The Shyft Group, Inc. (NASDAQ:SHYF) Q2 2023 Earnings Call Transcript

The Shyft Group, Inc. (NASDAQ:SHYF) Q2 2023 Earnings Call Transcript July 27, 2023

The Shyft Group, Inc. misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.21.

Operator: Good morning, Welcome to the Shyft Group’s Second 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. As a reminder, this call is being recorded. I would now like to introduce Randy Wilson, Vice President, Investor Relations and Treasury of the Shift Group. Mr. Wilson, you may proceed.

Randy Wilson: Thank you for joining this morning call I’m joined by Daryl Adams, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. Their prepared remarks will be followed by a question-and-answer session. For today’s call, we’ve included a presentation deck that’s been filed with the SEC and is also available on our website. 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. — primary risk that management believes to 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. During today’s call, we will provide a business update before moving on to a more detailed review of the results our updated 2023 outlook. We will then open the line for Q&A. Please turn to Slide 3, and I’ll turn it over to Daryl Adams.

Daryl Adams: Thank you, Randy. Good morning, and thank you for joining us to review our second quarter 2023 results. Overall, results in the quarter were in line with our expectations, highlighted by strong performance in specialty vehicles and robust cash generation. We made great progress on the execution of our long-term strategic priorities, delivering on key blue arc collect vehicle milestones. And consistent with our prior communications, we remain on track for blue arc production in the second half of the year. While fleet vehicles and services grew modestly in the quarter, we experienced further weakness in end market conditions as well as operational efficiencies that impacted our overall performance. Second quarter sales were down 3% year-over-year, with strength in both our truck and service body product lines more than offset by softness in last mile delivery in motorhome.

Despite the sales decline, we delivered $16 million of adjusted EBITDA, up 16% versus last year, led by record margin performance in specialty vehicles. We made solid progress on reducing working capital, resulting in $30 million of operating cash flow and ending the quarter in a strong financial position. Turning to our market commentary on Slide 4. Long-term outlook remains favorable in our key end markets, including last mile delivery and infrastructure, and we believe we are well positioned as the industry leader in these areas. However, throughout the second quarter, we saw accelerated signs of demand weakness due to broader economic conditions and evolving market dynamics. I will now provide additional details on what we are seeing within our businesses, starting with fleet vehicles and services.

We previously discussed concerns and a level of uncertainty in the last mile delivery market. After speaking with our customers and listening to their public commentary, there are several factors influenced influencing immediate buying decisions, including continued year-over-year declines in parcel package volume as well as specific customer dynamics regarding fleet strategy. As a result, — we have seen customers defer and cancel orders, leading to higher dealer inventory levels and reduced OEM chassis production. We experienced the impact of reduced chassis supply late in the second quarter, and we now expect to see more significant reductions in case production levels in the second half of the year. At the same time, we’re also hearing from customers that there is an ongoing need for vehicles, which gives us confidence in the long-term prospects for last-mile delivery vehicles.

While orders have been deferred, it is clear that fleet replacement needs e-commerce growth projections and regulatory requirements to reduce emissions will drive future vehicle purchases. In response to the current environment, we are taking decisive actions within FES, including adjusting operations to efficiently support current volumes while focusing on long-term productivity drivers. Driving improved product quality and on-time customer deliveries and refocusing our sales efforts by expanding into new customers and locations. Moving to specialty vehicles. Our work truck products, including service bodies, a zoo contract manufacturing and police vehicle upfit continue to perform well, supported by increased infrastructure spending and demand for vocational vehicles.

We expect these positive trends to continue, and we are focused on executing our strategy to expand our products and geographies to support the growing needs of the market. For example, we recently launched our royale XP body and opened our Nashville facility, which encompasses both service bodies and police vehicle upfit. For our motorhome chassis business, the broader RV industry has been challenged by general economic conditions after multiple years of growth. Entering 2023, we expected to see softening demand. However, in the second quarter, we have seen the demand decline accelerate and RV manufacturers have further reduced their production schedules in light of higher dealer inventory. That said, despite declines in the market, we continue to increase our market share in the greater than 400 horsepower diesel segment, and we experienced recent market share highs in the quarter.

Looking forward, industry reports suggest that there will be a marked improvement in 2024. However, we remain cautious about this outlook and have adjusted our business accordingly. Overall, we are confident we have positioned the ship group in markets with our long-term secular growth, including last mile delivery, infrastructure and electric vehicles. We have demonstrated the ability to manage challenging market conditions like the ones we are facing today, and we have industry-leading brands, flexible operations and a counter team that will enable us to win in the future. Turning to Slide 5. I’ll provide an update on our Blue Aric EV progress and the key milestones we expect to achieve in the second half of the year to have a successful product launch.

As we review our Blue Ark operational plans, we consider these lessons learned from our decades of manufacturing experience and are ensuring that blue arc vehicles are built with the quality and value for the best-in-class products in the market. We are currently field testing our vehicle with a key customer, and the initial feedback is positive, which gives us confidence in the vehicle’s capability. We are excited by the vehicles test performance in the hot weather conditions as well as the feedback that we have received from multiple drivers they have delivered packages on their daily routes. In addition, our suppliers are actively working to finalize component testing and provide final certification ahead of start of production. We are nearing completion of the facility construction and are conducting operator training through virtual and slow builds at our Mission campus.

We have completed the standard operating procedures and are on track for the initial production of 50 units for delivery to customers in the fourth quarter. We are committed to building out a highly qualified BlueArc dealer network to ensure fleet customers receive the products and services they expect. We have previously talked about a nationwide dealer and service network made up of a small group of dealers and an established service provider. We remain in the process of finalizing agreements to support this structure while also establishing banking relationships to ensure dealers can support their floor plan needs. While arrangements are being finalized, dealers are highly engaged with customers, and there continues to be a high level of interest in our product.

We are incredibly excited about Blue Ark’s prospects and our team’s ability to execute this product launch in the second half of the year. With that, I’ll now turn it over to John to discuss our second quarter financial results.

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Jon Douyard: Thank you, Daryl, and good morning, everyone. Please turn to Slide 7, and I’ll provide an overview of our financial results for the second quarter Overall, we delivered second quarter results that were in line with our expectations with solid year-over-year adjusted EBITDA growth. We continue to see pockets of strength across the company, particularly in our Specialty Vehicles segment. Sales for the second quarter were $225.1 million, down 3.1% from the year ago quarter. Net income was $4.7 million or $0.13 per share compared to net income of $5.3 million or $0.15 per share in the previous year. Second quarter net income was negatively impacted by approximately $3 million of expenses related to our CEO transition as well as actions taken to adjust our cost structure given the lower volumes.

In the second quarter, adjusted EBITDA was $15.9 million or 7% of sales up from $13.7 million or 5.9% of sales in the second quarter of 2022. These results include EV program spend of $7.4 million, up slightly from the prior year. Excluding these expenses, adjusted EBITDA was 10.4% of sales, up 140 basis points year-over-year. Adjusted net income improved to $8.7 million compared to $7.5 million in the year ago quarter while adjusted EPS rose to $0.25 per share from $0.21 per share last year. I’ll now walk you through our second quarter results by operating segment, beginning with Fleet Vehicles and Services on Slide 8. In the quarter, the FVS team delivered solid working capital reduction and meaningful year-over-year improvements in truck body output, while taking short-term and structural cost actions in a highly dynamic environment.

FVS achieved sales of $139 million, up 1.5% compared to $136.9 million a year ago, with sales growth from truck body and aftermarket more than offsetting declines in our last mile delivery products. Truck body sales in the quarter included $7.5 million of chassis pass-through revenue. Adjusted EBITDA for the quarter was $12.5 million versus $14.5 million a year ago. Adjusted EBITDA margin was 9% of sales compared to 10.6% in the second quarter last year. As we transition to the second half of the year, the FVS team remains focused on adjusting production to support softer near-term last mile demand while driving operational improvements to address ongoing margin challenges. Please turn to Slide 9 for the Specialty Vehicle second quarter results.

We are pleased with our SD results as the business delivered strong year-over-year profitability growth and record margin performance. The team also achieved a significant milestone with Isuzu, and we have now delivered more than 100,000 N-Series trucks through our partnership over the last 12 years. Overall, second quarter sales were $87.6 million, an 8.1% decrease from $95.3 million in the prior year, driven by a motorhome volume decline. Adjusted EBITDA was $17.4 million or 19.8% of sales compared to $12.9 million or 13.5% of sales in the same period last year. As we close out the SP comments, we would like to recognize the addition of Jacob Farmer to the Shift Group as President of our Specialty Vehicles segment. Jacob is a proven operations leader with broad industry experience, and we look forward to benefiting from his contributions.

Please turn to Slide 10 for our 2023 outlook. Entering the year, we were cautious regarding our outlook as there was uncertainty across our key markets, driven by broader economic challenges. As a result, we responsibly monitored and managed our cost structure to align with expected demand while continuing to deliver for our customers and focusing on generating cash flow. By the end of June, total headcount was down approximately 25% versus the start of the year and the team able to drive a solid working capital reduction. However, as we progress through the second quarter, our prior concerns surrounding a challenging demand environment materialized and conditions further deteriorated for last mile delivery vehicles and motorhome chassis. We saw last mile delivery orders canceled and purchases deterred ultimately leading to lower second half OEM chassis production.

All these factors significantly impacted our volume expectations for the year. Given these factors, our updated outlook for the full year 2023, notwithstanding further changes in the operating environment is as follows: sales to be in the range of $850 million to $950 million compared to the previous outlook of $1 billion to $1.2 billion. Adjusted EBITDA of $40 million to $60 million compared to the previous outlook of $70 million to $100 million. Blue Arc production remains on track, and we currently estimate 50 units to be produced and delivered in 2023 as we take a disciplined approach to our initial production. We also expect to drive positive incremental cash flow in the year as we continue to drive down working capital. We will continue to responsibly monitor and manage the business in the second half while protecting our Blue Arc product launch and maintaining a focus on long-term growth.

Please turn to the capital allocation update on Slide 11. Our balance sheet continues to be a strength and differentiator for the company. And despite a challenging environment, we were able to improve our financial position in the quarter. For the second quarter, we generated $29.7 million in operating cash flow, reflecting significant improvement over the prior year as we completed and reduced work in process vehicles. The company’s capital structure remains strong, with a net leverage ratio of approximately 0.6x and a $400 million revolver, which provides us strong access to capital. We’re funding organic growth opportunities, including the investment in Blue Arc EV and $6.5 million in capital expenditures. Before turning it back to Daryl, I want to take a minute to reiterate the financial strength of the company.

Over time, SHYFT has proven to be a successful cash flow generator. In the last 18 months, we have deployed $125 million of capital, including $75 million into organic growth investments that will accelerate growth in the coming years, the largest being Blue Arc. In addition, we have returned nearly $50 million to shareholders through dividends and share repurchases during that period. We expect to drive additional second half cash flow and maintain our financial strength as we close out the year. We are also confident that Blue Arc will generate positive cash flow in the coming years and provide solid returns on our investment. Overall, we have strong liquidity and are confident in our growth story, giving us the financial flexibility to efficiently deploy capital and maximize shareholder value.

With that, I’ll turn the call back to Daryl for closing remarks.

Daryl Adams: Thank you, John. Please turn to Slide 12. As the Shyf Group, we have created a compelling industrial growth company and we remain nimble in response to changing market conditions while maintaining a long-term strategic focus. With our financial strength, investment in innovation and focus on secular growth markets, we have positioned any to be a leader and drive shareholder value over the long term. Before I conclude, I’d like to acknowledge the recent announcement of my transition and personally thank the investment community for their support and interest in the Shyf Group. I look forward to continuing to lead the company until my successor is in place. Thank you. And with that, operator, we are now ready for the Q&A portion of the call.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Ray Guiso of BTIG. Please go ahead.

Ray Guiso: Thank you and good morning, everybody. Thanks for taking my question. I was hoping to dig a little bit more into the updated guidance. Just as kind of — as kind of we look at the updated revenue the step down in the revenue and I realize you were talking about that in some of the prepared remarks, but could you talk a little bit about that step down in terms of, is that primarily deferrals or any were there any cancellations? And any kind of color around the types of customers and where that kind of in which businesses that would kind of being stepped down?

Jon Douyard: Thank you and good morning, Ray, this is John. I think when you look at it and we touched on this in some of the prepared remarks, I think we saw both deferrals and cancellations from an order perspective. I think if you look at the midpoint, and we went from about $1.1 billion down to the $900 million, so $200 million, I would say it’s predominantly within the FBS business. There is a portion that is motorhome just given the overall dynamics there. But when you look at FES, we’ve talked about there being some noise in the system on dealer inventories historically that seems to have materialized as we discussed. And really, what we’re seeing is in response to that chassis production reduce. As we’ve had sort of an elevated backlog over the last couple of quarters, we’ve seen some cancellations given they haven’t been able to match that from a chassis perspective, and so that’s really impacted the outlook in the second half of the year.

I think some of the dynamics that Daryl talked about, you talked about specific customer dynamics. There are every customer sort of has their own sort of actions at this point, but we’re seeing sort of reorganizations internally. We’ve talked about cost actions and CapEx restrictions historically recently with these customers as well. And so, there’s a bit of a pause as the environment settles and package volumes continue to be down, and we expect that to continue through at least the end of the year and potentially even into early next year. And so again, we’ve taken sort of a cautious view of what that looks like, but the biggest drivers have been in the FES business.

Ray Guiso: Okay. Great. And you also did allude to some of the I don’t know the cost-cutting and kind of the rightsizing of the business and realizing that this has really only been going on for a pretty period of time with some of the commentary from your customers. But as we stand here in July, are we kind of where we need to be? Or could we see some other moves to kind of protect margins, just to your comment, John, about the lack of visibility, maybe all the way out into early next year?

Jon Douyard: Yes. I mean I think the — I think as we entered the year, we did have a cautious view. So it’s not like we’ve taken immediate cost actions following some of the late quarter news that we’ve had. We’ve been sort of managing the cost structure of the business throughout the first half of the year. And so I think that’s beneficial for us. We’ll continue to be flexible from a manufacturing perspective as we always have been. Right now, we’re looking at different ways to leverage the capacity that we have and potentially shift some production in products around to ensure that we’re meeting customer expectations, getting the appropriate output. And so we’ll continue to do those things as well as to the extent that there are times when there’s no volume, we will certainly flex from an hourly perspective.

So we feel like we’ve gotten ahead of this. Not to say that we won’t continue to look at monitor and look at this going forward, but we feel like we were a bit ahead of it