Q1 2022 Oshkosh Corp Earnings Call
Pat and good morning, everyone.
For the quarter, we reported sales growth of 3% with adjusted earnings per share of <unk> 24.
Modestly above the expectations, we shared on our last earnings call.
As expected, we experienced peak level price cost headwinds during the quarter, which challenged margins throughout the company, we expect price cost dynamics to improve in the second quarter and into the second half of the year as we begin to more fully realize the benefits of higher pricing levels.
Customer demand remains healthy as evidenced by strong order activity during the quarter and record high backlogs are long term growth outlook is strong.
Early in the quarter, we experienced modest improvements in supply chain and commodity costs. However, the Russian invasion of Ukraine is cause further inflation pressure and parts constraints across industries. In response, our teams acted quickly and implemented additional price increases.
Our nondefense segments in fact, many of these adjustments in the access and commercial segments were effective immediately we are also closely monitoring COVID-19 related lockdowns in China. As this is impacting our production in parts availability in China as well as global supply chains.
I am proud of the efforts of Oshkosh team members, who have shown their grit and determination as we work to overcome supply chain disruptions freight and logistics challenges as well as workforce constraints.
During the quarter, we received our first order from the United States Postal service for our cutting edge next generation delivery vehicles. We have also remained active in the M&A and investment space, We purchased cart seeker technology during the quarter and just yesterday, we completed a minority.
Investment in robotics, and autonomy leader robotic research you've heard US talk previously about the benefits, we expect to generate with programmatic M&A and investments. These are important steps in our journey to drive accelerated growth.
Also ethisphere once again named Oshkosh is one of the world's most ethical companies. This is our eighth consecutive year to be recognized and is emblematic of our strong culture rooted in doing business the right way.
In light of a more difficult supply chain and cost environment. We are updating our 2022 adjusted earnings per share expectations to a range of $5 to $6. Mike will provide further discussion on our expectations later in our presentation.
Please turn to slide four and we'll get started on our segment updates with access equipment.
Our access team grew sales by 20% over the prior year quarter as the team continues to execute in spite of short term challenges.
Despite ongoing supply chain disruptions and elevated commodity prices our team at J LG has taken many positive steps to improve the capacity and resiliency of our supply base, we saw pockets of improvement with our supply chain on time delivery metrics, but these metrics remain well off historical levels.
<unk>.
Progress continues with the ramp up of additional production lines at our Bedford, Pennsylvania in Jefferson City, Tennessee plants, which should facilitate higher production rates going forward. The access team has done an outstanding job of executing these key capacity expansion projects, which allows us to continue to incur.
<unk> production to meet strong demand.
During the early part of the quarter commodity and freight costs began to moderate as we expected as I mentioned in my opening remarks, Russia is invasion of Ukraine cause fuel steel aluminum and numerous other input costs increased sharply once again.
<unk> and additional risk to our outlook for the second quarter and back half of the year. In response, we implemented additional surcharges surcharges on shipments beginning April one as we work to mitigate these headwinds.
Orders were strong once again at $1 3 billion in the quarter.
Market fundamentals are robust supported by high utilization rates and elevated fleet ages. We only recently opened up opened our order books for 2023 and are already gaining solid visibility to requirements across our customer base for next year, we expect strong orders in the <unk>.
Second quarter as we finalize many 2023 annual purchase agreements leading to our positive outlook over the next several years.
Please turn to slide five and I'll review, our defense segment.
Revenues for the defense segment were lower in the quarter versus the prior year quarter as a result of lower tactical wheeled vehicle budgets that we've been discussing for a while.
However, as we look to late 2023 and beyond defenses and exciting growth segment as new programs such as the N G Dv and Stryker <unk> begin to ramp up our operating margin in the quarter was lower than we expected as a result of unfavorable cumulative catch.
Up adjustments due to increased input cost expectations, we do not expect margins to be notably lower on a prospective basis. At this time, Mike will provide further details in his section.
We continue to execute the J LTV program, well and are actively engaged in the recompete process during the quarter. The army extended the bid submission date from April to July of 2022 as a result, we expect the final decision to push out from September to the December 2000.
'twenty two time frame.
As a reminder, we won the J LTV competition seven years ago, knowing that it would be re competed and we believe we are well positioned to retain a significant program.
I mentioned, our USPS order in my opening remarks. The first order is for nearly $3 billion and includes a total of 50000 units.
<unk>, approximately 10000 units or battery electric up from prior expectations of approximately 5000 units and we have given the USPS the option to convert this order to an even richer mix of Evs should they have the funding to do so.
<unk> continues as we prepare our factory in Spartanburg, South Carolina for production and we look forward to supplying the USPS with these innovative new vehicles.
You've heard US talk previously about the many adjacent market growth opportunities. We're working on in the defense segment. One of the most significant adjacent programs is the stryker medium caliber weapons system.
We are very pleased with our progress on the program. The fiscal 2023 President's budget request was published a few weeks ago and contains solid funding for the <unk> program as well as our other key programs. These adjacent programs as well as the UBS contract USPS contract.
Provide defense with a strong long term growth outlook, beginning late 2023, let's.
Let's turn to slide six for a discussion of the fire and emergency segment.
Demand is strong for our industry, leading products and the fire and emergency segment production and deliveries were constrained in the quarter as a result of supply chain disruptions and workforce challenges.
These disruptions led to manufacturing inefficiencies and lower sales both of which impacted profitability.
Operating margins improved sequentially as we expected and we expect <unk> to deliver solid double digit operating margins for the year as we benefit from price increases previous previously implemented and additional capacity that will be coming online later in the year and into next year.
Orders remained strong at nearly $660 million during the quarter, leading to another record backlog, we announced a price increase effective February one and another price increase effective may one.
<unk> Tara electric pumper is performing well for the Madison, Wisconsin Fire Department and we just completed the next unit for Portland, Oregon, The Madison in Portland units will be showcased at the FDIC trade show in Indianapolis. This week, we will also debut our next generation Park.
Our peers ultimate configuration custom pumper unit, which offers a proprietary pump placed under the cab, resulting in best in class storage and productivity benefits for firefighters.
The Voltaire electric Arf has been generating strong interest with airports around the world and will be showcased at the <unk> Expo in Hanover, Germany. In June we will also be conducting demonstrations of the unit at several European airports. This summer these innovations continue.
<unk> to position, our fire and emergency segment as the market leader.
Please turn to slide seven and we'll talk about our commercial segment.
The commercial segment grew revenues over the prior year quarter and made progress to a more typical level of profitability in the quarter. Despite experiencing the same price cost and supply chain challenges that I've mentioned with our other segments, which affected volumes and margins are.
Our focused factory approach as part of our simplification mindset is gaining momentum and supports improved performance over time.
The commercial segment has remained disciplined with pricing actions, which we expect will drive higher margins as we progress through 2022.
We've seen some signs of chassis availability improving but it remains a primary focus in this segment as commercial is our biggest user of third party chassis.
Additionally, certain control modules and other components have also been constrained impacting our ability to ship on pace with demand.
During the quarter, we acquired cart seeker, curbside automation technology cart seeker complements our ongoing work with autonomy by providing operational simplicity and high performance to customers throughout through patented AI based recognition technology.
Demand for our Cvs has been solid reinforcing our positive outlook, we have been working closely with our customers on requirements and many want to begin placing orders for 2023, we have not fully opened our order books for 2023, as we are continuing to watch and evaluate commodity markets.
Our team will be attending waste Expo in May and we believe it will be a very well attended show there is a lot of excitement in the industry surrounding evs in autumn and automation.
R E PTO RCV bodies for EV chassis are performing well in the market and our cart seeker automation technology shows great promise demand for this type of technology in the environmental services space continues to strengthen and we believe we are well positioned for this positive long term trend.
With that I'm going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2022.
Thanks, John and good morning, everyone. Please turn to slide eight before I begin I want to remind everyone that all comparisons to the prior year quarter or to the three months ended March 31 2021.
Starting with first quarter results consolidated sales for the quarter were $1 $95 billion or $57 million higher than the prior year quarter, representing a 3% increase the consolidated sales increase was largely driven by a 20% or $145 million increase that access equipment due to strong demand.
And particularly in North America, partially offset by lower sales at defense due to lower <unk>, TV and <unk> TV volumes.
Consolidated operating income for the quarter was $29 $3 million or one 5% of sales compared to adjusted operating income of $143 3 million or seven 6% of sales in the prior year quarter consolidated operating income decreased due to unfavorable price cost down.
Mix and increased manufacturing costs due in part to component shortages in labor challenges offset in part by improved mix, our consolidated price cost headwind in the quarter came in higher than prior expectations at approximately $125 million, which impacted adjusted earnings per share by approximately.
$1 40.
Adjusted EPS for the quarter was 24 cents compared to adjusted EPS of $1 48.
Prior year quarter.
During the quarter, we amended and extended our credit agreement to March 2027 in conjunction with the extension, we repaid our outstanding term loan with a balance of $225 million at December 31, 2021, and increased our revolver availability from $850 million to $1 1 billion.
We repurchased approximately 751000 shares of common stock for a total cost of $85 million during the quarter. Please.
Please turn to slide nine for a discussion of our expectations for 2022.
Companies around the globe are facing more challenges in 2022 than previously expected just a quarter ago. The most notable changes Russia's invasion of Ukraine prior to the invasion steel aluminum and freight costs had moderated now we're experiencing pronounced increases once again.
Recent COVID-19 related Lockdowns in China are affecting parts availability for our China facility and have introduced additional volatility to global supply chains, while we experienced pockets of supply chain improvement during the quarter. We also experienced more challenging supply chain environment in some areas, including in our fire and emergency segment our previous.
Outlook assumed moderate supply chain improvements throughout the year as we are speaking today as the pace of supply chain improvements remains uncertain.
With commodity and freight cost trending up again all of our non defense businesses have remained agile and have taken additional pricing actions, notably some of these pricing actions are effective on orders and backlog just to mitigate some of the additional price cost headwinds we're facing nonetheless, there was a slight timing lag.
As we said on our last call, we expect price cost headwinds remain at peak levels in the first quarter, which was the case, while new cost pressures have emerged which will impact the year. We do expect improvement in price cost dynamics in the second quarter. We expect further improvements in price cost dynamics in the second half of the year, where we expect to.
Largely price cost neutral in total we expect price cost headwinds of approximately $180 million to $200 million for the year compared to our price cost baseline before the rapid escalation in 2021. This is up from our prior expectations of $140 million to $150 million for 2022.
With the primary impacts in the first and second quarters.
On a consolidated basis, we expect sales of eight 1% to $8 $6 billion in 2022, an increase of $100 million at both ends of our prior range. We are estimating operating income of $475 million to $560 million compared to our prior expectations of 545.
$625 million.
Reflecting increased price cost pressures and manufacturing inefficiencies driven by supply chain disruptions as well as direct labor constraints. We now expect adjusted EPS of $5 to $6 per share compared to our prior EPS range of $5 75 to $6 75.
At the segment level, our sales outlook at access equipment is now three eight to $4 2 billion, a $100 million increase compared to our prior expectations, primarily driven by additional surcharge revenue as a result of our recent pricing action demand remains robust through our revenue outlook is largely.
Dependent on parts availability for the remainder of the year. We are estimating that access equipments operating margin will be 8% to 875% down from our prior estimate of 9% to 10% increased freight and component cost as well as manufacturing inefficiencies are contributing to our lower expectations.
The recently announced surcharges should begin to mitigate incremental cost impacts during the second quarter.
Turning to defense, our 2022 sales expectations of $2 2 billion remains unchanged. We now estimate our defense operating margin will be approximately six 5% versus our prior expectation of 7% the more persistent inflationary environment caused a higher than expected cumulative catch up.
<unk> in the first quarter.
The unfavorable cumulative catch up adjustment impacts full year margin expectations. Our defense segment has done an outstanding job mitigating the impacts of inflation with our overtime method of accounting consistent with ASC 606 changes in inflation assumptions can trigger trigger larger adjustments in a single quarter, but importantly.
Our overall program margin.
Expectations are only modestly lower than our prior assumptions.
Fire and emergency segment sales expectation expectations remained largely flat to prior expectations at approximately $1 2 billion for the year, we expect the operating margin in the fire and emergency segment to be approximately 11 to 11, 75% for the year down from our prior expectations.
<unk> of approximately 13% the decline in margin expectations is due to increased supply chain disruption and staffing challenges contributing to labor inefficiencies as well as additional cost pressures.
We continue to estimate sales of one to $1 1 billion in the commercial segment in line with prior expectations and we are expecting operating margins for this segment of approximately six 5% down slightly from prior expectations of 7%.
We estimate the adjusted tax rate for 2022 will be approximately 22, 5% and we are estimating an average share count of $66 5 million shares.
Our expectations for Capex and corporate expense remain unchanged from prior expectation and our expectation for free cash flow is now for approximately $425 million versus our prior expectation of approximately $500 million driven by a decrease in expected income.
Looking to the second quarter, we expect consolidated sales to be approximately flat versus the prior year quarter with access equipment up approximately 15% and defense revenues down by approximately 20%, we expect additional price realization in our non defense businesses during the quarter as more of our sales will include price.
Increases in surcharges implemented over the past year, we expect a low to mid single digit consolidated operating margin in the quarter, which represents a solid improvement versus Q1, but well below our margin expectations in the back half of the year I will turn it back over to John now for some closing comments.
While we are facing short term challenges with global events that have emerged over the past quarter the market dynamics in all of our businesses remains strong.
We have market, leading innovative products and we are demonstrating leadership in this highly inflationary environment.
We remain confident that the actions we are taking will enable us to return to stronger margins in the back half of the year and into next year. We are excited to see many of you next Friday at our Investor Day at the New York Stock Exchange.
We're going to share our out year targets for sales and earnings as well as key growth drivers in our businesses.
You will also have the opportunity to meet the newest addition of our leadership team J E Hunger, who serves as our Chief Technology Officer, and Chief source strategic sourcing officer she'll be sharing many of the exciting new technologies that we're developing.
Pat back to you.
John I'd like to remind everyone to limit their questions to one plus a follow up and we need to be disciplined on the follow up question. Please after the follow up we ask that you get back in queue, if you'd like to ask additional questions. Please do so.
Operator, please begin the question and answer period of this call.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is no question queue you.
You May press Star two if you would like to remove your questions in the queue.
For participants using speaker equipment, it may be necessary to pwc and so people are precedents darcie one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Thanks, very much good morning, just within the low to mid single digit margin outlook that you have for the second quarter can you just give us a little help on what the dispersion is there by segment.
Yes.
Sure I can take that again.
We're going to see progression really in all the segments I would say sort of a.
A similar progression.
Across the board so I don't one segments, not really standing out notably versus others, I would say maybe access a bit higher.
And again, a lot of what's really driving that progression to the second quarter as the cost price.
Hundred $25 million in the first quarter, we expect that to be about 65 in the second quarter is significantly more price comes online.
Okay. That's helpful and I guess, just continuing on with the second quarter I mean, it seems like you took most of the guidance reduction in the second quarter.
I guess I am curious at this point how de risk do you think that second quarter is.
I guess kind of similarly for.
For the second half.
How much risk what do you see the biggest risks from here for that second half.
Sure and I think it may make sense to just step back for a minute just on that progression because obviously by our implied guidance you can see that the second half as we've been talking about for even back at the last earnings call was notably higher so it's really the price cost phenomenon and and pricing as the stories.
Again, I just mentioned.
Between the first and second quarter, we see about $190 million price cost headwinds that was up versus our prior expectation we have a lot more price coming online in the second quarter and then in the back half of the year were largely price cost neutral, but one of the things, causing additional pressure obviously following the.
We all saw the commodity and component and freight markets go up following the Russian invasion of Ukraine, We saw some nice decreases leading leading up to that earlier in the quarter.
But we took immediate action at access in commercial where we saw some of the higher inflation impact and that price is coming online fairly quickly. So even by as we exit the quarter, it's really solving for that additional inflation that we're seeing and that's why.
You see a notably different margin profile in the back half of the year. So it's really we see the price in backlog the level of price increases we've implemented between 15 and 20% plus.
Crossed our segments is really the big driver and by the time, we exit the second quarter, we're going to be realizing price at that level.
Thanks, Steve.
Our next question comes from the line of Tami Zakaria with Jpmorgan. Please proceed with your question.
Yeah.
Hi, good morning, Thanks for taking my question so.
My first question is what's the magnitude of pricing that you're taking for next.
Yes, 2020 orders for the equipment.
The admin segment, meaning.
Meaning are you aiming for price cost neutrality.
For next year.
Thank you recoup some of the margin loss this year.
Tammy This is John that's a great question.
You know we have done a lot of pricing actions over the over the past year as Mike just described our second half gets materially better because we start we start to get that backlog at full price versus versus what we're doing now which is clearing backlog at old price. So we have not yet fully opened 2023 yet for orders.
We're actually having negotiations now in the access equipment segment for example on annual purchase agreements for 2023.
And we have clauses that we've now put in place a stagnant business a little bit differently that give us in 2023 as we take orders will take we're taking orders today at full price we will take orders for 23 at full price, but we will also have conditions, let's say should there be further escalation in material costs, we will have pricing escalators.
Or the ability to re price at the time of manufacturing and delivery. So we feel pretty good about what we're doing in 2023.
And quite frankly.
That's what we have to do because of the big.
A big backlogs that we have in the long lead times that we have right now and so that's a little bit of a different way for us to operate but it's the right way for us to operate.
Got it makes sense and my follow up is.
I think it seems like your price cost headwind expectation.
It is now an incremental $40 million to $50 million versus what it was.
Last quarter.
But then youre operating.
Guidance is lower by call it about $60 million to $70 million.
What is the Delta what line item is driving that delta between your operating profit guidance and incremental.
Sure Yes.
Yes, you are correct. The first and largest piece is the price cost and thats largely hitting the first half of the year as you pointed out.
Other large large piece of that is manufacturing inefficiencies as I mentioned in my prepared remarks with the lumpy supply chain that is having an impact on manufacturing efficiencies. So thats really the other piece of it.
Got it and Thats also.
Do you need to test.
Don't expect manufacturing inefficiencies in the back half.
We do expect that supply chain moderate somewhat over the course of the year from a delivery perspective, but to be clear, we're not expecting it to be perfect by the end of the year and our guidance does obviously accommodate a range of scenarios there.
Thanks Danny.
Thank you.
Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.
Hi, Thank you I'm just curious the backlog in access.
Is about $8 million to $900 million more than the rest of the year implied access sales. So obviously it.
Its visibility into 'twenty three to some degree if I'm doing that math right.
That's right David can you give us some perspective on that 850 ish million of backlog that's already earmarked for 'twenty three a little more granularity on is that early conversations with majors and independents looking to get ahead I'm just trying to get a sense of the.
The the demand where it's coming from 'twenty, three where they are willing to lock in business already and so you can yes, David as I said before we haven't fully opened our 2023.
Her book, yet, but we have completed some purchase agreements for 2023 with some of our customers.
<unk>.
I can't back up my has a mix of Irc's and a couple of larger nationals, but those are those are reflective of those purchase agreements that we've concluded that are in the backlog and anything unique about the mix from aerials big booms versus scissors or <unk> any color on that and I'm just curious on the mix.
But from a mix perspective, what we're seeing is continued robustness in all the categories and Thats really aligns with what the fleet ages really all the categories are quite aged.
Really record levels at this point.
So the follow up then on the margins in the back half of this year for access feel like they're kind of north of 12% or so assuming kind of mid single ish, a little better for the June quarter, and I'm just trying to think about that as you think about 'twenty three and I guess you've hinted at this we will get some color next fraud and how youre.
About access margins can you give us any perspective, and I'm not asking for 'twenty three guidance, but youre going to touch bigger picture views of access profitability at the meeting can you give us any perspective, how to think about that 12% plus in the back half of the year and how that might.
Lead our thoughts on 'twenty three thank.
Thank you.
I would just say overall with margins for access obviously as we've talked about a lot of the price cost dynamics, we've had werent access and we have a lot more price coming online and as we've talked about a lot over the last several quarters, we're taking the right actions to get our ticket our margins back to what we expected.
And we believe we are well on the path to do that obviously its been.
[laughter] as unique set of circumstances over the last the last year or so, but we believe we're well on track to get back to those normal margins in access and David I think what you'd see in the back half of 2022 is indicative of what.
We will do in 2023.
Helpful. Thank you so much.
Thanks.
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good morning, I guess, just my first question on defense understanding the puts and takes of what you said about margins for 2022, but they are sort of below where we would have hoped I'm just I'm just thinking defense margins until the postal service award starts to kick in in the back half of the year is that how we should think about margins. So does that.
Headwind sort of continues into 2023 or is there any reason to be.
More optimistic there and then my other question or follow up question is.
It's nice to see you guys are putting the surcharges out there I mean I think you said April is when you announce them.
Did you see any deterioration in orders after the surcharge or maybe perhaps a pre buy ahead of the announced surcharge, which led to above average orders in the quarter. Thanks.
Sure I'll start with the first one on defense margins and John can talk a bit about the.
The surcharges.
In the quarter, we had so with with the Ukraine invasion.
By Russia with commodities going up with our accounting method basically you have to look out and the inflation environment is now viewed to be a bit more sustained and what that does is you have to look out in those contracts and calculate your estimate to complete that caused that cumulative catch up adjustment, we're about 75% delivered.
And the majority of our contracts that you have a catch up all at once.
I think as John and I said in our prepared remarks, we don't expect that our program margins are are notably lower going forward because of that actually defense has done a nice job managing it and it really goes back to you really need to look at defense margins over time, So I would I would expect that generally from a cumulative catch.
Our perspective, that's not necessarily a headwind that were that in our base expectation for the rest of the year that we're expecting so I would expect stronger margins through the remainder of the year. You are correct, we do expect that.
Margins in general are going to if you look at sort of our guide our initial guide for the year sort of hovering at the.
High single digits.
Until our new programs start ramping up that's where we're going to see growth return in that.
The defense segment with <unk> as well as Mcw us and some other adjacent programs so and that begins late 2023.
Yes.
Add to that Jamie.
And besides defense is a growth segment for us.
Now it doesn't feel like that in 2022, but we've been talking for a long time, knowing what the presidential budget, where the 2022 would be a lull year for for tactical wheeled vehicles as Mike said, we get into 'twenty three we start to bring programs online like the Stryker program like the United States Postal service. These big programs. This drives long term growth in both revenue.
And earnings.
It's great for our business just a quick comment on surcharges that you talked about we didn't see any material pull forward because of surcharges and we also did not see any material slowdown in order rates because of our pricing and our surcharges are order rates have been strong.
The only reason you might have seen a little bit of slowing in the first quarter of this year versus the comparable quarter a year ago is because we haven't fully opened 23 yet.
We're working all of those annual purchase agreements now so order rates have been strong even at full pricing and even our surcharges.
We don't like to do surcharges, it's based on the realities of what's in the in the.
Logistics environment today and.
That's why we have to do it but the business is strong.
Okay. Thank you.
Thanks, Jamie.
Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Hey, good morning, everybody. Thanks for taking my question I wanted to go back to the surcharge it sounds like kind of a difference in the way you guys are doing business, which makes sense in an inflationary environment, but are you essentially like for the second half are you basically able now to sort of cover whatever.
<unk> happens on the cost side with surcharges kind of in real time or is there still a lag or is there maybe a percentage of the business that surcharges don't touch.
I'm just trying to get a sense of kind of how protected you are in the second half if things change.
Sure I could actually actually take that one.
So the surcharges.
Kick on fairly quickly in the second quarter. There is of course, a little bit of lag.
And.
In some circumstances, but not not significant so we're really realizing all the price in the back half of the year.
And really without exception.
We're going to continue. These are these are times, where things are moving rapidly. So we're continuing to watch leading experts projections on commodities.
We're watching what costs, we're incurring and so on in that.
We're going to we're going to definitely remain agile and if we need to take further action, we're certainly going to do so.
Okay, Great and then probably the second half of that question is just on the cost side are you locked in essentially for kind of <unk>.
2022 costs.
Or are those still pretty variable depending on market conditions.
For steel and aluminum were locked to a particularly hot rolled coil steel.
Talked about on previous calls, we're locked up just north of 50% on those.
Obviously as we get through the year, you have more and more visibility of that other piece.
Obviously with the volatility of the futures market is not great right now for doing additional locks.
On that aspect of it and certainly freight is freight spend the one thats.
And particularly volatile.
Really following the.
Fuel prices going up following the invasion, but.
It's something that we're just going to continue to monitor and we're going to act quickly as we see as we see changes.
Great. Thank you.
Thanks.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Okay.
I'm wondering if you could just talk about on the <unk>.
Postal service contract do you have pass through on commodity setup, given the inflation we've seen.
<unk> costs in particular, I'm wondering how should we think about your commodity exposure.
On that contract and if you can comment on which contract drove the majority of the cumulative catch up adjustment this quarter in defense as well thanks.
So I'll start with the postal service contract.
The postal service contract relatively well protected on this contract is two things to talk about number one.
An economic adjustment in the contract, which helps protect us for a significant amount of inflation, but the other side of it is we've got long term agreements with a lot of our suppliers and now theres not long term agreements on everything so there's a little bit of exposure as you look to our supply base for postal, but theres also a lot of protect.
And with with agreements that we have with our supply base. So we feel pretty good about where we are with the postal contract I'll, let Mike comment on the.
The cumulative catch up adjustment sure on the cumulative catch up adjustment is really on the major tactical wheeled vehicle programs really in proportion to the size of those programs again it was.
As you look at the components and just the anticipation of a bank extended.
Horizon for the inflation, we are seeing it.
Cause that it's fairly pro rata across the programs.
Okay, Great and then given the move higher in costs in the first half of the year I Wonder if you could just comment on is that a function of.
Suppliers declared force majeure and setting up.
New prices to you folks or is that having to be flexible go into second and third tier suppliers at spot can you just talk about the drivers of the near term.
Volatility given.
Factors you mentioned earlier on the call. Thanks.
Sure I would say freights definitely a big piece of it and Thats obviously.
At freight generally happens a bit more real time, so that's a piece of it but obviously a lot of a lot of movement in suppliers in general.
And particularly what that with commodities escalating following.
World events and the other thing we're obviously watching very closely is just the <unk>.
The Lockdowns in China.
As well, obviously that that could have some some impact on supply chain, but in general.
Sure.
It's really a combination of factors that are driving it.
Yeah, and just to add a little color on that Gerry.
I had mentioned I think in my opening remarks, we felt pretty good when we were in the early part of Q1 in January with as Mike mentioned earlier, we used an aggregate of forecast for commodities.
Material cost inflation, and then as we said a couple of major of events have happened with.
The Ukraine and with China's Covid situation, which is to change those forecasts, which is which is essentially what put us into the position to.
To see some some new cost escalation. It is happened both of the commodity at the commodity level, but also we have a lot of.
A very strong suppliers and they've seen the same thing and they have come with.
Some accelerated price increases, which is also caused us to adjust some of those forecasts. So.
And then there's the freight side, which Mike Mike talked about I mean, it's all of those things changed dramatically in the middle to the end of the quarter right right.
Thanks Jerry.
You.
Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.
Hi, good morning, guys.
Okay.
So in your revised guidance I, just wanted to understand what you're assuming about the supply chain just like the slope of that improvement.
And then also if you can quantify that.
Manufacturing cost absorption that you're seeing year on year and then just lastly.
Just wanted to confirm whether the surcharge.
Air freight as well.
It includes all for all things.
Alright related.
Hum.
Yes, so for the so that was.
Yes.
Sorry, I, just lost metric supply chain supply chain from a a moderation standpoint, where we're expecting it to moderate gradually over the course of the year, but back to.
Even believe comments last quarter, we're expecting that it does not need to be we don't expect it to be necessarily perfect by the end of the year. So it improves it expect some moderation but not.
Back to maybe fully traditional what we've traditionally seen.
Again, it's based on those that aggregate of third party forecasts and we believe and we believe it is relatively conservative.
We've talked about a deteriorated in the middle of the quarter due to some of these external events, but it's not expecting any miracles to happen, it's relatively conservative outlook on where things should be expect to be.
Got it Okay, and then I was hoping also that you could breakdown your access outlook.
By geography, and just in terms of how you're thinking about revenue growth expectations for the year.
I would say generally similar to what we saw in the first quarter North America was the strongest but we're seeing.
Europes relatively robust as well, China, obviously with the Covid lockdown and so on that that's probably under a bit more pressure.
So I guess, that's how I'd characterize the majority the most meaningful growth is really coming from North America.
The access equipment market in general is very strong I want to emphasize we see continue to see and it's reflected in our backlog and our strong order rates multiyear growth segment.
Growth ahead of us and it's driven by fundamentals, it's driven by.
The aging of equipment, which we know the data of the most age we've ever seen the boom market for example.
Used prices are really high nonresidential construction forecasts are pretty good in terms of the growth of that that's a key indicator for access equipment. We're also seeing continued increases in applications for the equipment. So there is even the need for fleet growth.
And all of this is leading to strong growth of the segment.
For several years into the future.
We're also seeing that phenomenon unfold in Europe , where we're starting to see eight an aged fleet in Europe , and we expect that to continue to push up demand.
So a lot of positive things about the access equipment market on.
On the horizon.
Thank you.
Thanks, Chad.
Our next question comes from the line of Mike <unk> with D. A Davidson. Please proceed with your question.
Hey, good morning, guys.
Good morning, Thank you.
Can you maybe just talk about the backlog in the quarter.
Segment.
I was curious about the entire LGBT order was put into that.
Backlog and whether any major chunks.
Other programs window as well if you back out the entire program.
Perhaps backlogs were down a bit from the prior quarter. So, it's probably a little bit color about what.
The bigger Farnsworth.
Okay. Good question I, just want to clarify Mike.
So the order that we received was the first order or U S. Postal service, it's about $3 billion that went into the backlog, but thats not the entire program. That's the first order for the program.
Just want to make sure that that was clear so thats in the backlog.
That's the primary driver of that defense backlog.
Yes, and I would say just in terms of the other items in backlog with tactical wheeled vehicle budgets.
Being in flowing they're down a bit that obviously does put some downward pressure.
On backlogs for those programs and those.
Backlogs on the tactical wheeled vehicles really varies based on.
We are still extended while out beyond this year from a backlog perspective. So we still have good visibility. So a lot of that again just comes down to the timing of those tactical wheeled vehicle orders.
Got it.
I also wanted to ask secondly, commercial about concrete versus.
Refuse.
It looks like you didn't have a great quarter. This past quarter I mean, both of those models those products do use commercial chassis. So.
Just give us an outlook and some color as to how concrete Michael made progress throughout the year.
223 here.
Yes, I'll take that the commercial business. The backlog is strong the strongest we've seen in a long time and it's across both the refuse and concrete markets. The reason you saw the concrete was a little bit subdued in the quarter was purely because of the supply chain and our ability to produce based upon what we could get.
Now some of that is chassis and sometimes it's control modules and electronic units we can't get.
So it's a number of things chassis or probably the headline but both of those businesses have good backlogs and good order rates and are running strong it's purely back to what we've been talking about earlier supply chain constraining our ability to ship units.
Okay. Thanks, so much thank you Mike.
Our next question comes from the line of Mig <unk> with Baird. Please proceed with your question.
Thank you good morning.
Just going back to access.
A couple of questions you mentioned that youre using escalators as far as pricing goes into 2023, and I'm sort of curious.
That essentially cuts both ways right.
In terms of both.
Commodity inflation, but potentially exposing us to lower input costs as well as far as the pricing goes.
And then related to this.
I think I heard you say that right now.
Looking at price increases at 15%, 20% and I'm presuming that that applies to act with equipment as well.
Your customers how are they sort of taken these kinds of pricing increases.
Is there.
Any sort of pushback, especially from your larger customers when it comes to.
Just kind of move in price.
Yeah, I'll answer the price side of that Mig.
Nobody likes the environment that we're in.
Everybody's dealing with it in every industry that there is.
And we try to be very very transparent with our customers and of course very fair, we don't like to have to increase price, but its the realities of the climate that we're in.
And so ultimately.
Our customers understand why we're doing what we're doing our prices have been sticky.
We have not had issues with.
<unk>.
Sure.
With our order rates dropping are getting big cancellations, because we've got price increases.
That has not been the case, our order rates continued to be strong at full price.
And.
Yeah.
That's one.
I'd say, if I can't be any more clear than that.
The first one your comments on the escalator.
Yes.
<unk> costs are coming down in 2023 Thats good news.
That's all I'll say about it.
We'll have a lot better ability to drive that.
To drive the margins that we expect which we'll see in the second half of the year.
We've got a situation, where we're seeing a lot of costs coming down.
That's all I'll say about that.
Right, but I'm sorry to press you on this there's a difference between a price increase in an escalator and escalator would imply to me that.
Things move both ways and I'm just trying to understand how you are setting up the contracts just to be clear.
Well.
I'll be albeit as basic as I can about it it gives us the right.
Based upon from the time, we took the original order until the time that we ship if there is a material shift in.
Material cost.
We can reprice the product.
That's that's what we have negotiated for 2023.
Orders that we're taking now.
Okay.
And then lastly on defense.
I'm curious, if you're able to tell us.
From from Whats already in the backlog from the USDA, how much of that gets delivered into 2023.
And we talked a little bit about margin you talked about some of these contract.
Contract adjustments.
As we look into 2023 is it fair to assume that margins can start normalizing towards that double digit run rate that we're kind of seeing two or three years ago or is that too optimistic at this point.
Yeah.
Just in terms of pull full service deliveries, we're really talking about the back half of the year. So it's not it's not going to be a material portion of revenue yet.
In 2023, Youre going to start seeing a much more meaningful ramp in <unk> and 'twenty 'twenty four and beyond so I think.
That's just sort of a baseline in terms of the margins once we when we have a cumulative catch up adjustment we have it sort of resets our baseline of what we expect margins going forward. So.
Ultimately things that could change it as if commodities come down faster that type of thing, that's where you could see some higher margins, but again because there is an unfavorable cumulative catch up adjustment that's not reflective of the program margins in the quarter that we delivered at our margins on the program as I said in my prepared remarks are only.
<unk> modestly different but again with if you're estimating this large contract your estimate at complete and you have some inflation and you changed that assumption you can have a bigger impact in a single quarter. So again, we do not expect that.
Defence margins going forward to be meaningfully different than what we've seen over the last the last year or so.
In quarters, where we didn't have that cumulative catch up adjustments.
Thanks, Mig alright, thank you.
Our next question comes from the line of Nicole <unk> with Deutsche Bank. Please proceed with your question.
Yes, Thanks, guys. Thanks for squeezing me in here good morning.
Good morning.
Can we just maybe talk a little bit about I I hate to beat a dead horse I know theres been a lot of questions about the surcharge on price costs, but like is what youre doing consistent with what youre seeing with peers in the industry like it is this like has everyone's sorry at instituting surcharges like what are you seeing from a competitive perspective on pricing.
Well, what I can say about competitive pricing is just very very general all of our competitors are of course, increasing prices. There at the same the same climate that we're in.
And that's regardless of segment, where we are that we operate in.
I'm not going to go into who's doing pricing and who's doing surcharges.
We try to analyze our business based upon the realities of what we are seeing.
And.
<unk> recently with the surcharges, it's all related to logistics and freight.
And theres been a lot of disruption that continues to happen with with freight which is causing cost to continue to go way up and so our analysis told us the surcharges are the best way to deal with it.
But all of our competitors are doing something and.
I'll leave it at that.
Okay. That's helpful. Thank you and then Theres been a lot of discussion on access and defense on this call, but just maybe one on fire <unk> emergency I think the margins came in a little bit weaker than expected in the first quarter. Just I know you guys have embedded a path back to double digit margins. There is it just price costs in that segment or are there any other major factors that we.
Should be thinking about.
There is some price cost, but I'd say its much.
Less than relatively speaking than.
Like access and commercials.
<unk> of their business are there the revenues. The other piece. There is we did as John mentioned and I mentioned in my prepared remarks, we did see some higher.
Part shortage levels there.
Obviously theres a lot of parts that go into fire trucks. So that it's really those part shortages driving some labor inefficiencies in the quarter again supply chain over time are going to stabilize so it's not a long term concern for us.
We expect to.
Some normal fee to continuing to return throughout the year and that will drive the margin improvements that are implied in our guidance.
Thanks Nicole.
Thanks.
Our next question comes from the line of Courtney Owens with Morgan Stanley . Please proceed with your question.
Hi, good morning, guys.
Just wanted to go back to the change in the revenue guidance for access I think you mentioned, obviously that you'd put the surcharges and but you mentioned a couple of times. The output has been limited by supply chain disruption. So just wanted to.
Confirm whether you are expecting reduced volume output versus your original guidance or if all of the increase is just.
Same same volume and.
And upside just to be a pricing and then I guess same question from the other segments that we didn't see.
<unk> teams, but you did mentioned that you're taking pricing there with just two marginal to change guidance at the top line.
Yes first of all on access volumes pretty similar maybe some small mix change in there, but the biggest thing is the.
As a surcharge revenue driving that change the volume assumptions largely unchanged and yet with the other businesses are nondefense businesses I would say.
There is additional revenue coming on line for.
For commercial in particular with their surcharges.
It's sort of within the rounding range of our guidance so within that there's a there's a bit of a pick up there but it's.
It's it's what it's less meaningful than access.
Okay, great. Thanks, and then I know there were some comments earlier about the USPS contract.
But how do you have some clarity on that.
BV purposes.
Just curious if theres a significant margin discrepancy between those two platforms and.
Especially on the sales side as well there'll be a difference in how we be modeling that.
Yeah, the best way to think about the.
Ice versus the margin of the bed.
As you know it's higher technology.
There is a little bit more cost in a Bev unit, a bev unit has a higher price.
Price point.
Therefore, the margin dollars are higher than an ice unit.
So.
You know, that's what I'll say about it they drive higher margin dollars and higher price points.
Okay got it thanks.
We have reached the end of our allotted time for questions I would now like to turn the floor back over to management for closing comments.
Thank you.
We talk a lot about the fact that we are facing short term challenges with global events.
That have emerged over the past quarter. We've also talked about the market dynamics in all of our businesses and that they remain really strong.
We have market, leading innovative products and we are certainly demonstrating leadership in this tough environment.
We are confident that the actions, we're taking will enable us to return to stronger margins in the back half of the year and most importantly into next year and beyond.
We're very very excited by the way about next Friday for our Investor Day at the New York Stock Exchange and we hope to see many of you there we're going to share our out year targets.
For <unk>.
Sales and earnings.
Key growth drivers in our business and we look very much very much look forward to doing that and.
Appreciate your time and attention today. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.