Q2 2022 Oshkosh Corp Earnings Call
Two contract wins are notable along with other drivers that underpin solid demand.
And we believe we're in an outstanding position to leverage this solid demand to drive accelerated growth over the next several years as we highlighted at our recent Investor day.
Access equipment orders were strong and we have the highest backlog in the history of J L. G. This is driven by aged fleets high utilization rates and many large construction projects in the planning and execution stages and keep in.
Mind infrastructure spending tied to the infrastructure investment and jobs Act, which we expect to be a further demand catalyst for access equipment has not yet begun at scale.
Our defense business, we have two key contracts that drive growth into the future with <unk> and Stryker Mcw S. We expect to begin shipping <unk> late next year. The USPS contract is expected to contribute over $1 billion of revenue annually when we achieve full <unk>.
Production.
And as you may have recently heard USPS will increase the ratio of <unk> to 50% on the initial order of 50000 units. This is great news for all parties nor.
North American demand for fire trucks, as a return to well over 5000 units annually the highest industry level since prior to the great recession, and our Pierce brand remains the market leader.
Fire truck market is supported by strong municipal funding and aged fleets that we expect will be refreshed over the next several years.
In our commercial segment refuse collection vehicles are in high demand as our customers have returned to higher capex spending levels. Following a pause in capital spending during the height of the pandemic and finally, we are in the midst of a significant technology investment cycle, and we expect customers will be transitioning to.
Many electrified product offerings in the coming years as well as deploying autonomous functionality.
In early May we introduced our 2025 revenue and EPS goals and we believe we have a solid path forward to achieve these goals of course, we need to execute through the near term challenges, which we believe we will Oshkosh team members continue to persevere to deliver our.
Purpose built vehicles and aftermarket parts and services.
For the quarter, we reported year over year sales decline of six 5% with earnings per share of <unk> 41.
Both of which are below our expectations, we have strong backlogs. So the decline in sales versus our expectations was driven solely by supply chain challenges as part scarcity limited our ability to efficiently complete and ship units, particularly in the fire and emergency segment.
We also experienced unfavorable cumulative catch up adjustments in the defense segment and recognized an unfavorable noncash mark to market adjustment in our long term investment in micro vast during the quarter.
Sequentially, we made significant progress to overcome elevated input costs through our pricing actions.
In light of these constraints in the second quarter as well as ongoing supply chain challenges and inflationary pressures. We are updating our full year outlook for revenue and earnings per share. We now believe that 2022 revenue and adjusted EPS will be in the range of $8 3 billion.
And $3 50, respectively.
Before we discuss our segments in more detail I want to highlight our recently announced commitment to establish enterprise wide science based targets to reduce greenhouse gas emissions. We are committed to developing a plan that will be constructive for our company our customers and our communities around the globe. We take this one.
Sponsored <unk> very seriously.
Please turn to slide four and we'll get started on our segment updates with access equipment.
Our access equipment team delivered meaningful performance improvement during the second quarter compared to the first quarter sequentially. We grew revenue by over 10% and we achieved a 630 basis point improvement in operating margin, despite inflationary pressures and on time delivery metrics.
<unk> that remain well off historical norms I am proud of the efforts of our people as they work to secure materials and find alternative supply sources to allow us to keep our production lines running we are continuing to work towards delivering higher volumes in the second half of the year and are taking necessary.
Actions to increase our production capacity, including adding new production lines in Pennsylvania in Tennessee, as well as Onboarding additional suppliers.
As mentioned in my opening remarks demand for access equipment remains very high as reflected in our robust backlog of just under $4 billion orders were strong once again at nearly $1 billion in the quarter, we already have meaningful backlog for 2023 and have good visibility to customer.
<unk> beyond the orders and backlog based on customer discussions over the past quarter. As a reminder, prices are not fixed for 2023 deliveries. So we will continue to monitor inflation dynamics and adjust pricing as necessary.
To that end, we recently announced an additional 5% surcharge that takes effect for all shipments in North America, beginning September one the additional surcharge is necessary as a result of persistent inflation.
Please turn to slide five and I'll review, our defense segment.
Revenue for the defense segment were lower in the quarter versus the prior year due to lower tactical wheeled vehicle volumes, resulting from reduced department of defense budgets that we have been expecting for the last couple of years.
Margins were lower than our expectations as a result of unfavorable cumulative catch up adjustments driven by changes in inflationary projections, Mike will provide further color on the cumulative catch up adjustments in his section.
Moving to the J LTV Recompete. The army recently pushed the bid submission date to mid August 2022, as a result, we expect the final decision in early 2023, we remain highly focused on submitting a winning bid for this key program and will highlight our strengths in manufacturing.
And technology to our customer.
We also remain active on a number of additional program competitions, such as O M F. The CATV and <unk> and believe we are well positioned to win multiple adjacent programs to bolster our already strong business. The strength of our key programs was evident this past quarter as we received orders.
For the J LTV Stryker Mcw S and FH television programs. We are also receiving elevated inquiries from eastern European Nations for our tactical wheeled vehicles as the war in Ukraine continues there is a growing interest from numerous countries as they increase their deferred.
Spending.
Any new foreign military sales to these countries will likely begin in late 2023 or 2024.
Finally significant progress continues on our United States Postal service <unk> program, we were delighted to host a contingent of USPS professionals, including postal carriers in June for a program review and test drive we are pleased with our progress and we remain on track to be.
Delivering vehicles in the fourth quarter of 2023.
Let's turn to slide six for a discussion of the fire and emergency segment.
Demand remains very strong in the fire and emergency segment, but supply chain disruptions negatively impacted our ability to efficiently produce and deliver trucks. During the quarter. This led to a nearly 9% sales decrease compared to the prior year operating margins were down as a result of lower volume.
Manufacturing inefficiencies tied to these supply chain disruptions and labor availability.
Supply chain on time delivery metrics weakened over the course of the quarter, making it clear that volume will be impacted for the year, which was not our expectation. This was reflected in our revised guidance orders remained strong and were up 125% compared to the prior year highlighting excellent demand.
<unk> for our products as a reminder, we are in the midst of a capacity expansion for custom fire trucks in Appleton, Wisconsin, and we expect to benefit from this additional capacity in 2023 <unk>.
During the quarter, we announced our acquisition of Canadian fire truck manufacturer Maxi metal and organization known for quality reliability and outstanding customer service and support we expect to benefit from maxing metals experience and leadership as we grow our presence in Canada.
<unk>.
Their culture and customer focus align exceptionally well with fire and emergency and our dealer network.
Finally.
On our last quarterly call, we highlighted plans to take our Voltaire electric RFP unit to several airports around Europe for customer demonstrations. The response has been overwhelmingly positive as multiple airport authorities have expressed strong interest in ordering our innovative electric arps.
We are not yet accepting orders for the Voltaire, our expect we will begin doing so shortly.
Please turn to slide seven and we'll talk about our commercial segment.
In the commercial segment revenue was up sequentially and flat year over year. As a reminder, commercial is our biggest consumer of third party chassis and availability remains constrained. In addition, we have been impacted by several other components that are further limited our ability to produce.
Nonetheless, I am pleased with the efforts of our team at commercial to manage through the supply chain variability and keep our production lines running.
Demand for our Cvs continues to be strong during the pandemic many customers paused RCB purchases leading to elevated fleet ages. We are also seeing strong market fundamentals and the broader environmental services space. We believe both of these factors are contributing to strong demand for our innovative products.
We are working closely with our customers on requirements and a partially opened or order book for 2023, as we continued to monitor input cost and inflationary dynamics.
In May we experienced strong attendee enthusiasm for our vehicles at both the advanced clean transportation Expo and waste Expo, we displayed our electric front discharge concrete mixer at the advanced clean Transportation Expo, while we showed our recently acquired cart seeker autonomous.
Technology at waste Expo, we believe our technology enhanced new products will continue to strengthen our position as the industry leader.
With that I'm going to turn it over to Mike to discuss our results in more detail and our updated expectations for 2022.
Thanks, John and good morning, everyone. Please turn to slide eight as John discussed our results did not meet our expectations for the quarter. There were three principal factors that drove the shortfall first revised third party cost projections are indicating persistent inflation and therefore higher cost expectations to complete our large.
<unk> defense tactical wheeled vehicle backlogs.
This change in expectations yielded large unfavorable cumulative catch up adjustments in the defense segment of approximately $25 million in the quarter to adjust our life to date margins for our tactical wheeled vehicle contracts. While these adjustments had a large impact in the quarter. Our estimated contract margins are only 30 basis.
Points lower than prior expectations.
As previously mentioned fire <unk> emergency has been negatively impacted by supply chain delivery challenges for key components, notably axles and other powertrain components. This drove lower revenues in the second quarter. In addition to labor inefficiencies, resulting in a $15 million operating income.
Shortfall versus our expectations for the segment.
Finally, with public equity markets down significantly and technology stocks, even more we recognized an unfavorable noncash mark to market adjustment of $11 million for investment in micro vast during the quarter importantly, we expect to benefit from our joint development agreement with micro Bath on.
Key electrification projects.
Conversely access equipment and commercial outperformed our prior operating income expectations, despite lower than expected sales, we delivered strong sequential improvements in the second quarter at access equipment with revenue growth of 10, 6% and a 630 basis point improvement in operating margin.
Versus the first quarter, largely driven by increased price realization and volume.
Moving to a comparison versus the prior year consolidated sales for the quarter were $2, <unk> 7 billion or $143 million lower than the prior year quarter, representing a six 5% decrease the consolidated sales decline was largely driven by a 171 million.
Decline in defense segment sales due to lower tactical wheeled vehicle volumes and lower fire <unk> emergency sales volume as a result of the supply chain disruptions, we are facing partially offset by the benefit of increased pricing.
Consolidated operating income for the second quarter was $69 4 million or three 4% of sales compared to adjusted operating income of $205 1 million or nine 3% of sales in the prior year quarter consolidated operating income decreased due to the higher.
Cereal and freight costs lower sales volume decreased manufacturing efficiencies caused by part shortages unfavorable cumulative catch up adjustments in defense.
And this was offset in part by increased pricing and lower incentive compensation costs, our consolidated price cost headwind in the quarter came in slightly higher than our expectations at $75 million, which impacted earnings per share by <unk> 83.
EPS for the quarter was 41.
Compared to adjusted EPS of $2 nine in the prior year quarter EPS was impacted versus the prior year by a lower operating income and the microvascular mark to market adjustment.
We repurchased approximately 757000 shares of common stock for a total cost of $70 million during the quarter consistent with our disciplined capital allocation approach.
Let's turn to slide nine for a discussion of our updated expectations for 2022.
We're encouraged by robust demand for our products as evidenced by a record $13 billion backlog and are confident in our long term outlook, we shared at our Investor day in May and the near term our April earnings guidance called for a significant ramp up in revenue and earnings in the second half of the year. This was the <unk>.
And upon inflation moderating and supply chain constraints stabilizing which has not been the case.
While we continue to realize the benefits of pricing inflation has been higher than prior expectations and our non defense segments were able to price for inflation, but there is a timing lag in realizing the benefit.
Furthermore, significant supply chain disruptions continue despite relentless engagement with our supply base. These disruptions are reducing sales volume and increasing manufacturing inefficiencies both of which are impacting our expectations for 2022.
As a result of these factors, we do not expect to achieve our previous adjusted EPS range of $5 to $6 per share for the year. We now believe that revenues and EPS will be in the range of $8 $3 billion and $3 50 per share respectively or.
Our EPS could be lower if supply chain and inflation conditions worsen or higher if conditions improve we're continuing to monitor the factors contributing to our revised outlook for the year and we'll provide an update on our next earnings call I'll turn it back over now to John for some closing comments.
While we are facing near term supply chain challenges the fundamentals in our end markets remains strong we've taken numerous pricing and surcharge actions seeking to recover margins. Additionally, we have updated our production plans to better match. The current environment and believe we have a realistic outlook for the back half.
2022, we expect to exit 2022 in a stronger position as we head into 2023.
Pat back to you.
Thanks, John I'd like to remind everyone to please limit your questions to one plus a follow up and we need to be disciplined on the follow up question. Please after the follow up we ask that you get back in queue, if you'd like to ask additional questions. Operator. Please begin the question and answer period of this call.
Thank you we will now be conducting a question and answer session. We would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Tami Zakaria with Jpmorgan. Please proceed with your questions.
Hi, good morning. Thank you so much for taking my question.
Last question is can you talk about what kind of pricing you realized in the second quarter.
Thank you mentioned, 15% to 20% pricing in the last 12 months.
Well.
What was it in the second quarter and what's your expectation for the rest of the year.
Sure and our nondefense businesses. It was about 9% in the quarter sequentially. If you look at price cost price cost improved by about $50 million for.
For the full year, we believe our prior expectation was price cost would be.
About 190 $190 million at the midpoint.
Now, we now believe that it's about $250 million.
Really the change is attributable to the cumulative catch up adjustment we had in the quarter.
As well as some expectations of a higher LIFO reserves at the end of the year, what the with the more persistent inflation that we've seen.
Got it. Thank you so much and I'm, sorry, if I missed it but besides Marshall have you started filling orders.
Next year for any other segment.
And also how are you approaching pricing for next year.
Yes, so great question by the way our order rates are very very robust across all of our segments.
When you look at it and most of our.
Segments were taking orders well into 2023 in fact in F&B, our fire and emergency segment, we're taking orders in 2024.
Haven't now having said that we haven't fully opened the order books for 2023 and 2024. So when you look at our order numbers.
There are a little bit artificially lower than actual because because of the fact that we're being very careful about how we structure and take the orders for 2023, but we've got a lot of orders for 2023 across the access business, the F&B business and even the commercial business.
Thanks Danny.
Thank you.
Thank you. Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your questions.
Hey, guys good morning, and thank you.
I wanted to ask you about the defense margin.
<unk> the color on the.
With $25 million.
Catch up but I'm, just trying to make sure I'm understanding. This so would you expect.
Margins then in the back half of 2022, and then going forward to kind of continue to get back into that.
6% to 7% range is that the right way to think about it or is there some other.
It sounds like some of the volumes are a little bit lower I'm, just trying to think about like what what's a normalized defense margin going forward. Thanks.
Maybe just to provide a little color, we have cumulative catch up adjustments every quarter.
So happened is larger this quarter with the more persistent inflation in other words more cut we're expecting sort of low single digits.
Incremental costs to complete our $3 billion backlog. So we ended up recognizing one margin over the entire all of our contracts were about 80% complete so.
We only see our margins actually being about 30 basis points lower than our prior expectation, but when you have to catch up those contracts that are 80% complete you can have a bigger impact in a quarter. So that's really what happened so going forward and again one of the things we need to continue to watch as we're always looking at third party forecasts to understand.
What we're seeing from an inflation perspective, and obviously those have trended upward overtime, but assuming no major movements in those third party or the outlook for inflation versus where we're at today, we would expect that our margins would be within about 30 basis points of what they previously were.
So not we're not expecting a large margin impact going forward.
Okay. That's.
That's helpful. Thank you and then just as a follow up can you just.
Kind of give us your interpretation of what's there was a news article recently around.
The U S post all the <unk>.
Yes, potentially opening it up or I, just I'd just like to hear your perspective on on what's going on with.
Their appetite for orders and if you feel like there is another.
Opportunity for another supplier to come into the into the mix or just how you're interpreting what's what's out there. Thanks.
Yes, Seth this is John I'll take the I'll take that question everything Thats happening with U S. Postal service is positive for us everything Thats happening is positive I think what you saw recently saw couple of bits of news one of them had to do with.
Now what they call cost, which is commercial off the shelf vehicles. That's a standard off the shelf vehicle think of a sprinter van.
The postal service has always had a program for buying those off the shelf vehicles and it's just part of what they do this is has nothing to do with a long term plan for Engie Dv. The vehicle that were that were contracted on there are two separate programs. The other piece of.
News that they had.
Recently was that Theyre going to go to 50% battery electric vehicles on the initial 50000 unit order that's really good news for everybody. All parties involved want to see more electric faster with postal last mile delivery in the <unk> and we're seeing that really start to happen so that.
The more.
Eric faster is really good but the fact that they are buying off the shelf vehicles thats, what they always do as part of their program. It doesn't have any relation to our <unk> program.
Got it okay. Thank you guys I appreciate it thanks.
Thank you. Our next question is coming from the line of Jamie Cook with Credit Suisse. Please proceed with your questions.
Fortunately it looks like we lost Jamie I'm going to bring through David Raso of Evercore ISI. Please proceed with your questions Hi, Thank you for the time.
So the second half guide versus the first half it looks like you're assuming sales are up about 7% sequentially and.
And the operating margins go from two and a half to over six.
And if you adjust for the defense catch up let's call. It first half was 3% margins having to go to six and I'm just trying to get a sense of on price cost I guess first on the revenue sequentially the up seven or so how much of that do you feel you already have in pricing that will flow through including that 5% for September one.
So just trying to get a sense how much volume do we need to get to seven and then on the margin how much is price cost in your math swinging positive to account for that extra 300 bps.
Sure.
Oh, sorry.
Good.
You're operating at the end I thought you were done.
Go ahead please.
Yes, so I guess first of all from a pricing standpoint.
It's about $200 million of the revenue increase is price. So that's obviously a big meaningful component of it from a price cost perspective that improves by about a call. It a buck 70 to about 75 in the first half versus second half of the year. So on price cost is obviously a much.
As a big driver of that debt that EPS improvement in the back half of the year.
Okay that's interesting.
So you basically 75% of the revenue increase sequentially you feel like you have from price but.
Price cost number the 175 actually would suggest even more than 300 basis points of margin improvement I know, it's a wildcard it's been hard so I'm not saying, it's going to be easy, but on that price cost how much do you feel you have your your cost at least somewhat.
<unk> locked in versus the surprises you saw this past quarter I'm, just trying to get a chunk of inefficiencies. We saw chassis was going to show up and it didn't it and youre scrambling to airfreight things and I'm, just trying to get a sense of how comfortable we can be obviously given this quarter was.
The challenge.
Sure first of all I should just clarify that.
Price, it's about a $150 million in the second half of the year, but EPS conversions at dollar $1 $73 75.
It may be helpful. David just breakdown, if you kind of look at it.
Our prior midpoint to the.
Approximately $3 50 are in the neighborhood of $3 50, you were talking about about 40% of its volume mix that about 35% of that is inflationary impacts which inflation as we're looking at that the two biggest pieces of it it's really.
It's really the cumulative catch up adjustment and its a LIFO.
And then the last pieces manufacturing inefficiencies, which is about 25% of it I think from a visibility to cost perspective, obviously, we're getting further in the year we are.
Better visibility to our cost now.
<unk> further end of the year, what we're really watching it is of course, if we see upward inflation pressure or an extended obviously that can impact. We include cumulative catch up adjustments net cost price. So.
That's one area, we're watching closely as well as our LIFO reserve.
With LIFO at sort of the last things you're receiving in the year that obviously, we hadn't necessarily place the orders for those yet or Theres still some movement there that can impact LIFO. So it's not sort of the core FIFO cost that we do have a bit better visibility to right now.
Alright I appreciate the time thank you.
Thanks.
Thank you. Our next question is coming from the line of Nicole <unk> with Deutsche Bank. Please proceed with your question.
Thanks, Good morning, guys.
Good morning.
I just wanted to ask about what you're thinking for the cadence of earnings in <unk> versus <unk>.
Kind of like embedding normal seasonality there.
If you can provide with respect to how youre thinking about volumes as well as operating margins and the two remaining quarters of the year.
I would definitely say there will be a.
A bit of a cadence of continual improvement in particularly.
In the previous question just looking at price, so youre going to see a progression of price as we go through.
From the third to fourth quarter as well so we're going to we saw about a $50 million.
Price cost improvement from Q1 to Q2, we'll see nice progression from from Q3 or excuse me from Q2 to Q3 as well as Q3 to Q4, so I would see a bit of a progression to the end of the year.
Okay.
Okay got it that's helpful. And then just kind of maybe fast forwarding to 2023, I mean, it feels to me like we could be setting up for actually a pretty nice margin year, because theoretically pricing sticky can you give us a sense of like the potential carryover pricing into 2023 that we're looking out based on the actions you guys have taken so far and I mean.
Is the conclusion right not as input costs have come down recently that should benefit the cost piece of the equation probably into the first half of 'twenty three.
Maybe just starting with the cost side of it with that question I think.
Hot rolled coil has come down.
But input costs are much more than that and we're seeing pretty broad ranging inflation everything from engineered components like actuals and engines to electronics. So it's definitely more than steel aluminum has remained persistence. So I think the things that we're continuing to watch and frankly continuing to price for or what.
It happens with those input costs. So right now we've increased prices we talked about.
20% plus in our non defense businesses. So again, we're going to continue to watch those inflationary dynamics I think a lot of what the other dynamic we need to continue to watch is just what's the progression of supply chain, we expected supply chain.
Would improve in the back half of the year, we hadn't seen we didn't see that in the quarter. In fact, it went it got worse in the fire <unk> emergency business for instance.
So that's those are things that we're looking at as we go into 2023.
Obviously, we are exiting the year in a much better price cost position than we entered the year.
On the call we've done a lot of.
Lot of learnings and done a lot of.
Action around how we're managing the company through inflation and there is no question, we feel like as we get towards 2023 will have.
The actions that we've implemented for the most part in place and will be.
In a much better spot.
Going into 'twenty three.
Thank you.
Thanks Nicole.
Thank you. Our next question will come from the line, it's Steven Fisher with UBS. Please proceed with your questions.
Thanks, Good morning.
You've given a lot of details of some of the assumptions in the rest of the year, but I wanted to maybe just zoom out on this topic a little bit.
After a couple of consecutive quarters of guidance reductions I'm. Just curious if you can talk about how different your approach was.
For this quarter and the rest of the year if at all if you kind of tried to bake in any a little bit more of a cushion in the guidance or any different approaches.
I guess I'd say is we have not changed our approach I think what really changed over the last quarter, we expected that inflation would moderate somewhat we.
We see it obviously with what's hot rolled coil, but it was.
It has not come down as fast or as soon as expected.
The other pieces, we expect that that supply chain would start improving we didn't need supply chain to be perfect by the end of the year and we said that a lot, but we needed. It we needed some we needed progression there and we saw a pretty meaningful degradation of supply chain, particularly in fire and emergency and our on time delivery metrics are pretty similar quarter.
Over quarter in access equipment those are the two.
Two businesses that we're watching closely so I would say, it's really our forecast is really a reflection of current conditions that that we see between.
<unk> dynamics as well as supplier performance and then ultimately the impact that's having on our production facilities, creating some absorption challenges as well as labor inefficiencies.
Okay. That's helpful and then in terms of the.
The access backlog I'm curious how much of the sort of margin compromised orders you still have in backlog and originally we are anticipating that a lot of that would be rolled off by June timeframe I imagine, it's taking longer how do you see the.
How much is left in there now and how do you see the exit rate.
Margins on the access segment is that should we still be thinking about kind of low double digits there.
Building base for 2023.
Yes, I would say again from a cost price dynamics, we talked about.
Holistically.
Price gets we saw about.
200 of headwinds in the first half of the year that's about about.
About 50 in the back half of the year for a total of $2 50, So that's <unk>.
$150 million improvement quarter over our first half versus second half. So obviously access is a big piece of that so.
There's there's meaningful movements, there and we do expect that we in the fourth quarter.
In our in our nondefense businesses that were largely on price costs.
Neutral.
Positive so that's still our expectation.
Going it as we start going into next year, and it's just a little bit more color for me even on that.
On the access piece.
With regard to prior peak margins, we believe that we will.
Meet or even exceed prior peak <unk>.
Earnings and margins.
Clearly inflation has been volatile, but our pricing commensurate with the cost escalation that we've seen and we certainly expect to achieve a new peak in revenue for sure in prior peak margins and even exceed prior peak margins.
So we feel good about the trajectory of access and we feel good about the trajectory even as we go into Q3 and Q4 and are continuing to see margin development.
Perfect. Thank you.
Thanks, Steve.
Thank you. Our next question is come from the line of Stephen Volkmann with Jefferies. Please proceed with your questions.
Hi, guys. Just a couple of quick follow ups, if I could on the pricing question.
Question I'm curious some of it seems to be surcharges some of it seems to be list price increases.
Are those surcharges sort of tied to any triggers or how do we think about them potentially unwinding as raw materials shade going forward.
You know we have surcharges that go in place unless surcharge goes in place. It goes in place essentially effect of a certain date, which is usually immediate or in the very near future.
And.
That allows us to have more of a benefit.
With regard to the backlogs that we have because of the immediate nature of the cost escalation that we're seeing.
So that's the benefit of the surcharge now of course as we if we see.
Costs moderate significantly then that's always a point with our customers as to when can we released the surcharge. If we have to if we get to a point, where we're releasing surcharges. That's a really good that's a really good event and.
And we certainly.
I would hope that that will happen at some point in the future.
But these pricing mechanism, it's not they're not index space because right now inflation has been much broader than just a lot of times index. When you look at those pricing scenarios are based on our steel prices, Sean right now inflation, so much broader base than you typically see and Thats why theyre just not tied to an index that's based on an <unk>.
Inflation, and and really costs that we're seeing and we're being transparent with our customers on it.
Okay. That's helpful. Thanks, and then John you mentioned some discussions with your customers on AWP.
Stretching out into 'twenty three.
Just on that or would you assume that volume rather than dollars, which includes price. Obviously would you assume that volume will be up in 'twenty three for AWP.
Yeah.
We're not providing guidance for 'twenty three at this point.
But when I look at the market today, when I look at the fleet age and where it is still in its very the fleet is very Asia 60 months or more of the demand from our customers I have even been in meetings with big customers with with.
Jay LG, where they want to talk about 2024.
So I feel really good about.
The development of that business. The other thing Thats driving demand is.
New technology, we've put a lot of new technological developments onto our products with electrification and autonomy and that helps to drive accelerated fleet replacement as well because a lot of customers want that technology in their fleets, so while I'm not providing.
2023 guidance.
I'll tell you.
At least we feel really good about the health of the access equipment segment.
And because of those factors and even if there is everyone talks about the our work right now even if there is a mild recession.
A recession in the future, we still feel pretty good about the robustness of the backlog and where the order rates are and what we're hearing from our customers.
With regard to the.
To the market right now.
Okay. Thank you.
<unk>.
Thank you our next questions come from the line of Jerry Revich with Goldman Sachs. Please proceed with your questions.
Yes, hi, good morning, everyone.
Okay.
John normally when you folks would be $4 billion of revenue and access margins would be about 12%. It looks like will be about half that this year. It sounds like half of that variance is price cost can you just told me Jeff on the other pieces how much of that is manufacturing efficiencies from supply chain.
And the other moving pieces.
Put into perspective for us.
I think you.
You hit the big piece of it it's really it's really the volume.
Frankly the.
Some of the volume that we lost obviously is.
North America, AWP is which obviously have.
Our strong margins.
The other piece of it is really when.
When we're we're obviously.
Staffed and have demand to produce at higher levels. So there manufacturing inefficiencies are are absolutely an impact this year and then you add on top of it when you're not producing at rates you can add some absorption headwinds. So those really are the drivers of the margin differential youre speaking of.
Yes, Jerry.
Price cost is by far and away the.
The biggest reason and we'll make that up as with every quarter that goes by you'll see improvement.
<unk>.
As we get more through our full price.
The other thing is what Mike said, it's inefficiencies in our manufacturing operations due to very difficult inconsistent supply chain performance creates a lot of inefficiency within the plant.
And it creates.
Costs that we as we improve the supply chain going forward, we will be able to work out.
The business.
Okay.
And John you spoke about at a high degree of confidence of getting margins back to where they were historically.
Can we get there is it possible to.
Essentially you can pick up call on pricing.
23, all in one fell swoop can you just comment on that so you folks generate a fair return.
Well, we think you will see it continue to evolve with every quarter that goes by as we go into 2023 again I can't provide 2023 guidance at this time.
What I can tell you Jerry is that I think you'll see as you saw this quarter, we saw a nice improvement in access margins in this quarter.
I think we will continue to see that development quarter over quarter as we go forward and.
Certain confidence that.
That we will get.
To those prior levels of margins.
Sooner than later, but I can't give you any guidance on exactly when in 2023, what's going to happen yet.
Thanks Jerry.
Thank you our next questions come from the line of Chad Dillard with Bernstein. Please proceed with your questions.
Hi, good morning, guys.
Good morning.
So I wanted to circle back to the <unk> program and just better understand just like the contractual terms.
Just trying to think through.
Some inflation, particularly on <unk> and just wanted to figure out how much margin protection you have there and if you've taken any.
Catch up adjustments.
To normalize that.
That platform.
Yes for <unk>.
<unk> it is.
Overtime revenue recognition, but we haven't.
Nothing really starts until we begin the program recognizing revenue on that and that will be late 2023. There are similar to all of our our March large programs we have.
There is a large amount of supply base that we try to lock in where we can.
And I would say that we.
We're doing that is while there's also economic price adjustments as well with that so and again I think we need to if you go back again, the expectation, while we had a bigger margin impact or dollar impact in the quarter with a cumulative catch up adjustments I think the important point is our defense margin expectations on those major probe.
Grams is within 30 basis points of our prior expectations. So it's not a huge change and Thats really why these large contracts you have to look at the margin.
On them over time at times, it can be more challenging looking at it on a quarter to quarter basis, Yes, John I will just remind you. We go into production next year on engine ebay's. So we'll go into production in the third quarter next year start delivering vehicles in the fourth quarter. So that's why you'll see us start it'll start to show up as in term.
The revenue, but just talking about how we're managing through the inflationary environment and we've got a lot of <unk>.
Long term contracts that go into place on these programs, but as Mike said, we also have.
Economic adjustment that happens that we benefit from should there be an escalation of material costs. So we feel really good about where we are with <unk>.
The timeline for the postal service, we had an event with them just recently where were they came here to test drive the vehicles.
And even have some postal carriers it was a phenomenal event.
Vehicle performed.
Tastic Lee.
So we feel great about where we are with the development, where we are in terms of.
Getting ready for production next year, and we feel good about where we are with regard to managing the costs of the program.
So it's going as planned.
That's helpful.
And then I think you guys talked about a 20% price increase in your non defense segments.
Can you just breakdown how much of a surcharge versus list price.
It really varies by segment and even product line, but it's.
I guess I would look at it in totality of that debt.
Really the 20% and again I think in some of our businesses or the pricing is not set for next year. So I wouldn't.
Read too much into what surcharge versus versus a price theyre all pricing actions.
Got it okay. Thank you.
Thank you. Our next question will come from the line of Jamie Cook with Credit Suisse. Please proceed with your questions.
Hi, good morning, sorry about that I hung up instead of unprecedented.
Thanks, Jamie Yeah, sorry about that.
Most questions have been asked one can you sort of talk to your order trends in Europe .
And in China, seeing any signs of deterioration in Europe , given concerns and it's trying to starting to pick back up and then I guess just my second question you might not want to answer this but the street's all over the place for 2023, there's a material.
Earnings.
Ramp in 2023 that the street is estimating I guess.
Do you want to comment on that or can we think of at least if you think about the run rate of earnings in the back half of 2022 and imply earnings approaching I don't know 283 box or something like that is that the right run rate at least as a base to think about as we're thinking about 2023. So you know like a $6 556.
Dollar run rate thanks.
Let me start with your question regarding orders in Asia, China, specifically and in Europe .
Our strongest market for US right now no surprise to you as North America.
Where we're seeing the most demand come through.
<unk>.
China's market has been very very volatile for obvious reasons with all the lockdowns and shutdowns that the economy there has gone through.
So that market I'd say is certainly showing signs that it is stabilizing and I'll remind.
Mind.
Mind, you that we do see long term really strong market in China because of the size of the economy and the amount of construction activity that happens there and the move towards Awp's versus prior work methods. That's all still intact. So it's a big market.
I would say is stabilizing and we expect it to continue to grow over time.
The European market.
Perhaps not as bad as maybe some people would fear and I think thats because there is an aged fleet in Europe , just like there is in North America.
It's certainly not growing like North America is but I guess I would call it more stable right now.
There's a lot of.
Macro instability in the European market.
So it's stable.
Primarily because of the fleet age situation, where we're still getting orders for that Mike I'll turn yet and as we look to next year again as John said, we're not in a position to provide guidance for next year.
Just a few things that we've highlighted a few things that we know so.
So number one as John talked about demand, we see we see robust demand right now as.
As we talk to our customers. So that's a known then it comes down to what continues to happen with inflation of course, we're going to continue.
To be disciplined in our pricing actions around that but you can have a lag. So we got to continue to watch inflation and then it really comes down to what happens with supply chain does it does it start improving.
At a more rapid pace and so what.
When does that occur exactly so I think those are all the big things that we're continuing to monitor as we go into the back half of the year, obviously things are very dynamic right now.
In the here and now and we'll have to continue to watch that through the back half of the year.
Okay. Thank you.
Okay.
Yeah.
Thank you. Our next question comes from the line of Dillon Cumming with Morgan Stanley . Please proceed with your questions.
Hey, good morning, guys. Thanks for the question maybe just the first one on the Defence top line just curious how material some of the Fms inquiries from eastern Europe .
I'd imagine that's a pretty recent developments. So I guess just curious first of all that we thought would represent upside was wanted by the targets you gave at the Investor Day last month.
So talking about the.
Yeah.
Eastern European inquiries that we've had we've had a lot of them, we certainly expect to be taking orders and more orders from eastern European countries. As a result of what's happened recently in Europe .
And.
I'll just remind you that when we talk about orders in the U S. With the department of Defense can you talk about orders in terms of how many thousands of units are going to be order when you talk about.
Orders in Eastern Europe , it's typically in the neighborhood of dozens to maybe a big order would be 100.
Units so they're at a smaller scale I would say that it <unk>.
Clearly.
Positive for future years in 'twenty could be as early as 'twenty, three but probably 'twenty four 'twenty five deliveries.
Yes.
But this is not this is not a number that's similar to what you see us do with the department of defense.
So just keeping them keeping in perspective, yes.
Yes that makes sense. Thanks, John and then maybe just one more on the mix increase that you mentioned that was going up to 50% on the initial USPS contract I was just curious if that was more of an upper bound from your battery supplier or I guess do you feel like you have taken out.
Another leg higher USPS kind of wanted to request it.
Oh, it's not an upper bounds of or by US. We can go as high as the USPS once USPS wants to go to a 100% will go to a 100%.
This is this is really based upon what the United States Postal services plan is in terms of putting electric vehicles into the market versus low emission combustion engines and they have to do that based upon the amount of funding that they have a name, but more importantly, they have to do it based upon their pace.
Putting infrastructure in place to support battery electric vehicles whenever theres tens of thousands of postal offices around the country and you have to put the infrastructure in place to be able to support those vehicles that doesn't happen overnight. So that's another thing that.
The pace of this but 50% is a good number it could go up from 50% I think a lot of people wanted to continue to go up it's up to the U S. Postal service as to what Theyre going to do but we're not limiting them.
Got it appreciate it thank you.
Thank you. Our next question is coming from the line of Steve Barger with Keybanc capital markets. Please proceed with your questions.
Good morning.
Just a follow up to that one John it's probably early to talk about this but have you seen the production schedule and I'm just thinking about what the mix looks like and I am talking about N. G D V.
Whats mix look like front end versus back end, because <unk> is higher dollar and potentially higher margin right.
Yeah, Bev is higher higher higher sales revenue higher margin product correct margin dollars right.
So will that production schedule be evenly mixed between ice and bev or or will that be backend loaded because of what you just said about infrastructure.
No I don't so we've got an initial order of 50000 units or whenever this thing.
This contract is over 10 years and goes up to 165000 units. So the 50000 unit order is only the first quarter will produce that order in the first few years of the contract from when we go into production late next year.
The mix of that.
I believe it will be roughly 50 50 from day, one, but I don't know that for certain what the cadence of it is going to be but that's.
That's what I expect it to me.
And I just the micro Vas adjustment it was noncash I get that but operationally can you talk about when and how you'll benefit from that relationship.
Yes.
We did a strategic investment in micro vast.
Because of their capability their vertical integration with regard to <unk>.
Components of lithium ion batteries, but we havent joint development agreements as part of that strategic partnership we have with them. So they do development for us on certain programs, we're putting electrification into most end markets that we serve and they work with us on.
<unk>.
The right.
Battery into the structure of the vehicle for the program that we want to work with them on now we have a few different battery suppliers, depending on what the end market is and what the product is micro Vas is a big part of that and are there a close partner for us and in development.
Is that related to any <unk> at all or are those different programs and are using it.
No.
I'm not.
I am not at all.
A place where I can talk about who's supplying what program.
But we've got an outstanding.
<unk> for the U S postal service with regards to supply.
Got it thank you.
Thanks.
Thank you our final question of the day will come from the line of Felix <unk> with Raymond James. Please proceed with your questions.
Hey, good morning, everybody and thanks for squeezing me in here.
Good morning, good morning.
Hey, I just had a quick one on the fire and emergency segment. It seems like the backlog is stretching into 2024 already I'm, just curious and I think thats before even taking the electric our orders maybe out of Europe , but I'm curious if you could talk about how you're thinking about managing orders in that business.
And just kind of keep.
About your ability to reprice that backlog should input costs.
Over the next year and a half or so.
It's all I have I appreciate it.
Yes, Thanks, Sheila So let me start Mike do you want to add something to it so within the fire and emergency segment, we have not taken any orders for the electric vehicles, yet those will be released for sale in the near future, but we have the strongest backlog we've ever had in fire and emergency.
There is a lot of demand for our product you're correct. It goes into 2024.
Well point out what we're doing right now is we're adding capacity as we as we sit here today, we're adding capacity for peers, because we believed pierce needs it long term.
And that's going to help us drive long term growth.
<unk> of the strong order rates that we see per person, we expect them to continue we see we see a lot of demand.
Not just now but in the future for our products.
But first things first what's holding us back today in fire <unk> emergency is purely supply chain disruption.
It is we are paced by our supply chain right now and the supply chain disruptions are causing a lot of inefficiency in our manufacturing plants.
We will work through those problems in the short term.
And then start to get the benefit from the capacity additions that we're doing.
Mike I don't know, yes, I would just say for our from a backlog perspective, our backlog is longer for municipal fire trucks versus our and so.
So we're very excited.
Would you be able to start taking are taking though those bolt pair our quarters over time here.
We're managing the margin of those products for 'twenty, three and 'twenty four very very carefully we lead by far and away in pricing and fire and emergency and we're able to do that because we got the best product and we're the market leader, but we also are very aggressive.
Cost forecast as well so we feel good about where we are with our ability to continue to be.
Our leading margin generator for the company.
<unk>, we just we'll manage these supply chain issues get through them and we feel great about growth at <unk>.
Got it thanks, a lot thanks.
Thanks, Felix so I want I just want to thank everybody for joining us today or we are absolutely committed to driving long term growth and profitable growth will continue to innovate will continue to advance our company as we go forward.
Stay safe stay healthy and we look forward to speaking with you all very soon.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.