The Shyft Group Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to The Shift Group's Second Quarter 2024 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 like now to introduce Randy Wilson, Vice President of Investor Relations and Treasury the Ship Group. Please go ahead.

Speaker 1

Good morning and thank you for joining us. Today, you'll hear from 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. We'll begin with a business overview from our CEO, John Dunn, followed by John Dillard's review of second quarter performance and our 2024 outlook. We'll then open the line for Q and A.

Speaker 1

Please turn to Slide 3, and I'll turn it over to John Dunn, who will begin today's prepared remarks.

Speaker 2

Thank you, Randy, and good morning. I would like to welcome everyone as we discuss our Q2 performance as well as the exciting strategic announcement we made this morning regarding the acquisition of Independent Truck Outfitters, a unique business that aligns well with our growth strategy. For the quarter, we were pleased with our performance given the environment, as we saw benefits from our focus on operational efficiency. Overall, we delivered $12,500,000 of adjusted EBITDA, with significant improvement in our FES business with margin increasing to high single digits in the quarter. We have made organizational changes at the corporate office as well as in the businesses as we continued to drive efficiency across the company.

Speaker 2

We announced earlier in the quarter an order from FedEx, a long time partner for 150 BlueArc trucks. The BlueArc team also achieved key project milestones as we transition to production and we will deliver trucks to customers by the end of the year. Overall, I want to emphasize that Shift team members are acting with urgency to drive improved results with focus on commercial activity, profitability and cash flow. Please turn to Slide 4, and I will expand on our progress. Back in February, I introduced an operating framework to drive sustainable financial growth.

Speaker 2

This framework is anchored by the following pillars: high performing teams, operational excellence, customer centricity and financial growth. We continue to make progress across all pillars. We saw operational benefits in both margin performance and the quality scoring that we have recently received from our customers, which position us well for additional business in the future. We have also increased customer engagement. When I meet with customers, I consistently hear that they appreciate our partnership and are supportive of exploring additional opportunities where we can provide value and ultimately grow Shift's share of the business.

Speaker 2

With that said, today I want to go into more detail and share recent progress on the team and growth actions. Overall, our high performing teams are collaborating, holding each other accountable and working efficiently to deliver for our customers. In the quarter, we were proud to launch our safety initiative, Mission 0. Team member safety is not new here at Shift, but we have made great strides over the past couple of years. A safe work environment is fundamental to ensure that we are a great place to work.

Speaker 2

Our safety mission is straightforward: 0 incidents, 0 injuries, every job, every day. In addition, we have made great strides in streamlining our leadership structure, empowering our teams and recruiting top talent. We consolidated leadership roles at the corporate office and in the FES and SV businesses, while also flexing our operations to reflect the current environment. We will continue to focus on efficiency and flexibility in these areas moving forward. Turning to financial growth.

Speaker 2

I'm thrilled to discuss the acquisition of Independent Truck Outfitters or ITU, which we announced this morning and will significantly enhance our service body discussed how well our specialty vehicles service body business has performed as we've executed our strategy to become a national market leader. This acquisition closely aligns with that strategy, and I will provide additional details on strategic fit and the transaction on Slide 5. With the ITU acquisition, Shift adds 3 locations, a strong management team and it enhances our updating capabilities as they specialize in larger vehicles and more complex service body updating than Shift has historically. The acquisition provides unique cross selling opportunities for us, where we can sell our Royal, DuraMag and Utilimaster products through ITU, while also leveraging their upfitting capabilities and commercial relationships across Shift. Overall, the combination of Shift and ITU is powerful and well aligned strategically.

Speaker 2

From a financial perspective, we view this as an attractive combination, meeting key return thresholds, while maintaining balance sheet flexibility as we move forward. We are confident this transaction is an excellent strategic and financial opportunity for Shift, one that we believe will drive value creation as we continue to grow our infrastructure related business. We look forward to working with the ITU team to integrate the business and deliver significant benefits for customers, team members and shareholders. Now let's turn to Slide 6, and I will provide an update around the status of the BlueArc program. We have made great progress since launching BlueArc back in 2021.

Speaker 2

And I'm happy to say, sitting here today, we are in an inflection point in the program. We are on the cusp of starting commercial vehicle production and our focus is ensuring that we only put high quality vehicles on the road. As we ramp, we have rigorous processes to support a well disciplined vehicle launch. As we approach the delivery of our first vehicles, we are seeing increased customer interest. We're excited to announce the FedEx order earlier in the quarter.

Speaker 2

We appreciate their partnership through the development process. We have recently completed additional demos, providing end users the opportunity to experience the performance and quality of the BlueART vehicle. Customer feedback continues to give us confidence that we have the right vehicle for the market's needs. Turning to product development, testing and validation of the vehicle is now successfully completed. We recently celebrated the 1st production pilot vehicle built on our Charlotte, Michigan production line, a key milestone that validated our production and quality processes.

Speaker 2

We are pleased to report that the battery performance from our supplier continues to perform at our expectations. Overall, we're confident vehicle deliveries will begin later this year with a ramp up in 2025. I am pleased by the incredible progress our team has made and I look forward to providing further updates in the coming months. I will now turn it over to John for a detailed review of our financial results and 2024 outlook.

Speaker 3

Thanks, John. Please turn to Slide 8. Overall, our team delivered financial results above our expectations as we remain focused on driving efficiency across the organization. Sales for the Q2 were $192,800,000 down 14% from $225,100,000 in the prior year quarter. Net income was $2,200,000 or $0.06 per share compared to net income of $4,700,000 or $0.13 per share in the previous year.

Speaker 3

In the Q2, adjusted EBITDA was $12,500,000 or 6.5 percent of sales, down from $15,900,000 or 7% of sales in the Q2 of 2023. These results include EV program spend of $5,900,000 down from $7,400,000 in the prior year. Excluding these expenses, adjusted EBITDA was 9.5 percent of sales. Adjusted net income for the quarter was $5,300,000 while adjusted EPS was $0.16 per share. Please turn to Slide 9, and I'll provide an update on our segment performance.

Speaker 3

In the 2nd quarter, FES achieved sales of $109,800,000 down 21% from a year ago. Adjusted EBITDA for the quarter was $8,400,000 versus $12,500,000 a year ago, primarily driven by lower volume. Adjusted EBITDA margin was 7.6% of sales compared to 9% in the Q2 last year. Sequentially, the FES team made significant progress with EBITDA margin up 6 70 basis points versus the Q1 driven by operational improvements. Quarter end backlog for FES was $295,000,000 down 9% versus the end of the year.

Speaker 3

While order activity was soft and the parcel market has not yet recovered, we have seen positive signals. These include recent reports on year over year increases in package volume at a large parcel customer, as well as indications that walk in van dealer inventory levels have declined and are trending towards healthier levels. Turning to SV, the business delivered another solid quarter with strong margin performance. Sales of $82,900,000 were down 5% compared to last year, with strength in our vocational service body businesses, partially offsetting motor home softness. Adjusted EBITDA was $17,500,000 or 21.2 percent of sales compared to $17,400,000 or 19.8 percent of sales in the same period last year.

Speaker 3

SV backlog of $59,900,000 was down 29% versus the end of 2023 due to lower motor home demand. Please turn to Slide 10 for a discussion on our full year outlook. We are increasing our 2024 profit outlook to the higher end of our previously stated range. Updated adjusted EBITDA is now expected to be in the range of $45,000,000 to $50,000,000 on sales of $800,000,000 to $850,000,000 supported by improved first half profit conversion, the ITU acquisition, offsetting ongoing end market softness. At the midpoint of our current adjusted EBITDA outlook, we will deliver growth of 19% versus prior year.

Speaker 3

Overall, we expect the acquisition of ITU to contribute approximately $25,000,000 of sales and approximately $3,000,000 to $4,000,000 of adjusted EBITDA for the period of August through December 2024 and have included this impact in our current outlook. The ITU impact on EPS is expected to be minimal this year. We remain on track to deliver our free cash flow outlook of $25,000,000 to $35,000,000 and expect sequential improvement in the second half. In closing, our team remains focused on delivering our financial commitments for the year, investing in growth and maintaining our financial strength as we gain momentum heading into 2025. With that, I will turn it back over to John Dunn.

Speaker 2

Thank you, John. Turning to Slide 11. In summary, we delivered improved 2nd quarter results as the team focuses on our operating framework. We increased our 2024 profit outlook and are positioned for improved financial performance heading into next year. The team is eager to welcome ITU to the Shift Group family and quickly drive value as we integrate the business.

Speaker 2

Our Blue Arc truck is moving into production and customer momentum continues to build. Overall, it is a very exciting time for our company, and I'm confident that the Shift team is taking the right steps to drive long term growth and enhance shareholder value. We are now ready to take your questions. Operator, please open the line.

Operator

Our first question comes from Matt Koranda of Roth Capital. Please go

Speaker 3

ahead. Hi, guys. Good morning.

Speaker 4

Good morning, George. I wanted to cover the ITU acquisition in a little bit more detail. Just in terms of the EBITDA multiple you mentioned is 6x, post synergies and tax benefits. Just any way you can help us quantify the synergies that you expect from the acquisition? How long those take to go out and get?

Speaker 4

And then the tax benefits embedded in the language there?

Speaker 3

Yes. I think, Matt, when you look at it, what we noted in the presentation was sales of $55,000,000 with roughly low double digit margins for 2023. We do expect some growth out of the business in 2024. And when you look at it on a full year run rate as move forward and full year 2025, we would expect somewhere in the neighborhood of $10,000,000 of adjusted EBITDA coming out of the business. That does include the impact of some synergies, but and we feel like we can realize those relatively quickly.

Speaker 3

I think the company has a fantastic footprint, has fantastic brands and reach from a commercial perspective. And we feel John mentioned in his comments, our ability to put Royal Duramag Utilimaster bodies through their locations and through their customers is pretty high. And so we think we can execute those pretty quickly. I think from a cost perspective, this really the cost synergies we're expecting out of this transaction are really more on the procurement side of things. It may take a little bit more time to develop, but I think we're more excited about the commercial opportunities this brings us.

Speaker 3

So hopefully that has the perspective you need.

Speaker 4

Yes, that helps. Okay. And then maybe just shifting over the fleet vehicle side of things. You mentioned in the prepared remarks that obviously we're potentially getting some package volume growth at a larger parcel customer. We've got walk in van inventory levels at dealers that may be at healthier levels.

Speaker 4

Maybe just if you could maybe take those 2 data points and draw for us sort of a picture of what does that mean in terms of the timing of order flow and when we see that pick up on the fleet vehicle side, could that happen this year? Is it still likely that it's probably more of a 2025 event? Maybe just wanted to hear your latest thinking around sort of order flow in the fleet vehicle side of things?

Speaker 3

Yes. I think as we look at it from a commercial perspective, our team is incredibly active. John has even spent the last couple of weeks out there with customers really engaging and driving volume. I think as you look at overall parcel market recovery, we previously indicated that it could be second half of this year. It feels like it's more early 2025 at this point.

Speaker 3

I think from our perspective, it's always been about how do we deliver on the EBITDA commitment for us in 2024, while positioning the company for 'twenty 5. And so our teams are incredibly active, looking for new opportunities to drive volume, but likely not recovery till 2025. And I think when you look at that overall from a 2024 to 2025 perspective, there are a couple of catalysts that we have inside the company that are real, right? We've got the acquisition of ITU being incremental year over year. We've got BlueArc transitioning into production.

Speaker 3

We would expect to see some material profit benefits from that. And then on top of that, you've got expected end market recovery on the parcel side of the business. And so as we transition, execute 2024, but really focus on positioning us for growth in 2025 and beyond.

Speaker 4

Okay, fair enough. I'll ask one more and then I'll leave it to others. On the BlueArc side of things, so we have the 150 unit order with FedEx. Maybe just the latest expectation setting for us on the ramp up in production there? And I noticed you had the pilot units go through.

Speaker 4

Maybe when should we expect unit deliveries? I would assume it's later this calendar year. Once FedEx has those units in fleets, I guess, is there a way to think about timing of any follow on orders? Curious to get your perspective on that. And then what does this all mean for, I guess, development costs and the cost of the program as we head into 'twenty five?

Speaker 4

I would assume those costs drop a bit from the 'twenty to 'twenty five that you've guided for this year. Any perspective on that would be helpful.

Speaker 2

To start off with, just want to reaffirm that we will be shipping production units this year. We're ramping up production right now as we go into the end of the year. So we will have sold units out there and we see that continuing to progress into 2025. You mentioned FedEx. We obviously have a nice order from FedEx.

Speaker 2

We're very excited about the interest from other customers as well. And so we're not ready to announce those yet, but we're seeing strong overall customer interest in the vehicle. And as we get vehicles on the road, that interest will continue to develop. We really think we have the right product. So far, all of our demos are coming back with really positive feedback that this is the vehicle they've been looking for.

Speaker 2

We're focused on Class 4. So from a development spending, we're being very constrained in that area. As we go through 2025, we're striving to get close to a breakeven business by the end of the year.

Speaker 3

And I think just to add to that, Matt, I think the initial orders will be or initial deliveries will be the FedEx order as well as the Random Marion order that we previously announced as well. But I think when you look at this from a financial perspective, you noted the $20,000,000 $25,000,000 We're striving for that to be closer to breakeven next year. Do we get all the way there? I think we'll see how that plays out, but the team has done a nice job being efficient in this. And so we don't need a significant volume ramp to offset the operating costs of the business and can get closer to breakeven with even, call it, less than 500 units.

Speaker 3

And so I think a positive for us as well. When you look at these vehicles, we're not out here trying to be loss leaders. We're looking at gross margin positive variable gross margin positive vehicles here right out of the gates, which again helps fund some of that underlying operating costs and gets us closer to that breakeven number.

Speaker 4

Okay. Very clear, guys. I'll leave it over.

Speaker 3

Great. Thanks for that. Thanks, Matt.

Operator

The next question comes from Mike Schliske of D. A. Davidson. Please go ahead.

Speaker 5

Yes. Hi, good morning and thanks for taking my questions. First, I want to start off with a quick ITU question. As you start off with the company here this month and next month, are there any kind of one time costs either related to bringing your other brands to their locations or any other one times we should be thinking of that might take place in the 3rd quarter numbers?

Speaker 3

No, I think in the we talked about $3,000,000 to $4,000,000 for the balance of the year. I think as you look at it, there will be some initial integration costs, but I wouldn't view that as overly material. So it might not be a smooth run rate for the second half, but I think there's nothing that's significant there. I mean these are standalone operating companies today. We're looking to leverage the capability of their business and their team And we're expecting to do that pretty early.

Speaker 3

And it's really how do we sort of get in and sort of accelerate value from a shift perspective on getting our products through their channels.

Speaker 5

Got it. Chris, you're looking at the products that ITU puts out there. Do you anticipate that ITU will open up the doors to some newer different chassis providers, like for example, in the Class 7, 8 size range or is it still the same folks either working with all along?

Speaker 3

Yes, I don't know if we would get up into sort of a Class 8, but they do larger vehicles. I mean, if you look at what we're doing today, we're in sort of the Super Duty range. I think as you look at where ITU is, they're up in a much larger truck size. And so that does open some capacity there. And I think not only us leveraging us being able to sort of sell into their customer base, I think their capabilities in terms of customization design, working with the suppliers is things that we can leverage across the company as well at our different locations.

Speaker 3

And so that's where we're quite excited about this transaction.

Speaker 5

Got it. If we just turn to the motorhome business briefly here, That's been we're going to be about 12 months of a very tough industry here.

Speaker 3

Can you give

Speaker 5

us a sense as to when you feel that might lap in your numbers and start turning to some growth from

Speaker 3

here? Yes, I think similarly probably out in 2025. At this point, I mean, we did have a very strong Q1 that showed growth. I think at the time we pointed to that as maybe a bit of an anomaly. The second quarter was soft, second half of the year will be soft.

Speaker 3

Our SV backlog, you can see is down versus the end of the year, and that's primarily all motorhome. And so we're not expecting that to recover here as we get into the second half of the year. It's another area where we have been focused on efficiency and protecting margins in that business and preparing for that recovery, but it's likely out in 2025.

Speaker 5

Okay. Yes, that about wraps up my questions. I appreciate it.

Speaker 1

Great, Mike. Thank you.

Operator

The next question comes from Tyler DiMatteo of BTIG. Please go ahead.

Speaker 6

Hey, guys. Good morning. Thanks for taking the question here. John, I wanted to come back to some of your comments, I believe it was in the prepared remarks related to the product portfolio of independent outfitters here and how you said some of it is a little bit more complex. I mean, is it fair to assume that in the near term that's kind of how you're viewing it in terms of bolstering your existing product portfolio and then down the line to your point, kind of moving your own products through their channels.

Speaker 6

Can you just kind of help me understand a little bit more around the rationale in terms of what is complementary versus the cross selling components that you also alluded to there?

Speaker 2

I mean, we initially highlighted as well that DuraMag Royal service body is going through their facilities and Utilimaster as well. So we see there's a lot of cross selling that is going to take place and can. It should be rather quick to be able to ramp that up. But ITU also brings is just expertise in some of the different specialty vehicles that we just haven't spent a lot of time in. So if you look at their website, you'll see the cranes, the oil trucks, just variations that we haven't done.

Speaker 2

And we think that's going to be very additive to our portfolio.

Speaker 3

I think when you look at it, Tyler, I think our strategy has been on expanding geographies as well as expanding product offerings. And so we've got additional locations, it gives us access to additional chassis pools and ship through locations and it gives us that product expansion as well. I mean, we're doing crane mounts today, but they're doing crane mounts on a much larger vehicle, as an example, which given sort of growth in underlying infrastructure in those areas, there's a need for all vehicle class sizes. And so we're excited about what the company can bring to us.

Speaker 6

Okay, great. Yes, that makes sense. And then my follow-up here is, I wanted to kind of talk a little bit about that exact point on the national footprint. I know we've talked about this in the past and how we're looking to expand that. I guess, can we talk a little bit more about how what this could mean from expanding into the Midwest and how we're looking to expand nationally and just the different geographic regions?

Speaker 6

I know we have the 3 facilities. Can we go beyond that? I mean, what would it take to go beyond that? It seems like we're focused on the 3 for now. Just any other color there on kind of the geographic component of this?

Speaker 2

Yes. I guess I'll go back to also refer what we've done in Nashville as we've kind of gone national and that was our first step. This just continues on that journey, gives us 3 more locations to continue to expand our overall portfolio. They are Midwest located, so it strengthens our presence in the Midwest, which is definitely a positive where we see there's a lot of commercial activity. And we will continue to leverage all of our products within our different plants.

Speaker 2

So we're better utilizing our footprint where they're not just dedicated for 1 business unit or brand, we're sharing those plants going forward.

Speaker 6

Okay, great. That makes complete sense. Thank you, guys. Really appreciate the time here. I'll turn it back to the

Operator

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

Speaker 1

Thank you, operator. I'd like to thank everyone for joining today's call. The Shift management team looks forward to connecting with the investment community over the coming months, and we will update you through the Shift IR website of our conference attendance. Thank you for your interest in the Shift Group. And as always, please reach out if you have any follow-up questions.

Speaker 1

With that, operator, please disconnect the call.

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