Oshkosh Corporation (Holding Company)Common Stock

Greetings and welcome to the Oshkosh Corporation Reports Fiscal 2022 Second Quarter Results. At this time, all participants are in a listen-only mode. A 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. I would now like to hand the call over to Pat Davidson, Senior VP of Investor Relations for Oshkosh Corporation, Thank you, Mr. Davidson. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our second 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 8K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022, and all comparisons during this call to the prior year quarter are to the quarter-ended June 30, 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. Oshkosh has a strong long-term outlook, healthy order rates, and a robust backlog. Like many companies across the globe, we are facing near-term supply chain constraints and inflation challenges. We remain laser focused on mitigating these impacts and have continued to raise prices in the current inflationary environment. We believe these increases will become more impactful in the second half of 2022. While these challenges have lingered longer than expected, we remain confident that they will subside over time. Our strong outlook is driven by robust demand across our end markets. New technology and innovation, aged fleets across our non-defense segments, and new contract wins are notable along with other drivers that underpin solid demand. And we believe we're in an outstanding position to leverage this solid demand to drive accelerated growth over the next several years as we highlighted at our recent investor day. Access equipment orders were strong and we have the highest backlog in the history of JLG. This is driven by aged fleets, high utilization rates, and many large construction projects in the planning and execution stages. And keep in mind, infrastructure spending tied to the Infrastructure Investment and Jobs Act, which we expect to be a further demand catalyst for access equipment, has not yet begun at scale. In our defense business, we have two key contracts that drive growth into the future with NGDV and Striker MCWS. We expect to begin shipping NGDVs late next year. The USPS contract is expected to contribute over $1 billion of revenue annually when we achieve full rate production. And as you may have recently heard, USPS will increase the ratio of NGDB BEVs to 50% on the initial order of 50,000 units. This is great news for all parties. North American demand for fire trucks has returned to well over 5,000 units annually, the highest industry level since prior to the Great Recession, and our Pierce brand remains the market leader. The fire truck market is supported by strong municipal funding and aged fleets that we expect will be refreshed over the next several years. In our commercial segment, refuse collection vehicles are in high demand as our customers have returned to higher CapEx spending levels following a pause in capital spending during the height of the pandemic. And finally, we are in the midst of a significant technology investment cycle, and we expect customers will be transitioning to our many electrified product offerings in the coming years, as well as deploying autonomous functionality. In early May, we introduced our 2025 revenue and EPS goals, and we believe we have a solid path forward to achieve these goals. Of course, we need to execute through the near-term challenges, which we believe we will. Oshkosh team members continue to persevere to deliver our purpose-built vehicles and aftermarket parts and services. For the quarter, we reported year-over-year sales decline of 6.5% with earnings per share of 41 cents, both of which are below our expectations. We have strong backlogs, so the decline in sales versus our expectations was driven solely by supply chain challenges as part scarcity limited our ability to efficiently complete and ship units, particularly in the fire and emergency segment. We also experienced unfavorable cumulative catch-up adjustments in the defense segment and recognized an unfavorable non-cash mark-to-market adjustment in our long-term investment in microVAS during the quarter. Sequentially, we made significant progress to overcome elevated input costs through our pricing actions. In light of these constraints in the second quarter, as well as ongoing supply chain challenges and inflationary pressures, we are updating our full year outlook for revenue and earnings per share. We now believe that 2022 revenue and adjusted EPS will be in the range of $8.3 billion and $3.50 respectively. Before we discuss our segments in more detail, I want to highlight our recently announced commitment to establish enterprise-wide science-based targets to reduce greenhouse gas emissions. We are committed to developing a plan that will be constructive for our company, our customers, and our communities around the globe. We take this responsibility very seriously. Please turn to slide four, and we'll get started on our segment updates with Access Equipment. Our access equipment team delivered meaningful performance improvement during the second quarter compared to the first quarter. Sequentially, we grew revenue by over 10% and we achieved a 630 basis point improvement in operating margin despite inflationary pressures and on-time delivery metrics that remain well off historical norms. I'm proud of the efforts of our people. as they work to secure materials and find alternative supply sources to allow us to keep our production lines running. We are continuing to work towards delivering higher volumes in the second half of the year and are taking necessary actions to increase our production capacity, including adding new production lines in Pennsylvania and Tennessee, as well as onboarding additional suppliers. As mentioned in my opening remarks, demand for access equipment remains very high as reflected in our robust backlog of just under $4 billion. Orders were strong once again at nearly $1 billion in the quarter. We already have meaningful backlog for 2023 and have good visibility to customer requirements beyond the orders and backlog based on customer discussions over the past quarter. As a reminder, prices are not fixed for 2023 deliveries, so we will continue to monitor inflation dynamics and adjust pricing as necessary. To that end, we recently announced an additional 5% surcharge that takes effect for all shipments in North America beginning September 1st. The additional surcharge is necessary as a result of persistent inflation. Please turn to slide 5 and I'll review our defense segment. Revenue for the defense segment were lower in the quarter versus the prior year due to lower tactical wheeled vehicle volumes resulting from reduced Department of Defense budgets that we've been expecting for the last couple of years. Margins were lower than our expectations as a result of unfavorable cumulative catch-up adjustments driven by changes in inflationary projections. Mike will provide further further color on the cumulative catch-up adjustments in his section. Moving to the JLTV Recompete, the Army recently pushed the bid submission date to mid-August 2022. As a result, we expect the final decision in early 2023. We remain highly focused on submitting a winning bid for this key program and will highlight our strengths in manufacturing and technology to our customer. We also remain active on a number of additional program competitions, such as OMFV, CATV, and EHET, and believe we are well positioned to win multiple adjacent programs to bolster our already strong business. The strength of our key programs was evident this past quarter as we received orders for the JLTV, Striker MCWS, and FHTV programs. We are also receiving elevated inquiries from Eastern European nations for our tactical wheeled vehicles as the war in Ukraine continues. There is a growing interest from numerous countries as they increase their defense spending. Any new foreign military sales to these countries will likely begin in late 2023 or 2024. Finally, significant progress continues on our United States Postal Service NGDV program. We were delighted to host a contingent of USPS professionals, including postal carriers, in June for a program review and test drive. We are pleased with our progress and we remain on track to begin delivering vehicles in the fourth quarter of 2023. Let's turn to slide six for a discussion of the fire and emergency segment. Demand remains very strong in the fire and emergency segment. but supply chain disruptions negatively impacted our ability to efficiently produce and deliver trucks during the quarter. This led to a nearly 9% sales decrease compared to the prior year. Operating margins were down as a result of lower volume and manufacturing inefficiencies tied to these supply chain disruptions and labor availability. Supply chain on-time delivery metrics weakened over the course of the quarter, making it clear that volume will be impacted for the year, which was not our expectation. This was reflected in our revised guidance. Orders remained strong and were up 125% compared to the prior year, highlighting excellent demand for our products. As a reminder, we are in the midst of a capacity expansion for custom fire trucks in Appleton, Wisconsin. and we expect to benefit from this additional capacity in 2023. During the quarter, we announced our acquisition of Canadian fire truck manufacturer Maxi Metal, an organization known for quality, reliability, and outstanding customer service and support. We expect to benefit from Maxi Metal's experience and leadership as we grow our presence in Canada. Their culture and customer focus align exceptionally well with fire and emergency and our dealer network. Finally, on our last quarterly call, we highlighted plans to take our Volterra electric ARF unit to several airports around Europe for customer demonstrations. The response has been overwhelmingly positive, as multiple airport authorities have expressed strong interest in ordering our innovative electric ARFs. We are not yet accepting orders for the Volterra ARF, but expect we will begin doing so shortly. Please turn to slide seven, and we'll talk about our commercial segment. In the commercial segment, revenue was up sequentially and flat year over year. As a reminder, commercial is our biggest consumer of third-party chassis, and availability remains constrained. In addition, we have been impacted by several other components that have further limited our ability to produce. Nonetheless, I am pleased with the efforts of our team at Commercial to manage through this supply chain variability and keep our production lines running. Demand for RCBs continues to be strong. During the pandemic, many customers paused RCB purchases, leading to elevated fleet ages. we are also seeing strong market fundamentals in the broader environmental services space. We believe both of these factors are contributing to strong demand for our innovative products. We are working closely with our customers on requirements and have partially opened our order book for 2023 as we continue to monitor input costs and inflationary dynamics. In May, We experienced strong attendee enthusiasm for our vehicles at both the Advanced Clean Transportation Expo and Waste Expo. We displayed our electric front discharge concrete mixer at the Advanced Clean Transportation Expo, while we showed our recently acquired cart seeker autonomous technology at Waste Expo. We believe our technology-enhanced new products will continue to strengthen our position as the industry leader. 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. As John discussed, our results did not meet our expectations for the quarter. There are three principal factors that drove the shortfall. First, revised third-party cost projections are indicating persistent inflation and and therefore higher cost expectations to complete our large defense tactical wheeled vehicle backlogs. This change in expectations yielded large unfavorable cumulative catch-up adjustments in the defense segment of approximately $25 million in the quarter to adjust our life-to-date margins for our tactical wheeled vehicle contracts. While these adjustments had a large impact in the quarter, our estimated contract margins are only 30 basis points lower than prior expectations. Second, as previously mentioned, fire and emergency has been negatively impacted by supply chain delivery challenges for key components, notably axles and other powertrain components. This drove lower revenues in the second quarter in addition to labor inefficiencies that resulting in a $15 million operating income shortfall versus our expectations for the segment. Finally, with public equity markets down significantly and technology stocks even more, we recognized an unfavorable non-cash mark-to-market adjustment of $11 million for our investment in MicroVAS during the quarter. Importantly, we expect to benefit from our joint development agreement with MicroVAS on key electrification projects. Conversely, access equipment and commercial outperformed our prior operating income expectations despite lower than expected sales. We delivered strong sequential improvements in the second quarter at access equipment with revenue growth of 10.6% and a 630 basis point improvement in operating margin versus the first quarter, largely driven by increased price realization and volume. Moving to a comparison versus the prior year, consolidated sales for the quarter were $2.07 billion or $143 million lower than the prior year quarter, representing a 6.5% decrease. The consolidated sales decline was largely driven by a $171 million decline in defense segment sales due to lower tactical wheeled vehicle volumes and lower fire and emergency sales volume as a result of the supply chain disruptions we are facing, partially offset by the benefit of increased pricing. Consolidated operating income for the second quarter was $69.4 million, or 3.4% of sales, compared to adjusted operating income of $205.1 million, or 9.3% of sales in the prior year quarter. Consolidated operating income decreased due to the higher material and freight costs, lower sales volume, decreased manufacturing efficiencies caused by part shortages, unfavorable cumulative catch-up adjustments and defense, and this was offset in part by increased pricing and lower incentive compensation costs. Our consolidated price-cost headwind in the quarter came in slightly higher than our expectations at $75 million, which impacted earnings per share by 83 cents. EPS for the quarter was $0.41 compared to adjusted EPS of $2.09 in the prior year quarter. EPS was impacted versus the prior year by lower operating income and the microvast mark-to-market adjustment. We repurchased approximately 757,000 shares of common stock for a total cost of $70 million during the quarter, consistent with our disciplined capital allocation approach. Please turn to slide nine for discussion of our updated expectations for 2022. We're encouraged by robust demand for our products as evidenced by our record $13 billion backlog and are confident in our long-term outlook we shared at our investor day in May. In the near term, our April earnings guidance called for a significant ramp up in revenue and earnings in the second half of the year. This was dependent upon inflation moderating and supply chain constraints stabilizing, which has not been the case. While we continue to realize the benefits of pricing, inflation has been higher than prior expectations. In our non-defense segments, we are able to price for inflation, but there is a timing lag in realizing the benefit. Furthermore, significant supply chain disruptions continue despite relentless engagement with our supply base. These disruptions are reducing sales volume and increasing manufacturing inefficiencies, both of which are impacting our expectations for 2022. As a result of these factors, we do not expect to achieve our previous adjusted EPS range of $5 to $6 per share for the year. We now believe that revenues in EPS will be in the range of $8.3 billion and $3.50 per share, respectively. Our EPS could be lower if supply chain and inflation conditions worsen or higher if conditions improve. We're continuing to monitor the factors contributing to our revised outlook for the year and we'll provide an update on our next earnings call. I'll turn it back over now to John for some closing comments.

While we are facing near-term supply chain challenges, the fundamentals in our end markets remain strong. We've taken numerous pricing and surcharge actions seeking to recover margins. Additionally, we have updated our production plans to better match the current environment and believe we have a realistic outlook for the back half of 2022. We expect to exit 2022 in a stronger position as we head into 2023. Okay, Pat, back to you.

Thanks, John. I'd like to remind everyone Please limit your 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 if you'd like to ask additional questions. 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 your questions. Our first questions come from the line of Tammy Zacharia with JP Morgan. Please proceed with your questions.

Hi, good morning. Thank you so much for taking my questions. So my first question is, can you talk about what kind of pricing you realized in the second quarter? I think you mentioned 15 to 20% pricing in the last 12 months or so, the last time we spoke. So what was it in the second quarter and what's your expectation for the rest of the year?

Sure. In our non-defense businesses, it was about 9% in the quarter. Sequentially, if you look at price costs, price costs improved by about $50 million. For the full year, we believe our prior expectation was price costs would be about $190 million at the midpoint. We now believe that's about $250 million at that really the change is attributable to the cumulative catch-up adjustment we have in the quarter, as well as some expectations of higher LIFO reserves at the end of the year with the more persistent inflation that we've seen.

Got it. Thank you so much. And I'm sorry if I missed it, but besides commercial, have you started filling orders for next year for any other segment? And also, how are you approaching pricing for next year?

Yeah, so a great question. By the way, our order rates are very, very robust across all of our segments. When you look at it, you know, in most of our segments, we're taking orders well into 2023. In fact, in F&E, our fire and emergency segment, we're taking orders in 2024. Now, having said that, we haven't fully opened the order books for 2023 and 2024. So when you look at our order numbers, they're a little bit artificially lower than actual because of the fact that we're being very careful about how we structure and take the orders for 2023. But we've got a lot of orders for 2023 across the access business, the F&E business, and even the commercial business.

Thanks, Tammy.

Got it. Thank you.

Thank you. Our next question has come from the line of Seth Weber with Wells Fargo. Please proceed with your questions.

Hi, you guys. Good morning, and thank you. I wanted to ask about the defense margin. I appreciate the color on the 25 million catch-up, but I'm just trying to make sure I'm understanding this. So, would you expect Margins then in the back half of 2022 and then going forward to kind of continue to get back into that 6% to 7% range, is that the right way to think about it? Or is there some other, you know, it sounds like some of the volumes are a little bit lower. I'm just trying to think about, like, what's a normalized defense margin going forward? Thanks.

Yeah, maybe just to provide a little color. We have cumulative catch-up adjustments every quarter. It just so happened it was larger this quarter with the more persistent inflation. In other words, we're expecting sort of low single-digit incremental costs to complete our $3 billion backlog. So we end up recognizing one margin over the entire – all of our contracts. We're about 80% complete. So – We only see our margins actually being at all 30 basis points lower than our prior expectation, that when you have to catch up those contracts that are 80% complete, you can have a bigger impact in a quarter. So that's really what happens. So going forward, and again, one of the things we need to continue to watch is we're always looking at third-party forecasts. to understand what we're seeing from an inflation perspective. And obviously, those have trended upward over time. But assuming no major movements in those third parties, or the outlook for inflation versus where we're at today, we would expect that our margins would be within about 30 basis points of what they previously were. So we're not expecting a large margin impact going forward.

Okay, that's helpful. Thank you. And then just as a follow-up, can you just, you know, kind of give us your interpretation of what's – there was a news article recently around the U.S. Postal, the NGDB, just, you know, potentially opening it up, or I'd just like to hear your perspective on what's going on with, you know, their appetite for orders and if interpreting what's out there. Thanks.

Yeah, Seth, this is John. I'll take that question. Everything that's happening with the U.S. Postal Service is positive for us. Everything that's happening is positive. I think what you saw recently, you saw a couple of bits of news. One of them had to do with what they call COTS, which is commercial off-the-shelf vehicles. That's a standard off-the-shelf vehicle. Think of a sprinter van. The Postal Service has always had a program for buying those off-the-shelf vehicles, and it's just part of what they do. This has nothing to do with the long-term plan for NGDV, the vehicle that we're contracted on. They're two separate programs. The other piece of news that they had recently was that they're going to go to 50% battery electric vehicles on the initial – 50,000-unit order. That's really good news for everybody. All parties involved want to see more electric faster with postal last-mile delivery and the NGDB, and we're seeing that really start to happen. So the more electric faster is really good. But the fact that they're buying off-the-shelf vehicles, that's what they always do. It's part of their program. It doesn't have any relation.

Got it. Okay. Thank you, guys. I appreciate it. Thanks.

Thank you. Our next question has come from the line of Jamie Cook with Credit Suisse.

Please proceed with your questions. Unfortunately, it looks like we lost Jamie.

I'm going to bring through David Grasso of Evercore ISI. Please proceed with your questions.

Hi. Thank you for the time. So the second half guide versus the first half, it looks like you're assuming sales are up about 7% sequentially and the operating margins go from 2.5% to over 6%. And if you adjust for the defense catch-up, let's call it first half was 3% margins having to go to 6%. And I'm just trying to get a sense of on price cost, I guess first on the revenue sequentially, the up 7% or so, how much of that do you feel you already have in pricing that will flow through, including that 5% for September 1nd? So, you know, just trying to get a sense how much volume do we need to get to seven? And then on the margin, how much does price cost in your math swinging positive to account for that extra 300 bps?

Thank you. Sure. Oh, sorry. I cut you off right at the end. I thought you were done. Are you good? I'm done. Okay. Yeah. So I guess, first of all, from a pricing standpoint, it's about $200 million of the revenue increases price. So that's obviously a big meaningful component of it. From a price-cost perspective, that improves by about a – call it $1.70 to $1.75 in the first half versus second half of the year. So price-cost obviously is a big driver of that EPS improvement in the back half of the year.

Okay, that's interesting. So you're basically – 75% of the revenue increased sequentially, you feel like you have from price. But that price-cost number, the 175 actually would suggest even more than 300 basis points of margin improvement. I know it's a wild card. It's been hard, so I'm not saying it's going to be easy. But on that price-cost, how much do you feel you have your cost at least somewhat understood, locked in, versus the surprises you saw this past quarter? I'm just trying to get a sense of its inefficiencies. We thought a chassis was going to show up, and it didn't, and you're scrambling to air freight things. And I'm just trying to get a sense of how comfortable we can be, obviously, given this quarter was a challenge. Sure.

And first of all, I should just clarify that cost price is better, $150 million in the second half of the year, but EPS conversions $1.70 to $1.75. I think it may be helpful, David, to just break down. If you kind of look at our prior midpoint to the proximate 350 or the neighborhood of 350 we're talking about, about 40% of it is volume mix. About 35% of that is inflationary impacts, which inflation, as we're looking at that, it's the two biggest pieces of it. It's really the cumulative catch-up adjustment, and it's LIFO, And then the last piece is manufacturing inefficiencies, which is about 25% of it. I think from a visibility to cost perspective, obviously we're getting further in the year. We have better visibility to our costs now a quarter further into the year. What we're really watching is, of course, if we see upward inflation pressure or an extended, obviously that can impact. We include cumulative catch-up adjustments in that cost price. So that's one area we're watching. closely, as well as our LIFO reserves. With LIFO, it's sort of the last things you're receiving in the year that obviously we haven't necessarily placed the orders for those yet, or there's still some movement there that can impact LIFO. So it's not sort of the core FIFO costs that we do have a bit better visibility to right now.

All right. I appreciate the time. Thank you.

Thanks. Thank you. Our next question has come from the line of Nicole de Blasio at Deutsche Bank. Please proceed with your questions.

Yeah, thanks. Good morning, guys.

Morning.

I just want to kind of ask about what you're thinking for the cadence of earnings in 3Q versus 4Q, kind of like, you know, embedding normal seasonality there or any help you can provide with respect to how you're thinking about volumes as well as operating margins in the two remaining quarters of the year.

I would definitely say there will be a bit of a cadence of continual improvement, and particularly in the previous question, just looking at price. So you're going to see a progression of price as we go through from the third to fourth quarter as well. So we're going to – we saw about a $50 million increase. price cost improvement from Q1 to Q2. We'll see nice progressions from Q2 to Q3 as well as Q3 to Q4. So I see a bit of a progression to the end of the year.

Okay, got it. That's helpful. And then just kind of maybe fast forwarding to 2023. I mean, it feels to me like we could be setting up for actually a pretty nice margin year because theoretically the pricing is sticky. Can you give us a sense of, like, the potential carryover pricing into 2023 that we're looking at based on the actions you guys have taken so far? And, I mean, is the conclusion right that as input costs have come down recently, that should benefit the cost piece of the equation probably into the first half of 2023?

Maybe just starting with the cost side of it with that question. I think hot-rolled coil has come down recently. But input costs are much more than that. And we're seeing pretty broad-ranging inflation, everything from engineered components like axles and engines to electronics. And so it's definitely more than steel. Aluminum has remained persistent. So I think the things that we're continuing to watch and, frankly, continuing to price for are what happens with those input costs. So right now we've increased. We talked about 20% plus in our non-defense businesses. So, again, we're going to continue to watch those inflationary dynamics. I think a lot of what the other dynamic we need to continue to watch is just what's the progression of supply chain. We expected supply chain would improve in the back half of the year. We didn't see that in the quarter. In fact, it got worse in the fire and emergency business, for instance. So those are things that we're looking at as we go to 2023. But obviously, we're exiting the year in a much better price-cost position than we entered the year.

Nicole, we've done a lot, had a lot of learnings and done a lot of action around how we're managing the company through inflation. And there is no question we feel like as we get towards 2023, we'll have the the actions that we've implemented for the most part in place and will be in a much better spot going into 23.

Thank you. Thanks, Nicole.

Thank you. Our next question has come from the line at Stephen Fisher with UBS. Please proceed with your questions.

Thanks. Good morning. Good morning. I know you've given a lot of details of some of the assumptions in the rest of the year, but I wanted to maybe just zoom out on this topic a little bit. And, you know, after a couple of consecutive quarters of guidance reductions, I'm just curious if you can talk about how different your approach was for this quarter and then the rest of the year, if at all, if you've kind of tried to bake in a little bit more of cushioning the guidance or any different approaches. Sure.

I guess what I'd say is we have not changed our approach. I think what really changed over the last quarter is we expected that inflation would moderate somewhat. We see it obviously with hot-rolled coil, but it's not come down as fast or as soon as expected. I think the other piece is we expected that supply chain would start improving. We didn't need supply chain to be perfect by the end of the year. And we said that a lot, that we needed progression there. And we saw a pretty meaningful degradation of supply chain, particularly in fire and emergency. And our on-time delivery metrics were pretty similar quarter over quarter in excess equipment. So those are the two questions. to businesses that we're watching closely. So I would say it's really, our forecast is really a reflection of current conditions that we see between inflation dynamics, as well as supplier performance, and then ultimately the impact that's having on our production facilities, creating some absorption challenges, as well as labor inefficiencies.

Okay, that's helpful. And then, you know, in terms of the the access backlog. I'm curious how much of the sort of margin compromised orders you still have in backlog. And originally you were anticipating that a lot of that would be rolled off by the June timeframe. I imagine it's taking longer. How do you see the, you know, how much is left in there now and how do you see the exit rate of margins on the access segment? Is that, you know, should we still be thinking about kind of low double digits there and as a building base for 2023?

Yeah, I would say, again, from a cost-price dynamics, we talked about holistically cost-price gets – we saw about 200 of headwinds in the first half of the year. That's about – about 50 in the back half of the year for a total of 250. So that's a $150 million improvement quarter over our first half versus second half. So obviously access is a big piece of that. So there's meaningful movements there. And we do expect that we, in the fourth quarter, in our non-defense businesses, that we're largely price costs down. neutral to positive. So that's still our expectation as we start going into next year.

Just a little bit more color from me, Stephen, on that, you know, on the access piece. With regard to prior peak margins, we believe that we will meet or even exceed prior peak earnings and margins. Clearly, inflation has been volatile, but our pricing is commensurate with the cost escalation that we've seen, and we certainly expect to achieve a new peak in revenue for sure and prior peak margins and even exceed prior peak margins. So we feel good about the trajectory of access, and we feel good about the trajectory even as we go into Q3 and Q4 and continuing to see margin developments.

Perfect. Thank you. Thanks, Steve. Thank you.

Our next question has come from the line of Stephen Volkman with Jefferies. Please proceed with your questions.

Hi, guys. Just a couple quick follow-ups, if I could. On the pricing question, I'm curious, you know, some of it seems to be surcharges. Some of it seems to be, you know, list price increases. Are those surcharges sort of tied to any triggers, or how do we think about them potentially unwinding as raw materials fade going forward?

You know, we have surcharges that go in place, and when a surcharge goes in place, it goes in place essentially effective a certain date, which is usually immediate or in the very near future. And that allows us to have more of a benefit with regard to the backlogs that we have because of the immediate nature of the cost escalation that we're seeing. So that's the benefit of the surcharge. Now, of course, if we see costs moderate significantly, then that's always a point with our customers as to when can we release the surcharge. If we get to a point where we're releasing surcharges, that's a really good event, and we certainly would hope that that will happen at some point in the future.

But these pricing mechanisms, they're not index-based, because right now inflation's been much broader than just a lot of times index, when you look at those pricing scenarios, it's based on a steel price or so on. Right now, inflation's so much broader-based than you typically see, and that's why they're just not tied to an index. It's based on broader inflation and really costs that we're seeing, and we're being transparent with our customers on it.

Okay, that's helpful. Thanks. And then, John, you mentioned some discussions with your customers on AWPs stretching out into 23. You know, based on that, would you assume that volume rather than dollars, which includes price, obviously, would you assume that volume will be up in 23 for AWP?

You know, we're not providing guidance for 23 at this point. But when I look at the market today, when I look at the fleet age and where it is still, the fleet is very aged. It's 60 months or more. The demand from our customers – I've even been in meetings with big customers with JLG where they want to talk about 2024. So I feel really good about the development of that business. The other thing that's driving demand is – new technology. You know, we've put a lot of new technological developments onto our products with electrification and autonomy, and that helps to drive accelerated fleet replacement as well because a lot of customers want that technology in their fleets. So, while I'm not providing 2023 guidance, I'll tell you, you know, at least we feel really good about the health of the access equipment segment. because of those factors. And, you know, even if there's – everyone talks about the R work right now. Even if there's a mild recession in the future, we still feel pretty good about the robustness of the backlog and where the order rates are and what we're hearing from our customers with regard to the market right now.

Great. Thank you.

Thank you. Our next question has come from the line of Jerry Revich with Goldman Sachs. Please proceed with your questions.

Yes, hi. Good morning, everyone. John, normally, you know, when you folks would be achieving, you know, $4 billion of revenue and access, margins would be about 12%. It looks like we'll be about half that this year. It sounds like half of that variance is price cost. Can you just fill in the gap on the other pieces, you know, how much of that is? manufacturing efficiencies from supply chain and other moving pieces, just to put it in perspective for us?

I think you hit the big pieces. It's really the volume, and frankly, some of the volume that we lost, obviously, is North America AWPs, which obviously have strong margins. The other piece of it is really when we're we're obviously staffed and have demand to produce at higher levels. So manufacturing inefficiencies are absolutely an impact this year. And then you add on top of it, when you're not producing at rate, you can add some absorption headwinds. So those really are the drivers of the margin differential you're speaking of.

Yeah, Jerry, price-cost is by far and away the biggest reason, and we'll make that And as we get more to our full price, the other thing is what Mike said. It's inefficiencies in our manufacturing operations due to very difficult, inconsistent supply chain performance. It creates a lot of inefficiency within the plant, and it creates costs that we, as we improve the supply chain going forward, will be able to work out of the businesses.

And, John, you spoke about a high degree of confidence of getting margins back to where they were historically. How quickly can we get there? Is it possible to do essentially a make-up call on pricing into 23 all in one fell swoop? Can you just comment on that so you folks generate a fair return? Sure.

Well, we think you'll see it continue to evolve with every quarter that goes by as we go into 2023. Again, I can't provide 2023 guidance at this time. What I can tell you, Jerry, is that I think you'll see, you know, as you saw this quarter, you know, we saw nice improvement in access margins this quarter. I think we will continue to see that development quarter over quarter as we go forward. And I have certain confidence that we will get to those prior levels of margins sooner than later. But I can't give you any guidance on exactly when in 2023 what's going to happen yet.

Thanks, Jerry.

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

Hi, good morning, guys. Good morning. So I wanted to circle back to the NGDB program and just better understand just like the contractual terms. Just trying to think through, you know, you're seeing some, you know, inflation, you know, particularly on, you know, EV inputs and just wanted to figure out how much margin protection you have there and if you've taken any killer catch-up adjustments to normalize that platform.

Yeah, for NGED, it is overtime revenue recognition, but nothing really starts until we begin the program recognizing revenue on that, and that will be late 2023. Similar to all of our large programs, there's a large amount of supply base that we try to lock in where we can. And I would say that, you know, we're doing that as well. There's also economic price adjustments as well with that. So, and again, I think we need to, if you go back again, the expectation, while we had a bigger margin impact or dollar impact in the quarter with the cumulative catch-up adjustments, I think the important point is our defense margin expectations on those major programs is within 30 basis points of our prior expectations. So it's not a huge change. And that's really why these large contracts, you have to look at the margin on them over time. At times it can be more challenging looking at it on a quarter-to-quarter basis.

Yes, John, I'll just remind you, we go into production next year on NGDV. So we'll go into production in the third quarter next year, start delivering vehicles in the fourth quarter. So that's when you'll see it start to show up in terms of revenue. But just talking about how we're managing through the inflationary environment, we've got a lot of long-term contracts that go into place on these programs. But as Mike said, we also have economic adjustment that happens that we benefit from should there be an escalation in material costs. So we feel really good about where we are with NGDD. timeline for the postal service. We had an event with them just recently where they came here to test drive the vehicles and even had some postal carriers. It was a phenomenal event. The vehicle performed fantastically. So we feel great about where we are with the development, where we are in terms of getting ready for production. next year, and we feel good about where we are with regard to managing the cost of the program. So it's going as planned.

That's helpful. And then I think you guys talked about a 20% price increase in your non-defense segments. Can you just break down how much is search charge versus list price?

It really varies by segment and even product line, but I guess I would look at it in totality that really the 20%. And, again, I think in some of our businesses the pricing is not set for next year, so I wouldn't read too much into what's surcharge versus they're all pricing actions.

Got it. Okay. Thank you.

Thank you. Our next question has come from the line of Jamie Cook with Credit Suisse. Please proceed with your questions.

Hi. Good morning. Sorry about that. I hung up instead of pressing mute.

Thanks, Jamie.

Sorry about that. Most questions have been asked. One, can you sort of talk to order trends in Europe and in China, seeing any signs of deterioration in Europe, giving concerns, and is China starting to pick back up? And then I guess Just my second question, you might not want to answer this, but the street's all over the place for 2023, and there's a material, you know, earnings ramp in 2023 that the street is estimating. I guess, do you want to comment on that, or can we think of at least, if you think about the run rate of earnings, it's the back half of 2022. It implies, you know, earnings approaching, I don't know, 283 bucks or something like that. Is that the right run rate, at least as a base? to think about as we're thinking about 2023. So, you know, like a $6 or 550 to $6 run rate. Thanks.

Let me start with your question regarding orders in Asia, China specifically, and in Europe. You know, the strongest market for us right now, no surprise to you, is North America. It's where we're seeing the most demand come through. China's market has been very, very volatile for obvious reasons with all the lockdowns and shutdowns that the economy there has gone through. So that market, I'd say, is certainly showing signs that it's stabilizing. And I'll remind you that we do see a long-term, really strong market in China because of the size of the economy and the amount of construction. construction activity that happens there, and the move towards AWPs versus prior work methods, that's all still intact. So it's a big market, and I'd say it's stabilizing, and we expect it to continue to grow over time. The European market, perhaps not as bad as maybe some people would fear, and I think that's because there's an aged fleet in Europe, just like there is in North America. It's certainly not growing like North America is, but I guess I would call it more stable right now as there's a lot of macro instability in the European market. So it's stable primarily because of the fleet age situation where we're still getting orders for that.

Mike, I'll turn it over to you. And as we look to next year, again, as John said, we're not in a position to provide guidance for next year. But just a few things, just that we've highlighted a few things that we know. So number one, as John talked about demand, we see robust demand right now as we talk to our customers. So that's a known. Then it comes down to what continues to happen with inflation. Of course, we're going to continue – to be disciplined in our pricing actions around that. But you can have a lag. So we've got to continue to watch inflation. And then it really comes down to what happens with supply chain. Does it start improving at a more rapid pace? And when does that occur exactly? So I think those are all the big things that we're continuing to monitor as we go into the back half of the year. Obviously, things are very dynamic right now. in the here and now, and we'll have to continue to watch that through the back half of the year.

Okay. Thank you.

Thank you. Our next question has come from the line of Dylan Cumming with Morgan Stanley. Please proceed with your questions.

Great. Good morning, guys. Thanks for the question. Maybe this is the first one on the defense top line. Just curious how material some of the FMS inquiries from Eastern Europe are. I'd imagine it was a pretty recent development. So I guess just curious, first of all, if that would kind of represent upside of the 25 targets you gave at the Investor Day last month.

So talking about the Eastern European inquiries that we've had, we've had a lot of them. We certainly expect to be taking orders and more orders from Eastern European countries as a result of what's happened recently in Europe. And I'll just remind you that, you know, when we talk about orders in the U.S. with the Department of Defense, you talk about orders in terms of how many thousands of units are going to be ordered. When you talk about orders in Eastern Europe, it's typically in the neighborhood of dozens to maybe a big order would be 100 units. So they're at a smaller scale. I would say that it's clearly – a positive for future years in 20, could be as early as 23, but probably 24, 25 deliveries. But this is not a number that's similar to what you see us do at the Department of Defense. So just keeping it in perspective.

Yes, that makes sense. Thanks, Sean. Thanks, Sean. And then maybe just one more on the bad mix increase. I think you mentioned that was going up to 50% on the initial USPS contract. I was just curious if that was more of an upper bound from your battery supplier, or I guess do you feel like you would have taken that up another leg higher if the USPS kind of wanted to request it?

Oh, it's not an upper bound by us. We can go as high as the USPS wants. If the USPS wants to go to 100%, we'll go to 100%. This is really based upon what the United States Postal Service low-emission combustion engines, and they have to do that based upon the amount of funding that they have, but more importantly, they have to do it based upon their pace of putting infrastructure in place to support battery electric vehicles. Remember, there's tens of thousands of postal offices around the country, and you have to put the infrastructure in place to be able to support those vehicles. That doesn't happen overnight, so that's another thing that pays.

We're not limiting them. Got it. Appreciate it. Thank you.

Thank you. Our next question has come from the line of Steve Wagner with KeyBank Capital Markets. Please proceed with your questions.

Thanks. Good morning. Just a follow-up to that one, John. It's probably early to talk about this, but have you seen the production schedule? And I'm just thinking about what the mix looks like. And I'm talking about NGDV. What's mixed look like front end versus back end? Because BEV is higher dollar and potentially higher margin, right?

Yeah, BEV is higher sales revenue, higher margin product, correct. Margin dollars, right.

So will that production schedule be evenly mixed between ICE and BEV, or will BEV be back end loaded because of what you just said about infrastructure? Sure.

No, I don't, you know, so we've got an initial order of 50,000 units. Remember this thing, this contract is over 10 years and goes up to 165,000 units. So the 50,000 unit order is only the first order. We'll produce that order in the first few years of the contract from when we go into production late next year. The mix of that, I believe it will be roughly 50-50 from day one, but I don't know that for certain. I expect it to be.

Got it. And just the microvast adjustment, it was non-cash. I get that. But operationally, can you talk about when and how you'll benefit from that relationship?

Yeah, when we did a strategic investment in microvast, because of their capability, their vertical integration with regard to components of lithium ion batteries, but we have a joint development agreement as part of that strategic partnership we have with them. So they do development for us on certain programs, and we're putting electrification into most end markets that we serve. And they work with us on developing the right battery into the structure of the vehicle, for the program that we want to work with them on. Now, we have a few different battery suppliers, depending on what the end market is and what the product is. Microbass is a big part of that, and they're a close partner for us in development.

Is that related to NGDV at all, or are those different programs that you're using?

You know, I'm not in a place where I can talk about who's supplying what program. But we've got an outstanding plan for the U.S. Postal Service with regard to supply.

Got it. Thank you.

Thanks. Thank you. Our final questions of the day will come from the line of Felix Boshin with Raymond James.

Please proceed with your questions. Hey, good morning, everybody, and thanks for squeezing in here.

Morning. Morning. Good morning.

Hey, I just had a quick one on the fire and emergency segment. It seems like the backlog is stretching into 2024 already. I'm just curious, and I think that's before even taking the electric RF orders maybe out of Europe, but I'm curious if you could talk about how you're thinking about managing orders in that business and just kind of if you talk about your ability to reprice that backlog should input costs over the next year and a half or so. That's all I have. I appreciate it.

Yeah, thanks, Felix. Let me start. Mike may want to add something to it. So within the fire and emergency segment, we have not taken any orders for the electric vehicles yet. Those will be released for sale in the near future. But we have the strongest backlog we've ever had in fire and emergency. There's a lot of demand for our product. I will point out what we're doing right now is we're adding capacity. As we sit here today, we're adding capacity for Pierce because we believe Pierce needs it long-term. And that's going to help us drive long-term growth because of the strong order rates that we see for Pierce. And we expect them to continue. We see a lot of demand, not just now, but in the future for our products. But first things first, what's holding us back today in fire and emergency is purely supply chain disruption. We are paced by our supply chain right now, and the supply chain disruptions are causing a lot of inefficiency in our manufacturing plants. We will work through those problems in the short term and then start to get the benefit from the capacity additions that we're doing.

Yeah, I would just say for ARF, from a backlog perspective, our backlog is longer for municipal fire trucks versus ARF. And so we're very excited to be able to start taking those Volterra ARF orders over time here.

We're managing the margin of those products for 23 and 24 very, very carefully. Correct. We lead by far and away in pricing in fire and emergency, and we're able to do that because we've got the best product and we're the market leader. But we also have very aggressive cost forecasts as well. So we feel good about where we are with our ability to continue to be a leading margin generator for the company in F&E. We'll manage these supply chain issues, get through them, and we feel great about growth at F&E.

Got it. Thank you very much.

Thanks, Felix. So I just want to thank everybody for joining us today. We're absolutely committed to driving long-term growth and profitable growth. We'll continue to innovate. We'll continue to advance our company as we go forward. Stay safe, stay healthy, and we look forward to speaking with you all very soon.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.