Oshkosh Corporation (OSK) Earnings Call Transcript

Greetings, and welcome to the Oshkosh Corporation announces stub period 3 months ended December 31, 2021 results conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published results for the 3-month period ended December 31, 2021. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call, and it's also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation. Our remarks as follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we announced that we changed our fiscal year to a calendar year prior to our last earnings call. The October to December 2021 period we are reporting on today represents an abbreviated fiscal year or stub period to facilitate the transition to fiscal '22, which began on January 1, 2022. All references on this call to a quarter or year in 2021 or before are to a fiscal quarter or fiscal year, unless stated otherwise. All references to 2022 or later years as to a quarter or a year are to our new calendar fiscal year. Our presenters today include John Pfeifer, President and Chief Executive Officer; and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to Slide 3, and I'll turn it over to you, John.

Thank you, Pat, and good morning, everyone. For the stub period, we reported sales growth of nearly 14% compared to the 3 months ended December 31, 2020. Earnings per share were $0.09, consistent with our expectations of near breakeven performance that we shared on our last earnings call. As anticipated, we saw unfavorable price/cost dynamics in the quarter, which impacted margins in all of our segments. Going forward, we expect price/cost dynamics will continue to constrain operating margins in the first quarter of 2022, but we expect meaningful margin improvements in the second quarter as we move towards more typical margins in the back half of the year when we expect pricing to largely catch up with the cost escalation. Strong order activity across the company in the quarter, combined with robust price realization on new orders, support our solid financial outlook in the back half of 2022. Market fundamentals continue to support our belief that we are in the early stages of a multiyear growth cycle. While the global supply chain and logistics environment remains less predictable than normal, we have taken many actions to improve our supply chain flexibility and mitigate risk. We have also locked in meaningful portions of our steel and aluminum purchases to provide more certainty regarding input costs in 2022. With improved visibility, we are pleased to initiate earnings per share expectations of $5.75 to $6.75 for 2022. Mike will provide further discussion on our expectations later in our presentation. As we look to the future, I'm encouraged by the significant opportunities we see to drive profitable growth through innovation at Oshkosh. We are an industrial technology company with a strong pipeline of innovation in the areas of electrification, autonomy and active safety, intelligent products, advanced analytics and digital manufacturing. To further sharpen our focus on technology, I am proud to announce that Jay Iyengar joined Oshkosh earlier this month in the role of Executive Vice President and Chief Technology and Strategic Sourcing Officer. Jay is a proven leader who brings deep experience in driving innovation and strategy to Oshkosh. We look forward to benefiting from her insights and expertise as we continue to position Oshkosh for long-term growth and deliver market-leading purpose-built vehicles and equipment for everyday heroes around the world. And before we move to our segments, I want to share some good news regarding our focus on sustainability in our efforts to reduce energy consumption as well as greenhouse gas emissions. A few years ago, we entered into a virtual power purchase agreement with ALLETE Clean Energy to support the development of a 303-megawatt wind energy installation in Oklahoma. The project went live in early January and will offset approximately 60% of our U.S. electricity usage. This supports our goal of a 25% reduction in greenhouse gas emissions by 2024 and signals our leadership for this critical issue. I should also mention that in November, we learned that Oshkosh was named to the Dow Jones Sustainability Index for the third straight year. This honor represents a particular point of pride for all of us as leaders in doing business the right way. Please turn to Slide 4, and we'll get started on our segment updates with access equipment. Demand for our industry-leading access equipment remains strong, and I'm pleased that our access team grew sales by 48% year-over-year during the stub period. In fact, revenue of $834 million is a December quarter record for the segment. While the pandemic has continued to challenge global supply chains and logistics, we have taken steps to improve the capacity and resiliency of our supply base, including an increase in dual-sourcing activities as well as redesign work on our equipment to accept higher-capability chips with better availability. We even moved production from select workforce-constrained locations to other sites with greater workforce availability. These are just a few examples of the creativity and perseverance that are prevalent throughout the company. While margins were challenged the past 2 quarters, primarily from price/cost headwinds, we remain disciplined with the pricing actions we've taken, and we are making significant progress in working through the price-protected backlog. Orders were strong once again at $1.65 billion in the quarter, up 70% from last year, which led to a new record backlog of $3.6 billion. Importantly, these orders include strong price increases, which provides better visibility to strong margins in the second half of 2022. Looking forward, market fundamentals for access equipment remained strong with elevated fleet ages and robust utilization, particularly in North America. And we expect that demand will remain strong for the next several years with a combination of fleet replacement and fleet growth. Please turn to Slide 5, and I'll review our defense segment. Revenues and margins for the defense segment were lower in the stub period. But we believe that these challenges are temporary. Our long-term outlook is positive. And the team remains focused on many important new and adjacent program competitions, including but not limited to, multiple trailer programs, the Cold Weather All-Terrain Vehicle and the OMFV, which is currently in the digital design phase. We received another substantial JLTV order during the quarter valued at just over $590 million. We continue to execute on time and on budget for this critical defense program and believe we are well positioned to win the recompete scheduled for later this year. I'm pleased to report that just yesterday, we announced our innovative silent drive hybrid electric Joint Light Tactical Vehicle, the eJLTV. The eJLTV is capable of running fully electric and offers our military customers an affordable way to electrify their light tactical wheeled vehicle fleet without compromising the off-road performance or superior protection necessary in combat operations. We believe this represents a very strong technical advantage for JLTV customers. Turning to the Next Generation Delivery Vehicle contract with the United States Postal Service. The vehicle was displayed at the Consumer Electronics Show earlier this month in Las Vegas. It showcases Oshkosh's significant capabilities for designing purpose-built last-mile delivery vehicles. Our advanced design incorporates EV technology, enhanced safety and superior ergonomics for industry-leading productivity in the last-mile delivery market. We look forward to supporting postal carriers under this multibillion-dollar transformative program over the next decade. We are making solid progress in setting up our production facility in South Carolina and look forward to ramping up production in 2023. We expect to receive our initial production order in the next few months, so more news to come on this exciting program. We are confident in our growth opportunities in the defense segment over the next several years. While 2022 sales volume will be down as previously discussed, we expect important program wins like the NGDV and the Medium Caliber Weapons System will drive profitable growth in this segment over the next several years. And we believe we will have many more opportunities to add to this growth with additional key program wins in the coming months and years. Let's turn to Slide 6 for a discussion of the fire & emergency segment. The segment continues to drive strong demand for our industry-leading products. We have been dealing with supply chain disruptions and price/cost headwinds, which held back margins in the quarter. But we believe we'll be ahead of these challenges in future quarters, and our confidence in the fire & emergency segment remains high. Orders in the quarter were solid at nearly $370 million, leading to another record backlog. This strong demand supports our plans to increase Pierce fire truck production capacity in Appleton, Wisconsin and grow well into the future. We expect the initial phases of expansion will be complete later in 2022 with additional phases expected in 2023. Presently, we're in the process of increasing our cab assembly capacity, which is an important milestone in our journey to increase overall fire truck output. To support our growth initiatives at Pierce, we held a highly successful job fair during the quarter and hired approximately 100 new team members. We expect to add an additional 100-plus jobs as additional capacity comes online. We continue to receive strong interest in our Volterra line of electric fire trucks. Our Volterra electric pumper continues to impress with the Madison Fire Department and now has successfully completed more than 1,200 calls. And the feedback we are receiving from firefighters is invaluable as we enhance the industry's first electric frontline pumper. Please turn to Slide 7, and we'll talk about our commercial segment. The commercial segment grew revenues in the quarter, but higher input costs as well as uneven supply of third-party chassis and other components led to a modest operating loss. Similar to our other nondefense segments, commercial has implemented double-digit price increases, so the significant price cost headwinds we saw in the past 2 quarters are expected to improve as we approach the second half of 2022. Chassis and key component availability continue to create production and delivery challenges and are likely to continue for the next few quarters. We discussed this risk on the last call, and our teams are diligently working to mitigate this disruption. However, improvement will take some time as suppliers work through production headwinds in their own operations. We are working aggressively across the company to leverage our combined buying power and diversify our supply base. It is helping. But in the near term, it's not enough to overcome the historically low third-party chassis and component availability we are experiencing. That said, we are making progress, and we expect to exit 2022 in a much stronger position. Demand for RCVs and mixers remain solid and our outlook is positive. Residential construction strength and elevated customer fleet ages support higher demand. To close out my comments, I'd like to recognize the commercial team as they successfully launched our new High Flow production line in December. Starting with rear loader RCVs, we believe it will increase capacity, shorten lead times, increase quality and deliver improved efficiencies. The line is scheduled to ramp up in 2022 and reach full rate production later in the year. I'm going to turn it over to Mike to discuss our stub period results and expectations for 2022.

Thanks, John, and good morning, everyone. Please turn to Slide 8. As John discussed, stub period results were generally in line with our expectations discussed on the last earnings call. For stub period comparison purposes, all references to the prior year are to the 3 months ended December 31, 2020. Stub -- consolidated stub period sales were $1.79 billion or $215 million higher than the prior year, representing a 14% increase. The consolidated sales increase was largely driven by a 48% increase at access equipment partially offset by a 20% decrease in sales at fire & emergency. Access equipment sales increased by $270 million over the prior year to $834 million due to improved market demand in North America. Fire & emergency sales decreased in the quarter and lower fire truck delivery is driven by supply chain disruptions as well as lower ARFF deliveries as a result of several multiunit international order deliveries in the prior year. Consolidated operating income for the stub period was $18 million or 1% of sales compared to adjusted operating income of $104.6 million or 6.6% of sales in the prior year. Our consolidated operating results decreased largely due to unfavorable price/cost dynamics, unfavorable cumulative catch-up adjustments in the defense segment and unfavorable product mix, partially offset by higher sales. Our consolidated price/cost headwind in the stub period was approximately $90 million, which impacted earnings per share by nearly $1.05. EPS for the stub period was $0.09 compared to adjusted EPS of $1.13 in the prior year. We repurchased approximately 1.36 million shares of common stock for a total cost of $150 million during this stub period, consistent with our disciplined capital allocation approach. Please turn to Slide 9 for a discussion of our expectations for 2022. As I review expectations, I'll be comparing 2022 expectations to the pro forma results for the 12 months ended December 31, 2021. I'll refer to these pro forma results as calendar 2021. As we discussed on our last call, we expect price/cost headwinds to remain at peak levels in the first quarter of 2022 with meaningful improvement expected in the second quarter. We expect to be largely price/cost neutral in the back half of the year supported by robust backlogs with meaningfully higher prices on deliveries expected in the second half of 2022. In total, we expect price/cost headwinds of approximately $140 million to $150 million for the year compared to our price/cost baseline, which was before the rapid cost escalation in 2021. As a result of these price/cost dynamics, we expect margins in the first quarter to be similar to the stub period. We expect to deliver notable improvements in the second quarter and return to more typical margin levels in the back half of the year as more of our shipments include the full benefit of price increases implemented during the past several months. On a consolidated basis, we are estimating sales of $8 billion to $8.5 billion compared to $7.95 billion for calendar 2021. We are estimating operating income of $545 million to $625 million compared to adjusted operating income of $471 million in calendar 2021. And we expect EPS of $5.75 to $6.75 compared to adjusted EPS of $4.73 for calendar 2021. Demand remains strong as evidenced by our strong order intake rate in the quarter and record backlog of $9.3 billion at December 31, 2021. The cadence of magnitude of global supply chain and logistics improvements, particularly in light of the Omicron variant, are the primary drivers for the slightly wider revenue and EPS ranges to start the year. At a segment level, we are estimating access equipment sales of $3.7 billion to $4.1 billion, an 11% to 23% increase compared to calendar 2021. We expect the sales growth to be led by North America, although we expect sales growth in most regions of the world. We are estimating that access equipment's operating margin will be 9% to 10%. Included in our expectations is approximately $115 million to $125 million of unfavorable price/cost impact, largely in the first half of the year as we complete the shipment of price-protected backlog. Again, this price/cost comparison is against the baseline prior to the rapid cost escalation we experienced in calendar 2021. Turning to defense. We are estimating 2022 sales of approximately $2.2 billion, a 12.2% decrease compared to calendar 2021. This aligns with our prior comments that we expect defense revenues will be down in 2022 due to lower JLTV deliveries before we expect to return to growth as new programs, including NGDV and MCWS, ramp up. We are estimating our defense operating margin will be approximately 7%. Lower sales, unfavorable mix, higher material costs and new program start-up costs account for the slightly lower operating margin than in recent years. We expect margins will improve as new programs ramp up in future years. We expect fire & emergency segment sales will be approximately $1.2 billion, roughly $30 million higher than calendar 2021. The change in revenues reflects higher municipal fire truck sales, offset in part by lower ARFF demand. We expect the operating margin in the fire & emergency segment to be approximately 13%. We are estimating sales of approximately $1 billion to $1.1 billion in the commercial segment, a 10% increase versus calendar 2021 at the midpoint as a result of strong demand. Third-party chassis supply is expected to be lumpy through the next several quarters. And we are expecting operating margins for this segment of approximately 7%. Similar to access equipment, price/cost headwinds are expected to meaningfully impact margins early in the year as we ship the remaining price-protected backlog. We estimate corporate expenses will be approximately $160 million, an increase of $10 million versus calendar 2021, primarily driven by increased investments in growth initiatives and new product development. We estimate the tax rate for 2022 will be approximately 22.5%. And we are estimating an average share count of 67 million shares. For the full year, we are estimating free cash flow of approximately $500 million, reflecting an expected strong year of cash generation. We also estimate capital expenditures will be approximately $300 million, reflecting increased spending levels related to NGDV and capacity expansion projects at access equipment and fire & emergency. Looking to the first quarter. We expect consolidated sales to be approximately flat versus the 3 months ended March 31, 2021, with access equipment up approximately 15%, but defense and fire & emergency revenues both down. With price/cost headwinds at similar levels to the stub period, we expect EPS to be similar to the stub period as well with meaningful improvement expected in the second quarter and more typical margins in the back half of the year. I'll turn it back over to John now for some closing comments.

We just completed our transition to a new fiscal year with the close of the stub period. While we faced challenges in recent quarters, our outlook for 2022, particularly for the second half of the year, is strong. Before we start the Q&A, I want to announce the timing of our Investor Day. We look forward to hosting our Investor Day in early May of this year. Details will be forthcoming, but we are excited to have the opportunity to share our plans to grow the company, and we'll be providing some targets that we believe investors will value. We plan to share details of our strategy and highlight some of the many innovations and technologies we are leveraging to advance our company. Okay, Pat, back to you.

Thanks, John. [Operator Instructions] Operator, please begin the question-and-answer period of this call.

[Operator Instructions] Our first question comes from the line of Jamie Cook with Credit Suisse.

I appreciate the color that you guys provided on guidance. But just given the weak start to the year, can you help me understand how you're thinking about the second quarter relative to the second half? It seems like in terms of the earnings trajectory, it's really like a hockey stick in the back half of the year. Can you grow earnings down year-over-year in the second quarter? I just want to make sure The Street has calibrated that correctly. And then I guess, my follow-up question, John, is what actions have -- it sounds like you've taken some actions to better mitigate risk on the EPS front. But if you could go provide a little more color there on why you feel confident in the guidance this year, just given some of the challenges that are out there.

Sure. Thanks, Jamie. This is Mike. I'll start and then I can turn it over to John on the back half of your question. Just from a trajectory standpoint, I think the easiest way to think of it is very much tied to the cost/price headwinds we talked about in the prepared remarks. So you're going to see a similar price/cost headwind that we saw in the stub period in the first quarter. That's obviously meaningfully challenging margin, similar to what we saw in the stub period. As we ship that price-protected backlog, we're going to make meaningful progress in the first quarter. So by the time we get to the second quarter, but -- and really by the second half of the second quarter, we're going to start seeing more and more price hitting. And so that cost/price headwind is going to be a lot less in the second quarter. So we're going to see a meaningful margin progression. When you get to the back half of the year, then that where we're largely going to be that price/cost neutral. So that's when you're going to see pretty typical margins for the volumes. But it's really completely tied to the price/cost cadence and where we're at from a price-protected backlog perspective.

Yes. Jamie, this is John. I'll just talk a little bit about the second half of your question. So as we've come through this pandemic, and particularly the last year, as we've kind of, I guess, in a very bumpy way, come out of the pandemic, we've kind of been through a shock. I think industry has been through a shock: in terms of the material cost escalation that we've seen; and number two, in terms of the supply chain disruption that we've seen. And so that's been something that we've had to wrestle with because it caused us to -- as we saw big backlogs build, we saw material costs escalate, and that's what we're getting through right now. And we're very confident that we're going to get through that. So there's really three areas that will -- we think we're kind of heading into a new normal. We don't know that -- we don't believe that this material cost is transitory. We believe that inflation will most likely continue. So the best part of our business is we're leaders in our industries. And therefore, we have pricing power. And we have put double-digit pricing in place in our commercial segments, our access segments, our F&E segments. And we're able to do that prudently because of the material cost environment that we're in. We just have to burn through the backlogs that were built a couple of quarters ago, a few quarters ago, to get to a point where we start to realize the price that we should have based on material cost escalation. So that's the first thing. The second thing is we've completely revamped our price -- on the material cost side, we've completely revamped our price locking and our hedging strategies so that when we're in periods where we're building backlog, we're much more intense about how we're locking in prices and/or taking hedging strategies to protect ourselves if we've got backlog that builds 6, 9, 12 months into the future. And of course, we're also changing terms and conditions with a lot of our customers, where we're building -- if we're building backlog way into the future, that we have some ability to adjust price if there is significant movement in materials. A little bit of a long answer, but we've done a lot of work to adjust to the new normal, so to speak, because of what we've just been through.

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

John, in the past, you've spoken about how many suppliers you folks are monitoring in terms of their ability to deliver on time. Can you talk about where that stands today versus a quarter ago? Are we getting out of the woods on that part of the supply chain headwinds that the industry has seen over the past year?

Yes, Jerry, great question because that's what all of us in the industry are in the middle of right now. We've done a lot of work in changing the way that we manage our supply chain. We've got incredible people here that are working tirelessly on it. And if you look at our supply chain today, we've made a lot of improvements, both on working with our existing supply base to improve their capacity but also in qualifying a lot of new suppliers. We've qualified hundreds of new suppliers to give us better capacity to serve our customers as we go forward. And hey, we're a growing business. We feel really strong about the outlook for all of our businesses over the next several years. We know that we have to build the supply chain, not just to do what we do today but to do what we're going to be doing 3, 4, 5 years from now, which is materially higher than what we're doing today. And so there's a lot of work that's gone into it. Hundreds of suppliers have been qualified, new suppliers, and we've helped our current suppliers also expand their capacity. So we're making progress. We're not out of it yet. We still have work to do. But we are making progress in building the supply chain that we need for the future.

Okay. And in the defense business, can you expand on the material cost catch-up that you folks saw in the quarter? Which contract was that related to? Which commodity was that related to? And how should we think about upside and downside risk to margins on whatever platform that is as we get commodity price volatility from here?

Sure. I'll take that one, Jerry. Just from a defense perspective, one thing to level set on is obviously, we have large contracts and we have contract accounting for those. So the dynamics can be a bit different. And you see some quarters that are high and some that are low, and you really need to look at the margins over time. In this particular quarter, between a slight -- lower order for JLTV, some mix within that as well as somewhat higher material costs right now that led to the unfavorable cumulative catch-up adjustment. Importantly, as we go forward, we don't see this as a long-term issue. I think really, as you look to the margins this next year, we guided to 7% largely because the volume is down a bit next year. There's some mix going on. And we also have new program start-up costs that we're going to be incurring. As we look to the future of that business though, it's a growth business, and we see the margins increasing over time as those new programs ramp up.

So it sounds like a one-off?

Well, I think it's -- we always have -- whenever we have new contracts or changes in assumptions, we're looking at it. We don't necessarily -- if you look at the guidance for next year, that's not what we expect for margins over the course of 2022.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

If I could just wrap up on Jerry's question really fast on defense, so understanding all the issues during the stub period. But what is your expectation for margins in defense in 1Q? I'm just -- I understand that the price/cost situation is just as bad. But is defense also going to be a margin headwind in the first quarter?

I guess, we haven't really broken it down by quarter. But what I would just say in general is we look -- there's obviously a lot of moving pieces with mix and price/cost. And so I think there's -- obviously, the cumulative catch-up adjustment was a factor in the first quarter. Price/cost remains a factor in the first quarter. So I would say there's gives and takes. Again, I think I look to the full year guide for defense that we don't expect margin performance at that level throughout the year. So -- but again, I think one other thing I'd just mention on the first quarter just holistically, with the Omicron variant out there, absenteeism has been a bit higher. So there's a bit of that factor. Obviously, I think there's lots of signs that hopefully that's -- we'll get past that in the next several weeks or a couple of months here.

Nicole, I'll give you a little bit more long term on defense because I like talking about it so much. We've often talked about how 2022 is a bit of a lull year for defense. And you see that in our guidance. But I love talking about the long-term outlook for this business because of the growth that we're going to see as we get through towards the end of 2023 and into 2024. We've got the USPS business coming online. That's a gigantic contract, largest last-mile delivery fleet in the world that we'll be modernizing with new technology and electrification. We've got the MCWS program. That's new technology. New technology in these programs means it's really good business for us. And it means it's going to help us grow our margins over the next several year period of time. And it's even better for our customers because of the problems that it solves for them. So long term, we're really excited about this business. I just wanted to mention that because I know you see the guidance in 2022 as a bit of a lull year. But this is a growth business for us if you look out the next few years.

Okay. Got it. Totally fair, and we agree. I guess, maybe my follow-up around price/cost, so I know you guys have kind of put additional hedging programs in place, which is kind of seeming to lock in like neutral price/cost for the second half. Is the expectation still that at some point, maybe at 2023, you'll be able to recoup the price/cost headwinds that you faced and end up in a neutral position, therefore, implying price/cost tailwinds at some point in the future? Or is that going to be tough in this new normal inflationary environment?

Nicole, it's obviously early. But that's certainly what we've experienced in the past and that's certainly our intention going forward as well, but obviously very, very meaningful improvement to the back half of the year.

Yes. It really all depends, Nicole, on what's going to happen with material -- raw material prices really. And right now, we're planning for, "Well, what if we stay in an inflationary period for the foreseeable future and how we're going we to make sure that we can still deliver margins in that environment with the shock that we've just been through." That's what we're planning for. But if raw material prices come back down, that would be a good thing for all of us.

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

Really, I just want to follow up on that very last point there. I mean it does seem like raw material costs are coming down. And so I guess, I'm wondering the extent of how much you have hedged out. So if we were to see the potential in the market for lower raw material prices to come in to your cost of goods sold in the second half of the year, would that be able to happen? Or are you now hedged through the end of the year to kind of keep those costs a little bit more elevated than what you might see in the market? And then I guess, curious what you're thinking about freight and employee costs throughout 2022 and what you've embedded in the guidance there?

Sure. Those items are all certainly factored in and were carefully considered as we went through the year. From a lock perspective, we do see it declining over the course of the year. From a steel perspective, we've already seen pretty meaningful reduction. If you look at hot-rolled coil, we're up near $2,000 a ton a few months ago. Now it's in the $1,300s. So you've seen improvement there. The locked suite we have again are below even that level. Futures market is below that level. That's all built in to our guidance, that trajectory. We're never going to lock 100% of our materials, so there's some variable component of it that we'll always leave out there, but again very meaningfully higher percentage of locks than we were in the past. In terms of other costs, certainly, there's been -- wage costs are up as well as other costs. That's all baked into our guidance from a trajectory standpoint. It was all considered in our pricing dynamics as well that we're looking at.

Okay. That's very helpful. And then just in terms of maybe to think about the exit rate of margins in the access segment in, say, Q4, I think you said that they might be more aligned to typical volume levels? I mean, could we be at like a kind of a 12% margin level in access in the fourth quarter and then build from there into 2023?

The one thing I'd just say is from a fourth quarter perspective, the cadence obviously changes now that we're on a calendar year and that tends to be a little bit shorter quarter. But we fully expect to be back into double-digit margins in the back half of the year, consistent with what you would expect, given the revenue levels in any given quarter that we've seen in the past in that business. Yes. With every new peak we head towards, Steve, we expect to meet and exceed the prior peak in terms of margins. Our prior peak margins was 12%. And so that's where we're heading towards as we look forward through this cycle.

We're not stating that in 2022, right? We're...

No, not 2022, I'm talking about [indiscernible] year cycle. It might be, over the course of the year, an individual quarter can either be higher or lower than that.

Our next question comes from the line of Tami Zakaria with JPMorgan.

So my first question is the CapEx guide you have for the year, it seems like it's taking a big step-up. Can you help us understand what's driving that?

Sure. It's very consistent with what we've been talking about over the last couple of quarter since we won United States Postal Service contract, very, very heavily weighted towards that contract. We're going to be north of $300 million of CapEx for that program over the next couple of years. So with that ramping up in 2023, heavily concentrated there. We're also really excited, we have some other capacity expansion projects that are a lesser part of that but still meaningful in the fire & emergency and access equipment segments to really to support the growth that we see in those businesses.

Understood. And my follow-up is can you share some thoughts on how you're preparing to recompete for the JLTV program?

Yes, sure. Great question. So -- we are the incumbent manufacturer for the JLTV. We've been supplying these vehicles on time and within budget since the beginning. So we've been very efficient in the way that we're supplying these products. But we're also not resting on where we are. We're continuing to develop new technology and new capabilities for the JLTV. You saw us just yesterday introduce the eJLTV. This is the first tactical wheeled vehicle in the Department of Defense that will have the capability to run on full electric power that gives it capabilities that today's vehicles do not have in terms of silent operation, for example, in terms of how they can export power, for example, which makes it very efficient. They can idle without having an engine running, lots of different capabilities that, that gives the Department of Defense. So those types of capabilities, combined with our efficiency and know-how in manufacturing the current vehicle, we think, position us really, really well for the recompete. Remember, there's an acquisition objective for 50,000 units in total for the U.S. Army and about 15,000 or 16,000 for the United States Marines. We're only a fraction of that into this total acquisition objective at this point in time. So this is a long-term program. It will continue into the 2040s. And we'll continue to make innovations for this program with the full intent of continuing to supply it into the 2040s.

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

Maybe just a very big-picture question, John. I'm trying to balance some long-term things happening. I mean, you talked about margins being sort of higher each cycle. And yet it feels like we're adding a fair amount of cost. You talk about redesign to take more expensive chips and moving things around where you have better capabilities. You talk about dual sourcing. I assume there'll be somewhat higher levels of inventory just in the new normal as we go forward. So sorry for the long question, but even with those additional costs of running an industrial business over the next, say, 3 to 5 years, do you still think you can get higher margins at sort of peak-to-peak?

Yes, we do. What we're doing with our business in terms of adding suppliers, we're doing that because we need it because we need additional supply base to grow. We wouldn't have to add as many suppliers if we were growing at, say, GDP rates in that business, but we're not -- we're growing our business at higher than that. And so we've had to bring on new suppliers that are going to enable us to grow. But when you look at our business and the backlogs that we have, we've got record backlogs in our business today. And those record backlogs, combined with building a supply chain capable of supporting us as we execute on that growth path. Our intent -- and just your question, I think it was focused on access equipment, our confidence in bringing new technology to market with new technology typically comes strong margins that we'll continue to deliver on doing just that.

Okay. All right. Fair enough. And then the follow-up is just on electrification because you've mentioned that a few times, but my understanding of the JLTV contract and even the postal contract is electrification is pretty minimal portion in those contracts. So I'm just curious, do you have a different view? Do you think that's going to change? Just how do you think that progresses over the next few years?

Well, I think that it remains to be seen. But I want to make sure it's clear, we developed an eJLTV because we knew that our customer, the Department of Defense, is really interested in electrification. And we didn't wait for a specific program to tell us to quote an eJLTV or an electric vehicle of some kind. We just went out and did it and provided it as part of our JLTV platform. Now when you look at the JLTV itself, it will be evaluated, this recompete, where they're adding 16,500 units, it will be evaluated on a number of criteria. And there are things like cost and value for the customer, manufacturing capability and expertise, quality and efficiency of production and technology is another one, technology insertions to enhance the vehicle's capability. All of those are material factors and they all get considered. And so the electric or the eJLTV, that's one of several things that will be considered, but everything that you do to enhance your capability on the program certainly helps.