Q1 2023 The Shyft Group Inc Earnings Call
Kurt.
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 of the shift group. Mr. Wilson You May proceed.
Thank you for joining this morning's call Im joined by Daryl Adams, President and Chief Executive Officer, and John <unk>, Our Chief Financial Officer.
Their prepared remarks, we followed by a question and answer session.
For today's call. We've included a presentation deck thats been filed with the SEC and is also available on our website.
Before we begin please turn to slide two 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.
Primary risks that management believes could materially affect our results are identified in our forms 10-K, and 10-Q filed with the SEC.
We will be discussing non-GAAP information and performance measures. We believe are useful in evaluating the company's operating performance.
During today's call, we will provide a business update before moving onto a more detailed review of the results and our 2023 outlook.
We will then open the line for Q&A.
Please turn to slide three and I'll turn it over to Daryl Adams.
Thank you Randy and good morning, everyone. Overall, the shift group had a solid start to the year delivered improved financial performance, while continuing to deliver on our strategy and long term growth initiatives.
Our team achieved 18% sales growth led by another record quarter in our service provider business and improved performance and fleet vehicles and services.
Our ability to increase output enabled us to improve profitability by over $11 million versus the first quarter of last year and.
In addition, we delivered positive operating cash flow in the quarter and brought in nearly $34 million more than prior year, which allowed us to efficiently deploy capital.
We continue to make great progress on our Blue arc electric vehicle program in the quarter. We were very pleased to announce that not only did we achieve car and EPA certification for a class three four and five EV delivery vehicles.
But we did so with performance that more than exceeds our fleet customers needs.
<unk> test results for our class III vehicle included a 225 mile City range and over a 200 mile combined City Highway range.
Which can more than comfortably handle a daily delivery route.
I would also like to take a moment to highlight a fantastic addition to the shift group as John Dunne joined the company in January as our fleet vehicle and service President he.
He is a proven leader in manufacturing customer relations and product development and has made an immediate impact with our employees customers and suppliers.
Turning to slide four.
Over the past five years, we have strategically move the company towards last mile delivery and infrastructure focused specialty vehicles. We remain confident in these end markets and how the company is positioned to win over the long term.
Consistent with our commentary in February the market and macroeconomic environment remains dynamic I will take you through how that looks by segment, starting with fleet vehicle and services.
We continue to analyze the parcel market, including performing independent market surveys monitoring customer announcements and reviewing published industry reports. The consensus is clear after an acceleration driven by the Covid pandemic and subsequent pause and ecommerce penetration the industry growth rate is expected to be in the <unk>.
Mid to high single digit range for the proceeds of the future.
Driven by the secular shift to e-commerce as a leader in this space, we are well positioned to benefit from this growth.
As the operating environment unfolds in the near term, we continue to hear mixed feedback from our fleet operators dealers and suppliers.
While certain fleet operators are looking to accelerate fleet replacement others are still working to deploy vehicles from purchases made during COVID-19 are working through efficiency actions given economic uncertainties.
We remain close to our customers to support their fleet needs. During this time, but remain cautious given these market signals.
We remain flexible in our operations and will take the appropriate cost actions required to balance efficiency and growth.
As we have previously communicated the backlog in FBS continues to normalize from the higher levels that we saw during COVID-19.
Driven by the improvement in production rates and supply chain.
<unk> ended the quarter with a backlog of $585 million, which is still elevated compared to pre COVID-19 levels.
Moving to specialty vehicles.
Continued investment in infrastructure supported by Federal government spending is bolstering demand for work trucks with funding across end markets, including transportation power and grid enhancements and other critical infrastructure needs.
As projects begin contractors fleet operators are investing in their fleet to meet demand.
Sales of our work truck products were up 22% year over year, delivering above market growth and demonstrating strong customer demand.
Turning to our motor home chassis business, we like many others. Our previously communicated overall softness in the RV market while.
While the class a diesel segment is less cyclical we have experienced declines as well.
Our market share continues to remain strong and has been trending favorably demonstrating the value of our product innovations and quality overall the shift group continues to have industry, leading brands that are well positioned to win in the markets we serve.
We remain confident in our team's ability to execute in these dynamic times deliver for our customers and achieve our long term financial targets.
Now share some exciting developments underway and our FBS and SSD businesses.
Please turn to slide five.
Starting with Fas highlights.
As discussed earlier, we have seen certain delivery customers accelerate investment in fleet replenishment. We're excited to have been awarded a commercial off the shelf contract for over 18000 cargo van outfit split between Ford E Transit and Ram Pro Master.
We expect deliveries to begin in mid 2023 and <unk>.
And into 2024.
This win demonstrates our position as a trusted industry partner and reflects our ability to deliver a highly quality product at high volumes moving to our <unk> highlights.
We have been successful and our service body geographic expansion.
And continue to execute our strategy of being a leading national provider.
Consistent with this strategy, we recently announced the opening of our new Tennessee location, which will serve as a hub for opening Royal Jeremy Magnum and Strobes products.
This location provides direct access to the one one of the fastest growing regions in the country.
And enabled us to secure additional OEM chassis pools, which will help accelerate our growth in an already strong performing business.
Turning to slide six.
I will provide an update on our blue arc EBIT development program, we made great progress in the first quarter and we are on track with our original development timeline.
Which has us starting vehicle production in the second half of the year at.
At the MTA work truck show in March we saw significant interest from customers dealers and other industry partners.
We also successfully hosted numerous future customers as part of our ride and drive.
This positive response emphasizes that are blue arc Evs are differentiated within the commercial electric vehicle industry, both for their design and the performance.
In the first quarter. The fact that we achieve carb approval positions. The previously disclosed discussed preorder with random to a firm commitment their team remains excited about our progress and we continue to work with them on finalizing specifications for their first deliveries.
We also made solid progress with our production facility and remain on track for manufacturing readiness.
We continue to have positive momentum, both operationally and commercially in the coming months, we expect to deliver on key milestones, including delivery of our first test units to key customers expansion of our national dealer and service network.
<unk> commitments commencement of pilot and production vehicle build.
We are proud of the progress we have made and we have efficiently executed. This program and look forward to providing updates on future calls with that I'll now turn the call over to John to discuss our first quarter financial results.
Consistent with this strategy, we recently announced the opening of our new Tennessee location, which will serve as a hub for opening Royal Jeremy Magnum and Strobes products.
Thank you Daryl and good morning, everyone.
Please turn to slide eight and I'll provide an overview of our financial results for the first quarter.
As we anticipated our team performed well in this dynamic environment, delivering solid sales growth and significant improvement in profitability. After a challenging start last year.
Sales for the first quarter were $243 4 million up 17, 7% from the year ago quarter.
Year over year improvement reflects strong service body and truck body performance and improved chassis supply in our walk in van and <unk> product lines.
Net income was $1 7 million or <unk> <unk> per share compared to a net loss of $3 9 million or <unk> 11 per share in the previous year.
We improved adjusted EBITDA of $10 8 million or four 4% of sales up from a loss of <unk> $6 million for negative <unk>, 3% of sales in the first quarter of 2022.
These results include <unk> spend of $8 5 million up $4 1 million from the prior year.
Excluding ebay spend adjusted EBITDA was seven 9% of sales of 610 basis points year over year.
Adjusted net income improved to $4 3 million compared to a loss of $2 1 million in the year ago quarter.
While adjusted EPS growth to <unk> 12 per share from a loss of <unk> <unk> per share last year.
I'll now walk through our first quarter results by operating segment, beginning with fleet vehicles and services on slide nine.
The team delivered improved performance year over year as we saw the benefits from prior year truck body expansion efforts as well as higher production output driven by healthier chassis supply.
While margins did significantly improved year over year, we do continue to experience inefficiencies as we worked through the impact of supply chain challenges.
<unk> achieved sales of $159 4 million or 41, 5% compared to $112 7 million a year ago.
<unk> adjusted EBITDA was $12 5 million versus a loss of <unk> $9 million a year ago.
Adjusted EBITDA margin was seven 8% of sales compared to a loss of <unk>, 8% of sales in the first quarter last year.
Please turn to slide 10 for the specialty vehicles first quarter results.
Our specialty vehicles business continues to perform well despite the softness in the motor home chassis business.
The team delivered our third consecutive quarter of adjusted EBITDA margin of more than 15% driven by strong operating and commercial performance and our work truck businesses.
First quarter sales were $87 2 million or seven 4% decrease from $94 2 million in the prior year.
Adjusted EBITDA was $13 9 million or 15, 9% of sales compared to $10 1 million or 10, 7% of sales in the same period last year, reflecting strong operational performance and the impact of improved price and mix.
Please turn to slide 11 for our 2023 outlook.
We are pleased with our overall start to the year and the underlying performance in our business. Despite an uncertain operating environment we.
We delivered first quarter performance that was in line with our expectations and as we look to the balance of the year, we are reaffirming our full year guidance.
We remain cautious on demand in the broader economy.
And are taking appropriate actions to remain focused on both cost efficiency and growth.
Our 2023 outlook is as follows follows.
Sales to be in the range of 1 billion to $1 2 billion.
Adjusted EBITDA of $70 million to $100 million, representing 20% growth at the midpoint.
Adjusted EPS of <unk> 98 per share to $1 60 per share with shares outstanding of approximately $35 8 million, which includes the reduction in shares given recent stock repurchases.
And finally free cash flow conversion as a percentage of net income expected to be greater than 100% as we drive down working capital.
Please turn to the capital allocation slide on slide 12.
Overall, our balance sheet remains strong and we were able to maintain an overall net leverage ratio of <unk> nine times, while investing in the business and returning capital to shareholders in the quarter.
After delivering strong cash flow generation to end 2022, we generated $5 9 million of operating cash in the first quarter demonstrating significant year over year improvement.
Further progress on reducing working capital remains a key focus area for the company.
Shift organic investment priority is the development and launch of the Blue Earth EV.
As we ramp up production levels in the coming years Blue arc is expected to be a significant earnings contributor and deliver favorable returns.
We remain flexible and other capital deployment and while we continue to evaluate M&A. We are also focused on returning capital to our shareholders when appropriate as evidenced by the $10 7 million deployed in the first quarter through repurchases and dividends.
In closing, we are committed to generating cash flow and maintaining a robust balance sheet to support strategic investments future growth and efficient returns to shareholders.
Now I'll turn the call back to Daryl for closing remarks. Thank you John Please turn to slide 13.
As the shift group, we have created a compelling industrial growth company.
Our priority start with a culture of customer focus innovation, we are driving operational excellence across the company and our financial strength allows us to invest in long term growth and deliver returns ahead of our peers.
We have the right people and processes in place to execute our strategy I am proud of the dedication and agility of our team members as they remain focused on delivering value for our customers and shareholders.
I would like to conclude today's call by announcing that Todd <unk>, our COO, who joined the shift group four years ago as recently communicated his intent to retire mid year and we are working on a orderly transition since joining shifts in 2019.
Todd has been instrumental in laying the foundation and progressing lean and operational excellence across the company over the last several years, we have built out the depth of our operational experience across our businesses and we will look to these leaders to drive our continuous improvement journey going forward.
<unk> insight and we'd like to wish him well in retirement, operator, we're now ready for the Q&A portion of the call.
And at this time well begin the question and answer session.
To ask a question you May press Star and then one on a touchtone telephone.
You are using a speaker phone would you ask you please pick up the handset before pressing the keys.
So it's all your questions you May press star two.
Once again that is star and then one to ask a question.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Felix <unk> from Raymond James. Please go ahead with your question.
Hey, good morning, everybody.
Good morning Felix.
Hey, first of all congrats on the output Palm Charles.
Curious if you could talk about that.
Just curious if you could maybe comment on the aggregate revenue impact of the 18500 units.
And also if you could comment on the timing I know mid 2023 Star I'm just curious if it's if it's going to be all wrapped up by the end of 2024.
Yes, Phil.
This is John I think when we look at that that contract.
Think about an update for US is mid single digit thousands of revenues youre talking north of $70 million from that perspective.
It is an exciting win for the team as we continue to support the customer.
And Kerry on the long relationship that we've had there I think as we look at timing, we mentioned that it's across two different platforms. Both the E transit as well as the ramp pro Master.
Those will be bit of a sort of timing sequence from that perspective, but.
We expect to.
To begin production mid year, there will be a portion of that that does extend into 2024, though but we're extremely excited about the wind and the opportunity our team did a fantastic job being able to secure them.
Okay got it that's helpful.
And then just on the backlog I know, it's stepped down a bit but I just wanted to clarify that does not yet include any any of the EDI preorders.
And then just bigger picture I'm just curious if you could talk about how youre thinking about opening those blue arc.
Order books.
Just given the anticipated production start here.
Yes, I think from a blue arc perspective, I mean, we continue to see demand as <unk> talked about in his comments.
A high level of demand and interest from the customer base. We continue to work through building out the dealer network as well as working with key customers and getting vehicles in their hands here, which we expect to do in the second quarter.
When you look at the backlog to your point it does not include the.
The the order that we secured from a committed order from from Randy Marion that we previously discussed.
Our intent here at this time is to really.
To report backlog from.
Our legacy business perspective, but as we look at Blue arc really talk about vehicle commitments and a piece of that is really because it's tied to our overall production levels.
So we've talked previously about ramping the 3000 units here by 2025.
So putting in order in there thats multi years from a dollar perspective.
We don't necessarily need or want to.
Artificially inflate the backlog and we think production is actually a better representation of what future sales will look like versus <unk>.
<unk> is a multi year order.
So again vehicle will talk vehicle commitments.
And then continue to talk backlog in our legacy business.
Got it understood I appreciate the time I'll pass it on.
Thanks. Thank you. Thank you.
<unk>.
Our next question comes from Mike <unk> from D. A Davidson. Please go ahead with your question.
Good morning, and thanks for taking my question.
I wanted to start off with one.
A quick follow up on the off the shelf.
Or is that we've been talking about so far on the call.
Is that the kind of order, where you take ownership of the.
Of the chassis that you have in previous large orders at this type work.
Typical up fit order, where you are able to build on top of an existing.
Yes.
Congratulate you pitch your.
Your balance sheet a piano.
Great question, Mike Good morning.
This is a traditional uptick contract where we're not taking possession of the chassis. It's just our our content and labor that's going into these vehicles.
Great outstanding.
Your comments Daryl on.
So the final mile business being a mid to high single digit kind of industry growth rate for the foreseeable future.
Is that roughly in line what you expect the actual SBS business to go over a long period of time here or do you have.
Then blew off any kind of market share.
<unk> or other ways, you can outgrow or perhaps entre perform.
That growth rate here.
Yes. Good question, Mike So in the parcel delivery space, Yeah, we're comfortable with the mid to high single digit number I think what can accelerate the growth of <unk> would be the truck body business as we continue to see nice orders come in on that.
And Thats something that we jumped back into a couple of years ago, and we're seeing good order intake and customers are excited about our products. So.
Longer term I think that might add a little bit more to it to bump it up a percentage or two or so but.
The main driver as you know in Fps as the mature business is the parcel delivery.
Got it thanks for that.
And then looking at specialty vehicles real quick.
Do you expect that.
Good margins to continue.
The foreseeable future given the given the strong strong strong environment for demand can you give us some of the drivers there is it just volumes or.
Have some supply chain improvements you could point to as well on that on that.
Segment.
Yes.
As we've talked about in the prepared remarks, we've seen three fantastic quarters in a row delivering north of 15%.
I think as we look at that business forward and the team has done a really nice job, particularly on the work truck side of the business.
The service bodies and the like.
<unk> price as well as efficiencies in the factories and so continue to see strong demand I think and.
Certainly we expect to continue to see momentum.
From that perspective.
And like we said that the team has done a great job, both commercially and operationally to position that business and continue to move forward.
Got it once these one last one in here, if I could the guidance being pretty much unchanged.
It's still a pretty wide window.
No.
Third the way through the.
The year already can you maybe just review the big questions, you're ready to answer before you would narrow that got it and just how does the low high or.
Middle of the range here.
Yes, I mean, I think when you look at how we've guided the year on our last call we talked about doing mid single digits in the first quarter, which.
We just delivered we've talked about roughly 30% of the year in the first half.
Which is still in line with our expectations I think as we look to the second half of the year, we want to make sure that we understand what the.
The demand side of things will look like before we solidify and I think filling filling in with.
Filling in our sales with.
With with the off the shelf order and we talked about.
Earlier, the ups order things like that I think there's a couple different dynamics there from a lever perspective that would give us.
Give us.
Our put us in a position to narrow the guidance.
Great I appreciate the answers I'll leave it there. Thank you.
Thanks, Mike Thanks, Mike Thank you.
Our next question comes from Greg Lewis from <unk>. Please go ahead with your question.
Thank you and good morning, everybody and thanks for taking my question Daryl.
Was hoping maybe for a little bit more color on those comments around the mixed demand I mean, you touched on it with some of the existing fleet being.
Squeezing out efficiency could you maybe talk about the opportunity for shift as some of these companies. Some of your customers kind of are in the process.
Basically trying to extract some more value out of some of our legacy.
Vehicles.
Yes, I think good question, Greg I think it's.
Maybe a little early to.
Put a pin in anything certain but I think when you think about efficiencies right.
I'm sure you read the same articles, we are but maybe if you look at it a different way efficiency could also be.
Maybe getting rid of some of their older vehicles and moving to more fuel efficient vehicles.
Which we would have if they choose to do that we would have a velocity vehicle, which gets double.
The fuel efficiency of a typical walk in van and the cargo space is slightly smaller.
So that's that's one option that our sales guys are talking to them about but I think it's too early theres still trying to figure out, especially if you look at the Fedex too.
Express to the Fedex ground articles that have been out in the press right. There just on the startup of new project called drive so we.
Rest assured that we are sitting in meetings with them understanding that staying close and offering the products that we have to help them become more efficient we've been great partners in the past and expect it to continue.
Okay, Great and then just real quick on the call.
And we're going to keep the EV arc out of.
I'm, sorry, we're going to keep the.
We're going to keep it out of the backlog, but as we think about that normalization of the backlog.
Is there kind of how should we be thinking about that run rate of kind of normalized just so.
Yes.
Yes, I think when you when you look at.
Where this business historically operated its in the four to six month range and so as you look at.
Our next 12 month revenue historically, we would've had.
All at $45, 50% of that in backlog and we're still north of 60, if you and if you look at our 2023 guidance.
Extend that and so we would expect as we've said consistently to see that normalize here over the next couple of quarters.
Probably Q3, maybe.
Later in Q3 Q4, but.
Our view on where we are in our comfort with that Hasnt necessarily changed.
And so we expect to see that play itself out within the year.
Okay perfect. Thank you very much for the time.
Thanks, Greg.
Yes.
Our next question comes from Steve Dyer from Craig Hallum. Please go ahead with your question.
Yes.
Good morning, guys.
I may have missed.
The SP segment really fantastic margins better than they've been in a long time was there anything specific that drove that or was that just mix within the segment or was there anything particular to call out.
I think certainly a little bit of mix you talked about some motor home softness in there, but I think.
Really just strong performance within our service body and work truck businesses, both from a pricing and growth perspective, as well as just driving efficiencies in the factories.
Got it.
<unk> thousand 500 up fits you've talked quite a bit about it.
Is that a new customer or is that just one customer or any other color you can sort of joke around that to frame it up.
Yes.
Single single customer.
That we've been a partner with for decades.
So really good.
Good opportunity for us as they look to replenish our legacy fleet for us to step in and provide up to up fitting content, which we've been doing over the last.
The last number of years.
And so really just a continuation of that again I think they're all talked about.
Both from a quality perspective, as well as our ability to just deliver at high volumes. We think is a differentiator for us.
We're happy with that business.
Got it okay. The.
The rest amount have been answered thanks, guys.
Thanks, Steve Thank you.
Once again, if you would like to ask a question. Please press star and one our next question comes from Matt Koranda from Roth MKS. Please go ahead with your question.
Hey, guys good morning.
Just wanted to ask a more pointed good morning, guys.
Just wanted to ask a more pointed question on the philosophy around guidance I guess no change to the range that you provided despite a pretty big win just curious if there's something specific that you can point to that offsets that incremental revenue within 23 or is it just a more general tone of caution that you have towards the sort of the overall environment.
Yeah, Matt this is Daryl.
I think it's the latter that you brought up right as there is still a lot of moving parts.
We're excited about the order.
It's definitely going to.
Help move the needle, but there is still some uncertainty that we continue to hear about and maybe I didn't mention that earlier call is still early in the process of our traditional customers trying to figure out how they're going to become more efficient or what actions you can take to be more efficient. So.
It's just still haven't cautious still seeing some different.
Comments coming in from even different one different customers recently in the news. So we're just being cautious on that.
Okay Fair enough and then just on the margin profile.
That business, specifically, if I could.
I guess.
Historically office has been accretive to the margin profile of that should we expect anything different on that front with this particular piece of business.
No not necessarily I mean, I would say.
At the up fit business in general is a bit.
Shorter cycle of our business and so.
If the FBS backlog four to six months, it's typically on the shorter end of that and so when we gave guidance back in February we had assumed some level of up that business for the year. This obviously filled that in and so it's not I wouldn't view it as completely incremental I think it's sort of solidifies that outfit.
That outfit assumption.
But again, it's a great opportunity for us and I think physicians as well.
Okay got it and then curious on Fas.
Should backlog normalize like either if you want to characterize it in the form of by quarters months. However, you want to characterize it would be curious to get your take on where FBS backlog should normalize over the next quarter or so and then what does that mean for near term order flow.
Yes, I mean, I think as you I mean, it would be tough to pinpoint a number there it just because given that there is a number of variables.
But I think like we said we expect it to normalize here over the next couple of months I think if you look.
Really over the last four quarters or so.
Had modest orders in that business coming off that record high backlog I think we expect that to continue here in the near term.
Until it normalizes and then see some some activity from that perspective.
Okay Fair enough and then just.
One for me on Blue Arc, just wanted to get a specific sort of.
Some color I guess on.
Right with customer testing, how thats going to have vehicles now in the field, maybe you could just speak specifically to how that's progressing.
Yes, Matt this is Daryl.
Customers do not have the vehicles in their hand, yet we're still working through development testing.
And the big.
A milestone that we have to achieve as the brake testing, which would give us ABS. So that when customers have the vehicles that are certified to be safe and we expect that to happen later in this quarter.
Okay, Great I'll jump back in queue guys. Thank you.
Great.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to Randy Wilson for any closing remarks.
Thank you and I'd like to.
Okay got it and then curious on FBS, where should backlog normalize like either if you want to characterize it in the form of like quarters months. However, you want to characterize it would be curious to get your take on where FBS backlog should normalize over the next quarter or so and then what does that mean for near term.
Thank everyone for participating in today's conference call and your interest in the ship group over the coming weeks, we will be hosting one on one investor meetings at the advanced clean transportation Expo in Anaheim.
As well the 20th annual Craig Hallum Institutional Investor Conference in Minneapolis with that operator, please disconnect the call.
Ladies and gentlemen, the call has now concluded we thank you for joining you may now disconnect.
Some color I guess on an update with customer testing, how thats going to have vehicles now in the field, maybe you could just speak specifically to how that's progressing.
Yeah, Matt this is Daryl.
Customers do not have the vehicles in their hand, yet we're still working through development testing.
And the big.
A milestone that we have to achieve as the brake testing, which would give us a be asked so that when customers have the vehicles. They are certified to be safe and we expect that to happen later in this quarter.
Okay, Great I'll jump back in queue guys. Thank you.
Great.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to Randy Wilson for any closing remarks.
Thank you and I'd like to thank.
Thank everyone for participating in today's conference call and your interest in the shift group over the coming weeks will be hosting one on one investor meetings at the advanced clean transportation Expo in Anaheim and as.
Well, the 20th annual Craig Hallum, Institutional Investor Conference in Minneapolis with that operator, please disconnect the call.
Ladies and gentlemen, the call has now concluded we thank you for joining you may now disconnect.