Q4 2022 Oshkosh Corp Earnings Call

Our remarks that follow including answers to your questions contain statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward looking statements.

These risks include among others matters that we have described in our form 8-K filed with the SEC. This morning, and other filings we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call if at all.

As a reminder, we changed our fiscal year to align with a calendar year effective January one 2022, all comparisons during this call to the prior year quarter or to the quarter ended December 31, 2021, all comparisons to the prior year or two the 12 months ended December 31 two.

'twenty one.

Our presenters today include John Pfeifer, President and Chief Executive Officer, and Mike <unk> Executive Vice President and Chief Financial Officer, Please turn to slide three and I'll turn it over to you John .

Thank you Pat and good morning, everyone. We delivered strong earnings growth in the quarter, both sequentially and compared with the prior year.

For the quarter, we reported revenue of $2 $2 billion highlighted by year over year sales growth in all four segments, leading to adjusted earnings per share of $1 60.

Strong sequential improvement over adjusted EPS of $1 12 in the third quarter and even stronger improvement over the prior year quarter in.

Importantly, we delivered another quarter with a double digit operating income margin in access equipment of 10, 8%, which is a record margin for the fourth calendar quarter.

Demand remains solid and we finished 2022 with strong orders and a record consolidated backlog of more than $14 billion. We are continuing to prudently invest in capacity in all of our segments to take advantage of long term demand trends. We also continue to invest in exciting new.

<unk>, including our growing stable of purpose built electric vehicles that we expect will charge future growth.

Our EPS results for the quarter were lower than our expectations of approximately $1 86 caused by two factors first the mix of aftermarket parts in our December J L. T V order in the defense segment was less favorable than our expectations and second.

Access equipment deliveries, while strong were lower than planned.

We have several important highlights during the quarter in November we announced an agreement to acquire <unk> S. P. A and Italian manufacturer of compact crawler booms as well as other tracks equipment and a longtime partner of J L. G.

I'm proud to announce that we are closing on this acquisition today Hino brings innovation leadership with lithium ion powered equipment that supports our expansion into adjacent markets. We believe this acquisition is an outstanding growth platform and provides expanded manufacturing capabilities in Europe .

Ah represents another attractive bolt on acquisition in line with our disciplined approach to M&A that supports our commitment to grow shareholder value.

Additionally, we were once again recognized for our strong sustainability practices by being named to the Dow Jones sustainability World Index for the fourth consecutive year.

We were also named one of America's most responsible companies by Newsweek, a recognition of our commitment to our core values and excellent corporate citizenship.

Please turn to slide four for a recap of 2022.

We grew revenues by just over 4% in 2022 compared to the prior year delivering adjusted EPS of $3 46.

Adjusted EPS was lower than the prior year, largely due to manufacturing inefficiencies associated with supply chain disruptions and unfavorable price cost dynamics, including unfavorable cumulative catch up adjustments in our defense segment.

Our teams have made significant progress combating inflationary pressure by implementing multiple price increases over the past year and persevering through supply chain disruptions.

These actions enabled us to more than triple our adjusted operating income from the first half to the second half of the year, providing us with important momentum as we expect to significantly grow revenue and earnings over the next few years.

Our outlook remains consistent with our Investor day presentation based on strong market drivers and our innovative products, including USPS next generation delivery vehicle and electrified products, including the bolt Taro line of electric fire trucks as well as our pioneering da Vinci all electric scissor lifts.

We believe these products will be important drivers of growth as we move towards 2025 and beyond.

In addition to Hino, we also acquired or invested in other businesses. During 2022 that will facilitate growth in the new product categories and Adjacencies. These include cart seeker with its patented AI based recognition technology used on refuse collection vehicles.

<unk> research a global leader in autonomous mobility, and Maxi metal of Canadian leader in fire truck manufacturing headquartered in Quebec.

As we look to 2023, we expect the continued execution of our innovate serve advance growth strategy priced.

Price cost management and strong tailwind supporting our business will allow us to drive significant improvement in our earnings compared with 2022, we are initiating 2023 earnings per share guidance in the range of $5 50.

While demand remains very robust, we expect that supply chains will continue to constrain revenue during the year, Mike will provide more details in his section.

Finally, we are pleased to announce an increase of four cents or 10, 8% to our quarterly dividend rate. Today. This is the ninth consecutive year that we have announced a double digit increase to our cash dividend.

Before we talk about our segments in more detail I want to discuss an exciting change to our business segments. Please turn to slide five.

This morning, we are forming a new Oshkosh Corporation segment called the vocational we're combining our fire <unk> emergency and commercial businesses, which all design develop and manufacture purpose built vocational vehicles for people in our communities, who do tough work by combining.

These businesses, we expect to drive enhanced efficiencies across the board, while better leveraging our scale and technology development at an accelerated pace. We believe the vocational segment will also serve as a platform for further organic and inorganic growth opportunities in several important end markets.

We expect that the vocational segment will initially be a two plus billion dollar revenue segment with the opportunity to grow organically at a high single digit compound annual growth rate to near $3 billion with 12% plus operating margins in the next few years.

We are also announcing that we've entered into a definitive agreement to divest our rear discharge concrete mixer business, we expect to complete the sale by the end of the first quarter. This will enable us to focus on attractive end markets that value technology, and innovation and will drive higher margins over time and our new.

<unk> segment.

Going forward from today, our businesses will be aligned in three segments access defense and vocational the vocational segment will be led by our current fire and emergency segment President Jim Johnson, Jim and his team have successfully transformed the performance of the fire and emergency segment over the past.

And I am excited for our talented teams in both segments to come together as a force multiplier for future success of the vocational segment, we look forward to sharing more details in the coming quarters.

Please turn to slide six and we will get started on our segment updates with access equipment.

Our access team delivered solid performance in the fourth quarter with a double digit operating income margin and 620 basis point year over year margin improvement supply chain challenges limited our production output, but we have seen some improvements, particularly in December as supplier on time delivery metrics.

Lime to above 70% for the first time in several months. While this is still well below our historical level of 90% plus on time delivery. It represents improvement the team at access made progress by qualifying additional suppliers dual sourcing and leveraging alternate sourcing strategies.

The team resource more than $270 million of parts in the past year with plans to do more in 2023 to further improve supply chain performance.

We also continue to implement changes to our products and processes to improve both output and manufacturing efficiencies.

Demand remains very strong for our market, leading <unk> products, driven by strong utilization rates elevated fleet ages and the large number of mega projects underway across the United States. In fact, the percentage of access equipment and rental fleets deployed the mega projects, which are generally defined as projects with the valley.

<unk>, a $400 million or more has more than doubled over historical levels, we expect that mega projects, including factories for evs batteries and chips as well as nonresidential projects such as data centers and health care facilities will continue to contribute to strong demand for our equipment.

For the foreseeable future.

We ended the quarter with a record backlog of nearly $4 4 billion fourth quarter orders were strong once again at $155 billion and we continue to have visibility to man to demand well beyond our current backlog. Please.

Please turn to slide seven and I'll review, our defense segment.

The defense segment continues to engage in a significant number of new business opportunities as well as current programs. During the quarter. We received two separate contract awards for Jay LTV, one valued at a total of $645 million. The first award was for domestic requirements.

The second included several 100 units of foreign military sales, many of which will be bolstering the tactical wheeled vehicle fleets of eastern European Nations.

The Dod's announcement date for the J LTV to contract has been pushed back from late January and we expect an award decision. This quarter. The J LTV has been a foundational product for our defense segment and we are confident that we can deliver even more value to our customer in the future.

In December our defense team was selected to produce a ton armored personnel carrier halls for the Israeli Ministry of defense under a contract expected to be valued at over $100 million. This is another key adjacent program win for our team similar to the Stryker Mcw S.

And <unk> programs that demonstrate the success of our offerings and programs beyond tactical wheeled vehicles.

Those out my comments on our defense segment with an exciting update on our progress with the USPS is N. G. D V program, which allows for delivery of up to 165000 vehicles over the 10 year duration of the program.

In late December both the USPS and President Biden made important announcements that express the postal services intention to increase the number of units in the initial order from 50000 to 60000 units and increased the percentage of battery electric vehicles to approximately 75%.

This change will enable the USPS to electrify their fleet at a faster pace. We are actively engaged with our customer to formalize the contract modifications to reflect the change. This is great news for the USPS communities across our country and our company.

We believe we are well positioned to supply the increased percentage of that.

<unk> units and continue to expect significant ramp up of production in 2024, and 2025, let's turn to slide eight for a discussion of the fire and emergency segment.

Our fire <unk> emergency segment made progress to improve output as indicated by fourth quarter sales that were up approximately 21% sequentially and approximately 37% versus the prior year quarter, while production output remains constrained by current supply chain dynamics the improvement in.

Production outputs and deliveries is encouraging.

The improvement was driven by higher supplier on time delivery metrics as well as the benefit of operational improvement initiatives. Our operating margins remained below typical levels for fire and emergency due primarily to supply chain impact impacts on production as well as the time lag in realizing the benefits of our Cigna.

<unk> price increases with municipal customers, we remain confident that we will return to strong double digit margins as production output increases and we realize a greater portion of the price increases we have implemented.

Demand for municipal fire trucks has remained very high bolstered by aging fleets and solid municipal budgets.

Order rates have remained strong leading to a record $2 $9 billion backlog, which provides us with good visibility and supports our outlook for higher margins over the next two plus years.

Our lead times have extended beyond our optimal time frames, but we believe the actions, we're taking to improve parts supply as well as our capacity expansions, including robotic painting and Appleton will help us increase output as we move through 2023 and into 2024 I had the opportunity to participate in our.

Pearce annual dealer meeting this past month I continue to be extremely impressed and inspired by our dealers. They are continuing to make significant investments in parts and service capacity to support our customers and drive growth. We believe these investments are critical to our long term success as the pop.

<unk> Pierce fire trucks in the field continues to grow.

Please turn to slide nine and we'll discuss our commercial segment.

Commercial sales increased by 34% to nearly $283 million versus the prior year. Despite persistent third party chassis and component constraints limiting production, we expect that chassis and other materials will remain a significant constraint in 2023 as well.

We previously highlighted the success, we are having with our first refuse collection vehicle automated high flow line and Dodge Center. We are beginning to work on our second high flow line, which is expected to go live in the second half of 2023, our high flow lines leverage integrated automation to drive improved.

<unk> shorter build cycle times, lower direct labor hours and increased manufacturing efficiencies all of which are expected to drive higher operating margins.

As we previously discussed we see significant opportunities in electrification automation and other advanced technologies, particularly in the <unk> space, we expect to continue to make meaningful investments in new products and manufacturing facilities over the next several years, we look forward to sharing more.

<unk> over time.

With that I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2023.

Thanks, John Please turn to slide 10.

Consolidated sales for the fourth quarter were $2 $2 billion, an increase of $412 million or 23% over the prior year quarter. All segments contributed to the sales increase led by access equipment, which was up by $241 million or 29% versus the prior year to consolidate.

The sales increase was driven by increased sales volume and higher pricing to offset the impacts of inflation, particularly at access equipment fourth quarter consolidated sales were approximately $70 million lower than.

Our most recent expectations largely driven by lower volume at access equipment.

Moving to adjusted operating income, we implemented an inventory accounting method change in the fourth quarter moving the approximately 80% of our inventory that had been valued at LIFO to FIFO. The FIFO method of inventory valuation results in better matching of revenues with expenses since it more accurately reflects the curve.

<unk> value and physical flow of inventory pipe also aligns our inventory valuation method methodology with the majority of our peers and results in a consistent inventory valuation methods throughout Oshkosh.

Current and prior year adjusted operating income amounts have been restated on a FIFO basis adjust.

Adjusted operating income increased $111 million over the prior year quarter to $153 million or six 9% of sales, representing a 460 basis point improvement versus the prior year.

The improvement in adjusted operating income versus the prior year was largely driven by improved price cost dynamics and increased volume versus the prior year, particularly in access equipment, partially offset by production inefficiencies adjusted earnings per share was $1.60 in the fourth quarter versus 36 cents in the prior.

Per year, our adjusted earnings per share was lower than our most recent expectations as a result of lower volume at access equipment and a less favorable mix of aftermarket parts and our December J LTV order now, let's turn to our outlook for 2023, Please turn to slide 11.

We are estimating consolidated sales and operating income will be in the range of $8 $4 billion and $530 million, respectively were estimating EPS will improve to be in the range of $5 50, representing significant growth versus versus adjusted EPS of $3.

46, <unk> in 2022 included in our expectations is the EPS impact of approximately 80 cents related to incentive compensation costs, returning to typical levels and increased new product development investments of approximately 30 cents.

Demand remains strong as indicated by order intake of $3 $3 billion in the fourth quarter, leading to a record backlog of over $14 billion on December 31, 2022, our guidance reflects modest supply chain improvements in 2023, but we expect that supply chain impacts will continue.

To limit our revenues and contribute to production inefficiencies during the year.

At a segment level, we are estimating access sales and operating margin to be in the range of $4 $2 billion and 11% respectively.

The 300 basis point improvement in operating margin versus 2022 is driven by the full year benefit of improved pricing and a modest volume increase we expect supply chain dynamics remain the limiting factor of more significant revenue growth as demand remains very robust.

Turning to defense, we are estimating 2023 sales of approximately $2 billion or roughly $140 million lower than 2022 as previously discussed we anticipated that revenues would be down in both 2022 and 2023 importantly, we expect that revenues will begin to grow.

So in 2024 as the U S. P S and GDP production begins to ramp up.

We are estimating our defense operating margin will be approximately 4%, we expect lower sales unfavorable product and aftermarket mix and mgd and GDP related preproduction operating expenses to account for the mid single digit operating margin. We also expect margins will improve as new pro.

Graham's ramp up in 2024 and beyond.

Moving to our new vocational segment. Our guidance includes the combination of our former fire <unk> emergency and commercial segments and reflects the planned divestiture of our rear discharge concrete mixer business. During the first quarter of 2023, we expect vocational sales will be in the range of $2 $2 billion, which is roughly flat to the combined <unk>.

Revenue of the fire <unk> emergency and commercial segments in 2022, despite the approximately $150 million sales impact of our planned divestiture of our rear discharge mixers.

Similar to access demand remains very strong, but our revenue is expected to be constrained in 2023 by supply chain dynamics.

We expect the operating margin in the vocational segment will be approximately seven 5%, reflecting the impact of constrained output manufacturing inefficiencies due to supply chain dynamics, the impact of price protected orders and higher new product development investments.

Municipal customer orders in our backlog to be delivered in 2024 were booked with significantly higher prices and we expect them to drive meaningfully improved margins in the future. We also expect margin benefit over time from the integration of our two segments into vocational.

We estimate corporate expenses will be approximately $170 million versus $141 million in 2022, driven by a return of incentive compensation to typical levels and increased investments in growth initiatives and new product development we.

We estimate the tax rate for 2023 will be approximately 25% and we are estimating an average share count of $65 7 million shares.

For the full year, we are estimating free cash flow of approximately $300 million, which was impacted by a higher than typical capital expenditures of approximately $350 million as we complete the <unk> facility in South Carolina, and invest in manufacturing capacity as well as new product development initiatives throughout the company.

Recall that organic investment is a top capital allocation priority for us.

Looking to the first quarter, we expect consolidated sales to be in the range of $2 $1 billion down approximately $100 million versus the fourth quarter, we expect a lower revenues compared to Q4 2022 will be driven by the timing of deliveries in our access and vocational segments as well as lower sales at defense.

We expect EPS will be around $1, reflecting lower sales unfavorable order mix in the defense segment and the return of incentive compensation cost to typical levels when compared to the fourth quarter of 2022, we expect that the first quarter will be the lowest quarter of the year for EPS based on these factors I will turn it back over.

To John now for some closing comments.

We delivered significant sequential improvement in earnings and strong overall performance in the quarter. We are also making investments that will drive future growth.

Supply chain dynamics remain our most significant challenge and we are taking actions to drive higher output over time, we believe that the fundamentals in our end markets remain very strong and we expect to deliver robust earnings growth in 2023.

Okay path back to you. Thanks, Jen excuse me I'd like to remind everyone to please limit your questions to one plus a follow up and please stay disciplined on that follow up afterwards. After your follow up we ask that you get back in queue, if you'd like to ask additional questions. Operator. Please begin the question and answer period of this call.

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As a reminder, we ask all callers limit themselves to one question and one follow up one more.

Please while we poll for questions.

Thank you. Our first question comes from the line of Nicole <unk> with Deutsche Bank. Please proceed with your question.

Yeah. Thanks, Good morning, guys good.

Nicole.

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

Sure I guess from a revenue guide perspective, I think foundational.

There's limited volume increase a lot of it is just benefiting from the full year of run rate.

Did implemented an additional price increase of three 5% on the first of the year on Thats incremental to where we were in the fourth quarter. So that's so right now again, obviously, we have very very robust demand right now.

Why change really the constraining factor from revenue being higher so that's that's really what we're going to be continuing to watch over the course of the year is what transpired with supply chains.

Yeah, and I'll, just emphasize that Nicole our revenue and access is not constrained by the order rate. We've got really strong dynamics in the market you saw the healthy backlog continuing to grow really strong orders.

It's entirely.

Ply chain driven in terms of how much we can produce and ship in 2023.

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

Yeah, So our expectation is that.

That again that because of the lower volume that we had last year and again this year combined with the mix, that's certainly creating a headwind.

And obviously, we have had some impacts of inflation. There. So I think as we look to the future as we get into 2024 and postal service as well as other significant programs continue to ramp up.

Expect those margins to begin to return to more typical levels aided by the additional volume one other thing that I did forget to mention we do have that still have about 1% drag in 2023 similar to what we had last year just related to <unk> SG&A, that's not capitalized before the program starts.

So.

Down we expect to be down this year should begin to grow and of course as we look at new programs as well.

The economic price adjustments, particularly if you look at programs like <unk>.

Over time, those will those should offer more protection than we've had against inflation.

Thank you I'll pass it on.

Thanks Nicole.

Our next question comes from the line of Mike Hickey with D. A Davidson. Please proceed with your question.

Yes, Hello, good morning, Thanks for taking my question.

John on your comments about the U S market I was wondering if you can update us.

On how conditions internationally for access.

'twenty three.

No.

International positions at access had been relatively healthy, especially when you adjust for constant currency currencies hurt us a little bit with the strong dollar, but if you adjust for constant currency. The European market is for us or our business in Europe I should say is up nicely. We're up really strong in Latin America I think the <unk>.

One outlier there is of course, China, China is a huge market for the access equipment business and we all know what's going on in China, starting with the Covid Lockdowns and how thats really hindered the economy in China. So.

Asia Pacific in total has been down year over year.

Now, there's some nice pockets of growth in there, but China kind of being down pulls the whole region down we still do expect China to be over longer periods of time, a nice growth market.

So this is.

Likely a shorter term phenomenon, where we've seen China come down so sharply, but I would say outside of China.

Ben.

Maybe even better than expected around the world in terms of conditions and our ability to generate revenue.

Great. Thanks, and then just turning to two applications.

You had mentioned wanting to grow this $2 billion.

And over the next couple of years I'm, just wondering as to why combined. These two do you have plans to enter other locations over the next couple of years or is it going to be strictly.

Spire and LER concrete going forward.

Some feel for what the mix might look like.

Yes, yes.

We're really.

Positive on the on the creation of a vocational segment. This is going to do a lot for us when you really look at what we're doing in these in the businesses that are in vocation in the vocational market. They are purpose built vehicles designed to provide productivity and safety.

For a specific end market and that's what we do in that segment, whether it's a fire truck or it's a refuse a recycling collection vehicle.

Other things that we do this simplifies our business of course, it's going to deliver some some overhead or back office and production synergies, but the real positive thats going to come as we're going to leverage our scale to drive technology development at an even more accelerated pace you've seen us do a lot electric fire truck.

<unk>.

Autonomous features coming online we think we can do that faster to organically grow the business, we expect to organically get to $3 billion.

On the planning horizon that we've got but then when you look at the inorganic moves that we believe we can make.

We think that we potentially can even exceed that $3 billion. So this this is a really exciting area for our company and we did this because we believe we can drive margin growth.

Hum.

With the revenue growth that we see on the horizon.

Okay. Thanks, I'll pass it along.

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

Chad Dillard your line is live.

Hi, good morning, guys.

I was hoping you guys could talk a little bit more about your expectations for.

Cadence.

As well as just manufacturing absorption as you think about it.

First half versus second half of this year.

Sure from a price cost perspective.

The back half of 2022 is a good starting point because as we expected we were pretty much price cost neutral in the back half of the year as a company.

And so that carries into next year, we've implemented additional price increases. So if you break that down a bit more by business.

Were at particularly with the increase that we implemented at access we're at in that neutral to positive territory, there as well as our historic commercial business, we have a little bit longer lag with our municipal customers.

And fire and emergency just because of bonded orders.

So we don't necessarily get better and we have more price coming online. So we don't necessarily get better with inflation in.

In 2023, so we looked at 2024, which we essentially have a pretty robust backlog for 2024 already there is significant price increases like double digit.

Versus where we're sitting today. So we expect as we get into 2024 gross margins will return back to back to normal, but really our expectation is as a company price cost neutral to positive for the full year and thats really measuring back too.

The startup inflation at 2021 of course from first half, we'll certainly see quarter over quarter in the first half of the year the benefits that we saw in the back half of 2022.

That's super helpful.

And the second question is just on access.

Clearly you have a pretty strong backlog.

That segment.

So how far out do you build slots go.

What share of the backlog is getting shipped in 'twenty four and I know there are some supply chain constraints, but let's just assume that there.

<unk>.

To what extent do you have appetite to add ships to drive for the production this year.

Yes, I'll take that this is John .

So in the access business.

Talk about a $4 $4 billion backlog. So clearly we're now going out into 2024.

With our current level of capacity.

Now our capacity is constrained by supply chain, primarily we expect to continue to make improvement as we go through the year and how we operate the supply chain and we're doing a lot of dual sourcing resourcing better use of analytics to predict problems before they happen and thats all manifesting itself.

No.

In some of the improvement we've seen and we'll continue to do that but when we look at a $4 $4 billion backlog plus another.

Probably tranche of close to $1 billion of orders that have not been entered yet and you look at the that's that's with a billion five orders we booked in the quarter.

A healthy business and Theres a lot of dynamics, creating health that we see over the long term. So we're also.

<unk> looking to expand capacity, because we know we need more capacity as we improve the supply chain will need not just more shifts, but we'll need a little bit more.

<unk>.

Our facilities and we will be able to leverage the facilities that we have to add capacity.

So that we can deliver faster.

Thank you.

Thanks, Chad.

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

Yeah.

Yes, hi, good morning, everyone.

John I Wonder if we could just go back to access equipment.

Outlook for a second so essentially up 6% given the price increase was implies volumes that are down and your customers are looking for capex to be up this year on a unit basis, and so I know youre not in the business of doing.

<unk> market share or is it just a function of how you look.

Tough supply chain year last year, or so let's make sure. We're in a position to hit our guidance or are there other moving pieces that are specifically impacting those.

Any particular components that are still very hard for you folks.

Business.

Well I think the way that we're looking at it is we're trying to be realistic Jerry you know we've been through the past.

Six quarters of pretty intense supply chain disruption.

And we've done a lot of work with.

You're starting to have some impact.

But we're also wanting to be realistic with our customers in terms of what based on what we've experienced over the past six quarters being realistic on what type of improvement. We can expect we don't expect anyone to flip a light switch and all of a sudden everything is going to be back to perfect with the supply chain. So we're.

We're really just trying to be realistic now we're going to add capacity. So that we can deliver faster, but we have to do that prudently along because it doesn't matter. If we add capacity if we can't get the supply chain improved so we have to do that prudently along with our ability to make.

Work with our suppliers to improve the supply chain part of it.

I guess, that's the best way I can describe it.

Super and relative to your guidance of access volumes do.

Surprise to the upside if we're able to deliver on the supply chain is it fair to expect.

5% to 30% incremental profitability on any incremental volumes, if we are able to ramp deliveries.

Generally I would say incremental [noise] excuse me or not.

The low Twenty's I think certainly as we add volume the pricing is obviously there to generate typical incrementals, but obviously there is a dry it continues to be a drag from a manufacturing efficiency perspective, so I would say, probably a little bit lower than normal, but obviously it.

As volume increases, though some of those efficiencies will subside.

Super Thanks.

Our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Hi, Good morning, everybody I wanted to go back to defense, but more on the USPS side, so that that contract has changed quite a bit since we first.

Started looking at it obviously more volume and more mix of battery.

I assume that makes a pretty significant difference in kind of the cost per unit, which obviously means youre going to get more revenue as we go forward.

Please disagree with you if you want to but I'm also trying to think about.

Are these bev margins sort of the same as ice or would those also be higher and then sorry, I'm throwing a lot at you, but does it also mean that theres going to be higher R&D and development in startup costs than we might have otherwise.

I assume.

Yes, great question, the fact that theyre moving towards 75% Bev and I think they've even indicated that by 'twenty six they'd go full bev.

From 26 onward, that's all positive it's great for the USPS.

And as I said in my opening remarks, it's good for communities across across the country, we see communities wanting more electric and it's good for US. So you said the price level on it.

Bev is higher than on an internal combustion vehicle because the costs are higher now the margin dollars. The margin percents are about the same but the margin dollars are of course higher as well.

When you look at the investment I wouldn't say that the investment changes materially it does not but the timing could shift a little bit when you talk about the initial orders started with 10% Bev and now they are gone.

The likely gone to 75%.

That can change a little bit of a timing I don't think it's going to be material timing change.

No.

A little bit one way or the other but this is a great program will essentially be getting into production in 'twenty four and we'll be expecting to reach full production in 'twenty five that's what we've said in past calls as well so none of that changes. This is this is a good news story for everybody involved in the <unk>.

Graham.

Okay, Great and just as a follow on do you have Bev units now that are sort of out on the road doing tests and all of that I assume you must if it's going to start off I mean, we've got prototypes and validation units and so forth.

And do you get involved in charging at all or is it somebody else.

Well, we want to be a total solutions provider to our customers. It doesn't matter if it's the United States Postal service municipal fire station.

We intend to be a total solutions provider. So we are there to support the U S. Postal service in any way that they want us to provide support.

And that's what we'll do but it's ultimately up to the U S postal service as to exactly how they want to execute the recharging.

Part of it.

Thank you so much thanks.

Steve.

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

Hi, Good morning, I, just wanted to dig into the vocational margin guide even.

Understanding where combining commercial and fire <unk> emergency, but it's it's it's lower I guess than I would've thought and not really much of a year over year improvement. So can you talk to the path to get to I guess ethylene margins would be the driver there to double digit and then John just given where the guidance is today can you talk about your comfort level with your 2025.

Financial targets, there should we assume that just gets perhaps pushed to the right.

Sure I'll start with vocational so the way to think about it Jamie is where really you put the two segments together.

I think ultimately some modest growth there, but you back out $150 million to $200 million on a typical year for rear discharge mixers, so I think that.

That creates a little bit of noise I would say this year too we do have a transition services agreement. So we're going to have.

We're not going to fully benefit from some of the cost synergies are materially yet this year. So that's something we'll continue to look for for the future I think the biggest thing that's driving the margins obviously as John as John mentioned and I mentioned in our prepared remarks.

Fire and emergency use more typical margins or municipal fire trucks are down a bit right now really because of legs and realizing pricing as well as some of the inefficiencies that manufacturing right now and the tight supply chain environment.

We do expect though is is that.

As we get into we have more price coming online in 2023 about in line with inflation, we have significant double digit increase is already in backlog beyond current levels as we get into 2024. So we would expect our supply chain to improve and we get those additional pricing.

Benefits.

That business that will get back to our typical margins in 2024 and beyond.

Yeah, Let me address your question Jamie on 2025, we provided our 2025 outlook.

In May we still look at that outlook is what we're expecting to achieve and I'll just break that down a little but if you talk about.

Our backlog continuing to grow we're now at over $14 billion, that's because we are designing and developing really.

Effective new programs and winning contracts in the defense business that we really like.

So the great sign as we continue to see strong order rates and really strong backlogs. We've got great program development a lot of exciting new programs from electrification to autonomy. This was what we wanted to do and this is what we want to drive our future and it's driving that backlog that we have.

Got so the only thing that's been holding us back in the short term is a getting over the inflation that we've had to deal with and be getting over the supply chain disruption dynamics, we've come a long way to get through the inflation problem, you'll start you'll continue to see that get better and better.

And as we go through and we continue to execute improvement in the supply chain.

Youll see the same there as well, but ultimately that's what's been holding US back when you look at the long term outlook of the business and the business, we're winning in the programs.

Are being developed and some to be announced yet.

It's.

It gives us confidence of $25 is right, there, where we thought it would be.

Thank you.

Thanks, Jamie.

Our next question comes from the line of Mig <unk> with Baird. Please proceed with your question.

Hey, Thanks, good morning, guys.

Maybe sticking with the USPS.

Contract.

How much revenue if any is embedded in your 2023 outlook and Myra.

My recollection is that in your 2025 targets.

You had something around $700 million worth of revenue associated with this contract. So I guess the question is you know based on all the changes that have occurred since you issued those targets.

Is that still a reasonable number and can you give us some perspective as to how we're going to ramp.

In 2004 to get to that 25 figure.

Sure.

Maybe I guess from.

The revenue and.

And.

Margin that you have for <unk>.

It's pretty minimal this year consistent with what we've said we're always starting production late in the year, so not really a driver ramping up meaningfully.

In 2024 closer to full rate production in 2025, certainly as Jon mentioned earlier.

Based on the question, obviously with the mix shift that that should be.

That should be a bit of a revenue tailwind as we think about that.

The program because I guess are the quantities and so on that we're thinking about and.

In 2025 are not necessarily different than we were thinking about during analyst day.

But the mix could be absolutely that is going to tell here revenue tailwind of that 25 number Meg up because the mix is improving.

Right and.

I don't know if this is going to ramp linearly or is there some kind of a more back.

Back weighted sort of mechanism that you guys are anticipating right now.

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

Sure.

Great. Okay, and then my follow up going back to vocational.

I appreciate what you're trying to do here combining all these business lines, but it sounds to me like your ambitions are obviously, a little bit greater than the product lines are you currently have.

Is there some thought here that you can lean a little more aggressively into M&A and maybe.

Really add some new verticals here in the next couple of years.

Yes.

This is a segment that first of all we like businesses. The businesses that we have that that where we can deploy technology and continue to expand our business like the bolt Taro electric fire truck that will be a growth platform for many years that product.

But we also do look at this as a fruitful M&A opportunity when you look at what we do on what we know how to do purpose built vocational product when I say purpose built I'm talking about we we design and develop the entire vehicle from ground up to serve a purpose for an end market.

So when we look at that we do see opportunity there.

There will be inorganic opportunity its a little bit hard to predict the timing on inorganic opportunity, but that's certainly part of what we want to do is continue to grow this segment beyond the current <unk>.

Organic position that we have but we like the organic position that we have we expect the organic position alone to get to the $3 billion.

Without any M&A so.

Okay I appreciate it.

Thanks, Mike.

Our next question comes from the line of Tami Zakaria with Jpmorgan. Please proceed with your question.

Hi, good morning. Thank you so much I have a couple of quick questions for you. So the first one is can you comment on the margin profile of the rear discharge.

Concrete mixer business that you're exiting I think you mentioned it was $116 billion in sales.

Sales, but I didn't catch the margin.

Hum.

Yes.

<unk>.

Very low single digit.

Got it got it and <unk> new product development.

Investment headwind this year should we think about that completely reversing in 2024 or should that stay in the base for the next couple of years, but then it kind of maybe prices how should we think about that.

Hey, Tim I think if you think about what we talked about at analyst day, I would I would expect that we continue to have.

They have strong investments over there over the next few years, so I think that that would be representative of.

Over the next next few years.

Got it can I squeeze in one last one.

Can you provide some quantification on the cost synergies you expect by combining Anthony and commercial segments.

Yes.

Not providing quantification, yet because particularly this year with the transition services agreement that theres going to be a bit of a delay over the next several months and being able to you.

To act upon on those but we do expect them over time and certainly we'll provide updates as we go.

Got it thank you so much.

Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hey, good morning, everyone and thank you all for taking the questions quick.

On the new vocational group with the waste.

That's in vehicles and then also with the powered vehicles.

How aggressive you see those in markets moving to pursue more of an EV sort of.

Battery electric vehicle offering that you guys have been testing in the marketplace currently.

Yes, it depends on the end markets family, but let's take the Voltaire Electric municipal fire truck you could even take the Voltaire Airport rescue firefighting vehicle.

Now we go in we released this for sale and go into production in 2024. So when we talk about units going to Portland, Oregon in the unit in Madison, Wisconsin, and a few other places. These are really call them beta test units there municipalities that want to be partners in development.

That's going extremely well, but the amount of interest in that we're getting from municipalities across the country is really really strong.

And it can be of course, it's a little bit regionals, So think about the state of California State of California.

I think it will be probably one of the leaders in terms of all right.

On this product because of their interest in electrifying faster than other regions, but I think this is going to go across the country. We've seen it's not just California, we've seen a lot of interest from all over the country from every single one of our dealers. So this will be a really nice long term.

Growth product now you get into other end markets that we're in and it could be even faster than that.

This is this was one of the reasons we're so.

<unk>.

Bullish on this new segment.

Great guys Thats it from me thank you.

Thanks.

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

Hey, guys good morning.

I apologize if I missed this but I wanted to better understand the access margin guidance for this year. If you guys are going to be doing.

$4 $2 billion of revenue and it sounds like price cost is neutral to positive.

You're 11% margin as well.

Below what you guys did in 2019 or its about on par with what you did in 2018 at lower revenue. So I'm just trying to understand.

What's changed here and wide margins arent better with the higher revenue.

Sure, it's really two things.

One obviously, we talked about price cost, but I would say that because of the supply chain environment the impact on manufacturing still significant sourcing.

Much higher manufacturing inefficiencies than we would've seen in those previous periods, which as supply chain normalizes that will improve and again, even though the volumes.

Lower from a throughput perspective, theres fewer units. So that obviously has a bit of an absorption impact as well.

That sort of plays into that.

So I think that's a.

That's really probably the biggest thing.

Okay, but it's fair to say that your price cost.

Neutral to positive for 2023 and access.

When youre looking at input cost correct.

Okay, and then just on what I would say is I guess, one other piece to do.

With that new product development piece, obviously with access equipment being one of our larger businesses. There's certainly an element there is while I would add into that as well, but as it increases our our view hasnt changed as volume increases and we get those absorption and manufacturing benefits their margin will improve over time.

Right Okay.

And then just on the on the cash the free cash flow is capex.

Is this kind of a one off.

Spike here in 2023 up to $3 50 or is it you think it stays at that high level for the next couple of years as you are adding it sounds like you have a bunch of new capacity.

Additional plans that are in the works.

Yeah, I think if you if you go back even to analyst day, we expected that this past year and then in 2022 and 2020 through it'd be pretty robust we're really looking at.

Through 2025, averaging about $250 million of Capex, that's still our view. So I think we will continue to run probably a little bit higher I don't know that its necessarily going to be at the same level. It is this year I think this year with a number of of program sort of converging, it's probably our peak year.

Okay. Thanks, that's super helpful. Thank you.

Yes.

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

Hey, good morning, guys. Thanks for the question I just wanted to ask a longer term one on excess first I feel like it's been pretty clear that a lot of the rental companies.

So we'll not be able to make a dent in their fleet. It is this year just given your commentary around non res construction.

Total years of visibility there too as well.

From our perspective most of the consensus.

For the longer term sales targets that you put out there in the Investor day can you just speak to us on any multi year visibility that you still have in excess that's actually maybe kind of give us confidence in actually hitting those targets over the long term.

Yeah sure.

So first of all I really want to emphasize we feel great about the underpinning underpinning factors that are driving the demand.

<unk> dynamics in the in the access market place.

Our equipment is of course more driven by nonresidential.

And industrial spending.

And the important thing to note here is we are not seeing the slower residential metrics translate to nonresidential, there's kind of a bifurcation of those two metrics.

And we're hearing the same thing from our big customers as well, they're seeing the exact same thing.

<unk>.

So there is it's unusual times right now with both aged fleets.

And a lot of Mega projects and huge government spending as we've seen with several bills that have been passed.

Like the chips Act and others that are really driving demand driving those mega projects, that's going to happen for a long time.

As I said in my opening remarks, a lot of fleets being absorbed in the Mega projects and many of them have not even come online yet.

So as you said.

The customers that we have have not been able to do much fleet replacement, there primarily providing growth for their fleets because of the demand on equipment.

But remember they over time really need to replace their fleets. So that's an added dynamic that's driving demand.

So these are the primary reasons that we see multi year continuation of the of the demand in this segment.

Got it thanks, Jonathan that's a follow up then on the mix and the USPS contract again can you just speak to kind of the overall maturity of the supply chain and how that's developed over the last year or so you've still been working with micro vast but just kind of their own ability to handle that in your own ability to handle in terms of sourcing those components getting that battery supply chain up and kind of ready to actually supply those.

Higher volumes that we're expecting over time.

Well I think the thing that we pay most attention to is the new components that gets supplied to us and I E that means the bev type components like the lithium ion batteries.

We feel really good about our supply chain for lithium ion batteries is one example.

And we pay attention to it right down to the sell in where the cell is coming from.

And we will continue to pay attention to it because as we all know.

There's a lot of demand on lithium ion batteries supply today.

Today, and it will continue to grow as we see the automotive industry and other industries like ours continue to electrify. So we'll continue to pay very close attention to it. We also have contingency plans.

To the current path that we have.

But we we feel good about it in terms of <unk> drives and other systems that go into above their household name companies that are our partners.

And we'll continue to pay very close attention to it with everyday that goes by.

We will get into production over the next year and.

We feel good about where the program is.

Great. Thank you.

Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning, just wanted to ask about the cadence of the access margins in 2023. It sounds like you expect lower access revenues in Q1, so I think that should imply lower margins.

Then just higher margins and exiting the year relative to that full year, 11%. So I guess I'm curious if you agree with that and then.

To follow up on Jamie's question, how that exit rate margin in access in 2023 might relate to your 12 five to 13, 5% 2025 margins it seems like.

If we're going to be above that 11% exiting this year, you should be getting pretty close to that that long term margin range before 2025.

Sure first of all I guess.

Talking about the <unk>.

I'll just start with your last question first.

On the exit rate I think.

So yes, I think indeed, if you look to the first quarter generally our margins in all of our businesses are going to be lower in Q1.

I talked about in my prepared remarks, we have a we have a mix issue with that or a mix headwind with a with an order and defense that's driving the margin down and then in Q1, and then access and vocational the revenues are down due to some just really timing of deliveries.

Not so much production related so.

So thats going to apply to margins. It is the lowest we expect it to be notably the lowest margins of the year. So hope prove over the course of the year I think in terms of access exit four for margins.

Right now to the extent going back to my earlier comment the extent to which access is lower than like a 2019. It really comes down to our units are still lower so.

Absorptions have been unfavorable and we have manufacturing inefficiencies right now so it's really a supply chain function, that's causing the margin as volume as unit volume increases and so on.

Those those margins that we're talking about for 2025 are absolutely attainable.

So that's really what I would really do is focus on supply chain cadence.

Okay, and then did you comment at all about.

How youre thinking about catch up adjustments.

Potential in defense in 2023.

Assuming there might be more inflation.

What's your expectation for catch up adjustments this year.

While our expectations always have them every quarter. So our expectation is that we're building in everything that we know we certainly don't expect that inflation is going to be lower this year and certainly that's reflected in our estimates I think the.

Really what I would watch with a cumulative catch up adjustments.

The cadence of inflation to the extent, we've had so much variability over the past year and inflation was so much higher than what expectations were say 18 months ago, I think even though inflation is higher now.

It's not moving at the same pace and that's where you.

That's where the estimation challenges and so I would say, even if inflation is higher our going in proposition is that there should be less volatility there.

Makes sense, thanks, a lot.

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

Hey, guys. Thanks for squeezing me in and apologies. If this was asked earlier just how should we view the continuing resolution headlines.

Then defense budget discern any impact on some of your programs or just timing of awards that we have to monitor curious what you guys are hearing on that front.

Really from a CR perspective that really shouldn't have any impact on our existing our existing programs that really I think is obviously you have a little bit more impact. If there is a government shutdown at some point a new programs starting up might be effective affected but that really doesn't in terms of in 'twenty three it's right.

<unk> programs, so it's not.

Impact 'twenty three.

Great. Thanks, good to know and then just curious theres some signs of access equipment used pricing just sliding.

Over the last few months, it's still elevated but moderating from this high I'm just curious when you look at your backlog price increases the new equipment. There how should we kind of look at use axiom and <unk>.

Ariel values in that market.

Well it used equipment is I think you have to look at it over periods of time, it's still elevated significantly versus where it normally is.

So the fact that it came down a little bit.

We at this point, we don't think it means much I think we need more data points to see a little bit more of a trend before we can can make much of it.

But just the moderation right now as.

It's not something that we.

But we think means anything at this point in time and when I say that.

Michael I'm really talking about that because of the continued strong demand.

We feel from the market and from our customers and I'm talking about longer term demand to not just the here and now demand.

Makes sense. Thank you.

Thanks, Mike.

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

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.