Earnings Call
Oshkosh Corp (OSK)
Earnings Call Transcript - OSK Q1 2023
Operator, Operator
Greetings and welcome to the Oshkosh Corporation Fiscal 2023 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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.
Pat Davidson, Senior Vice President of Investor Relations
Good morning and thanks for joining us. Earlier today, we published our first quarter results. 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 is 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 two of that presentation. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Our presenters today include John Pfeifer, President and Chief Executive Officer, and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to slide three and I'll turn it over to you, John.
John Pfeifer, President and Chief Executive Officer
Thank you, Pat, and good morning everyone. I'm pleased to report Oshkosh Corporation's strong results for the first quarter of 2023 with revenues of $2.3 billion and adjusted earnings per share of $1.59, both representing meaningful improvement over the prior year quarter. We continued the positive momentum that began in the second half of 2022 and our teams remain focused on solid execution for our customers. As a result of our strong Q1 performance, robust demand, and progress on our key operational initiatives, I'm pleased to announce that we are raising our full year adjusted earnings per share expectations to be in the range of $6 compared to our previous estimate of $5.50. Mike will provide more details in his section. Our Access segment led the significant year-over-year improvement by delivering an operating margin of 11.3% in the quarter. Order flow across the board was robust during the quarter at just over $3 billion, driving another consolidated record backlog approaching $15 billion. We remain confident in both near-term and longer-term growth. We view construction markets as strong, particularly with the large number of mega projects around the country. In fact, metrics for the vast majority of construction categories point to continued growth for the foreseeable future. The access equipment fleet age remains elevated and new use cases continue to grow beyond construction. Our view on our end markets was bolstered by recent discussions with customers at the ConExpo Show in March. We also see healthy demand across the fire truck, RCV, and delivery markets, bolstered by solid market dynamics and long-term growth driven by our new electric vehicle offerings. We are investing in capacity, as well as exciting new products that support our plans for growth to drive long-term shareholder value. Notably, we're investing in capacity for our USPS next-generation delivery vehicles, our vocational segment for both e-RCVs and Pierce fire trucks, as well as our Access segment, where we are transitioning 500,000 square feet to telehandler manufacturing in Jefferson City, Tennessee. We also took a number of important steps in the quarter to continue to expand our portfolio with the next generation of innovative products. We completed the acquisition of Hinowa in our access segment and look forward to attractive growth opportunities with this well-run Italian manufacturer of Compact Crawler Booms and tracked equipment. In February, we announced the launch of the first fully integrated purpose-built all-electric refuse collection vehicle in our new vocational segment. I will talk more about this revolutionary new product in a few minutes. Additionally, we're pleased with the integration progress for the vocational segment, which we view as an outstanding growth platform for Oshkosh. Last quarter, we announced plans to combine our fire & emergency and commercial segments to drive enhanced efficiencies while better leveraging our scale and technology development at an accelerated pace. We also completed the divestiture of our rear discharge concrete mixer business in the quarter to further focus on our core growth areas. And finally, we're honored to have been selected with the world's most ethical designation for the eighth consecutive year. Please turn to slide four and we'll get started on our segment updates with Access. The team at Access built on their strong finish to 2022 with an excellent first quarter in 2023. We benefited from better-than-expected shipments due to modestly improved supply chain conditions. While supply chain challenges remain, we are seeing progress with supplier on-time delivery metrics, as well as the many actions we have taken to improve throughput. Demand remains very strong for JLG aerial work platforms and telehandlers, as fleet ages remain elevated. In fact, fleet ages have not improved since we reported average fleet ages in North America of over 60 months during our Investor Day in May of 2022. New use cases, as well as technology innovations continue to improve demand for our products. In addition to fleet ages, we believe high equipment utilization rates and the impact of mega projects and other construction verticals continue to point to strong demand for our market-leading JLG products for the foreseeable future. Orders remained healthy at $1.2 billion in the quarter leading to another record backlog of $4.4 billion. We believe that 2023 will be a strong year, with revenues limited by supply chain conditions. While we do not expect significant supply chain improvement in 2023, we are well positioned to deliver stronger results in the event supply chain improves faster than current expectations. Please turn to slide five and I'll review our Defense segment. As expected, Defense segment revenues were down year-over-year in the quarter in line with customer requirements; continued inflation, including higher-than-expected steel cost forecasts, contributed to the low operating margin in the quarter. As discussed last quarter, we believe that Q1 will be Defense's lowest quarter of the year for operating income. In February, we were disappointed to learn that we did not win the JLTV follow-on contract. The contract was won at a pricing level that would be unacceptable to Oshkosh. Of course, we are protesting the award based on the evaluation of financial, operational, and technical capabilities. In short, we believe the US Army is assuming significant risk based on their decision, and we expect the Government Accountability Office to issue a judgment in mid-June. As a reminder, we expect to deliver JLTVs through the end of 2024 under the current contract. With the tactical wheeled vehicle market under pressure, we continue to focus our efforts on more fruitful product categories such as combat and delivery. We have won some outstanding contracts and are vying for others. The DoD's down-select decision for the next phases of the Optionally Manned Fighting Vehicle or OMFV program is expected this summer. We are confident that our proposed solution delivers a high level of innovation and technical capability, which we believe places us in a strong competitive position for the program. Awards are expected to be announced for three competitors with a value for each bidder expected to be $886 million over a 54-month period. We are also competing for other attractive programs such as the Robotic Combat Vehicle or RCV. We continue to execute on our NGDV program for the United States Postal Service with plans to ramp up production in 2024. Several months ago, the USPS expressed their intention to significantly increase the percentage of battery electric or BEV NGDV units in their initial delivery order. During the quarter, we received a delivery order modification that reflects the richer mix of BEV units. This is good news for the USPS, good for communities across the country, and good for our product mix. We are excited about the growth of this business as we head towards launch. Let's turn to slide 6 for a discussion of the vocational segment. During our last earnings call, we announced the decision to combine our Commercial and Fire & Emergency segments to form a new segment we call our vocational segment. We believe that the new segment provides opportunities to drive enhanced efficiencies and better leverage scale and technology development at an accelerated pace. The vocational segment also serves as a platform for both organic and inorganic growth opportunities in several important end markets. We are in the process of integrating the businesses, which will continue throughout 2023. Since our announcement three months ago, Jim Johnson and his team have evaluated opportunities and implemented numerous changes to our structure that are expected to generate $15 million in annualized cost synergy benefits. The savings are a result of both back-office optimization, as well as leveraging shared manufacturing in our new factory in Murphysboro, Tennessee. We expect a modest impact in the second half of 2023 and the full $15 million run rate in 2024 as we ramp up transition services related to the divestiture of the rear discharge concrete mixer business. Cost synergies are only a part of the story, as we also expect to benefit from joint development for advanced technologies, particularly with electrification and autonomy. Additionally, we expect to benefit from channel synergies. We will continue to provide updates on our integration work and synergy opportunities in coming quarters. Demand for fire trucks remains very high, driven by aging fleets and solid municipal budgets. We are continuing to invest in automation and capacity enhancements at our fire truck facilities in Wisconsin. We believe this improved capacity will help us reduce lead times that have led to a very large backlog for custom fire trucks. We believe the actions we are taking to improve parts supply, as well as our capacity expansions, including robotic painting in Appleton, will help us increase output in late 2023 and into 2024. Of course, the biggest news for the segment came in February when we debuted our brand-new, state-of-the-art, fully integrated electric refuse and recycling collection vehicle. Customer reaction has been outstanding for this revolutionary, zero-emission vehicle. This is the first ever fully integrated vocational vehicle, built for the RCV market, and it's zero-emission fully electric. The e-RCV, with unmatched ergonomics, supports a wide range of driver body types, drives strong productivity gains, and supports lower total cost of ownership for our customers. So you can understand why the reception has been so strong. We will be showing the unit at Waste Expo next week and displaying the cab for demonstration using VR technology at the Advanced Clean Transportation Expo, also next week. Initial vehicle deliveries will start in 2024, and we will be ramping up from there over the next several years. With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2023.
Mike Pack, Executive Vice President and Chief Financial Officer
Thanks, John. Please turn to Slide 7. Consolidated sales for the first quarter were $2.3 billion, an increase of $322 million or 17% over the prior year quarter. The increase was driven primarily by a $310 million or a 35% increase in sales at Access. The consolidated sales increase was driven by higher sales volume, as supply chain conditions have improved over the prior year quarter and increased pricing in response to inflation. That said, revenue continues to be constrained in the Access and Vocational segments due to supply chain impacts while backlog and demand remain very strong for both segments. Consolidated sales exceeded our expectations for the quarter due to modestly improved supply chain conditions versus prior expectations and the absence of some delivery timing impacts we previously anticipated in the quarter in our Non-defense segments. Moving to adjusted operating income: We delivered an increase of $116 million over the prior year quarter to $148 million or 6.5% of sales. This represents a 490 basis point improvement in adjusted operating margin versus the prior year. The improvement in adjusted operating income was largely driven by improved price/cost dynamics and increased volume versus the prior year, particularly in the Access segment. The Access segment delivered strong results for the third straight quarter, with an 11.3% operating margin, representing a 1070 basis point improvement over the prior year quarter. Higher-than-expected sales during the quarter led to stronger operating income compared with prior expectations. Adjusted earnings per share was $1.59 in the first quarter versus $0.27 in the prior year. Now, let's turn to our outlook for 2023. Please turn to slide eight. We are off to a strong start and expect the higher sales and earnings we delivered in the first quarter of 2023 to benefit the full year. While supply chain conditions were modestly better than expectations in the first quarter, supplier on-time delivery metrics still remain well off of historical norms, so supply chain remains our most significant constraint for the year. On a consolidated basis, we are estimating 2023 sales and adjusted operating income to be in the range of $8.65 billion and $570 million respectively, up from our prior expectations of approximately $8.4 billion and $530 million respectively. We are estimating adjusted earnings per share will be in the range of $6 per share, up from our prior estimate of $5.50 per share and prior year adjusted EPS of $3.46. At a segment level, we are estimating Access segment sales and operating margin to be in the range of $4.4 billion and 11.5% respectively, both up from our prior estimates of $4.2 billion in sales and 11% operating margin respectively. The improvement is driven largely by stronger first quarter volume than prior expectations. Turning to the Defense segment, we estimate sales to be in the range of $2.1 billion for the year, up modestly from our prior expectations. We expect adjusted operating margin to be approximately 3.25%, modestly lower compared to our prior expectations of approximately 4%, due to the impact of higher steel and other component inflation, which drove higher unfavorable cumulative catch-up adjustments in the first quarter, as well as costs associated with the JLTV protest. We continue to expect 2023 Vocational segment sales will be in the range of $2.2 billion with adjusted operating margins of approximately 8%, up from our prior expectations of approximately 7.5%, as a result of improved price/cost dynamics versus previous expectations. As a reminder, fire truck orders in our backlog to be delivered in 2024 and 2025 were booked with significantly higher prices than units to be delivered in 2023. We expect Vocational segment margins to be meaningfully higher in 2024 and beyond as these units are delivered. Our estimate for corporate expenses increased modestly to $180 million for the year as a result of higher incentive compensation costs, and our estimate for tax rate and average share count remain unchanged from our prior expectations. We are also maintaining free cash flow and CapEx expectations at approximately $300 million and $350 million respectively. Looking to the second quarter, we expect consolidated sales and adjusted earnings per share to be approximately flat compared with our first quarter, reflecting similar supply chain dynamics to those we experienced during the first quarter. As a reminder, we do not expect typical seasonality trends to apply in this period of very strong demand and supply chain constraints.
John Pfeifer, President and Chief Executive Officer
I'll turn it back over to John now for some closing comments. We kicked off 2023 with strong performance and believe we are well positioned to deliver on our plans for the rest of the year. We are investing in product innovations and capacity to support future growth in all three of our segments. We continue to take actions that address supply chain challenges and we are making progress as you can see from our results today. And finally I will reinforce a key message from our last call. We believe the fundamentals in our end markets remain very strong and we expect to deliver robust earnings growth in 2023 and beyond. Okay Pat, back to you.
Pat Davidson, Senior Vice President of Investor Relations
Thanks, John. Operator, please begin the question-and-answer period of this call.
Operator, Operator
Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.
Steve Volkmann, Analyst
Super. Good morning, everybody. Thank you. I guess I'd like to go right to Access, probably not surprisingly. And Mike, I think you made a comment that Access revenues in the first quarter were better than what you were expecting. But then you guys have also said you're not really seeing any improvement in supply chain. So I'm just trying to kind of square that. How did you get so much more out the door in the first quarter if supply chains aren't improving?
Mike Pack, Executive Vice President and Chief Financial Officer
Yes. So I guess first of all just to clarify on supply chain. Supply chain is definitely showing improvement. It's modest. I think if you look specifically at the first quarter, typically what we see, even in a normal supply chain environment, is with holiday shutdowns of suppliers as well as weather, we tend to see some interruptions. So we really view that the first quarter was going to be impacted from a volume perspective really more timing than anything. The good news is we didn't see that. So supply chain was quite resilient, better than we expected in the quarter, again still well off of norms. So what we're seeing from a cadence perspective Steve is that we would expect that run rate in Q1 will really carry the next couple of quarters. I would say the fourth quarter right now our expectation is that would be a bit lower not due to supply chain or anything else. It's really just because of normal seasonality of having fewer production days, therefore less equipment production. So that's how we're viewing it right now. But we are seeing – we are definitely seeing improvement. It's not at a rapid pace but it is improving.
John Pfeifer, President and Chief Executive Officer
In other words Steve, it's not back to normal at this point but it is a bit better, which is the primary driver of us getting increased shipments.
Steve Volkmann, Analyst
Got it. Understood. And my disciplined follow-up on the supply chain you said you weren't really forecasting any improvement in that going forward but it seems like maybe that's conservative because I mean we are hearing improvements away from you as well. So I'm curious if supply chain did improve would you get more out the door?
John Pfeifer, President and Chief Executive Officer
Yes. Easy answer to your question. Yes, if supply chain continues to improve we'll get more out the door. We're being a bit cautious in terms of what to expect as we go through the year.
Steve Volkmann, Analyst
Thank you, guys.
Operator, Operator
Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Jamie Cook, Analyst
Hi. Good morning. I guess my first question is on defense. Can you talk about where the margins were in the first quarter versus expectations and how much the JLTV protest impacted margins? And then, I guess, John, just medium-term path to get to more constructive margins in defense as it's been under-earning the past couple of years. So I'll start there. Thanks.
Mike Pack, Executive Vice President and Chief Financial Officer
In the quarter, we anticipated lower margins for Jamie due to an unfavorable order mix, which led to a negative cumulative catch-up adjustment. The outcome was slightly worse than we expected, primarily due to ongoing commodity inflation and our forecasts. We believe this will be the lowest quarter of the year, and there aren't significant JLTV protest-related costs in the first quarter; those are factored into our guidance for the remainder of the year. Generally, as we assess margins, we've mentioned that volumes in defense will be lower. However, we plan to start ramping up NGDV next year, which will significantly alter the margin profile as we advance in that sector.
John Pfeifer, President and Chief Executive Officer
Yeah. And there's short-term there's long-term, short-term the defense margins have been squeezed by inflation, because we have to take these cumulative catch-up adjustments. As inflation forecast normalize or maybe they'll even improve a bit then, you'll start just because of that we'll start to see some margin improvement in the defense business. The longer term of it is winning these combat programs that are good margin business for us. Mike talked about the NGDV program going online a little bit longer term meaning, over the next couple of years two, three years, that starts to improve the margins materially.
Jamie Cook, Analyst
Okay. And then, my follow-up… …sorry go ahead, John.
John Pfeifer, President and Chief Executive Officer
I was just going to add to that. And there's short-term there's long-term, short term the defense margins have been squeezed by inflation, because we have to take these cumulative catch-up adjustments. As inflation forecast normalize or maybe they'll even improve a bit then, you'll start just because of that we'll start to see some margin improvement in the defense business. The longer term of it is winning these combat programs that are good margin business for us. Mike talked about the NGDV program going online a little bit longer term meaning, over the next couple of years two, three years, that starts to improve the margins materially.
Jamie Cook, Analyst
Okay. And then my follow-up just Mike on before the guide was I think $0.80 headwind in incentive comp $0.30 product development I think incentives a little higher. Can you just remind me where these numbers are now in your new guide? Thanks.
Mike Pack, Executive Vice President and Chief Financial Officer
Yeah. New guide, incentive compensation is about $1.10 and new product development is similar at the $0.30.
Jamie Cook, Analyst
Okay. Thank you.
John Pfeifer, President and Chief Executive Officer
Thanks Jamie.
Operator, Operator
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich, Analyst
Yes. Hi. Good morning, everyone.
John Pfeifer, President and Chief Executive Officer
Good morning, Jerry.
Jerry Revich, Analyst
I'm wondering if you could just talk about in fire & emergency it looks like we had a nice margin improvement in the quarter. Can you comment on where the pricing point is going to be exiting this year compared to the first quarter? Is it starting to improve sequentially? And how much higher is the pricing point in 2024 than 2023 that you alluded to in your prepared remarks?
Mike Pack, Executive Vice President and Chief Financial Officer
Sure. The timing of some of the increases we've had is important. By the end of the year, we expect to see a low single-digit increase in pricing within vocational, while we anticipate a more significant change, specifically over 10%, next year. This gives us confidence that we will return to a double-digit growth in that area. We'll see a meaningful increase later in the year as we move into 2024.
John Pfeifer, President and Chief Executive Officer
It will transform as we go into 2024 Jerry.
Jerry Revich, Analyst
Very interesting. And then can I just ask on the supply chain I know, you track carefully the number of components that are on a watch list. What's that number look like today versus three to six months ago? And can you comment on just what are the most meaningful pinch points now that are rising to your level?
John Pfeifer, President and Chief Executive Officer
Yeah. We track several metrics in supply chain. The highest level metric would be supplier on-time delivery. Supplier on-time deliveries improved by a few hundred basis points. Again, it's not up to above 90%, like we'd like it to be, but it's made some decent improvement. We also track past dues. That's more of almost a daily weekly basis. That can interrupt production if we have unexpected past dues. What I would say, I guess the best way to describe it is that there's more green on our charts now than there were a quarter ago. But we still have troubled suppliers and we still have a risky categories of components that we have to manage on a day-to-day basis and week-to-week basis. But we're seeing moderate improvement in our ability. One thing I will say is, I think we're starting to see some benefit from the actions we've been taking. We've been doing a lot of reengineering to help our suppliers supply us better. We've been doing a lot of dual sourcing, qualifying additional sources that stuff can't be done overnight. Takes a lot of engineering work to do it, but we're really starting to see a lot more supply come in as a result of those efforts. And I think that that's having a positive impact on our ability to produce more.
Jerry Revich, Analyst
Thank you.
John Pfeifer, President and Chief Executive Officer
Thanks, Jerry.
Operator, Operator
Our next question comes from the line of Tim Thein with Citi. Please proceed with your question.
Tim Thein, Analyst
Thank you. Good morning. The first question is about the EPS guidance. If the second quarter resembles the first and considering that the third quarter is typically the largest, it suggests a significant drop in the fourth quarter to reach approximately $6. Is there anything specific you'd like to point out? I understand that seasonality has been affected by the supply chain issues, but is there anything we should keep in mind regarding this, as it could heavily impact your quarter?
Mike Pack, Executive Vice President and Chief Financial Officer
Yes, you are correct. The typical seasonal patterns don't really apply in the first three quarters this time around. Historically, seasonality was tied to demand, which is currently far exceeding our supply. We're essentially fulfilling all our production. Therefore, I anticipate that our revenue will remain relatively stable. If the supply chain maintains its current status and we experience a slight decline in the fourth quarter due to fewer production days, that will affect our guidance. Our outlook heavily relies on the pace of supply chain improvements and the number of production days available each quarter.
Tim Thein, Analyst
Okay. Understood. Regarding the increase in telehandler capacity, if I remember correctly, you have a long supply agreement with a major OEM that might end in the next year or two. I would expect you have some visibility and confidence that it will be renewed if you're increasing telehandler capacity. Is that a fair assumption?
John Pfeifer, President and Chief Executive Officer
We have a strong partnership that has been beneficial for us over a long period. Regarding our telehandler capacity investment, we are witnessing ongoing growth in the telehandler market, where we are the leading company. New use cases for telehandlers are emerging, contributing to this growth, and we view this as an opportunity to further expand our business. The market as a whole is expected to perform well for many years to come, driving our investment. Our utilization data in the JLG business is very healthy and surpasses last year's figures. We see many positive indicators in construction metrics, supported by organizations like the Portland Cement Association and Moody's. All these data suggest that we anticipate growth in the near and long term. Current geopolitical issues are prompting manufacturers to reshore production, which is already affecting construction and manufacturing. There is also considerable focus on mega projects related to new electric vehicle plants and chip manufacturing, alongside recently passed infrastructure bills that are starting to generate these significant projects. All of this supports our outlook for strong demand in the future, and the health of these metrics compels us to continue investing in our capacity to meet that demand.
Tim Thein, Analyst
Got it. Thanks for the time.
John Pfeifer, President and Chief Executive Officer
Thanks, Tim.
Operator, Operator
Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.
Unidentified Analyst, Analyst
This is Larry Savitz on for Seth this morning.
John Pfeifer, President and Chief Executive Officer
Good morning.
Unidentified Analyst, Analyst
I wanted to inquire about the outlook for Access pricing costs for the rest of the year. Will it become less of a benefit as the year goes on?
Mike Pack, Executive Vice President and Chief Financial Officer
For Access, we are currently in a good position regarding the price and cost scenario. We will continue to keep an eye on inflation, which might lead to further pricing adjustments. However, that's not the main focus for Access. Right now, we see more opportunities for improving margins as the supply chain becomes more stable since we are still below our production capacity. With increased volume and throughput in our factories, we anticipate higher margins. Therefore, cost pricing isn't the main factor driving our performance at this time.
Unidentified Analyst, Analyst
Okay. Understood. And just as a follow-up, are you seeing any order cancellations or pushouts due to macro concerns or rate concerns or anything of that nature?
John Pfeifer, President and Chief Executive Officer
Demand for the product is very strong. If you consider our order rate for Access Equipment, we've received $1.2 billion in orders in the first quarter, which reflects a robust order rate. Our 2024 order book is not fully open yet, and all the orders being taken now are for 2024. This indicates that while the flow of orders isn't completely unrestricted, we still achieved $1.2 billion in orders and have set another record backlog at the JLG business. This suggests that the backlog is in good shape. Additionally, the order rates we are experiencing are strong and expected to remain strong moving forward.
Unidentified Analyst, Analyst
Great. Thanks a lot for your time.
John Pfeifer, President and Chief Executive Officer
Thanks, Larry.
Operator, Operator
Our next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.
Tami Zakaria, Analyst
Hi. Good morning. Congrats on the great results. Going back to that backlog comment. Since you still haven't opened 2024 order book fully, do you expect backlog to sort of keep climbing from here on, or do you expect to sort of bring it down a little bit by the end of this year as production ramps up?
John Pfeifer, President and Chief Executive Officer
We currently have a backlog that extends about a year, which is quite lengthy. Ideally, we would like to have a backlog that is less than a year or closer to what is considered a more normal level, as this provides our customers with better visibility regarding equipment delivery timelines. This is the reason for our decision to increase production capacity. I mentioned telehandlers earlier; specifically, the additional 500,000 square feet dedicated to telehandlers will also enhance our McConnellsburg facility's ability to produce more booms and similar products. By continuing to increase our capacity, we will foster growth. We are optimistic about the long-term market outlook and believe we can reduce the backlog to a six-month timeframe or slightly beyond, but we definitely do not want it to remain at a year. Overall, our plans to invest in capacity align well with the healthy market conditions we observe, which will stimulate growth and ultimately benefit our customers.
Tami Zakaria, Analyst
Got it. That's very helpful. And then, for modeling purposes, for Access Equipment, should we think about EBIT margin sort of sequentially getting better in Q2 and then again in Q3? And then sort of steps back in Q4, given you said lower production days. So what I'm trying to really understand is, is sort of Q1 the lowest margin quarter of the year as we sit here today, or is Q4 going to be the lowest margin quarter?
Mike Pack, Executive Vice President and Chief Financial Officer
I believe that the next three quarters will be quite similar, with the fourth quarter expected to be somewhat lower due to decreased volume and less absorption benefit. We're very early in the year, so we will continue to monitor the supply chain, and as conditions improve, we will be ready to increase production.
Tami Zakaria, Analyst
Got it. Thank you so much.
John Pfeifer, President and Chief Executive Officer
As you see supply chain improve, Tami, I believe our factories will become more efficient, leading to margin improvement later this year. Much of this is dependent on the supply chain and our efficiency.
Tami Zakaria, Analyst
Perfect. Thank you so much.
John Pfeifer, President and Chief Executive Officer
Thanks, Tami.
Operator, Operator
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Steven Fisher, Analyst
Thanks. Good morning. You actually just answered the question I had about whether there's any additional efficiency benefits that would be additive to the margins on Access as supply chain improves, and you get the leverage. But I guess now the follow-up to that would be, how much you're thinking or to what extent you might be thinking we could hit those 2025 margin target sooner than expected if the demand I look is pretty good and we're already probably exiting this year fairly close to those 2025 target margin levels.
John Pfeifer, President and Chief Executive Officer
Yes, Steve, thanks for the question. I'm glad you asked about our 2025 targets. Last year during our Investor Day, we provided a range for those targets. As we look ahead a few years, we know there will be both positive and negative events that can impact our ability to meet those targets. Unfortunately, due to a very low price, we were unable to retain the JLTV target, which was a setback for our 2025 goals. On the positive side, we are a growing organization and anticipate a higher mix of battery electric vehicles for the postal contract, which is encouraging. We also acquired Hinowa and plan to pursue further mergers and acquisitions during this period. There are many favorable factors within our businesses that remain strong, so we are committed to achieving our 2025 targets.
Steven Fisher, Analyst
That's really helpful. And then just quickly on steel prices. Obviously, they're back to rising. I'm curious what that means for you and how you're planning for that now if at all?
Mike Pack, Executive Vice President and Chief Financial Officer
We're actively monitoring all of our input costs, including fuel. We are keeping a close eye on these factors and will consider them as they impact commodity inflation and pricing. For now, we're focused on continuing to monitor all inputs closely.
Steven Fisher, Analyst
Thank you very much.
Operator, Operator
Thank you. We have no further questions at this time. Mr. Davidson, I would like to turn the floor back over to you for closing comments.
Pat Davidson, Senior Vice President of Investor Relations
Thanks, Christine and thanks everybody for joining us today. We're committed to driving long-term profitable growth as we innovate, serve and advance. We look forward to speaking with you perhaps at the ACT Expo next week or Waste Expo or at a conference in May or June or during the summer. Take care and have a good day.
Operator, Operator
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.