Greetings, and welcome to the Oshkosh Corporation Reports Fiscal 2022 Third Quarter Results Call. At this time, all participants are in a listen-only mode. This conference call is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior VP of Investor Relations for Oshkosh Corporation. Thank you, Mr. Davidson, you may begin.

Good morning, and thanks for joining us. Earlier today, we published our third quarter 2022 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 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. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended September 30, 2021. Our presenters today include John 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 delivered strong earnings growth in the quarter in the face of ongoing supply chain challenges that have constrained production for companies across the globe. We are pleased with the strong sequential quarterly earnings growth as a result of positive price attainment, particularly in our Access Equipment segment, where we returned to a double-digit adjusted operating income margin of 11.3%. We expect to further benefit from stronger pricing in our non-defense backlogs into 2023. Demand has remained robust across the company, fueled by aged fleets, solid equipment utilization rates, technology adoption, and high levels of non-residential and infrastructure spending, which are contributing to our strong backlogs. Global supply chain conditions remain our most significant constraint and are suppressing production levels in all of our businesses, impacting both sales volume and manufacturing efficiencies. We are continuing to qualify new suppliers, reengineer components to expand supply availability, and leverage digital supply chain tools to help mitigate these constraints, which we expect will continue throughout 2023. We are also managing our cost to better align spending levels with our constrained production rates. For the quarter, we reported revenue of $2.07 billion with adjusted earnings per share of $1, a 144% sequential improvement from earnings per share of $0.41 in the second quarter and down modestly from the prior year quarter. I am proud of our team's resiliency as they delivered these results despite a number of challenges in the quarter including Hurricane Ian, which caused us to shut down our Florida facilities for the last week of September and a major shortage of axle castings in the Defense segment, which caused two weeks of lost production. As we have shared in the past, we are proud of Oshkosh's strong environmental, social and governance, or ESG leadership. In recognition of our leadership, MSCI updated its risk profile for Oshkosh, and we achieved a AAA rating which puts us in the top 3% of our industry category. We are dedicated to taking the right actions to responsibly deliver results for our stakeholders. As we move into the final quarter of the year, we are maintaining our most recent expectations of revenues and adjusted earnings per share in the range of $8.3 billion and $3.50 per share, respectively. Mike will share additional details on our expectations in his section. While it's not possible to predict when supply chain conditions will improve, our disciplined actions to increase prices and manage costs are contributing to improved results, particularly at Access Equipment. We are confident in our people, our company, and our outlook for the remainder of 2022, and believe we will exit the year in a stronger position to deliver growth in 2023 and beyond. Please turn to Slide 4, and we'll get started on our segment updates with Access Equipment. As I mentioned in my opening comments, our Access Equipment team delivered strong performance in the third quarter with a 420 basis point adjusted operating income margin improvement sequentially and a nearly 800 basis point improvement year-over-year, while supply chain dynamics continued to limit production as well as contribute to elevated freight and expediting costs. Our pricing actions drove strong earnings improvement. As expected, we largely worked through the remaining price-protected backlog in the third quarter and returned to delivering double-digit operating margins. The team at Access Equipment remained focused on improving supply chain efficiency, including qualifying additional suppliers, allowing us to both dual source components and leverage alternate sourcing strategies that will optimize parts flow and maximize our production rates. We continue to experience strong demand for our market-leading JLG products, and our backlog remains elevated at $3.9 billion. The strong demand is driven by robust market fundamentals, including aged fleets, high utilization rates, and continued solid non-residential construction metrics as well as technology adoption. Orders were high once again at nearly $1 billion in the quarter. We believe we have good visibility to customer requirements for 2023, well beyond our current backlog and discussions for 2024 requirements are already beginning in some cases. Please turn to Slide 5, and I'll review our Defense segment. Revenues for the Defense segment were lower in the quarter versus the prior year due to lower vehicle production as a result of both significant production disruptions caused by parts shortages and planned reductions in DoD spending on tactical wheeled vehicles. As I mentioned, axles and related components drove the most significant disruptions, impacting both sales and manufacturing efficiencies. We also recorded unfavorable cumulative catch-up charges in the quarter as material and freight cost escalation have been more persistent than previously expected. These events reduced operating income during the quarter below our prior expectations. Moving to an update on key programs, we submitted our proposal for the JLTV 2 contract in August, and we expect to hear the Army's decision in early 2023. We believe our strengths in manufacturing and technology bring substantial benefits to our DoD customer, and we are confident that we can deliver even more value to our customer in the future. We achieved some important wins for margin-accretive programs during the quarter as well. Notably, we were announced as the winner of the EHETS trailer competition. The contract is worth approximately $260 million over the next several years. We received the first delivery order for 73 trailers that we will deliver in 2024 and 2025 in conjunction with our Dutch partner, Broshuis. Late in the quarter, the US Marine Corps awarded us a contract for the ROGUE Fires mobile launch system. ROGUE Fires is an unmanned 4x4 JLTV that houses a launcher to fire naval strike missiles, and is another example of Oshkosh leveraging our technology developed for one program and successfully applying it to another program. And last week, Lithuania's Ministry of Defense announced its intention to purchase 300 additional JLTV units. Finally, we are pleased to welcome Tim Bleck to his new role as President of our Defense segment. Tim works side-by-side with our retiring President, John Bryant, for many years. And together, they were instrumental in delivering several key program wins, including JLTV I, NGDV, and Stryker MCWS, among others. I want to personally thank John Bryant for his years of service to both our company and the US Marine Corps. We are confident that Tim and the entire defense team will continue to execute our successful strategy and drive profitable growth in the segment. Let's turn to Slide 6 for a discussion of the Fire & Emergency segment. Demand remains very strong for municipal fire trucks, and our team at Pierce continues to strengthen its position in the marketplace with outstanding new products, including our Volterra electric vehicles and other productivity-enhancing features. Supply chain disruptions and manufacturing challenges, due in part to workforce availability, have limited our ability to produce to our targeted rates. This led to lower fire truck deliveries and higher manufacturing inefficiencies in the quarter, thus contributing to a lower-than-typical operating margin of 7.8%. We experienced modest improvements in some supplier metrics during the quarter, such as past due purchase orders, but we are not experiencing the sustained improvements we need to consistently achieve planned production rates in our facilities. We believe our purchasing and operations leaders are taking the right actions, and we remain confident that the Fire & Emergency segment will return to strong double-digit operating margins as supply chains improve and our production volumes increase to keep pace with demand. This strong demand is supported by aged fleets and solid municipal funding that are driving the market for fire trucks. Pierce's backlog is at an all-time high, up more than 80% compared to the prior year, highlighting excellent demand for our products as evidenced by our leading market share. During the quarter, we partnered with our dealers to secure many notable orders, two of which I'd like to highlight. First, our dealer in Florida won a large order with the city of Jacksonville for 15 custom fire trucks. And second, our dealer in Texas secured a strategic order with the city of Dallas. Before we leave Fire & Emergency, I'm proud to highlight that Gilbert, Arizona is our latest customer for a Volterra electric fire truck. Gilbert will provide us with a hot climate environment that will benefit our development activities. Please turn to Slide 7, and we'll talk about our Commercial segment. In the Commercial segment, sales were up versus the prior year, but third-party chassis availability remained a constraint. Adjusted operating margins were down versus the prior year as a result of increased new product development and technology investments as well as higher warranty costs. We continue to make investments in automation that we believe will improve our operations and our competitive position for the long term. For example, our team at Commercial is implementing its manufacturing 4.0 strategy, which will increase capacity, improve efficiency and raise quality while reducing the need for additional headcount in a labor-constrained market. Earlier this year, we started up our first refuse collection vehicle, high flow line in Dodge Center, and the line is redefining how we produce RCVs. We expect further benefits in 2023 and beyond as we continue to ramp to full rate production, and the supply chain improves. We expect to roll out additional high flow lines for RCV production in the coming years. With that, I'm going to turn it over to Mike to discuss our results in more detail, and our expectations for the remainder of 2022.

Thanks, John. Please turn to Slide 8. Adjusted operating income of $114 million for the third quarter was in line with our expectations despite the unplanned revenue shortfall of approximately $130 million, primarily due to supply chain disruptions. As John discussed, defense production was impacted by a number of axle and related component shortages during the quarter. Further, our revised outlook for higher inflation projections in our Defense segment prompted an unfavorable cumulative catch-up adjustment during the quarter of approximately $14 million versus our most recent expectations. Strong price realization and favorable mix, particularly at Access Equipment, as well as prudent cost management offset the lower-than-expected consolidated sales volume and unfavorable cumulative catch-up adjustments versus our most recent expectations. Adjusted EPS was negatively impacted versus our most recent expectations by approximately $0.06 due to unfavorable foreign currency translation adjustments caused by the impacts of weakening foreign currencies relative to the US dollar, our tax rate was also modestly higher than our most recent expectations. Moving to a comparison versus the prior year. Revenue was up $4 million to $2.07 billion. Access Equipment and Commercial segment revenues were up by $192 million and $31 million, respectively, driven primarily by the benefit of higher pricing as well as increased sales volume in North America at Access Equipment. Defense and Fire & Emergency sales were down by $132 million and $91 million, respectively, driven primarily by supply chain disruptions impacting production as well as expected lower DoD tactical wheeled vehicle requirements in the Defense segment and lower RF demand in the Fire & Emergency segment as airport spending has not returned to pre-pandemic levels. Adjusted operating income was up $10 million versus the prior year to $114 million or 5.5% of sales, representing a 9.4% increase. Access Equipment adjusted operating income increased $87 million to $118 million or 11.3% of sales versus the prior year. This represents an impressive 770 basis point improvement in adjusted margins versus the prior year driven by improved price/cost dynamics as a result of our pricing actions catching up to increased costs as well as improved absorption, lower product liability costs, and lower incentive compensation. Defense operating income was down $47 million versus the prior year on lower sales driven by a combination of supply chain disruptions experienced during the quarter as well as planned lower tactical wheeled vehicle production resulting from lower DoD budgets. Operating income was impacted by lower sales volume and unfavorable cumulative catch-up adjustments versus the prior year as a result of persistent inflation and unfavorable product mix. Fire & Emergency operating income was down $28 million versus the prior year as a result of lower sales volume, driven in part by supply chain disruptions and unfavorable price/cost dynamics. Consolidated price/cost dynamics improved approximately $55 million sequentially versus the second quarter. Adjusted EPS was $1 per share for the quarter compared to $1.05 per share in the prior year. Adjusted EPS was negatively impacted by approximately $0.08 due to the aforementioned foreign currency translation adjustments and $0.15 due to a higher effective tax rate versus the prior year. Share buyback benefited earnings per share by $0.05. Please turn to Slide 9 for a discussion of our updated expectations for 2022. Last quarter, we said that we expected 2022 sales and adjusted EPS to be in the range of $8.3 billion and $3.50 per share, respectively. Our expectations were based on supply chain and inflation conditions remaining the same as we experienced in the second quarter. While on-time delivery metrics have improved in pockets, these metrics remain well off historic norms and below levels that facilitate smooth production. As previously mentioned, supply chain disruptions contributed to a $130 million revenue shortfall in the third quarter versus our most recent expectations. Further, inflation has remained persistent as supported by recent PPI data despite improvement in some commodities. We continue to price for inflation in our non-Defense businesses as demonstrated by our margin improvement during the third quarter in the Access Equipment segment. Despite these challenges, we are affirming our expectations of fiscal 2022 sales and adjusted EPS to be in the range of $8.3 billion and $3.50 per share, respectively. This implies fourth quarter EPS in the range of $1.85. As we look to the fourth quarter versus the third quarter, there are three key factors that support our outlook. One, the expected benefit of increased volume at Defense and Access Equipment. Two, the benefit of an expected positive cumulative catch-up adjustment from incoming orders anticipated in the fourth quarter compared to a charge in the third quarter in Defense. And three, the expected benefit of cost management actions throughout the company to align our costs with the constrained production environment. Of course, the environment remains volatile and difficult to forecast, so we remain laser-focused on execution. While current supply chain inflation conditions remain a challenge, we are encouraged by the strong recovery of Access Equipment margins during the quarter as well as robust demand for our market-leading products, and we remain confident in our long-term outlook. I'll turn it back over to John now for some closing comments.

We delivered significant sequential improvement in margins, and it's clear we benefited from pricing actions in our non-Defense end markets. We will continue to remain focused on managing costs and staying disciplined with our pricing approach during this time of high inflation. Supply chain remains our most significant challenge, and we will continue to take actions to drive a more resilient supply chain over time. Importantly, we believe the fundamentals in our end markets remain very strong. And finally, we expect to exit 2022 in a stronger position as we head into 2023 and beyond. Okay, Pat, back to you.

Thanks, John. I'd like to remind everybody, please limit your questions to one plus a follow-up. And please stay disciplined on that follow-up question. Afterwards, we ask that you get back in queue if you'd like to ask additional questions. Operator, please begin the Q&A portion of this call.

Thank you. We will now start the question-and-answer session. Our first question comes from Jerry Revich with Goldman Sachs. Please go ahead with your question.

Yes, hi. Good morning, everyone.

Good morning, Jerry.

John, we're hearing from a number of your customers about nice-sized price increases anticipated for 2023. And I'm wondering if we're looking for pricing to be up mid- to high single digits next year, would that get you to your historical low to mid-teens margin profiles at this $4-plus billion revenue run rate in Access Equipment? Does that essentially make up for all of the volatility we've seen on the cost structure over the past couple of years? Thanks.

I'll start that, Jerry. This is Mike. I would say, first of all, you look at Access, we're obviously at a real strong margin, really within about 100 basis points of what our prior peak was. And that's still in a very constrained supply environment, which is limiting our output and contributing to labor inefficiencies. From a true price/cost perspective, we're approaching that neutral, and we expect to exit the year neutral to positive really in our non-Defense businesses. So I would say right now, the margin opportunity going forward is really the cadence of supply chain improvement versus the price/cost dynamic.

Okay. Super. Thank you. And then, can we talk about in the Defense segment, the cumulative catch-up adjustment? Can you just say more about which of the programs the catch-up was related to this quarter? And is there a particular input cost dynamic that drove it? Was it expedited freight inefficiencies that we're unable to recover with the pass-through mechanisms, or any additional color on that, if you wouldn't mind.

Certainly. Firstly, regarding the quarter, the main factor affecting defense performance compared to the cumulative catch-up adjustment was the volume disruption caused by the axle casting issue. This had a significant impact. We did experience a negative cumulative catch-up adjustment, primarily related to our major programs, JLTV and FMTV. What it essentially boils down to is that we are consistently assessing third-party forecasts for inflation, freight, and other factors, and the expectation that these will remain high for an extended period is what is driving the issue. We consult many experts each quarter as we analyze the situation. Thankfully, the impact is much smaller than what we saw in the previous quarter. Looking ahead to the fourth quarter, we anticipate that with incoming orders, the cumulative catch-up adjustment should turn to our advantage.

Super. Thanks.

Thank you.

Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Thank you and good morning, everyone. Just to clarify on defense here, since we've seen, obviously, a lot of moving parts to margins in 2022. Can you pinpoint how you're thinking about margin in the fourth quarter here? Presumably, you've got decent visibility at this point? And then, is it fair for us to expect margin to normalize in 2023, or are there other items like CCA that might be creating distortions next year as well?

Just to start off, Mig, I think the Defense business, obviously, we've had some CCAs, but this is a good solid margin business going forward. And our view hasn't changed there. As we go from the really the bridge from the third quarter to the fourth quarter, it's really three items driving that, Defense being one of the biggest. So we do expect to see some more volume as we go from the third to fourth quarter. That certainly will be beneficial to Defense's margins. And really, about half of that volume uplift is really split between Access and Defense. I would say the other piece is we expect a positive CCA, because we're going to have some large JLTV and FMTV orders expected coming in. So we tend to get a benefit, so a flip from having a negative to an expected positive. So we do expect that margins will be more robust in the Defense segment as we go to the fourth quarter.

Yes, Mig, it's John. I want to add that we anticipate a more normalized margin in 2023. Additionally, looking at the long term, defense is a solid business. While it may seem puzzling when comparing this and the previous quarter, defense remains a strong business and will be a key growth driver for Oshkosh Corporation starting in 2024. Therefore, we are confident in the defense sector for 2023 and beyond.

Understood. Then, I guess, my follow-up is on Access Equipment. If we're looking at the order intake that you had this quarter, about $950 million, thereabouts, do you sort of view this order intake level as sustainable? Is this sort of the new normalized level, based on what you're kind of hearing from customers? And I'm also curious, in terms of whether or not you are opening the order books beyond sort of what you have told us last quarter. I mean, you talked about 2024. Are you in a position where you can actually take for orders for '24? Thank you.

Yes. That's a great question. Let me clarify. We're experiencing very strong demand in the Access Equipment segment. Orders for the past quarter, Q3, were nearly $1 billion, which reflects a healthy order rate. We're currently taking orders because we have a $3.9 billion backlog extending from late 2023 into 2024. This situation is quite unprecedented for both the Access Equipment industry and for JLG. It represents a managed order book rather than a free flow order book. However, keep in mind that a year ago, in the third quarter, we had a large order intake largely due to a significant order from one of our biggest customers, making the year-over-year comparison somewhat misleading. If you speak with any of our customers, many publicly traded companies, you will find that they are increasing their capital expenditure plans. They are struggling to acquire enough equipment due to numerous mega projects that are now underway, many of which are driven by legislation passed by Congress. These projects are just starting to materialize, and they are absorbing more of the market fleet than usual. Consequently, our customers are indicating a need to adjust by adding and replacing their fleet. This is why we feel confident that we are entering a multiyear growth cycle. This summarizes the current demand in the access sector.

Appreciate it.

Thanks, Mig.

And our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. I’ll ask this question even though I suspect you may not want to address it. I'm trying to assess the earnings run rate for the second half of 2022 and what that means for 2023. I realize there are several unusual factors at play, but it seems the market expects earnings of $650 million next year, which would nearly double the current earnings. Should we consider the second half of the year as a reliable run rate? I'm trying to determine if the guidance or consensus needs to be adjusted for 2023. Thank you.

Yes, Jamie, we are not prepared to provide guidance for next year at this time. However, there are a few points to note. We experienced significant improvement from Q2 to Q3, primarily due to price cost. Supply chain continues to be a constraint and will be a variable as we move into next year. We anticipate solid growth from the third quarter to the fourth quarter. It's worth mentioning three factors: firstly, we expect increased volume as events return to normal production levels, overcoming previous axle challenges. Additionally, we foresee a slight increase in international volume, particularly for units currently in transit. The CCA benefit is another contributing factor, along with the spending benefit. This is how we envision the progression. Looking ahead to next year, it's important to note that the CCA benefit is not a recurring feature each quarter; it's more of a specific event, so it shouldn't be considered a steady run rate item.

Yeah. Jamie, I think it's Mike talked about a few benefits that we get that do not recur in 2023, but it's safe to say that it's more similar to the back half of this year than the front half of this year.

And our next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Great. Hi, guys. Thanks for taking the question. Mike, can I go back to your three things?

Sure.

You've talked about the positive CCA adjustment a couple of times. Can you just quantify that?

Sure. So there's about an $0.85 uplift from Q3 to Q4 that we expect. I'll break it down in those three buckets: about 20% of that – or excuse me, about 40% of that is volume. About 40% of it's the CCA flipping from negative to positive, expected. And then the last 20% of that is spending related.

Okay. Great. And then on the spending related, is that SG&A, or is there more that's being done? Does that affect any specific segment more than others?

It's largely SG&A. And what I would say is that, it's really across the board. Obviously, we have a constrained production environment. So what we're just prudently trying to align our spending with our constrained production levels. But I'd say it's really across the board.

Thank you so much.

Sure.

Thanks, Steve.

And our next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Hi. Good morning. Thank you so much. So I just wanted to clarify what you said about CCA. You had some outsized negative case adjustment in the second and the third quarter of this year. It seems like it was about $40 million in total. If commodity prices stay where they are, will you recapture all of this headwind next year? I'm just trying to model next year. So is it like a full recapture we should be modeling?

So what we're doing, Tami, is when we're resetting, we're really looking at what our expectations are for costs for the remainder of our programs. So in some cases, we're looking out three or four years, predicting what the costs are, and looking at expert cost curve. So if commodities stay about where they're at, that really is going to be not a particularly big net negative or net positive, it will stay – it will be fairly neutral. So if you saw like an outsized drop versus what leading experts would say you'd get a benefit. Conversely, if you see higher inflation levels, it could be a headwind. So I would say right now, this reflects our best estimate of what the margins be on the program going forward. And again, I think the important point is, again, you get an outsized impact in one quarter because you're essentially catching up an entire program to get it to that new margin level. So you can have a bigger impact. But again, we expect more normalized type margins next year as we – for the Defense segment.

Got it. That is very helpful. And then another quick one, what – how should we think about R&D spend next year versus this year, if you're able to comment?

Yeah, sure. We've had a step-up in R&D in 2022, and we'll continue to increase it more in 2023. We've invested a lot in technology. You've seen us put electrified products into the market in almost every segment we serve. You've seen us do a lot with autonomy. I talked about that rogue fires, that's an unmanned vehicle. So we continue to invest in technology. But I think when you look at it as a percent of sales, it's not materially different. While we're stepping it up in dollars, when you look at it as a percent of sales in 2023, it's not materially different.

Great. Thank you so much.

Thanks, Tami.

And our next question comes from the line of Michael Feniger with Bank of America. Please proceed with your question.

Hi, guys. Thanks for taking my question. The inventories are building, and that makes sense to have a big backlog. I'm just curious what areas we're seeing you guys are building that inventory? And where do you think free cash flow kind of finishes this year? And will we expect a more normalized return in 2023?

I believe that from an inventory standpoint, we're noticing elevated levels across almost all categories, particularly in work-in-progress and raw materials. This is a reflection of the current irregular manufacturing flow. The slight increase in finished goods can be attributed to some international goods that are still in transit. I expect this situation will start to straighten out in the fourth quarter. Regarding free cash flow for the year, we're estimating it will be in the range of $200 million to $250 million. I anticipate that free cash flow will begin to normalize next year as production stabilizes. The inventory situation is closely linked to production rates and the state of the supply chain, but at present, the inventory levels are primarily influenced by production conditions.

Make sense. And then just when we think of the ordering patterns and access, just is there any differences between what we know from the big national branches versus the smaller independents? Are you seeing the small independent ordering at a stronger clip than what we can see from the poly peers? Just love to get some color there on how you're seeing the ordering trends between those two customers. Thanks.

Yes, demand for both IRCs and NRCs, the major national companies, is strong for both. I don't see a significant difference in the acceleration of demand between the IRC mix or the independent mix, although the IRC mix provided a slight advantage in Q3. Overall, the equipment needs and the necessity to replace aging fleets are fairly equal, and there is a strong desire for additional fleets to meet the increasing applications of the equipment and the expansion of large projects. However, growth in these large projects tends to favor the big national companies more than the IRCs. Nonetheless, the demand is strong across the board.

Thank you. And our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hi. Good morning. And thank you all for taking the question. A quick question. We didn't hear a whole lot on the USPS contract. Has anything changed with that? And then curious if that has any impact on some of the CCA adjustments?

Yes. First, I'll discuss the program and then Mike can address the CCAs. We are moving forward with the US Postal Service and our NGDV platform. Production is set to begin in 2023, and you can expect to see vehicles being delivered and on the streets by the end of 2023. Overall, things are progressing well, and both we and the Postal Service are excited about this collaboration as we work to bring this vehicle to fruition. Now, I will let Mike provide comments on the CCAs.

Sure. Stanley, similar to other long-term contracts, there is contract accounting there, but we won't start recognizing any revenue on postal until we start producing the units that will be late next year. So, really no impact of CCAs.

Perfect. And then switching gears to the Fire & Emergency business. You mentioned supply chain and manufacturing challenges, and I guess workforce availability as well. So much of the production kind of localized in Wisconsin area, at least for the Pierce brand. What are some of the other things you can do to try to alleviate that because the backlogs are massive and there's obviously a huge demand for the products you're bringing to market.

Yes, I'll outline the challenges with Fire & Emergency. We've seen ongoing progress in managing a tough supply situation in the Access Equipment segment. When it comes to the Fire & Emergency segment, it's our most complex product line. For example, a municipal fire truck is highly intricate, has a long list of materials, and many can sell for around $1 million each. There are numerous potential issues in manufacturing a fire truck compared to most of our other equipment. We're still navigating that learning curve, making necessary adjustments, expanding capacity with existing suppliers, or bringing in new suppliers where more capacity is needed. I anticipate that we will continue to work through these issues and achieve improvement over time. We are very confident in the Fire & Emergency business; we are so confident that we are still adding capacity to meet the strong demand from our backlog. Additionally, we have exciting new products like the electric Volterra that will drive demand for many years as municipalities upgrade their fleets. Ultimately, we will get this situation under control, and we are confident that the Fire & Emergency segment will return to the strong double-digit margins we expect.

And Stanley, one thing I would mention is that we discussed this in the last call, where we are utilizing Defense's plant in Tennessee. We are starting some fabrication welding activities for F&E that are beginning to ramp up. This will provide some geographic diversity, which is also benefiting Access.

Thanks guys. Best of luck.

Thank you. Our next question comes from Seth Weber with Wells Fargo Securities. Please go ahead with your question.

Hey, guys. Good morning. I've heard you guys talk about normalized Defense margins a couple of times. Can you just remind us what you think that might be? It's been kind of all over the place for the last number of years. Is it sort of high single digits? Is it mid to high? Just any kind of framework that we should be thinking about for normalized Defense margins going forward? Thank you.

So what I'd say is, historically, it's been sort of the high single digits. I think what we've talked about over the last year is, while we're ramping up postal, we are carrying about a 100 basis point load of SG&A that is related to that ramp. So that takes the margin down a bit temporarily. So that's obviously an impact. But again, we expect that once we've talked about volume next year. Obviously, this year is down a bit next year with tactical wheeled vehicles, maybe similar. But again, once these new programs start ramping up, that's when we'll also get some additional benefit from a margin as well. But again, our other than postal and a few of those other things just in the short term, no major changes to our views.

Seth, let me just add to that. Inflation has been tough for the Defense business, and that's reflected in these cumulative catch-up charges that we've had. But the Department of Defense has developed. They've recognized this. They've developed an economic price adjustment as a result of some of the higher inflation. It's been the highest in 40 years, as we all know. And it contains EPAs or economic price adjustments that provide adjustment of contract prices based upon movement of a cost index. So we think this is a very positive development with our customer, and we feel pretty good about that as we go forward.

That's helpful. Thanks. As a follow-up on the excess orders or backlog you're experiencing, could you discuss how much of that has firm pricing? How much is based on provisional pricing, and how are you communicating with your customers regarding the pricing in the backlog for next year's orders? Thanks.

Yeah. So I'll talk about that, it's John. As we are here in the fourth quarter of 2022, we have pricing on the entire backlog, but we also have terms and conditions that allow us to make adjustments should inflation proceed beyond our expectations. Now we're going to do everything in our power to keep our costs down and not have to do that to our customers, because we certainly don't want to do that. But if it continues to accelerate, it at least gives us the protection that we need. But if you look at 2022, everything we've shipped has been based upon the exact price at the time of order. And we've changed our process a little bit to give ourselves a little bit more protection because of the inflationary environment that we're in. So it's got a price on it. That price will stay the same unless there is a significant change in inflation.

Okay. And that's indexed it's tied to some commodity index, or what should we be watching indicate that?

You should be watching whether or not inflation continues to go up and beyond what economists are predicting it will go up at. But I don't want to get into the mechanics of how it works.

Okay. All right guys, thank you.

Thanks, Seth.

And our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks and good morning. I'm not sure if I missed this because I dropped off for a minute, but you mentioned the 40% volume benefits in Q4 relative to Q3. What gives you the confidence that those volumes will be able to expand, given that there have been some ongoing production constraints? Is that based on your sort of current run rate of production, or are there any other factors there?

Sure. There are two main points. First, there's some additional volume at JLG, and some of that inventory is already built and currently en route to international locations. So there's no further inventory to be built to take advantage of that. The second point is related to defense; it hasn't experienced significant disruptions due to supply chain issues. There have been some challenges, but not as severe as those affecting other areas of our business, like the axle casting problems that shut down our line for two weeks. We are currently operating at more typical rates.

Okay. That's helpful. And then, did you say where you are with price versus cost for the year? I think there was a $50 million number previously. And kind of what are the steel prices you're embedding into your Q4 guidance? Thank you.

Sure. The price and cost situation remains consistent with what we discussed in the last call. For the full year, we are facing a headwind of $250 million, with around $200 million of that expected impact occurring in the first half and $50 million in the second half. We experienced some price advantage in the third quarter, which benefited Access. I anticipate similar price and cost trends in the fourth quarter. From a steel perspective, hot-rolled coil prices have decreased, while plate prices remain high. There is a delay of up to six months for the benefits of lower hot-rolled coil prices to materialize, but this is just one part of our overall commodity cost or inflation situation.

I just want to add a comment on this topic. The positive aspect of our Q3 is that we demonstrated our ability to adjust prices to match inflation, which was evident. Our operating income is meeting or exceeding our expectations. Although there were a few factors that slightly impacted our EPS, our operating income still aligned with or surpassed our expectations. This is notable given the unexpected two-week shutdown at our Defense plant and an unanticipated cumulative catch-up charge. Looking ahead to Q4, we are confident about our pricing strategy and optimistic about 2023.

Perfect. Thank you.

Thanks, Steve.

There are no further questions at this time. And now I'd like to turn the floor back over to John Pfeifer for any closing comments.

Yes. Thanks for joining us today, everyone. We are certainly committed to driving long-term profitable growth, and we've got a lot out there that's going to deliver that. Please stay safe and healthy, and we look forward to speaking with you very soon.

Thank you. This does conclude today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.