Q3 2022 Shyft Group Inc Earnings Call
[music].
Good morning, and welcome to the chefs groups third quarter 2022 conference call and webcast all participants will be in a listen only mode until the question and answer session of the conference call. This call is being recorded and if anyone has any objections. You may disconnect. At this time I would now like to introduce Randy Wilson Vice President.
Investor Relations and Treasury for the shift script you May proceed.
Good morning, and welcome to the ship groups third quarter 2022 earnings Conference call speaking today will be Daryl Adams, President and Chief Executive Officer, John <unk>, Chief Financial Officer.
Earlier today, we published our results which are available on our website.
Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during our call.
Please turn to slide two of the presentation for our Safe Harbor statement.
You should be aware that certain statements made during today's conference call may be considered forward looking statements.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied.
For a more complete discussion of these risks. Please see the 8-K filed with the SEC. This morning, and other filings, we make with the SEC, which are all available on the company's website.
I remind everyone that the divestiture of the emergency response vehicle business on February one 2020 is classified as discontinued operations.
The results discussed today will refer to continuing operations unless otherwise noted.
And now I'd like to turn the call over to Daryl Adams beginning on slide three.
Thank you Randy.
And thank you for joining us to discuss our third quarter 2022 results.
I am pleased with our overall performance as the team continued to manage through a dynamic environment in the third quarter.
Especially vehicles once again delivered strong results across all product lines.
Revenue for service Bobby's solid results in motor home chassis and contract manufacturing reflect the continued effort by the team to execute on our growth strategy.
In addition, we.
<unk> services saw sequential improvement this chassis inflow continue to improve in the third quarter.
Supply chain remains challenging due to component part shortages and delays impacting production.
The team remains focused on delivering for customers and improving profitability.
Our excitement continues to build around our blue arc electric vehicle offerings as evidenced by our recent customer preorder.
Please turn to slide four.
Demand within our end markets remained strong as backlog is robust and we achieved revenue of $286 million.
However, our reported EPS declined year over year as electric vehicle investment and production inefficiencies caused by the supply chain adversity virtually impacted our results.
The team maintains a focused and nimble approach to our operation.
And remains committed to prudent cost management.
Backlog was $1 billion up 22% versus prior year, but was down sequentially as production improve.
Please turn to slide five where I'll discuss our business segments.
Fleet vehicle and services continued to work through supply chain challenges. Our team remained focused on our performance during the quarter and we remain diligent to reduce production and efficiencies increase.
Production to deliver backlog is chassis pool improved and maintained pricing discipline, while working with customers to meet their needs.
We demonstrated a significant ramp of velocity, our two production in the quarter as customers demand our innovative industry leading products.
Excuse me the <unk> band showcase at the Fedex ground contractors Expo in Las Vegas, 3000 contractors and received positive customer feedback.
Turning to specialty vehicles. The business continued its momentum as we are focused on executing our growth strategy.
Our service body business saw continued strong growth in demand as these vehicles are productive tools, which are critical to the markets. They serve.
We're expanding our position as a leading national service bodies player, which is allowing us to expand royal products into other geographies.
We saw improvement in our <unk> business as F series production ramped up and our motor home chassis business continues to perform well overall, both businesses are working hard to navigate dynamic market conditions and deliver.
Please turn to slide six.
We're excited.
By the continued progress of our Blue our go to market brand as we have received strong interest from a range of traditional customers, including last mile delivery and other fleet operators as well as government agencies.
At the North American International Auto show the merchants fleet summit, the contractors event held in Vegas, and a private ride and drive event and Memphis, our customers received firsthand experience with the blue our last mile delivery vehicle.
Earlier. This month, we also hosted a blue arc showcase.
Huron, Michigan, allowing customers media and investors the opportunity to drive a blue our last mile delivery vehicle. So they could get the <unk> of its performance and drive the ability as.
As customers continue to interact and get experience with the quality of the vehicle their feedback is increasingly complementary of the design engineering and capabilities of our blue our last mile delivery vehicle.
The shift group stands alone in the class three to five space and the emerging EV market.
As a testament to this we secured a preorder of 2000 of our Blue arc last mile delivery vehicles from Randy Marion dealership group, which is a strong indication of customer demand.
We're on track with our vehicle validation testing and we will start building customer field test vehicles. During Q4, we expect to ramp up production in the middle of 2023.
We are truly excited by the potential to blue arc.
And look forward to updating you on our progress.
Please turn to slide seven.
Our industry has a responsibility to creating more environmentally sustainable future.
We recognize that our electric vehicle strategy is part of a broader discussion of our environmental social and governance initiatives.
We recently released our inaugural sustained.
The inability report to highlight our many efforts to make a difference in the world. We are making changes to reduce the environmental impact of our business activities. We are committed to providing the resources and opportunities that will allow all team members to thrive at the shift group.
Finally, we are pursuing excellent governance, and best policies and practices with that I'll turn it over to John starting on slide eight.
Thank you Daryl and good morning, everyone.
Overall, we were pleased to see the business recover and to deliver solid results in Q3.
Revenue for the third quarter was $286 1 million up four 9% from the year ago quarter, and up 23, 2% sequentially with improvements in chassis availability.
Income from continuing operations was $17 $3 million compared to $21 million a year ago adjust.
Adjusted net income was $18 6 million compared with $22 9 million in the prior year.
Diluted earnings per share from continuing operations was <unk> 49 per share compared to <unk> 58 per share in the third quarter of 2021.
Adjusted EPS from continuing operations decreased to 53 per share from <unk> 63 per share a year ago.
Third quarter, adjusted EBITDA was $27 1 million compared to $33 7 million in the previous year.
As a percent of sales adjusted EBITDA declined to nine 5% compared to 12, 4% in the same period last year.
These results include <unk> spending of $7 $7 million.
Turning to slide 10, and I will review, our fleet vehicles and services results.
The Fps team did a nice job ramping production in response to improved chassis availability improving sales output by 35% versus the second quarter.
<unk> revenue was $184 5 million compared to $191 4 million a year ago.
<unk> adjusted EBITDA was $24 4 million versus $36 $4 million a year ago.
The decrease was primarily driven by volume productivity inefficiencies that resulted from ongoing supply chain challenges and cost inflation, partially offset by pricing actions.
Adjusted EBITDA margin was 13, 2% of sales and while down year over year margin was up 260 basis points versus the second quarter.
<unk> backlog was $915 million up 22% year over year, which positions us well for the fourth quarter and into 2023.
Turning to slide 11, and I will review our specialty vehicles results.
The SB team delivered another solid quarter, achieving record revenue and profitability levels with growth across all businesses.
Sales were $103 9 million, an increase of $22 7 million.
Or 27, 9% year over year with the benefit of both higher volume and strong pricing versus 2021.
Adjusted EBITDA was $15 6 million or 15% of sales up 730 basis points year over year compared to $6 2 million or seven 7% of sales in the same period last year.
The improvement was driven by higher sales volume pricing actions to offset inflation and favorable product mix.
<unk> backlog was up 25% year over year to $129 million.
With demand led by our service body business as we continue to benefit from our product and national expansion strategy.
Turning to slide 12, and I will discuss our balance sheet and updated 2022 outlook.
Overall, our balance sheet and liquidity remain healthy at the end of the third quarter, we had liquidity of $168 million and our leverage ratio was approximately one four times adjusted EBITDA positioning us well to fund operations and invest in the business.
In the first nine months cash flow from operating activities was an outflow of $44 $5 million driven by an increase of substantially complete vehicles, but are waiting final components at slight supply chain disruptions persist.
Turning to the full year, while our outlook remains consistent with our prior quarterly communications, given our third quarter performance chassis of chassis visibility for the balance of the year and strong backlog, we are tightening our full year outlook as follows.
Revenue in the range of 1 billion to $1 1 billion.
Adjusted EBITDA of 62, 5% to $72 5 million, including approximately approximately $30 million of expenses related to <unk> initiatives.
Adjusted earnings per share of $1 four to $1 28.
Capital expenditures of approximately $25 million for the full year.
And while cash flow performance has been challenged year to date, we expect to see a recovery in the fourth quarter as delivery of finished vehicles improves.
In closing.
As expected we saw a meaningful recovery in performance as our team has done a fantastic job responding to the improved chassis inflow to start the second half.
Our third quarter results had shift up for a strong close to the year and we look forward to carrying this momentum into 2023.
And with that I'll turn it back to Daryl.
Thank you John Please turn to slide 13.
We are pleased with the solid effort of our team during the third quarter to execute and drive long term value for customers employees and shareholders. We.
We will continue to continue to invest in technology capacity and talent, we will ask for long term sustainability in our business, including the development and launch of a blue arc EV products to meet their evolving needs of our customers.
Our disciplined capital allocation strategy allows us to grow our business and efficiently return capital to shareholders in conclusion, our operational improvement investment in innovation and financial discipline, clearly demonstrate that the shift group as an industrial growth story. Operator, we are now ready for Q&A portion of the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
My first question is from Steve Dyer of Craig Hallum. Please go ahead.
Thanks, Good morning, guys.
Alright.
Given you still have like a year's worth of backlog given the stuff that you're quoting in rfps and things like that with your.
What is your final mile customers looking out a year I mean are you I guess qualitatively are you still are the majority of the conversation sort of where all the ice chests season ice vehicles are you starting to quote more easy stuff sort of Hollywood given again that we're talking about a year old now.
Could you just maybe give us a little color on those conversations.
Yeah sure Steve This is Daryl.
No all of the discussion from all of our customers is still.
All about ice.
And chassis availability.
The discussion on EV is us going out to our dealer network and working with mainly the contractors.
And having discussions with our customers I think youll see.
<unk>.
Once we get our products, our EV products into the customers hands in the first half of next year for their testing.
We should probably see some more activity on the EV side from the shift group.
Got it.
And then could you remind us I think it's 25 or $30 million of sort of EBV specific cost. This year can you remind us sort of how we should model that going forward.
Yeah.
Yes, so we've.
We communicated a step down next year, we haven't put out a specific number.
But if you go back to sort of our original investment thesis is to step down to somewhere in that.
And the $15 million range.
And should we think about that as kind of a maintenance capex level for that piece of the business going forward or is next year still some some growth pieces to the.
No I think we've we've indicated higher R&D going forward and so I think.
Certainly as you.
The EV volume really starts to ramp when you get into 2024, you've got support of volume for that but we do expect that too to.
To maintain it at a higher sustainable level going forward.
Yes.
Got it last one for me just I mean.
We've been talking about chassis availability forever, obviously big step up in units.
This quarter can you sort of I guess.
Can you quantify or in any way to kind of give color as to in the list last quarter. It was one quarter doesn't make a trend, but it would appear to be I don't know if you'd say out of the woods, but certainly on the upswing there or is that something you expect to continue into the first half of next year.
Yes, all indications, Steve and discussions that I've had with some of the suppliers personally.
Our that again I don't want to say, we're out of the woods, but they're more confident that <unk> will continue.
Alright got it thanks, guys. Good luck.
Thank you.
Yes.
The next question is from Matt Koranda Roth capital. Please go ahead.
Hey, guys. Thanks for taking the questions.
So just a near term one real quickly.
The implied fourth quarter outlook I guess, the midpoint of your revenue guide implies about 325 million.
In the fourth quarter, which doesn't seem like it was a pretty big step up.
Sequentially, maybe could you just talk about sort of what you're seeing on the supply chain profit gives you confidence that you can step up that revenue run rate into the fourth quarter.
Yes, I would say.
A couple of things Matt.
If you think about sort of chassis flow as it progressed through the year, we saw improvement.
Late in the second quarter and that continued into the third quarter, where we were really healthy call. It mid Q3.
And so we would expect that to sustain based on the visibility that we have now and so call. It a full quarter, maybe a couple less days, but still a full quarter of chassis visibility we have.
Also do you have.
Some of the USPS volume.
In the fourth quarter as well so is about $15 million of just chassis pass through as well.
Okay. That's helpful.
And then maybe if you could what other near term one for you John .
If you could just talk about sort of the working capital.
The reversal that you are expecting in the fourth quarter or does that primarily come from the inventory flushing that chat and a bunch of finished vehicles that were waiting component. So assuming that those sort of flush, but maybe any more color on just sort of how we should expect cash flow to.
The puts and takes in the fourth quarter.
Yes, yes, no that is the biggest piece I think.
At the end of the third quarter, we did have a decent amount of vehicles that we're missing.
One or two components that we needed to flush through we've seen progress on that is as we've even started October as we're nearing the end of October but as.
As we got into Q4.
And so we expect that to continue so that will be the biggest piece as we convert those vehicles able to invoice them and then convert to cash.
And then inventory.
Maintained higher inventory levels through the year.
Part of that strategic other parts trying to align it to the schedule and with improved chassis visibility now through.
Through certainly the end of the year and enter into January February .
We're able to sort of manage that more efficiently and so that'll be the other piece that helps us.
Helps us drive cash conversion here in Q4.
Great and then.
One other one on just what the improvement in chassis visibility.
You are sitting there.
Should we assume that sort of the EPS segment doesn't have I guess the typical seasonality that you guys, usually had where <unk> was a bit lower than the third and fourth quarter should we expect sort of a sequential increase in EPS.
From the fourth quarter into the first just any helpful. It sort of seasonality and how to how to think about sort of as you clear the relatively large backlog you have and how that plays out.
Yes, I wouldnt.
I think we'll continue to have seasonality in the business for a couple of reasons there are model year changes.
Yes.
Shutdowns.
Oems have at the end of the year, which naturally impacts flow.
Youre really starting in December and into the first quarter and so while we have visibility we do expect that to.
To not be sort of linear or it.
As we move forward and so I think youll have the natural seasonality I think on some of our product lines as well we will start to see orders here later in the year in early Q1 to fill some of those gaps as well.
Maybe later in Q2 and Q3.
Okay, I guess that threat into my next question and the last one and I'll leave it to others, but just on FBS in order flow.
Your order flow at the moment in the third quarter.
Does just seem constrained to me.
And maybe just given some of the checks we've done on sort of lead times and availability of chassis at it seems like maybe that is the issue that's constraining order flow in Fps, but maybe just.
If you could level set us on what's the right level of sort of new orders to expect over the next couple of quarters should we expect it to be a little bit constrained until we clear out some of the backlog just given the lead times have been extended.
In that segment.
And whats the catalyst I guess to kind of pick up on order flow and then.
Maybe just also just clarify I just want to make sure I don't think theres any.
And backlog at the moment, but just clarify for us if there is anything in there.
I'll take the second part first which is no no <unk> revenue in the.
<unk> orders in the backlog currently I.
I think in terms of timing I think you kind of hit it I think lead times are going to be a constraint here until we see that improve.
Obviously, we've seen chassis improvement, but components continue to be a bit of a challenge just from a broader supply chain perspective.
You go back historically, even in our orders are not linear we've got lumpiness and so we would expect that to continue and so you might see some.
And pockets of orders here in Q4 and into Q1.
But we're very comfortable with where we are from a demand perspective.
As we look out in the 'twenty three.
Awesome I'll leave it there thanks.
Thanks, Matt Thanks, Matt.
The next question is from Mike Swiftkey at D. A Davidson. Please go ahead.
Hello, Good morning, and thanks for taking my question John I wanted to show up on your last answer there, maybe just get a little bit more granular.
Can you talk with larger fleets.
And even some of the smaller ones.
What's been the most.
In your most recent discussions in the tone of those discussions about.
Volume.
Additional vehicles from here I guess, what's been the tone around new Capex.
Potential for some parts of the economy, turning downward next year.
Yes, Mike this is Daryl.
Our discussions that we've had is they are all still positive.
I think they may have.
Extended.
Some of their facilities.
More than their vehicles in the past because you have to remember they didn't receive the vehicles they needed in 2021 or even the first half of 'twenty. Two so there's a bit of catch up still for them and I think that's shown in our backlog.
Get the vehicles out.
As we've discussed in the past, we still see a lot of rental vehicles at the distribution centers that are close to the offices.
We operate so.
They need to vehicles and I think thats.
Key for them and as they continue to have replacement needs.
In normal growth.
There's still a nice inflow of discussions about the quotes.
Got it.
Thanks, and just turning over to John Real quick I want to clarify on your other answers to questions from earlier about the Blue ox spending next year.
I know, it's going to be stepping down.
But in prior events, you've mentioned the overall business because of some revenues next year it could be pretty much EBITDA neutral.
That's still the case, so going from 30 to zero or is it three to 15.
Costs for 2023.
Yes.
I don't necessarily want to start guiding on 2023, specifically, we did talk about it at the ride and drive event, where we will see some revenue contribution next year.
We will but we do expect sort of R&D to step down year over year, and so I think thats consistent with what we've what we said previously.
Okay.
And maybe thirdly, I can I ask about the motor home business.
We are seeing some of the smaller motor home category is seeing a bit of a downturn here.
What's the outlook for your business in the larger or I guess in case of shift, but the absolute largest categories that you guys plan is that.
Does that differ wildly from the smaller total and much smaller.
Product these days.
Yes, I mean, I think generally we've certainly lag some of the changes that have happened in the <unk> and lower size via smaller size vehicles.
Earlier in the year.
We've said that.
We're certainly comfortable with this year, we just actually had I think.
Record if not close to record revenue here in Q3 on the on our product lines.
So.
That's not to say that it's going to.
Those levels are going to sustain forever I think as we get into 'twenty, three we'll probably see some negative impact, but we remain confident in our ability to take share from that perspective as well as look for other avenues to increase our revenue, including the Red Diamond launch that we did to expand aftermarket parts and so I think as you look at that business in total or.
We're not expecting to see significant declines as we move forward.
Okay. Thank you I appreciate the discussion I'll pass it along.
Thanks, Brian .
The next question is from Steve with session of Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning, Phil.
Hey, I was hoping just to start maybe quickly a follow up on John your comments around the U S. USPS truck body contract and the $15 million of chassis pass through revenue in <unk> can you remind us of the size of that contract and sort of how much up on pass through revenue, we should be expecting for 2023 at this point.
Yes, so I think we've set the contracts about.
The pass through a portion of it is about $40 million.
And so we've seen we haven't seen any of that yet so youll see some of that come through in Q4, and then into 'twenty three Unfortunately, some of the chassis delays.
From from the Oems.
Push the schedule on that project.
Okay. That's super helpful. And then I wanted to talk a little bit about specialty vehicle margins.
They looked super strong in fact kind of close to your long term targets already.
Kind of curious if you could talk about Directionally, where you expect them to go from here or any puts and takes that we should think about.
Coming out of the quarter.
Yes, I mean, I think that the team continues to perform incredibly well.
I wouldn't necessarily start modeling, 15% on a long term basis.
But as you look at the strength of the underlying businesses that we have there we do feel confident with the margin profiles of those products and businesses as well as our ability to sort of expand over time.
I think when you.
Alright.
I mean, I think when you look at it on a year to date basis, you're probably in the 13% range, which is which is.
Still a great increase year over year.
Probably that low teens is maybe where it naturally is and then we will see ya.
Sort of peak, depending on mix of products and customers with any business in any given quarter.
Okay.
And then just my last one I think in the earnings release, you all pointed out mix as a positive to fleet vehicles and I'm. Just curious if we could broadly talk about the mix within that segment. Today, if you could give us directional comments around velocity versus traditional walk in van and other sort of products and how that may.
It compares to the backlog as it stands today.
Yes, I think when you when you look at what we disclosed I think we saw favorable pricing in that business, which we've combined with mix I think as we.
Looking forward, we do like the margin composition of the product lines that we have I think we've said historically truck bodies.
A little bit lower than the average we have seen significant growth there which is creating some.
Negative mix for us.
But I think when you put pricing mixed together we've got.
The positive year over year performance with a little headwind from mix.
Okay I appreciate it.
Thanks, Kevin Thanks Lewis.
This concludes our question and answer session I would like to turn the conference back over to Randy Wilson for closing remarks.
Thanks, operator.
Look forward to meeting with analysts and investors that the bird Barclays Craig Hallum, and Deutsche Bank Deutsche Bank conferences here in November and December we thank you for your participation today in today's call and your interest in the ship group with that operator, you may disconnect the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.