Oshkosh Corp Q2 FY2021 Earnings Call

Greetings, and welcome to the Oshkosh Corporation Fiscal 2021 Second Quarter Results Conference Call. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published 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 Pack, Executive Vice President and Chief Financial Officer. Please turn to Slide 3, and I'll turn it over to you, John.

Thank you, Pat, and good morning, everyone. 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 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 that 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 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 service's 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 one-time costs and one-time 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 continued 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.

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 multi-unit 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 in 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.

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.

Thanks, John. Operator, please start the question-and-answer session for this call.

Our first question comes from Tim Thein with Citi.

Could you provide more details on the access backlog, specifically regarding the product mix and the division between AWPs and teles? Additionally, there's been a 3% price increase announced in early March. Could you give us an estimate, even if it's just a rough range, of how that applies to the $1.5 billion backlog? I'll stop there, thank you.

Sure. Tim, as we evaluate the product mix throughout the year, we expect to see a somewhat heavier weighting toward AWPs, similar to what we experienced this quarter. The year-over-year comparison is a bit atypical because some of our customers continued using telehandlers as we entered the pandemic. That's the outlook for the year. Regarding price adjustments, we did implement a price increase that became effective in early March for new orders placed after that. We anticipate a cost price headwind in the access segment amounting to approximately $30 million, primarily affecting our fourth quarter on a net basis. By next year, we expect that headwind to start neutralizing.

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. Both of those are weighted towards AWPs versus telehandlers. The U.S. because the AWP fleet, which is largest age, needs to be replaced. And so we're seeing that start to happen. In China, it's really mostly an AWP market in China. So as that market continues to grow faster than others, that also pushes up AWPs versus telehandlers.

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?

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 where 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'll 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.

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?

Yes, we are actively considering capital deployment and mergers and acquisitions to enhance our capabilities. We need to continue utilizing the most advanced technology for product development. Currently, we are heavily engaged in electrification, autonomous programs, and intelligent product initiatives, all of which are crucial for our target markets. Advancing this technology requires both organic investment and inorganic strategies. Our partnership with Pratt Miller has significantly boosted our capacity for rapid robotics and electrification development, improving our already strong capabilities. Innovation is essential for maintaining our leadership positions across all these markets we serve. Additionally, we have millions of machines and vehicles in operation today, and we aim to optimize their productivity and support our customers throughout the product lifecycle. This will necessitate further inorganic investment. We also see opportunities in new categories that align with our expertise and can drive growth. For instance, our organic initiative with the U.S. Postal Service represents a new category in last-mile delivery. While this was a success through organic investment, we also anticipate pursuing some inorganic opportunities within our scope.

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?

Sure. We're closely monitoring steel as it is the main factor. If we need to make further adjustments, we will. Based on our current actions, we believe we are returning to balance. Looking back at 2018, we experienced a similar situation with rapid increases in steel. There is typically a delay due to backlog positions, so this isn't a new scenario. The plan is in place, and we will keep monitoring it. If additional actions are necessary, we will take them.

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?

Thank you for your question. It's certainly relevant as we've begun our recovery sooner than anticipated, experiencing growth in this past quarter. We believe we are entering a multi-year growth cycle in access equipment and expect to not only meet but surpass our previous peak revenues, which were just over $4 billion. Access equipment continues to grow in diverse applications beyond construction, indicating a positive trend for its usage. The aging fleet in the U.S. will significantly contribute to this growth cycle as the replacement demand increases. Our team at JLG has effectively positioned the company to benefit from this growth phase, implementing simplifications and rationalizing facilities during the pandemic. We’ve set new performance benchmarks and are well-prepared to exceed past revenue peaks. While achieving a 15% margin remains uncertain, we are optimistic about surpassing previous peak margin performance. Our goal is to ensure each peak exceeds the last. We take pride in how we've managed our operations during the downturn and are confident about reaching a new peak ahead.

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.

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?

Sure. First of all, in terms of order patterns, we think the current orders are indicative of replacement demand, with strong fleet age and utilization rates in the marketplace. Customers seem to be responding to these trends by placing their orders, but we don't believe there is a bubble. Regarding the postal service, we are very excited about this program. It is similar to our other large government contracts in the Defense sector and will involve contract-based accounting. We expect to begin delivering production vehicles in the second half of 2023 and will generate some revenue over the next couple of years for early deliverables during the ramp-up phase. From an investment perspective, we anticipate an investment of about $300 million for capital and tooling. Importantly, this investment closely aligns with our milestone payments, which may occasionally have a slight lag, but overall, it won’t significantly impact cash flow from quarter to quarter compared to the baseline model we have used in the past.

Let me just add to the postal service. We are very proud of this win. This enables the U.S. postal service to modernize its fleet, addressing many of its challenges and providing postal carriers with a vehicle that exceeds their expectations. The design incorporates numerous productivity, safety, and performance features. It allows the postal service to transition to an electrified fleet throughout the contract, moving towards zero emissions, which aligns with President Biden's goals. This initiative is beneficial not only for the postal service and its carriers, but also for Oshkosh Corporation and our shareholders. That is the update I can provide about the margin.

I'm curious about the implied sales guidance for the second half, which is 76%. It seems like there's a solid mix toward AWP. Typically, for that kind of growth, we'd expect incremental increases of at least 30% to 35%. However, your guidance around $19 suggests additional costs of about $90 million to $130 million. We also know about the impact of the supply chain and input costs, but you've only mentioned steel as a $30 million headwind. I'm trying to understand where the remaining $60 million to $100 million is coming from, or if there's some reasonable conservatism included regarding cost and logistical challenges, as the gap seems quite large.

David, this is Mike. The significant factor that’s missing is the $30 million for steel. Another major element is the return of temporary costs, with access being the largest part. For our company, we expect to see about $60 million in reversals next quarter in Q3. We also anticipate around $10 million in permanent benefits during that quarter. Therefore, we are facing approximately a $50 million headwind, with a substantial portion affecting access since they were particularly impacted. As we review the guidance, please note that the supply chain is unpredictable. We don’t foresee a widespread shutdown for an extended duration, but there will be some fluctuations in the latter half of the year, which are taken into account as well.

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?

Yes. Jerry, I would say supply chain is currently our most pressing risk. It's been a challenge during the pandemic due to many suppliers shutting down because of various restrictions. We managed to navigate through that, though it wasn't easy. Our supply chain teams are exceptional, and we have dedicated staff collaborating closely with our suppliers. Many of our long-term suppliers go above and beyond to meet our needs. Recently, we've experienced issues with semiconductors, which are classified as Tier 2 and Tier 3 suppliers for us. This has resulted in delays in chassis delivery because chassis manufacturers, who supply components for our commercial products, have experienced slowdowns. To address this, we collaborate with the chassis suppliers and, when necessary, adjust our production by focusing more on custom-built chassis to manage these challenges. Another area of difficulty has been the supply of resin, primarily due to disruptions in Texas in mid-February. We face various constraints now, which differ from the blanket shutdowns during the pandemic; currently, we deal with isolated cases. Last year, many slowed down for over six months, and now as production ramps back up, it creates shockwaves throughout the manufacturing sector. I anticipate that we will continue to encounter specific supply issues for the next few quarters, but the silver lining is that we have highly capable personnel who have dealt with similar challenges before, and we will persist in addressing these issues. We have installed a new production line in Oshkosh at one of our facilities, which is the most advanced in our Defense segment. This line enhances productivity and quality control and incorporates Industry 4.0 or digital manufacturing capabilities. Our goal is to connect every tool in the facility and effectively utilize robotics and automation where appropriate, which is evident in this new production line. It required some initial investment as anticipated, contributing to one of the challenges faced by defense in the past quarter. However, we are very pleased with our current progress, and this operation will be crucial for advancing our defense efforts in the coming years.

Most of my questions have been answered, but I am curious. Back in 2018, I believe you introduced a price increase tariff, not a full price increase. I'm wondering, given that you have introduced price increases this time, do you expect that the price inflation in steel is more permanent? Can you explain the rationale for tariffs versus a price increase?

Sure, Ann. They were surcharges. Right now, we're viewing them as adjustments. We've discussed access, but we've really taken action in all of our non-defense businesses. It's something we're going to continue to evaluate and see how the markets respond. Obviously, we're focused on the price and cost dynamic. We believe that once we work through the backlog that existed at the time of the increase, we'll start to see the benefits. We're already noticing some of those benefits in the fourth quarter. The $30 million we mentioned regarding access, which amounts to $45 million for the company overall, is expected to decrease next year.

Yes, Ann, it's John. I'll address that question and provide some additional insight. We have not experienced any domestic backlash in China. It's important to note that we produce within China, employ many people there, and export from the country. Our operations in China positively contribute to the Chinese economy, so we do not anticipate any backlash. I want to emphasize that we are proponents of free trade as well as fair trade and we welcome competition. When I mention "we," I'm referring to the industry as a whole, which has united on this matter. When we observe unfair trade practices that we believe could be harmful, we will voice our concerns, and that is exactly what we have done. We are pleased that the U.S. ITC unanimously voted 5-0, which means the case will move forward. I want to stress that we are open to fair competition; we have always supported it and will continue to do so. This approach ensures a competitive and vibrant industry, including equipment manufacturers, rental companies, and end users. We need to keep innovating for those companies and end users because innovation is vital to a healthy industry. Unfair trade practices threaten that health, and allowing them to persist would harm the entire ecosystem. That’s why we took a stand and asserted that these unfair practices need to end. This stance is not just ours; it reflects the industry's collective voice. As a leader, JLG is committed to the well-being of the entire ecosystem, and that is the core of this issue.

Just a question on seasonality. I think normally the third quarter is typically the best quarter for both segment income and revenue. You did a really good job of explaining the factors affecting the margin line. However, considering the revenue outlook from here, is there any reason why revenue would differ from the usual seasonal pattern where the third quarter is the strongest of the year?

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 shifts between the two quarters. But right now, we believe that both quarters are going to be pretty robust.

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.

Regarding the revenue for the second half, it's important to remember that last year we faced supplier interruptions and quality issues, which made it challenging for customers. As a result, we saw a significant decrease in volume from the second quarter into the latter part of the year. This is something to keep in mind when evaluating anticipated revenues. Additionally, in that sector, we need to consider that there will be some temporary costs returning. Our product mix is also not entirely favorable, as we have a greater proportion of commercial chassis products compared to aerials. This will also play a role in the second half.

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?

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 timeline of being zero emission by 2035 because we're ahead of that. So this is full steam ahead.

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?

I would say that in the second half of the year, when you adjust for some of the temporary costs related to steel headwinds, you're pretty much there. We're currently around a 20% margin in that period. Those are the primary factors to consider. It’s too early to predict next year, but we aim to be in the mid-20s range. We've discussed the price-cost dynamics and the timing of achieving balance with steel, which are important elements we are monitoring.

Steve just asked my question about the postal service. Given all the noise coming from Washington, is there going to be a final reaffirmation of your award? If the mix shifts more towards electric vehicles, could that affect the delivery timing due to the necessary charging infrastructure and other requirements for the postal service to expand its electric vehicle fleet sooner than previously expected?

Yes, that's a great question. I appreciate you bringing it up. To clarify, the funding for the U.S. postal service program does not require congressional approval. While there is a minimal risk that Congress could influence the award, such a situation would be unprecedented and unjustified given that we have offered the best solution for the U.S. postal service. Our proposal aligns with Congress's interests, focusing on electrification and achieving a zero emissions fleet over the contract's duration. The recent discussions in Congress have not aimed at altering the contract but rather at accelerating the adoption of electric vehicles. We are capable of delivering 100% electric vehicles from the start. If the U.S. postal service approached us tomorrow with the funding for a complete transition to electric vehicles by 2023, we would be ready. We are committed to collaborating with the postal service, and the only factor affecting the program timeline will be the pace at which they can establish the necessary infrastructure for recharging electric vehicles. This will not hold up the program. 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. 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.

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.