Mike Pack: Yeah. When you’re looking at input costs, correct.
Seth Weber: All right. Okay. And then just on
Mike Pack: What I would say is, I guess, one other piece, too, we do — with the new product development piece, obviously, with access equipment being one of our larger businesses, there’s certainly an element there as well, I would add into that as well. But as volume increases, our view hasn’t changed as volume increases and we get those absorption and manufacturing benefits, their margin will improve over time.
Seth Weber: Right. Okay. And then just on the free cash flow, is CapEx — is this kind of a one-off spike here in 2023 up to $350 or is it — do you think it stays at that high level for the next couple of years as you’re adding — it sounds like you have a bunch of new capacity addition plans that are in the works.
Mike Pack: Yeah. I think if you go back even to Analyst Day, we expected that this past year and then in 2022 and 2023, it would 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’ll continue to run probably a little bit higher. I don’t know that it’s necessarily going to be at the same level it is this year. I think this year, with a number of programs sort of converging. It’s probably our peak year.
Seth Weber: Okay. That’s super helpful. Thank you.
Pat Davidson: Thanks, Seth.
Operator: Our next question comes from the line of Dillon Cumming with Morgan Stanley. Please proceed with your question.
Dillon Cumming: Great. Good morning, guys. Thanks for the question. Just wanted to ask a longer-term one on Access first. I feel like it’s been pretty clear that a lot of the rental companies still will not be able to make a dent in their fleet age this year. And just given your commentary around non-res construction, it still feels like you have multiple years of visibility there too as well. Just from our perspective, most of the consensus are still not giving you credit for the longer-term sales targets that you put out there at the Investor Day. Can you speak to kind of any multi-year visibility that you still have been in access that can actually maybe kind of give us confidence in actually hitting those targets over the long term?
John Pfeifer: Yeah. Sure. First of all, I really want to emphasize, we feel great about the underpinning factors that are driving the demand dynamics in the Access marketplace. Our equipment is, of course, more driven by non-residential and industrial spending. And the important thing to note here is we are not seeing the slower residential metrics translate to non-residential. 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. So there’s — 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, they’re 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 multiyear continuation of the demand in this segment.
Dillon Cumming: Got it. Thanks, John. If I just ask a follow-up then on the bus mix and the USPS contract again. Can you just speak to kind of the overall maturity of the supply chain, how that’s developed over the last year or so? You’ve still been working with Microvast, but just kind of their own ability to handle your own ability to handle in terms of sourcing those components getting that battery supply chain kind of up and kind of ready to actually supply those higher volumes that you’re expecting over time?
John Pfeifer: Yeah. Well, I think the thing that we pay most attention to is, the new components that get supplied to us and i.e., that means the BEV type components, like, the lithium-ion batteries. And we feel really good about our supply chain for lithium-ion batteries as one example. And we pay attention to it right down to the cell and 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 battery supply 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 feel good about it. In terms of e-drives and other systems that go into a BEV. They’re household name companies that are our partners. And we’ll continue to pay very close attention to it with every day that goes by. We’ll get into production over the next year, and we feel good about where the program is.
Dillon Cumming: Great. Thank you.
Operator: Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Steven Fisher: Hi. 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. And then just higher margins than 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 12.5% to 13.5% on 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 long-term margin range before 2025.
Mike Pack: Sure. First of all, I guess, talking about the — 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 mix issue with a mix headwind with an order in 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 that’s going to apply to margins. It is the lowest — we expect it to be notably the lowest margins of the year so it will improve over the course of the year. I think in terms of Access exit for margins, right now, to the extent — going back to my earlier comments, 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 unit volume increases and so on, those margins that we’re talking about for 2025 are absolutely attainable. So that’s really — what I’d really do is focus on supply chain cadence.
Steven Fisher: Okay. And then did you comment at all about how you’re thinking about catch-up adjustment potential in Defense in 2023, assuming there might be more inflation, what’s your expectation for catch-up adjustments this year?
