Oshkosh Corp

NYSE:OSK

Earnings Call Transcript 2021-Q2

[Operator]

Greetings, and welcome to the Oshkosh Corporation Fiscal 2021 Second Quarter Results Conference Call. [Operator Instructions].

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.

[Patrick Davidson, SVP, IR]

Good morning, and thanks for joining us. Earlier today, we published our second quarter 2021 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 2 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. All references on this call to a quarter or a year are to our fiscal quarter or our fiscal year, unless stated otherwise.

Our presenters today include John Pfeifer, President and Chief Executive Officer and Mike Pat, Executive Vice President and Chief Financial Officer.

Please turn to Slide 3, and I'll turn it over to you, John.

[John Pfeifer, President, CEO & Director]

Thank you, Pat, and good morning, everyone. We're happy to announce outstanding second quarter results, highlighted by sales of $1.9 billion and adjusted earnings per share of $1.48, both of which exceeded the prior year and our expectations.

Demand across the company and particularly in our Access Equipment segment has come back stronger and faster than we expected as a result of positive vaccination progress and the confidence that, that brings to the marketplace. Our production rates are back to pre-pandemic levels across the company and our 14,000 dedicated team members continue to do an exceptional job of rapidly adapting to changing situations as we recover from the pandemic.

Companies across the globe are facing significant supply chain challenges as the economy rebounds, including a global semiconductor shortage, record high steel prices and resin shortages from the deep freeze in Texas back in February. Our supply chain team members and third-party suppliers have worked hard to maintain production, but supply chain disruptions will likely remain a risk, we will continue to manage for the duration of 2021.

In addition to our strong second quarter performance, we received some great news on February 23, when we were notified that we won the Next Generation Delivery Vehicle program with the United States Postal Service. I am very proud of the efforts of our team over the past several years that culminated in this historic win, which supports President Biden's goal to electrify the federal fleet with zero-emission vehicles and create new sustainable manufacturing jobs in America.

Our Defense segment will supply the Postal Service with as many zero-emission battery electric vehicles or BEV units that they desire as they upgrade their fleet to be increasingly sustainable. This award is the latest accomplishment in our 25 years of continuous innovation in electric drive and BEV engineering. I will discuss this exciting contract win in more detail a little later.

We are also proud to be included in the S&P Global Sustainability Yearbook once again in 2021. The inclusion in the yearbook highlights top 15 performance for Oshkosh in our industry category and underscores our commitment to creating a more sustainable future and culture that is centered on a safe and inclusive workplace.

Additionally, we have pledged to further reduce greenhouse gas emissions and energy consumption as we continue to make investments in technology, including the development of battery electric products in all of our businesses.

I am also pleased to announce our expectations for 2021, adjusted EPS to be in the range of $6.35 to $6.85 as we return to our practice of providing quantitative guidance. Mike will share more details in his section.

Let's turn to Slide 4 and get started on our segment updates with access equipment. The improvements we started to see in our markets back in December and January, following positive vaccine news, rapidly accelerated over the past few months and helped drive the strong performance we are reporting today. Revenue increased by 6.5% over the prior year, leading to a solid adjusted operating margin of over 11%. We previously expected a return to growth in the second half of the year, so we are pleased to be ahead of schedule. These strong results would not be possible without the access team's disciplined execution through the pandemic, which has enabled the business to quickly respond to changing customer demand, particularly in North America.

Orders were also strong, leading to a solid backlog of $1.5 billion for this segment, up 80% versus last year.

Since most forecasts project nonresidential construction to be down in 2021, we have -- we believe replacement demand is driving access equipment sales growth. As we've discussed for the past several quarters, fleet ages are elevated throughout the North American market, and we believe the need to replace these aged fleets will be a significant driver for new equipment sales in the coming quarters. We are further encouraged that demand has returned for a broad cross-section of customers, not just the largest and most visible rental companies. This is important as we believe it signals a healthy and robust market.

As we noted on the last earnings call, JLG's U.S. production facilities returned to full production levels in March. While the threat of absenteeism in our operations has significantly decreased due to lower COVID infectivity rates and robust contact tracing, we are closely managing supply chain challenges that could impact production in the second half of the year.

As part of the coalition of American Manufacturers of Mobile Access Equipment, we also took action during the quarter against some unfair competition practices by foreign companies in the United States. We believe this is good for the long-term health of the industry.

Steel prices remain at record highs, and we took further actions during the quarter to mitigate the risk, including additional cost locks on portions of our planned steel purchases as well as price increases for new units ordered beginning in early March. Much like we experienced in 2018 when steel costs increased significantly, there will be a lag in the benefit until we work through orders that were in our backlog prior to the price increase.

I'd also like to share some good news on our Tianjin China facility. Construction is largely complete for our expanded operations, and we expect to begin shipping product out of the new capacity later this year. This is an important step in our long-term strategy to drive profitable growth in China and other Asian markets. Please turn to Slide 5, and I'll review our Defense segment.

We're proud to be the supplier of the next-generation delivery vehicles for the United States Postal Service. Recall that this competition has been a rigorous 5-year process and our world-class engineers really stepped up to the challenge to provide the postal service with a vehicle that meets or exceeds all of their current and future needs. The program covers the purchase of 50,000 to 165,000 units over 10 years as part of the postal services plan to significantly modernize their delivery fleet with improved safety, reliability, sustainability, cost efficiency and a much better working experience for our nation's postal carriers.

Our offering provides the postal service with both zero-emission BEV units and fuel-efficient, low-emission ICE units with the option of delivering any combination up to 100% of either model. The vehicle design also provides the postal service with the flexibility of converting ICE units to BEV units in the future. We expect to begin delivering production vehicles in the second half of calendar 2023.

We are also pleased with the progress of integrating Pratt Miller into the company, following the close of the acquisition in January. We look forward to leveraging their speed, agility and expertise as we intensify our innovation focus across the company. I know some of the team are listening to our call today, and we welcome them to the Oshkosh family.

Our operations team at Defense continues to work hard to deliver the JLTVs, FMTVs and FHTVs that support our U.S. armed forces. During the quarter, we established a new production line for a portion of our volume. The new production line incorporates industry-leading technology to further optimize the manufacturing process. We did experience higher onetime costs and onetime inefficiencies during the quarter as part of the move, which supports the long-term success of the segment.

Before we leave the Defense segment, I'm pleased to announce that the National Advanced Mobility Consortium has selected Oshkosh Defense and our partner, ST Engineering, to participate in the prototype phase for the U.S. Army's cold weather all-terrain vehicle, or CATV. The CATV is a new program for tracked vehicles that operate in arctic conditions and are designed to replace the small unit support vehicles that have been in service since the early 1980s. We believe the program represents another solid opportunity in an adjacent product space for our defense business.

Let's turn to Slide 6 for a discussion of the Fire & Emergency segment. The Fire & Emergency segment delivered another quarter of outstanding performance with both strong sales growth and an operating income margin over 15%. Last year, we faced a significant supplier challenge, combined with customer final inspection limitations as the pandemic struck, but the team recovered quickly and continues to deliver industry-leading performance. We've also moved past concerns we had discussed surrounding absenteeism, and our operations have returned to pre-COVID levels.

We often talk about the strength and capabilities of our strong Pierce dealer network. Despite the pandemic, our dealers have continued to increase investments in their sales and service networks, demonstrating their commitment to customers. We believe this is the type of commitment that ensures sustainable success going forward. The segment finished the quarter with another solid backlog of $1.3 billion, basically on par with last year's all-time record.

Orders in the quarter were lower year-over-year as we expected, largely due to the pandemic-related impacts. As we've said previously, we will monitor municipal budgets, and we believe that the North American fire truck market will decline modestly over the next few quarters as a result of the pandemic. However, we don't believe this will be much of an impact on the long-term success story that we are building with our Fire & Emergency business. And as Mike will discuss, our outlook for this business in 2021 is strong.

Please turn to Slide 7, and we'll talk about our Commercial segment. Our Commercial segment delivered a solid quarter with higher operating income on lower sales. Our simplification and innovation strategy in this segment is working, which gives us confidence that margins can continue to improve over the long term.

During the quarter, we continue to make excellent progress on our focused factory approach of transitioning mixer production to London, Ontario. I want to commend the team on their efforts as it hasn't been easy due to cross-border travel restrictions with Canada as a result of COVID. We are also making great progress in building a high flow refuse collection vehicle line in Dodge Center, Minnesota, leveraging the space freed up from the move of mixers. This modernization and automation investment brings added capacity and efficiencies as part of our strategy.

Moving to our markets, we are seeing solid recovery in order activity for mixers and refuse collection vehicles as business improves as we move beyond the pandemic. We believe the reopening of the U.S. is driving increased refuse collection, and construction is picking back up again, as evidenced by our higher year-over-year backlog. We believe these trends will continue as we work through 2021.

As you might expect, supply chains also pose risks in the Commercial segment. For instance, the availability of third-party chassis from truck manufacturers as a result of semiconductor and other component shortages is an issue that we are managing closely, and it could have some impact on our deliveries in the back half of 2021. Our supply chain teams are doing a great job of responding to these challenges and keeping our production lines running, and we are staying vigilant.

We remain on track to deliver the electric refuse collection vehicles we talked about last quarter to our customer in Boise. These units will provide valuable insights on opportunities and challenges when BEVs are used on a daily basis for refuse collection. The development of these products is part of our long-term electrification journey across the company that we believe will generate significant benefits for our customers and the environment.

This wraps it up for our business segments. I'm going to turn it over to Mike to discuss our second quarter results and expectations for the remainder of 2021.

[Michael Pack, EVP & CFO]

Thanks, John, and good morning, everyone. Please turn to Slide 8. We delivered a strong quarter that well exceeded our expectations. As the quarter unfolded, demand increased sharply in the Access Equipment segment, leading to consolidated sales of $1.9 billion, $92 million higher than the prior year and approximately $140 million above our expectations. The growth over the prior year was driven by a 29% increase in Fire & Emergency sales and a 6.5% increase in Access Equipment sales, offset in part by a modest sales decrease in the Defense segment. Access Equipment sales increased due to improved market demand in Asia and North America. Last year, demand was negatively impacted late in the second quarter as the COVID-19 pandemic drove shelter-in-place restrictions around much of the globe.

Defense sales decreased in the quarter due to lower FMTV sales and lower cumulative catch-up adjustments as we received FHTV and JLTV contract awards in the second quarter last year, offset in part by higher FHTV sales and Pratt Miller sales for a portion of the quarter following its acquisition in January.

Fire & Emergency sales increased as a result of both higher fire truck and ARFF vehicle sales. In the prior year, fire truck sales were negatively impacted by the combined effects of COVID-19-related customer travel restrictions and a supplier quality issue that impacted our truck delivery schedules. Our sales benefited from the delivery of vehicles under 2 multiunit contracts in the current year quarter. And Commercial segment sales were down primarily due to lower refuse collection vehicle demand caused by the COVID-19 pandemic and the impact of divesting our concrete batch plant business in the fourth quarter of 2020, offset in part by an increase in concrete mixer volume.

Front discharge concrete mixer sales were muted in the prior year as the new S-Series 2.0 was still ramping up. Consolidated adjusted operating income for the second quarter was $143.3 million or 7.6% of sales compared to $133.6 million or 7.4% of sales in the prior year quarter. Access Equipment adjusted operating income increased as a result of higher sales volume, lower spending as a result of the COVID-19 pandemic and improved product mix, offset in part by higher incentive compensation expense.

Defense adjusted operating income decreased as a result of unfavorable cumulative catch-up adjustments as well as costs and labor inefficiencies associated with the start-up of the new manufacturing line during the quarter.

Fire & Emergency operating income increased in the current year quarter, primarily as a result of the increased sales volume, favorable price cost dynamics, improved product mix and improved manufacturing performance. And Commercial segment operating income increased due to lower product liability costs, lower spending as a result of the COVID-19 pandemic and lower warranty costs.

Adjusted earnings per share for the quarter was $1.48 compared to adjusted earnings per share of $1.25 in the prior year. Please turn to Slide 9 for a discussion of our expectations for 2021. We are pleased with our solid performance in the first half of 2021 as well as the improved visibility we have for the second half of the year, which has positioned us to once again provide quantitative expectations. We have solid backlogs in all 4 segments and have seen a significant reduction in COVID-19-related absenteeism. As John said, we faced supply chain risk for the remainder of the year, just like most companies around the globe. Our supply chain teams have done an outstanding job of keeping our manufacturing lines running. However, it is possible that supplier shortages could interrupt production in the back half of the year. Our expectations that follow assume no major production interruptions as a result of supply chain shortages.

On a consolidated basis, we are estimating sales of $7.75 billion to $7.95 billion compared to $6.9 billion in 2020. We are also estimating adjusted operating income of $610 million to $655 million compared to $496 million in the prior year and adjusted EPS of $6.35 to $6.85 compared to adjusted EPS of $4.94 in 2020.

At the segment level, we are estimating access equipment sales of $3.15 billion to $3.35 billion, a 25% to 33% increase compared to 2020. We expect growth to be led by North America, although we expect sales growth in most regions as the world comes out of the pandemic. We are estimating that access equipment adjusted operating margin will be 10.5% to 11.25%, included in our expectations is an approximately $30 million net headwind from elevated steel prices that we expect will primarily impact the fourth quarter. We believe the headwind will decrease in 2022, as we begin to more fully realize the benefit of pricing actions implemented in the second quarter. The full year impact of last year's temporary cost reductions returning to our expected run rate this year has declined versus prior expectations due to lower spending in the first half of the year as travel, trade shows and other discretionary spending have returned slower than anticipated.

Turning to Defense, we're estimating 2021 sales of approximately $2.5 billion, an 8% increase compared to 2020. This estimate includes increased JLTV production and the benefit of Pratt Miller sales. Backlog remains robust at $3.5 billion, providing solid visibility into 2022.

We are estimating our defense operating margins will be approximately 8%, consistent with our comments over the past several years of high single-digit operating margin percentages. This estimate reflects higher new product development spending, manufacturing inefficiencies associated with the start of the new production line and lower cumulative catch-up adjustments compared to 2020.

We expect Fire & Emergency segment sales will be approximately $1.2 billion, roughly $90 million higher than 2020. The increase in revenue is primarily due to a return to more normal production and customer deliveries as interruptions due to COVID-19 decline.

We expect operating margin in the Fire & Emergency segment to increase to approximately 14% as a result of increased sales volume. We are estimating sales of approximately $925 million in the Commercial segment, down slightly from 2020 as a result of the prior year scale of the concrete batch plant business. And we are expecting operating margins for this segment of approximately 7%. Margins will be impacted the second half of the year in this segment as a result of the rapid increase in steel costs as well as disruption in the supply of third-party chassis. Similar to access equipment, we expect this unfavorable impact to wane as we begin to realize the benefits of price increases in early 2020 June. We estimate corporate expenses will be $150 million to $155 million, an increase of $25 million to $30 million as a result of the return of higher incentive compensation levels. We estimate the tax rate for 2021 will be approximately 22%, and we are estimating an average share count of 69.3 million shares.

For the full year, we are estimating free cash flow of approximately $650 million, reflecting an expected strong year of cash generation. We also estimate capital expenditures will be approximately $120 million.

Looking at the third quarter, we expect consolidated sales to be up approximately 40% over the prior year, with access equipment and defense up most significantly. We expect commercial sales to be up high single digits as our markets rebound, and Fire & Emergency sales are expected to be essentially flat. Last year, we benefited from approximately $60 million of temporary cost benefits in the third quarter. This will be a headwind to incremental margins during the quarter as our spending begins to return to more typical levels in the third quarter this year with increased business activity.

I'll turn it back over to John now for some closing comments.

[John Pfeifer, President, CEO & Director]

We just announced a great quarter, and we have a strong outlook for the remainder of the year with expected growth in revenue, adjusted operating income and adjusted earnings per share compared to 2020.

We expect to exit the year in a strong position as we look forward to the next several years. Supply challenges remain, but we believe we are in a great position to take advantage of the many opportunities open to us through the recovery as we continue to innovate, serve our customers and advance our company going forward.

I'll turn it back over to Pat to get the Q&A started.

[Patrick Davidson, SVP, IR]

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

[Operator]

[Operator Instructions]. Our first question comes from the line of Tim Thein with Citi.

[Timothy Thein, Citigroup]

The first question is just, hopefully, you could provide a bit more color on the access backlog, both in terms of product mix in terms of the split between AWPs and teles. And then what the -- I think there's about 3% price increase that was announced back in early March, just can you give us even if just -- even if it's a ballpark, kind of a range as to what does that apply to in terms of the $1.5 billion backlog? I'll stop with that, please.

[Michael Pack, EVP & CFO]

Sure. Tim, first of all, just as we look at the product mix, over the course of the year, you'll see that we are going to be a little -- if you look at past history, we're going to be a little heavier weighted to AWPs similar to the mix that we saw this quarter. I think, from a year-over-year perspective, the comp was a little unusual because some of our customers continue to take telehandlers as we entered into the pandemic. So that's really what we're expecting over the course of the year.

As we go to the price adjustments, indeed, we did adjust price that was effective. We did that early March. It's effective for new orders after that point in time. So we are going to have a cost price headwind in access to tune of about $30 million. It's largely going to be in our fourth quarter, and that's on a net basis. By the time we start getting into next year, we'll see that will begin to neutralize that headwind.

[John Pfeifer, President, CEO & Director]

Tim, it's John. I'll just add a little bit to Mike's response. The 2 fastest-growing markets right now are the U.S. and China. And both of those are weighted towards AWPs versus telehandlers. The U.S., because the AWP fleet, which is largest age, and it needs to be replaced. And so we're seeing that start to happen. And in China, it's really all -- it's mostly an AWP market in China. So as that market continues to grow faster than others that also pushes up AWPs versus telehandlers.

[Timothy Thein, Citigroup]

Yes. Okay. That makes sense. And John, just a quick one on the balance sheet. You're comfortable in a net cash position and $650 million of free cash flow is a pretty big number. So just can you maybe update us in terms of your priorities there?

[John Pfeifer, President, CEO & Director]

Yes. Sure. We feel great about our balance sheet, right? And it gives us a lot of optionality as we go forward. We'll always be paying attention to returning money to shareholders. We're a consistent dividend payer and opportunistically, we'll look at share buybacks. But more importantly, we look at the optionality of how we can continue to invest in our business, wherein -- you saw us make the acquisition of Pratt Miller. I think you'll see us make some more bolt-on tuck-in type acquisitions that help us facilitate growth going forward, but you also see us continue to make investments organically.

We won the postal contract. Well, that didn't happen without investment. We had to make upfront investment to do a lot of design and development work to be able to win that program. And so you'll see us continue to make a lot of organic investment. Now that manifests itself more on the OpEx side of it, but it's still investment that we make in the future.

So we like our balance sheet, and we've got a lot of optionality. And you'll see it happen on both returning money to shareholders. You'll see the use of it in terms of both returning to shareholders and growing the business through investments.

[Operator]

Our next question comes from the line of Mig Dobre with Baird.

[Mircea Dobre, Robert W. Baird & Co.]

So maybe sticking with this concept of investment and your guys' clean balance sheet. I think, John, I heard you talk about the development happening across all your segments or something that you're targeting across all your segments. I want to hear more about that and how that plays into this investment dynamic internally in the company? And I'm also curious if you're thinking about capital deployment through M&A to help you in any way to build out your capabilities here?

[John Pfeifer, President, CEO & Director]

Yes. Well, the simple question is, yes. We're thinking about capital deployment and M&A to build out our capabilities. We got to continue -- we use the most advanced technology to develop our products. We're heavily involved in electrification today. We're involved in autonomous programs today, intelligent product programs today, more sophisticated mobility systems, which are important to most of our end markets. So we've got to continue to develop that technology. That takes organic investment, but it also takes some investment in inorganic moves. Pratt Miller added a lot to us in terms of their ability to rapidly develop robotics and rapidly develop electrification. That enhances our own already strong capability to do that. So innovation is a big part of it. We've got to continue to advance innovation, if we're going to continue to expand our #1 positions in all these end markets that we serve.

But we also -- when you look at the fleet of machines and vehicles that we have in the marketplace, it's in the millions that are in use today. And we think that we can continue to make moves to wrap our arms around our customers and make sure that those -- that, that equipment is as productive as it possibly can be and make sure we're really supporting them strongly in the life cycle of the product. I think that, that will require some additional investment inorganically.

And then there's new categories that we know we can get into that are right inside our wheelhouse that will drive growth. We did the U.S. Postal Service organically. That's a new category, last mile delivery for us. Organic investment, big win, but there's also some inorganic stuff that's in our wheelhouse that I think you'll probably see us make some moves in. So it's a little more color, Mig, for you.

[Mircea Dobre, Robert W. Baird & Co.]

That's helpful. And then my follow-up here, just a clarification on access equipment. So when you're saying that going into fiscal '22, you're going to be more balanced from a price cost standpoint. Am I to sort of understand that the price increase that you put through in March is enough to bring you to that balanced status in the '22 or are there subsequent price increases that will be required in order to get you there in '22?

[Michael Pack, EVP & CFO]

Sure. Really, we're continuing to watch steel. And obviously, that's the biggest driver. And if we need to make additional adjustments, we will. Right now based on what we've done, we believe that it brings us back to balance.

If you look back to 2018, we're through a similar environment with rapid steel increases. And there's always a bit of a lag when you come into it based on backlog positions. But -- so this is not new. But yes, that's really the plan. And we're going to continue to monitor it, of course, if we need to take additional action, we will.

[Operator]

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

[Stephen Volkmann, Jefferies]

I'm going to go back to access here as well, John. And can you just give us your sort of big picture thoughts over the next few years relative to where you think we are in the cycle? Does this replacement cycle have legs here? And you, at one point, did a margin close to 15% in that segment. Is there any reason you couldn't get back to that? Just how are we thinking sort of more medium term here?

[John Pfeifer, President, CEO & Director]

Yes. Thanks for that question. I think that's a good question, certainly very timely as we've started to really recover. And we've started to recover earlier than we thought with growth in this past quarter.

So we believe that we're entering a multi-year growth cycle in access equipment. We absolutely expect to achieve and exceed the prior peak revenues. And you remember, the prior peak revenues was not too long ago. It was a little over $4 billion. We absolutely expect to exceed that.

The access equipment, it really continues to expand. I mean, I'm talking about the application of access equipment continues to expand. It's more versatile. It's used in different applications, not just construction. We're continuing to see wider usage of the equipment. We think that bodes well for it.

Of course, there's the fleet age. There's an aged fleet in the U.S. that is going to -- that alone, the replacement of that aged fleet will drive a lot of that multi-year growth rate. I think that we -- our team at access has done a phenomenal job of positioning JLG to really take advantage of this multiyear growth cycle. We've done a lot of simplification in our operations that have been -- that's really helped us just recently and will help us going forward. It includes some facilities rationalization that we did during the pandemic. We've developed new benchmarks for performance, and we've really positioned the business to exceed and get past prior year peak levels.

Now whether or not we can get to 15%, that's a question mark. I think you'll see us get to and maybe exceed the prior peak margin performance. And our goal is, of course, for every peak to be higher than the last peak. What we're really proud of is the performance that we're able to deliver in this past downturn. We think we really redefined our ability to perform in a downturn. And now we're -- we believe that we're headed to a new peak. So it's a little color on it for you.

[Stephen Volkmann, Jefferies]

Great. I appreciate all the detail there. And then for my follow-up on...

[Patrick Davidson, SVP, IR]

Steve, I think you asked your follow up, right? I mean, on access? Sorry to have come down heavy handed there, but we need to keep moving.

[Operator]

Our next question comes from the line of Jamie Cook with Crédit Suisse.

[Jamie Cook, Crédit Suisse]

I guess two questions. One, on access, you talked about the 3% pricing increase in March. Is there any concern that there was sort of a pull forward or have you seen order trends continue after you announced the price increase? So that's my first question.

And then I guess my second question, any help you can provide on just the postal service award, just how to think about a framework for earnings? Is this accretive to margins in any investment required?

[Michael Pack, EVP & CFO]

Sure. First of all, just in terms of the order patterns, we -- I think right now, the order patterns that we've seen are reflective of replacement demand, the fleet age and utilization rates being strong out in the marketplace. So I think certainly work to the extent that, that customers saw those trends, obviously, focused on getting their orders in. But I don't know that there's -- we don't necessarily believe that there is a bubble there.

Just jumping to the postal service, postal service is a great program. We're very excited about it. It's similar to our other large government contracts, we have in our Defense segment. It will be contract-based accounting. We start deliveries of production vehicles in the back half of 2023. We will have some revenue over the next couple of years leading up to that for some of the early deliverables as we go through the ramp-up phase of that.

From an investment standpoint, we expect an investment of about $300 million for capital and tooling. I think importantly, that investment very closely aligns with our milestone payments. You might have like a quarter lag here and there. But generally, it's going to be supportive of -- you're not going to see a big cash flow impact from quarter-to-quarter versus sort of baseline model you may have had in the past.

[John Pfeifer, President, CEO & Director]

Let me just add to the postal service. This is a -- we're really proud of this win. This really delivers the U.S. postal service the ability to modernize their fleet. It solves a lot of problems for the postal service, and it delivers the postal carrier a vehicle that is better than anything that they could have ever imagined. And it's designed in a lot of productivity, safety and performance features. It allows the postal service to electrify its fleet over the course of the contract and make it zero emission that's directly in line with President Biden's objectives.

And so it's -- first and foremost, this is great for the postal service and the postal carrier, but it's also great for Oshkosh Corporation, and it's great for our shareholders. And that's what I can tell you about. That's what I can tell you about the margin.

[Operator]

Our next question comes from the line of David Raso with Evercore.

[David Raso, Evercore ISI]

For the access implied second half, I'm just curious, the implied sales guide in the second half is 76%. And to an earlier question, it also sounds like that's with a pretty solid mix toward AWP. So you would normally think of the incrementals on that kind of growth, say, at least 30% to 35%. But the way you're guiding around '19, that's about a $90 million to $130 million of extra cost. And then obviously, we all appreciate what's going on with the supply chain and input costs. But $90 million to $130 million, you only cited steel at $30 million of a headwind. So I'm just trying to -- what is that extra $60 million to $100 million? Or is there some understandable conservatism baked into where the cost and logistical issues could be? It just seems like a really big gap.

[Michael Pack, EVP & CFO]

David, this is Mike. Yes, the big piece that's missing, you've got the $30 million for steel. The other big piece is those temporary costs coming back. That's really -- access has the biggest piece of that. Just as a company, we have about -- we have $60 million reversing this next quarter in Q3. We have about $10 million, call it, of permanent benefits we're benefiting from that quarter. So it's about a $50 million headwind there. A big chunk of that is in access because they were obviously most impacted. So that's really the other piece.

We do, as you look at the guidance, there's -- supply chain is lumpy. So I think we do have some -- we don't have a broad shutdown for an extended period of time factored in, but there's some lumpiness that we'll face the back half of the year. So that's factored in as well.

[David Raso, Evercore ISI]

So the net cost back is $50 million for the company in 3Q, and let's say, access is more than half of that. Does that repeat in the fourth quarter? Is that how we get closer to the gap I referenced?

[Michael Pack, EVP & CFO]

You're going to have a -- there's a cost impact in the fourth quarter. The $30 million of steel in access, and there's another kind of reversal of those temporary costs of, call it, $20 million to $25 million in the fourth quarter as well. So -- and again, heavy access.

[Operator]

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

[Jerry Revich, Goldman Sachs Group]

John, I'm wondering if you could just touch on your supplier heat map and talk about are there any other supply chain components that you folks are monitoring closely beyond electronics? And can you also just touch on how much labor capacity you folks have as we think about what production should look like into '22?

[John Pfeifer, President, CEO & Director]

Yes. Jerry, so supply chain, I would call that the most front and center risk that we have right now. And supply chain has been a risk as we've gone through the pandemic because we had so many suppliers that shut down due to shelter-in-place orders and whatever else happened. We're able to get through that, not easily. Our supply chain teams are phenomenal. We've got enterprise-wide people that are actively engaged in working with our suppliers, and we've got a lot of long-term suppliers that go out of their way to make sure that they do what we -- that they get through us what we need.

So recently, of course, we've had semiconductor issues. Now semiconductors is not a Tier 1 supplier to us. It's a Tier 2 and a Tier 3 supply. So what that's done is that's created some problems with chassis delivery because the chassis manufacturers where we make commercial products on a third-party chassis have slowed in some cases. So that manifests itself as a constraint.

What we do to combat that, we work with the chassis suppliers, of course, but we also sometimes have to reshuffle our production. We do more of our custom-built chassis to make sure that we're absorbing our production to get through those types of problems.

The other area that we've had some difficulty in has been with resin supply. That's mostly because of the problems that they had down in Texas in the middle of February. There is a variety of constraints that come up. This is very different from the way it was in the middle of the pandemic when everybody was just shutting down. Now it's isolated cases that we have to pay attention to.

And I think what's happened is everybody slowed down last year for 6 or more months. And now everyone's heating back up and that type of shock to the manufacturing base is always very difficult to get through. So I think we're going to continue to wrestle with supply issues in discrete cases probably for the next few quarters.

The good news is we got really good people. They know -- they've been -- they've done this work before, and we'll continue to work our way through it.

[Jerry Revich, Goldman Sachs Group]

Okay. And then on defense, can you say more about adding the additional production line because you're a pretty mature point for the major product lines? Can you just talk about the efficiency gains that you're targeting and just flesh out that move a little bit more, please?

[John Pfeifer, President, CEO & Director]

Yes. We put in a new production line here in Oshkosh in one of our facilities. This is the most advanced production line that we have in our Defense segment. It drives a lot of productivity and a lot of quality control into the production line. And it drives into the production, really, Industry 4.0 or digital manufacturing capabilities.

We don't want to have -- we want every tool in the facility to be connected. We want to make sure that we're using robotics and automation where it makes sense to use robotics and automation, and you see that in this new production line. It took some investment to get there as we expected, some onetime investment. That's one of the headwinds that defense had in this past quarter. But we're very pleased with where we are today, and it's a really, really nice operation that's going to be very important to take defense into the future in the next few years.

[Operator]

Our next question comes from the line of Ann Duignan with JPMorgan.

[Ann Duignan, JPMorgan Chase & Co.]

Most of my questions have been answered, but I am curious, back in 2018, I believe, that you introduced a price increase tariff, not a full price increase. And so I'm just curious this time around, given that you've introduced price increases, do you -- does that mean that you expect that this price inflation in steel is more permanent and here to stay? Or can you just explain the rationale for tariffs versus price increase?

[Michael Pack, EVP & CFO]

Sure, Ann. They were surcharges. I think right now, we're viewing them as adjustments. And this is -- we've talked about access, but we've really taken action in all of our nondefense businesses. So it's something we're going to continue to evaluate it and see what the markets do. But it obviously, we're focused on what that price/cost dynamic is. And we believe that once we get through the backlog that we had at the time of the increase that we'll start seeing the benefit of that.

We start seeing some benefit of that in the fourth quarter. So that $30 million we talked about at access, which is really $45 million for the company as a whole begins to reduce next year.

[Ann Duignan, JPMorgan Chase & Co.]

Okay. That's -- sorry, I meant to say surcharges not tariffs. And then talking about tariffs, maybe I was thinking about my follow-up question, that's the petition that the industry has filed against mobile equipment and subassemblies from China. Can you just explain the rationale for that and the impact it has on your customers? I mean, clearly, somebody is buying that equipment. They are your customers. And then do you fear any backlash against the Chinese -- in the Chinese domestic market in retaliation?

[John Pfeifer, President, CEO & Director]

Yes. Ann, it's John. I'll answer that question and give you a little color on it. We have not had any backlash domestically in China. Remember, we produce domestically in China. We employ a lot of people in China. We export from China. So what we do in China is very good for the Chinese economy. So we don't really expect backlash in China.

I want to kind of emphasize what this is all about. We are free traders, but we are also fair traders. And we are open to competition. And when we -- and when I say we, I'm really talking about the industry because this was an industry that stood up. When we see unfair trade practices that we think are damaging, we're going to speak up about it and that's what we did.

We're pleased that the U.S. ITC had a unanimous 5-0 vote, which basically means the case is going to proceed. Well, I'll just highlight that fair competition, we're open to fair competition. We always have been, and we always will be. And that keeps an industry competitive, and it keeps it vibrant. And I'm talking about equipment makers, rental companies and end users. We have to continue to innovate for those rental companies and the end users, and innovation is the lifeblood of a healthy industry. And certainly, unfair trade practices undermine that.

So the entire ecosystem would be harmed, if unfair trade practices are permitted to continue. And that's why we stood up and said, "Hey, this unfair trade practice has to stop." Again, it wasn't just us. It was the industry that said that. As a leader that JLG is, we are interested in the health of the overall ecosystem, and that's what this is about.

[Operator]

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

[Nicole DeBlase, Deutsche Bank]

Just a question on seasonality. I think normally, 3Q is typically the best quarter for both segment income and revenue. And I think you guys did a really good job of telling us kind of the puts and takes at the margin line. But I guess maybe thinking about the revenue path from here, is there any reason why revenue would diverge from normal -- that normal seasonal trend where the third quarter is the best of the year?

[Michael Pack, EVP & CFO]

Thanks, Nicole. Obviously, the backlog is pretty robust right now. I think you'll see similar type revenue numbers between the 2 quarters. We talked about being up approximately 40% year-over-year. So that kind of gives you an idea where we think the third quarter is going to be in kind of back into the fourth quarter. I think that the main thing right now is just in terms of just timing, if we have some supply chain disruptions or interruptions, you could have a little bit of volume that shift between the two quarters. But right now, we believe that both quarters are going to be pretty robust.

[Nicole DeBlase, Deutsche Bank]

Okay. Got it. That's helpful. And then follow-up on Fire & Emergency. I know the outlook from here implies a pretty big deceleration in the second half. But I guess what I'm trying to understand is, I understand conceptually what's going on with municipal budgets and the concern there, but your backlog is also at record levels. So maybe you could help us understand the assumption for Fire & Emergency in the second half?

[John Pfeifer, President, CEO & Director]

Yes. I'll just try to give you an overview of what's happening in Fire & Emergency, and we're paying very close attention to it quarter-by-quarter. We do expect that in the near future could be some quarters of a little bit softer order activity. You did see some of that in Q2. Our orders were healthy in Q2, but they were down from where they were a year ago.

We've got a very strong culture in F&E of innovation and of simplification, and that's allowed us to continue to perform even when market conditions are soft and that manifests itself typically in market share gains, and we've got a really strong dealer network. So that's the kind of the foundation of the business, great dealer network, great people, innovation and simplification.

The market is really kind of ebbed and flowed on an annual basis between 4,000 and 4,600 units for about a decade. And we're simply expecting that the market in this fiscal year will be a little lower than it was last year.

Now going forward, in 2022, it's possible that the recent stimulus that went through did provide relief to municipalities. It's very possible that, that relief could help municipal spending around Fire & Emergency is that typically is a priority investment for municipalities and there's an aged fleet. So we're watching it very closely because all that stimulus spending is fairly new. So we're paying attention to how that's going to impact the market.

So I would say the worst case, a little soft for a few more quarters. The best case is the stimulus spending helps out, and it stabilizes or grows a little bit, but we'll continue to perform regardless.

[Michael Pack, EVP & CFO]

And Nicole, specific to the second half revenue, I would just say that, recall, last year, we had that supplier interruption or supplier quality challenge and also, it was difficult for customers that come in. So we saw a lot of volume slip from that second quarter really into the back half of the year. So I think that's another thing is you're just -- if you're backing into what revenues are, that's something to consider.

And then in that business, if you look at the implied incrementals or decrementals, the -- you really need to -- remember, we are going to have some temporary costs coming back in that business as well. Our mix is slightly unfavorable as well. We have some more commercial chassis products versus aerials in that business. So that's another factor in the second half.

[Operator]

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

[Steven Fisher, UBS]

I just want to ask about the postal service contract in terms of the process for giving you notice to proceed. Can you start working on that $482 million upfront engineering contract already or do you need to see some other type of approvals?

[John Pfeifer, President, CEO & Director]

No, we're moving forward. It's full steam ahead. We've got the agreement with the U.S. postal service. It's signed, it's executed, and we are moving forward with developing and getting ready for production. And production starts in 2023. And we feel really, really good about our plan.

So I want to make sure that I emphasize that we won this program. It was a 5-year process, and we won this fairly. We know how to compete for government programs. It's one of the things we know how to do. We won it fairly, and we won it because we have the best solution for the U.S. postal service and the U.S. postal carriers. That's why we won it. Our solution was best, and that's why we're so comfortable with it.

And it does meet all of the zero-emission objectives that President Biden has laid out. We allow the postal service to fully electrify and make their fleet zero emission over the life of the contract. And this even is ahead of California's time line of being zero emission by 2035 because we're ahead of that. So this is full steam ahead.

[Steven Fisher, UBS]

Great. If I could just ask a follow-up on access, there's obviously some puts and takes to the margins later in the year, as discussed before. But how quickly do you think you could see the incrementals return to closer to 25%? Would that maybe not be until the second half of next fiscal year or could it be sooner than that?

[Michael Pack, EVP & CFO]

I guess I would just say is the back half of the year, if you correct for some of these -- the temporary costs coming back in the steel headwinds, you're basically there. So because we're in the -- we're right around that 20% right now is what you're seeing in the back or in that back half. So I think those are really the factors.

I think it's too early to call next year. But generally, as we've said, we strive to be in that mid-20s range. And I think we talked a lot about the price cost dynamics and the timing of getting back to a balance with steel. So I think that's -- I think those are the things we're continuing to watch.

[Operator]

Our final question comes from the line of Ross Gilardi with Bank of America.

[Ross Gilardi, Bank of America Merrill Lynch]

Steve just basically asked my question on the postal service. But just given all the noise out of DC, like is there going to be some final reaffirmation over your award kind of once and for all? If the mix was to shift more to EV, would that potentially shift out the delivery timing just because of all the charging infrastructure and all the other stuff that needs to happen to -- for the postal service to have a much bigger EV fleet earlier on a game than previously envisioned?

[John Pfeifer, President, CEO & Director]

Yes, great question. I'm glad you asked that question. So I want to make -- I'll kind of clarify this. The U.S. postal service program funding is not subject to approval from Congress. So there is always some remote risk that Congress could exert some influence on the award, but that would be unprecedented and it would have really no basis because we provided the absolute best solution for the U.S. postal service. And it does what everybody in Congress wants, I think, which is electrifies and makes the fleet zero emission over the life of the contract.

And the discussion in Congress recently that you've heard has really not been about changing the contract. It's been about increasing the rate of introduction of electric vehicles. We can do 100% electric vehicles from Day 1. If they said to us, the U.S. postal service came to us tomorrow and said, we've got the funding to do 100% electric from 2023, we can do it. So we're ready to go. Its -- we're going to work hard with the postal service. It's about how quickly they can get the infrastructure up and running to recharge electric vehicles, but that will not delay this program.

[Ross Gilardi, Bank of America Merrill Lynch]

Okay. And then just to the independents, in general, get their orders in, in time, like if you just look collectively at the smaller independents in the market, are there a lot of these smaller fleets, not going to get their fuller allocations in time for the construction season? Just the reason I ask that if that's the case, could we see the real CapEx recovery for a lot of -- at least the smaller independents, not really even starting until fiscal '22?

[John Pfeifer, President, CEO & Director]

What we've seen is that really across the broad spectrum of our customers, the large nationals as well as the independents, behaving very similarly. So we're expecting a pretty balanced mix over the course of the year from a buying perspective.

[Operator]

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

[John Pfeifer, President, CEO & Director]

Thanks for joining us today, everyone. I just want to say stay safe, stay healthy as we continue to work hard and anticipate a more positive environment as we get through this pandemic. We all see the light at the end of the tunnel and the economy continues to strengthen. We certainly look forward to speaking with you all on a virtual conference or at the very least on our next earnings call. Have a great day.

[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.