Stub Period Oshkosh Corp Earnings Call
Greetings and welcome to the Oshkosh Corporation announces stub period of three months ended December 31st 2021 results Conference call.
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It is now my pleasure to introduce your host Pat Davidson Senior Vice President of Investor Relations for Oshkosh Corporation.
Sir you may begin.
Good morning, and thanks for joining US earlier today, we published results for the three months period ended December 31 2021.
A copy of the release, it's 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 it's also available on our website. The audio replay and slide presentation will be available on our web.
Site for approximately 12 months. Please refer now to slide two of that presentation.
Our remarks that follow including answers to your questions contain statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward looking statements.
These risks include among others matters that we have described in our form 8-K filed with the SEC. This morning, and other filings we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call if at all.
As a reminder, we announced that we changed our fiscal year to a calendar year prior to our last earnings call.
October to December 2021 period, we are reporting on today represents an abbreviated fiscal year or stub period to facilitate the transition to fiscal 'twenty, two which began on January 1st 2022, all references on this call to a quarter or a year in 2021 or before are to our fiscal <unk>.
Warner or fiscal year, unless stated otherwise all references to 2022 or later years as two a quarter or a year are to our new calendar fiscal 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 for.
For the stub period, we reported sales growth of nearly 14% compared to the three months ended December 31st 2020 earnings per share were ninth sense consistent with our expectations of near breakeven performance that we shared on our last earnings call as anticipated we saw unfair.
Both price cost dynamics in the quarter, which impacted margins in all of our segments.
<unk> forward, we expect price cost dynamics will continue to constrain operating margins in the first quarter of 2022 but we expect meaningful margin improvements in the second quarter as we move towards more typical margins in the back half of the year, when we expect pricing to largely catch up with the cost escalation.
Strong order activity across the company in the quarter combined with robust price realization on new orders support our solid financial outlook in the back half of 2022 .
Market fundamentals continue to support our belief that we're in the early stages of a multiyear growth cycle.
While the global supply chain and logistics environment remains less predictable than normal we have taken many actions to improve our supply chain flexibility and mitigate risk. We have also locked in meaningful portions of our steel and aluminum purchases to provide more certainty regarding input costs in 'twenty two.
'twenty two with improved visibility we are pleased to initiate earnings per share expectations of $5 75 to.
To $6.75 for 2022 Mike will provide further discussion on our expectations later in our presentation as.
As we look to the future I'm encouraged by the significant opportunities, we see to drive profitable growth through innovation at Oshkosh, We are an industrial technology company with a strong pipeline of innovation in the areas of electrification autonomy and active safety intelligent products.
Advanced analytics and digital manufacturing.
To further sharpen our focus on technology I am proud to announce that J E. Enger joined the Oshkosh earlier. This month in the role of executive Vice President and Chief Technology, and strategic sourcing officer, Jay is a proven leader who brings deep experience in driving innovation and strategy to Oshkosh.
We look forward to benefiting from her insight and expertise as we continue to position Oshkosh for long term growth and deliver market, leading purpose built vehicles and equipment for everyday heroes around the world.
And before we move to our segments I want to share some good news regarding our focus on sustainability and our efforts to reduce energy consumption as well as greenhouse gas emissions a few years ago, we entered into a virtual power purchase agreement with ALLETE clean energy to support the development of a 300.
Three megawatt wind energy installation in Oklahoma.
The project went live in early January and will offset approximately 60% of our U S. Electricity usage. This supports our goal of a 25% reduction in greenhouse gas emissions by 'twenty 'twenty four and signals our leadership for this critical issue I.
I should also mention that in November we learned that Oshkosh was named to the Dow Jones sustainability index for the third straight year. This honor represents a particular point of pride for all of US as leaders in doing business the right way.
Please turn to slide four and we'll get started our segment updates with access equipment.
Demand for our industry, leading access equipment remains strong and I'm pleased that our access team grew sales by 48% year over year. During the stub period. In fact revenue of $834 million is a December quarter record for the segment, while the pandemic has continued.
<unk> global supply chain and logistics, we have taken steps to improve the capacity and resiliency of our supply base, including an increase in dual sourcing activities as well as redesign work on our equipment to accept higher capability chips with better availability, we even move production from <unk>.
Select workforce constrained locations to other sites with greater workforce availability.
These are just a few examples of the creativity and perseverance that are prevalent throughout the company.
While margins were challenged the past two quarters, primarily from price cost headwinds, we remain disciplined with our pricing actions, we've taken and we are making significant progress in working through the price protected backlog.
Orders were strong once again at $1.65 billion in the quarter up 70% from last year, which led to a new record backlog of $3 $6 billion. Importantly. These orders include strong price increases, which provides better visibility to strong margins in the second half of <unk>.
2022 looks.
Looking forward market fundamentals for access equipment remains strong with elevated fleet ages and robust utilization, particularly in North America, and we expect that demand will remain strong for the next several years with a combination of fleet replacement and fleet growth.
Let's turn to slide five and I'll review, our defense segment.
Revenues and margins for the defense segment were lower in the stub period. We believe that these challenges are temporary or long term outlook is positive and the team remains focused on many important new and adjacent program competitions, including but not limited to multiple truck trailer programs.
The cold weather all terrain vehicle.
And the O M N V, which is currently in the digital design Phase we received another substantial J L. T V order during the quarter valued at just over $590 million, we continue to execute on time and on budget for this critical defense program and believe we are.
Well positioned to win the Recompete scheduled for later this year I'm pleased to report that just yesterday, we announced our innovative silent drive hybrid electric joint light tactical vehicle. The E. J L. T V. The E. J L. T V is capable of running fully electric.
And offers our military customers and affordable way to electrify their light tactical wheeled vehicle fleets without compromising the off road performance or superior protection necessary in combat operations. We believe this represents a very strong technical advantage for J L. T V customers.
Turning to the next generation delivery vehicle contract with the United States Postal service. The vehicle was displayed at the consumer Electronics show earlier this month in Las Vegas. It showcases Oshkosh has significant capabilities for designing purpose built last mile delivery vehicles.
Our advanced design incorporates EV technology enhanced safety and superior ergonomics for industry, leading productivity in the last mile delivery market.
We look forward to supporting postal carriers under this multibillion dollar transformative program over the next decade, we are making solid progress in setting up our production facility in South Carolina and look forward to ramping up production in 2023, we expect to receive our initial production order in the next few months so more.
News to come on this exciting program.
We are confident in our growth opportunities in the defense segment over the next several years, while 2022 sales volume will be down as previously discussed we expect important program wins like the N. G. D V and the medium caliber weapons system will drive profitable growth in this segment over the next several years.
Ours, and we believe we will have many more opportunities to add to this growth with additional key program wins in the coming months and years.
Let's turn to slide six for a discussion of the fire and emergency segment.
The segment continues to drive strong demand for our industry, leading products, we have been dealing with supply chain disruptions and price cost headwinds, which held back margins in the quarter.
But we believe.
We will be ahead of these challenges in future quarters, and our confidence in the fire and emergency segment remains high.
Orders in the quarter were solid at nearly a $370 million leading to another record backlog. This.
This strong demand supports our plans to increase Pierce fire truck production capacity in Appleton, Wisconsin and grow well into the future. We expect the initial phases of expansion will be complete later in 2022 with additional phases expected in 2023.
Presently we're in the process of increasing our cab assembly capacity, which is an important milestone in our journey to increase overall fire truck output to support our growth initiatives with peers, we held a highly successful job fair during the quarter and hired approximately 100 new team members we expect.
<unk> added an additional 100 plus jobs as additional capacity comes online.
We continue to receive strong interest in our volt Terra line of electric fire trucks are Voltaire electric pumper continues to impress with the Madison Fire Department and now has successfully completed more than 1200 calls and the feedback we're receiving from firefighters is invaluable as we enhance the industries.
First electric frontline pumper please.
Please turn to slide seven and we'll talk about our commercial segment.
The commercial segment grew revenues in the quarter, but higher input costs as well as uneven supply of third party chassis and other components led to a modest operating loss similar to our other nondefense segments commercial has implemented double digit price increases so the significant price cost headwinds we saw in the <unk>.
Two quarters are expected to improve as we approach the second half of 2022 .
Chassis and key component availability continue to create production and delivery challenges and are likely to continue for the next few quarters. We discussed this risk on the last call and our teams are diligently working to mitigate this disruption however improvement will take some time as suppliers worked through.
Production headwinds in their own operations.
We are working aggressively across the company to leverage our combined buying power and diversify our supply base. It is helping but in the near term it's not enough to overcome the historically low third party chassis and component availability. We are experiencing that said, we are making progress and we expect.
Exit 2022 in a much stronger position.
Demand for our C V's and mixers remains solid and our outlook is positive residential construction strength and elevated customer fleet ages support higher demand.
To close out my comments I'd like to recognize the commercial team as they successfully launched our new high flow production line in December .
Starting with rear loader Rcv's, we believe it will increase capacity shortened lead times increase quality and deliver improved efficiencies of line is scheduled to ramp up in 2020 two and reach full rate production later in the year.
I'm going to turn it over to Mike to discuss our stub period results and expectations for 2022.
Thanks, John and good morning, everyone. Please turn to slide eight.
As John discussed stub period results were generally in line with our expectations discussed on the last earnings call for stub period comparison purposes, all references to the prior year or to the three months ended December 31 2020 stuck.
Consolidated stub period sales were $1.79 billion or $215 million higher than the prior year represent representing a 14% increase the consolidated sales increase was largely driven by a 48% increase at access equipment, partially offset by a 20% decrease.
And sales at fire and emergency.
Access equipment sales increased by $270 million over the prior year to $834 million due to improved market demand in North America.
An emergency sales decreased in the quarter and Laura fire truck deliveries driven by supply chain disruptions as well as lower ARP deliveries as a result of several Multiunit international order deliveries in the prior year.
Consolidated operating income for the stub period was $18 million or 1% of sales compared to adjusted operating income of $104 $6 million or six 6% of sales in the prior year. Our consolidated operating results decreased largely due to unfavorable price cost dynamics unfavorable.
Catch up adjustments in the defense segment, and unfavorable product mix, partially offset by higher sales our consolidated price cost headwind in the stub period was approximately $90 million, which impacted earnings per share by nearly $1.05.
E P. S for the stub period was nine cents compared to adjusted EPS of $1.13 in the prior year.
We repurchased approximately 1.36 million shares of common stock for a total cost of $150 million during the stub period consistent with our disciplined capital allocation approach. Please turn to slide nine for a discussion of our expectations for 2022.
As I review expectations I'll be comparing 2022 expectations to the pro forma results for the 12 months ended December 31st 2021, I referred to these pro forma results as calendar 2021 .
As we discussed in our last call, we expect price cost headwinds remain at peak levels in the first quarter of 2022 with meaningful improvement expected in the second quarter, we expect to be largely price cost neutral in the back half of the year supported by a robust backlogs with meaningfully higher prices and deliveries expected in the second half of <unk>.
2022 in total we expect price cost headwinds of approximately $140 million to $150 million for the year compared to our price cost baseline, which was before the rapid cost escalation in 2020 one as a result of these price cost dynamics, we expect margins in the first quarter to be similar.
To the stub period, we expect to deliver notable improvements in the second quarter and returned to more typical margin levels in the back half of the year as more of our shipments include the full benefit of price increases implemented during the past several months on a consolidated basis. We are estimating sales of 8 billion to $8 $5 billion compare.
To $795 billion for calendar 'twenty 'twenty. One we are estimating operating income of $545 million to $625 million compared to adjusted operating income of $471 million in calendar 2021 and we expect EPS of $5.75 just $6.
And 75 cents compared to adjusted EPS of $4.73 for calendar 2021 .
Demand remains strong as evidenced by our strong order intake rate in the quarter and record backlog of $9 $3 billion at December 31, 2021 the cadence of magnitude of global supply chain and logistics improvements, particularly in light of the omicron variant are the primary drivers for the slightly wider revenue in <unk>.
P S ranges to start the year.
At a segment level, we are estimating access equipment sales of 3.7 to $4 $1 billion and 11% to 23% increase compared to calendar 'twenty 'twenty. One we expect the sales growth to be led by North America, Although we expect sales growth in most regions of the world.
We are estimating that access equipments operating margin between 9% to 10% included in our expectations is approximately $115 million to $125 million of unfavorable price cost impact largely in the first half of the year as we complete the shipment of price protected backlog again. This price cost comparison is against the base.
This line prior to the rapid cost escalation, we experienced in calendar 2021.
Turning to defense, we are estimating 2022 sales of approximately $2 $2 billion at 12.2% decrease compared to calendar 'twenty 'twenty. One this aligns with our prior comments that we expect defense revenues will be down in 2022 due to lower G. L. T V deliveries before we.
Spectra returned to growth as new programs, including N. G D E and M. C. W. US ramp up we are estimating our defense operating margin will be approximately 7% lower sales unfavorable mix higher material costs and new program startup costs account for us the slightly lower operating margin than in recent years.
We expect margins will improve as new programs ramp up in future years, we expect fire and emergency segment sales will be approximately $1 $2 billion, roughly $30 million higher than calendar 'twenty 'twenty. One the change in revenues reflects higher municipal fire truck sales offset in part by lower RF demand we.
Expect the operating margin in the fire and emergency segment to be approximately 13%. We are estimating sales of approximately 1 billion to $1 $1 billion in the commercial segment at 10% increase versus calendar 2021 at the midpoint as a result of strong demand third party chassis supply is expected to be.
Lumpy through the next several quarters and we are expecting operating margins for this segment of approximately 7% similar to access equipment price cost headwinds are expected to meaningfully impact margins early in the year as we ship the remaining price protected backlog.
We estimate corporate expenses will be approximately $160 million, an increase of $10 million versus calendar 2021 primarily driven by increased investments in growth initiatives and new product development we.
We estimate the tax rate for 2022 will be approximately 22, 5% and we are estimating an average share count of 67 million shares.
For the full year, we are estimating free cash flow of approximately $500 million, reflecting an expected strong year of cash generation. We also estimate capital expenditures will be approximately $300 million, reflecting increased spending levels related to N. G. D V and capacity expansion projects at access equipment and fire <unk>.
Urgent and see.
Looking to the first quarter, we expect consolidated sales to be approximately flat versus the three months ended March 31, 2021 with access equipment up approximately 15%, but defense and fire and emergency revenues, both down with price cost headwinds at similar levels to the stub period, we expect E. P. S.
To be similar to the stub period, as well with meaningful improvement expected in the second quarter and more typical margins in the back half of the year I'll turn it back over to John now for some closing comments.
We just completed our transition to a new fiscal year with the close of the stub period.
While we faced challenges in recent quarters, our outlook for 2022 particularly for the second half of the year is strong before we start the Q&A I want to announce the timing of our Investor day, we look forward to hosting our Investor day in early May of this year details will be forthcoming, but we are.
Excited to have the opportunity to share our plans to grow the company and we will be providing some targets that we believe investors will value. We plan to share details of our strategy and highlight some of the many innovations and technologies, we are leveraging to advance our company.
Okay, Pat back to you. Thanks.
Thanks, John I'd like to remind everyone to please limit your questions to one plus a follow up and please be disciplined on that follow up cost question. After the follow up we ask that you get back in queue, if you'd like to ask additional questions. Operator. Please begin the question and answer period of this call.
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Thank you. Our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good morning, I appreciate the color that you guys provided that guidance, but just given the weak start to the year can you help me understand how you're thinking about the second quarter relative to the second half. It seems like in terms of the earnings trajectory, it's really like a hockey stick in the back half of the year can you grow earnings down year over year.
In the second quarter I, just want to make sure the street and calibrated that correctly and then I guess my follow up question. John as you know what actions have it sounds like you've taken some actions to better mitigate risk on the E. P. S. Ryan, but if you could go I'll provide a little more color there and why you feel confident in the guidance. This year just given some of that.
That the challenges that are out there. Thank you.
Sure. Thanks. Thanks, Jamie This is Mike I'll start and then I can turn it over to John I'm on the back half of your question I'm just from a trajectory standpoint, I think the easiest way to think about it it's very much tied to the cost price headwinds, we talked about in the prepared remarks, so youre going to see a similar price cost headwind that we saw in the stub period in the first quarter.
That's obviously meaningfully challenging margin similar to what we saw in the stub period.
As we ship that price protected backlog, we're gonna make meaningful progress in the first quarter. So by the time, we get to the second quarter, but and really by the second half of the second quarter, we're gonna start seeing more and more price hitting and so that cost price headwinds going to be a lot less in the second quarter. So we're going to see a meaningful.
Arjun progression when you get to the back half of the year than that where we're largely going to be that price cost neutral. So that's when you're going to see pretty typical margins for the volumes, but it's really completely tied to to the price cost cadence and where we're at from a price protected backlog perspective.
Yeah, Jamie this is John I'll I'll, just talk a little bit about the second half of your question. So you know as we've come through this pandemic and particularly the last year as we've kind of I guess in a very bumpy way come out of the pandemic. We we've kind of been through a shock I think industry has been through a shock in terms of.
The material cost escalation that we've seen and number two in terms of the supply chain disruption that we've seen and so that's that's been something that we've had to wrestle with because it caused us to as as we saw big.
Backlog build we saw material costs escalate in and that's the that's what we're getting through right now and we're very confident that we're going to get through that so there's there's really three areas that will you know we think we're kind of heading into a new normal we don't know that that we don't believe that this material cost is transitory.
Sorry, we believe that if.
Inflation will most likely continue so the best part of our businesses we're leaders in our industries.
And therefore, we have pricing power.
And we put double digit pricing in place and in our commercial segments, our access segments, our F&I segments, and we're able to do that prudently because of the material cost environment that we're in we just have to burn through the backlogs that were built a couple of quarters ago, a few quarters ago to get to a point.
Where we start to realize the price that that we should have based on material cost escalation. So that's the first thing. The second thing is we've completely revamped our our price on the material cost side, we've completely revamped our price locking in our hedging strategies. So that when we're in periods, where we're building backlog.
We're approach where we're much more intense about how we're locking in prices and are taking hedging strategies to protect ourselves. If we've got backlog that builds six 912 months into the future and of course, we're also changing terms and conditions with with a lot of our customers where we're building.
If we're building backlog way into the future that we have some ability to adjust price. If there is significant movement in materials, a little bit of a long answer, but we've done a lot of work to to adjust to the new normal so to speak because of what we just we've just been through.
Okay.
Thanks, Jamie.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Yeah.
John in the past you've spoken about how many suppliers you folks are monitoring.
In terms of their ability to deliver on time can you talk about where that stands today versus a quarter ago are we good.
Getting out of the woods on that part of the supply.
Supply chain headwinds that the industry has seen over the past year.
Yeah, Jerry a great question because because that's.
What all of us in the industry are in the middle of right now we've done a lot of work and changing the way that we manage our supply chain. We've got incredible people here that are working tirelessly on it.
And if you look at our supply chain today, we've made a lot of improvements both on working with our existing supply base to improve their capacity, but also in qualifying a lot of new suppliers. We've qualified hundreds of new suppliers to give us better capacity to serve our customers as we can.
Go forward and Hey, we're a growing business, we feel really strong about the outlook for our all of our businesses over the next several years you know where were we we know that we have to build the supply chain not just to do what we do today, but to do what we're gonna be doing three or four or five years from now which is materially higher than what we're doing today.
And so there's a lot of work that's gone into it hundreds of suppliers have been qualified new suppliers and we've we've helped our current suppliers also expand their capacity. So so we're making progress.
We're not out of it yet we still have work to do but where we are making progress in and.
Building the supply chain that we need for the future.
Uh huh.
In the defense business can you expand on the material cost catch up that you folks are in the quarter, which contract was that related to which commodity was that.
Related to end.
How should we think about upside and downside risk to margins on whatever platform that is as we get commodity price volatility from here.
Sure I'll take that one Jerry just from a defense perspective, one thing to level set on US obviously, we have large contracts and we have a contract accounting for those so the dynamics can be a bit different and you see some quarters that are higher and some that are low and you really need to look at the margins over time.
In this particular quarter between a slightly you know a lot.
Lower order for J L. T V. Some mix within that as well as somewhat higher material costs right now that led to the unfavorable cumulative catch up adjustment importantly, as we go forward.
We don't see this as they have long term issue you know I think really if you look to the margins. This next year, we guided to 7% largely because volumes down a bit next year, there's some Mexico again, and we all saw new program startup costs that we're gonna be incurring as we look to the future of that business, though it's a.
Growth business, and we see the margins increasing over time as those new programs ramp up.
So it sounds like a one off.
Well I think it's we always have whenever we have new contracts or changes in assumptions. We're looking at it we don't necessarily if you look at the guidance for next year, that's not what we expect for margins over the course of up 2022.
Thank you.
Our next question comes from the line of Nicole <unk> with Deutsche Bank. Please proceed with your question.
Yeah. Thanks, good morning, guys.
Good morning, good morning.
If I can just wrap up on Jerry's question really fast on defense. So I understand all of the corn belt that his dreams I'm curious, but what is your expectation for margins in defense and one can't I'm just I understand that the price cost situation is just as bad, but it's just been off they're going to be a margin headwind in the first quarter.
I guess, we haven't really broken it down by quarter, but what I would just say in general as we look there's obviously a lot of moving pieces, what with mix and price cost and so I think there's obviously a cumulative catch up adjustment was a factor in the first quarter priced cost remains a factor and in the first quarter. So I would say there's gifts.
And takes again I think I would look to the full year guide for defense that we don't expect margin performance at that level throughout the year, So, but again I think one other thing I just mentioned that in the first quarter, just holistically with the omicron variant out there absenteeism been a bit higher.
There, there's a bit of that factor, obviously I think there's lots of signs that hopefully that's that's a we'll get past that and in the next you know several weeks or a couple of months here.
Hey, Nicole I'll give you a little bit more long term on defense because I like talking about it. So much you know we bought we've often talked about how 2022 is a bit of a lull year for defense.
And you see that in our guidance, but you know I love talking about the long term outlook for this business because of the growth that we're going to see as we get through to the towards the end of 2020 three 'twenty 'twenty four we've got the U S. P. S business coming online that's a gigantic contract loss.
Just last mile delivery fleet in the world that will be modernizing with new technology and and electrification. We've got the M. C. Ws program, that's new technology, New technology. In these programs means it's really good business for us and it means it's going to help us grow our margins over.
For the next several.
Several year period of time, and it's even better for our customers because of the problems that it solves for them. So long term. We're really excited about this business I just wanted to mention that because I know you see the guidance in 2020 two is a bit of a lull year, but this is a growth business for us. If you look out the next few years okay.
Okay got it totally fair and we agree and I guess, maybe my follow up around price costs. So I know you guys have have kind of put additional hedging programs in place, which is kind of you need to lock in like neutral price cost for the second half is the expectation still that at some point, maybe in 2020 three you'll be able to.
Recoup the price cost headwinds that you faced and end up in a neutral position, therefore, implying price cost tailwind at some point in the future or is that going to be tough unless you know new normal inflationary environment.
You know Nicole it it's obviously early but that's that's certainly what we've experienced in the past and that's certainly our intention going forward is as well, but you know obviously very very meaningful improvement to the back half of the year. Yeah. It really all depends on call on what's going to happen with material raw material prices really.
And right now we're planning for well what if we stay in an inflationary period for the foreseeable future and how are we going to make sure that we can still deliver margins in that environment with the shock that we've just been through that's what we're planning for but but if if raw material prices come back down that would be a good thing for all of us.
Yeah.
Understood. Thank you.
Thanks.
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
I think good morning, really just wanted to follow up on that very last point. There I mean, it does seem like raw material costs are coming down and so I guess I'm wondering to the extent of how much you have hedged out. So if we were to see the potential in the market for.
Lower raw material prices to come in to your cost of goods sold in the second half of the year would that be able to happen or are you now are hedged through the end of the year.
Just to kind of keep those costs.
A little bit more elevated than what you might see in the market and then I guess, just curious what you're thinking about.
Freight and employee costs throughout 2022, and and what you've embedded in the guidance there.
Sure those items are all certainly certainly factored in and where were carefully considered as we went through the year from a work perspective, we do see it declining over the course of the year from a steel perspective, we've already seen pretty meaningful reductions you'll look at hot rolled coil were up near $2000 a tonne couple.
A few months ago I'm now its in the 1300, so we've seen improvement there. The locks, we we have again, our or below even at that level futures markets blow that level. That's all built into our guidance and that that trajectory, we're never going to lock, 100% of our of our materials. So there is some barrier.
All component of it that that well will always leave out there, but again, we're very meaningfully higher percentage locked in we were in the past in terms of other cost. It certainly theres been wage costs are up as well as as well as the other costs that's all.
Baked into our guidance from a trajectory standpoint is all considered in our pricing dynamics as well that work that we're looking at.
Okay. That's very helpful. And then just in terms of maybe to think about the exit rate of margins in the access segment and say Q4.
I think you said that.
They might be more aligned to typical volume levels I mean could we be at like a you know.
Kind of a 12% margin level in access.
In the fourth quarter, and then builds from there into 2023.
But the one thing I would just say is from a fourth quarter perspective at cadence, obviously changes now that run at on a calendar year and that tends to be a little bit shorter quarter, but we fully expect to be back and double digit margins in the back half of the year consistent with what you would expect given the revenue levels and in any given.
Quarter that we've seen in the past in that business, Yeah with every new peak, we had towards Steve we expect to meet and exceed the prior peak in terms of margins.
Prior peak margins was 12%.
And so that's our that's what we're heading towards as we as we look forward through this cycle.
We're not stating that in 'twenty two right.
I don't need to I'm talking about that that would be all right.
Are the cycle like you said that'd be over the course of the year in individual quarters can obviously, yeah fire or later than that.
Thanks, Steve Great. Thanks, Thanks very much.
Our next question comes from the line of Tami Zakaria with JP Morgan. Please proceed with your question.
Hi, everyone. Good morning, Thanks for taking my questions. So my first question is.
The Capex guide do you have for the year. It seems like it's taking a big step up.
Can you help us understand what's driving that.
Sure. It's it's very consistent with what we've been talking about over the last couple of quarters. Since we won the United States Postal service contracts are very very heavily weighted towards that contract. We're gonna be north of $300 million of Capex for that that program over the next couple of years, so I've with that <unk>.
<unk> up in 2023 heavy heavily concentrated there. We also really excited we have some other capacity expansion projects that or a lesser part of that but still meaningful in the fire and emergency and access equipment segments to really to support there the growth that we see in those businesses.
Understood. Thank you and my follow up is can you share some thoughts on how you're preparing to recompete for the G. L. T V program.
Yeah sure Great question. So so.
We are the incumbent manufacturer for the J L T V.
Been supplying these vehicles on time and within budget since the beginning.
We've been very efficient in the way that we're supplying these products, but we're also not stopped and not resting on where we are we're continuing to develop new technology and new capabilities for the J L. T. V. You saw just yesterday introduced the E. J L. T. V. This is the first tactical wheeled vehicle in the department of defense.
That will have the capability to run on full electric power that gives us capabilities that today's vehicles do not have in terms of silent operation. For example in terms of how they can export power for example, which makes it very very efficient and they can they can idle without having an engine running.
Lots of different capabilities that that gives us the department of defense. So those types of capabilities combined with our efficiency and know how and manufacturing. The current vehicle, we think position us really really well for the Recompete remember Theres an acquisition objective for 50000 units in total.
The U S Army in about 15 or 16000 for the United States Marines are you know, we're only a fraction of that into this total acquisition objective at this point in time. So this is a long term program it'll continue into the 20th Forties and we'll continue to make innovations for this program with them.
We'll intent of of continuing to supply out into the 20th forties.
Great. Thank you so much.
Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Hi, Good morning, guys, maybe just a very big picture question John .
I'm trying to balance some long term things happening I mean, you talked about margins being sort of higher each cycle and yet it feels like we're adding a fair amount of cost you talk about redesigned to take more expensive chips and moving things around where you have better capabilities. You talk about dual sourcing are you know I assume there.
It'll be somewhat higher levels of inventory just in the new normal as we go forward. So sorry for the long question, but even with those additional costs of running an industrial business over the next say three to five years, you still think you can get higher margins sort of peak to peak.
Yes, we do.
You know, what we're doing with our business.
In terms of adding suppliers, we're doing that because we need it because we need additional supply base to grow we wouldn't have to add as many suppliers. If we were growing at say GDP rates and in that business, but we're not where we're growing our business at higher than that and so we've had to.
Bringing on new suppliers that are going to enable us to grow but but when you look at our our business and the backlogs that we have we've got record backlogs in our business today and those record backlogs combined with building a supply chain capable of supporting us as we as we execute on that growth growth path.
Yeah, our intent and you just your question I think it was focused on access equipment.
Our our confidence in bringing new technology to market with new technology typically comes a strong margins that will continue to deliver on doing just that.
Okay, Alright fair enough and then the follow up is just on electrification because you've mentioned that a few times, but my understanding of the jail TV contract and even the postal contract is as electrification is pretty minimal portion in those contracts. So I'm. Just curious do you have a different view do you think that's gonna.
Change just how do you think that progresses over the next few years.
Well I think that it remains to be seen but but I want to make sure. It's clear we developed an E. J L. T V. Because we knew that our customer the department of defense is really interested in electrification and we didn't wait for a specific program to tell us to quote and E. J L. T V.
Our eyes are on electric vehicles, some kind, we just went out and did it and provided it as part of our J L. T V platform.
Now when you look at the J L. T V itself it'll be evaluated this recompete.
Where they're adding 16500 units it'll be evaluated on a number of criteria.
And then there are things like cost and value for the customer manufacturing capability and expertise quality and efficiency of production.
And technology is another one technology insertions to enhance the vehicles capability.
All of those are material factors and they all get considered and so the electric or the E. J L. T V.
That's one of several things that will be considered but every everything that you do to enhance your capability on the program certainly helps.
Understood. Thank you so much.
Thanks.
Our next question comes from the line of Mig <unk> with Baird. Please proceed with your question.
Thank you good morning, everyone, John I I want to go back to some comments that you made at the top of the call where you were talking about.
The fact that you have made changes to the way you're operating and some of those changes include different approaches to pricing.
You know putting some some of this volatility that we're seeing in raw materials.
Onto the customer as well so not taking some of that risk wholly within your backlog I'm curious if you can give us a little more context around around that in terms of what change here which segments.
Would apply to and you know what do you foresee the impact on your business to be longer term from this.
Yeah. So.
That.
What what I'll comment on is the thing that was most challenging for us as we've gone through the past year is that we've had huge demand for our products and that's that's really across all of our segments. So we built bigger backlogs than we've ever seen before and when I say bigger backlogs I mean backlogs that stretch longer.
And of the future than we've ever experienced.
And when that happens you you increase of course, the risk that you're susceptible to changes in material cost or other other factors as you go from the point of taking the order to the point of actually manufacturing and delivering your order. So that's why we said hey, we have to with our terms and conditions.
Build in when we're gonna be delivering product three or four quarters into the future. Some terms and conditions that should material changes occur for example, and material price escalation, we would have the ability to make an adjustment to the price.
That's what I was referring to on that item in terms of how we're we're changing the approach that we ship a lot of things within a very short period of time I'm not talking about that I'm talking about when we have extended periods of.
<unk> between taking an order and delivering an order.
And just to clarify this applies across all of your business or are there only specific segment and you know I'm wondering like for instance, your large rental customers that you have in access equipment are they onboard with this with this approach that you're rolling well I'll just tell you that at a pet.
It impacts the most material parts of our business.
Understood and then my follow up is on the cadence abaxis equipment, you're talking about margin, but I'm kind of curious as to how you were thinking about revenue because if I understand your Q1 guidance. We have correctly, we had about three quarters now where revenues have been in this call at 800.
$840 million range and it seems like you're you're forecasting some kind of a ramp up in revenue as the year progresses, but.
I'm curious as to how that ramp occurs relative to normal seasonality and how much visibility you have there the supply chain can actually support a.
Higher production rates at this point thank you.
Sure I can take that Meg I would say overall just foundational Lee we do have a range around the revenue and that's it's really that range is tied primarily to supply chain. So we're obviously looking at at different scenarios. I think we do expect that you know the typical quarters that you would see.
See higher volumes and access are likely we're likely to see higher hydro volumes in our our second and third quarters. You know there was obviously a bit of a seasonality impact. So we do expect it to ramp up over the course of the year, obviously year over year, we made progress from a Rev.
New standpoint in our stub period. So so again, we do believe that there will be a progression over the course of the year.
And in May we made a lot of progress in our Q.
Q4 in our access equipment business remember that's a it's it's the holiday season in the middle of it.
And I believe seasonally a low period for us and we shipped an all time record during the stub period.
So there was a lot of progress made by our supply chain people and our operations people in that stub period at access equipment.
And I think that that's noteworthy.
Thanks Mig.
Appreciate it.
Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.
Hi, good morning, guys.
Morning.
So I wanted to go back to defense margins I'm seeing got it at two 7% for this year, but just interested in just like that the longer term potential and whether anything has changed.
Given some of the new opportunities as well as like the Recompete.
So in that context like how do we think about that I mean are you assuming kind of similar margins.
And potentially when the G L T D recompete.
And then also for the U S. Postal service contract can you just remind me whether this is a fixed price contract versus cost plus.
Sure. So overall from a margin standpoint, I'd say this year, the 7% I would say just from a program ramp up is it's really a transitional year, there's there's nearly 100 basis points of.
Start up costs and the margin. So that that's just I think are noteworthy item, we do expect us to that as these new programs ramp up as John said. These are a great programs. We're excited about them or our shareholders will be excited about them. We do believe will we will grow margins and our.
Segment, particularly as those new programs begin to ramp up.
Got it and just in terms of the the Red tag or something like the unfinished under Levered vehicles and equipment that you had how far along.
And getting that equipment shipped out to customers and how much more do you have to go and how should we think about just the margin impact of that as that starts to normalize.
Are you you're talking just generally like like work and work in process that that's what that's missing components or or what are you guys exactly yeah. I think I think overall I'm you know it definitely varies by product and by segment and and so on but.
I would say generally our inventory levels are still I'm still on the lower end of the spectrum, just what what the supply chain that were producing much of it as quickly as they were shifting and I think you probably have a bit more work in process, perhaps like in our commercial segment, what with some of the variability around third party chassis that are.
We believe that again, it's there's something with supply chain, it's going to take some time to get a to get a cadence and I think it's not different than what others are experiencing out in the marketplace.
Got it thank you.
Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.
Hi, good morning.
You made a comment about the ordering and the visibility further out given how long. Some of these you know orders are projected out your access backlog you ended the year with a backlog that represents 92% of your your sales guide for the year right. So it's a it's a you've covered most of the sales guide, but I'm curious within that.
Backlog, how much of that backlog is actually four years beyond 'twenty, two and how should we think about you know contracting pricing on those I'm just curious if those conversations but again, how much of that backlog does not ship in 'twenty two.
Hey, David I can get that one the majority of the backlog is really is really for 2022. So we buy there's a very limited amount that that extends out to 2023 at this point.
So for the new orders that you were looking to take this year are you holding off on taking those orders for better visibility of your costs and how to price for 'twenty three.
Or are you willing to open up 23, let's say earlier than normal given most of 'twenty two is spoken for.
Those are still discussions, we're having with our customers and I, obviously will Uh huh, that's not where we're at right now, but we're going to continue to monitor monitor cost in the marketplace and obviously demand room remains very robust and this would be a sort of unprecedented to be taking orders that at scale.
Oh for for a year out already so it's something that we're watching very closely and we'll continue to work with our customers on it.
Okay I think the reason it's relevant as if the orders look weak the next quarter or two that's not necessarily reflected demand, it's you're not willing to open the book up early for 'twenty three and most of 'twenty. Two is spoken for is that a fair generalization of how the orders might play out near term that you.
Yeah, they're going to be a bit soft is there's not much left for 'twenty two.
Ready to open up 23 is that a fair.
Generalization.
We're going to continue to monitor it I think we have the David I think it's TBD right now yeah, yeah, but demand is extremely strong.
That's you're you're spot on there is not a market indicators between fleet utilization use used prices and all the dynamics are very strong construction metrics are still strong yeah, we believers thoughts at the beginning of a multiyear growth cycle. Yeah, I mean, I'm just trying to figure out if you're willing to pry.
<unk> 23, a ready when things are you know obviously things are strong both of the infrastructure Bill keeps some strong just to start thinking about populating twenty-three already with some nice price cost I mean that was what I was sort of fishing for I'm thinking about twenty-three how early do we start sort of locking that in to some degree.
Yeah.
Yeah.
Yeah, that's what I meant when I said T V, where we're working through that right now David.
I think that that alright. Thank you. Thank you very much.
David.
Okay.
Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Hey, good morning, everybody. Thank you all for fitting me in quick question again on kind of the pricing within some of the best summer for the longer term pizza.
Should we think of this as something thats going to be more indexed to some sort of a you know it still number of material whatever you guys. When I say I'm in the event that the pricing could go up but then it also can kind of flex down depending upon what the conditions are in the marketplace.
Well in general that's correct, yeah, yeah yeah.
I mean do you think you kind of you know I won't go into the specifics, but you know you're thinking about it is generally the way you're thinking about it in your question is generally accurate okay fair enough and then with all the announcements in the activity on the EV side.
I mean, what are the expectations to kind of expand the commercialization of rollout of some of these products and you know I guess has that accelerated from maybe the recent viewpoints.
In terms of commercial rollout.
Well I mean, you look at the correct I mean, you've got the E V on on the fire. The you know I mean, obviously, you've got the access already there, but just curious if we start to see more units in the field for for sale.
Oh, I think you'll absolutely see that whatever with every quarter and every year that goes by you'll continue to see more electric machines and vehicles.
Our sales than the prior year you know this this all this all evolve as quickly as our customers are ready to adopt electric versus conventional powered machines and vehicles and I think some segmental evolved very very rapidly and others might be a little bit slower too.
Evolve, but remember the average life of you know you can go through all of our different segments.
The average life of most of our segments is over 10 years some of them closer to 20 years and so you know it it doesn't happen overnight. It gradually gets phased in as equipment gets replaced in of new equipment, that's going to be sold at what level is it going to be electric.
It will continue to happen year over year different rates of speed, depending on what the end market is that we're serving but hey, we couldn't feel more and more confident in and or electrification programs our capability. Our engineering capability. We've been doing this for a long time and we're at a point.
Now, where we can deliver positive total cost of ownership or positive economic benefits, that's relatively new with these programs that you can deliver positive economic benefits along with all the performance benefits. So the fact that we've been able to demonstrate that we are leaders in electrification and you've seen it now just yesterday with it.
The E J L T V.
We couldn't be more confident in the future of electrification for all other segments that we serve.
But it'll happen at different rates of speed.
Thanks Stanley. Thank you.
Our final question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question. Thanks.
Thanks for squeezing me in guys. Most of mine have has it had been a been asked I just wanted to throw in there that yeah. There's been quite a disconnect between what you were saying about pricing in access equipment versus what the national rental accounts are saying I mean, it's it's.
You know kind of been a major difference she should we assume that that most of the non price protected backlog that is going out in the first half is going to your national rental accounts in that that a greater proportion of your price protected backlog has gone to the independents because it certainly sounds that way when when when you asked me about companies about what type of cost inflation that we're expecting in 2020.
Yep.
Yeah, I would just say that from a backlog perspective based on where our backlog is at and what our revenue guide is obviously, we have a pretty big coverage a lot of the terms and conditions discussions and this is this is not specific to access just holistically. We're worth the the terms and condition discussions are early.
And this is and again across all of our businesses.
Okay.
Right great. Thanks, guys. Good luck to her but in terms of the in terms of the backlog that we have today.
The biggest pressure that we're under and what and why you saw a near breakeven in the stub period and why we're saying you know Q1, we'll continue to see some some tough margins until we make a significant improvement as we go later into 2022 is because of price cost dynamics and because we've got these big Bang.
Logs that have different tranches of price levels in them and so there is still in this quarter. We're still shipping orders that we took a few quarters ago that are not at the current price right and that's what's putting pressure on the margins.
I'm not going to go into how much of that goes to the national rental companies versus independents versus other segments, but you know that that is the crux of why we're seeing margin squeeze right now right price cost. It's that we've got these big backlogs with tranches of a price product from.
Several quarters ago that we're working through and so that may not be inconsistent with what you're hearing from the national rental companies.
Thank you Mr. Pfeiffer I would now like to turn the floor back over to you for closing comments.
Yeah, I really appreciate everybody joining us today.
We're committed to driving long term profitable growth as we continue to innovate our products are in the company and advance our company.
Please stay safe and healthy and we look forward to speaking with you soon and hopefully seeing you in may at our Investor day. 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.