Oshkosh Corporation (OSK) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Oshkosh Corporation Fiscal Year 2021 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President 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 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 8K 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 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. I'm proud to share that Oshkosh has delivered another quarter of strong performance, experiencing strong orders, sales growth, and robust backlogs across all of our segments. Our third - our strong third quarter results include sales of $2.2 billion and adjusted earnings per share of $2.09, an increase of more than 60% over prior year adjusted EPS. We are pleased with this strong performance and I'm proud of our team's perseverance to deliver growth and solid results in the face of one of the most challenging global supply chain environments in recent memory. Our third quarter was highlighted by several exciting announcements on the heels of the USPS next-generation delivery vehicle, or NGDV win in the second quarter. In early June, we were notified that we won the U.S. Army's Stryker Medium Caliber Weapons System, or MCWS program, which represents an important new adjacency for our Defense business. Less than a week later, we held a joint news conference with the city of Madison, Wisconsin to announce our revolutionary new electric fire truck, the Pierce Volterra. Madison is the first city in North America to be operating an electric fire truck as part of its fleet and we're pleased to report that the truck has been performing extremely well. This is a big step forward for our EVs and is another milestone in our two-decade-plus history of electrifying products. As we've been discussing over the past year, we have significant electrification projects in all of our business segments. And in late June, we announced Spartanburg, South Carolina is our newest manufacturing facility. The Spartanburg factory will be the home of our USPS NGDV production. We are proud to be creating over 1,000 manufacturing jobs in South Carolina for this exciting new program. As we look at the current landscape, many industries including our own are seeing a rapid increase in demand with market recoveries causing significant stress on global supply chains. And that has only intensified over the past quarter. At Oshkosh, we are witnessing the effect of these supply chain disruptions primarily within the Access Equipment business, impacting sales by approximately $100 million during the quarter. Importantly, we believe these supply chain issues will eventually subside, and we are well positioned to capitalize on the market recovery. As we address these disruptions, we are updating our expectations for 2021 adjusted EPS and now expect $6.35 to $6.50 tightening the range a bit heading into our fourth quarter. Reducing the top end of the range reflects the ongoing supply chain issues that I mentioned. Mike will share more details in his section. Now let's turn to Slide 4 and get started on our segment updates with Access Equipment. The recovery momentum we discussed on our last call continued in demand for our industry-leading Access Equipment strengthened. While we expected some supply chain disruptions in the back half of the year. The magnitude of the impacts has been more significant than we previously expected. Our access team did an outstanding job minimizing the volume impact during the quarter, which allowed us to deliver nearly 90% revenue growth versus the prior year. We are seeing strong demand led by North America. Elevated fleet ages combined with strong equipment utilization and a healthy rental market are fueling this demand. We expect a multi-year opportunity for robust replacement demand as rental companies' look to lower the overall age of their fleets, which were at historically high levels entering 2021. We expect further opportunities when non-residential construction rebounds. As a result of these market fundamentals, our customers are already beginning to plan for their 2022 capital requirements. Orders were strong during the quarter leading to a backlog of $1.75 billion, up more than 200% versus last year and an all-time record for access for the third quarter. We continue to be pleased with customer interest in orders for our electric booms and scissor lifts. The move towards electric is still in its early stages and is gaining traction with customers that are looking for improved performance benefits, total cost of ownership benefits, and carbon footprint reduction. The bottom line for the segment is that we're still in the beginning of what we believe is a multi-year growth cycle as economies recover and customers use our safety and productivity enhancing equipment in more applications. Please turn to Slide 5 and I'll review our Defense segment. Our Defense team delivered solid third quarter results with double-digit sales and operating income growth and continues its success entering new adjacent markets that supplement our market-leading position with tactical wheeled vehicles. As I mentioned in my opening remarks, we announced the decision to build the U.S. PS's next-generation delivery vehicles in Spartanburg, South Carolina in late June. Spartanburg is an outstanding location with deep automotive manufacturing roots and we look forward to bringing new team members on board to help build these game-changing zero emissions and low-emission last-mile delivery vehicles for our nation's postal carriers. Our team has already begun preparing the facility for the planned production launch of the NGDV in 2023. Recall this is a 10-year contract that calls for between 50,000 and 165,000 vehicles with a mix of both zero emission BEVs and fuel-efficient ICE vehicles. We are continuously engaged with a broad cross-section of USPS representatives including postal carriers procurement and technology professionals, and are very encouraged by the positive feedback we received on the great technology we are building into the NGDV. We look forward to sharing our progress during our Analyst Day this September in Wisconsin. In early June, we were notified that we won the Stryker MCWS competition, which will result in our team integrating MCWS on the Stryker vehicles that are used by U.S. Army brigade combat teams, SBCTs. The six-year contract includes a full spectrum of system technical support, in term contractor logistics support and integrated product support. To achieve this win our team brought together the best in class capabilities for system design, manufacturing, and integration to provide a highly capable solution that meets current Stryker MCWS program requirements while offering the flexibility to upgrade in the future. The six-year contract is worth up to $943 million. This is a great example of our team's ability to successfully compete for and win programs in adjacent markets that are part of the army's priorities. Our January acquisition of Pratt Miller was instrumental in our ability to win this important program. Before I leave Defense, I wanted to mention some late-breaking news that our bid for the OMFB, or optionally manned fighting vehicle, was selected as one of five proposals to participate in the concept design phase of the program. We are working with some outstanding partners, and this is a significant win for Oshkosh. It's also another example of our ability to compete in adjacencies outside of tech four wheeled vehicles. The OMFV is planned to replace the Bradley fighting vehicle and the program involves several milestones over the next several years. Let's turn to Slide 6 for a discussion of the Fire & Emergency segment. The Fire & Emergency segment delivered excellent performance in the quarter with solid sales and an operating income margin of 14.7%, despite the challenging supply chain environment. As we've shared over the past year, we had some concerns with municipal budgets as we emerged from the pandemic that could lead to downward pressure on fire truck demand. Our expectations are changing as communities have been more resilient through the pandemic, buoyed by strong residential construction and increasing property values. We now expect 2022 to be a solid year, as evidenced by our better-than-expected order rates. F&E finished the quarter with another solid backlog of $1.2 billion, an increase of 8.5% over last year. Orders in the quarter were impressive at $247 million, an increase of 69% over last year. Pierce is the industry leader in municipal fire trucks, and that leadership was punctuated with our June announcement of North America's first electric fire truck, a milestone for both Oshkosh and the industry. The city of Madison is piloting our new Volterra Pumper as part of its front-line fleet and it has successfully responded to hundreds of emergency calls. The Volterra highlights our expertise with electric vehicles and provides all of the operational, functional, and safety benefits our customers have come to expect from Pierce while not sacrificing performance. Our customer is saving over 100 gallons of diesel fuel per week with the Pumper, and they are also inviting the community and other fire departments to see the unit up close throughout the summer. We also launched the Volterra Electric ARFF vehicle, which will be visiting airports around the United States. Please turn to Slide 7, and we'll talk about our Commercial segment. Our Commercial segment returned to growth this quarter with a revenue increase of over 12%. Our efforts to drive margin improvement through simplification and innovation in this segment are working as evidenced by our 10.6% operating margin performance in the quarter, surpassing last year's 10.2% adjusted operating margin. Our third quarter results were particularly impressive given the challenging supply chain environment. As most of you are aware, our Commercial segment is more reliant on third-party chassis than our other segments. Commercial has been working diligently to address reduced chassis availability that has been prevalent across the industry during the recovery. Our team has maximized production in the face of these headwinds by adjusting our schedules, thus allowing our production lines to remain operational and effective despite these hurdles. Our outlook is supported by strong orders in the quarter for both RCBs and mixers as the U.S. and Canada move beyond the pandemic. These orders led to an all-time high backlog of just under $500 million, providing solid visibility into 2022. We're pleased to report that rear discharge concrete mixer production in our focus factory in London, Ontario, Canada is proceeding very well and the transition is complete. We are also focused on optimizing RCV production in our Dodge Center, Minnesota facility in the coming quarters. We also delivered the first unit of five electric RCVs for Boise, Idaho, working closely with one of our OEM partners. We look forward to working with our customers and partners as they establish and implement electrification and emission reduction strategies for the long-term. Finally, we are participating in the Advanced Clean Transportation Expo in Long Beach, California in late August. We plan to showcase our fully electric Kobalt concrete mixer truck concept. I urge all of you to check it out if you plan to attend the expo. I'm going to turn it over to Mike to discuss our third quarter results and expectations for the remainder of 2021.

Thanks, John, and good morning, everyone. Please turn to Slide 8. We delivered strong third quarter results despite significant supply chain disruptions which impacted our ability to complete and deliver units. Consolidated revenues were approximately $100 million lower than our prior expectations as a result of these disruptions largely at Access Equipment. Consolidated sales for the third quarter were $2.2 billion or $628 million higher than the prior year, representing a 40% increase. The sales increase was driven by an 89% increase at Access Equipment, a 27% increase at Defense, and a 12% increase at Commercial. Access Equipment sales increased due to improved market demand as we exit the pandemic driven by strong replacement demand. Last year demand was negatively impacted as COVID-19 shelter in place restrictions peaked around much of the globe in our third quarter. Defense sales increased in the quarter due to higher JLTV volume and the benefit of Pratt Miller sales, which we acquired in the second quarter of this year. Fire & Emergency sales were approximately flat in the quarter and Commercial segment sales were up due to increased RCV demand as we emerged from the pandemic, offset in part by the lack of concrete batch sales. As a reminder the concrete batch plant business was divested in the fourth quarter of the prior year. Consolidated adjusted operating income for the third quarter was $205.1 million or 9.3% of sales compared to $128.8 million or 8.1 of sales-- 8.1% of sales in the prior year quarter. As a reminder, we benefited from approximately $60 million of temporary cost reduction actions as a result of the pandemic during last year's third quarter. As we shared on prior calls, the return of the majority of these expenses to our run rate was a headwind to year-over-year incremental margins in the quarter. Access Equipment adjusted operating income increased as a result of higher sales volume offset in part by higher incentive compensation expense, higher material costs, and unfavorable customer and product mix. Defense operating income increased as a result of higher sales volume and lower new product development spending, offset in part by unfavorable price cost dynamics. Fire & Emergency operating income decreased in the current year quarter as a result of higher incentive compensation expense, offset in part by favorable product mix. And Commercial segment operating income increased largely due to higher sales volume and favorable product mix, offset in part by higher material costs. Corporate costs increased $16.8 million due to higher incentive compensation expense and the return of other spending subject to temporary cost reductions in the prior year. During the quarter we repurchased approximately 107,000 shares of common stock for a total cost of $13 million. Adjusted EPS for the quarter was $2.09 compared to adjusted EPS of $1.29 in the prior year. Our GAAP EPS of $3.07 for the quarter includes a tax benefit of $1 per share related to a U.S. net operating loss carry-back to previous years with higher federal statutory rates. This tax benefit is excluded from adjusted EPS. Please turn to slide 9 for a discussion of our updated expectations for 2021. During our last earnings call, we shared that our expectations assumed no major supply chain disruptions. As we discussed today, we are facing significant supply chain challenges which are impacting a broad range of parts and components across all of our businesses, much like many industries across the globe. Despite these challenges, our teams have delivered solid results. Aside from supply chain challenges, our business is healthy as order rates and backlogs are strong in all of our segments which provide solid visibility for the quarter and into next year. Our updated expectations reflect our belief that supply chain challenges will neither improve nor deteriorate meaningfully for the remainder of 2021. Our updated expectations fall within the range of our prior expectations despite these headwinds. We expect consolidated revenues of approximately $7.8 billion. An adjusted consolidated operating income range of approximately 610 to $630 million and an adjusted EPS range of $6.35 to $6.50 compared to our prior range of $6.35 to $6.85. At the segment level we are estimating Access Equipment sales of approximately $3.2 billion, a 28% increase compared to 2020 and adjusted operating income margin of approximately 10.5%. Our revised expectations reflect production constraints, manufacturing inefficiencies, and increased freight cost due to the current supply chain environment. We are reaffirming our full-year expectation for Defense and Fire & Emergency. We expect sales and an operating income margin of approximately $2.5 billion and 8% respectively at Defense and sales and an operating income margin of 1.2 billion and 14% respectively at Fire & Emergency. Within the Defense segment we have analyzed the accounting treatment for the USPS share NGDV contract award and have determined that we will begin recognizing revenue upon production of units which is planned to begin in 2023. As such, we expect to see very limited USPS revenue over the next 18 to 24 months. We are estimating commercial segment sales will be up modestly versus our prior expectations to approximately $950 million and we expect operating income margins of approximately 8%. We estimate corporate expenses will be approximately $155 million. We estimate our adjusted tax rate for 2021 will be approximately 22.5% and we estimate an average share count of 69.3 million shares. For the full year we are estimating free cash flow of approximately $750 million, an increase of approximately 100 million versus our prior expectations. We also estimate capital expenditures will be approximately $140 million. Looking at the fourth quarter, we expect consolidated sales to be up approximately 18% over the prior year with Access Equipment largely driving the increase. We expect that material and freight cost increases will be a $35 million headwind to consolidated margins in the quarter and we expect a $30 million year-over-year headwind as a result of temporary cost reductions in the prior year quarter I'll turn it back over to John now for some closing comments.

We announced another solid quarter and our outlook for the remainder of the year continues to be positive. We've made adjustments to our expectations as we work through supply chain challenges. Importantly, we believe the supply chain challenges will subside over time. We won some big programs recently and we're taking actions to drive profitable growth as we innovate, serve, and advance the company. Our long-term outlook is strong as we leverage technology and innovation to generate industry-leading performance and further distance ourselves from the competition. I hope you will attend our Investor Day in September. We have a full agenda that will provide an excellent overview of our company, a chance to speak with our leadership team, and experience our industry-leading, innovative products firsthand. While portions of the meeting will be live streamed, you will need to be here in person to get the full experience. We hope to see you there. Please reach out to Pat if you have any questions I'll turn it back over to Pat to get the Q&A started.

Thanks, John. I'd like to remind everybody please limit your questions to one plus a follow-up. And we need to be disciplined on that follow-up question. After the follow-up, we ask you to get back in queue if you'd like - to ask any additional questions. Operator, please begin the question-and-answer period of this call.

[Operator Instructions] Thank you. Our first question comes from Stephen Volkmann with Jefferies. Please proceed with your question.

Thanks for taking the question. The question is really on sort of price versus cost, and I think you talked about $35 million of headwind for material and freight in the fourth quarter. I assume that's net of any price increases you're putting through, but if you could just kind of describe what's happening with price and when and if that kind of normalizes and maybe even gets better in 2022? Whatever commentary you could have around that, I'd appreciate?

Sure Steve, this is Mike, I can take that. Yes so, really from a price cost perspective, what we're seeing for next quarter, the $35 million that references is in line with what our expectations were last quarter when we said about $45 million that we did see about 10 to 12 in the third quarter we just wrapped up. We do expect that we'll continue to have some cost price headwinds in our first quarter of next year, but by the time we get to the January quarter or second quarter, that will start moderating. Certainly, since the last call, we have continued to see commodity escalation, in some cases we've taken further pricing action during the past quarter. So, we're going to continue to manage it in a disciplined manner, but, again, by the time we get to the second quarter, we should start seeing moderation to get back to - an equilibrium there. And again, if you go back to 2018 when we saw the steel escalation, we did see a benefit on the back end of that. So, we don't have reason to believe we wouldn't see something similar in this go-around.

Our next question comes from Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Can we talk a little bit about what's going on with the supply chain, and I guess, did you actually have to shut down production as a result at all in the third quarter? And then when we think about fourth quarter and access, is the anticipation, are you guys anticipating shutting down production at certain points during the quarter there?

Yes thanks, Nicole. The supply chain was definitely the headline for us this quarter. As the markets have rebounded really sharply, the supply chain has had a tough time catching up. And when we talk about supply chain disruption, we're talking about it beyond just, say, the chip challenge. Suppliers are really facing challenges and hiring employees across industries. Shipping itself has been a major challenge. We have global supply chains, so there's a lot of freight imbalance that's added two weeks, sometimes up to four weeks of lead time just in freight from Asia or Europe that's caused problems. So we've had a lot of, I'll call it disruptions, slowdown in manufacturing. A couple of times where we've had to stop lines for temporary periods of time, and that has had a bigger impact at the Access Equipment segment where we have a lot of high-volume manufacturing than the other segments. But it's a challenge across our entire business. We expect that this will subside. We don't think this is going to last for a long period of time. We believe we're in it for another couple of quarters, and as we get into 2022, we believe we will start to see much more normalization as the suppliers have caught up with this quick recovery that we've all been struggling to keep up with.

Understood thanks. And maybe for my follow-up, just on the free cash flow guidance increase, is that all working capital driven just curious since earnings at the top end have come down a bit?

Yes, it indeed is free cash flow, some customer advances, and modestly lower inventory levels.

Our next question comes from Chad Dillard with Bernstein. Please proceed with your question.

So can you talk a little bit about your conversations with rental companies? At least as it pertains to 2022, are they happening earlier? Any color you can give on just initial thoughts on how you're thinking about pricing.

Yes, so it's John. I'll kind of give you maybe an overview of the access customer environment and demand environment also I'll try to answer your question about 2022. So, needless to say, the current environment is really, really strong. And that's - you see that in our backlog $1.75 billion in backlog. And when I talked to Nicole's question about the supply chain, hey, we're not losing business. We've got lots of, orders are strong, our backlog is good, this is all business that we'll continue to - our orders that we'll continue to fulfill. Right now, when you look at the rental market, we believe that the demand is largely driven by replacement demand. We've got - we've been talking for several quarters about how fleets are aged and our customers now, they're more confident in the recovery, they're more willing to spend capital to upgrade those fleets. And that's what they're doing. Now, there's also fleet growth that's happening. They're trying to grow the fleets because they're finding new opportunities to apply the equipment. That's also, of course, very good. This leads - this all means that there is, really strong utilization rates. Even with not such great non-residential construction metrics, these demand rates have been strong. And again, it's that replacement demand that's really been fueling as we believe. But as non-residential starts to improve in the future, that's just going to continue to help our demand which is why we believe we're in a multi-year recovery period. So if you look at 2022, the one thing I'll say about it is we are having - already speaking with our customers regarding their plans and their purchases for 2022. And we know and we've always said that, hey, we've got some cost inflation in our business with material cost and some of the freight rates, and we intend to make sure that we recover that. Sometimes there's a little bit of a lag effect because we've got backlogs. But we will fully expect to stay ahead of it over time. So that's what I can tell you about it.

Okay, that's helpful. And then maybe a bit longer term question on some of your new electric products versus internal combustion?

Yes.

Can you talk about just, you know, what the margin difference would be potentially, is there any margin difference, can you talk about just your philosophy on R&D and the level of intensity you think is appropriate?

Yes.

And lastly just manufacturing footprint, are you thinking about, you know, having dedicated lines or is it going to be integrated with the legacy products.

The last point, it will be some of both. Some will be integrated, some will be independent lines, it really depends on the segment, it depends on the product. What I can tell you about the electrification business, hey I'll tell you in general we're an innovation company, and we innovate all the time whether it's electrification or autonomy or with data and how we use data that provides better performance of a product and better insights to our customers. When you look at electrification, I think the most important thing to understand with electrification, is electrification the fact that it provides zero emission is good, but that's not - that's only one benefit that we all get out of electrification. The other benefits that are big are - there's big total cost of ownership benefits because it's more efficient to run off of electricity than it is off of diesel or gasoline, for that matter. Number two, there is a lot of performance benefits that we provide for the product, for our customers, or productivity with electrification that you don't necessarily get with an internal combustion engine. So the answer to your question is absolutely, that leads to our ability to improve our margins because we're able to solve customer problems better. And the economics are there. So that's one of the great compelling things about electrifying a lot of our product lines. And this will go on for years, you know. We're not going to see entire end markets electrify overnight. It's going to be - it's going to take several years for the adoption by our customer base. Some will adopt faster than others. But this is a positive trend on many different levels.

Our next question comes from Jamie Cook with Credit Suisse. Please proceed with your question.

I guess just two questions, John. You know, obviously, you know, 2021's a challenging year but as you think about 2022 is there any way you could outline for us which markets you think have the opportunity, you know, for growth and if anything, if sales that were - that we couldn't get in 2021 because of the supply chain if that's sort of additive to your 2022 outlook and I guess a as longer term question I think you've done a good job sort of talking about how Oshkosh can grow sort of in adjacent markets whether it's the optional manned vehicle market or last mile delivery. Can you talk about sort of when we think Oshkosh can start like, do we start to see knows benefits in 2022 or do those - does the growth from adjacent markets, should we expect it further out? Thanks.

Yes, so, you know, I think that for the most part, if you look at all of our Commercial segments, non-Defense secretaries let's call them, we expect really healthy markets in 2022. We had - and I'll give you an example. We had previously been very concerned about the municipal spending and municipal budgets and we talked about that in past quarters because, you know, usually after a recession municipal budgets get squeezed and sometimes that can have a downward pressure on fire truck demand. We are not seeing that. We are seeing municipal spending that is better than we anticipated. Where we see the market for our fire trucks to be better than maybe we thought it would be several quarters ago. So that's positive. We see multi-year growth in the access segment for a lot of factors so - that also include global and China and so forth. The Defense segment, you know, the fact call wheeled vehicle budgets are going to be under a little bit of pressure in 2022 and fuzz so there will - 2023 so there will be some pressure there but Defense is a great growth story for us because what you mentioned in the second half of your question our ability to win in adjacent programs has been validated the last six months, USPS is a big, big program for us. MCWS is a near billion dollar program for us. These are adjacencies that are much more in line with funding priorities. We were just downselected on the OMFV, that's optionally manned fighting vehicle that will replace the gigantic infantry fighting vehicle or the Bradley that's in the market. So to get downselected to participate on that's a big deal. So I'll give you some color on the timing. So on MCWS there will actually be a little bit of revenue in 2022 from MCWS and we'll get - but the material revenue will come from 2023. And that will last about 6-ish years for that program to run. And on postal, we go into production in postal in the second half of 2023. So we'll see some revenue in 2023, we'll see material revenue in 2024 and up to full rate revenue in 2025 and that's a long-term program and a big program. So that's a little bit of color I can provide you.

Our next question comes from Mig Dobre with Baird. Please proceed with your question.

Mike, maybe this question for you. I'm sort of trying to understand the moving pieces through your updated outlook here on the cost side. I do remember you spelling out for us the raw material headwind in terms of a dollar headwind that you had in fiscal 2021 as well as the cost reversal, the temporary cost reversal. So can we get an update as to how you were thinking about these figures, again, in your updated fiscal 2021 outlook, and then how much, in terms of dollars, all these supply chain issues are dragging your full-year outlook.

So Mig, I think first of all, really the cost price is fairly similar to what we expected this past quarter so we talked about the 45 million in the back half of the year. We had about 10-ish million in the third quarter. Rises to about $35 million in the fourth quarter. The other obvious headwind year-over-year was those temporary costs reversing was about $60 million and a lot of those came back this past quarter in the third quarter and it was about $30 million in the fourth quarter. So those are sort of the foundational numbers. If you really look at it from a margin standpoint, we were geared up and John and I also said in my prepared remarks that we missed probably about $100 million revenue or had the opportunity for another $100 million in revenue largely in access. And obviously we were geared up from a staffing perspective to really build that revenue or deliver those products and realize that revenue. And that would have been, obviously, you think about it, that's about $0.25 of EPS in the quarter. So I think when you factor in a bit more volume and so on, I don't know that the cost price dynamic is really any different than what we've been talking about. You know, freight's maybe modestly higher than what we thought, but I would say materials versus my last assumption or last assumption we shared probably a small bit less in the fourth quarter.

And then, again, you talked about things starting to normalize in the second quarter of '22. And I'm sort of curious here as to what your visibility is on that. And people already asked about pricing for access in '22, but do you recall the market is tight enough to where you actually need the pricing power in order to offset the multiple headwinds we're talking about here?

Yes, Mig, we're watching the cost dynamic very closely and back in the second quarter, we implemented price increases in our non-Defense businesses, in some cases we've implemented additional price increases. We're watching the commodities and we're going to continue to adjust as necessary. Obviously, we talked about - we are going to have the headwinds in the first quarter next year. When we get to the second quarter, we believe that moderates and again we're watching it closely and we're going to be responsible as we're heading into those pricing discussions with our customers.

Yes, Mig. This is John. I'll just add to that. We have all-time record backlogs in the company right now, I mean, all-time in the company, never had a backlog this strong. And we feel really good about where we're headed. We feel really good about what we're doing right now. We've had really tough supply chain challenges as everyone tries to ramp up quickly. I don't think that's overly unusual. But when you couple that with the freight challenges, it becomes a little bit more unusual. When we say that it's going to norm, we believe - we don't have perfect visibility, when we believe it will normalize in second quarter, which means the first quarter of calendar year 2022, that's coming from our very mature supply chain management team that have a lot of insight, not just into our vast supply chain, but our Tier 2 and our Tier 3 supply chain. That's where that information's coming up to us from. And we've got really, really good supply chain people, who are able to manage a complex situation like this fairly well. In terms of the demand, I mean, demand is good. We provide a lot of value to our customers. We're number one in our segments. We will absolutely price responsibly. That's all I can say.

Our next question comes from David Raso with Evercore ISI. Please proceed with your question.

Thank you for the time. I appreciate the fourth quarter comments about year-over-year costs, right, the materials and freight costs and the temp cost reduction, but then the comment you made earlier in the call about the supply chain won't deteriorate or improve for that matter the rest of '21, I'm just trying to square that up with for Access, sequentially you saw this most recent quarter, revenues up about $185 million, and EBIT still went up $32 million, right? Not great incrementals, but still EBITDA upon on rev. The fourth quarter's implying revenues go up another $50 million, but now EBIT drops sequentially $8 million. So I'm just trying to square up the comment, no deterioration from the year, because that really suggests it does get more challenging sequentially. And then I have a quick follow-up after that if you don't mind.

Yes, David, this is Mike, I'll take it. I think my comments in my prepared remarks really responding to the challenge we had in the quarter that was sort of new was the availability of parts and the ability then to produce and deliver the products. So it's really commenting on the availability of parts. And so we're assuming that doesn't, in the fourth quarter, we believe it's still going to be a challenge, just more challenge than it was in our second quarter, similar to what we saw at the back-half of the third quarter. You're correct, from a supply chain perspective, our assumption was always that the price cost dynamic was going to be more challenged in the fourth quarter, and that's why, as we talked about it and even on the last earnings call, we saw about a $10 million headwind in the third quarter from a price cost, from a material escalation. And that grows to about $35 million next quarter. But that's really in alignment with what we saw last quarter.

Okay, so the availability of components doesn't deteriorate.

Correct, correct. Yes.

And with that increased visibility that you have, the size of your backlog, I mean, across all the businesses, but I'm specifically asking about access, given that feedback from your mature supply chain management suggesting looking into second tier suppliers, maybe things loosen up a little bit when we get into calendar 1Q, I'm curious operationally, how is that impacting your strategy when it comes to locking in costs for next year? I'm just trying to think about, that increased visibility might give you confidence that it will be a little stronger in your negotiations for price. But how are you managing your costs that you're aligning up your supply with that increased visibility of demand?

Yes, David, we always have a - just as we managed through the pandemic, we have a robust playbook as we manage. So it's really a combination, in some cases we have locks, we're talking to our suppliers, so there's certainly visibility that we're gaining over time. Obviously, underlying commodities have continued to escalate even over the course of the last quarter. And so, we'll continue to watch that. But when we do have larger backlogs, it does provide an opportunity for us to continue to work with our supply chain partners, and in some cases lock in our material costs.

Okay. So fair to say the increased visibility in the top line, you have taken some of that visibility and locked in more of your cost side of the equation as well, than normal?

Yes, that's fair.

That's fair.

Yes.

Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.

I'm wondering if you could just talk about your thoughts around pricing mechanism heading into 2022 and longer term. Over the past couple years, we've had a lot of supply chain volatility, steel volatility, and any views on potentially setting up inflation index pricing mechanisms, so we're not looking at these types of price cost headwinds that we're talking about here with escalations this year. How are you thinking about that as we head into this coming cycle?

Thanks. Yes, I guess - this is Mike. I can start, maybe John will have a couple comments too. I think the bottom line is, we saw significant material inflation back in 2018. And what we typically see is, we're going to be disciplined and continue to adjust our prices, but very difficult when you have a backlog to go back and reprice that. And there is always debate around, there's always the light when you see the core raw material increase and when that reads through the supply chain. So, it's really the doubles in the details. So what we've done is, we watch it closely, we adjust price when we see changes, and as we saw in 2018, you have a bit of a headwind coming into an inflationary environment, you normalize, and then as things moderate over time, you tend to get a benefit. And we saw exactly that happen back in the first quarter of 2019 as we came out of the - really the elevated steel environment in 2018. So we don't have reason to believe that that's different, and we think that's - again it works - that's how we work with our customers and over time that's been effective.

And you have to - I don't - our customers for the most part, you don't ever say anything absolutely, they don't like the indexing, because they have to forecast what their costs are going to be. And so they're trying to rely on us to forecast what the costs are going to be as opposed to doing index-type pricing.

Okay. And then, separately, silver lining was really strong performance in Fire & Emergency and Commercial margins this quarter and you folks left the full year margins more or less unchanged I'm wondering is that a function of now the supply chain headwinds in access, you're starting to see those same issues hitting your suppliers in those areas or is that just a healthy respect for all of the broader supply-based moving pieces?

So, from a - first of all, on a commercial front, recall we do have more price cost headwinds in that segment because they are higher users of steel. So there's about $10 million of headwind Q3 to Q4 for Commercial from a commodities perspective. Again, that will normalize just as we talked about with Access Equipment. With Fire & Emergency I would just say as you look at the implied incrementals to the fourth quarter, we have a bit of a - we have a higher mix of Commercial or third-party chassis fire apparatus that happened to be delivering in the fourth quarter versus aerials, there's a little bit of a year-over-year mix shift and a mix shift from Q3 to Q4, really a timing factor and that will normalize over time.

Our next question comes from Ross Gilardi with Bank of America. Please proceed with your question.

So how much demand are you seeing from the rental companies for electrified product? And is it primarily for, you know, smaller compact equipment versus - I'm curious what's happening with your larger booms. And then just what's the likelihood of maybe even a second lag to this replacement cycle in three to five years at the rental companies propelled by their customers to carry more electrified fleet and therefore replace more of the ICE fleet that they are taking on now, prior to the end of its useful life?

So, we're - Ross, we're seeing, of the products we've introduced as electric to date, we are seeing strong demand. Stronger than we had expected or put into our - our business plans. Which, of course, is a great sign. I think what we're going to see going forward is a continued increase, step-by-step of demand for electric products. And, of course, we're working on a lot as we speak in electrification, not just in access but in every single segment that we have. And you see it like the Pierce Voltara first ever electric fire truck and it's actually been on hundreds and hundreds of live runs and performing extremely well. I mean, this has gone on all over our company. In the access segment, we think that it will increase in demand at faster rates in certain regions of the world than others, but it's going to increase in demand in all regions. So in Europe, for example, it tends to be increasing faster, the demand for electrified products tends to be increasing a little faster than it is in the U.S., but we are doing it and very happy with what we're seeing in the U.S. as well. So what I can tell you is the demand for these products is real.

And then just on Fire & Emergency, when you've got this severe drought out West you've got heightened forest fire risk all over the country, is this contributing to the order growth you're seeing, if not, why not? But I would think that would be a pretty material driver of your business.

Well recall that, you know, we do wildland and firefighting vehicles, but recall that most of our product is municipal fire apparatus, aerials, pumpers, that type of product. So I would suggest that, for the most part, it is not the driving factor of market improvement in Fire & Emergency for us. But there are some ancillary benefits, because we have a small product line that does address wildlife fires. And there's maybe certain traditional aerials and pumpers that are close to regions that are impacted by wildland fires that is pushing up some demand. But for the most part, that's not the demand driver for our product. Our demand driver is the aged fleet - municipalities, wanting new technology on their trucks, that kind of thing is what's pushing demand up.

Our next question comes from Felix Boeschen with Raymond James. Please proceed with your question.

I have a bit of a longer-term question, but John, I know you've mentioned aftermarket expansion as a key driver for you, over called a multi-year period. I was hoping you could maybe expand on that commentary a little bit, maybe which segments you see the most opportunity going forward and whether or not we should think about that growth as being more organic or inorganically-driven, given your virtually debt-free balance sheet?

Yes, I'll tell you that it's a focus across the entire enterprise, number one, in all of our businesses. I think you'll see the biggest areas of focus in our more commercial-oriented segments, particularly our access segment, our commercial specialty vehicle segment. We have plans, both organically to serve the market and grow the market for our product, but we also have inorganic opportunities that we're looking at to drive an increased participation in parts of the aftermarket we don't participate in today. So it really, it's on both fronts. We want to increase the percentage of sales that are aftermarket-driven because we believe this is an area that's really fundamentally important to our customers, the fleet owners, and important to the end user of the product. And we want to continue to make investments where it's ultimately going to support them better. And it's healthy for our company. It's less cyclical revenue streams and a lot of positives that come from it, but that's what I can tell you about it.

And then just a quick follow-up on the Volterra fire truck, curious if you could maybe expand a little bit on the feedback you've gotten so far, or maybe what other customers have said after the rollout or the announcement.

Yes, the feedback's been phenomenal. The truck has performed incredibly well, as I mentioned in my opening comments. You know, hundreds of gallons of diesel fuel savings on one truck. You can imagine, as we continue to roll this out, how much environmental benefit there is, and there's a huge cost benefit for the fire departments as well. The fire truck itself functions, we've spent decades perfecting the performance of an aerial or a pumper, where it meets the needs of the firefighter, where they can be really, really productive on a site and they could be really safe on a site. So what we did was, when we designed this product, our people at F&E were brilliant with paying attention to the firefighter themselves. We didn't want to change the functionality of the product because they liked the functionality of the product. We wanted to change the propulsion, which improves the performance of the vehicle, improves the total cost of ownership of the vehicle, and improves the environmental sustainability of the vehicle. And that's what we did, but the early returns are fantastic on this product. Really a great step forward for our Pierce business.

Our next question comes from Ann Duignan with JPMorgan. Please proceed with your question.

I appreciate you sneaking me in at the top of the hour. Most of my questions have been answered, but I just wanted to take a step back on Fire & Emergency and ask one of the earlier questions slightly differently. You know, as we look at the transition of the population from urban locations to more rural locations, and we read about it every day, I wonder if this isn't a bigger driver of demand for fire trucks as some of these smaller communities all around the country are expanding and growing and now have to support larger populations. And in that context, could you just remind us, what were the sales of fire trucks at the peak of the last cycle? And is there a possibility that we could reach a higher peak next cycle just given the expansion we're seeing around the country?

Ann, it just from a sizing perspective, you know, we were about - this segment in total is about a [1.2 billion] two segments so we're not vastly off of what our peak revenue was in the segment. Now if you look at prior peak total market size of fire apparatus and this really goes back before the Great Recession, it was a market that was in the lower 5,000s units per year. It's really not - never recovered from that level. It's sort of hovered around the mid 4,500 unit range so just as we look going forward, I think one of the big drivers, number one, is aged fleets. We need to continue to replace those, our customers need to continue to upgrade their fleets for that average fleet age is up in the 14, 15 years right now, which is getting up there, so that's going to continue to be a tailwind. And, of course, the other piece of it is, as you have expansion into other communities, that's going to drive property tax space, more properties, that really is going to drive demand as well. So ultimately, there are some tailwinds obviously, it's great that municipalities have been more resilient through the pandemic. So we'll continue to watch as that demand continues to evolve. Of course, municipalities do have some headwinds on the pension front and so on. So there are gives and takes with that, but overall we like the outlook for that market.

But Ann, this is John, I will just say, you know, your initial comment about migration to suburban and/or rural areas. I think if that continues that trend that will certainly be beneficial to the F&E, to the Fire & Emergency market. I think right now it's a little too early to tell whether that has any impact at all on the current really healthy rate of orders and backlogs. I think it probably - it does not yet. But if it continues, I think you're absolutely right. I think it's probably very positive. But we need to wait another year or so to really kind of see what's happening with that.

There are no further questions. Thank you there are no further questions at this time. I would like to turn the floor back over to John Pfeifer for any closing comments.

Thanks, everyone, for joining us. We are delighted with the business performance and the trajectory of our business. We welcome you to join us this September when we have our Analyst Day. We're going to give you more detail and a little bit more clarity on what we see a little bit longer term in our business. We'll give you an up-close view of some exciting new products, some of which we've talked about today. And so, hope to see you in September. Thanks, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.