of the services in the aftermarket, we do not expect that to have impacted at all, the electrification part of it.
Thank you.
Thanks, Mike.
Thank you. Our final question comes from the line of Walt Liptak with Seaport Research. Please proceed with your question.
Hey, good morning. Thanks for taking my question, guys. Congratulations on buying a great asset. I'll be interested in what you have to do with it. You know, during your comments, you mentioned that you'd be doing 80/20 as part of the $20 million. I wondered if just how you do it, do you start fast, you know, like prepping before the close and then in the second half, or is this something where over time, you'll get some benefits from 80/20?
Typically, you get the benefits from 80/20 over a period of time. You know, you can't go in and just say, "Okay, we're gonna 80/20 this," and six months later, you're, you know, you know, you're there. This and similar to our other businesses, I mean, we're still in the other vocational businesses and our access business, we're still continuing to drive 80/20 simplification. It's, it's just a way of looking at your business on an ongoing basis. We'll expect to get benefit from it over time. I'd say you'll start to see, we'll start to show improvement from it in, you know, maybe as early as year two, but certainly by year three. This is kind of a, the way that we look at our operating process, our operating system, so to speak.
Okay, great. Maybe just as a second question, you guys talked about, you know, the business being a growth. I wonder, you know, with a high market share already, is there more M&A, or is it, you know, kind of helping the other businesses to develop that service revenue, and that's where you see the growth?
We see the growth 'cause we see the industry growing, and the industry is projected to continue to grow, as Mike talked about, kind of the high single-digit growth rate for this industry, and we're the market leader, so we really like that part of it. This also leads to potential opportunities for additional bolt-on M&A in this space, and we like that part of it as well.
Okay, perfect. Thank you.
Thanks, Walt.
Thank you. Mr. Davidson, I would now like to turn the floor back over to you for closing comments.
Thanks, Christine. Thanks, everybody, for joining us today. We're very excited about bringing AeroTech into the Oshkosh family. We're participating at several conferences over the next two weeks. We hope to speak with you, and take care. Thanks again.
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.