The Shyft Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 9 speakers on the call.

Operator

Good morning. This is Shannon Group's Second 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.

Operator

Mr. Wilson, you may proceed.

Speaker 1

Thank you for joining this morning's call. I'm joined by Daryl Adams, President and Chief Executive Officer and John Doyard, Chief Financial Officer. The prepared remarks will be followed by a question and answer session. For today's call, we've included our presentation deck that's been filed with the SEC and is also available on our website. 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 will be discussing non GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. During today's call, we will provide a business update before moving on to a more detailed review of the results and our updated 2023 outlook. We will then open the line for Q and A.

Speaker 1

Please turn to Slide 3, and I'll turn it over to Daryl Adams.

Speaker 2

Thank you, Randy. Good morning, and thank you for joining us to review our Q2 2023 results. Overall, results in the quarter were in line with our expectations, highlighted by strong performance in specialty vehicles and robust cash generation. We made great progress on the execution of our long term strategic priorities, delivering on key BlueArc electric vehicle milestones. And consistent with our prior communications, we remain on track for BlueArc production in the second half of the year.

Speaker 2

While Fleet Vehicles and Services grew modestly in the quarter, we experienced further weakness in end market conditions as well as operational efficiencies that impacted our overall performance. 2nd quarter sales were down 3% year over year with strength in both our truck and service body product lines more than offset by softness in last mile delivery and motorhome. Despite the sales decline, we delivered $16,000,000 of adjusted EBITDA, up 16% versus last year, led by record margin performance in Specialty Vehicles. We made solid progress on reducing working capital, resulting in $30,000,000 of operating cash flow and ending the quarter in a strong financial position. Turning to our market commentary on Slide 4.

Speaker 2

Long term outlook remains favorable in our key end markets, including last mile delivery and infrastructure. And we believe we are well positioned as an industry leader in these areas. However, throughout the Q2, we saw accelerated signs of demand weakness due to broader economic condition and evolving market dynamics. I will now provide additional details on what we are seeing within our businesses, starting with Fleet Vehicle and Services. We previously discussed concerns and a level of uncertainty in the last mile delivery market.

Speaker 2

After speaking with our customers and listening to their public commentary, There are several factors influencing immediate buying decisions, including continued year over year declines in parcel package volume, as well as specific customer dynamics regarding fleet strategy. As a result, we have seen customers defer and cancel orders, leading to higher dealer inventory levels and reduced OEM chassis production. We experienced the impact of reduced chassis supply late in the second quarter and we now Expect to see more significant reductions in chassis production levels in the second half of the year. At the same time, we're also hearing from customers that there is an ongoing need for vehicles, which gives us confidence in the long term prospects for last mile delivery vehicles. While orders have been deferred, it is clear that fleet replacement needs, e commerce growth projections and regulatory requirements to reduce emissions will drive future vehicle purchases.

Speaker 2

In response to the current environment, we are taking decisive actions within FVS, including adjusting operations to efficiently support current volumes while focusing on long term productivity drivers driving improved product quality and on time customer deliveries and refocusing our sales efforts by expanding into new customers and locations. Moving to specialty vehicles, our Work Truck products, including service bodies, Isuzu contract manufacturing and police vehicle outfit continue to to continue and we are focused on executing our strategy to expand our products and geographies to support the growing needs of the market. For example, We recently launched our Royal XP Body and opened our Nashville facility, which encompasses both service bodies and police vehicle outfit. For our Motorhome Chassis business, the broader RV industry has been challenged by general economic conditions after multiple years of growth. Entering 2023, we expected to see softening demand.

Speaker 2

However, in Q2, we have seen the demand decline accelerate and RV manufacturers have further reduced their production schedules in light of higher dealer inventory. That said, despite declines in the market, We continue to increase our market share in the greater than 400 horsepower diesel segment and we experienced recent market share highs in the quarter. Looking forward, industry reports suggest that there will be a market improvement in 2024. However, we remain cautious about this outlook have adjusted our business accordingly. Overall, we are confident we have positioned the Shift Group in markets where their long term secular growth, including last mile delivery, infrastructure and electric vehicles.

Speaker 2

We have demonstrated the ability to manage challenging market conditions like the ones we are facing today. We have industry leading brands, flexible operations and a talented team that will enable us to win in the future. Turning to Slide 5, I'll provide an update on our BlueArc EV progress and the key milestones we expect to achieve in the second half of the year to have a successful product launch. As we review our BlueArc operational plans, we consider these lessons learned from our decades of manufacturing experience and are ensuring that BlueArc vehicles are built with the quality and value for the best in class products in the market. We are currently field testing our vehicle with a key customer and the initial feedback is positive, which gives us confidence in the vehicle's capability.

Speaker 2

We are excited by the vehicle's test performance and the hot weather conditions as well as the feedback that we have received from multiple drivers as They have delivered packages on their daily routes. In addition, our suppliers are actively working to finalize component testing and provide final certification ahead of start of production. We are nearing completion of the facility construction and are conducting operator training through virtual and slow builds at our Mission campus. We have completed the standard operating procedures and are on track for the initial production of 50 units for delivery to customers in the Q4. We are committed to building out a highly qualified BlueArc dealer network to ensure fleet customers receive the products and services they expect.

Speaker 2

We have previously talked about a nationwide dealer and service network made up of a small group of dealers and an established service provider. We remain in the process of finalizing agreements to support this structure, while also establishing banking relationships to ensure dealers can support their floor plan needs. While arraignments are being finalized, Dealers are highly engaged with customers and there continues to be a high level of interest in our product. We are incredibly excited about BlueRock's prospects our team's ability to execute this product launch in the second half of the year. With that, I'll now turn it over to John to discuss our Q2 financial results.

Speaker 3

Thank you, Daryl, and good morning, everyone. Please turn to Slide 7, and I'll provide an overview of our financial results for the Q2 of 2023. Overall, we delivered 2nd quarter results that were in line with our expectations with solid year over year adjusted EBITDA growth. We continue to see pockets of strength across the company, particularly in our Specialty Vehicles segment. Sales for the Q2 were $225,100,000 down 3.1% from the year ago quarter.

Speaker 3

Net income was $4,700,000 or $0.13 per share compared to net income of $5,300,000 or $0.15 per share in the previous year. 2nd quarter net income was negatively impacted by approximately $3,000,000 of expenses related to our CEO transition as well as actions taken to adjust our cost structure given the lower volumes. In the Q2, adjusted EBITDA was $15,900,000 or 7 percent of sales, up from 13,700,000 dollars were 5.9 percent of sales in the Q2 of 2022. These results include EV program spend of $7,400,000 up slightly from the prior year. Excluding these expenses, adjusted EBITDA was 10.4 percent of sales, up 140 basis points year over year.

Speaker 3

Adjusted net income improved to $8,700,000 compared to $7,500,000 in the year ago quarter, while adjusted EPS rose to $0.25 per share from $0.21 per share last year. I'll now walk you through our Q2 results by operating segment, beginning with Fleet Vehicles and Services on Slide 8. In the quarter, the FES team delivered solid working capital reduction and meaningful year over year improvements in truck body output, while taking short term and structural cost actions in a highly dynamic environment. FES achieved sales of $139,000,000 up 1.5 percent compared to $136,900,000 a year ago with sales growth from truck body and aftermarket more than offsetting declines in our last mile delivery products. Truck body sales in the quarter included $7,500,000 of chassis pass through revenue.

Speaker 3

Adjusted EBITDA for the quarter was $12,500,000 versus $14,500,000 a year ago. Adjusted EBITDA margin was 9% of sales compared to 10.6% in the Q2 last year. As we transition to the second half of the year, the FPS team remains focused on adjusting production to support softer near term last mile demand, while driving operational improvements to address ongoing margin challenges. Please turn to Slide 9 for the Specialty Vehicles' 2nd quarter results. We are pleased with our SB results as The business delivered strong year over year profitability growth and record margin performance.

Speaker 3

The team also achieved a significant milestone with Isuzu. We have now delivered more than 100,000 N Series trucks through our partnership over the last 12 years. Overall, 2nd quarter sales were $87,600,000 an 8.1% decrease from $95,300,000 in the prior year, driven by motorhome volume decline. Adjusted EBITDA was $17,400,000 or 19.8 percent of sales compared to $12,900,000 or 13.5 percent of sales in the same period last year. As we close out the SV comments, We would like to recognize the addition of Jacob Farmer to the Shift Group as President of our Specialty Vehicles segment.

Speaker 3

Jacob is a proven operations leader with broad industry experience, and we look forward to benefiting from his contributions. Please turn to Slide 10 for our 2023 outlook. Entering the year, we were cautious regarding our outlook as there was uncertainty across our key markets driven by broader economic challenges. As a result, we responsibly monitored and managed our cost structure to align with expected demand, while continuing to deliver for our customers and focusing on generating cash flow. By the end of June, total headcount was down approximately 25% versus the start of the year and the team was able to drive a solid working capital reduction.

Speaker 3

However, as we progress through the Q2, our prior concerns surrounding a challenging demand environment materialized Conditions further deteriorated for last mile delivery vehicles and motorhome chassis. We saw last mile delivery orders Canceled and purchases deferred, ultimately leading to lower second half OEM chassis production. All these factors significantly impacted our volume expectations for the year. Given these factors, our updated outlook for the full year 2023, notwithstanding further changes in the operating environment is as follows. Sales to be in the range of $850,000,000 to $950,000,000 compared to the previous outlook of $1,000,000,000 to $1,200,000,000 adjusted EBITDA of $40,000,000 to $60,000,000 compared to the previous outlook of $70,000,000 to 100,000,000 BlueArc production remains on track and we currently estimate 50 units to be produced and delivered in 2023 as we take a disciplined approach to our initial production.

Speaker 3

We also expect to drive positive incremental cash flow in the year as we continue to drive down working capital. We will continue to responsibly monitor and manage the business in the second half, while protecting our BlueArc product launch and maintaining a focus on long term growth.

Speaker 4

Please turn

Speaker 3

to the capital allocation update on Slide 11. Our balance sheet continues to be a strength and differentiator for the company. And despite a challenging environment, we were able to improve our financial position in the quarter. For the Q2, we generated $29,700,000 in operating cash flow, reflecting significant improvement over the prior year as we completed and reduced work in process vehicles. Company's capital structure remains strong with a net leverage ratio of approximately 0.6 times and a $400,000,000 revolver, which provides a strong access to capital.

Speaker 3

We are funding organic growth opportunities, including the investment in BlueRTV and $6,500,000 in capital expenditures. Before turning it back to Daryl, I want to take a minute to reiterate the financial strength of the company. Over time, Shift has proven to be a successful cash flow generator. In the last 18 months, we have deployed $125,000,000 of capital, including $75,000,000 into organic growth investments that will accelerate growth in the coming years, the largest being BlueArc. In addition, we have returned nearly $50,000,000 to shareholders through dividends and share repurchases during that period.

Speaker 3

We expect to drive additional second half cash flow and maintain our financial strength as we close out the year. We are also confident that BlueArk will generate positive cash flow in the coming years and provide solid returns on our investment. Overall, we have strong liquidity and are confident in our growth story, giving us the financial flexibility to efficiently deploy capital and maximize shareholder value. With that, I'll turn the call back to Daryl for closing remarks.

Speaker 2

Thank you, John. Please turn to Slide 12. At the Ship Group, we have created a compelling industrial growth company and remain nimble in response to changing market conditions, while maintaining a long term strategic focus. With our financial strength, investment in innovation And focused on secular growth markets, we have positioned the company to be a leader and drive shareholder value over the long term. Before I conclude, I'd like to announce the recent announcement of my transition and personally thank the investment community for their support and interest in the Shift Group.

Speaker 2

I look forward continuing to lead the company until my successor is in place. Thank you. And with that, operator, we're 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 Greg Lewis of BTIG. Please go ahead.

Speaker 5

Yes. Thank you and good morning everybody and thanks for taking my questions.

Speaker 6

I was hoping to dig

Speaker 5

a little bit more into the updated guidance. Just as kind We look at the updated revenue, the step down in the revenue. And I realize you were talking about that in some of the prepared remarks. But could you talk a Little bit about that, that step down in terms of is that primarily deferrals? Were there any cancellations?

Speaker 5

And just as any kind of color around the types of customers and where that kind of In which businesses that was kind of being stepped down in?

Speaker 3

Hi, Sher. Good morning, Greg. This is John. I mean, I think when you look at it and we touched on this in some of the prepared remarks, I think we saw both deferrals and cancellations from an order perspective. I think You look at the midpoint and we went from about $1,100,000,000 down to the $900,000,000 So $200,000,000 I would say it's predominantly within the FBS business.

Speaker 3

There is a portion that is Motorhome, just given the overall dynamics there. But when you look at FVS, we've You know, talked about there being some noise in the system on dealer inventories historically, that seems to have materialized as we discussed. And really what we're seeing is in response to that, chassis production reduce. And so as we've had sort of an elevated backlog over the last couple of quarters, we've seen some cancellations given they haven't been able to match that from Chassis perspective, and so that's really impacted the outlook in the second half of the year. I think some of the dynamics that Daryl talked about, You talked about specific customer dynamics.

Speaker 3

There are some every customer sort of has their own Sort of actions at this point, but we're seeing sort of reorganizations internally. We've talked about cost actions and CapEx restrictions historically with these or recently with these customers as well. And so there's a bit of a pause as the environment settles and package volumes continue to be down. And we expect that to continue through at least the end of the year and potentially even into early next year. And so again, we've taken sort of a cautious view of what that looks like, but the biggest Have been in the FES business.

Speaker 5

Okay, great. And thank you for that. And then and you also did allude Some of the I don't know the cost cutting and kind of the rightsizing of the business. And realizing that this has really only been going on For a brief period of time with some of the commentary from your customers. But as we stand here in July, are we kind of We need to be or could we see some other moves to kind of protect margins, just to your comment, John, about The lack of visibility maybe all the way out into early

Speaker 3

next year. Yes. I mean, I think the I think as we entered the year, we did have a cautious view. So it's not like we've taken immediate cost actions following some of late quarter news that we've had, we've been sort of managing the cost structure of the business throughout the first half of the year. And so I think that's beneficial for us.

Speaker 3

We'll continue to be flexible from a manufacturing perspective as we always have been. Right now, we're looking at different ways to leverage the capacity that we have and Potentially shift some production and products around to ensure that we're meeting customer expectations and getting the appropriate output. And so we'll continue to do those things as well as to the extent that there are times where there's no volume, we will certainly flex From an hourly perspective, but we feel like we've gotten ahead of this. Not to say that we won't continue to look at Monitor and look at this going forward, but we feel like we were a bit ahead of it.

Speaker 5

Okay. Good to hear. All right. Thank you for taking my questions. Have a good

Operator

The next question is from Mike Schloski of D. A. Davidson. Please go ahead.

Speaker 4

Yes. Hi, good morning and thanks for taking my questions. The weakness that you've been talking about in the e commerce World, is that a sector wide thing or is it maybe just 1 or possibly 2 customers that are causing that right now?

Speaker 3

I missed the first part of your question, but I think the as you look at Each I mean, there's only a handful of large parcel customers that are out there. I would say there's specific dynamics with each of them. But I think the themes are consistent across. I mean, certainly elevated dealer inventories. I think if look at any of the parcel companies right now, they're reporting year over year package declines.

Speaker 3

And certainly, specific reorganizations and those types Things are attributable both to 1 company. But I think all of that sort of adds up to a Point of pause from a purchases perspective and that's really what we're seeing from out in the environment. I think Daryl made the comment early in his remarks. We continue to have positive discussions with our customers, right? They continue to tell us that there's a need for vehicles.

Speaker 3

It's just balancing sort of CapEx in the short term with how they're managing their fleets over the long term. And so we expect those from a demand perspective, we That to come together at some point, but it's probably pushed out a little bit. And could there be some activity later in the year potentially? But we think that, again, we want to be somewhat cautious here over the next couple of quarters.

Speaker 4

Okay. Thanks for that. Can you comment on the fleet age for some of your larger Final Mile customers? Are they still going out to outside third party White demand providers to ensure they have just enough trust to just meet everyday delivery demand or has the fleet age caught up to Prior levels.

Speaker 2

Yes. Mike, this is Daryl. I'm not sure we can give you an exact number on fleet age, but To your question about the white trucks, I think we've mentioned on previous calls, we have a Parcel Delivery Company Depot right next to our office here or close to our office, they had a lot of those white trucks and now those white trucks are now gone. So I think to John's point in my commentary, right, the package volume is going down post COVID And those vans were needed because they couldn't get the vehicles. They got their vehicles, those vans are gone.

Speaker 2

So It's a dynamic environment trying to figure out exactly what's the right formula. The customers are trying to figure that out And we're right with them and having conversations. So to the point is that's going to keep coming. The point is the fleet age and the replacement cycle. And what we're making sure is that our FVS division is ready to take on those orders and flex back up once The volume comes and that's what we're doing right now, right?

Speaker 2

Any good manufacturing company will take this opportunity and put some different processes in place to make sure when it comes back that they're ready to be more efficient at the time. That's what we're doing.

Speaker 4

Okay, great. Maybe one last one. Does your 2024 outlook for BlueArc still appear to be in line? And I guess, lately, Does your kind of you had mentioned that a certain run rate you hit in 2025 in BlueArk, does that also appear to still be in line? And just a little more detail on people who have been testing the vehicles, What they've been saying, Sasha, would be really appreciated.

Speaker 3

Yes. I think Daryl made I think the feed we've been in field testing now. The vehicle has performed very well. The customer feedback From the broader team as well as the drivers has been fantastic. And so we're really pleased with the progress that we've made there and we'll continue to Execute those types of field tests and demos with customers going forward.

Speaker 3

I think as you look at where we are from a production standpoint, Our expectation is that we'll have capacity for up to sort of 1500 as we get into next year, which will continue to ramp as we get into 2025. And so certainly we'll see an acceleration of production and deliveries delivery expectations as we move forward.

Speaker 4

Okay. I'll leave it there. Thanks for the time, guys.

Speaker 7

Thanks, Mike. Thanks, Mike.

Operator

The next question is from Matt Koranda of ROTH MKM. Please go ahead.

Speaker 8

Hey, guys. It's Mike Zabrin on for Matt. As it relates to the guidance, we talked about revenue already and how much is coming out of FVS and SV. Maybe just moving over to Adjusted EBITDA, we cut about $35,000,000 at the midpoint. Maybe to speak to how much is coming from FVS and SV?

Speaker 8

Is it a similar dynamic and then just put a finer tune to actions that were taken this year to cut costs?

Speaker 3

Yes. I think as you look at it, I think it's more heavily weighted towards the FES business, but Primarily related to the volume decline as we've talked about. When you look at some of the cost actions that we've taken, we talked about 25 Roughly a 25% reduction in headcount through the first half of the year, which will continue to flex and adjust as necessary to manage 2nd half, we've also been managing discretionary programs. I think Key for us is to protect the BlueArk investment as we are confident in what that will return here in the future. And so We've been able to manage other investments from whether it's in IT, marketing, You know, go through the functions.

Speaker 3

And so those are the 2 biggest pieces. And we'll continue to look at other items as we get into the second half of the year, Those are the key actions. There hasn't necessarily been any facility consolidation or anything like that. I think The one the additional thing that we are doing is looking to leverage the facility and footprint capacity that we have by transferring products, which I talked about earlier as well.

Speaker 8

Got it. Makes sense. So then I guess, spiraling off that, how should we think about the cadence of EBITDA margins in the back half of the year for both FBS and SV? Do SV margins come down a bit from here? Do FVS margins improve at all?

Speaker 8

Just a little bit more color here would be helpful.

Speaker 3

Yes. I mean, I would expect, as you think about sort of the quarterly profile, I would expect the second half of the year to be relatively balanced. I think when you look at it from a margin perspective, you probably see a step down in SV off their record highs in the quarter. And I would say FVS continues to operate where they are with some of the volume pressures that we have in the second half of the year offset by productivity actions that we're looking to drive.

Speaker 8

Got it. That's helpful. Maybe just one more for me. On the backlog, any line of sight into when demand improves? I know we kind of It's a little bit dependent on package volumes, but do we expect more cancellations in the next few quarters?

Speaker 8

Or do you think we've seen the worst Cancellations and deferrals in 2Q.

Speaker 3

I think from a cancellation perspective, I think we're probably past the probably trough here in the Q2. I think When you look at when the demand comes back, I think there's a couple of variables, one being dealer inventory. I think there needs to be some comfort And what package volume does or we need to see that start to turn as well, which may happen here in the second half of the year. I think I point back to Daryl's comments that we continue to have good discussions with customers about the Need for vehicles. And so there's a bit of a pause or a timing shift here that's impacting the second half of the year, But the long term continues to be the outlook continues to be very solid from our perspective.

Speaker 3

And so You'll continue to manage the business through the second half and do that in an efficient manner and be ready to return to production

Operator

The next question is from Felix Voshen of Raymond James. Please go ahead.

Speaker 6

Hey, good morning, everybody.

Speaker 3

Hi, Marcos.

Speaker 6

Hey. I was wondering if you have a rough number for us or a rough bogey on what percent of the FBS Backlog today is not tied to parcel customers.

Speaker 4

I

Speaker 3

would say that it is probably More balanced than what it has been in the last couple of quarters. I don't have a precise number for you. We can certainly look into that. But We've seen sort of a shift, particularly with the growth in the truck body, sort of that mid mile business, shift away from parcel. So I'd say it's more balanced than what it has been historically.

Speaker 3

Okay.

Speaker 6

And then I wanted to circle back to BlueArc. And I'm kind of wondering 2 things. But number 1, what sort of the next milestones that investors should be For whether that's dealer partnerships, hard orders, more testing with customers. Just maybe if you could help us understand those dynamics better? And then the 50 vehicles in 4Q, I think when you did the EV Day, that number was a little bit higher.

Speaker 6

Can you maybe talk about what's driving that difference?

Speaker 2

Yes, sure, Felix. It's Darryl. I think the next Milestones you're going to see will probably be some dealer agreements and then the service provider agreement.

Speaker 3

And

Speaker 2

Not sure if we'll have a press release when we roll off the first vehicle or not, but then it'll be getting those vehicle off the end of the line After we complete the training of the operators in virtual and slow builds. So on the The number was higher and I think we talked about it in the past. I don't remember exactly what forum, but One of the brake suppliers that we initially went with had wasn't going to have a component, so we needed to go to the current brake supplier and their testing It was a little bit longer. They did both winter and summer. The other one was only doing one battery of testing.

Speaker 2

So that pushed it out a little bit And their certification, so they once they get done with the brake testing, they need to certify it internally and that's the process they're in now. So what we don't want to do is Get the vehicles out there without having that all the certifications we need to make sure it's a safe vehicle. So that was the main delay and there was a little bit of some battery testing that went on, but that's all behind us now. So it's We just want to make sure the vehicle is safe and ready to go for the customer and we're not going to jeopardize any of that.

Speaker 6

Okay. So you don't think it's a demand driven thing?

Speaker 2

No.

Speaker 6

Okay. I appreciate that. And then just my last one. I was just curious if we could, John, maybe compare FBS margins today implied for 2023 versus levels that you all did in 2019 2020 on seemingly a similar revenue base. I understand overall in the corporate P and L, there's heightened R and D spend associated with BlueArc.

Speaker 6

Okay. Can you maybe talk about some of the margin differentials in FBS and how we should think about maybe the back half of the year a 24 in the context of what you guys used to do.

Speaker 3

Yes. I mean, I think as I mentioned, I think the second half of the year looks pretty close to what the 2nd quarter looks like from an FVS standpoint. When you look at I mean, we certainly when Volumes were up and parcel delivery vehicles were units were high. We delivered significantly higher margins than where we are today. I think as you look at that shift of the business more towards truck body versus parcel, I think there's a bit of a mix aspect from that perspective.

Speaker 3

But I think it's also important to note out that we continue there are inefficiencies that we continue to get after experience. And I think if you look at it, Part of that is just volume related and the absorption on some of the capacity, which I mentioned we're looking to fill to offset some of that. But some of the material issues that have plagued us for over a year, as we go back and rework some of those vehicles, it's created More cost and efficiencies and have been a challenge from that perspective as well. And so there's still a couple of points of margin headwinds that we have From just an operational perspective that we've the team is working to get us through as we get into later in the year and into 2024. And so I'd expect margin expansion as we move forward, but I think the we'll continue to manage it through the second half of the year with some Further volume challenges and the leverage that, that creates or leverage issues that creates offset by some of the productivity improvements That we expect.

Speaker 6

Got it. I appreciate the time this morning.

Speaker 3

Thanks, Phil. Thanks, Phil.

Operator

The next question is from Ryan Sigdahl of Craig Hallum Capital Group. Please go ahead.

Speaker 7

Good morning. Ryan on for Steve Dyer. Curious on market share. So you guys commented on SCV and the high horsepower Chassis, but on FVS, are you guys seeing any dynamics there where their share shift moving around given the current dynamics?

Speaker 2

Hi, Ryan. This is Daryl. No, it's FVS is one of the harder ones because there isn't really any good data. It's all self reporting. And I think I've mentioned multiple times in the past, right, it depends on year over year orders, but on average, We don't see any deterioration.

Speaker 2

It's 2 suppliers, it's us and Morgan. So it would be Maybe this year they get a different order from one customer that we had last year. So it does move around, but overall not seeing any Deterioration, it's a wide market challenge that's going on right now with the parcel delivery Volume is going down. And I think you read that in all of the parcel of the delivery company commentary that I mentioned during my Part of the call. And I think

Speaker 3

just to add to that, Ryan, I think if as you look at The OEM chassis manufacturer reaction of cutting production for the second half of the year, I think that points to it being more of an industry challenge than a specific company or market share Challenge than a specific company or market share issue.

Speaker 7

And then just secondly, any price changes, I guess, where your customers are trying to press for price reductions within the backlog Or in future negotiations, which is causing them to kind of pause and cause a stalemate here?

Speaker 3

Nothing I would say that's impacting moving forward from an ordering perspective. Certainly a more challenging pricing environment than when where we sat 12 months ago, but nothing specific to point out from that perspective.

Speaker 7

Last one for me. Just remind me dealer inventories versus direct business, kind of the mix of how much is in each and then how long you think it will take to normalize The dealer channel inventory?

Speaker 3

Yes. I mean every to Daryl's point, our business is a little bit lumpy from a customer perspective, but It's relatively balanced between direct I'll call it direct and dealer on the FCS side of the business. Sometimes it's tilted one way or the other. We would expect to see some of that clear through as we get into next year. I think we don't want to get ahead of ourselves and assume that going to turn around here in the second half of the year.

Speaker 3

And so we expect it to be a Softer environment here through at least the next 3 quarters 3 or 4 quarters, maybe even through mid next year. So we'll continue to monitor that. Again, I'd point back to the conversations we're having with customers is that they need vehicles. And so At some point, that's going to break and we'll see an increased demand. I think we're just in a period of pause.

Speaker 3

Thanks, guys. Appreciate it. Thank you. Thanks, Ryan.

Operator

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

Speaker 1

Thank you. I'd like to thank all investors for participating in today's conference call. We look forward to hosting investors in September at the RBC Global Industrials Conference in Las Vegas, the Raymond James Vehicle Technology Day held virtually and the D. A. Davidson 22nd Annual Diversified Industrials and Service Conference in Nashville.

Speaker 1

We thank you for your interest in The Ship Group. And with that, operator, please disconnect the call.

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