Q4 2021 Oshkosh Corp Earnings Call
Greetings welcome to Oshkosh Corporation reports fiscal 2021 fourth quarter and full year results. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
I didn't want you require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Pat Davidson Senior Vice President 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 fourth quarter 2021 results a copy of the release is available on our website at Oshkosh Corp. Dot 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.
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 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 we highlighted in our business update on October 8th 2021 we are changing our fiscal year to the calendar year.
The October to December 'twenty, 'twenty, one quarter will represent an abbreviated fiscal year, our stub period to facilitate the transition to our first full calendar year, which will begin on January one 2022. This change should provide us with better visibility as our planning and reporting cycles will be aligned with those of many of our.
Customers and suppliers as a result, all references on this call to a quarter or year end 2021 or before are to our fiscal quarter or fiscal year unless stated otherwise all references to 2022 or later years as to a quarter or a year are to our calendar year.
Our presenters today include John Pfeifer, President and Chief Executive Officer, and Mike Pack Executive Vice President and Chief Financial Officer, Please turn to slide three and I'll turn it over to you John.
Thank you Pat and good morning, everyone.
As we discuss our fourth quarter and full year results I want to provide some color on the current business environment.
It's clear that we're in a unique period of time with robust customer demand for our market leading products, while facing one of the most challenging global supply chain logistics and workforce availability environments in decades.
These factors are limiting production and also contributing to manufacturing labor efficient inefficiencies at.
At the same time, we're facing significant material cost inflation, we view these challenges as temporary and we believe we are taking the right actions to position our company for success as we emerge from the current environment as a stronger more resilient business.
Some examples of the actions include implementing multiple price increases in the last several months and our nondefense segments to mitigate cost inflation.
Redesigning many of our J L. G products to accept higher capability microprocessors, which are produced in higher quantities by chipmakers to reduce our risk of shortages.
Shifting production within our existing facilities to better align with labor availability.
And we're undertaking a rigorous qualifying process to identify and engage hundreds of new suppliers to drive a more robust supply chain for key materials and components.
Our long term outlook is attractive based on strong market fundamentals strategic program wins in a comprehensive offering of innovative new products that will drive continued market leadership.
With this backdrop, we reported $15, 6% higher revenues on sales growth in our access equipment defense and fire and emergency segments.
This led to fourth quarter adjusted earnings per share of $1 five slightly above the estimated range included in our October 8th business update.
The modest increase was driven by a lower effective tax rate.
And we continued our commitment to responsible capital allocation with increased share repurchases in the quarter, which Mike will discuss I'm also pleased to announce that our board approved a 12% increase in our quarterly dividend from 33 to 37 cents, which represents.
The eighth consecutive year of double digit percentage increases.
Now, let's move to the full year.
Please turn to slide four.
We grew revenues by just under 13% for the year and adjusted earnings per share by 16, 4%.
This led to a full year record for free cash flow of more than $1.1 billion.
Importantly, we have an opportunity to grow revenue and EPS over the next few years based on our innovative products and the strong market drivers. We also have a strong foundation of programs in our defense segment bolstered by a significant recent program wins, including United States Postal service next generation does.
Livery vehicle and the U S Army's medium caliber weapons system.
2021 was a year of significant electrification announcements for our company beyond the U S. P. S. When we launched our revolutionary New Voltaire, our family of electric fire trucks, including the Pierce bolt Terra electric custom pumper currently in service in Madison, Wisconsin.
And the Voltaire electric Arf truck, which was a major highlight for attendees at the advanced clean Transportation Expo back in late August the Expo brings together participants from across the globe to discuss and demonstrate clean technologies for commercial applications.
Customer response to these electrified products has been outstanding.
We made several important investments in 2021, including the acquisition of Prep Miller, and a strategic investment and partnership with Microburst, we wrap the year up with a minority investment and strategic partnership with Carnegie foundry to build upon our autonomy and robotics capabilities. We also.
So announced a minority investment in wildland fire truck market leader Boise mobile equipment.
These investments highlight our commitment to advanced into new markets and leverage technology to both enhance our product offerings and drive profitable growth as part of our long term strategy.
We have also continued our commitment to environmental social and government governance leadership as evidenced by our investments in electric vehicle technologies, while fostering an inclusive culture and continuing to deliver on our high governance standards.
For many years move M. O V E was our strategy over the past year, we evolved beyond move and have introduced our strategy summarized with three simple words innovate serve advance we believe this strategy provides.
The necessary framework to continue to drive long term sustainable growth and it is grounded in our purpose.
Making a difference in People's lives, we innovate customer solutions by combining leading technologies and operational strength to empower and protect the everyday hero.
We serve and support those who rely on us with a relentless focus throughout the product lifecycle.
We advanced by expanding into new markets and geographies to make a difference around the world.
We're excited about the direction, we're headed and believe that innovate serve advance provides the roadmap to get US there I invite you to check out the details of our strategy on the Oshkosh website.
Please turn to slide five and we'll get started in our segment updates with access equipment.
Much like we discussed on our last call demand for our industry, leading access equipment remains very strong, but near term results are being meaningfully impacted by supply chain and logistics challenges as well as higher input costs.
Access equipment, which faced an extreme decline in demand in 2020 as a result of the COVID-19 pandemic has since experienced the most rapid rebound of any of our businesses.
The rapid return of demand in 2021 exacerbated the supply chain challenges, we've been facing and we believe it will remain choppy well into 2022.
Our access team continues to work hard to source components to build and ship products to customers around the globe. Despite these challenges we delivered strong revenue growth of 37% in the fourth quarter, leading to 22% revenue growth for the full year.
We have taken multiple pricing actions over the past several months based on rising input costs, which we expect will largely address price cost challenges by the end of the second quarter of 2022.
And of course, we will continue to be diligent in our pricing approach should input cost increase further.
Orders came in at $1.9 billion in the fourth quarter, representing a quarterly record for the segment leading to a record backlog of $2 $8 billion at September 30.
The rental equipment market is strong and the access leadership team is taking measured steps to preserve the health of the industry by addressing unfair competition through our trade case.
We believe that we're in the early stages of a multiyear growth cycle for access equipment as the rental companies work to lower the overall age of their fleets, which were at historically high levels entering 2021.
I want to emphasize that our growth outlook is underpinned by strong market fundamentals and our continued launch of innovative product offerings, such as the da Vinci All electric scissors that you've heard me talk about and many other new product launches in recent quarters, our trend of new product launches continues.
Continued in the fourth quarter, we're entering the North American tell a handler market for agriculture in a more significant way with a new 9000 pound capacity model. We are also expanding our industry, leading U S tell a handler family with a new line of rotating tell our handlers with our Italian partner Daiichi I look.
Forward to discussing additional new products with you in the coming quarters.
Please turn to slide six and I'll review, our defense segment.
Our defense team delivered a solid fourth quarter, leading to a full year revenue of $2.53 billion, an increase of almost 10% and an operating margin of nearly 8% in this very challenging supply chain environment.
You're all familiar with the J L. T V one of our foundational and enduring programs.
We've been showcasing the village the vehicles ability to serve as a long range weapons platform in either manned or semi autonomous modes. These capabilities directly support the department of Defense's focus on near peer threats domestic and international customers continue to be impressed with the <unk>.
J L Tvs outstanding versatility.
We are also preparing for the upcoming Recompete scheduled in 2022 and believe we are well positioned to win the follow on contract.
As we've discussed over the past several quarters, we are actively competing for a number of adjacent programs, including the CATV attractive vehicle for Arctic climates. The O M. F V, which is planned to replace the Bradley fighting vehicle and the E. H E T or the enhanced heavy equipment transporter.
Among many others the.
The acquisition of Pratt Miller significantly enhances our ability to win adjacent programs just like it helped us win the M. C Ws contract earlier in 2021.
Before I leave defense I'd like to make a few comments about our next generation delivery vehicle contract with the United States Postal service, we continue to work with the customer to finalize some of the vehicles parameters. We are also on track with setting up our new facility in South Carolina and expect a successful product launch in the back half of 2023.
<unk>. This is a 10 year contract calls for between 50000, and 165000 vehicles with a mix of both zero emission battery electric vehicles and fuel efficient ice vehicles and allows the USPS to electrify its fleet.
Let's turn to slide seven for a discussion of the fire and emergency segment.
The fire and emergency segment delivered another strong quarter with an operating income margin of 14%, despite the challenging supply chain environment and extreme cost inflation.
Even more impressive is the fact that our team at <unk> delivered an all time record for operating income margin for a full year at 14, 2%.
Municipal market remains strong and we're encouraged by the record orders, we booked last year, which led to our year.
Year end record backlog.
But we are tempered in our outlook for the stub period as a result of near term supply chain disruptions, we've talked about during this call.
Of course, we expect to overcome these hurdles and time and we are planning an expansion of our Appleton manufacturing sites that will support long term growth.
As I mentioned earlier, our volt Terra electric custom pumper is serving frontline duty in Madison, and we recently announced an agreement with Portland to work with them on bolt terror as well, we are receiving a steady stream of inquiries from fire departments around the United States and our volt Taro electric vehicle.
<unk> been receiving rave reviews, while conducting demos at airports around the U S.
As I close out my comments, then F N E I want to welcome Boise mobile equipment to the Pierce family.
Boise is the industry leader in Wildland firefighting trucks are more minority investment will bring the Boise product into our dealer network and allow both peers and Boise to take advantage of this growing segment of the market.
Please turn to slide eight and we'll talk about our commercial segment.
Similar to our other segments commercial delivered solid results in 2021 in fact, the team posted its best full year adjusted operating income margin in the past 15 years, that's an impressive accomplishment in this difficult supply chain environment with record high steel cost is.
As many of you are aware, we build our Cvs and rear discharge concrete mixers on third party chassis, either purchased by us and supplied to customers with a body and a complete package or furnished by our customers. This represents a meaningful risk as chassis availability has worsened over the past couple of months.
And we expect it will remain a challenge for much of 2022.
Demand for our CBS and mixers has been strong and we have a solid outlook for both markets residential construction as well as other construction indicators are positive and elevated customer fleet ages are creating additional demand for replacement. Our outlook is further supported by solid orders in the quarter for both our <unk>.
<unk> and mixers as the U S and Canada move beyond the pandemic. These orders led to an all time high backlog of just under $570 million, providing good visibility into 2022, I'm going to turn it over to Mike to discuss our fourth quarter results and expectations for the stub period.
Sure.
Thanks, John and good morning, everyone. Please turn to slide nine as John highlighted we faced significant supply chain and logistics disruptions in the fourth quarter well beyond our experienced in the third quarter. We also experienced meaningful material cost inflation recall that we account for inventory on a last in first out basis. So the additional cost escalation with.
Bond purchases in the fourth quarter negatively impacted price cost dynamics, particularly at access equipment. We previously expected a consolidated year over year price cost headwind of $35 million in the quarter. The actual price cost impact increased to approximately $60 million supply chain disruptions.
Several price cost dynamics and labor constraints, all contributed to fourth quarter financial results significantly lower than the expectations discussed on our third quarter call consolidated sales for the fourth quarter were two point or $6 billion or $279 million higher than the prior year, representing a <unk>.
16% increase the consolidated sales increase was driven by a 37% increase at access equipment, a 5% increase that defense and a 10% increase at fire <unk> emergency, partially offset by a 6% decrease at commercial.
Access equipment sales increased by $230 million over the prior year quarter due to improved market demand led by North America as.
As the impact of the pandemic has waned the sales increase was lower than our prior expectations by approximately $130 million largely due to the previously mentioned supply chain disruptions.
<unk> sales increased in the quarter due to higher ltvs sales as well as the benefit of prep Miller sales, which we acquired in the second quarter, partially offset by lower F M TV and international sales.
You're an emergency sales increased in the quarter on higher arf deliveries and commercial sales were down on lower package sales.
Consolidated consolidated adjusted operating income for the fourth quarter was $104 $2 million or five 1% of sales compared to $124 $1 million or 7% of sales in the prior year quarter access equipment adjusted operating income decreased as a result of unfair.
<unk> price cost dynamics, the return of spending subject to temporary cost reductions in the prior year and unfavorable product liability largely offset by an increase in sales and improved manufacturing absorption defense adjusted operating income decreased as a result of unfavorable product mix increased material costs and unfavorable.
<unk> production variances, partially offset by higher sales volume.
Fire and emergency adjusted operating income decreased in the current year quarter as a result of higher material costs unfavorable manufacturing efficiencies and the return of spending subject to temporary cost reductions in the prior year offset in part by higher sales and improved pricing.
And commercial segment adjusted operating income decreased as a result of unfavorable material costs and the return of spending subject to temporary cost reductions in the prior year offset in part by improved manufacturing absorption and improved pricing.
Adjusted earnings per share for the quarter was a dollar and five cents compared to adjusted EPS of $1 30.
In the prior year.
During the quarter, we repurchased approximately 821000 shares of common stock for a total cost of $95 million.
Please turn to slide 10 for a discussion of our expectations for the stub period.
We expect that the challenges we faced in the fourth quarter of 2021 will continue into the stub period demand remains robust across the company as indicated by our strong order rates in the fourth quarter and record year end backlogs in several segments. However, the current supply chain and logistics disruptions are making it difficult to forecast sales volume.
While our backlog support of 10% to 15% sales increase in the stub period versus the first quarter of 2021, we expect parts availability will likely constrain our ability to deliver higher sales as a result of this uncertainty we are unable to provide quantitative expectations for the stub period at this time.
We do expect that stub period, EPS will be significantly lower than the first quarter of 2021 and may approach breakeven levels on a consolidated basis.
We expect that unfavorable price cost dynamics will be a $75 million to $85 million headwind versus the first quarter of 2021 steel and other component costs have continued to increase we have taken multiple pricing actions in our nondefense businesses over the past several months and in many cases prices aren't.
Greater than 10% above early 2021 levels. We believe these price increases will enable us to achieve price cost equally equilibrium, but it will still need to but we still need to work through large backlogs. So it will take until the end of the second quarter of 2022 for these pricing actions to largely catch up with <unk>.
Escalation, if we experience further escalation, we expect to take further pricing action.
We also expect higher spending levels in the stub period versus the first quarter of 2021 last year COVID-19 infection rates spiked early in our first quarter and our spending levels remained low since center spending levels have begun to normalize in areas such as travel advertising and medical we also expect that parts availability constraints.
We will continue to drive labor inefficiencies, while the current environment is challenging we are taking appropriate actions and believe that supply chain constraints will subside over time and the longer term outlook for our businesses remains very strong we will provide further updates on 2022 during our January earnings call I'll turn it back.
Over to John now for some closing comments, we just completed a challenging quarter and expect those challenges to remain for the next few quarters. However, we believe we're taking the right actions as we manage through through this period position ourselves for success as supply chains improve.
We also won significant programs in 2021 and are committed to driving long term profitable growth as we innovate serve and advance the company before I turn it back over to Pat for Q&A I want to thank all 15000 Oshkosh team members for the hard work and sacrifices. They go through every single day.
To help our company be successful.
Okay, Pat back to you. Thanks, John I'd like to remind everybody. Please limit your questions to one plus a follow up and we need to be disciplined on the follow up question. Afterwards, 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 if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the queue. You May press star two if he would like to remove your lines and thank you and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star. He is our first question.
<unk> is from feel expulsion with Raymond James. Please proceed.
Hey, good morning, everybody.
Morning morning.
Hey, just curious if you could talk about maybe directionally, how you think that the new fiscal year shapes out from a price cost perspective over time.
You said $75 million to $85 million headwind to stop and then price cost parity by the end of two Kindle.
Just wondering if we think that 85 million headwind against slightly better by quarter. It sort of pricing flows then or just generally how much visibility you have there given the large backlog and clearly still some supply chain issues.
Sure.
Things feel like they can I can take that one first of all just a level set everything that we're currently booking in North America has double digit price increases in that sense.
The beginning of 2021, so I think that's just a good backdrop as we think about the backlog.
From a quarterly cadence you're correct.
See about 75% to $85 million in the stub period, as we look to the first quarter expecting similar levels to that based on our backlog we.
We do see in the second quarter that starts getting meaningfully better and.
And you should start seeing our margins start normalizing.
And then as we said by the second quarter, we should be largely price cost neutral.
By the end of the second quarter.
Excuse me by the by the third quarter, we should be largely price cost neutral.
Okay. That's helpful and then John or Mike I'm, not sure who this is best for book, but the model is throwing off obviously, a substantial amount of free cash and cash is growing on the balance sheet. I know you guys have talked about M&A in the past as a focal point.
So maybe just curious if you could touch on that environment and how you would think about uses of cash or what the right amount of cash on the balance sheet outside of M&A going forward.
I'll leave it there.
Yeah. This is Joe this is John feel that's all I'll talk about that because we're pretty focused on our capital plan.
And we do have a lot of cash on our balance sheet and we've generated a lot of cash we're always going to be returning cash to shareholders I've talked a little bit about share share buybacks and increasing our dividend.
But we're also making investments organically and.
In terms of technologies.
<unk>, new product developments and how we grow the business over time.
And we've got a constant pipeline of inorganic moves that we're always looking at but we're very very prudent about how we look at those moves we know exactly where we think we should be making moves and you've seen us do some smaller moves Boise mobile was a great move but.
A smaller move.
We did the acquisition of Pratt Miller, which is a fantastic acquisition.
Few quarters ago, that's leading to a lot of really positive growth opportunities for our company. So you'll continue to see us active but as you know the M&A environment today is very frothy.
And so we're pretty prudent about.
We want to look at where we can make moves that are going to make meaningful differences to how we grow the company over time.
And what we're where we're careful but focused on it so.
So I think you'll see us continue to make a few a few moves inorganically and Felix one other thing I'd just add we did step up our repurchase activity in the quarter I would expect that to continue perhaps even a somewhat more robust level into the stub period, so that share buybacks as well as our increased dividend.
We talked about today will also remain important parts of our capital allocation strategy.
Very helpful. Thank you.
Our next question is from Stanley Elliott with Stifel. Please proceed.
Hey, good morning, everyone and thank you all for taking the question.
Curious on the EV commentary I mean, do you have a lot of our prototypes and and and.
Units in the field across all of the all the different segments.
Are we still looking at kind of a $23 20 for a period of commercialization is there an opportunity to accelerate that I mean, you mentioned kind of a frothy M&A environment. Just curious how you think about that given the interest levels you're seeing.
Yeah. He vs as a law as a long term strategy for US you know when we look at our markets, we think that Evs will gradually be.
<unk> be put into the market over the next 10 to 20 years.
There are certain segments, where we're already commercializing mostly access today, where we're commercializing things like all electric aerial work platforms. If you look at <unk>. It's more of a 2023, where you will see much more commercialization of these EV vehicles that we've put into the market recently and the U S. Postal service of course.
Start shipping E V vehicles in 2023.
As part of that program so.
I think we've already started it now in some segments I think 23 is a certainly a year, while youll see a lot more actual product being released for sale and shipment.
But it'll continue to gradually increase with every year that goes by for the next 10 to 20 years is as our.
Our fleets get get electrified and that's good for us because this offers economic benefit to our customers. There's a lot of value created with these with these evs and.
So it's good for us from a margin standpoint is great for our customers in terms of giving them a better economic solution.
Great and then in terms of the access you mentioned North America strength.
What's happening over in China, I mean, that's been a great growth market for you all curious what's happening you if if some of the things with the property market has as a kind of curtailed some of the growth opportunities there.
Curious how that shaken out.
Yes, China is a.
Has the.
Access equipment segment in China has slowed a bit.
As China's economy has slowed a little bit, but it's still a very robust.
A robust market and one of the biggest it will be one of the biggest markets in the world. It's already the biggest construction market in the world. So while it slowed a little bit we're still very bullish on China. We've got great operations. There are incredible people, there who do a great job.
Addressing the marketplace.
But but it has slowed a little bit over the past year.
Guys, Thanks, and best of luck.
Our next question is from Jerry Revich with Goldman Sachs. Please proceed.
Yes, hi, good morning, everyone.
Good morning.
Can you talk about are coming through and exiting this post COVID-19 environment. How are you thinking about potential structural changes to the supply chain or price.
Price protection that you give customers and orders going forward.
Any significant changes in the business model that you're thinking through you know as a result of what we learn you know call.
Call it in the Covid and post Covid environment, so far.
Yeah, Jerry Thanks for the question. So we've been doing an enormous amount of heavy lifting in our supply chain.
Capabilities.
We have qualified literally hundreds of new suppliers.
To both dual source and are just improve our resiliency of supply because of some of the disruption that we've seen so we've looked at it not just in the short term, but more of a opportunity of let's really take a look at the supply chain and make sure that we're building it for the future not just looking at it for what are we.
Need next quarter, but what do we need for the next five years as we continue to grow the business. So a lot of heavy lifting and that's why we've qualified hundreds of new suppliers. We've also done a lot of work digitally connecting our supply chain to give us more visibility than we've had in the past.
So that we know where we have.
Where we have opportunities and we know where we have issues.
Quicker, but we've been doing a lot of reengineering of components, which helps facilitate better supply I've talked in the opening commentary about redesigning all the chips for access, which gate, which gave us much better supply of chips.
So there's a lot of heavy lifting that's been done you know as you look at the <unk> the.
The price cost issue that we're currently wrestling with.
<unk>.
We talk about we will come out of this and as we get through Q2.
We built really fast strong backlogs in the access equipment segment earlier started earlier in 2021.
And as those backlogs built we were also seeing.
Really strong.
Stronger than than usual.
Serial cost inflation.
And when we book when we book orders, we'd have a forecast for what material cost inflation would be and then a month later those forecasts were much higher than they were when we booked a bunch of backlog the month before and that's what created the pinch that we're in right now, but we are confident so so if you go back in time should we had been.
More locking them, we were doing probably we probably should have as we look at it going forward, we're being much more aggressive with.
Making sure as we are building backlog today, and where we're building backlog at full price today. So we're we're very confident in what we're doing and it's we're protecting ourselves as we go more prudently.
Based on what we see with material cost as we go forward. So that's what gives us the confidence to say that.
As we get into Q2, we'll start to see nice improvement there.
And John you know on on that note as.
As we think about you know the next time the demand environment accelerates like this will you have the capability to lock in cost when orders are accelerating is that a function of the work you've done on qualifying and expanding the supply base or is the expanded use of any futures or.
Other instruments in other words.
In a tepid demand recovery.
Pretty easy to match those two but what about the next time, we have the type of.
Demand cycle, we're looking at now.
Systems in place to allow you to match in that type of environment.
Jerry the work we're doing now is particularly on the cost side, you know trying to lock in costs, either with price locks or with suppliers as we as.
As we see how healthy order rates and backlog building.
That's where we've put the most focus.
With regard to how we're operating and certainly the environment. We're in right. Now is further unique because you see the escalation that the level of disruption, whether it's logistics or even to obtaining components not just in our industry, but across industries I think of is certainly better.
E V adder to.
Sort of the situation that us and many other companies are facing right now.
Thanks, Gerry discussion thanks.
Our next question is from Stephen Volkmann with Jefferies. Please proceed.
Hi, Good morning, guys. Thanks for taking my question I'm wondering if we can just go back you talked a lot about the price cost trajectory that was very helpful. But you also talked about a lot of other sort of near term pressures with labor availability and parts availability and productivity, resulting from those.
Can you just talk us through sort of like you did on price cost how does that play out sort of in the stub period, and then into 'twenty two do you think.
Sure really that as we look at the stub period, when we while we're not providing explicit guidance. We're talking about it qualitatively, we don't expect a meaningful change in supply chain at this point in time, so we're expecting that we're going to face those labor inefficiencies and so on that one.
In the quarter and I of course, we know the cost side of it.
Well, we're certainly not providing guidance yet for 2022 and there are a lot of moving pieces. We do believe over time supply chain is going to get better and our labor situation. The exact cadence of that is not clear.
Hopefully as we approach that July or excuse me that January earnings call. We will start to have better visibility to that but I think if you look at the biggest factors that we're facing right now it's really the cost price dynamic and I think that's where we have visibility and that's what gives us confidence that.
We should start seeing a return of normalcy to our margins as we exit the second quarter really more so in the third quarter next year in the fourth quarter, and Steve and a little bit bigger picture. If you look at where we are in this supply chain disruption period.
We've done a lot of really good work with our with our supply base, our supply base has improved and its ability to keep pace with our production forecasts now we still have problem areas. We've talked about chassis chassis as an example of a win.
Fundamental.
<unk>.
Supply concern, but for the most part we've got a lot of suppliers make nice improvements in their ability to produce we still see huge challenges on the logistics side of things not only high cost, but really the lead times and the predictability of being able to or domestic freight.
For for Ocean freight and.
And the predictability of its one of the biggest challenges is really the long lead times and hard to predict lead times in terms of when we can get supply in the door and when we're when we're running the way we're running that becomes challenging it becomes a little bit unpredictable.
So we still have a ways to go on the logistics front.
But we have made improvements in the overall ability of our supply base to keep up.
Okay. That's helpful. Thanks, and then.
Related to that I saw your inventories didn't look like they were up much sequentially I would have thought maybe you would have some partially built equipment sort of sitting around waiting for parts that could ultimately be shipped out, but maybe that's not as big a deal as I might've thought just anything happening there.
From a concentration perspective, we're definitely seeing higher raw.
<unk> and whip levels. Our finished goods are definitely at lower levels I think what youre seeing is really.
Supply of of parts in the fourth quarter, certainly was not at the levels that that that.
That we that we wanted to see and that ultimately impacted sales I think youre still seeing some supply chain availability dynamics reading through the inventory numbers.
Thank you.
Thanks, Steve.
Our next question is from Maine to celebrate with Baird. Please proceed.
Thank you.
Good morning, everyone.
I'm just trying to maybe put a little finer point here and understanding all the moving pieces on your price cost commentary.
If we're looking at the orders that you take it into the quarter in access equipment, So a little over call it $1 $8 billion.
Is it.
So that these orders are going to convert to revenue in the second quarter of 'twenty two.
And maybe even beyond.
Hum.
This order batch that you've taken this quarter.
Didn't keep price cost neutral related to those two I'm curious as to what your cost assumptions are in this comment that your price cost neutral do you actually bacon <expletive> spot prices for raw materials.
Or is it that you're expecting that raw materials are going to moderate its kind of a lot here, but hopefully you can address at all.
Yeah. So first of all speaking to the backlog and we're not going to breakdown different price levels that we've had multiple price increases. So if you look at the breakdown of our backlog that there's there's several price level. Obviously, the most recent pricing actions. We we we took for more like the middle of of.
The fourth quarter. So there are certainly orders booked in the fourth quarter that werent at that that third price level, yet so what we see again it very much.
Aligns with the commentary had before what will be largely shipping the backlog over the next two and a half quarters that that's out there. So you have obviously again, the $75 million to $85 million headwind in the stub period that inventories in backlog today.
Likewise in the first quarter, we should see similar levels of cost price headwind and then it gets meaningfully better. So we really start getting the benefit of those price increases as we as we manage through the second quarter of next year and that's why we said really coming out of the out of the second quarter or in the third quarter largely back to cost.
Price neutral from an assumption standpoint, you know of course, we're looking at.
What our current costs are and obviously, we have much better visibility today as we've worked through with our suppliers and understand where costs are at we're not seeing the rapid increase of steel anymore. While it is still obviously at a very very elevated level I think the good news is as we are seeing a.
Blocks available and areas like hot rolled coil for meaningfully lower than what current spot rates are and that's consistent if you look out on.
Many of the published yield curves.
That it is expected to tail off, albeit still at very elevated levels versus historically. So those are all things that we're looking at it's not just the although we're looking at all components from and our pricing decisions from labor to rubber components to aluminum to commercial chat or third party.
Passes so we're looking at it Holistically Meg.
And Meg just emphasize our order rates are really healthy market is really healthy.
And all of our orders.
Recently in a healthy percent of our of our backlog is at our full price level and that's across and if I look at access alone right all of our commercial segments have come.
Come up in double digits because of the material cost inflation. When you look at access alone independent rental companies national rental companies you order rates across our all at the price level that gets us to where we're where we need to be in terms of that price cost equation.
I see.
Maybe to go back to the.
Sort of process question that Jerry was was asking earlier I mean look.
Here, what's going on here would be could be that.
You know theres some theres some flaws in a process given given whats been happening this year and your performance relative to peers right.
In terms of how the order intake was manage relative to cost inflation and then also some of the disruptions that showed up maybe sooner.
You then than it has for others.
And I guess I'm wondering here is you're sort of running an analysis looking back beyond qualifying additional suppliers, which would you would you talked about.
There is some procedural things that you think you are going to implement going forward.
So that so that investors can gain some level of confidence that structurally you know you can you can sort of become a better business next cycle through the cycle as these headwinds eventually dissipate.
The answer to your question is an emphatic absolutely. Yes. We are you know it was kind of a it was an unusual period I'd say from March April through where we were in lets call. It September in terms of how fast that backlog built along with how much core.
Cost escalation got away from.
Everybody almost I mean, they're the forecast just kept changing constantly. So you thought you were okay with a certain cost level and then the forecast would change and.
And we just kept seeing it escalate and escalating escalate, but absolutely we will learn and we will put more specific practices in place.
So that in the future, where we're more protected from this type of a rapid buildup of backlog in the event that there's also a rapid cost escalation that goes with it yeah and when we're talking about the forecast we're looking at really the yield curve.
Published out in the marketplace I think if you roll back the clock to the February timeframe. When we're already starting to book meaningful orders. There was a view that fuel is going to be elevated.
For a few months and will come down which is not dissimilar to other cycles, what what's happened. We obviously saw a very different trajectory in this case.
And so those forecast that came that were published that companies across the globe are looking at obviously that.
<unk> continued to increase and push out longer so again I think we're definitely dealing with.
Some unique factors that we haven't seen in other recoveries and again it.
You look at how we manage through the pandemic, obviously delivered solid results through that and what we're dealing with right. Now is short term in nature and we certainly see light at the end of the tunnel as we we exit the second quarter and Megan I'll just emphasize a.
A few this this we don't like what we're going through at all we will learn from it.
It's a few quarters of disruption for US we are entering what we believe is a multi year cycle in access equipment.
Our completely confident in our ability as we go through a multiyear growth cycle to deliver for our customers and to deliver for our investors. We're very confident in our ability to do that in spite of this short term issue that we're in.
Thanks, Nick if you the comments good luck.
Our next question is from Chad Dillard with Bernstein. Please proceed.
Good morning, everyone. This is Brandon on for Chad.
Okay.
A quick question so based on the conversations in the backlog right now or what are you guys expecting in terms of customer mix next year in terms of like rental car national rental companies versus the independent rental companies.
Yeah, I can I can take that one the mix first of all just backing up we saw a pretty similar mix.
Year over year, this year slightly heavily more weighted towards.
Towards the nationals each of last two years, so bad that over 50%. We expect similar mixes going forward, we don't expect a major mix shift there.
Cool and then one follow up how should we think about for defense the topline in 'twenty two and then it goes into 23 can we expect to see some growth in the business and 23 on top of the USPS does.
Sure as we look at at at 2022, as we've as we've been saying over the last last couple of years. We do expect that your LTV volumes are going to be lower that is going to put downward pressure on defense as revenues and obviously and really as we think of.
2022.
We're not going to see much of any U S. P. S revenue.
We will have some medium caliber weapons system revenue, we'll start seeing a build of that in 2023 with a more robust in 2024 and really tied to the ramp up of USPS, which will happen in the in the back half of 2023.
A brand in a way this is John the way to look at our defense business, it's really a growth business today.
Today, it's primarily tactical wheeled vehicles, and that's a great base business for us tactical wheeled vehicles tend to go through cycles, where theyre growing and then cycles, where they're not growing.
But there are critical enduring programs for the department of Defense why do I say this is a growth business. It's a growth business. Because we are winning adjacent programs that are material in nature and that are going that will drive growth from say the second half of 'twenty, three or 'twenty 'twenty four.
Onward, it's programs like the MSC Ws program and more importantly, the United States Postal service program. These are big programs driving growth and we're competing for a lot more so having this business where he got this base of tactical wheeled vehicles that we know how to how to execute on.
Plus adding incremental program wins that drives a growth business over the next.
Three to five years.
Great. Thank you.
Thanks.
Our final question is from Tim Thein with Citigroup. Please proceed.
Great. Thank you.
And Mike.
Minder earlier in terms of.
The LIFO accounting I, certainly think that's at least a play some role in that.
The difference in terms of some of the near term performance versus peers, but.
Just the question John.
To continue along that last train of thought in terms of the growth prospects for defense how do you.
Or how should we think about that.
That in the context of some of the recent press reports about.
Potentially so.
Our larger cuts to J L. T V digital T V volumes.
Sure, there's a timing aspect to that but maybe you can just kind of update us on your thoughts there. Thank you yeah. So hey, here's how I think about J L. T V.
They the present the recent presidential budget would indicate that 2022 volumes will be down.
And 'twenty three will likely be down. These these these programs go through their ups and their downs.
What the thing that we always focus on is the the Army's acquisition objective still is about 50000 vehicles I think it's precisely 49900 vehicles and then the U S. Marines went from 5000 and increased it all the way up to 15 or 16000 units and to date, we've shipped about 30.
<unk> thousand 500 units. So you can see in terms of the long term objective for the army and the Marines. The two biggest customers are we still have a long way to run with these programs. These programs are for J L. T V. This J LTV program will go well into the 20th forties beyond 2040.
And as you that's why I say this is a great base business and I was going to be up years, and theres going to be down years based on presidential budgets and priorities and so forth and what's happening around the world. But these are fundamental programs for the army and the Marines to to operate and so it's great base business and then we build on top.
Top of that some of these other program wins that we're getting and it's and that's why our defense business is a really nice growth growth platform for us as a company.
But we focus on the Army's acquisition objective long term that 50000 units and the Marines acquisition objective, that's what we focus on.
Knowing that there'll be ups and downs from year to year.
Got it okay.
I'll just leave it there thank you.
Thanks, Tim.
We have reached the end of our question answer session I would like to turn the conference back over to management for closing remarks.
So want to thank everybody for joining us today appreciate your interest in Oshkosh Corporation.
And wish everyone a.
Safe and healthy.
Next quarter.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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