The Shyft Group Q4 2023 Earnings Call Transcript

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February 22, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to The Shift Group's 4th Quarter and Full Year 2023 Conference Call and Webcast. 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. Please go ahead.

Speaker 1

Good morning and thank you for joining us. I'm joined by John Dunn, President and Chief Executive Officer and John Dillard, Chief Financial Officer. Their prepared remarks will be followed by a question and answer session. Before we begin, please turn to Slide 2 of the presentation for our Safe Harbor statement. 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.

Speaker 1

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. Reconciliations for these non GAAP measures can be found in the conference call materials posted on our website. We will start with opening comments from our CEO, John Dunn, before turning the call over to John Dillard for a review of 2023 performance as well as our 2024 outlook. We will then open the line for Q and A.

Speaker 1

Please turn to Slide 3 and John Dunn will begin today's prepared remarks.

Speaker 2

Thank you, Randy, and good morning to everyone. As I noted on our call back in October, I'm excited to be leading this fantastic company. Over the last 50 years, Shift has grown to a national leader in many specialty vehicle markets, while consistently demonstrating the ability to innovate, partner with customers and maintain financial stability. In past roles, I've delivered ambitious growth by focusing on building solid teams and driving commercial and operational excellence. I spent my career in the automotive sector with experience launching vehicles for General Motors and having senior leadership roles for Tier 1 auto suppliers, one of which grew annual sales from $50,000,000 to $1,500,000,000 in North America.

Speaker 2

I look forward to building on Shift's great legacy and leveraging my experience to deliver a higher level of performance. Having just completed my 1st full year at Shift, including the last 4 months as CEO, I continue to be impressed by the industry leading products and the team's capabilities. Together with the leadership team, we have defined an operating framework, which will serve as the foundation to drive sustainable financial growth and deliver value for our shareholders going forward. Our approach includes a relentless focus on building high performing teams to foster collaboration and drive results, delivering operational excellence, improving efficiency in all aspects of the business, while bringing innovative and high quality products to our customers. And keeping customers at the center of everything we do, from sales to design to delivery, we are here to enable our customers' success.

Speaker 2

Shift's recent performance has been impacted by end market demand softness, and we are acting with urgency to return the business to historical profitability. As we transition to Slide 4, I will walk you through the actions we have taken over the past 4 months, which reflect this operating framework. It all starts with the team, and our immediate focus was on team alignment to drive operational rigor and financial growth. We top graded key roles, including production and sales leadership to improve immediate performance and build bench strength. We promoted Jacob Farmer into our FES President role.

Speaker 2

He previously led our SV business. Jacob is a proven leader and we are confident that he will continue to drive the necessary improvements already underway in FVS and utilizes his experience within SV to strengthen coordination across the company. We look for better ways to enable our businesses to ensure that they had the appropriate tools and support needed to be successful. We have simplified our internal reporting rhythms and identified opportunities to push down functional support into the businesses where it is needed most. An example of this is in our marketing function, which now reports directly into our segments.

Speaker 2

Transitioning to operational excellence, we understand the importance of product quality and process efficiency, as well as sales force effectiveness and overall customer satisfaction. We are on improvements in all of these areas. In December, for the first time, we pulled together our sales team from across the company. We held product training and identified cross selling opportunities. Coming out of the sales summit, we adjusted our sales compensation to incentivize business with new customers and to establish targets for our sales team to sell all Shift brands.

Speaker 2

We have a portfolio of industry leading products and need to make sure we are selling them broadly to the market. By taking a more comprehensive approach, we will expand our reach and diversify our customer base. Operationally, we've identified opportunities, including deeper cross company synergies in procurement and ways to optimize our footprint. I look forward to updating you on the output of these initiatives on our upcoming calls. Another area of focus, given its strategic importance to Shift and our customers, has been the BlueArc EV program.

Speaker 2

I've spent time with the team, validating the overall market opportunity, reviewing the project plan in-depth and assessing our manufacturing capability. I'm impressed by the quality of the product, the robustness of the design and what the team has been able to accomplish. I had direct conversations with our key customers who communicated their excitement for our Blue Arc vehicle and its role in their fleet strategy. After assessing progress and interest, we prioritized the Class III to IV walk in van as the most efficient path to getting BlueArc to market. While we discussed other class sizes and vocations historically, we have refined our focus in 2024, which will drive lower spending versus 2023.

Speaker 2

Now let's turn to Slide 5, and I'll give you more detail around the status of our Blue Arc program. Our team continues to make solid progress on overall vehicle development, including the battery performance. We previously discussed battery quality issues impacting our ability to go into production. We worked with our supplier, Proterra, to solve the issues until the recent purchase of Proterra by Volvo. Currently, we are exploring a new commercial agreement with Volvo.

Speaker 2

In parallel, we accelerated the battery integration in our Class III to IV vehicle with battery supplier, Our Next Energy. We recently completed performance testing and are pleased to confirm the vehicle range is over 200 miles. These results meet customer requirements and are consistent with our prior vehicle testing. From a vehicle standpoint, we have finalized the design and the first production and tank units have been manufactured in our Charlotte, Michigan facility. With the revised program timeline, we expect final testing in the coming months to complete and start production in late 2024.

Speaker 2

In conclusion, our team has built an outstanding vehicle. While there is more work to do, I am confident this will be a growth driver for Shift. We will provide additional detail around BlueArc as John Dillard discusses our outlook later in the presentation. With that, I'll turn it over to him to discuss our financial results.

Speaker 3

Thanks, John. Please turn to Slide 7, and I'll start with our full year 2023 financial results and highlights. Overall, 2023 was a challenging year for Shift as deterioration in the parcel and motor home markets impacted overall performance. In the year, we delivered $872,000,000 of revenue $40,000,000 of adjusted EBITDA, which was in line with our recent expectations. Excluding the impact of EV expenses, our core business delivered adjusted EBITDA of $73,000,000 or 8.3 percent of sales.

Speaker 3

We delivered tremendous performance in our Specialty Vehicles business with 20% adjusted EBITDA margin for the full year, and we drove solid cash generation, allowing us to fund key growth initiatives, including BlueArc. Throughout the year, we flexed our operations, moving productions between sites and adjusting headcount as needed in response to the decreased sales volume. Overall, we reduced headcount by approximately 30% from the beginning of the year. Despite the sales volume pressure, our team focused on driving cash flow and reducing working capital, resulting in free cash flow of $36,000,000 up $75,000,000 versus the prior year. Turning to Slide 8, I will now provide an overview of our 4th quarter financial results.

Speaker 3

Sales were $202,300,000 down 33 percent from $302,000,000 in the prior year. Net loss of $4,400,000 or a loss of $0.13 per share compared to net income of $17,800,000 or $0.50 per share in the previous year. 4th quarter 2023 results included a tax benefit of $4,800,000 In the 4th quarter, adjusted EBITDA was $2,300,000 or 1.1 percent of sales, down from $30,700,000 or 10.2 percent of sales in the Q4 of 'twenty 2. These results include EV program spend of $9,300,000 up from $7,600,000 in the prior year. Excluding these expenses, adjusted EBITDA was 5.7 percent of sales.

Speaker 3

Adjusted net loss for the quarter was $900,000 while adjusted EPS decreased to a loss of $0.03 per share. I'll now walk you through our results by operating segment on Slide 9. In the quarter, Fleet Vehicles and Services achieved sales of $119,000,000 down 44.1% compared to $212,900,000 a year ago, reflecting softness in the last mile delivery end markets. These results include $15,000,000 of pass through chassis revenue related to the USPS truck body program. Adjusted EBITDA for the quarter was a loss of $2,600,000 versus income of $27,700,000 a year ago, with lower profitability driven by sales volume and negative product mix, which includes the impact of the USPS pass through sales.

Speaker 3

Adjusted EBITDA margin was negative 2.2 percent of sales compared to 13% in the Q4 last year. FES backlog was $325,000,000 at the end of the year, down 15% versus the prior quarter. In Specialty Vehicles, our team closed out a strong year with another quarter of record profitability, as our infrastructure focused vocational truck businesses continued to deliver solid growth and operational improvements, offsetting ongoing market weakness in Motorhome chassis. 4th quarter sales were $83,400,000 a 10.6% decrease from $93,200,000 in the prior year. Adjusted EBITDA was $19,000,000 or 22.8 percent of sales compared to $15,900,000 or 17.1 percent of sales in the same period last year.

Speaker 3

SV backlog was $84,300,000 at the end of the year, up 4% versus prior quarter. Please turn to Slide 10 for our 2024 outlook. We continue to be excited about the long term growth prospects of the company. Our focus and investment into infrastructure related businesses is paying off as reflected in the strength of SV's performance. While the last mile parcel delivery business has been soft recently, we continue to maintain a leading position and the long term growth projections remain intact for the industry.

Speaker 3

As we enter 2024, we continue to take a cautious view on near term demand for both parcel and motorhome volume and we expect the softness we experienced in the second half of twenty twenty three to persist, likely through mid year. In response, as John Dunn discussed earlier, our team is taking urgent actions both commercially by identifying cross selling synergies and diversifying our customer base and on spending, including a focused approach to BlueArc. Given these factors and notwithstanding further changes in the operating environment, we are introducing our 2024 outlook as follows: sales to be in the range of $850,000,000 to $900,000,000 While we plan for BlueArc to be in production later this year, we've not included any revenue estimate in our forecast at this time. Adjusted EBITDA of $40,000,000 to $50,000,000 including $20,000,000 to the year, we anticipate that 1st quarter adjusted EBITDA will be approximately breakeven. Adjusted EPS is expected to be in the range of $0.28 to $0.51 per share and free cash flow of $25,000,000 to $35,000,000 Before I close out this section, I would like to reinforce our core business' ability to generate cash.

Speaker 3

Over the last 4 years through a challenging cycle, we've generated approximately $100,000,000 of free cash flow, while self funding a transformational EV initiative and returning capital to shareholders. Going forward, as our end markets recover and with continued focus on working capital, we believe we are well positioned to generate cash flow and continue to constantly invest in our future. With that, I will turn it back over to John Dunn for closing remarks.

Speaker 2

Thank you, John. Turning to Slide 11. We have excellent core businesses with leading market positions, well recognized brands and our customers rely on us every day. We are preparing for the future with our BlueArc EV truck and continue to offer innovative solutions to our customers. The team is acting with utmost urgency to deliver improved 2024 results.

Speaker 2

We are laser focused on execution, efficiency and leveraging our internal strengths. As John Dillard discussed earlier, our core businesses are excellent at generating cash through the cycle. Looking ahead, we've established a framework to drive improved performance at Shift. Our experienced and highly engaged team is committed to creating value for our customers and shareholders. I'm very excited about Shift's future and look forward to the years to come.

Speaker 2

Thank you. And with that, operator, we are now ready for the Q and A portion of the call.

Operator

Yes. Thank you. We will now begin the question and answer And the first question comes from Matt Koranda with ROTH and Kilometers.

Speaker 4

Hey guys, good morning. It's Mike Zabrin on for Matt. Good

Speaker 3

morning, Mike.

Speaker 4

Good morning. Maybe just starting on the guide, it sounds like we're signaling a second half weighted year. Maybe just speak to some of the visibility we have into that?

Speaker 3

Yes. I think, as we talked about the demand softness that we saw in the second half of the year, particularly as we got into Q4, we expect that to continue, which is through the first half of the year, which is consistent with what we've talked about previously. I think when you look at order activity in the business, particularly on the FPS side of the business, I think we did see improvement in the second half of the year of 'twenty three versus the first half, but still remains relatively soft. We did see a strong orders month in January, which is a positive, but we're not at a point yet where we're saying that the market is opening up or turning at this point. And so we want to be cautious as we continue here through the first half of the year on how quickly this market opens up.

Speaker 3

And I think with that, we'll be cautious from a cost perspective as well. But I think as you look at the year, Q1, as I indicated, will be roughly breakeven. We'll see a step up in Q2 and would expect to see improved performance in the second half.

Speaker 4

Got it. Makes sense. Maybe moving to bookings. So bookings looks a bit better year over year, though still relatively tepid compared to prior years. Maybe just speak to what are we hearing from FVS fleets in terms of refresh and expansion demand this year?

Speaker 3

Yes, I think I mean some of the dynamics that we've talked about previously with some of our major customers, I think are still in play. You got the reorganization going on with FedEx. We've got an EV transition from an Amazon perspective. And so we continue to have, I'd say, healthy dialogues across our customer base, but those are impacting short term ordering patterns. I think the nice part as we look at some of the recent orders is that there isn't as much parcel in there as there has been historically.

Speaker 3

And so we talk about diversifying the business. I think there is an opportunity there. But we expect based on the dialogue and interactions we're having with our customers that there will be an increase in parcel activity here in the coming months. It's just hard to pinpoint exactly when that will be.

Speaker 4

Okay. Makes sense. Any way to think about how much we need in new bookings this next year in FES and SV to hit the guide?

Speaker 3

I think when you look at it overall, ending the year at $400,000,000 of backlog, we've got an $875,000,000 guide. We'll say the FVS business backlog has been sequentially down for a couple of quarters or quarters in a row. Some of that is also extending a bit. So that FVS backlog will likely some of that will likely push into $25,000,000 And so there is an element of conversion there, but we've got $400,000,000 to $500,000,000 if you just take that backlog number in our sales guidance.

Speaker 4

Makes sense. That's helpful, John. Thank you. Maybe last one for me for John Dunn maybe. John, maybe if you could discuss some of the strengths and weaknesses you see on the Shift platform and then just hone in on maybe what changes do you plan to make relative to prior leadership and where might there be continuity?

Speaker 2

So we started with the thank you, Mike. With the first slide saying that our mission hasn't changed, the core business and where we're taking the company. It's stable. We believe in that model and we're going forward. Some of the strengths that we have is great products, great relationships with our customers.

Speaker 2

Where we saw there is opportunities as I went around and interacted with different locations is to do more as a one shift organization and leverage our strengths, bring expertise from one area into other areas. A clear example we mentioned in the discussion was procurement, bring together our total spend and really leverage that spend in the market to get better pricing.

Speaker 4

That makes sense. That's all for me guys. Thank you.

Speaker 1

Thanks Mike. Operator, next please.

Operator

Yes. Thank you. And the next question comes from Mike Schuszky with D. A. Davidson.

Speaker 5

Hey, good morning. Thanks for taking my questions. Good morning. Just following that last question and your last answer there, John. Do you think that it should be a need to make kind of a cost restructuring or changes to the footprint or the headcount going forward?

Speaker 5

Or is it kind of what you feel you've got enough volumes to meet the current capacity of the company and there's enough work to go around for all the folks who work at Shift Group currently?

Speaker 2

What we're seeing is that we're really making sure our plants are agile, so they can run different products and we better leverage that footprint. In the past, we were very singularly focused. So one brand would be built in one facility. And as we see the market kind of fluctuate, there's an opportunity to flex products into other facilities and really fully utilize our installed capacity. We continue to monitor the demand and we'll make those adjustments as needed.

Speaker 2

But a great example was in Bristol, which is our traditional walk in van plant. As we saw walk in van demand go down, we flexed truck body production into that plant and have ramped that up successfully. We're looking to do more of that sharing of the footprint going forward.

Speaker 5

Okay. Thanks for that. And then I'd be curious to talk about chassis supply. It sounds like when you've got walk in van work, you've got chassis that you can get to put on it. But I'm more curious about vocational and specialty.

Speaker 5

Do you have at this point a much better feel for your allocations and the timing of deliveries to get those chassis maybe this time versus maybe this time last year or any kind of update you can give us there would be appreciated?

Speaker 2

We start with the FVS side. We're seeing the chassis coming through. So we don't have that significant issue we had about a year ago. It's getting the customers to really reengage. And as John mentioned, especially in parcel, it's been lighter than we had hoped and we monitor that closely.

Speaker 2

So to be very clear, the limiting factor is in chassis availability. It's really getting the customers to get reengaged. From the other side of the business, we have the SC side, the chassis are flowing and we're doing our work on them and getting them to dealers. It's also not an issue right now with chassis at a significant level.

Speaker 5

Fantastic. Maybe one last one for me. Given the relatively strong free cash flow you've got that's going to continue here in 2024 and pretty much no debt. Do you have any feel for John Dunn the ability of shift or the desire to expand through M and A, to get some more scale in some of these businesses or expand into some new products in the truck buying side? Any feel you can get first for M and A given your relative strength versus some other folks who might be a little bit more subscale would be appreciated?

Speaker 2

I'll answer it. First step is we really want to drive the performance of our core business. And that's the real focus right now to get that operating at the highest level. We need to get BlueArc launched and that's why we narrowed the scope to make sure we get that to market as soon as possible and deliver that to customers. In parallel, we do see opportunities where we can do acquisitions, M and A, and we are looking at a couple of opportunities there.

Speaker 2

But really don't want to lose focus on what we need to do and the urgency around making sure that core business is running at the right level.

Speaker 5

I'll hop there, John. When you just work on the Class III for BlueArc, any feel for how that might affect your 2025 projections for BlueArc? The previous projections back in 2022 had $500,000,000 plus for sales for that for the overall line. What is it do you think with just the Class III IV and the current trajectory of the program, where might that be in 2025 now?

Speaker 2

What we're seeing is we want to get this vehicle to market and really gauge the interest. I think there's been a lot of publications out there about the acceptance rate and the speed of the acceptance rate. So we know we're going to have that strong demand eventually. Will that timing happen in 2025 like we originally thought? We're watching that closely, but that may be a year or 2 out beyond that.

Speaker 2

So we're being cautious. And I think that's why you see us narrowing the focus, get a product out in the market, understand its reception and not over commit the company in this EV space. Also going back to your other question, does make cash available to do acquisitions and strengthen our core business as well. So we want to make sure we stay balanced as we go through go forward in the coming years.

Speaker 3

And I think Mike just to add to that, I think as we look at sort of the production ramp up in the timeline, we're probably out a year, right. I mean, just a year ago, we were talking about second half production '23 and the battery issues. Now we're talking about later 'twenty four. And so as we look at it, the program is essentially pushed a year from that perspective. Our plan is to do to a couple of 100 units this year.

Speaker 3

And then we'll start to see that ramp. And I would expect some of the financial milestones that you talked about to push out a year as well, but it gets back to John's point on adoption and acceptance. From a customer perspective, he hit on it in his prepared remarks, but there is still a lot of enthusiasm about what this product can do and how it stacks up from a competitive standpoint. And so we feel very good about it and we want to make sure that we get that right vehicle on the road.

Speaker 5

Great. Thanks so much. I appreciate the discussion.

Speaker 1

Thanks, Mike. Thanks, Mike. Operator?

Operator

Yes. Thank you. And the next question comes from Steve Dyer with Craig Hallum.

Speaker 6

Thanks. Good morning. Most of mine have been answered at this point. Just as it relates to BlueArk a little bit more, how much of the delay do you feel like is attributable just to supply chain and battery issues and things like that? And then how much would you sort of associate with just sort of a little bit softer demand in overall parcel and people sort of moderating their chatter on that in the last 6 or 9 months?

Speaker 2

Really the driver of the delay was the battery. That threw us a curve with Proterra being bought by Volvo and we had technical issues candidly with Proterra as well, all related to the battery. The vehicle is fantastic. When we get the vehicle on the road, the customers use it. A lot of enthusiasm around the vehicle.

Speaker 2

So our challenge is really to make sure we have a battery that meets all the requirements. We have a new partner in 1. They were the original intended battery supplier for our Class 5. So it wasn't a new supplier to us. It's just pulling them ahead into this Class 3, 4 walk in van.

Speaker 2

So there was some work already done, which helps us accelerate. But we're going through that validation to make sure when we put a vehicle out to market, it's going to be at the right quality level really deliver the performance long term that we expect and our customers expect.

Speaker 6

So given that, it sounds like this year is primarily a testing and validation year again and you still feel like demand is quite solid there?

Speaker 2

We do. Meeting with customers, I met with customers personally and there's a lot of enthusiasm around the vehicle, excitement to just get it in their hands. But we don't want to rush it. We want to make sure that, that battery, the final touches and that performance is at the right level. You get one chance to make sure they're satisfied.

Speaker 6

Yes. And then can you just kind of refresh our memory, the Randy Marion order, if there were sort of any timelines or parameters around that when you announced it and sort of when you would expect that to begin shipping?

Speaker 3

Yes, I think the Randy Marion order when we announced it was a multiyear order. Certainly, as we look at the demand side of things and what our production looks like, they will be one of the first customers that we delivered to here in the second half of the year.

Speaker 6

I lost you there at the end, John, but we can take that offline.

Speaker 5

Go ahead. I was

Speaker 3

just saying they'll be one of the first customers that we deliver to in the second half of the year.

Speaker 2

The first group of vehicles, they're blended right in that and they will give vehicles as soon as we're ready to give it to them.

Speaker 6

Got you. Okay. Last question for me, just housekeeping. You talked about share repurchases. How many repurchase shares did you repurchase, I guess, both in Q4 and then also the year, if you have that in front of you?

Speaker 3

Yes, we didn't repurchase anything in Q4. For the year, we repurchased about 1,000,000 shares.

Speaker 6

Okay. And was that pretty front half loaded? I'm just trying to recall what you've said previously.

Speaker 3

No, it was mixed between Q1 and Q3. Correct.

Speaker 6

Got you. Okay. Thanks very much.

Operator

Thank you. And the next question comes from Greg Lewis with BTIG.

Speaker 7

Hey, thank you and good morning and thanks for taking my questions. John, in the prepared remarks, you mentioned the ongoing dialogue with Volvo around the battery. I guess, when should we think about this being, I mean, I'm finalized and then just thinking about some of the challenges we had over the last year, realizing Volvo is a little bit different of a company than the previous supplier. What are the thoughts around maybe a plan B here just to avoid potential, I don't know, supply chain issues down the road?

Speaker 2

It's Greg. What we're looking at and maybe they come across as clear as it could have. We're all in right now working with 1, that new battery source. There we were focused the validation on. In parallel, we don't want to just walk away from Proterra, and which is now Volvo.

Speaker 2

And so we're still waiting to understand what Volvo their intention. They're going through that reorganization with the Proterra Group and we expect to know more in the next 4 to 6 weeks on how we want to proceed. The key point there is we'll invest the resources needed to solve some of the challenges, the issues we had with the battery. But our goal is to be dual source. So we would like them to solve their problem and have that be an option as well.

Speaker 7

Okay, great. And then just, John, on the kind of on the EBITDA guidance for Q1 and full year, obviously, specialty was did great in Q4. Is there some seasonality why it looks like those EBITDA margins are going to come under pressure in Q1, I guess, before looking at playing with numbers and guidance before kind of rebounding to that kind of Q4 run rate. Is that the right way to be thinking about that?

Speaker 3

In SVB specifically or broadly?

Speaker 7

No, just specifically around specialty.

Speaker 3

Yes. I mean, I think the SV business had a tremendous year. I think 20 percent EBITDA margins for the year, which ramped really sequentially throughout the year as well. We've said historically that business is more of a high teens business over the long term as we think about it. And so we'll that is what we're expecting as we enter 2024.

Speaker 3

I think when you look at the total company, volume will be a little bit pressured in the Q1 just based on how demand in the backlog is playing out. And so there will be sequential declines as well, which put pressure on the Q1 margins before we see volumes return as we move through the year.

Speaker 7

Okay. Thank you.

Speaker 3

Thanks, Craig.

Operator

Thank you. This concludes our question and answer session. I would like to turn the floor back over to Randy Wilson for any closing comments.

Speaker 1

Thank you, operator. I'd like to thank everyone for joining today's call. We look forward to connecting with you over the coming weeks as the Ship management team will be hosting investor meetings at the Raymond James Institutional Investor Conference in Orlando on March 4, the NTA Work Truck Week in Indianapolis on March 6 7 and the 36th Annual ROTH Capital Conference in Dana Point on March 18th. Thank you for your interest in The Shift Group. As always, please reach out if you have any follow-up questions.

Speaker 1

Have a great day. With that operator, please disconnect the call.

Operator

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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The Shyft Group Q4 2023
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