Oshkosh Corporation (Holding Company)Common Stock

Greetings and welcome to the Oshkosh Corporation Fiscal 2022 First Quarter Results Conference Call. At this time, all participants are in 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. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our first quarter 2022 results. 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, 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 two 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 file with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we changed our fiscal year to align with a calendar year, effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended March 31, 2021. Our presenters today include John Pfeiffer, President and Chief Executive Officer, and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to slide three, and I'll turn it over to you, John.

Thank you, Pat, and good morning, everyone. For the quarter, we reported sales growth of 3% with adjusted earnings per share of 24 cents, modestly above the expectations we shared on our last earnings call. As expected, we experienced peak-level price-cost headwinds during the quarter, which challenged margins throughout the company. We expect price-cost dynamics to improve in the second quarter and into the second half of the year as we begin to more fully realize the benefits of higher pricing levels. Customer demand remains healthy, as evidenced by strong order activity during the quarter and record high backlogs. Our long-term growth outlook is strong. Early in the quarter, we experienced modest improvements in supply chain and commodity costs. However, the Russian invasion of Ukraine has caused further inflation pressure and parts constraints across industries. In response, our teams acted quickly and implemented additional price increases in our non-defense segments. In fact, many of these adjustments in the access and commercial segments were effective immediately. We are also closely monitoring COVID related lockdowns in China as this is impacting our production and parts availability in China, as well as global supply chains. I'm proud of the efforts of Oshkosh team members who have shown their grit and determination as we work to overcome supply chain disruptions, freight and logistics challenges, as well as workforce constraints. During the quarter, We received our first order from the United States Postal Service for our cutting-edge next-generation delivery vehicles. We have also remained active in the M&A and investment space. We purchased CartSeeker technology during the quarter, and just yesterday we completed a minority investment in robotics and autonomy leader robotic research. You've heard us talk previously about the benefits we expect to generate with programmatic M&A and investments, These are important steps in our journey to drive accelerated growth. Also, Ethisphere once again named Oshkosh as one of the world's most ethical companies. This is our eighth consecutive year to be recognized and is emblematic of our strong culture rooted in doing business the right way. In light of a more difficult supply chain and cost environment, we are updating our 2022 adjusted earnings per share expectations to a range of $5 to $6. Mike will provide further discussion on our expectations later in our presentation. Please turn to slide four and we'll get started on our segment updates with access equipment. Our access team grew sales by 20% over the prior year quarter as the team continues to execute in spite of short-term challenges. Despite ongoing supply chain disruptions and elevated commodity prices, our team at JLG has taken many positive steps to improve the capacity and resiliency of our supply base. We saw pockets of improvement with our supply chain on-time delivery metrics, but these metrics remain well off historical levels. Progress continues with the ramp up of additional production lines at our Bedford, Pennsylvania and Jefferson City, Tennessee plants, which should facilitate higher production rates going forward. The access team has done an outstanding job of executing these key capacity expansion projects, which allows us to continue to increase production to meet strong demand. During the early part of the quarter, commodity and freight costs began to moderate as we expected. As I mentioned in my opening remarks, Russia's invasion of Ukraine caused fuel, steel, aluminum, and numerous other input costs to increase sharply once again, resulting in additional risk to our outlook for the second quarter and back half of the year. In response, we implemented additional surcharges on shipments beginning April 1 as we worked to mitigate these headwinds. Orders were strong once again at 1.3 billion in the quarter. Market fundamentals are robust, supported by high utilization rates and elevated fleet ages. We only recently opened our order books for 2023 and are already gaining solid visibility to requirements across our customer base for next year. We expect strong orders in the second quarter as we finalize many 2023 annual purchase agreements leading to our positive outlook over the next several years. Please turn to slide five and I'll review our defense segment. Revenues for the defense segment were lower in the quarter versus the prior year quarter as a result of lower tactical wheeled vehicle budgets that we've been discussing for a while. However, as we look to late 2023 and beyond, defense is an exciting growth segment as new programs such as the NGDV and Striker MCWS, begin to ramp up. Our operating margin in the quarter was lower than we expected as a result of unfavorable cumulative catch-up adjustments due to increased input cost expectations. We do not expect margins to be notably lower on a prospective basis at this time. Mike will provide further details in his sections. We continue to execute the JLTV program well and are actively engaged in the re-compete process. During the quarter, the Army extended the bid submission date from April to July of 2022. As a result, we expect the final decision to push out from September to the December 2022 timeframe. As a reminder, we won the JLTV competition seven years ago, knowing that it would be re-competed and we believe we are well positioned to retain this significant program. I mentioned our USPS order in my opening remarks. The first order is for nearly $3 billion and includes a total of 50,000 units, of which approximately 10,000 units are battery electric, up from prior expectations of approximately $5,000. And we have given the USPS the option to convert this order to an even richer mix of EVs should they have the funding to do so. Progress continues as we prepare our factory in Spartanburg, South Carolina for production, and we look forward to supplying the USPS with these innovative new vehicles. You've heard us talk previously about the many adjacent market growth opportunities we're working on in the defense segment. One of the most significant adjacent programs is the Stryker medium caliber weapons system. We are very pleased with our progress on the program. The fiscal 2023 president's budget request was published a few weeks ago and contains solid funding for the MCWS program, as well as our other key programs. These adjacent programs, as well as the USPS contract, provide defense with a strong long-term growth outlook beginning late 2023. Let's turn to slide six for a discussion of the fire and emergency segment. Demand is strong for our industry-leading products in the fire and emergency segment. Production and deliveries were constrained in the quarter as a result of supply chain disruptions and workforce challenges. These disruptions led to manufacturing inefficiencies and lower sales, both of which impacted profitability. Operating margins improved sequentially, as we expected, and we expect F&E to deliver solid double-digit operating margins for the year as we benefit from price increases previously implemented and additional capacity that will be coming online later in the year and into next year. Orders remained strong at nearly $660 million during the quarter, leading to another record backlog. We announced a price increase effective February 1 and another price increase effective May 1. Our Volterra electric pumper is performing well for the Madison, Wisconsin Fire Department, and we just completed the next unit for Portland, Oregon. The Madison and Portland units will be showcased at the FDIC trade show in Indianapolis this week. We will also debut our next generation puck, or Pierce Ultimate Configuration, custom pumper unit which offers a proprietary pump placed under the cab, resulting in best-in-class storage and productivity benefits for firefighters. The Volterra Electric ARF, has been generating strong interest with airports around the world and will be showcased at the Interschutz Expo in Hanover, Germany in June. We will also be conducting demonstrations of the unit at several European airports this summer. These innovations continue to position our fire and emergency segment as the market leader. Please turn to slide 7 and we'll talk about our commercial segment. The commercial segment grew revenues over the prior year quarter and made progress to a more typical level of profitability in the quarter, despite experiencing the same price cost and supply chain challenges that I've mentioned with our other segments, which affected volumes and margins. Our focused factory approach as part of a simplification mindset is gaining momentum and supports improved performance over time. The commercial segment has remained disciplined with pricing actions, which we expect will drive higher margins as we progress through 2022. We've seen some signs of chassis availability improving, but it remains a primary focus in this segment as commercial is our biggest user of third-party chassis. Additionally, certain control modules and other components have also been constrained, impacting our ability to ship on pace with demand. During the quarter, we acquired CartSeeker curbside automation technology. CartSeeker complements our ongoing work with Autonomy by providing operational simplicity and high performance to customers through patented AI-based recognition technology. Demand for RCVs has been solid, reinforcing our positive outlook. We have been working closely with our customers on requirements, and many want to begin placing orders for 2023. We have not fully opened our order books for 2023 as we are continuing to watch and evaluate commodity markets. Our team will be attending Waste Expo in May, and we believe it will be a very well-attended show. There's a lot of excitement in the industry surrounding EVs and automation. Our EPTO RCV bodies for EV chassis are performing well in the market, and our CartSeeker automation technology shows great promise. Demand for this type of technology in the environmental services space continues to strengthen, and we believe we are well positioned for this positive long-term trend. With that, I'm going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2022. Thanks, John, and good morning, everyone.

Please turn to slide eight. Before I begin, I want to remind everyone that all comparisons to the prior year quarter are to the three months ended March 31st, 2021. Starting with first quarter results, consolidated sales for the quarter were $1.95 billion or $57 million higher than the prior year quarter, representing a 3% increase. The consolidated sales increase was largely driven by a 20% or $145 million increase at access equipment due to strong demand, particularly in North America, partially offset by lower sales at defense due to lower FHTV and FMTV volumes. Consolidated operating income for the quarter was $29.3 million, or 1.5% of sales, compared to adjusted operating income of $143.3 million, or 7.6% of sales in the prior year quarter. Consolidated operating income decreased due to unfavorable price-cost dynamics and increased manufacturing costs due in part to component shortages and labor challenges, offset in part by improved mix. Our consolidated price-cost headwind in the quarter came in higher than prior expectations at approximately $125 million, which impacted adjusted earnings per share by approximately $1.40. Adjusted EPS for the quarter was $0.24 compared to adjusted EPS $1.48 in the prior year quarter. During the quarter, we amended and extended our credit agreement to March 2027. In conjunction with the extension, we repaid our outstanding term loan with a balance of $225 million at December 31, 2021, and increased our revolver availability from $850 million to $1.1 billion. We repurchased approximately 751,000 shares of common stocks for a total cost of $85 million during the quarter. Please turn to slide nine for a discussion of our expectations for 2022. Companies around the globe are facing more challenges in 2022 than previously expected just a quarter ago. The most notable change is Russia's invasion of Ukraine. Prior to the invasion, steel, aluminum, and freight costs had moderated. Now we are experiencing pronounced increases once again. Recent COVID-related lockdowns in China are affecting parts availability for a China facility and have introduced additional volatility to global supply chains. While we experienced pockets of supply chain improvement during the quarter, we also experienced a more challenging supply chain environment in some areas, including in our fire and emergency segment. Our previous outlook assumed moderate supply chain improvements throughout the year. As we are speaking today, the pace of supply chain improvements remains uncertain. With commodity and freight costs trending up again, all of our non-defense businesses have remained agile and have taken additional pricing actions. Notably, some of these pricing actions are effective on orders and backlog. This will mitigate some of the additional price cost headwinds we are facing. Nonetheless, there's a slight timing lag. As we said on our last call, we expect price cost headwinds to remain at peak levels in the first quarter, which was the case. While new cost pressures have emerged, which will impact the year, we do expect improvement in price-cost dynamics in the second quarter. We expect further improvements in price-cost dynamics in the second half of the year, where we expect to be largely price-cost neutral. In total, we expect price-cost headwinds of approximately $180 to $200 million for the year, compared to our price-cost baseline before the rapid escalation in 2021. This is up from our prior expectations of $140 to $150 million for 2022 with the primary impacts in the first and second quarters. On a consolidated basis, we expect sales of $8.1 to $8.6 billion in 2022, an increase of $100 million at both ends of our prior range. We're estimating operating income of $475 to $560 million compared to our prior expectations of $545 to $625 million, reflecting increased price cost pressures and manufacturing inefficiencies driven by supply chain disruptions, as well as direct labor constraints. We now expect adjusted EPS of $5 to $6 per share, compared to our prior EPS range of $5.75 to $6.75. At the segment level, our sales outlook at Access Equipment is now $3.8 to $4.2 billion, a $100 million increase compared to our prior expectations, primarily driven by additional surcharge revenue as a result of our recent pricing action. Demand remains robust, so our revenue outlook is largely dependent on parts availability for the remainder of the year. we are estimating that access equipment's operating margin will be 8% to 8.75%, down from our prior estimate of 9% to 10%. Increased freight and component costs, as well as manufacturing inefficiencies, are contributing to our lower expectations. The recently announced surcharges should begin to mitigate incremental cost impacts during the second quarter. Turning to defense, our 2022 sales expectations of $2.2 billion remains unchanged. we now estimate our defense operating margin will be approximately 6.25% versus our prior expectation of 7%. The more persistent inflationary environment caused a higher-than-expected cumulative catch-up adjustment in the first quarter. While the unfavorable cumulative catch-up adjustment impacts full-year margin expectations, our defense segment has done an outstanding job mitigating the impacts of inflation. With our overtime method of accounting consistent with ASC 606, Changes in inflation assumptions can trigger larger adjustments in a single quarter, but importantly, our overall program margin expectations are only modestly lower than our prior assumptions. Fire and emergency segment sales expectations remain largely flat to prior expectations at approximately $1.2 billion for the year. We expect the operating margin in the fire and emergency segment to be approximately $11.5 to 11.75% for the year, down from our prior expectation of approximately 13%. The decline in margin expectations is due to increased supply chain disruption and staffing challenges contributing to labor inefficiencies as well as additional cost pressures. We continue to estimate sales of $1 to $1.1 billion in the commercial segment in line with prior expectations. And we are expecting operating margins for this segment of approximately 6.5% down slightly from prior expectations of 7%. We estimate the adjusted tax rate for 2022 will be approximately 22.5%. And we are estimating an average share count of 66.5 million shares. Our expectations for CapEx and corporate expense remain unchanged from prior expectations. And our expectation for pre-cash flow is now approximately $425 million versus our prior expectation of approximately $500 million driven by a decrease in expected income. Looking to the second quarter, we expect consolidated sales to be approximately flat versus the prior year quarter with access equipment up approximately 15% and defense revenues down by approximately 20%. We expect additional prices Realization in our non-defense businesses during the quarter is more of our sales will include price increases and surcharges implemented over the past year. We expect a low to mid-single-digit consolidated operating margin in the quarter, which represents a solid improvement versus Q1, but well below our margin expectations in the back half of the year. I'll turn it back over to John now for some closing comments.

While we're facing short-term challenges with global events that have emerged over the past quarter, the market dynamics in all of our businesses remain strong. We have market-leading, innovative products and we are demonstrating leadership in this highly inflationary environment. We remain confident that the actions we are taking will enable us to return to stronger margins in the back half of the year and into next year. We are excited to see many of you next Friday at our Investor Day at the New York Stock Exchange. We are going to share our out-year targets for sales and earnings, as well as key growth drivers in our businesses. You will also have the opportunity to meet the newest addition of our leadership team, Jay Younger, who serves as our Chief Technology Officer and Chief Strategic Sourcing Officer. She'll be sharing many of the exciting new technologies that we're developing. Okay, Pat, back to you.

Thanks, John. I'd like to remind everyone to limit their questions to one plus a follow-up, and we need to be disciplined on the follow-up question, please. After the follow-up, we ask that you get back in queue, and if you'd like to ask additional questions, please do so. Operator, 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 Steven Fisher with UBS. Please proceed with your question.

Thanks very much. Good morning. Just within the low to mid single digit margin outlook that you have for the second quarter, can you just give us a little help on what the dispersion is there by segment, please?

Sure, I can take that. Again, we're going to see progression really in all the segments. I would say sort of a similar progression across the board. So one segment's not really standing out notably versus others I'd say maybe access a bit higher. And again, a lot of what's really driving that progression to the second quarter is the cost-price it was $125 million in the first quarter. We expect that to be about $65 in the second quarter as significantly more price comes online.

Okay, that's helpful. And I guess just continuing on with the second quarter, it seems like you took most of the guidance reduction in the second quarter. I guess I'm curious at this point, how de-risked do you think that second quarter is? And I guess, you know, kind of similarly for the second half, how much risk, what do you see the biggest risk from here for that second half?

Sure. And I think it makes sense to just step back for a minute just on that progression, because obviously, by our implied guidance, you can see that the second half, as we've been talking about for even back at the last earnings call, is notably higher than So it's really the price-cost phenomenon and pricing is the story. So again, I just mentioned between the first and second quarter, we see about $190 million price-cost headwinds. That was up versus our prior expectations. We have a lot more price coming online in the second quarter. And then in the back half of the year, we're largely price-cost neutral. Now, one of the things causing additional pressure, obviously, following the We all saw the commodity and component and freight markets go up following the Russian invasion of Ukraine. We saw some nice decreases leading up to that earlier in the quarter. But we took immediate action at access and commercial where we saw some of the higher inflation impacts. And that price is coming online fairly quickly. So even as we exit the quarter, it's really solving for that additional inflation that we're seeing. And that's why you see a notably different margin profile in the back half of the year. So we see the price in backlog. The level of price increases we've implemented between 15% and 20% plus across our segments is really the big driver. And by the time we exit the second quarter, we're going to be realizing price at that level.

Thanks a lot.

Thanks, Steve.

Our next question comes from the line of Tammy Takaria with JP Morgan. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. So my first question is what's the magnitude of pricing that you're taking for next year's 2023 orders for the access equipment segment, meaning are you aiming for price-cost neutrality for next year's orders, or do you expect to recoup some of the margin loss this year?

Hey, Tammy, this is John. That's a great question. You know, we have done a lot of pricing actions over the past year, and as Mike just described, our second half gets materially better because we start to get that backlog at full price versus what we're doing now, which is clearing backlog at old price. So we have not yet fully opened 2023 yet for orders. We're actually having negotiations now in the access equipment segment, for example, on annual purchase agreements for 2023. And we have clauses that we've now put in place. We're starting to do business a little bit differently that give us in 2023, as we take orders, we're taking orders today at full price. We'll take orders for 23 at full price, but we'll also have conditions that say, should there be further escalation in material costs, we'll have pricing escalators or the ability to reprice at the time of manufacturing and delivery. So we feel pretty good about what we're doing in 2023. And quite frankly, that's what we have to do because of the big backlogs that we have and the long lead times that we have right now. And so that's a little bit of a different way for us to operate, but it's the right way for us to operate.

Got it makes sense. And my follow up is, I think it seems like your price cost headwind expectation for the year is now an incremental 40 to $50 million versus what it was last quarter. But then your operating profit guidance is lower by call it about 68 to 70 million. So what is the delta? What line item is driving that delta between lower operating profit guidance and the incremental price cost headwind?

Sure. Yeah, you're correct. The first and largest piece is the price cost, and that's largely hitting the first half of the year, as you pointed out. The other large, large piece of that is manufacturing inefficiencies. As I mentioned in my prepared remarks, with the lumpy supply chains that is having an impact on manufacturing efficiencies. So that's really the other piece of it.

Got it. And that's also largely the first half. You don't expect manufacturing inefficiencies in the back half?

We do expect that supply chain moderates somewhat over the course of the year from a delivery perspective, but to be clear, we're not expecting it to be perfect by the end of the year. And our guidance does obviously accommodate a range of scenarios there.

Thanks, Tammy.

Got it. Perfect. Thank you. Our next question comes from the line of David Rasso with Evercore ISI. Please proceed with your question.

Hi. Thank you. I'm just curious. The backlog in access is about $800 million, $900 million more than the rest of the year implied access sales. So obviously it's, it's visibility into 23 to some degree, if I'm doing that math, right. Can you give us some perspective on that eight 50 ish million of, of, of backlog that's already earmarked for 23, a little more granularity on is that early conversations with majors? Is it independence looking to get ahead? I'm just trying to get a sense of the, you know, the demand, where it's coming from for 23, where they're willing to lock in business already.

Yeah, as I said, David, as I said before, we haven't fully opened our 2023 order book yet, but we have completed some purchase agreements for 2023 with some of our customers. I can't back up my head. It's a mix of IRCs and a couple of larger nationals. But those are reflective of those purchase agreements that we've concluded that are in the backlog.

And anything unique about the mix from aerials, big booms versus scissors or tellies? Any color on that? I'm just curious on the mix.

From a mix perspective, what we're seeing is continued robustness in all the categories, and that really aligns with the fleet ages. Really, all the categories are quite aged to really record levels at this point.

So the follow-up then, the margins in the back half of this year for access feel like they're kind of north of 12% or so, assuming kind of mid-single-ish, a little better for the June quarter. And I'm just trying to think about that. As you think about 23, and I guess you hinted at this, we'll get some color next Friday on how you're thinking about access margins. Can you give us any perspective? And look, I'm not asking for 23 guidance, but you're going to touch – bigger picture views of access profitability at the meeting. Can you give us any perspective how to think about that, you know, 12% plus in the back half of the year and how that might, you know, lead our thoughts on 23? Thank you.

I would just say overall with margins for access, obviously, as we've talked about, a lot of the price-cost dynamics we've had were in access, and we have a lot more price coming online. And as we've talked about a lot over the last several quarters, we're taking the right actions to get our margins back to what we expect, and we believe we're well on the path to do that. Obviously, it's been – a unique set of circumstances over the last year or so, but we believe we're well on track to get back to those normal margins and access.

David, I think what you see in the background for 2022 is indicative of what we will do in 2023.

Okay, helpful. Thank you so much.

Thanks.

Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. I guess just my first question on defense, understanding the puts and takes of what you said about margins for 2022, but they're sort of below where we would have hoped. I'm just thinking defense margins until the Postal Service Award starts to kick in in the back half of the year. Is that how we should think about margins? So that headwind sort of continues into 2023, or is there any reason to be more optimistic there? And then my other question or follow-up question is, It's nice to see you guys are putting the surcharges out there. And I think you said April is when you announced them. Did you see any deterioration in orders after the surcharge or maybe perhaps a pre-buy ahead of the announced surcharge, which led to above-average orders in the quarter? Thanks.

Sure. I'll start with the first one on defense margins, and John can talk a bit about the surcharges. So in the quarter, we had, so with the Ukraine invasion by Russia, with commodities going up, with our accounting method, basically you have to look out and the inflation environment is now viewed to be a bit more sustained. And what that does is you have to look out in those contracts and calculate your estimate at complete. That caused a cumulative catch-up adjustment. We're about 75% delivered on the majority of our contracts. So you have a catch-up all at once. I think as John and I said in our prepared remarks, we don't expect that our program margins are notably lower going forward because of that. Actually, defense has done a nice job managing it. And it really goes back to, you really need to look at defense margins over time. So I would expect that generally, from a cumulative catch-up perspective, that's not necessarily a headwind that we're, that in our base expectations for the rest of the year that we're expecting. So I would expect stronger margins through the remainder of the year. You are correct, we do expect that Margins in general are going to, if you look at sort of our guide, our initial guide for the year, sort of hovering at the high single digits until our new programs start ramping up. That's where we're going to see growth return in the defense segment with NGDB as well as MCWS and some other adjacent programs. And that begins late 2023.

Yeah, and I'll add to that, Jamie. You know, I'll just emphasize defense is a growth segment for us. Now, it doesn't feel like that in 2022, but we've been talking for a long time knowing what the presidential budgets were that 2022 would be a lull year for tactical wheeled vehicles. As Mike said, we get into 23, we start to bring programs online like the Stryker program, like the United States Postal Service, these big programs. This drives long-term growth in both revenue and earnings. So that's great for our business. Just a quick comment on surcharges that you talked about. We didn't see any material pull forward because of surcharges, and we also did not see any material slow down in order rates because of our pricing and our surcharges. Our order rates have been strong. The only reason you might have seen a little bit of slowing in the first quarter of this year versus a comparable quarter a year ago is because we haven't fully opened 23 yet. And we're working out all those annual purchase agreements now. So order rates have been strong even at full pricing and even at surcharges. And, you know, we don't like to do surcharges. It's based on the realities of what's in the logistics environment today. And that's why we have to do it. But the business is strong.

Okay. Thank you.

Thanks, Jamie.

Our next question comes from the line of Stephen Volkman with Jefferies. Please proceed with your question.

Hi. Good morning, everybody. Thanks for taking the question. I wanted to go back, John, to the surcharge. It sounds like kind of a difference in the way you guys are doing business, which makes sense in an inflationary environment. But are you essentially like for the second half – are you basically able now to sort of cover whatever happens on the cost side with surcharges kind of in real time? Or is there still a lag? Or is there maybe a percentage of the business that surcharges don't touch? I'm just trying to get a sense of kind of how protected you are in the second half if things change.

Sure, I can actually take that one. So the surcharges – kick on fairly quickly in the second quarter. There's, of course, a little bit of lag in some circumstances, but not significant. So we're really realizing all the price in the back half of the year, and really without exception. Obviously, we're going to continue. These are times where things are moving rapidly, so we're continuing to watch leading experts' projections on commodities, We're watching what costs we're incurring and so on, and we're going to definitely remain agile, and if we need to take further action, we're certainly going to do so.

Okay, great. And then probably the second half of that question is just on the cost side. Are you locked in essentially for kind of 2022 costs now, or are those still pretty variable depending on market conditions?

For steel and aluminum, we're locked to particularly hot-rolled coil steel. We had talked about on previous calls, we're locked to just north of 50% on those. Obviously, as we get through the year, you have more and more visibility of that other piece. Obviously, with the volatility, the futures market's not great right now for doing additional locks on that aspect of it. And certainly, freight's been the one that's than particularly volatile, really following the fuel prices going up following the invasion. But, again, it's something that we're just going to continue to monitor, and we're going to act quickly as we see changes.

Great. Thank you. Thanks, Dave.

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

Yes, hi. Good morning, everyone. Morning, Jerry.

I'm wondering if you could just talk about on the postal service contract, do you have pass-through on commodities set up, you know, given the inflation we've seen and, you know, battery costs in particular? I'm wondering how should we think about your commodity exposure on that contract? And if you can, comment on which contract drove the majority of the cumulative catch-up adjustment this quarter in defense as well. Thanks.

So I'll start with the Postal Service Contract. The Postal Service Contract, we're relatively well protected on this contract. There's two things to talk about. Number one, there's an economic adjustment in the contract which helps protect us for a significant amount of inflation. But the other side of it is we've got long-term agreements with a lot of our suppliers. Now, there's not long-term agreements on everything, so there's a little bit of exposure as you look to our supply base for postal, but there's also a lot of protection in it with agreements that we have with our supply base. So we feel pretty good about where we are with the postal contract. I'll let Mike comment on the cumulative catch-up adjustment. Sure.

On the cumulative catch-up adjustment, it's really on the major contracts. technical wheeled vehicle programs really in proportion to the size of those programs. Again, it was, as you look at the components and just the anticipation of an extended time horizon for the inflation we are seeing, it caused it. But it's fairly pro-rad across the programs.

Okay, great. And then, you know, given the move higher in cost in the first half of the year, I'm wondering if you could just comment on, is that a function of suppliers declaring force majeure and setting up new prices to you folks, or is that having to be flexible, going to second and third tier suppliers at spot? Can you just talk about the drivers of the near-term volatility, given the factors you mentioned earlier in the call? Thanks.

Sure. I would say freight's definitely a big piece of it, and that's obviously that freight generally happens a bit more real-time So that's a piece of it, but obviously a lot of movement in suppliers just in general, and particularly with commodities escalating following the world events. The other thing we're obviously watching very closely to is just the lockdowns in China as well. Obviously, that could have some impacts on supply chains, but in general, we're... it's really a combination of factors that are driving it.

Yeah, and just to add a little bit of color on that, Jerry, you know, I had mentioned, I think, in my opening remarks, you know, we felt pretty good when we were in the early part of Q1 in January with, as Mike mentioned earlier, we used an aggregate of forecasts for commodities and material cost inflation. And then, as we said, a couple of major events have happened with the Ukraine and with China's COVID situation, which has changed those forecasts, which is essentially what put us into the position to see some new cost escalation. It has happened both at the commodity level, but also we have a lot of very strong suppliers, and they've seen the same thing, and they have come with some accelerated price increases, which has also caused us to adjust some of those forecasts. And then there's the freight side, which Mike talked about. I mean, all those things change dramatically in the middle to the end of the quarter. Right, right.

Thanks, Jerry.

Thank you. Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.

All right. Good morning, guys. Good morning, Jerry. Good morning. So in your revised guidance, I just want to understand what you're assuming about the supply chain, just like the slope of the improvement. And then also, if you can quantify the manufacturing cost absorption that you're seeing year on year. And then just lastly, just want to confirm whether the surcharge, does that include air freight as well?

It includes all things freight related. Yes, so that was, I guess, sorry, now I just lost my trick. Supply chain. Yeah, supply chain. From a moderation standpoint, we're expecting it to moderate gradually over the course of the year, but back to, I even believe comments last quarter, we're expecting that it does not need to be We don't expect it to be necessarily perfect by the end of the year, so it expects some moderation, but not back to maybe fully traditional, what we've traditionally seen.

Again, it's based on that aggregate of third-party forecasts, and we believe it's relatively conservative. As we talked about, it deteriorated in the middle of the quarter due to some of these external events, but it's not... expecting any miracles to happen. It's relatively conservative outlook on where things should expect to be.

Got it. Okay. And I was hoping also that you could break down your access outlook by geography, just in terms of, you know, how you're thinking about revenue growth expectations for the year.

You know, I would say generally that similar to what we saw in the first quarter, North America is the strongest, but we're seeing Europe's relatively robust as well. China, obviously, with the COVID lockdowns and so on, that's probably under a bit more pressure. So I guess that's how I'd characterize it. The majority, the most meaningful growth is really coming from North America.

Yeah, and you know, the access equipment market in general is very strong. I want to emphasize that. we see, continue to see, and it's reflected in our backlog and our strong order rates, multi-year growth segment, a growth ahead of us. And it's driven by fundamentals. It's driven by the aging of equipment, which we know the data of. It's the most aged we've ever seen, the boom market, for example. Used prices are really high. Non-residential construction forecasts are pretty good in terms of the growth of that. That's a key indicator for access equipment. We're also seeing continued increases in applications for the equipment, so there's even a need for fleet growth. And all of this is leading to strong growth of the segment for several years into the future. We're also seeing that phenomenon unfold in Europe where we're starting to see an aged fleet in Europe, and we expect that to continue to push up demand. So a lot of positive things about the access equipment market on the horizon.

Thank you.

Thanks, Chad.

Our next question comes from the line of Mike Schliske with DA Davidson. Please proceed with your question.

Hey, good morning, guys. Can you maybe just talk about the backlog in the quarter in the defense segment? I was curious whether the entire NGDB order was put into that backlog and whether any major chunks in other programs were in there as well. If you back out the entire NGDB program, you know, it Perhaps backlogs were down a bit from the prior course. I just want to get a little bit of color about how bigger parts were.

Okay, good question. I just want to clarify, Mike. So the order that we received was the first order for the U.S. Postal Service. It's about $3 billion. That went into the backlog. But that's not the entire program. That's the first order for the program. I just want to make sure that that was clear. So that's in the backlog. Okay. That's the primary driver of that defense backlog change.

Yeah, and I would say just in terms of the other items and backlog, with tactical wheeled vehicle budgets adding and slowing their down a bit, that obviously does put some downward pressure on backlogs for those programs. And those The backlogs on the tactical wheeled vehicles really varies based on we're still extended well out beyond this year from a backlog perspective. So we still have good visibility. So a lot of that, again, just comes down to the timing of those tactical wheeled vehicle orders.

Got it. I also want to ask separately in commercial about concrete versus refuse. You know, it looks like concrete didn't have a great quarter this past quarter. I mean, both of those models, both of those products, do use commercial chassis. So can you give us an outlook and some color as to how concrete might progress throughout the year to 2023 here?

Yeah, I'll take that. You know, the commercial business, the backlog is strong. It's the strongest we've seen in a long time, and it's across both the refuse and the concrete markets. The reason you saw the concrete was a little bit subdued in the quarter was purely because of supply chain and our ability to produce based upon what we could get. Now, some of that's chassis, and sometimes it's control modules and electronic units we can't get. So it's a number of things. Chassis are probably the headline. But both of those businesses have good backlogs and good order rates and are running strong. It's purely back to what we've been talking about earlier, supply chain constraining our ability to ship units.

Okay.

Thanks so much.

Thanks, Mike.

Our next question comes from the line of Meg Dobre with Baird. Please proceed with your question.

Thank you. Good morning. Just going back to access, I guess a couple of questions. You mentioned that you're using escalators as far as pricing goes into 2023, and I'm sort of curious if that essentially cuts both ways, right, you know, in terms of both. commodity inflation, but potentially exposing you to lower input costs as well, as far as your pricing goes. And then related to this, I think I heard you say that right now you're looking at price increases at 15 to 20%, and I'm presuming that that applies to access equipment as well. Your customers, how are they sort of taking these kinds of pricing increases? Is there a Any sort of pushback, especially from your larger customers, when it comes to seeing this kind of move in price?

Yeah, I'll answer the price side of that, Mig. Nobody likes the environment that we're in. Everybody's dealing with it in every industry that there is. And we try to be very, very transparent with our customers. And of course, very fair. We don't like to have to increase price, but it's the realities of the climate that we're in. And so ultimately, our customers understand why we're doing what we're doing. Our prices have been sticky. We have not had issues with... with our order rates dropping or getting big cancellations because we've got price increases. That has not been the case. Our order rates continue to be strong at full price, and that's what I'll have to say, but I can't be any more clear than that on it.

Okay, can you comment on de-escalator?

Yeah, you know, if commodity costs are coming down in 2023, that's good news. That's all I'll say about it. We'll have a lot better ability to continue to drive the margins that we expect, which we'll see in the second half of the year if we've got a situation where we're seeing a lot of costs coming down. That's all I'll say about that.

Right, but I'm sorry to press you on this. There's a difference between a price increase and an escalator. An escalator would imply to me that things move both ways. And I'm just trying to understand how you're setting up your contracts, just to be clear.

Well, I'll be as basic as I can about it. It gives us the right based upon from the time we took the original order until the time that we shift, if there's a material shift in material cost, we can reprice the product. That's what we have negotiated for 2023 orders that we're taking now.

Okay. And then lastly, on defense, I'm curious if you're able to tell us from what's already in the backlog from the USPS How much of that gets delivered into 2023? And, you know, we talked a little bit about margin. You talked about some of these contract adjustments. As we look into 2023, is it fair to assume that margins can start normalizing towards that double-digit run rate that, you know, we were kind of seeing two or three years ago, or is that too optimistic at this point?

Just in terms of the postal service deliveries, we're really talking about the back half of the year. So it's not going to be a material portion of revenue yet in 2023. You're going to start seeing a much more meaningful ramp in 2024 and beyond. So I think that's just sort of a baseline. In terms of the margins, when we have a cumulative catch-up adjustment, we have it sort of resets our baseline of what we expect margins going forward. So, you know, ultimately things that could change it is if commodities come down faster, that type of thing, that's where we could see some higher margins. But again, because there's an unfavorable cumulative catch-up adjustment, that's not reflective of the program margins in the quarter that we delivered. Our margins on the program, as I said in my prepared remarks, are only modestly different. But again, if you're estimating this large contract, your estimate at complete, and you have some inflation, and you change that assumption, you can have a bigger impact in a single quarter. So again, we do not expect defense margins going forward to be meaningfully different than what we've seen over the last year or so in quarters where we didn't have the cumulative catch-up adjustments. Thanks, Meg.

All right. Thank you.

Our next question comes from the line of Nicole DeBlaze with Deutsche Bank. Please proceed with your question.

Yeah, thanks, guys. Thanks for squeezing me in here. Good morning.

Morning. Morning.

Can we just maybe talk a little bit about – I hate to beat a dead horse. I know there's been a lot of questions about the surcharge and price cost, but Is what you're doing consistent with what you're seeing with peers in the industry? Has everyone started instituting surcharges? What do you think from a competitive perspective on pricing?

Well, what I can say about competitive pricing is just very, very general. All of our competitors are, of course, increasing prices. They're in the same climate that we're in, and that's regardless of segment that we operate in. I'm not going to go into who's doing pricing and who's doing surcharges. We try to analyze our business based upon the realities of what we are seeing. And particularly recently with the surcharges, it's all related to logistics and freight. And there's been a lot of disruption that continues to happen with freight, which is causing costs to continue to go way up. And so our analysis told us that Surcharge is the best way to deal with it. But all of our competitors are doing something, and I'll leave it at that.

Okay, that's helpful. Thank you. And then there's been a lot of discussion on access and defense on this call, but just maybe one on fire and emergency. I think the margins came in a little bit weaker than expected in the first quarter. I know you guys have embedded a path back to double-digit margins there. Is it just price cost in that segment, or are there any other major factors that we should be thinking about?

There's some price cost, but I'd say it's less than, relatively speaking, than like access and commercials as a percentage of their business or their revenues. The other piece there is we did, as John mentioned, and I mentioned in my prepared remarks, we did see some higher – part shortage levels there. And obviously there's a lot of parts that go into fire trucks. So it's really those part shortages driving some labor inefficiencies in the quarter. Again, supply chains over time are going to stabilize. So it's not a long-term concern for us. We expect some normalcy to continue to return throughout the year. And that will drive the margin improvements that are implied in our guidance. Thank you. Thanks.

Our next question comes from the line of Courtney Aguilar with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys. Just wanted to go back to the change in the revenue guidance for access. I think you mentioned, you know, obviously you put the surcharges in, but you mentioned a couple times that output has been limited by supply chain disruption. So just wanted to... confirm whether you are expecting reduced volume output versus your original guidance or if all of the increase is just, you know, same volume and upside just via pricing. And then I guess, you know, same question on some of the other segments that we didn't see, you know, guidance change, but you did mention that you're taking pricing there. Was it just, you know, too marginal to change guidance on the top line?

Yeah, first of all, on access, volume is pretty similar. Maybe some small mixed change in there, but the biggest thing is the surcharge revenue driving that change. So volume assumptions largely unchanged. And, yeah, with the other businesses or non-defense businesses, I would say there's additional revenue coming online for commercial in particular with their surcharges. But it's sort of within the rounding range of our guidance. So within that, there's a bit of a pickup there, but it's, you know, it's less meaningful than access.

Okay, great. Thanks. And then I know there were some comments earlier about the USPS contract. But now that you have some clarity on the BV versus IC, just curious if there's a significant margin discrepancy between those two platforms, especially on the sales side as well, if there would be a difference in how we'd be modeling that.

Yeah, the best way to think about the ICE versus the BEV margin is that BEV is – There is a little bit more cost in a BEV unit. A BEV unit has a higher price point, and therefore the margin dollars are higher than an ICE unit. So, you know, that's all I'll say about it. They drive higher margin dollars and higher price points.

Okay, gotcha. Thanks. We have reached the end of our allotted time for questions. I would now like to turn the floor back over to management for closing comments.

Thank you. We talked a lot about the fact that we're facing short-term challenges with global events that have emerged over the past quarter. We've also talked about the market dynamics in all of our businesses and that they remain really strong. We have market-leading innovative products, and we are certainly demonstrating leadership in this tough environment. We are confident that the actions we're taking will enable us to return to stronger margins in the back half of the year, and most importantly, in the next year and beyond. We're very, very excited, by the way, about next Friday for our Investor Day at the New York Stock Exchange. We hope to see many of you there. We're going to share our out-year targets for sales and earnings and key growth drivers in our business. And we very much look forward to doing that and appreciate your time and attention today. Thank you.

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.