Good morning, and welcome to the Shyft Group's Third Quarter 2022 Conference Call and Webcast. [Operator Instructions]. I would now like to introduce Randy Wilson, Vice President, Investor Relations and Treasury for the Shift Group. You may proceed..

Good morning, and welcome to the Shyft Group's Third Quarter 2022 Earnings Conference Call. Speaking today will be Daryl Adams, President and Chief Executive Officer; John Douyard, Chief Financial Officer. Earlier today, we published our results, which are available on our website.

Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during our call. Please turn to Slide 2 of the presentation for our safe harbor statement.

You should be aware that certain statements made during today's conference call may be considered forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied.

For a more complete discussion of these risks, please see the 8-K filed with the SEC this morning and other filings we make with the SEC, which are all available on the company's website. I will remind everyone that the divestiture of the emergency response vehicle business on February 1, 2020, is classified as discontinued operations.

The results discussed today will refer to continuing operations unless otherwise noted. And now I'd like to turn the call over to Daryl Adams, beginning on Slide 3..

Thank you, Randy. Good morning, and thank you for joining us to discuss our third quarter 2022 results. I am pleased with our overall performance as the team continued to manage through the dynamic environment in the third quarter. Special Vehicles once again delivered strong results across all product lines.

Director revenue for service bodies, solid results in motorhome chassis and contract manufacturing reflect the continued effort by the team to execute on our growth strategy. In addition, Fleet Vehicle and Services saw a sequential improvement as chassis inflow continue to improve in the third quarter.

Supply chain remains challenging due to component part shortages and delays impacting production, but the team remains focused on delivering for customers and improving profitability. Our excitement continues to build around our Blue arc electric vehicle offering as evidenced by a recent customer preorder. Please turn to Slide 4.

Demand within our end markets remain strong as backlog is robust and we achieved revenue of $286 million. However, reported EPS declined year-over-year as electric vehicle investment and production efficiencies caused by the supply chain adversely impacted our results.

The team maintains a focused and nimble approach to our operation and remains committed to prudent cost management. Backlog was $1 billion, up 22% versus prior year but was down sequentially as production improved. Please turn to Slide 5, where I'll discuss our business segments.

Fleet Vehicle and Services continue to work through supply chain challenges. Our team remained focused on performance during the quarter, and we remain diligent to reduce production and efficiencies, increased production to deliver backlog as chassis flow improved and maintained pricing discipline while working with customers to meet their needs.

We demonstrated a significant ramp of Velocity R2 production in the quarter as customers demand our innovative industry-leading products, the R2 van showcased at the FedEx Ground Contractors Expo in Las Vegas to 3,000 contractors and received positive customer feedback. Turning to specialty vehicles.

The business continued its momentum as we are focused on executing our growth strategy. Our service body business saw continued strong growth in demand as these vehicles are productive tools, which are critical to the markets they serve.

We are expanding our position as a leading national service body player, which is allowing us to expand Royal products into other geographies. We saw improvement in our Zuzu business as F-Series production ramped up, and our motorhome chassis business continues to perform well.

Overall, both businesses are working hard to navigate dynamic market conditions and deliver. Please turn to Slide 6.

We're excited by the continued progress of our Blue Arc go-to-market brand as we have received strong interest from our range of traditional customers, including last-mile delivery and other fleet operators as well as government agencies.

At the North American International Auto Show, the Merchant Fleet Summit, the contractors event held in Vegas and a private ride drive event in Memphis, our customers received firsthand experience with the blue arc last-mile delivery vehicle.

Earlier this month, we also hosted a Blue Ark showcase here in Michigan, allowing customers, media and investors, the opportunity to drive our Blue Ark last mile delivery vehicle, so they can get the true sense of its performance and drivability.

As customers continue to interact and get experience with the quality of the vehicle, their feedback is increasingly complementary of the design, engineering and capabilities of our Blue Arc Glass mile delivery vehicle. The Shift group stands alone in the Class 3 to 5 space in the emerging EV market.

As a testament to this, we secured a preorder of 2,000 of our Blue Arglass nondelivery vehicles from Rainy Marion Dealership Group, which is a strong indication of customer demand. We are on track with our vehicle validation testing and we'll start building customer field test vehicles during Q4 and expect to ramp up production in the middle of 2023.

We are truly excited by the potential of the blue arc and look forward to updating you on our progress. Please turn to Slide 7. Our industry has a responsibility creating more environmentally sustainable future. We recognize that our electric vehicle strategy is part of a broader discussion of our environmental, social and governance initiatives.

We recently released our inaugural sustainability report to highlight how many efforts to make a difference in the world. We are making changes to reduce the environmental impact of our business activities. We are committed to providing the resources and opportunities that will allow all team members to thrive at the Shift group.

Finally, we are pursuing excellent governance and best policies and practices. With that, I'll turn it over to John starting on Slide 8..

revenue in the range of $1 billion to $1.1 billion adjusted EBITDA of $62.5 million to $72.5 million, including approximately $30 million of expenses related to EV initiatives. Adjusted earnings per share of $1.02 to $1.24, capital expenditures of approximately $25 million for the full year.

And while cash flow performance has been challenged year-to-date, we expect to see a recovery in the fourth quarter as delivery of finished vehicles improved. In closing, as expected, we saw a meaningful recovery in performance as our team has done a fantastic job responding to the improved chassis inflow to start the second half.

Our third quarter results have shifted up for a strong close to the year, and we look forward to carrying this momentum into 2023. And with that, I'll turn it back to Daryl..

Thank you, John. Please turn to Slide 13. We are pleased with the solid effort of our team during the third quarter to execute and drive long-term value for customers, employees and shareholders. We will continue to invest in technology, capacity and talent.

We will act for long-term sustainability in our business, including the development and launch of our BlueArc EV products to meet the evolving needs of our customers. Our disciplined capital allocation strategy allows us to grow our business and efficiently return capital to shareholders.

In conclusion, our operational improvement, investment in innovation and financial discipline clearly demonstrate that the Ship Group is an industrial growth story. Operator, we are now ready for Q&A portion of the call..

[Operator Instructions]. The first question is from Steve Dyer of Craig-Hallum..

Given you still have like a year's worth of backlog, given the stuff that you're quoting and RFPs and things like that with your final mile customers looking out a year, I mean are you -- I guess, qualitatively, are you still -- are the majority of the conversations sort of around iced chassis and ice vehicles? Are you starting to quote more EV stuff sort of how given again that we're talking about a year out now.

Could you just maybe give us a little color on those conversations?.

Yes. Sure, Steve. This is Daryl. Now all the discussion from all of our customers is still all about ICE and chassis availability.

The discussion on AV is us going out to our dealer network and working with mainly the contractors and having discussions with our customers, I think you'll see, once we get our EV products into the customers' hands in the first half of next year for their testing, we should probably see some more activity on the EV side from the Shift Group..

Got it. And then could you remind us, I think it's $25 million or $30 million of sort of EV specific costs this year.

Can you remind us sort of how we should model that going forward?.

Yes. So we've communicated a step down next year. We haven't put out a specific number. But if you go back to sort of our original investment thesis, it's a step down to somewhere in that $10 million to $15 million range..

And should we think about that as kind of a maintenance CapEx level for that piece of the business going forward? Or is next year still some growth pieces to that?.

I think we've indicated higher R&D going forward. And so I think, certainly, as the EV volume really starts to ramp when you get into 2024, you've got support of volume for that, but we do expect that to maintain at a higher sustainable level going forward..

Got it. Last one for me, just, I mean we've been talking about chassis availability forever. Obviously, a big step up in units this quarter. Can you sort of, I guess, you quantify or in any way kind of give color as to in the last quarter, because 1 quarter doesn't make a trend.

But it would appear to be, I don't know, out of the woods, but certainly any upswing there.

Is that something you expect to continue into the first half of next year?.

Yes. all indications, Steve, in discussions that I've had with some of the suppliers personally that, again, I don't want to say we're out of the woods, but they're more confident that the supply will continue..

The next question is from Matt Koranda of Roth Capital..

So just a near-term one real quickly, just in the implied fourth quarter outlook, I guess, the midpoint of your revenue guide implies about $325 million in the fourth quarter, which does seem like it was a pretty big step-up sequentially.

Maybe could you just talk about sort of what you're seeing on the supply chain front that gives you confidence that you can step up that revenue run rate into the fourth quarter?.

Yes. I would say a couple of things, Matt. If you think about sort of chassis flows and progressed to the year, we saw improvement late in the second quarter, and that continued into the third quarter where we were really healthy, call it, mid-Q3. And so we would expect that to sustain based on the visibility that we have now.

So call it a full quarter, maybe a couple less days but still a full quarter of chassis visibility. We also do have some of the USPS volume in the fourth quarter as well. So there's about $15 million of just chassis pass-through as well..

Okay. That's helpful. And then maybe if you could just talk about sort of the working capital reversal that you're expecting in the fourth quarter, does that primarily come from the inventory plus you mentioned a bunch of finished vehicles that were awaiting components.

So assuming that those sort of flush, but maybe any more color on just sort of how we should expect cash flow to and the puts and takes in the fourth quarter..

Yes. Yes. No, that is the biggest piece. I think at the end of the third quarter, we did have a decent amount of vehicles that we're missing 1 or 2 components that we needed to flush through. We've seen progress on that as we've even started October through as we're nearing the end of October, but as we've gotten into Q4.

And so we expect that to continue. So that will be the biggest piece as we convert those vehicles able to invoice them and then convert to cash. And then inventory, we've maintained higher inventory levels through the year.

Part of that strategic other parts, trying to align it to the schedule and with improved chassis visibility now through certainly the end of the year and into January, February, we're able to sort of manage that more efficiently. And so that will be the other piece that helps us drive cash conversion here in Q4 ..

Great. And then one other one on just with the improvement in chassis visibility that you're sitting there, should we assume that sort of the FBS segment doesn't have, I guess, the typical seasonality that you guys have usually had where 1Q is a bit lower than the third and fourth quarter.

Should we expect sort of a sequential increase in FBS from the fourth quarter into the first? Just any help with sort of seasonality on how to think about sort of as you clear the relatively large backlog you have in FBS, how that plays out?.

Yes, I think we'll continue to have seasonality in the business for a couple of reasons. There are model year changes and shutdowns that the OEMs have at the end of the year, which naturally impacts flow really starting in December and into the first quarter.

And so while we have visibility, we do expect that to not be sort of linear or as we move forward. And so I think you'll have the natural seasonality, I think, on some of our product lines as well, we'll start to see orders here later in the year and early Q1 to fill some of those gaps as well, which would maybe be later in Q2 and Q3..

Okay. I guess that threads into my next question and the last one, and I'll leave it to others.

But just on FBS and order flow, your order flow at the moment in the third quarter, it does this seem constrained to me? And maybe just given some of the checks we've done on sort of lead times and availability of chassis, it just seems like maybe that is the issue that's constraining order flow in FES.

But maybe just if you could level set us on what's the right level of sort of new orders to expect over the next couple of quarters? Should we expect it to be a little bit constrained until we clear out some of the backlog just given the lead times have been extended in that segment? And what's the catalyst, I guess, to kind of pick up on order flow? And then maybe just also just clarify, I just want to make sure I don't think there's any EV in backlog at the moment, but just clarify for us if there's anything you maybe there..

I'll take the second part first, which is no EV revenue and the -- or no EV orders in the backlog currently. I think in terms of timing, I think you kind of hit it.

I think lead times are going to be a constraint here until we see that improve Obviously, we've seen chassis improvement, but components continue to be a bit of a challenge just from a broader supply chain perspective. You go back historically, even in our orders are not linear. We've got lumpiness. And so we would expect that to continue.

And so you might see some pockets of orders here in Q4 and into Q1. But we're very comfortable with where we are from a demand perspective as we look out into '23..

Awesome. I'll leave it there. Thanks..

The next question is from Mike Shlisky of D.A. Davidson..

John, I want to follow up on your last answer there. Maybe just get a little bit more granular. As you talk with larger fleets and even some of the smaller ones, what's been your most recent discussions and the tone of those discussions about buying additional vehicles from here.

I guess, what's been the tone around new CapEx in potential for some parts of the economy turning downward next year?.

Yes, Mike, this is Daryl. Our discussions that we've had is they're all still positive. I think they may have extended some of their facilities, more than their vehicles in the past because you have to remember, they didn't receive the vehicles they needed in '20, '21 or even the first half of '22.

So there's a bit of catch-up still for them, and I think that's shown in our backlog to get the vehicles out. And as we've discussed in the past, we still see a lot of rental vehicles at the distribution centers that are close to offices that we operate. So they need the vehicles, and I think that's key for them.

And as they continue to have replacement needs and normal growth, there's still a nice inflow or discussions about quotes..

Got it. And just turning over to John, real quick, I want to clarify one of your other answers to your questions from earlier about the Blue ark spending next year. I know it's going to be stepping down but in prior events, you've mentioned the overall business because of some revenues next year could be pretty much EBITDA neutral.

Is that still the case? Or we're going to be going from 30 to 0? Or is it 30 to 15 costs for in 2023?.

Yes. I don't necessarily want to start guiding on 2023 specifically. We did talk about it at the Ride and Drive event where we will see some revenue contribution next year. We do expect sort of R&D to step down year-over-year. And so I think that's consistent with what we've said previously..

Okay. And maybe thirdly, can I ask about the motorhome business. We are seeing some of the smaller motor home categories seeing a bit of a downturn here.

What's the outlook for your business in the larger or, I guess, in case of Shyft the absolute largest category that you guys play in, is that -- does that differ widely from the smaller towable and much smaller products these days?.

Yes. I mean I think generally, we've certainly lagged some of the changes that have happened in the towables and smaller-sized vehicles earlier in the year. We've said that we're certainly comfortable with this year. We just actually had, I think, a record, if not close to record revenue here in Q3 on our product lines.

And so that's not to say that it's going to -- those levels are going to sustain forever.

I think as we get into '23, we'd probably see some negative impact, but we remain confident in our ability to take share from that perspective as well as look for other avenues to increase our revenue, including the Red Diamond launch that we did to expand aftermarket parts, and so I think as you look at that business in total, we're not expecting to see significant declines as we move forward..

Okay. I appreciate the discussion. I'll pass it along..

The next question is from Felix Boeschen of Raymond James..

I was hoping just to start maybe quickly a follow-up on, John, your comments around the USPS truck body contract and the $15 million of chassis pass-through revenue in 4Q.

Can you remind us of the size of that contract and sort of how much of that pass-through revenue we should be expecting for 2023 at this point?.

Yes. So I think we've said the contracts about the pass-through portion of it is about $40 million. And so we haven't seen any of that yet. So you'll see some of that come through in Q4 and then into '23. Unfortunately, some of the chassis delays from the OEMs has pushed the schedule on that project..

Okay. That's super helpful. And then I wanted to talk a little bit about specialty vehicle margins. They look super strong, in fact, kind of close to your long-term targets already.

Kind of curious if you could talk about directionally where you expect them to go from here or any puts and takes that we should think about coming out of the quarter?.

Yes. I mean I think that the team continues to perform incredibly well. I wouldn't necessarily start modeling 15% on a long-term basis.

But as you look at the strength of the underlying businesses that we have there, we do feel confident with the margin profiles of those products and businesses as well as our ability to sort of expand over time, but I think when you look at it on a year-to-date basis, you're probably in the 13% range, which is still a great increase year-over-year.

Probably that low teens is maybe where it naturally is, and then we'll see it sort of peak depending on mix of products and customers in any given quarter..

Okay. And then just my last one. I think in the earnings release, you all pointed out mix as a positive to fleet vehicles. And I'm just curious if we could broadly talk about the mix within that segment today.

If you could give us directional comments around velocity versus traditional walk-in van and other sort of products and how that maybe compares to the backlog as it stands today?.

Yes, I think when you look at what we disclosed, I think we saw favorable pricing in that business, which we've combined with mix. I think as we look forward, we do like the margin composition of the product lines that we have. I think we've said historically, truck body is maybe a little bit lower than the average.

We have seen significant growth there, which is creating some negative mix for us. But I think when you put pricing mix together, we've got sort of positive year-over-year performance with a little headwind from mix..

This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wilson for closing remarks..

Thanks, operator. We look forward to meeting with analysts and investors at the Baird Barclays, Craig Hallum and Deutsche Bank conferences here in November and December. We thank you for your participation in today's call and your interest in the Shyft Group. With that, operator, you may disconnect the call..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..