Shyft : Q1 2023 Conference Transcript

The Shyft Group

First Quarter 2023 Earnings Conference Call April 27, 2023, at 10:00 a.m. Eastern

CORPORATE PARTICIPANTS

Randy Wilson -- Vice President, Investor Relations

Daryl Adams - Chief Executive Officer

Jonathan Douyard - Chief Financial Officer

1

PRESENTATION

Operator

Good morning, and welcome to the Shyft Group's First 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 at the request of the Shyft Group. 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 Shyft Group. Mr. Wilson, you may proceed.

Randy Wilson

Thank you for joining this morning's 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 it's 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 risks that management believes could materially affect our results are identified in our Forms 10-k and 10-Q filed with the SEC.

We'll be discussing non-GAAP information and performance measures we believe are useful in evaluating the company's operating performance.

During today's call, we'll provide a business update before moving on to a more detailed review of the results in our 2023 outlook. We'll 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, everyone.

Overall, the Shyft Group had a solid start to the year, delivering 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 body business and improved performance in 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. 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 CARB and EPA certification for our Class 3, 4 and 5 EV delivery vehicles, but we did so with performance that more than exceeds our fleet customers' needs. The car test results for our Class 3 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'd also like to take a moment to highlight a fantastic addition to The Shyft Group as John Dunn joined the company in January as our Fleet Vehicle and Service President. He is a proven leader in

The Shyft Group April 27, 2023, at 10:00 a.m. Eastern

2

manufacturing, customer relations and product development and has made an immediate impact with our employees, customers, and suppliers.

Turning to slide 4. Over the past five years, we have strategically moved the company toward last mile delivery and infrastructure focus 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 in ecommerce penetration, the industry growth rate is expected to be in the mid to high single digit range for the foreseeable future, driven by the secular shift to ecommerce. 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 or working through efficiency actions given economic uncertainty. 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 FVS continues to normalize from the higher levels that we saw during COVID driven by the improvement in production rates and supply chain. FVS ended the quarter with a backlog of $585 million, which is still elevated compared to pre COVID 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 and 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.

To ensure our motorhome chassis business we, like many others, have previously communicated overall softness in the RV market. 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 Shyft 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. I will now share some exciting developments underway in our FVS and SV businesses. Please turn to slide 5.

Starting with FVS 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 18,000 cargo van outfits, split between Ford ETransit and RAM Promaster. We expect deliveries to begin in mid-2023 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 SV highlights. We have been successful in our service body geographic expansion and continue to execute our strategy of being a leading national provider. Consistent with this strategy, we

The Shyft Group April 27, 2023, at 10:00 a.m. Eastern

3

recently announced the opening of our new Tennessee location, which will serve as a hub for opening Royal, Durameg, Magnum and Strobes products. This location provides direct access to the 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 6. I'll put an update on our Blue Arc EV 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 the NTEA 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 & Drive. This positive response emphasizes that our Blue Arc EVs are differentiated within the commercial electric vehicle industry, both for their design and their performance.

In the first quarter, the fact that we achieved CARB approval positions that previously discussed pre order with Randy Marion 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, and commencement of pilot and production vehicle builds. 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 Jon to discuss our first quarter financial results.

Jon Douyard

Thank you, Daryl. And good morning, everyone. Please turn to slide 8 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. The year over year improvement reflects strong service body and truck body performance, and improved chassis supply in our walk-in van and upfit product lines.

Net income was $1.7 million or $0.05 per share compared to a net loss of $3.9 million or $0.11 per share in the previous year. We improved the adjusted EBITDA to $10.8 million, or 4.4% of sales, up from a loss of $0.6 million, or negative 0.3% of sales in the first quarter of 2022. These results include EV spend of $8.5 million, up $4.1 million from the prior year. Excluding EV spend, adjusted EBITDA was 7.9% of sales, up 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 rose to $0.12 per share from a loss of $0.06 per share last year.

I'll now walk through our first quarter results by operating segment beginning with Fleet Vehicles and Services on slide 9. 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 improve year over year, we do continue to experience inefficiencies as we work through the impact of supply chain challenges.

The Shyft Group April 27, 2023, at 10:00 a.m. Eastern

4

FVS achieved sales of $159.4 million, up 41.5% compared to $112.7 million a year ago. FVS adjusted EBITDA was $12.5 million versus a loss of $0.9 million a year ago. Adjusted EBITDA margin was 7.8% of sales, compared to a loss of 0.8% 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 motorhome chassis business. The team delivered our third consecutive quarter of adjusted EBITDA margin of more than 15% driven by strong operating and commercial performance in our work truck businesses.

First quarter sales were $87.2 million, a 7.4% 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 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: 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 $0.98 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 0.9 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.

Shyft's organic investment priority is the development and launch of the Blue Arc 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 in 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.

Daryl Adams

Thank you, Jon. Please turn to slide 13. At The Shyft Group, we have created a compelling industrial growth company. Our priority starts with a culture of customer focused 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 want to conclude today's call by announcing that Todd Heavin, our COO, who joined The Shyft Group

The Shyft Group April 27, 2023, at 10:00 a.m. Eastern