The Shyft Group, Inc. (NASDAQ:SHYF) Q3 2023 Earnings Call Transcript

The Shyft Group, Inc. (NASDAQ:SHYF) Q3 2023 Earnings Call Transcript October 26, 2023

The Shyft Group, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.08.

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

Randy Wilson: 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 Dunn as a Shyft Group’s next President and Chief Executive Officer. He will succeed Daryl Adams effective today as part of our previously announced leadership transition plan. On today’s call, I’m joined by Daryl Adams outgoing President and Chief Executive Officer, John Dunn; and Jon Douyard, Chief Financial Officer. 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. 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 on to a more detailed review of the results and 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 Jon Douyard, who will lead today’s prepared remarks.

Jon Douyard: Good morning, and thank you for joining us to review our third quarter 2023 results. Overall, 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 in 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 4. 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 and motorhome, 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 auto workers’ 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 5, I will provide an update on our Blue Arc TV 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 the large parcel customers. We subsequently completed that test and the feedback was overwhelmingly positive. The vehicle performance exceeded expectations 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, the dealer we announced in the fall of 2022, Rush 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 Arc electric vehicle program. Please turn to Slide 7, 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 were $201.3 million down 29.6% from the year ago quarter. Net income was $4.5 million or $0.13 per share compared to net income of $17.3 million or $0.49 per share in the previous year. Third quarter 2023 net 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 5.5% of sales down from $27.1 million or 9.5% 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 9.2% of sales. Adjusted net income was $6.7 million compared to $18.6 million in the year ago quarter while adjusted EPS decreased to $0.19 per share from $0.53 per share last year. I’ll now walk you through our third quarter results by operating segment on Slide 8. 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 in aftermarket sales partially offsetting softness in walk-in van. Adjusted EBITDA for the quarter was $8 million versus $24.4 million a year ago. Adjusted EBITDA margin was 6.4% 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. Third quarter sales were $76.6 million, a 26.3% decrease from a $103.9 million in the prior year driven by lower Motorhome market demand. Adjusted EBITDA was $16 million or 20.9% of sales compared to $15.6 million or 15% of sales in the same period last year. Please turn to Slide 9 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 uncertainty to remain given overall market conditions in the quarter while we saw a sequential uptick in FBS orders, we continue 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 workers’ strike began. The strike has been – impact has been minimal for us to-date it has created uncertainty across the industry. Given these factors we have narrowed our 2023 outlook notwithstanding further changes in the operating environment as follows. Sales to be in the range of $850 million to $900 million, adjusted EBITDA of $40 million 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 we’ll manage the business aggressively as we close out the year. Please turn to the capital allocation update on Slide 10.

Shyft’s balance sheet remains a competitive advantage. In the third quarter, we generated $9.2 million in operating cash flow reflecting significant improvement over the prior year. The company’s capital structure remains strong with a net leverage ratio of approximately one turn in 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 SB 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 Shyft 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 Shyft 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 with Spartan Motors and The Shyft Group. While I was not here in 2024 when he started, I’m 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 Daryl.

Daryl Adams: Thanks, Jon. 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 a leadership transition plan, in which I was stepped 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 as Shyft’s 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 Shyft team for the last nine years. I am proud of the incredible work our team has done to transform Shyft into an industrial leader in our attractive end markets, and last mile delivery and infrastructure.

As I look ahead, I’m confident Shyft is well positioned with a growing roster of innovative brands, strong prospects and we will work closely with John to ensure a seamless transition. Given John’s familiarity with the company along with his significant leadership in manufacturing, operations and product development, we are confident John is the right person to lead Shyft through the next phase of transformation and growth. And thank you to our analysts 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. And I’ll hand it over to John Dunn for some remarks.

John Dunn: 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. In our fast-based industry, I recognize the need for Shyft 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.

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Q&A Session

Operator: [Operator Instructions] First question is from Matt Koranda of ROTH Capital. Please go ahead.

Matt Koranda: Hi guys, good morning and congrats to John and best of luck to Daryl. Just wanted to maybe dig into the FTS implied order flow that you reported this morning. It doesn’t look like it’s ticking up for the first time in several quarters and just wondered if you could maybe break down some of the factors that’s driving demand in the quarter specifically order flow like for truck body versus walk in van, and just the mix in the current order flow that you’re observing?

Daryl Adams: Yes, good morning, Matt. Yes, I think we definitely saw an uptick in orders. I think as you know, our businesses historically lumpy from an orders perspective. So I wouldn’t call one point a trend necessarily but it’s positive to see to see some progress there. We continue to see activity on the truck body side of the business as well as some of the opposite side of the business as well. I think walk demand 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 SPS 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 attract the market. 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.

Matt Koranda: Okay, fair enough. And then just on Blue Arc. I mean maybe can we cover one, I guess are you getting any order indications, obviously you’re indicating that the trials with customers 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 ramping production until 2024. And then maybe also if you could talk about the production ramp in ’24 any additional thoughts when we should start modeling a ramp up in production in ’24 of Blue Arc? And what’s that mean in the context of the multi-year targets you guys put out last year around the ride and drive events?

John Dunn: Yes. There’s a lot to add to that question, but I mean I think the battery issues are certainly a gating item at this point. We do talk about solid customer demand and interest. There’s clearly Canadian demand. There’s clearly other parcel demand that’s out there that the customers have a high level of interest that 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 be that demand, but we obviously need to get through a battery issue before we left production go and move forward from that perspective. So, as we look, 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 team is very focused on driving closure to that and we continue to look at other opportunities and alternatives to mitigate that risk as well.

So, I think from a long-term perspective I guess point there is 2024, probably a little tough to model but I wouldn’t – 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 address or react to the production curve and the demand profile. And so, with the 2025 numbers, we still feel pretty confident and so we’ll continue to provide updates to you on that. But, we view this as more as a short-term issue 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.