The Shyft Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 7 speakers on the call.

Operator

Good morning and welcome to the Shift Group's Third Quarter 2023 Conference Call and Webcast. All participants will be in a listen only mode until the question and answer session of the conference call. As a reminder, this call is being recorded. I would now like to introduce Randy Wilson, Vice President, Investor Relations and Treasury of The Shift Group. Mr.

Operator

Wilson, you may proceed.

Speaker 1

Thank you for joining this morning's call. As you may have already seen this morning, we issued a press release announcing Appointment of John Dunn as the Ship Group's next President and Chief Executive Officer. You will succeed Daryl Adams effective today as is part of our previously announced leadership transition plan. On today's call, I'm joined by Daryl Adams, outgoing President and Chief Executive Officer John Dunn and John Dillard, Chief Financial Officer. Before we begin, please turn to Slide 2 of the presentation for our Safe Harbor statement.

Speaker 1

Today's conference call contains forward looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. Primary risks that management believes could materially affect our results are identified in our Forms 10 ks and 10 Q filed with the SEC. We We will be discussing non GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. For today's call, we've included a presentation deck that's been filed with the SEC and is also available on our website. We will provide a business update before moving on to a more detailed review of the results and our updated 2023 outlook.

Speaker 1

We will then open the line for Q and A. Please turn to Slide 3, and I'll turn it over to John Dillard, who will lead today's prepared remarks.

Speaker 2

Good morning and thank you for joining us to review our Q3 2023 results. Overall, our team delivered 3rd quarter performance that was in line with our expectations as our vocational and infrastructure related businesses continue to perform well, leading to another quarter of record profitability in specialty vehicles. We remain focused on driving operational and commercial execution as well as generating cash flow to enable long term investment in the company. For the Q3, the company delivered solid operating cash flow of $9,200,000 invested in the BlueArc Electric Vehicle Program and repurchased $10,300,000 in shares. In addition to our Q3 financial highlights, we were pleased to release our 2nd annual sustainability report, highlighting the progress we've made on environmental, social and governance initiatives to benefit our team members, communities and other stakeholders.

Speaker 2

In summary, we continue to make good progress on key strategic initiatives and we are committed to driving improved execution in a challenging macro environment. Turning to our market commentary on Slide 4. The long term fundamentals for our key last mile delivery and infrastructure end market remains strong. As we laid out in our July earnings call, the markets continue to be fluid, driven by higher dealer inventory levels in both We were able to gain some clarity on these items, including the depth of OEM chassis production cuts, but additional items, including the auto worker strike that started in September continue to drive uncertainty across the market. Fortunately, our infrastructure related truck businesses continue to see strong demand and the impact of the strike on those products has been minimal to date.

Speaker 2

We continue to stay close to our customers and monitor market drivers, while focusing on execution to ensure we respond appropriately, both commercially and operationally. Turning to Slide 5, I will provide an update on our BlueArc EV program and key milestones that relate to the product, production readiness and dealer network. On our last earnings call, we discussed a field test that was in process with a large parcel customer. We subsequently completed that test and the feedback was overwhelmingly positive. The vehicle performance exceeded expectation and easily met the customer's daily needs, giving us confidence that our BlueArc vehicle will meet the daily rigor demanded by our customers.

Speaker 2

From a commercial perspective, We made further progress on building out our BlueArc dealer network by adding Rush Enterprises, the operator of the largest commercial vehicle dealer network in North America. In addition to Randy Marion, the dealer we announced in the fall of 2022, Rush expands our geographic reach and will be a fantastic representative of the BlueArc brand. As we communicated earlier in the quarter, we experienced an increase in quality issues related to production batteries from a key supplier. Our goal is and always has been to provide customers high quality products that will meet their daily needs and unfortunately Due to these battery issues, we have had to delay customer deliveries into 2024. We continue to work with the supplier to resolve these issues.

Speaker 2

Overall, customer interest remains high and we are incredibly excited about our BlueArc Electric Vehicle program. Please turn to Slide 7, and I'll provide an overview of our Q3 2023 financial results. We delivered earnings that were in line with our expectations is down 29.6 percent from the year ago quarter. Net income was $4,500,000 or $0.13 per share, compared to net income of $17,300,000 or $0.49 per share in the previous year. 3rd quarter 2023 net income includes a tax benefit of $2,000,000 primarily driven by favorable adjustments for R and D tax credits.

Speaker 2

In the Q3, adjusted EBITDA was $11,000,000 or 5.5 percent of sales, down from $27,100,000 or 9.5 of sales in the Q3 of 2022. These results include EV program spend of $7,600,000 consistent with the prior year. Excluding these expenses, adjusted EBITDA was 9.2 percent of sales. Adjusted net income was $6,700,000 to $18,600,000 in the year ago quarter, while adjusted EPS decreased to $0.19 per share from $0.53 per share last year. I'll now walk you through our Q3 results by operating segment on Slide 8.

Speaker 2

In the quarter, Fleet Vehicles and Services achieved sales of $124,300,000 is down 32.6% compared to $184,500,000 a year ago, with strong truck body and aftermarket sales, partially offsetting softness in walk in van. Adjusted EBITDA for the quarter was $8,000,000 versus $24,400,000 a year ago. Adjusted EBITDA margin was 6.4 percent of sales compared to 13.2% in the Q3 last year. Turning to Specialty Vehicles, our team delivered another great quarter with record margin performance. 3rd quarter sales were $76,600,000 a 26 point 3 percent decrease from $103,900,000 in the prior year, driven by lower motorhome market demand.

Speaker 2

Adjusted EBITDA was $16,000,000 or 20.9 percent of sales compared to $15,600,000 or 15% of sales in the same period last year. Please turn to Slide 9 for our 2023 outlook. Throughout the year, we have remained cautious regarding our outlook as there was uncertainty across our key markets driven by broader economic headwinds. Entering the Q3, We expected uncertainty to remain given overall market conditions and in the quarter, while we saw a sequential uptick in FVS orders, we continued to experience lower demand versus historical levels. We also gained further visibility to the severity of reduced OEM chassis supply for key parcel products and the OEM auto worker strike began.

Speaker 2

While the strike has been impact has been minimal for us to date, it has created uncertainty across the industry. Given these factors, we have narrowed our 2023 outlook, notwithstanding further changes in the operating environment as follows: Sales to be in the range of $850,000,000 to $900,000,000 adjusted EBITDA of $40,000,000 to $45,000,000 We expect positive operating cash flow for the year and additional working capital reductions in the Q4 and we continue to take additional cost actions given the current environment and we'll manage the business aggressively as we close out the year. Please turn to the capital allocation update on Slide 10. Chip's balance sheet remains a competitive advantage. In the Q3, we generated $9,200,000 in operating cash flow, reflecting significant improvement over the prior year.

Speaker 2

The company's capital structure remains strong with a net leverage ratio of approximately one turn and a $400,000,000 revolver, which provides us solid access to capital. We continue to fund organic growth initiatives focused primarily on BlueRx EV and market expansion in our SB business. We maintain a healthy M and A pipeline and remain active in cultivating opportunities to accelerate growth. In In the quarter, we repurchased $10,300,000 of shares as we believe the company represents an attractive value. We have now repurchased $19,100,000 of shares in 2023, leaving $223,000,000 remaining on our share repurchase authorization.

Speaker 2

Please turn to Slide 11. The Shift Group has compelling industrial growth story with robust long term market fundamentals. We are confident in our long term strategy, the strength of our balance sheet and we are focused on driving execution across the business. Before turning the call over to Daryl and John Dunn for closing remarks, on behalf of the Ship management team and all our team members, I I would like to take the opportunity to thank Daryl for his vision, leadership and partnership during his tenure with Spartan Motors and the Ship Group. While I was not here in 2024 when he started, I'm confident in saying that the company looks different and is much stronger today because of his leadership.

Speaker 2

Has left a great foundation for us as we move forward. With that, I will turn the call to Daryl.

Speaker 3

Thanks, John. Before we conclude today's call, I'd like to briefly take a moment to address the leadership news we announced this morning. Earlier this year in June, we announced a leadership transition plan, in which I would step down from my role as President and CEO following the appointment of a successor. Following a comprehensive search process in which The Board considered internal and external candidates. We have announced the appointment of John Dunn as Shift's next CEO effective today.

Speaker 3

John previously served as President of Fleet Vehicle and Services Business. It's been a privilege for me to lead the Shift team for the last 9 years. I am proud of the incredible work our team has done to transform Shift into an industrial leader in our attractive end markets and last mile delivery and infrastructure. As I look ahead, I'm confident Shift is well positioned with a growing roster of innovative brands, strong prospects, I will work closely with John to ensure a seamless transition. Given John's familiarity with the company, along with his significant leadership operations and product development.

Speaker 3

We are confident John is the right person to lead Ship through the next phase of transformation and growth. And thank you to our analysts and the investment community for your interest and support of the company. I thoroughly enjoyed spending time with all of you and getting to know you professionally and personally. I'll now hand it over to John Dunn for some remarks.

Speaker 2

Thank you, Daryl. I'm honored that the Board selected me for this role. With our great products, team members and customers, I'm excited to lead the organization is next chapter of growth. In our fast paced industry, I recognize the need for Shift to continually adapt and perform. We will grow through innovation, commercial and operational excellence, product quality and an increased customer focus.

Speaker 2

We are committed to delivering shareholder value by allocating resources and efficiently deploying capital. In early 2024, we will share more details regarding my business priorities and the company's strategic direction. Thank you. And with that, operator, we are now ready for the Q and A portion of the call.

Operator

We will now begin the question and answer session. The first question is from Matt Koranda of ROTH Capital. Please go ahead.

Speaker 4

Hi, guys. Good morning and congrats to John and best of luck to Daryl. Just wanted to Maybe dig into the FBS implied order flow that you reported this morning. It does look like it's Taking out for the first time in several quarters and just wondered if you could maybe break down some of the factors that's driving demand in the quarter, Specifically order flow like for truck body versus walk in van and just the mix in the current order flow that you're observing?

Speaker 2

Yes. Good morning, Matt. Yes, I think the we definitely saw an uptick in orders. I think as you know, our business is historically lumpy from an orders perspective. So, I wouldn't Call one point a trend necessarily, but it's positive to see some progress there.

Speaker 2

We continue to see Activity on the truck body side of the business as well as some of the upfit side of the business as well. I think walk in demand continues to be slow, which leads to Some of the production cuts that we've talked about, but I think we've also taken a number of actions internally Under John's leadership within the FES business, we brought in a new sales leader here in the quarter, which you may have seen on some of our social media and continue to look at different ways to attack the market. So, I think good progress, but again, we're not going to sit here and call it a trend at this point.

Speaker 4

Okay, fair enough. And then just on BlueArc, I mean, maybe could we cover One, I guess, are you getting any order indications? Obviously, you're indicating that the trials with customers have shown some success, But it doesn't seem like it's translated to order flow yet. What's holding it back? Is that just essentially the fact that you have the battery issue And you won't be ramping production until 2024?

Speaker 4

And then maybe also if you could talk about the production ramp in 2024, any additional Thoughts on when we should start modeling a ramp up in production in 'twenty four for Blue Arc? And what's that mean in the context of the multi year targets you guys put out last year around the Ride and Drives event?

Speaker 2

Yes, there is a lot to that question. But I mean, I think the battery issues are certainly a gating item at this point. We do talk about solid customer demand and interest. There is clearly Canadian demand. There is clearly other parcel demand That's out there that the customers have a high level of interest.

Speaker 2

The dealers, whether it's Rush or Randy Marion that we've signed up to this point, Continue to react or interact with some of the local customers and so there continues to be that demand, but we obviously need to get through a battery issue before we let production go and move forward from that perspective. So as we look, when we announced the delay or Push out into 2024 in September related to that supplier issue. We didn't put a date on it, As we continue to work through it and so the team is very focused on driving closure to that and we continue to look at Other opportunities are in alternatives to mitigate that risk as well. So I think from a long term perspective, I guess point there is 2024 probably a little tough to model, but it would I wouldn't it's probably not early in the year at this point. But But I think as you look out 2025 and beyond, we continue to make progress from a production standpoint and being able to address or react to the production curve and the demand profile.

Speaker 2

And so the 2025 numbers, we Still feel pretty confident in and so we'll continue to provide updates to you on that. But we view this as more as a short term issue than The longer term issue and again we are very confident in the product and the feedback that we have received from customers.

Speaker 4

Okay. And then just to clarify, John, maybe is the fix to the battery issue going to be a supplier change or is it going to be Affixed with the existing supplier that you currently have sourced from?

Speaker 2

Well, I mean, I think at the end of the day, we want to make sure that we have all options We've talked in the past about having multiple battery suppliers. We've announced 1 battery on the Class 5. Our next energy The company is a better supplier on the Class 5. And so, we continue to look at options, but we're also engaged with our current supplier and trying to get resolution to the issue. And We're certainly not myopic in how we're trying to mitigate or resolve the problem here.

Speaker 4

Okay. Got it. And then just one more on BlueArc for me and No, I'll leave to others. But the agreement that you announced with Rush, maybe just a little bit more detail on how that works. Are they going to actually be taking any units into inventory or is that essentially just they're agreeing to sell the product For custom order flow, maybe just some additional color on sort of how that will function once you get production up and running?

Speaker 2

Yes, I think it will be a combination of both. I think they will be they've got a fantastic footprint that covers really all of the country and a great service network. So we'll have solid support from them as well from that perspective. But we would anticipate some level of stocking once we get into production. I think we've talked in the past about how we're working with both the dealers on financing arrangements and those types of things.

Speaker 2

And so, we would expect it to operate in that Normal commercial environment, but there's going to be opportunities where there's one off orders that we end up leveraging their dealership network for as well. Thanks, Matt.

Speaker 4

Okay. Appreciate it, guys.

Operator

The next question is from Greg Lewis of BTIG. Please go ahead.

Speaker 2

Yeah. Yes. Thank you and

Speaker 5

good morning everybody. Thanks for taking my questions. Good morning. Yes, Daryl thanks for everything. Congrats and maybe I'll see you on circuit.

Speaker 5

Hey, guys. This is John. I was hoping to get some more color around the guidance Change, as I kind of do the implied for Q4, that is what it is. Is there any way to kind of parcel out I'm realizing visibility is challenged, but is there any way to kind of think about the high end and the low end? And really, Is that going to be around revenues, margins, like any kind of more color as we kind of like try to nail down that Q4?

Speaker 2

Yes, I mean, the thing when we came out in July, we obviously had a pretty wide range. I think as we look at the quarter, some of the dynamics that we talked about in terms of chassis supply And the overall demand environment, I think, in some of the factors, including the strike, which thankfully made Seems to have made some progress last night, but there's a lot of variables. So the impact as we closer to the end of the year from a volume I think we've got pretty good visibility at this point. I mentioned in the prepared remarks that we continue to be aggressive from a cost standpoint. And We're continuing to sort of drive efficiency in the business while managing significantly lower volumes year over year.

Speaker 2

So The variability is probably more around the cost side and we're certainly pushing from a commercial perspective as well.

Speaker 5

Okay, great. And then just I did want a little bit more color around the share repurchases, how we're thinking about that? Was that just opportunistic or As kind of we're here, this is something we're going to kind of look to continue to do and Maybe it's not going to be continual given the outlook maybe for Q4, but kind of like any kind of broad thoughts about How you're thinking about the buyback here, just given where the stock is?

Speaker 2

Yes, I mean, I think fortunately we've got flexibility from that perspective. We've got Fantastic balance sheet despite some of the challenging market environment. And so we were able to sort of adapt and be flexible from that perspective. I think We certainly feel there is value in the stock today. We bought close to $20,000,000 in shares this year.

Speaker 2

We like the long term prospects of the company. I think As we move forward, I think we've got a significant authorization that's out there, but we also don't want to have that be the only capital allocation that we're doing as a company. I think there is we'd like to be able to accelerate growth in within organic and inorganic investments here over time. And so, We'll continue to balance that as we look at it. And I think in the quarter, it was an opportunity for us to repurchase shares that were above and beyond sort of the annual dilution that we've done over the last couple of years.

Speaker 2

Good opportunity. We'll continue to look at that as a lever for us given where our balance sheet strength is.

Operator

The next question is

Speaker 6

from

Operator

Mike Shlisky of D. A. Davidson.

Speaker 6

Good morning and thanks for taking my question. And Daryl, of course, thank you for your partnership over all these years. Appreciate everything. Thanks Mike. John, you just yes.

Speaker 6

So John, you just touched on it briefly in passing here, your last answer, but It does look like Ford has essentially resolved the strike overnight. I guess, do you feel materially better about your New term prospects today compared to yesterday, especially regarding the Kentucky plant that was on strike. And do you have any feel Whether Trustify will get better coming out of Kentucky after the strike than we have before?

Speaker 2

Yes. I mean, I think the impact that we have seen to date has been relatively minimal. I think as we got closer to the end of And into 2024 is where we really would have seen some risks. And so to the extent that the timing of this resolves itself in the next weeks or days. We certainly feel more confident as we enter 2024.

Speaker 2

There certainly may be some risk that we took into the narrowing of the guidance at the end of the year, but we haven't really seen an impact to date or it was minor anyway.

Speaker 6

Got it. I also wanted to touch on the battery issue as well. Are there any costs that Shift Group will have to incur that you hadn't Foreseen thanks to the issues that are going on with the supplier or the cost to fix what's going on strictly going to be borne by that supplier?

Speaker 2

Yes, I think largely carried by the supplier. I mean, we obviously have A bit of a distraction internally in supporting that, which is inefficiency from a cost perspective. And then as we continue to look at other avenues of potential supply. I think there could be some incremental cost from that perspective, but in terms of fixing this issue, really lies in the supplier.

Speaker 6

Maybe one last one for me and that is the EBITDA and the SV Group It was relatively flat despite I guess the RV business being down over the prior year. And I'm just curious Is the RV business generally that challenged on EBITDA that have a large decline and have no change in the segment EBITDA? And is there anything you can do to fix that or that you're working on to get margins in the RV business to improve a bit?

Speaker 2

Yes. Well, I think as you look at that business, I think with the volume declines that we've seen, you're certainly going to have some pressure just

Speaker 1

on motor In terms of margins and

Speaker 2

absorption, we don't have a ton of fixed cost tied up in that business, but there certainly still is some. And so Yes, we've I think structured that business appropriately for where the market is today. I think when you look at the rest of the business, it continues to perform well. We continue to drive top line. We've continued to increase capacity through pretty much the same footprint.

Speaker 2

We've talked before about expansion in Nashville. These are all creating opportunities for us to gain share and drive the top line, which is helping Gained some leverage, but the team is also doing a fantastic job managing supply chain, managing the operations to push margins. And so, we like that business. I think the service body infrastructure related businesses that we have in that portfolio, I think, continue to perform really well. We like that space and we'll continue to invest there.

Speaker 6

All right. Thanks so much guys. I appreciate it.

Speaker 1

Great, Mike. Thank you. Thanks, Mike.

Operator

This concludes our question and answer session. I would like to I'll turn the conference back over to Randy Wilson for closing remarks.

Speaker 1

Thank you, everyone. And we look forward to hosting investors at the Baird Global Industrial conference in Chicago and the UBS Annual Industrial Summit in Florida. We thank you for your interest in the Ship Group. And with that, operator, please disconnect the call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

Powered by Quartr
Earnings Conference Call
The Shyft Group Q3 2023
00:00 / 00:00