Q3 2023 The Shyft Group Inc Earnings Call
Good morning, and welcome to the shift groups third quarter 2023 conference call and webcast all participants will be in a listen only mode until the question and answer session of the conference call.
This call is being recorded.
I'd now like to introduce Randy Wilson, Vice President Investor Relations and Treasury of the shifts grip. Mr. Wilson you May proceed.
Thank you for joining this morning's call as you may have already seen this morning, we issued a press release announcing the appointment of John done as a ship groups next president and Chief Executive Officer.
You also see Daryl Adams effective today as part of our previously announced leadership transition plan on.
On today's call I'm joined by Daryl Adams, outgoing President and Chief Executive Officer, John Don and John Dewey yard Chief Financial Officer.
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, which we believe are useful in evaluating the company's operating performance.
For today's call. We've included a presentation deck, that's been filed with the SEC and is also available on our website.
We will provide a business update before moving onto a more detailed review of the results and our updated 2023 outlook.
I'll then open the line for Q&A.
Please turn to slide three and I'll turn it over to John do yard who will lead today's prepared remarks.
Good morning, and thank you for joining us to review our third quarter 2023 results.
For all our team delivered third quarter performance that was in line with our expectations as our vocational and infrastructure related businesses continued to perform well leading to another quarter of record profitability and specialty vehicles.
We remain focused on driving operational and commercial execution as well as generating cash flow to enable long term investment in the company.
For the third quarter the company delivered solid operating cash flow of $9 $2 million invested in the Blue arc electric vehicle program and repurchased $10 $3 million in shares.
In addition to our third quarter financial highlights we were pleased to release, our second annual sustainability report highlighting the progress we've made on environmental social and governance initiatives to benefit our team members communities and other stakeholders.
In summary, we continue to make good progress on key strategic initiatives and we are committed to driving improved execution in a challenging macro environment.
Turning to our market commentary on slide four.
The long term fundamentals for our key last mile delivery and infrastructure end markets remained strong.
As we laid out in our July earnings call. The markets continue to be fluid driven by higher dealer inventory levels in both last mile delivery in motor home as well as fleet strategy initiatives and mixed parcel volume reports that have limited recent order activity.
Throughout the third quarter, we were able to gain some clarity on these items, including the depth of OEM chassis production cuts, but additional items, including the autoworkers strike that started in September continue to drive uncertainty across the market.
Fortunately our infrastructure related truck businesses continued to see strong demand and the impact of the strike on those products has been minimal to date.
We continue to stay close to our customers and monitor market drivers, while focusing on execution to ensure we respond appropriately both commercially and operationally.
Turning to slide five I will provide an update on our blue arc EV program and key milestones that relate to the product production readiness and dealer network.
On our last earnings call, we discussed the field test that was in process with a large parcel customer.
We subsequently completed that test and the feedback was overwhelmingly positive.
The vehicle performance exceeded expectation and easily met the customers' daily needs, giving us confidence that our blue arc vehicle will meet the daily rigor demanded by our customers.
From a commercial perspective, we made further progress on building out our blue arc dealer network by adding rush enterprises, the operator of the largest commercial vehicle dealer network in North America.
In addition to Randy Marion.
We announced in the fall of 2020 to Russia.
Brush expands our geographic reach and will be a fantastic representative of the Blue arc brand.
As we communicated earlier in the quarter.
We experienced an increase in quality issues related to production batteries from a key supplier.
Our goal is and has always has been to provide customers high quality products that will meet their daily needs and unfortunately due to these battery issues, we have had to delay customer deliveries into 2024.
We continue to work with the supplier to resolve these issues.
Overall customer interest remains high and we are incredibly excited about our blue Arctic electric vehicle program.
Please turn to slide seven and I'll provide an overview of our third quarter 2023 financial results.
We delivered earnings that were in line with our expectations, despite facing market pressures that impacted our year over year sales and margin performance.
Sales for the third quarter with $201 $3 million down 29, 6% from the year ago quarter.
Net income was $4 $5 million or <unk> 13 per share compared to net income of $17 $3 million or <unk> 49 per share in the previous year.
Third quarter 2023, net income income includes a tax benefit.
Of $2 million, primarily driven by favorable adjustments for R&D tax credits.
In the third quarter, adjusted EBITDA was $11 million or five 5% of sales down from $27 $1 million or nine 5% of sales in the third quarter of 2022.
These results include EV program spend of $7 $6 million consistent with the prior year.
Excluding these expenses adjusted EBITDA was nine 2% of sales.
Adjusted net income was $6 $7 million compared to $18 $6 million in the year ago quarter, while adjusted EPS decreased to <unk> 19 per share from 53 per share last year.
I'll now walk you through our third quarter results by operating segment on slide eight.
In the quarter fleet vehicles, and services achieved sales of $124 $3 million down 32, 6% compared to $184 $5 million a year ago with strong truck body and aftermarket sales, partially offsetting softness in walk in van.
Adjusted EBITDA for the quarter was $8 million versus $24 $4 million a year ago adjust.
Adjusted EBITDA margin was six 4% of sales compared to 13, 2% in the third quarter last year.
Turning to specialty vehicles, our team delivered another great quarter with record margin performance there.
Third quarter sales were $76 $6 million or 26, 3% decrease from $103 $9 million in the prior year, driven by lower motor home market demand.
Adjusted EBITDA was $16 million or 29% of sales compared to $15 $6 million or 15% of sales in the same period last year.
Please turn to slide nine for 2023 outlook.
Throughout the year.
We remain cautious regarding our outlook there was uncertainty across our key markets driven by broader economic headwinds.
Entering the third quarter, we expect that uncertainty to remain given overall market conditions and in the quarter. While we saw a sequential uptick in Fps orders, we continued to experience slower demand versus historical levels.
We also gain further visibility to the severity of reduced OEM chassis supply for key parcel products and the OEM auto worker strike began.
While the strike has been impact has been minimal for us to date. It has created uncertainty across the industry.
Sales to be in the range of $850 to $900 million.
Adjusted EBITDA of $40 to $45 million.
We expect positive operating cash flow for the year and additional working capital reductions in the fourth quarter.
And we continue to take additional cost actions given the current environment and will manage the business aggressively as we close out the year.
Please turn to the capital allocation update on slide 10.
<unk> balance sheet remains a competitive advantage.
In the third quarter, we generated $9 $2 million in operating cash flow effect, reflecting significant improvement over the prior year.
The company's capital structure remains strong with a net leverage ratio of approximately one turn and a $400 million revolver, which provides us solid access to capital.
We continue to fund organic growth initiatives focused primarily on blue arc EV and market expansion in our SBA business.
We maintain a healthy M&A pipeline and remain active in cultivating opportunities to accelerate growth.
In the quarter, we repurchased 10 $3 million of shares as we believe the company represents an attractive value.
We have now repurchased $19 $1 million of shares in 2023, leaving $223 million remaining on our share repurchase authorization.
Please turn to slide 11.
The shift group has compelling industrial growth story with robust long term market fundamentals.
We are confident in our long term strategy the strength of our balance sheet.
And we are focused on driving execution across the business.
Before turning the call over to Daryl and John Dunn for closing remarks.
On behalf of the ship management team and all our team members I would like to take the opportunity to thank Daryl for his vision leadership and partnership during his tenure tenure with Spartan Motors and the shift group.
Well it was not here in 2024, when he started I am confident in saying that the company looks different and is much stronger today because of his leadership.
He has left a great foundation for us as we move forward.
With that I will turn the call to Darryl.
Thanks, John before we conclude today's call I'd like to briefly take a moment to address the leadership news we announced this morning.
Earlier this year in June we announced the leadership transition plan, which I will step down from my role as President and CEO. Following the appointment of a successor.
Following a comprehensive search process in which the board considered internal and external candidates, we have announced the appointment of John Dunn of shifts next CEO effective today.
John previously served as president of fleet vehicle and services business.
It's been a privilege for me to lead the shift team for the last nine years I am proud of the incredible work. Our team has done to transform shift into an industrial leader in our attractive end markets and last mile delivery and infrastructure.
As I look ahead, I'm confident shift is well positioned with a growing roster of innovative brands strong prospects that will work closely with John to ensure a seamless transition.
Josh familiarity with the company along with its six significant leadership in manufacturing operations and product development. We are confident John is the right person to lead ship through the next phase of transformation and growth.
And thank you to our analyst and the investment community for your interest and support of the company I thoroughly enjoyed spending time with all of you and getting to know you professionally and personally.
Thank you Daryl I'm honored that the board selected me for this role.
With our great products team members and customers I'm excited to lead the organization in its next chapter of growth.
And our fast paced industry I recognize the need for shift to continually adapt and perform we will grow through innovation commercial and operational excellence product quality and an increased customer focus.
We are committed to delivering shareholder value by allocating resources and efficiently deploying capital.
In early 2024, we will share more details regarding my business priorities and the company's strategic direction.
Thank you and with that operator, we are now ready for the Q&A portion of the call.
We will now begin the question and answer session to ask a question you May Crestar then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing a key to withdraw from the question queue. Please press Star then two.
The first question is from Matt Koranda Roth capital. Please go ahead.
Hey, guys, good morning, and congrats to John and best of luck to Darryl.
Just wanted to.
Maybe dig into the Fps implied order flow.
You reported this morning.
It doesn't look like it's ticking up for the first time in several quarters and just wondering if you could maybe break down some of the factors that's driving demand in the quarter.
Pacifically order flow like for <unk>.
Truck body versus walk in van.
And just the mix and the current order flow that you're observing.
Yeah, Good morning, Matt.
Yes, I think we definitely saw an uptick in orders I think as you know our business is historically lumpy from an orders perspective, so I wouldn't call. It one point a trend necessarily but it's positive to see.
To see some progress there.
To see activity on AR and the truck body side of the business as well as some.
Some of the upset side of the business as well I think walk in van continues to be slow, which leads to some of the production cuts that we've talked about but I think we've also taken a number of actions internally.
Under John's leadership within the Fps business, we brought in a new sales leader here in the quarter, which you may have seen on some of our social media and continue to look at different ways to attack.
So.
I think good progress, but again, we're not going to we're not going to sit here and call. It a trend at this point.
Okay fair enough.
And then just on blue or I mean, maybe can we cover one I guess.
Are you getting any order indication, obviously youre, indicating that the trials with customers who have shown some success, but it doesn't seem like it's translated to order flow yet.
What's holding it back is that just essentially the fact that you have the battery issue and you won't be rapid production until 2024, and then maybe also if you could talk about the production ramp in 'twenty for any additional thoughts on when we should start modeling a ramp up in production in 'twenty.
For for Blue arc.
And what's that mean in the context of the multiyear targets you guys put out last year around the ride and drive event.
Yes.
There's a there's a lot to that question, but I.
When you think that the battery issues are certainly a gating item at this point, we do talk about.
Uh huh.
Solid customer demand and interest there's clearly Canadian demand, there's clearly other parcel demand that's out there.
The customers have a high level of interest are the dealers, whether it's Russia, Randy Marion that we've signed up to this point continue to react.
Interact with some of the local customers and so there continues to be that demand, but we obviously need to get through a battery issue before before we let production go in and move forward from that perspective, so as we look at when we announced the delay or the push out into 2024 in September related to that supplier issue.
We didn't put a date on it because we continue to work through it and so the teams.
Very focused on on driving closer to that and we continue to look at other other opportunities are in alternatives to mitigate that risk as well. So I think from a long term perspective, I guess point there is two.
2024, probably a little tough to model, but it would.
Wouldn't.
You know, it's probably not early in the year at this point.
But I think as you look out 2025 and beyond we continue to make progress from a production standpoint, and being able to to address or react to the to the to the production curve and the demand profile and so is the 2025 numbers.
Still feel pretty confident in and so we will continue to provide updates to you on that but.
We view this as more as a short term issue than than.
The longer term a longer term issue and again, we're very confident in the product and the feedback that we've received from customers.
Okay, and then just to clarify John maybe is the fix to the battery issue going to be a supplier change or is it going to be.
Fixed with the existing supplier.
<unk> currently are sourced from.
Well I mean, I think at the end of the day, we want to make sure that we have all options open right. We've talked in the past about having multiple battery suppliers, we've announced one battery on the class five.
Our next energy.
The company is there a better supplier on the class five.
And so we continue to look at options, but we're also engaged with our current supplier and trying to get resolution to the issue and so.
We're certainly not myopic and how we're trying to mitigate our resolve the problem here.
Okay got it and then just one more on Blue Arc for me and then I'll leave it to others, but the agreement that you announced with the rush I mean, maybe just a little bit more detail on how that works.
Are they going to actually be taking any units into inventory or is that essentially just there there are going to sell the product.
For custom order flow, maybe just some additional color on sort of how that will will function that once you get production up and running.
Yeah, I think the.
It'll be a combination of both I think there'll be they've got a fantastic footprint that covers really all of the country.
And a great service network. So we'll have a solid support from them as well from that perspective.
But we would anticipate.
Some level of stocking once we get into production I think.
In the past about how we're working with with both the dealers on floor plan financing arrangements and those types of things and so we would expect it to operate in that in.
And that normal commercial environment, but there's going to be opportunities where.
There is one off orders that we end up leveraging their dealership network for as well.
Thanks, Matt.
Okay I appreciate it guys.
The next question is from Greg Lewis of <unk>. Please go ahead.
Yeah. Thanks, Thank you and good morning, everybody and thanks for taking my questions Yeah Tao.
Thanks for everything congrats and maybe I'll see you on the circuit.
Hey, Guy.
John I was hoping to get some more color around the guidance change you know as I kind of do the implied for Q4 and that is what it is.
Is there any way to kind of parcel out.
Realizing.
Visibility is challenged but is there any way to kind of think about the high end and the low end and really is is that going to be around revenues margins like any kind of more colorado as we kind of like trying to nail down that Q4.
Yes, I mean, I think when we came out in July we obviously had a pretty pretty wide range I think as we look at the quarter. Some of the dynamics that we've talked about in terms of chassis supply and the overall demand environment I think.
And some of the factors, including the strike, which thankfully made seems to have made some progress last night, but.
You know theres a lot of variables. So the impact as we get closer to the end of the year from a volume perspective, I think we've got pretty good visibility at this point I had mentioned on the in the prepared remarks that we continue to be in.
I said from a cost standpoint, and so.
We're continuing to to sort of drive efficiency in the business, while managing and significantly lower volumes year over year. So.
The variability is probably more around the cost side and ER.
We're certainly pushing from a commercial perspective as well.
Okay, Great and then just I didn't want a little bit more color around me I'm.
Share repurchases, how we're thinking about that was that just opportunistic or you know is kind of where here. This is something we're going to kind of look to continue to do you know and maybe.
Maybe it's not going to be continual given Lee outlook, maybe for Q4, but kind of like any kind of broad thoughts about how you're thinking about the buyback here.
Given where the stock is.
Yeah, I mean, I think Fortunately, we've got flexibility from that perspective, we've got a fantastic balance sheet. Despite some of the challenging market environment until we were able to.
Sort of adapt and be flexible from that perspective, I think we certainly feel there's value in the stock today, we bought close to $20 million in shares this year.
We like the long term prospects of the company I think.
As we move forward I think we've got a significant authorization that's out there, but we also don't want to have that be the only capital allocation that we're doing as a company I think.
We'd like to be able to accelerate growth and with organic and inorganic investments here over time, and so we will continue to balance that as we look at it and I think in the quarter. It was an opportunity for us too.
<unk>.
Two.
To repurchase shares that were above and beyond sort of the annual dilution that we've done over the last couple of years. So.
You know good opportunity and we'll continue to look at that as a lever for us given the given where our balance sheet strength is.
The next question is Greg its Mike <unk>.
<unk> of D. A davidson.
Good morning, Thanks for taking my question and of course, Thank you for your partnership with Hulu.
Appreciate everything.
Thanks, Mike John you just yes.
So John you just touched on it briefly in passing new your last answer but.
It does look like for us essentially resolved the strike overnight.
I guess.
Do you feel materially better about you about your nutrient prospects today.
Third yesterday, especially regarding the Kentucky plant there was on strike and do you have any feel for whether choice right.
We will get a bedroom coming out of Turkey. After strengthened we had before.
Yeah, I mean, I think the impact that we have seen to date has been relatively minimal I think as we got closer to the end of the year and into 2024 is where we really would've seen some risks and so to the extent that the timing of this resolves itself in the next six weeks or days.
We certainly feel more confident as we enter 2024.
There certainly may be some risk that we took into the narrowing of the guidance at the end of the year.
But we haven't really seen an impact today.
Or was minor anyway.
Got it.
I also wanted to touch on the battery issue as well.
Are there any cost shift.
<unk> group will have to incur that you hadn't foreseen. Thanks to the issues that are going on with the supplier.
The cost to fix what's going on strictly going to be borne by you know find that supplier.
Yes, I think largely carried by the supplier I mean, we obviously have.
A bit of a distraction internally and supporting that which is inefficiency from a cost perspective, and then as we continue to look at other avenues of.
Potential supply I think theirs.
There could be some incremental costs from that perspective, but in terms of fixing this issue really lies in the supplier.
Maybe one on.
One last one for me and that is the EBITDA in DSV group.
With relatively flat despite I guess.
RV business be down over the prior year.
Just curious.
Is the RV business generally not challenged on EBITDA right.
We have a large decline of no change in the segment EBITDA.
You can do to fix that issue.
Margins in the RV business to improve it.
Yeah, well I think.
Absorption.
Don't have a ton of fixed cost tied up in that business, but you know.
There are certainly still has some and so.
Yes.
I think structured that business appropriately for where the market is today I think when you look at the rest of the business. It continues to perform well we continue to drive top line, we continue to increase capacity through pretty much the same footprint.
We've talked before about expansion in Nashville. These are all creating opportunities for us to gain share and drive the top line, which is which is helping.
Gain some leverage but the team is also doing a fantastic job managing supply chain managing the operations to push.
Push margins and so we like that business I think.
Service body infrastructure related businesses that we have in that portfolio.
Thank you know continue to perform really well, we like that space and we'll continue to invest there.
Alright.
So much guys I appreciate it.
Great. Thank you Mike.
This concludes our question and answer session I would like to turn the conference back over to Randy Wilson for closing remarks.
Thank you everyone.
And we look forward to hosting investors at the Baird Global Industrials conference in Chicago, and the UBS annual industrial summit in Florida. We thank you for your interest in the ship group and with that operator. Please disconnect the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.