Oshkosh Corporation (Holding Company)Common Stock

Greetings, and welcome to the Oshkosh Corporation Fiscal 2022 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 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-K 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. All comparisons during this call to the prior year quarter are to the quarter ended December 31, 2021. All comparisons to the prior year are to the 12 months ended December 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. We delivered strong earnings growth in the quarter, both sequentially and compared with the prior year. For the quarter, we reported revenue of $2.2 billion, highlighted by year-over-year sales growth in all four segments, leading to adjusted earnings per share of $1.60, strong sequential improvement over adjusted EPS of $1.12 in the third quarter, and even stronger improvement over the prior year quarter. Importantly, we delivered another quarter with a double-digit operating income margin in access equipment of 10.8%, which is a record margin for the fourth calendar quarter. Demand remains solid, and we finished 2022 with strong orders and a record consolidated backlog of more than $14 billion. We are continuing to prudently invest in capacity in all of our segments to take advantage of long-term demand trends. We also continue to invest in exciting new products, including our growing stable of purpose-built electric vehicles that we expect will charge future growth. Our EPS results for the quarter were lower than our expectations of approximately $1.86, caused by two factors. First, the mix of aftermarket parts in our December JLTV order in the defense segment was less favorable than our expectations. And second, access equipment deliveries, while strong, were lower than planned. We had several important highlights during the quarter. In November, we announced an agreement to acquire Hinoa, SPA, an Italian manufacturer of compact crawler booms as well as other tracked equipment, and a longtime partner of JLG. I'm proud to announce that we are closing on this acquisition today. Hinoa brings innovation leadership with lithium-ion powered equipment that supports our expansion into adjacent markets. We believe this acquisition is an outstanding growth platform and provides expanded manufacturing capabilities in Europe. Hinoa represents another attractive bolt-on acquisition in line with our disciplined approach to M&A that supports our commitment to grow shareholder value. Additionally, we were once again recognized for our strong sustainability practices by being named to the Dow Jones Sustainability World Index for the fourth consecutive year. We were also named one of America's most responsible companies by Newsweek, a recognition of our commitment to our core values and excellent corporate citizenship. Please turn to slide four for a recap of 2022. We grew revenues by just over 4% in 2022 compared to the prior year, delivering adjusted EPS of $3.46. Adjusted EPS was lower than the prior year largely due to manufacturing inefficiencies associated with supply chain disruptions and unfavorable price-cost dynamics, including unfavorable cumulative catch-up adjustments in our defense segment. Our teams have made significant progress combating inflationary pressure by implementing multiple price increases over the past year and persevering through supply chain disruptions. These actions enabled us to more than triple our adjusted operating income from the first half to the second half of the year, providing us with important momentum as we expect to significantly grow revenue and earnings over the next few years. Our outlook remains consistent with our Investor Day presentation based on strong market drivers and our innovative products including USPS Next Generation Delivery Vehicle, and electrified products, including the Volterra line of electric fire trucks, as well as our pioneering DaVinci all-electric scissor lifts. We believe these products will be important drivers of growth as we move toward 2025 and beyond. In addition to Hinoa, we also acquired or invested in other businesses during 2022 that will facilitate growth in the new product categories and adjacencies. These include CartSeeker with its patented AI-based recognition technology used on refuse collection vehicles, robotic research, a global leader in autonomous mobility, and MaxiMetal, a Canadian leader in firetruck manufacturing headquartered in Quebec. As we look to 2023, we expect that the continued execution of our innovate, serve, advance growth strategy, price-cost management, and strong tailwinds supporting our business will allow us to drive significant improvement in our earnings compared with 2022. We are initiating 2023 earnings per share guidance in the range of $5.50. While demand remains very robust, we expect that supply chains will continue to constrain revenue during the year. Mike will provide more details in his sections. Finally, we are pleased to announce an increase of 4 cents or 10.8% to our quarterly dividend rate today. This is the ninth consecutive year that we have announced a double-digit increase to our cash dividend. Before we talk about our segments in more detail, I want to discuss an exciting change to our business segments. Please turn to slide five. This morning, we are forming a new Oshkosh Corporation segment called Vocational. We are combining our fire and emergency and commercial businesses, which all design, develop, and manufacture purpose-built vocational vehicles for people in our communities who do tough work. By combining these businesses, we expect to drive enhanced efficiencies across the board while better leveraging our scale and technology development at an accelerated pace. We believe the vocational segment will also serve as a platform for further organic and inorganic growth opportunities in several important end markets. We expect that the vocational segment will initially be a $2 billion plus revenue segment with the opportunity to grow organically at a high single digit compound annual growth rate to near $3 billion with 12% plus operating margins in the next few years. We are also announcing that we've entered into a definitive agreement to divest our rear discharge concrete mixer business. We expect to complete the sale by the end of the first quarter. This will enable us to focus on attractive end markets that value technology and innovation and will drive higher margins over time in our new vocational segment. Going forward from today, our businesses will be aligned in three segments, access, defense, and vocational. The vocational segment will be led by our current fire and emergency segment president, Jim Johnson. Jim and his team have successfully transformed the performance of the fire and emergency segment over the past decade, and I am excited for our talented teams in both segments to come together as a force multiplier for future success of the vocational segment. We look forward to sharing more details in the coming quarters. Please turn to slide six and we'll get started on our segment updates with access equipment. Our access team delivered solid performance in the fourth quarter with a double digit operating income margin and 620 basis point year over year margin improvement. Supply chain challenges limited our production output. but we have seen some improvements, particularly in December, as supplier on-time delivery metrics climbed above 70% for the first time in several months. While this is still well below our historical level of 90% plus on-time delivery, it represents improvement. The team at Access made progress by qualifying additional suppliers, dual sourcing, and leveraging alternate sourcing strategies. The team resourced more than $270 million of parts in the past year with plans to do more in 2023 to further improve supply chain performance. We also continue to implement changes to our products and processes to improve both output and manufacturing efficiencies. Demand remains very strong for our market-leading JLG products, driven by strong utilization rates elevated fleet ages, and the large number of megaprojects underway across the United States. In fact, the percentage of access equipment in rental fleets deployed to megaprojects, which are generally defined as projects with a value of $400 million or more, has more than doubled over historical levels. We expect that megaprojects, including factories for EVs, batteries, and chips, as well as non-residential projects such as data centers, and healthcare facilities will continue to contribute to strong demand for our equipment for the foreseeable future. We ended the quarter with a record backlog of nearly $4.4 billion. Fourth quarter orders were strong once again at $1.55 billion and we continue to have visibility to demand well beyond our current backlog. Please turn to slide seven and I'll review our defense segment. The defense segment continues to engage in a significant number of new business opportunities as well as current programs. During the quarter, we received two separate contract awards for JLTV1, valued at a total of $645 million. The first award was for domestic requirements, while the second included several hundred units of foreign military sales, many of which will be bolstering the tactical wheeled vehicle fleets of Eastern European nations. The DoD's announcement date for the JLTV2 contract has been pushed back from late January, and we expect an award decision this quarter. The JLTV has been a foundational product for our defense segment, and we are confident that we can deliver even more value to our customer in the future. In December, our defense team was selected to produce Aton armored personnel carrier hulls for the Israeli Ministry of Defense under a contract expected to be valued at over $100 million. This is another key adjacent program win for our team, similar to the Stryker MCWS and NGDV programs that demonstrate the success of our offerings and programs beyond tactical wheeled vehicles. I'll close out my comments on our defense segment with an exciting update on our progress with the USPS's NGDV program, which allows for delivery of up to 165,000 vehicles over the 10-year duration of the program. In late December, both the USPS and President Biden made important announcements that expressed the Postal Service's intention to increase the number of units in the initial order from 50,000 to 60,000 units and increase the percentage of battery electric vehicles to approximately 75%. This change will enable the USPS to electrify their fleet at a faster pace. We are actively engaged with our customer to formalize the contract modifications to reflect the change. This is great news for the USPS, communities across our country, and our company. We believe we are well positioned to supply the increased percentage of BEV units and continue to expect significant ramp-up of production in 2024 and 2025. Let's turn to slide eight for a discussion of the fire and emergency segment. Our fire and emergency segment made progress to improve output as indicated by fourth quarter sales that were up approximately 21% sequentially and approximately 37% versus the prior year quarter. While production output remains constrained by current supply chain dynamics, the improvement in production output and deliveries is encouraging. The improvement was driven by higher supplier on-time delivery metrics, as well as the benefit of operational improvement initiatives. Our operating margins remain below typical levels for fire and emergency due primarily to supply chain impacts on production, as well as the time lag in realizing the benefits of our significant price increases with municipal customers. We remain confident that we will return to strong double-digit margins as production output increases and we realize a greater portion of the price increases we have implemented. Demand for municipal fire trucks has remained very high, bolstered by aging fleets and solid municipal budgets. Order rates have remained strong, leading to a record $2.9 billion backlog, which provides us with good visibility and supports our outlook for higher margins over the next two-plus years. Our lead times have extended beyond our optimal timeframes, but we believe the actions we're taking to improve parts supply as well as our capacity expansions, including robotic painting in Appleton, will help us increase output as we move through 2023 and into 2024. I had the opportunity to participate in our Pierce annual dealer meeting this past month. I continue to be extremely impressed and inspired by our dealers. They are continuing to make significant investments in parts and service capacity to support our customers and drive growth. We believe these investments are critical to our long-term success as the population of pierced fire trucks in the field continues to grow. Please turn to slide nine and we'll discuss our commercial segment. Commercial sales increased by 34% to nearly 283 million versus the prior year. despite persistent third-party chassis and component constraints limiting production. We expect that chassis and other materials will remain a significant constraint in 2023 as well. We previously highlighted the success we are having with our first refuse collection vehicle automated high flow line in Dodge Center. We are beginning to work on our second high flow line, which is expected to go live in the second half of 2023. Our high-flow lines leverage integrated automation to drive improved quality, shorter build cycle times, lower direct labor hours, and increased manufacturing efficiencies, all of which are expected to drive higher operating margins. As we previously discussed, we see significant opportunities in electrification, automation, and other advanced technologies, particularly in the RCV space. We expect to continue to make meaningful investments in new products and manufacturing facilities over the next several years. We look forward to sharing more details over time. With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2023. Thanks, John.

Please turn to slide 10. Consolidated sales for the fourth quarter were $2.2 billion, an increase of $412 million or 23% over the prior year quarter. All segments contributed to the sales increase led by access equipment, which was up by $241 million or 29% versus the prior year. The consolidated sales increase was driven by increased sales volume and higher pricing to offset the impacts of inflation, particularly at access equipment. Fourth quarter consolidated sales were approximately $70 million lower than our most recent expectations, largely driven by lower volume at access equipment. Moving to adjusted operating income, we implemented an inventory accounting method change in the fourth quarter, moving the approximately 80% of our inventory that had been valued at LIFO to FIFO. The FIFO method of inventory valuation results in better matching of revenues with expenses since it more accurately reflects the current value and physical flow of inventory. FIPO also aligns our inventory valuation methodology with the majority of our peers and results in a consistent inventory valuation method throughout Oshkosh. Current and prior year adjusted operating income amounts have been restated on a FIPO basis. Adjusted operating income increased $111 million over the prior year quarter to $153 million or 6.9% of sales representing a 460 basis point improvement versus the prior year. The improvement in adjusted operating income versus the prior year was largely driven by improved price-cost dynamics and increased volume versus the prior year, particularly at access equipment, partially offset by production inefficiencies. Adjusted earnings per share was $1.60 in the fourth quarter versus $0.36 in the prior year. Our adjusted earnings per share was lower than our most recent expectations as a result of lower volume at access equipment and a less favorable mix of aftermarket parts in our December JLTV order. Now let's turn to our outlook for 2023. Please turn to slide 11. We're estimating consolidated sales and operating income will be in the range of $8.4 billion and $530 million respectively. We are estimating EPS will improve to be in the range of $5.50 representing significant growth versus adjusted EPS of $3.46 in 2022. Included in our expectations is the EPS impact of approximately $0.80 related to incentive compensation costs returning to typical levels and increased new product development investments of approximately $0.30. Demand remains strong as indicated by order intake of $3.3 billion in the fourth quarter, leading to our record backlog of over $14 billion on December 31st, 2022. Our guidance reflects modest supply chain improvements in 2023, but we expect that supply chain impacts will continue to limit our revenues and contribute to production inefficiencies during the year. At a segment level, we are estimating access sales and operating margin to be in the range of $4.2 billion and 11% respectively. The expected 300 basis point improvement in operating margin versus 2022 is driven by the full year benefit of improved pricing and a modest volume increase. We expect supply chain dynamics to remain the limiting factor of more significant revenue growth as demand remains very robust. Turning to defense, we're estimating 2023 sales of approximately $2 billion or roughly $140 million lower than 2022. As previously discussed, we anticipated that revenues would be down in both 2022 and 2023. Importantly, we expect that revenues will begin to grow in 2024 as the USPS NGDV production begins to ramp up. We're estimating our defense operating margin will be approximately 4%. We expect lower sales, unfavorable product and aftermarket mix, and NGDV-related pre-production operating expenses to account for the mid-single-digit operating margin. We also expect margins will improve as new programs ramp up in 2024 and beyond. Moving to our new vocational segment, our guidance includes a combination of our former fire and emergency and commercial segments, reflects the planned investiture of our rear discharge concrete mixer business during the first quarter of 2023 we expect vocational sales will be in the range of 2.2 billion dollars which is roughly flat to the combined revenue of the fire and emergency and commercial segments in 2022 despite the approximately 150 million dollar sales impact of our planned divestiture of our rear discharge mixers similar to access Demand remains very strong, but our revenue is expected to be constrained in 2023 by supply chain dynamics. We expect the operating margin in the vocational segment will be approximately 7.5%, reflecting the impact of constrained output, manufacturing inefficiencies due to supply chain dynamics, the impact of price protected orders, and higher new product development investments. Municipal customer orders in our backlog to be delivered in 2024 were booked with significantly higher prices, and we expect them to drive meaningfully improved margins in the future. We also expect margin benefit over time from the integration of our two segments into vocational. We estimate corporate expenses will be approximately $170 million versus $141 million in 2022, driven by a return of incentive compensation to typical levels and increased investments in growth initiatives and new product development. We estimate the tax rate for 2023 will be approximately 25%, and we are estimating an average share count of 65.7 million shares. For the full year, we are estimating free cash flow of approximately $300 million, which is impacted by higher than typical capital expenditures of approximately $350 million as we complete the NGDV facility in South Carolina and invest in manufacturing capacity as well as new product development initiatives throughout the company. Recall that organic investment is a top capital allocation priority for us. Looking to the first quarter, we expect consolidated sales to be in the range of $2.1 billion, down approximately $100 million versus the fourth quarter. We expect the lower revenues compared to Q4 2022, will be driven by the timing of deliveries in our access and vocational segments, as well as lower sales at defense. We expect EPS will be around $1 reflecting lower sales, unfavorable order mix in the defense segment, and the return of incentive compensation costs to typical levels when compared to the fourth quarter of 2022. We expect that the first quarter will be the lowest quarter of the year for EPS based on these factors. I'll turn it back over to John now for some closing comments.

We delivered significant sequential improvement in earnings and strong overall performance in the quarter. We are also making investments that will drive future growth. Supply chain dynamics remain our most significant challenge, and we are taking actions to drive higher output over time. We believe the fundamentals in our end markets remain very strong, and we expect to deliver robust earnings growth in 2023. Okay, Pat, back to you.

Thanks, John. Excuse me. I'd like to remind everyone to please limit your questions to one plus a follow-up, and please stay disciplined on that follow-up. Afterwards, or after your 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. As a reminder, we ask all callers limit themselves to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Yeah, thanks. Good morning, guys.

Good morning, Nicole.

If we could just start with the outlook for access. So I think the revenue guide implies kind of like 6% full year growth. Can you just talk about what you're embedding for price versus volume and maybe how that relates to what you're hearing from your rental customers going into the year?

Sure. I guess from a revenue guide perspective, I think foundationally there's limited volume increase. A lot of it is just benefiting from the full year of run rate. We did implement an additional price increase of 3.5% on the first of the year. That's incremental to where we were in the fourth quarter. So right now, again, obviously we have very, very robust demand right now. Supply chain is really the constraining factor from revenue being higher. So that's really what we're going to be continuing to watch over the course of the year is what transpires with supply chains.

Yeah, and I'll just emphasize that, Nicole. Our revenue and access is not constrained by the order rate. We've got really strong dynamics in the market. You saw the healthy backlog continuing to grow, really strong orders. It's entirely... supply chain driven in terms of how much we can produce and ship in 2023.

Understood. That's really helpful. Thanks. And then maybe just shifting to defense, I guess I was a little bit surprised by the 4% margin outlook in 23. It sounds like that's mostly mixed. I guess like how, what is the timeframe or how possible is it that this segment could return to more of a normal high single digit margin cadence? Thank you.

Yeah, so our expectation is that, again, that because of the lower volume that we had last year and again this year combined with the mix, that's certainly creating a headwind. And obviously we have had some impacts of inflation there. So I think as we look to the future, as we get into 2024 and postal service as well as other significant programs continue to ramp up, we expect those margins to begin to return to more typical levels, aided by the additional volume. One other thing that I did forget to mention, we do have that, still have about a percent drag in 2023, similar to what we had last year, just related to NGDV, SG&A, that's not capitalized before the program starts. So, you know, down, we expect to be down this year, should begin to grow. And of course, as we look at new programs as well, With the economic price adjustments, particularly as you look at programs like JLTD2, over time, those should offer more protection than we've had against inflation.

Thank you. I'll pass it on. Thanks, Nicole.

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

Yes, hello. Good morning, and thanks for taking my question. John, a lot of your comments about access were about the U.S. market. I was wondering if you could update us on how conditions are internationally for access going into 2023.

You know, international positions at access have been relatively healthy, especially when you adjust for constant currency. Currency has hurt us a little bit with the strong dollar, but if you adjust for constant currency, the European market is for us or our business in Europe, I should say, is up nicely. We're up really strong in Latin America. I think the one outlier there is, of course, China. China is a huge market for the access equipment business. And we all know what's going on in China, starting with the COVID lockdowns and how that's really hindered the economy in China. So Asia Pacific in total has been down year over year. Now there's some nice pockets of growth in there, but China kind of being down pulls the whole region down. We still do expect China to be over longer periods of time a nice growth market. So this is likely a shorter term phenomenon where we've seen China come down so sharply. But I would say outside of China, it's been maybe even better than expected around the world in terms of conditions and our ability to generate revenue.

Great, thanks. And then just turning to vocational, you had mentioned wanting to grow this from $2 billion to $3 billion over the next couple of years. I'm just trying to get a sense as to why combine these two. Do you have plans to enter other vocations over the next couple of years, or is it going to be strictly, you know, fire, waste, and whatever left of concrete going forward? Just some feel for what the mix might look like in a couple of years.

Yeah, so we're really – positive on the creation of a vocational segment. This is going to do a lot for us. When you really look at what we're doing in the businesses that are in the vocational market, they are purpose-built vehicles designed to provide productivity and safety for a specific end market. And that's what we do in that segment, whether it's a fire truck or it's a refuse or recycling collection vehicle and the other things that we do. This simplifies our business. Of course, it's going to deliver some overhead or back office and production synergies. But the real positive that's going to come is we're going to leverage our scale to drive technology development at an even more accelerated pace. You've seen us do a lot, electric fire trucks, autonomous features coming online. We think we can do that faster to organically grow the business. We expect to organically get to $3 billion on the planning horizon that we've got. But then when you look at the inorganic moves that we believe we can make, we think that we potentially can even exceed that $3 billion. So this is a really exciting area for our company, and we did this because we believe we can drive margin growth with the revenue growth that we see on the horizon.

Okay, thanks. I'll pass it along.

Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question. Chad Dillard, your line is live.

Hi, good morning, guys. So I was hoping you guys could talk a little bit more about your expectations for price-cost cadence as well as just manufacturing absorption as you think about, you know, first half versus second half for the share.

Sure. From a price-cost perspective, I think the back half of 2022 is a good starting point because as we expected, we were pretty much price-cost neutral in the back half of the year as a company. And so that carries into next year. We've implemented additional price increases. So if you break that down a bit more by business, we're at, particularly with the increase that we implemented at Access, we're in that neutral to positive territory there, as well as our historic commercial business. We have a little bit longer leg with our municipal customers and in fire and emergency just because of bonded orders. So we don't necessarily get better and we have more price coming online. So we don't necessarily get better with inflation in 2023. So we looked at 2024, which we essentially have a pretty robust backlog for 2024 already. There is significant price increases like double digit versus where we're sitting today. So we expect as we get into 2024, those margins will return back to normal. But really our expectation is as a company, price cost neutral to positive for the full year. And that's really measuring back to the start of inflation at 2021. Of course, from first half, we'll certainly see quarter over quarter in the first half of the year, the benefits that we saw in the back half of 2022.

That's super helpful. And the second question is just on access. um clearly you have a pretty strong backlog um in that in that segment um so how far out do your build slots go um like what share of the backlog is getting shipped in in 24 and i know you know there are some supply chain constraints but let's just assume that they're they lift um to what extent do you have appetite to add further ships to to drive further production this year

Yeah, so I'll take that. This is John, Chad. So in the access business, we talk about a $4.4 billion backlog, so clearly we're now going out into 2024 with our current level of capacity. Now, our capacity is constrained by supply chain primarily. We expect to continue to make improvement as we go through the year in how we operate the supply chain, and we're doing a lot of dual sourcing, resourcing, better use of analytics to predict problems before they happen, and that's all manifesting itself in some of the improvement we've seen, and we'll continue to do that. But when we look at a $4.4 billion backlog plus another, you know, probably tranche of close to a billion dollars of orders that have not been entered yet, and you look at the – that's with a billion five of orders we just booked in the quarter – This is a healthy business and there's a lot of dynamics creating health that we see over the long term. So we're also actively looking to expand capacity because we know we need more capacity. As we improve the supply chain, we'll need not just more shifts, but we'll need a little bit more capacity in our facilities and we'll be able to leverage the facilities that we have to add capacity. so that we can deliver faster.

Thank you. Thanks, Chad.

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

Yes, hi. Good morning, everyone. John, I wonder if we could just go back to the access equipment outlook for a second. So essentially, you know, up 6% given the price increases and applies volumes. that are down and your customers are looking for CapEx to be up this year on a unit basis, and so I know you're not in the business of donating market share. Is it just a function of, hey, look, it was a tough supply chain year last year, so let's make sure we're in a position to hit our guidance, or are there other moving pieces that are specifically impacting any particular components that are still very hard for you folks in this business?

I think the way that we're looking at it is we're trying to be realistic, Jerry. We've been through the past six quarters of pretty intense supply chain disruption, and we've done a lot of work which is starting to have some impact, but we're also wanting to be realistic with our customers based on what we've experienced over the past six quarters and being realistic on what type of improvement we can expect. We don't expect anyone to flip a light switch and all of a sudden everything's going to be back to perfect with the supply chain. So we're really just trying to be realistic. Now we're going to add capacity so that we can deliver faster, but we have to do that prudently along, because it doesn't matter if we add capacity, we can't get the supply chain improved. So we have to do that prudently along with our ability to to work with our suppliers to improve the supply chain part of it. I guess that's the best way I can describe it.

Super. And, you know, relative to your guidance of access volumes, do you surprise to the upside if we're able to deliver on the supply chain? Is it fair to expect 25% to 30% incremental profitability on any incremental volumes if we are able to ramp deliveries?

Generally, I would say incrementals, excuse me, in the low 20s, I think certainly as we add volume, the pricing is obviously there to generate typical incrementals, but obviously there continues to be a drag from a manufacturing efficiency perspective. So I would say probably a little bit lower than normal, but obviously as volume increases, some of those efficiencies will subside.

Super. Thanks.

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

Hi. Good morning, everybody. I wanted to go back to defense, but more on the USPS side. So, that contract has changed quite a bit since we first started looking at it. Obviously, more volume and more mix of battery. I assume that makes a pretty significant difference in kind of the cost per unit, which obviously means you're going to get more revenue as we go forward. Please disagree if you want to, but I'm also trying to think about, you know, are these BEVs margins sort of the same as ICE, or would those also be higher? And then, sorry, I'm throwing a lot at you, but does it also mean that there's going to be higher R&D and development and startup costs than we might have otherwise assumed?

Yeah, great question. The fact that they're moving towards 75% BEV, and I think they've even indicated that by 26 they'd go full BEV from 26 onward, that's all positive. It's great for the USPS. As I said in my opening remarks, it's good for communities across the country. We see communities wanting more electric, and it's good for us. As you said, the price level on a BEV is higher than on an internal combustion vehicle because the costs are higher. Now, the margin dollars, the margin percents are about the same, but the margin dollars are, of course, higher as well. When you look at the investment, you know, I wouldn't say that the investment changes materially. It does not. But, you know, the timing could shift a little bit when you talk about the initial order started with 10%, Bev, and now they're likely going to 75%. You know, that can change a little bit of the timing. I don't think it's going to be material timing change, you know, a little bit one way or the other. But this is a great program. We'll essentially be getting into production in 24, and we'll be expecting to reach full production in 25. That's what we've said in past calls as well. So none of that changes. This is a good news story for everybody involved in the program.

Okay, great. And just as a follow-on, Do you have dev units now that are sort of out on the road doing tests and all that? I assume you must if it's going to start.

We've got prototypes and validation units and so forth.

And do you get involved in charging at all or is that somebody else?

Well, you know, we want to be a total solutions provider to our customers. It doesn't matter if it's the United States Postal Service, a municipal fire station. We intend to be a total solutions provider. So we're there to support the U.S. Postal Service in any way that they want us to provide support, and that's what we'll do. But it's ultimately up to the U.S. Postal Service as to exactly how they want to execute the recharging part of it.

Thank you so much.

Thanks, Steve.

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

Hi, good morning. I just wanted to dig into the vocational margin guide. It was even, you know, I understand we're combining commercial and fire and emergency, but it's lower, I guess, than I would have thought, not really much of a year-over-year improvement. So can you talk to the path to get to, I guess, F&E margins would be the driver there to double-digit. And then, John, just given where the guidance is today, can you talk about your comfort level with your 2025 plan? financial targets or should we assume that just gets perhaps pushed to the right? Thanks.

Sure. I'll start with vocational. So the way to think about it, Jamie, is we're really, you put the two segments together. I think ultimately some modest growth there, but you back out 150 to 200 million on a typical year for rear discharge mixers. So I think that creates a little bit of noise. I would say This year, too, we do have a transition services agreement, so we're not going to fully benefit from some of the cost synergies materially yet this year, so that's something we'll continue to look for for the future. I think the biggest thing that's driving the margins, obviously, as John mentioned and I mentioned in our prepared remarks, fire and emergencies, typical margins or municipal fire trucks, are down a bit right now really because of legs and realizing pricing as well as some of the inefficiencies of manufacturing right now in the tight supply chain environment. What we do expect though is that as we get into, we have more price coming online in 2023, about in line with inflation. We have significant double digit increases already in backlog beyond the current levels as we get into So we would expect as supply chains improve and we get those additional pricing benefits in that business that we'll get back to our typical margins in 2024 and beyond.

Let me address your question, Jamie, on 2025. We provided our 2025 outlook in May. We still look at that outlook as what we're expecting to achieve. I'll just break that down a little bit. If you talk about our backlog continuing to grow, we're now at over $14 billion. That's because we are designing and developing really effective new programs and winning contracts in the defense business that we really like. So the great sign is that we continue to see strong order rates and really strong backlogs. We've got great program development, a lot of exciting new programs from electrification to autonomy. This is what we want to do, and this is what we want to drive our future, and it's driving that backlog that we've got. So the only thing that's been holding us back in the short term is, A, getting over the inflation that we've had to deal with, and B, getting over the supply chain disruption dynamics. We've come a long way to get through the inflation problem. You'll continue to see that get better and better. And as we go through and we continue to execute improvement in the supply chain, you'll see the same there as well. But ultimately, that's what's been holding us back. When you look at the long-term outlook of the business and the business we're winning and the programs that are being developed and some to be announced yet, it gives us confidence that 25 is right there where we thought it would be.

Thank you.

Thanks, Jamie.

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

Hey, thanks. Good morning, guys. Maybe sticking with the USPS contract, how much revenue, if any, is embedded in your 2023 outlook? And, you know, my recollection is that in your 2025 target, you had something around $700 million worth of revenue associated with this contract. So I guess the question is, you know, based on all the changes that have occurred since you issued those targets, Is that still a reasonable number? And can you give us some perspective as to how we're going to ramp in 24 to get that 25 figure?

Sure. I guess from the revenue and margin that you have for NGDBs is pretty minimal this year, consistent with what we said. We'll be starting production late in the year. So not really a driver, ramping up meaningfully in 2024, closer to full rate production in 2025. Certainly, as John mentioned earlier, based on the question, obviously, with the mix shift, that should be a bit of a revenue tailwind as we think about that, the program, because I guess the quantities and so on that we're thinking about in 2021 and 2025 are not necessarily different than we were thinking about during Analyst Day. But the mix could be up.

Absolutely. That's going to be a revenue tailwind. Tailwind to that 25 number, because the mix is improving.

Right. And, you know, I don't know if this is going to ramp linearly or if there is some kind of a more back-weighted sort of mechanism that you guys are anticipating right now.

Well, I think the U.S. Postal Service wants us to get to full rate production as fast as we can.

Great. Okay, then my follow-up, going back to vocational, you know, I appreciate what you're trying to do here, combining all these business lines, but it sounds to me like your ambitions are obviously a little bit greater than the product lines that you currently have. Is there some thought here that you can lean a little more aggressively into M&A and maybe really add some new verticals here in the next couple of years?

Yeah, this is a segment that, first of all, we like businesses, the businesses that we have where we can deploy technology and continue to expand our business like the Volterra electric fire truck. That'll be a growth platform for many years, that product. But we also do look at this as a fruitful M&A opportunity. When you look at what we do and what we know how to do, purpose-built vocational product. When I say purpose-built, I'm talking about we design and develop the entire vehicle from ground up to serve a purpose for an end market. So when we look at that, we do see opportunity. There will be inorganic opportunity. It's a little bit hard to predict. the timing on inorganic opportunity. But that's certainly part of what we want to do is continue to grow this segment beyond the current organic position that we have. But we like the organic position that we have. We expect the organic position alone to get to $3 billion without any M&A.

Okay. Appreciate it. Thanks, Victor.

Our next question comes from the line of Tammy Zakaria with J.B. Morgan. Please proceed with your question.

Hi, good morning. Thank you so much. I have a couple of quick questions for you. So the first one is, can you comment on the margin profile of the rear discharge concrete mixer business that you're exiting? I think you mentioned $150 million in sales, but I didn't catch the margin profile of that business.

CAMI is very low single digits.

Got it, got it. And the $0.30 new product development investment headwind this year, should we think about that completely reversing in 2024, or should that stay in the base for the next couple of years, but then it kind of reverses? So how should we think about that?

Hey, Tim, I think if you think about what we talked about at analyst day, I would expect that we continue to have strong investments over the next few years. So I think that that would be representative of, you know, over the next few years.

Got it. Can I, we have one last one. Can you provide some quantification on the cost synergies you expect by combining the F&E and commercial segments?

Yeah, we're not providing quantification yet, because particularly this year with the transition services agreement, there's going to be a bit of a delay over the next several months in being able to act upon on those. But we do expect them over time, and certainly we'll provide updates as we go.

Got it. Thank you so much. Our next question comes from the line of Stanley Elliott with Stiefel. Please repeat your question.

Hey, good morning, everyone. Thank you all for taking the question. Quick question on the new vocational group with the waste collection vehicles and then also with the fire vehicles.

How aggressive do you see those end markets moving to pursue more of an EV sort of or battery electric vehicle offering that you guys have been testing in the marketplace currently?

Yeah, it depends on the end market, Stanley, but let's take the Volterra Electric Municipal Fire Truck. You could even take the Volterra airport rescue and firefighting vehicle. Now we go in, we release this for sale and go into production in 2024. So when we talk about units going to Portland, Oregon and the unit in Madison, Wisconsin, a few other places, these are really call them beta test units. They're municipalities that want to be partners in development and that's going extremely well. But the amount of, interest that we're getting from municipalities across the country is really, really strong. And it can be, of course, it's a little bit regional. So think about the state of California. The state of California, I think, will be probably one of the leaders in terms of pull rate on this product because of their interest in electrifying faster than other regions. But I think this is going to go across the country. It's not just California. We've seen a lot of interest from all over the country from every single one of our dealers. So this will be a really nice long-term growth product. Now, you get into other end markets that we're in, and it could be even faster than that. So this is one of the reasons we're so bullish on this new segment.

Great, guys. That's it for me. Thank you. Thanks.

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

Hey, guys. Good morning. I apologize if I missed this, but I wanted to better understand the access margin guidance for this year. If you guys are going to be doing $4.2 billion of revenue, and it sounds like price cost is neutral to positive, your 11% margin is below what you guys did in 2019 or it's about on par with what you did in 2018 at lower revenue. So I'm just trying to understand what's changed here and why margins aren't better with the higher revenue. Thanks.

Sure. It's really two things, Seth. Number one, obviously we talked about price cost, but I would say that Because of the supply chain environment, the impact on manufacturing is still significant. So we're seeing much higher manufacturing inefficiencies than we would have seen in those previous periods, which as supply chain normalizes, that will improve. And again, even though the volume is lower from a throughput perspective, there's fewer units. So that obviously has a bit of an absorption impact as well that sort of plays into that. So I think that's really probably the biggest thing.

Okay. But it's fair to say that your price cost neutral to positive for 2023 in excess?

Yeah. When you're looking at input costs, correct. Right.

Okay.

What I would say is I guess one other piece, too, we do – With the new product development piece, obviously, with access equipment being one of our larger businesses, there's certainly an element there as well I would add into that as well. But as volume increases, our view hasn't changed. As volume increases and we get those absorption manufacturing benefits, their margin will improve over time. Right.

Okay. And then just on the free cash flow, is CapEx, is this kind of a one-off? you know, spike here in 2023 up to 350, or do you think it stays at that high level for the next couple of years as you're adding? It sounds like you have a bunch of new capacity addition plans that are in the works.

Yeah, I think if you go back even to analyst day, we expected that this past year and then in 2022 and 2023 would be pretty robust. We're really looking at... through 2025, averaging about 250 million of CapEx. That's still our view. So I think we'll continue to run probably a little bit higher. I don't know that it's necessarily going to be at the same level it is this year. I think this year, with a number of programs sort of converging, it's probably our peak year.

Okay. That's super helpful. Thank you.

Our next question comes from the line of Dylan Cumming with Morgan Stanley. Please proceed with your question.

Great. Good morning, guys. Thanks for the question. I just wanted to ask a longer-term one on access first. You know, I feel like it's been pretty clear that a lot of the rental companies still will not be able to make a dent in their fleet agents this year. And just given your commentary around non-risk construction, it still feels like you have multiple years of visibility there, too, as well. Just, you know, from our perspective, you know, most of the consensus is still not giving you credit for the longer-term tail targets that you put out there in the investor day. You know, can you speak to kind of any multi-year visibility that you still have in an access that can actually maybe kind of give us confidence in actually hitting those targets over the long term?

Yeah, sure. So first of all, I really want to emphasize we feel great about the underpinning factors that are driving the demand dynamics in the access marketplace. Our equipment is, of course, more driven by non-residential and industrial spending. And the important thing to note here is we are not seeing the slower residential metrics translate to non-residential. There's kind of a bifurcation of those two metrics. And we're hearing the same thing from our big customers as well. They're seeing the exact same thing. So it's unusual times right now with both aged fleets and a lot of mega projects and huge government spending, as we've seen with several bills that have been passed, like the CHIPS Act and others, that are really driving demand, driving those mega projects. That's going to happen for a long time. As I said in my opening remarks, a lot of fleets being absorbed in the mega projects, and many of them have not even come online yet. So as you said, the customers that we have have not been able to do much fleet replacement. They're primarily providing growth for their fleets because of the demand on equipment. But remember, they over time really need to replace their fleets, so that's an added dynamic that's driving demand. So these are the primary reasons that we see multi-year continuation of the demand in this segment.

Got it. Thanks, John. I guess that's a follow-up then on the BevMix and the USPS contract. Again, can you speak to kind of the overall maturity of the supply chain, how it's developed over the last year or so? You've still been working with MicroVAS, but just kind of their own ability to handle and then your own ability to handle in terms of sourcing those components, getting that battery supply chain kind of up and kind of ready to actually supply those higher volumes that you're expecting over time.

Yeah, well, I think the thing that we pay most attention to is the new components that get supplied to us, and i.e., that means the BEV-type components like the lithium-ion batteries. And we feel really good about our supply chain for lithium-ion batteries as one example, and we pay attention to it right down to the cell and where the cell is coming from. And, you know, we will continue to pay attention to it because, as we all know, there's a lot of demand on lithium-ion battery supply today, and it will continue to grow as we see the automotive industry and other industries like ours continue to electrify. So we'll continue to pay very close attention to it. We also have contingency plans to the current path that we have, but we feel good about it in terms of e-drives and other systems that go into it, Bev. You know, they're household name companies that are our partners. And we'll continue to pay very close attention to it with every day that goes by. We'll get into production over the next year. And, you know, we feel good about where the program is.

Great. Thank you.

Our next question comes from the line of Stephen Fisher with UBS. Please receive your question.

Thanks. Good morning. Just wanted to ask about the cadence of the access margins in 2023. It sounds like you expect lower access revenues in Q1. So I think that should imply lower margins and then just higher margins than exiting the year relative to that full year 11%. So I guess I'm curious if you agree with that. And then to follow up on Jamie's question, how that exit rate margin in access in 2023 might relate to your 12 and a half to 13 and a half percent 2025 margins it seems like if we're going to be above that 11 exiting this year you should be getting pretty close to that that long-term margin range before 2025. sure um first of all i guess um

Talking about the, I'll just start with your last question first. On the exit rate, I think that, so yes, I think indeed, if you look to the first quarter, generally our margins in all of our businesses are going to be lower in Q1. You know, I talked about in my prepared remarks, we have a mixed issue with a mixed headwind with an order in defense that's driving the margin down in Q1 and then access and vocational, the revenues are down due to some just really timing of deliveries, not so much production related. So that's going to apply to margins. It is the lowest, we expect it to be notably the lowest margins of the year. So we'll prove over the course of the year. I think in terms of access exit for margins, right now to the extent, going back to my earlier comments, The extent to which access is lower than like a 2019, it really comes down to our units are still lower, so absorption is a bit unfavorable, and we have manufacturing inefficiencies right now. So it's really a supply chain function that's causing the margin. As unit volume increases and so on, those margins that we're talking about for 2025 are absolutely attainable. So what I'd really do is focus on supply chain cadence.

Okay. And then did you comment at all about how you're thinking about catch-up adjustments? potential in defense in 2023? Assuming there might be more inflation, what's your expectation for catch-up adjustments this year?

Well, our expectations always, we have them every quarter, so our expectation is that we're building in everything that we know. We certainly don't expect that inflation is going to be lower this year, and certainly that's reflected in our estimates. I think that really what I would watch with the cumulative catch-up adjustments is the cadence of inflation to the extent we've had so much variability over the past year and inflation was so much higher than what expectations were, say, 18 months ago. I think even though inflation is higher now, it's not moving at the same pace and that's where the estimation challenges come in. So I would say even if inflation is higher, our going in proposition is that there should be less volatility there.

Makes sense. Thanks a lot.

Our final question comes from the line of Michael Feniger with Bank of America. Please proceed with your question.

Hey, guys. Thanks for squeezing me in. Apologies if this was asked earlier. Just how should we view the continuing resolution headlines with the defense and defense budget? Does that have any impact on some of your programs or just timing of awards that we have to monitor? Curious what you guys are hearing on that front.

Really, from a CR perspective, that really shouldn't have any impact on our existing programs. It really, I think, is obviously going to have a little bit more impact if there is a government shutdown at some point.

A new program starting up might be affected, but that really doesn't impact us.

In terms of in 23, it's existing programs, so it's not going to impact 23. Nope.

Great, thanks. Good to know. And then just curious, there's some signs of access equipment use pricing just sliding over the last few months. It's still elevated, but moderating from those highs. I'm just curious, when you look at your backlog and the price increases of the new equipment there, how should we kind of look at, you know, used access and aerial values in that market?

Well, used equipment is, I think you have to look at it over periods of time. It's still elevated significantly versus where it normally is. So the fact that it came down a little bit, at this point, we don't think it means much. I think we need more data points to see a little bit more of a trend before we can make much of it. But just the moderation right now is is not something that we think means anything at this point in time. And when I say that, Michael, I'm really talking about that because of the continued strong demand that we feel from the market and from our customers. And I'm talking about longer-term demand too, not just the here and now demand.

Makes sense. Thank you.

Thanks, Mike.

Thank you. Mr. Pfeiffer, I would now like to turn the floor back over to you for closing comments.

Okay. Thank you, everyone, for joining us today. We're committed, of course, to driving long-term profitability and growth as we continue to innovate, serve, and advance our company. Stay safe, healthy, and we look forward to speaking with you throughout 2023.

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.