Oshkosh Corp Q1 FY2025 Earnings Call

Greetings, and welcome to the Oshkosh Corporation First Quarter 2025 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Davidson, Senior Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our first quarter 2025 results. A copy of that 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, if at all. Our presenters today are John Pfeifer, President and Chief Executive Officer; and Matt Field, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to highlight our upcoming Investor Day. We are planning for a morning start on Thursday, June 5, at the New York Stock Exchange in Lower Manhattan. We look forward to sharing our plans for the future, and you will get to hear from several of our key leaders in addition to both John and Matt. Please reach out to Victoria Connelly or myself if you are interested in attending in person. Now please turn to Slide 3, and I'll turn it over to you, John.

Thank you, Pat, and good morning, everyone. We are off to a good start in 2025 with strong performance in our Vocational segment, good margins and resiliency in our Access segment, and solid progress as we ramp up NGDV production in the Defense segment. For the quarter, we delivered revenue of $2.3 billion and adjusted operating income margin of 8.3%. Our adjusted EPS of $1.92 was in line with our expectations of approximately $2 for the quarter. We are confident with the underlying trajectory of our operational performance across all our segments, which we believe would keep us on track to deliver our full-year adjusted EPS guidance in the range of $11, excluding headwinds caused by the recent tariff announcements. Before Matt provides more details on potential tariff impacts on our results, I want to make some key tariff points upfront. First, as we've said previously, nearly all of what we sell in the United States is built in the United States, and we have a broad U.S. production footprint, which we believe puts us in a strong competitive position in our industries. Second, we have a global supply chain, and we are proactively working to mitigate potential impacts from tariffs. Third, at this time, we are not experiencing significant secondary impacts of tariffs, such as supply chain disruption or reductions in demand. And fourth, we continue to execute on our strategies despite near-term volatility as we believe the trends that support our industry-leading businesses align with our long-term growth initiatives. Please turn to Slide 4, and we'll get started on our segment updates. Access performance was in line with our expectations. We delivered a resilient adjusted operating margin of 11.3% despite lower sales. We remain confident in the long-term opportunities arising from mega projects and infrastructure spending. Our backlog remains strong, ending the quarter at $1.8 billion, equal to the end of last year as we booked orders in the quarter of $930 million and achieved a book-to-bill ratio of 1.0. We did not experience any notable order cancellations from customers in the quarter. We continue to stay close to our customers to respond quickly to any changes in the macroeconomic environment. A good example of our team's ability to respond quickly to tariffs was the localization of booms at our Hinowa facility in Italy in response to duties that the European Union applied to Chinese imports. I'm proud to report that it took our team less than a year to move production from China to Italy and begin shipping our first units to customers, thus mitigating the tariff impact. On the product front, the Access team previewed our new micro-sized ES1930M scissor lift at the ARA Rental Show in February. This category of scissor lifts is creating excitement in the market, growing at a solid clip and being used in places like data centers. Customers are particularly eager for our entry into this emerging category as they value JLG's quality, service and support. Finally, JLG hosted international customers at the Bauma event in Munich earlier this month. Attendees were enthusiastic about our product innovations, including our new line of multi-fuel booms, and ClearSky Smart Fleet with its many technological advantages. This was another outstanding opportunity for us to showcase our products and technology that lead the industry toward a connected and productive job site of the future. Please turn to Slide 5, and I'll review our Vocational segment. We achieved strong year-over-year revenue growth of 12% in the quarter and a robust adjusted operating income margin of nearly 15%. The higher volume was led by higher refuse and recycling vehicle sales and strong price realization across the segment. The backlog remains robust at $6.3 billion, providing excellent visibility to future revenue. We continue investing in people and resources toward our goals of increasing production levels across the segment to support strong demand, which we expect to lead to meaningful revenue and operating income growth. A great example of a growth opportunity that I'd like to share is with the City of Calgary in Alberta, Canada. Some of you may recall that Calgary was an early adopter of our Pierce Volterra electric fire truck. Previous to that, they purchased limited apparatus from peers, but their experience with our Volterra custom pumper EV helped us, along with our dealer, commercial truck equipment in Canada, secure a multi-year order for 22 conventional Pierce fire trucks for the City of Calgary. Innovations are key to our success and we continue to develop advanced technology such as our CAMS, that's Collision Avoidance Mitigation System, and ClearSky intelligence, fully integrated telematics solutions showcased at FDIC earlier this month. These are great examples of our neighborhood of the future technological advances. Additionally, we announced a new lineup of Oshkosh's IMT Cranes at Work Truck Week in March. The updated family delivers increased reach, lifting capacity and reliability across 16 models. We've incorporated customer feedback into the design and focused on commonality, ease of maintenance and exceptional performance. Finally, Oshkosh AeroTech continues to perform very well and lead with innovative technologies like iOPS, fleet management software and investments in autonomous baggage handling vehicles. Several of you on this call today experienced these products at our CES Airport of the Future display earlier this year. Customer demand for our jet bridges, ground support equipment and advanced technologies continues to grow as customers seek to improve efficiency of airport operations. Let's turn to Slide 6 for a discussion of the Defense segment. We're confident in the Defense outlook for 2025. Although first-quarter results reflected lower volume and higher cumulative catch-up adjustments, we are pleased with our progress on the production ramp-up for the NGDV program and deliveries to the United States Postal Service. We are on target to increase NGDV volume to full-rate production by year-end. This should provide strong revenue growth in the back half of 2025 and into 2026. We continue to execute programs for the United States Department of Defense. During the quarter, we took orders for the FMTV low-velocity aircraft vehicles as well as PLS A2 autonomy-ready vehicles for the U.S. Army. We're also wrapping up negotiations for a sole-source FMTV A2 contract extension later this year. We expect the extension to include an economic price adjustment mechanism similar to our agreement for the FHTV program we announced in 2024. Just last week, we announced a 150-unit JLTV contract with the Netherlands Ministry of Defense for the Dutch Marine Corps. The contract calls for design modifications to the JLTV that fulfill the requirement of the Dutch expeditionary control vehicles. This order is an excellent example of the active international opportunities for our tactical wheeled vehicles, and we look forward to sharing more of these successes in the future. Before I turn it over to Matt, I want to note that our Defense business is going through a leadership transition. I am overseeing the segment for the time being, and we expect to announce a new segment leader later this year.

Thanks, John. Please turn to Slide 7. Consolidated sales for the first quarter were $2.3 billion, a decrease of $231 million, or 9%, from the same quarter last year, primarily reflecting the softer market conditions for Access equipment in North America, as we expected and highlighted on our previous call, primarily offset by improved pricing in the Vocational segment. Adjusted operating income was $192 million, or 8.3% of sales. Adjusted operating income was down from the prior year as a result of lower sales volume, higher operating expenses and higher new product development spending, partially offset by improved price-cost dynamics. Adjusted earnings per share was $1.92 in the first quarter in line with our expectations of approximately $2 per share. Free cash flow for the quarter was also in line with our expectations and reflected a net use of cash of $435 million due to seasonal working capital needs. During the quarter, we entered into a new $500 million 24-month term loan to provide additional liquidity. We used the proceeds to reduce the balance on our revolving credit facility. The term loan, which can be repaid early, carries a slightly lower interest rate than our revolver. We also continued to repurchase shares steadily throughout the quarter, repurchasing nearly 290,000 shares of our stock for $29 million. Share repurchases during the previous 12 months benefited adjusted EPS by $0.03 compared to the first quarter of 2024. Please turn to Slide 8. At the beginning of our call, John mentioned our confidence in the underlying trajectory of our operational performance, which we believe would keep us on track to deliver our full-year adjusted EPS guidance in the range of $11, if not for the impact of announced tariffs. Based on current announcements and what we are seeing as of today, we estimate that the direct impact of tariffs, net of targeted mitigation actions could be about $1 per share. We are monitoring conditions closely and proactively working to mitigate the impact of tariffs through cost actions across the company. We believe these efforts may offset the impact of tariffs by up to $0.50 per share. We do not anticipate these tariffs will have a material impact on our second-quarter results as we work through existing inventories. Our estimate of the direct impact of tariffs is based off currently announced rates and excludes potential future indirect impacts, which are difficult to predict at this time. We remain committed to execute on our strategies despite uncertainty introduced by tariffs, and we believe the trends that support our industry-leading businesses will provide long-term growth opportunities. With that, I'll turn it back over to John for some closing comments.

We delivered our first quarter in line with expectations, and I'm confident that we have the right team to execute our priorities regardless of the current macroeconomic environment. We believe our industry-leading brands, strong product portfolio and strategic initiatives will serve us well and position us for long-term growth. I'll now turn it back over to Pat for the Q&A.

Thanks, John. I'd like to remind everybody, please limit your questions to one plus a follow-up. And please stay disciplined on your follow-up question. After the follow-up, we ask that you rejoin the queue if you have additional questions. Operator, please begin the Q&A session.

Thank you. We will now be conducting our question-and-answer session. Again, we ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may requeue and those questions will be addressed time permitting. Thank you. Our first question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Hi, good morning guys. I'm going to lead off with a question on tariffs, and I bet you didn't expect that.

Yes.

So big picture, I'm curious, John, how you're thinking about this. Last time we had tariffs, you were able to basically offset all that with price. But let's be clear, I mean, this time, it seems like the demand environment is not quite as robust. So do you think over time that we should still expect that you'll be able to recapture whatever tariffs sort of hand you here?

Thank you for the question, Steve. Our approach right now is to minimize the impact that we pass on to our customers. We do have pricing power in all our markets since we lead in those areas, but we want to limit the impact on customers as much as possible and consider raising prices as a last resort. Currently, we have several initiatives in place to address targeted tariffs. We are focusing on the top three countries where we need to mitigate the most significant tariff impacts. If we can manage those, we will handle the majority of the challenges associated with tariffs. I mentioned in my prepared remarks how quickly we adapted to European tariffs on China, and we plan to use similar strategies here. While we possess pricing power, our goal is to avoid passing on significant costs to our customers. We recognize that there is elasticity of demand in any market, and we want to be careful in how we approach this situation.

Got it. And my extremely disciplined follow-up is last time it took quite a while to pass some of this through given long backlogs and various types of price. So just any comments there.

Yes. So what we learned last time is and what everyone learned is, a, we do have pricing power; but b, when we had general inflation, and this was not just U.S. inflation, it was general inflation that was global, it did take us a little bit of time in some of our end markets to realize the price because of big backlogs and contractual obligations and so forth. So we've been able to change that we do business to give ourselves more flexibility now versus what we had a few years ago during the ramp in inflation years. So we definitely feel good about that, but I'll back to say our MO is to try to minimize disruption for our customers.

Thank you guys.

Thanks, Steve.

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

All right, thanks and good morning. Just on this tariff topic. I'm curious if you can maybe give us a little more clarity in terms of where the cost headwinds are here. As you said, you manufactured things in the U.S. So presumably, I would imagine this has to do with components. Maybe you can highlight. Yes. Maybe you can highlight some of the key countries that we need to watch for here just in case policy changes so that we get an understanding as to how your cost structure might evolve.

Good morning, Mig. It's Matt. So if you think about our exposures, fundamentally, you think about the three segments, Access is the most global of the segments. And so there, you've got a broader supply chain. Obviously, with the rate at which tariffs were put in, China has the outsized impact just given the overall tariff amount there. And then we do source some from Europe in that global supply chain. The other two segments have a much more U.S.-focused supply chain. And so really, in terms of mitigation, it's about negotiation, sourcing and all those normal toolkit things you'd use for tariffs, which are slightly different than what you'd use for general inflation.

Thank you for providing clarity. My follow-up question is regarding the Defense segment. I appreciate that you've started to break out the NGDV revenue. Could you share your thoughts on how that revenue is expected to increase and what the exit run rate might be in the fourth quarter? Additionally, in relation to your initial guidance for segment margin, how should we understand the progression of margins, considering we are starting the year at breakeven? Thank you.

So Mig, in Defense, we have always talked about how we'll exit the year at full-year run rate, and that's 16,000 to 20,000 units of NGDV production. Obviously, the first quarter would be the lowest quarter, and we said that should be about linear across the year. So that's really how I'd think about the revenue. In terms of margins in Defense, you would expect that to ramp up sequentially as well to support a reasonable rate as we guided earlier in the year, net of, I mean excluding tariffs, obviously.

Yes. And the Q1 did not influence our outlook for the year at all. There is a little bit of tariff impact, but mostly the Q1 being breakeven did not influence our confidence that defense is going to do exactly what we expect it to do.

All right, thank you.

Our next question comes from the line of Jamie Cook with Truist. Please proceed with your question.

Hi, good morning. I guess two questions. And sorry, more tariff questions for you there. But of the $1 headwind that you're talking about, is there any way you could allocate that sort of across the segment? It sounds like most of that would hit Access? And then I am just trying to figure out of the $0.50 does more go to Access as well? So any help there would be helpful. Thank you.

Jamie, thanks for the question. So as I mentioned, most of the cost elements would be Access in terms of how the costs flow through on tariffs. The cost offsets, those will be broad-based across the company. So it would be difficult for me to allocate that specifically to the segments.

But I mean, I'm assuming the buck like over half, I mean like $0.70 or the majority of that is all Access because I'm just trying to think about the implications for margins. I mean, I think before you guys were targeting at 13% for the year. So obviously, that's off the table, but I'm just trying to think how low months go there?

We're not going to provide specific guidance on margin by segment relative to the tariff impacts because we see this up to $1 and obviously it's a dynamic environment. So we're going to have to adjust as policies evolve.

Okay. And then I guess, just back to Access again, John, any color, I guess, just broadly across the board, any color in terms of as you're talking to customers with regards to tariffs just there's sentiment, so for the results I think across the board haven't been as bad as people would have thought. So just wondering what you're thinking or hearing how customers are reacting? Thank you.

Yes, sure. We have great relationships with our customers, and we talk to them all the time, of course. So if you look at our customers, I think they've got a pretty balanced view on 2025. I think the best indicator is our backlog coming out of the quarter at $1.8 billion. $1.8 billion backlog for Access is a very healthy backlog coming into Q2, and as was the order rate throughout the first quarter. So that's kind of a metric that I always point to because it indicates what customers expect. But underneath that, you hear our customers talk about fleet productivity or they talk about utilization rates. Those are both in a healthy range. There is no defleeting that's happening in the market. So the customer sentiment is continuing to be what we would expect coming into Q2. And I think in line with our expectations when we provided guidance one quarter ago. So it's continuing to stay the course.

Thank you.

Our next question from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning everyone.

Hi, Jerry.

Hi. I'm wondering if I could ask in terms of orders that you folks are taking today, can you just talk about the terms that you're implementing by business to provide protection just in case tariffs are at the high end of the expectation range? Can you just talk about the parameters for fire trucks in particular that are in backlog as well, John, in terms of what kind of protection you folks might have on that book of business given the long lead times?

Yes. A lot of the work you're asking about was completed some time ago. When inflation ramped up a few years back, we realized that we had pricing power, but it took us a while to act due to significant backlogs. We made adjustments in our markets, keeping in mind that different markets have varying terms and conditions. For example, some involve bonded orders with municipalities while others are focused on private customers. We are confident about these terms. I want to reiterate our approach. While tariffs may lead to some price increases, our goal is to minimize their impact on our customers, as demand elasticity varies by market. We know this and aim to reduce the effects. We believe we can manage this better than during the broad-based inflation period from 2021 to 2023, which offered very few alternatives. In the current tariff situation, while the effects are still widespread, we have a clear understanding of where they will impact us the most and where they won't. This knowledge allows us to target our efforts to mitigate the impact of tariffs effectively.

Super. And just to shift gears, capital deployment has been a big focus for you folks, AeroTech doing really well. You see an opportunity in the current environment for meaningful M&A or is the focus here let's make sure we execute on the tariff and manufacturing transition?

Mitigating tariffs is our top priority right now. Everyone would likely agree with that. We have an active corporate development group and maintain a constant approach, always exploring opportunities while our balance sheet remains strong. When considering mergers and acquisitions, we focus on growth in healthy segments, particularly within our Vocational segment and related areas. We also look at growth and stability in our Access segments, targeting opportunities with reliable revenue streams. It's important to note that we carefully evaluate our capital allocation priorities, and we will consistently reinvest in our businesses organically. However, in the current environment, returning money to shareholders is becoming increasingly important given our current valuation.

Thank you.

Thanks, Jerry.

Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi. This is Brendan on for Angel. If I could just touch on Access quickly. So you noted not seeing material impacts from tariffs to customer demand yet, but volumes there were a bit of a headwind. So just kind of higher level, if you could give more color what you're seeing in terms of the overall construction market conditions in the U.S. and Europe and how that might be impacting the higher sales discounts that you noted in the quarter? Thanks.

I believe that the demand in the Access Equipment segment remains strong and healthy. Our public company customers are reporting solid activity, particularly with large infrastructure projects and data centers, which is reflected in our backlog. Additionally, there is healthy demand in various non-construction markets where our equipment is utilized. However, we are experiencing some weakness in the private non-residential construction sector, where many projects are currently in a holding pattern due to high interest rates. This situation aligns with our earlier forecast of a 15% decline in the Access market, which we maintain as our outlook. The private non-residential construction market has many projects on the table, but given the current conditions, they are hesitant to move forward. This situation is consistent with our guidance.

Okay, great. Thank you for that. And then for my follow-up, if we could talk on Vocational. Just what's driving the strong performance in refuse and recycling that you've seen? And how does that compare, I guess, to your internal expectations? Thank you.

Yes, I believe the refuse and recycling market is one we have had a positive outlook on for quite some time. We appreciate this market due to its resilience, our customer base, and the necessity and eagerness for us to leverage our technological advancements, such as autonomous features and electrification to reduce costs. We have made significant investments in this sector, and you may have noticed our product innovations showcased at events like CES and the upcoming Waste Expo, where we will present new technologies aimed at enhancing productivity within the end markets. Additionally, we have invested in our manufacturing capabilities, achieving state-of-the-art facilities. You are currently witnessing the benefits of that investment, as our plant productivity has increased significantly, resulting in healthy output that is contributing to our positive results, and we anticipate this trend will persist.

Got it. Thank you.

Thanks, Brendan.

Our next question comes from the line of Tami Zakaria with J.P. Morgan. Please proceed with your question.

Hi, good morning. Thank you so much. So, Access margins were quite impressive given the pullback in sales in the first quarter. So just wanted to get some color on the second quarter. Usually, it's a sequential step-up. But given all the tariffs, how should we think about Access margin in 2Q versus what we saw in the first quarter?

Hi, Tami. Thanks for pointing out the resilience in Access. It's good to have a positive question like that. We talked on our Q4 call about the work the Access team has done to improve resilience in a relatively down year. And what you're seeing in the first quarter and what we guided to for the year and inherent in the original $11 was that resilience in margins. So set aside tariffs, I would expect second and third quarter to be stronger than the first. We did talk about that on the Q4 call. The first quarter would be our lowest quarter. You throw in tariffs. We still expect second quarter to be quite strong just because you don't really see a tariff impact because of inventories in the second quarter. Beyond that I reference that we've provided in terms of the dollars and the offsets, but it's difficult to say how the rest of the year shapes up.

Understood. The follow-up is that the $1 EPS headwind is essentially a partial year figure, not an annualized headwind.

Yes. No, no, that's right. So for this year, we see that as a $1, mostly back half loaded, obviously, just how tariffs will work. Obviously, over time, we have more levers. Resourcing is a bit of a lag. You can't do that in day one. And so that $1 would be the impact on this year. And again, we've got levers we pull over time depending on how the tariffs work and how they're instituted.

Yes, Tami, you make a great point. The $1 is a figure for part of the year, but we are actively working to address the situation. I previously mentioned how swiftly we adapted to mitigate European tariffs, which was a significant amount that we managed to reduce. We are applying the same approach to these new tariffs. We are not remaining static. Our goal is to maintain momentum and minimize the impact as much as possible for 2026 and beyond, and we believe we can significantly lessen those effects.

That's wonderful. Thank you.

Thanks, Tami.

Our next question comes from the line of Kyle Menges with Citi. Please proceed with your question.

Hi, thanks for taking the question. I just had a couple on just digging into the segment revenue results a little bit more, like starting with Access. Telehandler sales were certainly down a little bit more than I anticipated and down actually quite a bit more than the AWPs in the quarter. So if you could just provide some color, help me understand kind of what drove that. And I guess is that already seeing the impact of the loss of the CAT contract? Like is that what that is?

Some of the impact from the CAT situation is present, yes. However, I advise not to focus too heavily on the first quarter revenue from the Access business, as the second and third quarters provide a clearer picture of the market's health. Despite the decline in telehandler sales during the quarter, it's important to note that our market share in the telehandler sector continues to increase. This does not affect our long-term outlook for the telehandler market or our commitment to manufacturing these products. We remain confident in our strategy and our position in the market, and the first quarter sales decline does not alter that. Additionally, we still hold the leading share in this market, which is growing.

Helpful. Thanks. And then just looking at the refuse and recycling side, I mean, those revenues were up quite a bit in the quarter. Could you just help us understand like how much of that is market growth versus you outgrowing the market? And then I guess, layer in some impact assumed as you stock dealers as you move to more of a distribution model? And I guess, could that create a tough comp for next year?

I don't anticipate it will result in a difficult comparison for next year. You highlighted two points. First, we have been able to make progress on our backlog thanks to our production investments, which is one factor contributing to our performance, but not the entire picture. You also mentioned our dealer network. We've implemented a more comprehensive go-to-market strategy and established an excellent dealer network, which is highly professional and includes numerous aftersales service centers nationwide. This enables us to effectively serve small and mid-sized refuse companies, in addition to our long-standing large customers who are also experiencing growth. Therefore, while our new dealer network is helping us expand, we do not foresee it leading to any significant challenges with comparatives next year.

Helpful. Thank you.

Thanks, Kyle.

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

Hi, good morning guys.

Good morning.

Good morning, Chad.

So my question is on the $1 impact from tariffs that you guys are guiding to. So it sounds like it's very back-end loaded. Is it fair to say nearly all the whole dollar goes into 3Q and 4Q? And then secondly, on the $0.50 of mitigation efforts, is that mainly cost? Are you embedding some price increase? And then secondly, is that more like a 3Q or 4Q event? And then I guess, like what do you think in terms of when that P&L impact actually hits?

Hi, Chad. So if you think about the dollar and the $0.50 offset, I would say they're both Q3 and Q4 primarily because, again, the cost actions are really taking hold on spending, restraining growth, slowing down hiring, all of those things. And then the tariff impact, obviously, that net of mitigation efforts would be mostly Q3, Q4 as well.

Got it. And the breakdown between cost versus price increases?

It's all in there. So any of the cost actions and any pricing associated with tariffs would be in the dollar and the $0.50 really is on overall corporate cost, belt tightening and so forth.

Yes, our plan encompasses both short-term and long-term strategies. Mitigating these tariffs requires significant effort, including engineering work and reorganization of the supply chain, which cannot be accomplished overnight and will take time. In the short term, we will focus on tightening our budgets and addressing any costs we can in order to mitigate the impact of the tariffs until we can implement our longer-term strategies, which are expected to provide benefits starting in 2026. For 2025, our priority will be to manage our expenses and ensure we protect the year and our customers.

Okay, that's really helpful information. Shifting focus to the fire side of your business, I would like to know your perspective on where we stand in the replacement cycle. You've experienced strong growth over the past couple of years, and I am interested in your thoughts on the current phase and your outlook for the business in the next one to two years.

I believe the fire market will remain strong for the foreseeable future. After COVID, we experienced a significant surge in the market that exceeded expectations, resulting in longer lead times for the industry. We anticipate the industry will stabilize as we enhance our capacity to meet current demand. Our confidence in sustained market health stems from the presence of aging fleets across the country. We stay in close communication with fire departments to understand their needs for fleet upgrades. Additionally, we are introducing various technological advancements that were showcased at the Consumer Electronics Show and FDIC events. Municipalities are expressing interest in these technologies that enhance safety and productivity for their essential vehicles. Given the age of the fleets and the demand for new technologies, we believe this is indicative of a healthy market for the foreseeable future. While the market spiked post-pandemic, it doesn’t need to remain at that elevated level; consistent, healthy growth over time is sufficient, and we are prepared to meet industry needs with our innovations.

Got it. Thank you.

Thanks, Chad.

Our next question comes from the line of Steve Barger with KeyBanc. Please proceed with your question.

Hi, good morning. For the full year 2024, Vocational incremental margin ran at 27%, and it was better than that in 1Q. So when you think about planned capacity actions and mix in the upcoming production schedule, should we think that segment can keep running at 27% or better for the year?

So the first quarter was a very strong result in Access. We were pleased to see that. Last year was strong. We are making...

This is Vocational.

Sorry, Vocational. Too many questions on Access. Sorry.

Yes.

So Vocational has had strong results. We continue to make investments in capacity. So, some of those investments will reduce that incrementality as we put down cost to drive volume over time. But overall, we do continue to believe, as we've talked about before, in the strength of Vocational and the opportunities we have there, whether that's in fire, where we talked earlier, but also in refuse where you see continued strength based off the capacity we put in place over the last couple of years.

Capacity notwithstanding, you don't expect a negative mix, like you'll still continue to monetize better pricing and that sort of thing in the backlog?

Yes. We have considerable pricing still in the backlog to flush out as we build. And so the more capacity we can put in place, the more we build ahead the units that are planned for the future.

Got it. And I know you're agnostic to drivetrain, and it's mostly ICE to start, but any update on guidance you're getting in terms of mix for internal combustion versus battery electric for NGDV?

We talk to the Postal Service all the time. We had the entire leadership team of the Postal Service at our plant in Spartanburg, South Carolina just recently. It was a phenomenal visit. They saw the product being produced down the production line. We were just with them earlier this week at their National Postal Forum. It is stay the course. We need vehicles. The vehicle is performing exceptionally well, and we feel really good about it. So the simple answer to your question is there has not been any mix shifts. They're taking both internal combustion and they're taking battery electric. They're staying the course that they've been on. We're happy to supply them with whatever mix they want and we'll let them make that decision. But at this point, we're continuing to stay the course per their direction.

All right, thanks.

Thanks, Steve.

Our next question comes from the line of Judah Aronovitz with UBS. Please proceed with your question.

Hi, good morning. Calling in for Steve Fisher. Just on the catch-up adjustment in Defense, which programs was that tied to? And how should we think about risk going forward?

Hi, Judah. It's Matt. Regarding the CCA, that's primarily due to the ongoing line rebalancing in Defense. We had a catch-up adjustment for JLTV as we addressed the backlog of lost units, along with FMTV being the two main programs. You shouldn't expect future CCAs because the accounting for a CCA relies on your projections of what will happen in the future. So, I wouldn't anticipate any significant CCA moving forward based on our current outlook.

Thanks.

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

Hi, thank you. Just one clear, and I apologize, I've been hopping between calls. There is no change in the segment guidances from before, except for allocating the $0.50 drag in the guide and that most of that hit or if you can help me with the mix of the hit that goes to Access versus the other businesses. I know it's a large part of it. But is that correct? No change to the revenue by segments, just a change on the net $0.50 cost, mostly second half and majority Access. Is that correct?

Hi, David. I think that's a fair characterization. I mean, this is a dynamic environment. So spreading out the exact revenue impacts and how that works exactly by segment is difficult to do. We reiterated that without tariffs, we would be comfortable with the $11 in the guidance we put out, including by segments and margins. With the tariff impact, the dollar and then the cost offset of $0.50, more difficult to provide specific guidance to the level we did earlier. But I think broad-based, you've characterized it fairly.

But it's fair to say of the net, call it, $42.5 million, $42 million pretax, right, the net, not the dollar, the $0.50, is a large majority, just to be clear, should be Access because I'm just trying to think through the margins for the rest of the year. Ex-tariffs, you're implying decrementals at around 30% for Access. And again, this is keeping the original revenue guide, which seems a pretty impressive result given the magnitude of the revenue decline. And then obviously, I have to layer in the related tariffs. So that's I was just looking for a little guidance. Of the $42-ish million of pretax hit, in the second half net, should we apply again a large majority, $30 million plus, $35 million plus to Access? Just if we had a...

Yes, I can't be as explicit and precise as what you're asking. But I think you can think of the broad brush of the dollar hitting Access. The $0.50 will be more spread across the company based off our cost structure. Decrementals, when we set up our guidance in Access was about 33% with the allocation of the dollar and tariff impact. Obviously, that will move around some.

That's helpful to know. I understand this isn't an easy task. We're all trying to navigate the uncertainties together. Regarding the revenue trends for the remainder of the year, Access revenue growth is projected to decline by 12% following the 23% drop we've just experienced. I'm interested to know if there have been any changes in our expectations about how we progress from the decline in the first quarter to only a 12% decrease for the rest of the year. Is there a delay due to the current uncertainties? Are customers indicating that they might commit sooner if we offer them a specific price? I'm curious about the timing of these changes.

At this point, it remains unchanged. In the first quarter, we had a higher mix towards independents compared to the larger nationals. This is mainly because many are positioning their fleet for the construction season during this time. Some seek it at the end of the first quarter, while others prefer it early in the fourth quarter, depending on their situation. We anticipate a shift back towards the nationals as the year progresses, and that aligns with our expectations at the start of the year. There haven’t been any significant developments that would alter our revenue outlook at this moment. Regarding tariffs, the situation is fluid. We are managing various scenarios as things evolve. Between now and July, this will continue to change. However, we have solid and proactive strategies in place based on current information to handle those tariffs. In the short term, it involves tightening our budgets and reducing costs in 2025. In the longer term, we will implement initiatives focused on resourcing and supplier negotiations, which will become more prominent from 2026 onwards.

Yes, we are in a challenging situation regarding whether to move forward with mitigation efforts, especially with the unpredictability of new developments. The decision to relocate the AWB assembly to Italy, in response to EU duties on China, is notable. I'm curious about the reasons behind this decisive action compared to any hesitations we might have about moving operations from Mexico or elsewhere. It seems reasonable to think that the tariffs on China will remain quite high, which might make the decision to act a bit clearer. Are we perhaps being more cautious about making significant changes to our supply chain in other countries until we have a clearer understanding of the situation?

With the European tariff implemented about a year ago, we anticipated the changes and responded quickly as the situation developed. Currently, we are facing uncertainty with the tariff rates in China, which are significant, and we plan to take mitigation actions. Several other countries have announced blanket tariffs of 10% but are trying to negotiate lower rates from the higher tariffs announced in early April. The outcomes of these negotiations are crucial for us, as we need to know whether countries will maintain their announced rates, which could be as high as 24% or even in the 40s, or if they will settle at 10%. These results will influence our decisions moving forward.

I appreciate that. Thank you so much for the conversation.

Thanks, David.

Thanks. Have a great day.

We have reached the end of the question-and-answer session. Mr. Davidson, I'd like to turn the floor back over to you for closing comments.

Alright. Thanks, Christine, and thanks, everybody, for joining us on this busy earnings day. We look forward to speaking with you at a conference or perhaps during our Investor Day scheduled for Thursday morning, June 5th in New York. So have a great rest of the day and week.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.