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spk00: Greetings and welcome to the Oshkosh Corporation Reports Fiscal 2022 Third Quarter Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson. You may begin.
spk03: Good morning, and thanks for joining us. Earlier today, we published our third quarter 2022 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. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended September 30, 2021. Our presenters today include John Pfeiffer, 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.
spk13: Thank you, Pat, and good morning, everyone. We delivered strong earnings growth in the quarter in the face of ongoing supply chain challenges that have constrained production for companies across the globe. We are pleased with this strong sequential quarterly earnings growth as a result of positive price attainment, particularly in our access equipment segment, where we returned to a double-digit adjusted operating income margin of 11.3%. We expect to further benefit from stronger pricing in our non-defense backlogs into 2023. Demand has remained robust across the company, fueled by aged fleets, solid equipment utilization rates, technology adoption, and high levels of non-residential and infrastructure spending, which are contributing to our strong backlogs. Global supply chain conditions remain our most significant constraint, and are suppressing production levels in all of our businesses, impacting both sales volume and manufacturing efficiencies. We are continuing to qualify new suppliers, re-engineer components to expand supply availability, and leverage digital supply chain tools to help mitigate these constraints, which we expect will continue throughout 2023. We are also managing our costs to better align spending levels with our constrained production rates. For the quarter, we reported revenue of $2.07 billion with adjusted earnings per share of $1, a 144% sequential improvement from earnings per share of 41 cents in the second quarter and down modestly from the prior year quarter. I am proud of our team's resiliency as they delivered these results despite a number of challenges in the quarter, including Hurricane Ian, which caused us to shut down our Florida facilities for the last week of September, and a major shortage of axle castings in the defense segment, which caused two weeks of lost production. As we have shared in the past, we are proud of Oshkosh's strong environmental, social, and governance, or ESG, leadership. In recognition of our leadership, MSCI updated its risk profile for Oshkosh and we achieved a triple A rating, which puts us in the top 3% of our industry category. We are dedicated to taking the right actions to responsibly deliver results for our stakeholders. As we move into the final quarter of the year, we are maintaining our most recent expectations of revenues and adjusted earnings per share, in the range of $8.3 billion and $3.50 per share, respectively. Mike will share additional details on our expectations in his section. While it's not possible to predict when supply chain conditions will improve, our disciplined actions to increase prices and manage costs are contributing to improved results, particularly at Access Equipment. We are confident in our people, our company, and our outlook for the remainder of 22 and believe we will exit the year in a stronger position to deliver growth in 2023 and beyond. Please turn to slide four and we'll get started on our segment updates with access equipment. As I mentioned in my opening comments, our access equipment team delivered strong performance in the third quarter with a 420 basis point adjusted operating income margin improvement sequentially and a nearly 800 basis point improvement year over year. While supply chain dynamics continued to limit production, as well as contribute to elevated freight and expediting costs, our pricing actions drove strong earnings improvements. As expected, we largely worked through the remaining price-protected backlog in the third quarter and returned to delivering double-digit operating margins. The team at Access Equipment remained focused on improving supply chain efficiency, including qualifying additional suppliers, allowing us to both dual-source components and leverage alternate sourcing strategies that will optimize parts flow and maximize our production rates. We continue to experience strong demand for our market-leading JLG products, and our backlog remains elevated at $3.9 billion. The strong demand is driven by robust market fundamentals, including age fleets, high utilization rates, and continued solid non-residential construction metrics, as well as technology adoption. Orders were high once again at nearly $1 billion in the quarter, We believe we have good visibility to customer requirements for 2023 well beyond our current backlog and discussions for 2024 requirements are already beginning in some cases. Please turn to slide five and I'll review our defense segment. Revenues for the defense segment were lower in the quarter versus the prior year due to lower vehicle production as a result of both significant production disruptions caused by parts shortages and planned reductions in DOD spending on tactical wheeled vehicles. As I mentioned, axles and related components drove the most significant disruptions impacting both sales and manufacturing efficiencies. We also recorded unfavorable cumulative catch-up charges in the quarter as material and freight cost escalation had been more persistent than previously expected. These events reduced operating income during the quarter below our prior expectations. Moving to an update on key programs, we submitted our proposal for the JLTV2 contract in August, and we expect to hear the Army's decision in early 2023. We believe our strengths in manufacturing and technology bring substantial benefits to our DoD customer, and we are confident that we can deliver even more value to our customer in the future. We achieved some important wins for margin accretive programs during the quarter as well. Notably, we were announced as the winner of the EHETS trailer competition. The contract is worth approximately $260 million over the next several years. We received the first delivery order for 73 trailers that we will deliver in 2024 and 2025 in conjunction with our Dutch partner, Brocious. Late in the quarter, the U.S. Marine Corps awarded us a contract for the Rogue Fires mobile launch system. Rogue Fires is an unmanned 4x4 JLTV that houses a launcher to fire naval strike missiles and is another example of Oshkosh leveraging our technology developed for one program and successfully applying it to another program. And last week, Lithuania's Ministry of Defense announced its intention to purchase 300 additional JLTV units. Finally, we are pleased to welcome Tim Bleck to his new role as president of our defense segment. Tim worked side-by-side with our retiring president, John Bryant, for many years, and together they were instrumental in delivering several key program wins, including JLTV-1 and NGDV, and Stryker MCWS, among others. I want to personally thank John Bryant for his years of service to both our company and the U.S. Marine Corps. We are confident that Tim and the entire defense team will continue to execute our successful strategy and drive profitable growth in the segment. Let's turn to slide six for a discussion of the fire and emergency segment. Demand remains very strong for municipal fire trucks, and our team at Pierce continues to strengthen its position in the marketplace with outstanding new products, including our Volterra electric vehicles and other productivity-enhancing features. Supply chain disruptions and manufacturing challenges, due in part to workforce availability, have limited our ability to produce to our targeted rates. This led to lower fire truck deliveries and higher manufacturing inefficiencies in the quarter, thus contributing to a lower than typical operating margin of 7.8%. We experienced modest improvements in some supplier metrics during the quarter, such as past due purchase orders, but we are not experiencing the sustained improvements we need to consistently achieve planned production rates in our facilities. We believe our purchasing and operations leaders are taking the right actions, and we remain confident that fire and emergency will return to strong double-digit operating margins as supply chains improve and our production volumes increase to keep pace with demand. This strong demand is supported by aged fleets and solid municipal funding that are driving the market for fire trucks. Pierce's backlog is at an all-time high, up more than 80% compared to the prior year, highlighting excellent demand for our products as evidenced by our leading market share. During the quarter, we partnered with our dealers to secure many notable orders, two of which I'd like to highlight. First, our dealer in Florida won a large order with the city of Jacksonville for 15 custom fire trucks. And second, our dealer in Texas secured a strategic order with the city of Dallas. Before we leave fire and emergency, I'm proud to highlight that Gilbert, Arizona, is our latest customer for a Volterra electric fire truck. Gilbert will provide us with a hot climate environment that will benefit our development activities. Please turn to slide seven, and we'll talk about our commercial segment. In the commercial segment, sales were up versus the prior year, but third-party chassis availability remained a constraint. Adjusted operating margins were down versus the prior year as a result of increased new product development and technology investments, as well as higher warranty costs. We continue to make investments in automation that we believe will improve our operations and our competitive position for the long term. For example, our team at Commercial is implementing its Manufacturing 4.0 strategy, which will increase capacity, improve efficiency, and raise quality, while reducing the need for additional headcount in a labor-constrained market. Earlier this year, we started up our first refuse collection vehicle high-flow line in Dodge Center, and the line is redefining how we produce our CVs. We expect further benefits in 2023 and beyond, as we continue to ramp to full rate production and the supply chain improves. We expect to roll out additional high flow lines for RCV production in the coming years. With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for the remainder of 2022. Thanks, John. Please turn to slide eight.
spk02: Adjusted operating income of $114 million for the third quarter was in line with our expectations despite the unplanned revenue shortfall of approximately $130 million, primarily due to supply chain disruptions. As John discussed, defense production was impacted by a number of axle and related component shortages during the quarter. Further, our revised outlook for higher inflation projections in our defense segment Let's do an unfavorable cumulative catch-up adjustment during the quarter of approximately $14 million versus our most recent expectations. Strong price realization and favorable mix, particularly at access equipment, as well as prudent cost management, offset the lower-than-expected consolidated sales volume and unfavorable cumulative catch-up adjustments versus our most recent expectations. Adjusted EPS was negatively impacted versus our most recent expectations by approximately 6 cents due to unfavorable foreign currency translation adjustments as a result of the impacts of weakening foreign currencies relative to the U.S. dollar. Our tax rate was also modestly higher than our most recent expectations. Moving to a comparison versus the prior year. Revenue was up $4 million to $2.07 billion dollars. Access equipment and commercial segment revenues were up by $192 million and $31 million, respectively, driven primarily by the benefit of higher pricing as well as increased sales volume in North America at Access equipment. Defense and fire and emergency sales were down by $132 million and $91 million, respectively, driven primarily by supply chain disruptions impacting production as well as expected lower DOD tactical wheeled vehicle requirements in the defense segment and lower ARF demand in the fire and emergency segment as airport spending has not returned to pre-pandemic levels. Adjusted operating income was up $10 million versus the prior year to $114 million or 5.5% of sales representing a 9.4% increase. Access equipment's adjusted Operating income increased $87 million to $118 million, or 11.3% of sales versus the prior year. This represents an impressive 770 basis point improvement in adjusted margins versus the prior year, driven by improved price-cost dynamics as a result of our pricing actions catching up to increased costs, as well as improved absorption, lower product liability costs, and lower incentive compensation. Defense operating income was down $47 million versus the prior year on lower sales driven by a combination of supply chain disruptions experienced during the quarter as well as planned lower tactical wheeled vehicle production resulting from lower DOD budgets. Operating income was impacted by lower sales volume, unfavorable cumulative catch-up adjustments versus the prior year as a result of persistent inflation and unfavorable product mix. Fire and emergency operating income was down $28 million versus the prior year as a result of lower sales volume driven in part by supply chain disruptions and unfavorable price-cost dynamics. Consolidated price-cost dynamics improved approximately $55 million sequentially versus the second quarter. Adjusted EPS was $1 per share for the quarter compared to $1.05 per share in the prior year. Adjusted EPS was negatively impacted by approximately $0.08 by the aforementioned foreign currency translation adjustments and $0.15 due to a higher effective tax rate versus the prior year. Share count benefited earnings per share by $0.05. Please turn to slide 9 for a discussion of our updated expectations for 2022. Last quarter, we said that we expected 2022 sales and adjusted EPS to be in the range of $8.3 billion and $3.50 per share, respectively. Our expectations were based on supply chain and inflation conditions remaining the same as we experienced in the second quarter. While on-time delivery metrics have improved in pockets, these metrics remain well off of historic norms and below levels that facilitate smooth production. As previously mentioned, supply chain disruptions contributed to a $130 million revenue shortfall in the third quarter versus our most recent expectations. Further, inflation has remained persistent as supported by recent PPI data, despite improvement in some commodities. We tend to continue to price for inflation in our non-defense businesses as demonstrated by our margin improvement during the third quarter in the access equipment segment. Despite these challenges, we are reaffirming our expectations of fiscal 2022 sales and adjusted EPS to be in the range of $8.3 billion and $3.50 per share respectively. This implies fourth quarter EPS in the range of $1.85. As we look to the fourth quarter versus the third quarter, there are three key factors that support our outlook. One, the expected benefit of increased volume at defense and access equipment. Two, the benefit of an expected positive cumulative catch-up adjustment from incoming orders anticipated in the fourth quarter compared to a charge in the third quarter in defense. And three, the expected benefit of cost management actions throughout the company to align our costs with the constrained production environment. Of course, the environment remains volatile and difficult to forecast to remain laser-focused on execution. While current supply chain inflation conditions remain a challenge, we're encouraged by the strong recovery of access equipment margins during the quarter, as well as robust demand for our market-leading products, and we remain confident in our long-term outlook. I'll turn it back over to John now for some closing comments.
spk13: We delivered significant sequential improvement in margins, and it's clear we benefited from pricing actions in our non-defense end markets. We will continue to remain focused on managing costs and staying disciplined with our pricing approach during this time of high inflation. Supply chain remains our most significant challenge, and we will continue to take actions to drive a more resilient supply chain over time. Importantly, we believe the fundamentals in our end markets remain very strong. And finally, we expect to exit 2022 in a stronger position as we head into 2023 and beyond. Okay, Pat, back to you.
spk03: Thanks, John. I'd like to remind everybody, please limit your questions to one plus a follow-up, and please stay disciplined on that follow-up question. Afterwards, we ask that you get back in queue if you'd like to ask additional questions. Operator, please begin the Q&A portion of this call.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for any questions. Our first question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
spk11: Yes, hi. Good morning, everyone. Morning, Jerry.
spk08: John, we're hearing from a number of your customers about nice-sized price increases anticipated for 2023. And, you know, I'm wondering if we're looking for pricing to be up mid to high single digits next year, would that get you to your historical, you know, low to mid-teens margin profiles at this, you know, $4-plus billion revenue run rate in-access equipment? Does that essentially make up for all of the volatility we've seen on the cost structure over the past couple of years.
spk02: Thanks. I'll start that, Jerry. This is Mike. I would say, first of all, you look at access, we're obviously a real strong margin, really within about 100 basis points of what our prior peak was. And that's still in a very constrained supply environment, which is limiting our output and contributing to labor inefficiencies. From a true price-cost perspective, we're approaching that neutral, and we expect to exit the year neutral to positive, really, in our non-defense businesses. So I would say right now the margin opportunity going forward is really the cadence of supply chain improvement versus the price-cost dynamic.
spk08: Okay, super. Thank you. And then can we talk about, in the defense segment, the cumulative catch-up adjustment? Can you just say more about which of the programs the catch-up was related to this quarter? And, you know, is there a particular input cost dynamic that drove it? Was it, you know, expedited freight inefficiencies that we're unable to recover with the pass-through mechanisms or any additional color on that, if you wouldn't mind?
spk02: Sure. I guess, first of all, two things. I think, first of all, for the quarter, the bigger driver of defense performance versus the CCA was actually the volume interruption that we had due to the actual casting challenge. So that was a bigger impact. We did have a negative CCA. It was really on our major programs, GLTV and FMTV. It's really, what it is, is we're continually looking at third-party projections of inflation. And freight and other items, the projections of them staying elevated for longer is really what's causing the impacts. We're looking at a lot of experts every quarter as we're looking at it. Obviously, it's much smaller than this past quarter. And again, we do expect as we go to the fourth quarter with expected incoming orders that our CCAs should be a benefit.
spk11: Super. Thanks. Thank you.
spk00: Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.
spk09: Thank you, and good morning, everyone. Just to clarify in defense here, since we've seen, obviously, a lot of moving parts to margin in 22, can you pinpoint how you're thinking about margin in the fourth quarter here? Presumably, you've got decent visibility at this point, and then Is it fair for us to expect margin to normalize in 2023, or are there other items like CCA that might be creating distortions next year as well?
spk02: You know, just to start off, Meg, I think the defense business, obviously we've had some CCAs, but this is a good solid margin business going forward, and our view hasn't changed there. As we go from really the bridge from the third quarter to the fourth quarter, it's really three items driving that, defense being one of the biggest. So we do expect to see some more volume as we go from the third to fourth quarter. That certainly will be beneficial to defense's margins, and really about half that volume uplift is really split between access and defense. I would say the other piece is we expect a positive CCA because we're going to have some large JLTV and FMTV orders expected coming in, so we tend to get a benefit. So a flip from having a negative to an expected positive. So we do expect that margins will be more robust in the defense segment as we go to the fourth quarter.
spk13: Yeah, and hey, Meg, it's John. I'll just add a little bit to that. I think we would say that we expect a more normalized margin in 2023. But also I want to say more long-term, defense is a good business. You look at the quarter, this quarter and last quarter and scratch your head, but defense is a good business and it's a long-term growth driver from 2024 for Oshkosh Corporation. So we're confident in the defense business in 23 and beyond. Understood.
spk09: Then I guess my follow-up is on access equipment. You know, if we're looking at the order intake that you had this quarter, about 950 million thereabouts, do you sort of view this order intake level as sustainable? Is this sort of the new normalized level based on what you're kind of hearing from customers? And I'm also curious in terms of whether or not you are opening the order books beyond sort of what you have told us last quarter. I mean, you talked about 2024. Are you in a position where you can actually take firm orders for 24? Thank you.
spk13: Yeah, great question, Meg. Let me clarify. We're seeing really strong demand. in the access equipment segment. You know, you look at the orders this past quarter, Q3, near a billion dollars. That's a really healthy order rate. And as you say, we're taking orders now because we've got a $3.9 billion backlog for late 23 into 2024. So this is, you know, that's kind of an unprecedented territory for the access equipment industry and for JLG. So it's more of a managed order book versus a free flow order book. But also recall a year ago in the third quarter, we had a gigantic order intake that quarter, primarily because of one huge order from one of our biggest customers. So the comp versus a year ago is a little bit misleading. If you talk to any of our customers, there's lots of publicly traded customers that we have that talk about it. They're increasing their CapEx plans. They can't get enough equipment. There's mega projects going on, unprecedented mega projects, a lot of them bills passed by Congress, that are starting to take shape. They're just beginning to take shape. They're absorbing a lot of the fleet that's in the market more than they normally would. And therefore, our customer base is saying, hey, we've got to adjust to this and keep adding fleet and replacing fleet. And so that's why we have confidence that we're in a multi-year growth cycle. So that's what I'll say about the demand in the access world right now.
spk09: Appreciate it.
spk03: Thanks, Meg.
spk00: And our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
spk05: Hi. Good morning. I'll try this question, although my guess is you're not going to want to answer it. I'm just trying to look at the run rate of earnings in the back half of 2022 and what that implies for 2023. um you know understanding there's a lot of unusual things going on but the street i think has earnings next year of 650 which is you know almost doubling your earnings relative to where we sit today so is there i mean should we not take the back half as a good run rate i'm just trying to think about 2023 and whether or not that the guidance or the consensus out there needs to be de-risked thank you um
spk02: yeah jamie we're not we're not ready to provide guidance yet for next year um but a few things obviously we saw significant improvement from um from q2 to q3 really driven by price cost obviously supply chain remains a constraint so that's that that will be a variable as we go into next year obviously we expect some some solid growth from the third quarter to the fourth quarter. And I think it might be just worth mentioning those three items. I think from number one, we expect a bit more volume with the fence going back to more normal production. They're back there now getting past the axle challenges. Combined with, we have a little bit more international volume we expect for access for some in-transit units on the water right now. you know, again, the CCA benefit is another driver. And then also the spending benefits. So I think that's really what we see the bridge. And then I guess if we look to next year, that CCA benefit's not something that recurs every quarter. That's a more discreet event. So that's something that's not necessarily a run rate type item.
spk13: Yeah. Jamie, I think it's... Mike talked about a few benefits that we get that may not recur in 2023, but it's safe to say that it's more similar to the back half of this year than the front half of this year.
spk05: Okay. Thank you.
spk00: And our next question comes from the line of Stephen Volkman with Jefferies. Please proceed with your question.
spk14: Great. Hi, guys. Thanks for taking the question. Mike, can I go back to your three things?
spk06: Sure.
spk14: We've talked, you've talked about the positive CCA adjustment a couple of times. Can you just quantify that?
spk02: Sure. So there's a, there's about an 85 cent uplift from, uh, from Q3 to Q4 that we expect. Um, I'll break it down in those three buckets, about, about 20% of that, or excuse me, about 40% of that volume, about 40% of it's the, the CCA flipping from negative to positive. Um, And then the last 20% of that is spending related.
spk14: Okay, great. And then on the spending related, is that SG&A or is there more that's being done? Does that affect any specific segment more than others?
spk02: It's largely SG&A. And what I would say is that it's really across the board. Obviously, we have a constrained production environment. So we're just prudently trying to align our spending with our constrained production levels. But I'd say it's really across the board.
spk14: Thank you so much.
spk02: Sure. Thanks, Steve.
spk00: And our next question comes from the line of Tammy Zachariah with JP Morgan. Please proceed with your question.
spk04: Hi. Good morning. Thank you so much. So I just wanted to clarify what you said about CCA. You had some outside negative cut-up adjustment in the second and the third quarter. of this year seems like it was about $40 million in total. If commodity prices stay where they are, will you recapture all of this headwind next year? I'm just trying to model next year. So is it like a full recapture we should be modeling?
spk02: So what we're doing, Tammy, is when we're resetting, we're really looking at what our expectations are for costs for the remainder of our program. So in some case, we're looking out three or four years predicting what the costs are and looking at expert cost curves. So if commodities stay about where they're at, that really is going to be not a particularly big net negative or net positive. It will stay, it'll be fairly neutral. So if you saw like an outsized drop versus what leading experts would say you would get a benefit, conversely, if you see higher inflation levels, it could be a headwind. So I would say right now, this reflects our best estimate of what the margins are will be on the program going forward. And again, I think the important point is, again, you get an outsized impact in one quarter because you're essentially catching up an entire program to get it to that new margin level. So you can have a bigger impact. But again, we expect more normalized type margins next year for the defense segment.
spk04: Got it. That is very helpful. And then another quick one. How should we think about R&D spend? next year versus this year, if you're able to comment.
spk13: Yeah, sure. We've had a step up in R&D in 2022, and we'll continue to increase it more in 2023. We invest a lot in technology. You've seen us put electrified product into the market in almost every segment we serve. You've seen us do a lot with autonomy. I talked about that Rogue Fires. That's an unmanned vehicle. So we continue to invest in technology. But I think when you look at it as a percent of sales, it's not materially different. While we're stepping it up in dollars, when you look at it as a percent of sales in 23, it's not materially different.
spk04: Great. Thank you so much.
spk03: Thanks, Tammy.
spk00: And our next question comes from the line of Michael Senegar with Bank of America. Please proceed with your question.
spk01: Hey guys, thanks for taking my question. The inventories are building and that makes sense. You have a big backlog. I'm just curious what areas we're seeing you guys are building that inventory and where do you think Freecastle kind of finishes this year and will we expect a more normalized return in 2023?
spk02: Yeah, I think from an inventory perspective, you're certainly seeing higher levels, really all categories, but I'd say particularly whip and raw materials is where you're seeing that. And that's reflective of obviously manufacturing not being a normal flow right now. To the extent you see a little bit higher finished goods, some of that's just some of the previously mentioned in transit international goods. So that probably begins to resolve itself a bit in the fourth quarter. I would say from a free cash flow perspective for the year, we're looking probably in that $200 to $250 million range. I would say that ultimately free cash flow starts normalizing as we get into next year as production. Again, I think it's highly correlated to what production looks like, what supply chain looks like, that type of thing. But I would say right now the inventories are really driven by the current state of production.
spk01: Makes sense. And then just when we think of the ordering patterns and access, is there any differences between what we know from the big national branches versus the smaller independents? Are you seeing the smaller independents? ordering at a stronger clip than what we can see from the poly peers. Just love to get some color there on how you're seeing the ordering trends between those two customers. Thanks.
spk13: Yeah, Michael. Demand for both IRCs and NRCs, the big nationals, it's strong for both of them. And I don't know that there's a material difference in how much acceleration of demand that there is. The IRC mix, or the independent mix, was a slight tailwind in Q3. But overall, I think it's pretty equal in terms of the equipment and the need to replace fleet that's been aging And across the board, a lot of desire for additional fleet to serve some of the additional applications of the equipment and the growth of the megaprojects. The growth of the megaprojects, though, does tend to go much, much more to the big national companies than the IRCs, but it's really across the board.
spk11: Thank you.
spk00: And our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
spk07: Hey, good morning, everyone. Thank you all for taking the question. Quick question. We didn't hear a whole lot on the USPS contract. Has anything changed with that? And then curious if that has any impact on some of the CCA adjustments.
spk13: Yeah, first of all, I'll comment on the program and then let Mike comment on the CCA We go – it's full steam ahead with U.S. Postal Service and our NGDV platform. We are scheduled to go into production in 2023. Next year, you'll start seeing vehicles delivered and hit the streets in the end of 2023. So no news is good news, I would say. Everything's continuing to progress with it. We're really excited about it. The Postal Service is excited about it. We have great – collaboration with them as we continue to bring this vehicle to production. So beyond that, I will let Mike comment on the CCAs.
spk02: Sure. Stanley, similar to other long-term contracts, there is contract accounting there, but we won't start recognizing any revenue on postal until we start producing the units. That will be late next year. So really no impact of CCAs.
spk07: Perfect. And then switching gear to the fire and emergency business, you mentioned supply chain, manufacturing challenges, and I guess workforce availability as well. So much of the production kind of localized in the Wisconsin area, at least for the Pierce brand. What are some of the other things that you all can do to try to alleviate that? Because the backlogs are massive and there's obviously a huge demand for the products you're bringing to market.
spk13: Yeah, so I'll just kind of I'll outline the challenge with F&E. First of all, we've seen continued progress in navigating a tough supply chain in the access equipment segment. So you go over to the F&E segment, and that's our most complicated product. I mean, if you take a municipal fire truck, very complicated, has a long bill of materials, a lot of them sell for a million dollars a unit. So there's more that can go wrong on building a fire truck than most of the other equipment that we make. So we're still going through that learning curve. We're still making adjustments. We're still expanding capacity at suppliers or adding new suppliers where we see we need new capacity. And I expect we'll continue to navigate through that and get continued improvement as we go forward. I would say that... We are very confident in the F&E business. We're confident enough that we're continuing to add capacity because we need more capacity to deliver on that strong backlog. And we've got great new products like the electric Volterra that's going to put upward pressure on demand for many years as municipalities continue to upgrade fleets. So bottom line is we will get this under control and navigate through it, and we're confident F&E is going to return to the margins we expect, which is strong double-digit margins.
spk02: Stanley, one thing I would mention, we talked about this, I believe, last call, that we are leveraging defenses plant as well down in Tennessee. We're doing some fabrication welding activities for F&E that's just starting to ramp, so we will get a little We're getting some geographic diversity there as well. That's also benefiting access as well.
spk00: Thanks, guys. Best of luck. Thank you. And as a reminder, if you would like to ask a question, please press star 1. Our next question comes from the line of Seth Weber with Wells Fargo Securities. Please proceed with your question.
spk12: Hey, guys. Good morning. I I've heard you guys talk about, uh, normalized defense margins a couple of times. Can you just remind us what you think that might be? Uh, you know, it's been kind of all over the place for the last number of years. Is it, is it sort of high single digits? Is it mid to high, you know, just any kind of framework that we should be thinking about for normalized defense margins, uh, going forward. Thank you.
spk02: So what I'd say is, um, historically it's been, um, sort of the high single digits. I think what we've talked about over the last year is while we're ramping up postal, we are carrying about 100 basis point load of SG&A that related to that ramp. So that takes the margin down a bit temporarily. So that's obviously an impact. But again, we expect that once we've talked about volume next year, obviously this year is down a bit. Next year with tactical wheeled vehicles, Um, you know, maybe similar, but again, once these new programs start ramping up, that's when, um, we'll also get some additional benefit from a margin as well. But again, our, our other than postal and a few of those other things, just in the short term, uh, no major changes to our views.
spk13: And Hey, Seth, let me just add to that. Um, you know, inflation has been tough for the defense business and that's reflected in these cumulative catch up charges. that we've had. But the Department of Defense has developed, they've recognized this, they've developed an economic price adjustment as a result of some of the higher inflation. It's been the highest in 40 years, as we all know. And it contains EPAs, or economic price adjustments, that provide adjustment of contract prices based upon movement of a cost index. So we think this is a very positive development with our customer and we feel pretty good about that as we go forward.
spk12: That's helpful. Thanks. And then just as a follow-up on the access orders or the backlog that you're sitting at, can you just talk to how much of that has firm pricing, how much is like provisional pricing, or just how your conversations with your customers are around the pricing that's in the backlog right now for orders for next year. Thanks.
spk13: Yeah, so I'll talk about this, John. As we are here in the fourth quarter of 2022, we have pricing on the entire backlog, but we also have T's and C's that allow us to make adjustments should inflation proceed beyond our expectations. Now, we're going to do everything in our power to keep our costs down and not have to do that to our customers because we certainly don't want to do that. But if it continues to accelerate, it at least gives us the protection that we need. But if you look at 2022, you know, everything we've shipped has been based upon the exact price at the time of order. And we've changed our process a little bit to give ourselves a little bit more protection because of the inflationary environment that we're in. So it's got a price on it. That price will stay the same unless there is a significant change in inflation.
spk12: Okay. And that's indexed? It's sort of tied to some commodity index? What should we be watching to indicate that.
spk13: You should be watching whether or not inflation continues to go up and beyond what economists are predicting it will go up at. But I don't want to get into the mechanics of how it works.
spk11: Okay. All right, guys. Thank you. Thanks, Seth.
spk00: And our next question comes from the line of Stephen Fisher with UBS. Please proceed with your question.
spk10: Thanks. Good morning. I'm not sure if I missed this because I dropped off for a minute, but you mentioned the 40% volume benefits in Q4 relative to Q3. What gives you the confidence that those volumes will be able to expand given that there have been some ongoing production constraints? Is that based on your current run rate of production or any other factors there?
spk02: Sure. It's really two items. The first one is really some additional volume at JLG. Some of that's built inventory already. That's just in the water going to international locations. So that's number one, that there's not further inventory to build to leverage that. The second half of that is really defense. Defense really hasn't had a lot of significant disruption due to supply chain. They've certainly had some, but not to the magnitude of some of our other businesses. With some of the mentioned axle casting challenges, that shut our line down for two weeks. We're back to running at rates right now, so that's just reflective of us running at a more typical rate.
spk10: Okay, that's helpful. And then did you say where you are with price versus cost for the year? I think there was a $50 million number previously.
spk02: um and kind of what are the steel prices you're embedding into your q4 guidance thank you sure um so price cost remains pretty much what we said on last call the full year headwind again measuring back to the beginning of inflation of 250 million with about 200 of that in the first half of the year 50 million headwind in the back half of the year um so we did get a little bit of a pull ahead of price um In the third quarter, you saw that in some of the benefit and access. So I would expect similar price-cost dynamics in the fourth quarter. And really, from a steel perspective, hot-rolled coils come down, plates still elevated. There is certainly a lag of as much as six months with hot-rolled coil as that comes down to try to get a benefit. But again, that's just one element of – of all of our commodity costs, or excuse me, inflation in general.
spk13: Yeah, I'll just make an additional comment on this topic. I think it's a little bit related to this. I think the good thing about our Q3 is we're showing that we're actually able to price for inflation. And I think that came through loud and clear. And if you look at our Q3 operating income, it's at or ahead of our expectation. When you look at Below the line, there were some items that pulled our EPS down a bit, but our operating income is at or ahead of our expectations. And that's with an unexpected two-week shutdown in our defense plant and an unexpected cumulative catch-up charge. So as we go into Q4 with pricing where we think it needs to be and then go into 23, you know, we're feeling good about this.
spk10: Terrific. Thank you.
spk13: Thanks, Steve.
spk00: There are no further questions at this time, and now I'd like to turn the floor back over to John Pfeiffer for any closing comments.
spk13: Yeah, thanks for joining us today, everyone. We are certainly committed to driving long-term profitable growth, and we've got a lot out there that's going to deliver that. Please stay safe and healthy, and we look forward to speaking with you very soon.
spk00: Thank you. This does conclude today's conference call. You may not disconnect your lines at this time. Thank you for your participation and have a great day.
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