The Shyft Group, Inc.

Good morning and welcome to the SHIFT Group's third quarter 2020 conference call and webcast. All participants will be in listen-only mode until the question and answer session of the conference call. This call is being recorded at the request of the SHIFT Group. If anyone has any objections, you may disconnect at this time. I would now like to introduce Juris Paygrop, Group Treasurer and Head of Investor Relations for the SHIFT Group. Mr. Paygrop, you may begin.

Thanks, Alyssa. Good morning, everyone, and welcome to the SHIFT Group's third quarter 2020 earnings call. Joining me in the call today are Daryl Adams, our president and chief executive officer, and John Dewyard, our chief financial officer. For today's call, we've included a presentation deck, which will be filed with the SEC and is also available on our website at theshiftgroup.com. You may download the deck from the investor relations section of our website to follow along with our presentation during the call. Before we start today's call, please turn to slide two of the presentation for our Safe Harbor Statement. You should be aware that certain statements made during today's conference call, which may include management's current outlook, viewpoint, predictions, and projections regarding the SHIFT Group and its operations, may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. I caution you that As with any prediction or projection, there are a number of factors that could cause the shift group's actual results to differ materially from projections. All known risks that management believes could materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC. However, there may be other risks that we cannot anticipate. On the call today, we will provide a business update, including the ongoing impact of the COVID-19 pandemic on our operations, as well as the third quarter highlights before moving on to a more detailed review of the third quarter results and our outlook for the remainder of the year. We will then be opening the line for Q&A. I'd like to also remind everyone that with the divestiture of emergency response business on February 1, 2020, the revenues and expenses associated with the ER business, as well as the assets and liabilities, have been reclassified as discontinued operations for all periods presented. With this reclassification of the ER business to discontinued operations, the results discussed today will refer to continuing operations unless otherwise noted. At this time, I'm pleased to turn the call over to Daryl for his comments beginning on slide three.

Thank you, Juris. Good morning, everyone. Thank you for joining us to discuss our third quarter 2020 results. Let's start by saying that I could not be more proud of the hard work and tremendous effort by our team during the quarter as we achieved some truly amazing results, finishing the quarter with record performance across the company. We also need to acknowledge that 2020 has been a year that has really put the team and our company to task. As we face the COVID-19 pandemic, affecting virtually every aspect of our personal and working lives for the past eight months, we continue to work hard managing supply constraints while emphasizing the health and safety of our team members. We rose at the challenge, we over-delivered on our prior outlook, in many cases exceeded our own expectations, resulting in the most profitable quarter in our company's history. We also remain focused on M&A opportunities by finalizing the recently announced acquisition of F3 Manufacturing, a complimentary service body opportunity, which I will discuss later. As we head into the home stretch of 2020, we continue to proactively address opportunities prioritizing the needs of all our stakeholders in a way that reflects our goal to be nimble, aggressive, and positioned to win in markets that are growing at an accelerated pace since the onset of the pandemic. Please turn to slide four to discuss the current environment and the progress we've made to address and emerge from the health crisis. On our last quarterly earnings call, we discussed the initial actions we took to address the pandemic. our leadership team remains fully engaged and aligned on controlling what we can. As we return to full production, our teams adapted with incredible and innovative solutions to meet our customers' demands, such as pulling forward customer orders when requested, drive-through interviews to address our labor constraints, and employing a second shift to allow our employees the flexibility to provide care for the school-age children. From a supply perspective, Our continued, sorry, from a supply perspective, conditions improved throughout the quarter as we now have clear visibility through the rest of the year. Parts of delivery continues its accelerated growth trajectory as consumers embrace e-commerce at a much higher rate. In a recent Wall Street Journal article, delivery companies have indicated that their upcoming holiday shipping capacity is already booked, once earlier than usual. Between Thanksgiving and Christmas this year, total shipping is expected to be up 21%. Carriers have already been operating near capacity for months as consumers have stayed home, avoided stores, and shopped online. And that has driven a capacity shortage for partial delivery vehicles. We are excited about these trends. Our partial delivery customer orders are ramping, and customers have been asking us to fill them with urgency. FES backlog has jumped $54 million to $282 million in the month of October alone. On the special vehicle side, our luxury motor coach chassis operations benefited from the ongoing resurgence of the RV industry emerging from the pandemic. With the rebound in demand, our motorhome chassis line increased daily production levels throughout the quarter. On the service truck body side, the road truck body rebounded significantly due to the increase in chassis availability, and finished the quarter strong. These recent SV trends are reflected in our backlog, which is up 30% year-over-year to 52 million, and includes back-to-back quarterly records for the motor coach chassis. With that, let me take a moment and summarize our year-to-date results on slide five. For the first nine months of 2020, we posted solid improvement in our results. especially considering the pandemic-related headwinds we encountered in the second quarter. Once again, our year-to-date results demonstrate the success and effectiveness of our business transformation strategy, which is focused on growth in higher margin product offerings within our core markets, growing market share within our expanding geographic footprint, and consistent productivity improvements in our operations. The results of our strategy can be clearly seen by the increase in our overall adjusted EBITDA margins through the first nine months as we achieved 12% margins, even in the face of headwinds from COVID-19, shutdowns, and supply constraints that limited some production. Revenues for the first nine months increased 19 million, or 4%, to 104 million, excluding the USPS order. Adjusted EBITDA for the first nine months period increased 20 million, or 49% to 60 million, which nearly matches all of our 2019 when we achieved 64 million. Adjusted even margin improved 500 basis points, driven primarily by considerable labor efficiencies, as well as a shift in product mix resulting from the continued implementation of our business transformation strategy. Please turn to slide six. I'll provide an FVS business update. Last week, Utilamaster announced the launch of the Velocity F2, a purpose-built walk-in van based on a Ford Transit Class 2 chassis to meet growing demand for e-commerce and last-mile delivery. Initial customer reviews have been very favorable as Velocity F2 combines nimbleness, comfort, and increased fuel efficiency with cargo space, load capacity, and access similar to the traditional walk-in vans. This innovative new vehicle is an ideal solution for partial delivery fleet operators that want to expand their fleet and delivery capacity quickly, as Velocity F2 offers lower total cost of ownership. Utilimaster's Velocity F2 expands our product offering and complements the previously announced Velocity F3, built on a Ford Transit chassis, and the M3, which is built on a Mercedes Sprinter chassis, offering parcel delivery fleet customers an entirely new vehicle lineup with innovative solutions to improve efficiency and safety from the loading process to the final delivery. Please turn to slide seven for an update on our most recent acquisition, which will be part of the SV business. On October 1, we announced the acquisition of Maine-based F3 Manufacturing, a leading aluminum service body and accessory manufacturer. Going forward, we will refer to the business as Duramax, after one of its core product brands. We are all excited to welcome Duramax to the Schiff Group family. We are looking forward to growing their complementary product lines and expanding our service body production and distribution footprint from coast to coast. The company has two industry-recognized brands, Duramax in the service bodies and Magnum in the light-duty aluminum accessory, primarily headache racks. Duramax also brings a wide range of complementary aluminum products to SHIFT, which are lighter weight, leading to better fuel efficiency as well as enhanced corrosion production. Aluminum products also provide a growth advantage as the segment has been growing above market rates. F3 has been included in Inc.' 's magazine annual list of America's 5,000 fastest growing privately held companies in both 2018 and 19. Sales for DERMAG grew at a 74% CAGR rate from 2015 to 19, and generated revenues of approximately $25 million in 2019. The acquisition closed on October 1, and we expect it to be accretive in 2021. With that, I will turn the call over to John to discuss SHIFT's financial results for the third quarter in more detail, as well as provide an update on our 2020 outlook, beginning on slide 8.

Thank you, Daryl, and good morning, everyone. please turn to slide nine and I'll provide an overview of our financial results for the third quarter. As Daryl alluded to earlier, despite the ongoing impacts of the COVID-19 pandemic, we had a terrific quarter, one that saw conditions improve sequentially each month. We worked through the lingering supply chain and labor constraints, and in each case exceeded expectations, alleviating the pressures through a variety of initiatives that resulted in a record-breaking profit quarter. Revenues for the third quarter were $203.5 million, up slightly from the year-ago quarter, excluding $23 million of USPS pass-through revenues. Income from continuing operations was $19.4 million compared to $13.1 million a year ago. Earnings per share from continuing operations increased to a record $0.54 per share, up from $0.37 per share in the third quarter of 2019. Turning to slide 10, Q3 adjusted EBITDA from continuing operations increased 46% to $36.2 million from $22 million, while as a percent of sales, adjusted EBITDA from continuing operations increased 610 basis points to 16% of sales compared to 9.9% of sales in the same period last year. I will cover these increases in more detail when we get to the segment discussions. For the third quarter, adjusted net income from continuing operations was $22.1 million a $6.2 million increase from $15.9 million a year ago, while adjusted EPS from continuing operations rose 38% to $0.62 per share compared to $0.45 per share at the same time last year. Next, we'll jump into the results by operating segment. Let's begin with the fleet vehicles and services segment on slide 11. Our FBS business delivered remarkable results in the third quarter while managing through a number of challenges. Our truck body business experienced significant year-over-year volume declines, with our factories shut down for a good portion of the quarter due to order softness and chassis timing. On the flip side, our Bristol and Upfit teams were able to respond quickly to customer demand and accelerate deliveries that were planned for Q4, which offset the truck body volume decline and drove favorable mix and productivity for FES in the quarter. Overall, FES generated total revenues of $145.2 million, which was down 19% compared to $179.6 million in the third quarter of 2019. As a reminder, third quarter 2019 included $23 million of USPS pass-through revenue, so excluding that impact, FES sales year-over-year decreased 11.4 million, or 7%. Despite the decreased revenue, FBS adjusted EBITDA increased 34% to $33.2 million from $24.7 million a year ago due to the improved product mix and productivity noted earlier, as well as lower material and component costs and favorable health care expenses. That said, adjusted EBITDA margin also improved 920 basis points to 22.9% of sales from 13.7% of sales last year. FBS backlog totaled $229 million, up 5 million, or 2%, compared to 224 million at the end of the third quarter 2019. And as Darrell mentioned earlier, demand has been robust recently, with orders exceeding the order volume we experienced in all of third quarter, with October orders volume exceeding the order volume we experienced in all of the third quarter, resulting in a current FBS backlog of approximately $282 million. Please turn to slide 12 for the specialty vehicles segment overview. Specialty vehicles also had a great quarter, delivering the first quarter of motorhome sales growth since 2018, while also realizing the benefits of the Royal truck body acquisition that we made in September of last year. SB had sales of $58.3 million, an increase of $13.2 million, or 29%, primarily due to higher sales of luxury motor coach chassis, as well as the addition of revenues from the Royal acquisition. adjusted EBITDA with $7.2 million or 12.3% of sales compared to 4.1 million or 9% of sales in the same period last year, driven primarily by production efficiencies and higher motor coach volume, as well as the addition of the Royal Truck Body business. SV backlog was up 30% to $52 million, which included a record $40 million in motor coach backlog, breaking the record set in Q2 of this year. Please turn to the liquidity and Outlook update on slide 13. As we noted in our previous Q2 earnings call, we took a number of steps to enhance our liquidity to confront the pandemic. We continue to exercise discipline in our use of cash and plan to continue to support our M&A growth strategy as opportunities arise. We generated 32 million of cash from operating activities in Q3, ending the quarter with $43 million of cash on hand and $144 million of total liquidity. As we began October, we used a portion of the $43 million of cash on hand to fund the Duramax acquisition, as well as make a payment to finalize the network and capital adjustment related to the sale of the ER business. As conditions improved during Q3, we paid down $10 million of debt in August and recently made $20 million of paydowns in Q4. As a result, our current leverage ratio stands at approximately 0.5 times adjusted EBITDA, which positions us well to fund our operations and to pursue our growth strategy. We are extremely proud of our overall performance, given the significant challenges we faced this year. The high level of execution at FVS, coupled with the transformational actions we made earlier in the year, illustrate the power of SHIFT's earnings and growth potential. We are increasingly confident in the underlying strength of our end markets. In October, we saw sizable increases in order volume, which is a positive indication as customers are now making initial buying decisions for 2021 vehicle orders to support e-commerce parcel delivery. Given these factors, and despite the industry-wide headwinds that impacted our business, we are excited to reinstate our initial March 2020 guidance at the high end of the full-year profit range. We expect to deliver full-year revenues in the range of $660 to $680 million, adjusted EBITDA of $73 to $75 million, and adjusted EPS of $1.28 to $1.32 per share, barring any additional pandemic-related impacts. Now I'll turn the call back to Daryl for closing remarks. Thank you, John. Please turn to slide 14.

We had an incredibly successful quarter. I want to reemphasize how proud I am of the incredible hard work, dedication, and commitment to excellence demonstrated by our team throughout this unusual time. When we needed to step up to ensure the shift group could manufacture and shift the vehicles our customers demanded, our employees came through. It's often said that challenging times bring out the best in people, and we certainly saw that demonstrated at the shift group in 2020. Over the last few years, we've made a number of key strategic decisions that have positioned the shift group to win in markets that are growing at an accelerated pace. I believe our year-to-date performance reflects the earnings power of the transformed company. Our entire team is excited as we continue to have great conversations with our customers who share their optimism for continued growth trends in 2021. Operator, we are now ready for the Q&A portion of the call.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mike Schliske of Collier Securities. Please go ahead.

Good morning, guys. Good morning, Mike. So I want to maybe first talk about the Q4 outlook. You know, the last two years, the Q4 margins have been better than the Q3 margins. Looking at what you've mentioned today, it looks like the margins will be a bit lower from the all-time record we just had in Q3. So I'm kind of curious, you know, you've only worked through any operational issues. It seems like those are probably going away also. So I'm trying to figure out how or why margins might be down in Q4 compared to Q3.

Yeah, Mike, this is John. I'd say a couple things. You know, as we look at the The mix of volume that we had in the third quarter with heavy heavy walking van and upfit compared to what Q4 looks like, which will be higher truck body and lower contribution from an upfit and walking van perspective. We certainly see some some negative mix and that that's, you know, again, partially attributable to some of the pulling activity that we had. We'll also see some strong growth in the motor home business, which was strong in Q3, you know, will accelerate year over year in Q4. There's also the lower volume impact. And so, you know, we're not going to be able to get the same fall through from a contribution perspective, just with the volume, sequential volume declines. And then, you know, we do have, we do expect to see some of the productivity that you talked about. I think, you know, as we look at the quarter, you know, there's still, you know, uncertainty given the environment that we're operating in. And so we think we've taken a good view here as to what it could be. But there is still a lot of variability and uncertainty that we're playing with, particularly given some of the case increases that we've seen across the country in the last couple of weeks. Okay.

Okay. And then to follow up there, in Q3 in the FBS segment, it sounded like some customers wanted to be put at the front of the line for their orders. I was curious, is there a charge for that? And do you have other orders or other folks in Q4 who just simply cannot wait any longer and also want to be put to the front of the line here?

Yeah, Mike, this is Daryl. I'll take this one. No, we don't. We look at our customers as partners, and they're struggling to meet the demand. So we wanted to make sure that we could do that. So we got creative, did a few different things. I think it just shows, you know, as the shift group name gets out there more, that we continue to be, according to our strategy, nimble, agile, flexible. And the customers really look at that as an asset. And we think it's going to pay off in future orders that we're able to help them out in Q3 and pull some of those orders forward.

Okay. Got it. Also, I want to ask about some of the big partial delivery companies. I think that one of them over the last week or two has indicated that they want to cut their CapEx in 2021. I don't know if you talked with those folks recently, but do you know if that will be including the vehicle part of the CapEx? And do you think that the other companies out there, the other partial folks might be actually increasing to offset what this one company might be cutting?

yeah Mike we did hear that and I think you know when you look at the the big delivery companies out there they're buying airplanes and a lot of other product in their capex budget so we have not heard directly that our products are going to be part of that reduction we're actually seeing a increases in a number of our parcel delivery customers having great conversations with some other ones that we think will come to fruition here before the end of the year. So we're actually bullish and optimistic on 2021.

Excellent. I'm going to squeeze in one more here on the velocity discussion you had earlier, the F2. Will that family of products eventually be electrified, and will it be the F2 or the F3? And do you have to wait until either Ford or Mercedes has an EV chassis that's available? Or can you use another manufacturer's chassis if you do choose to electrify the Velocity product lineup?

So I think there was three questions in that last question. So let me try to answer them. Yes, we can electrify the F2, the F3, and the M3. And we have, it will not be, we don't have to wait for the OEMs to come out with their product. We can use a third party to electrify those. And that's, you're probably getting ahead of us a little bit, but that's probably something that we're going to be talking more about as we move forward into 2021. Okay.

Well, thanks very much. I will, I'll leave it there. Appreciate it. Thanks, man.

Thank you.

The next question comes from Matt Kuranda of Roth Capital. Please go ahead.

Hey, guys. Thanks. I guess implied in your commentary on the sequential backlog increase in fleet vehicles suggests that you may have had order flow approaching 100 million. So I was just wondering if you could speak to whether that's accurate, and then also maybe on the composition of that order flow Sounds like you guys are alluding to it mostly being parcel fleet, which I would assume is mostly walk-in van, but any inclusion of velocity product in that October order flow as well?

This is John. Yeah, I would say your math is close, probably a little bit less than the number you stated. And, you know, what we saw is mostly... Certainly mostly on the parcel side, also on the walk-in van side of the business. I think as we continue to have very good discussions with customers on the velocity, and hopefully we'll have something here shortly, but there's nothing in that backlog increase in October related to that velocity increase. Sorry, related to backlog increase.

Okay, very helpful. And then just usually, I mean, the normal seasonality, I believe, to your parcel fleets sort of order flow tends to be more balanced toward the spring. And so I'm just wondering, as you get orders kind of toward the end of the year here, how does that impact your view or your expectations as we head into early 2021 when you sort of would normally get the sort of normal course orders?

Yeah, Matt, this is Daryl. Morning. You know, I think the COVID delayed some of the ordering in Q2 as we discussed, and we're seeing some of that come through right now. And the other factor that we're right now currently unable to weigh is what does the velocity mean in 2021, right? So even if we go back to 2019, We had some restrictions in late 2018 with chassis due to a various number of reasons. And I think at that time, if you go back and check, I discussed that we're going to develop additional class three chassis that will not put in that situation again. So I think it's very timely that as e-commerce continued to accelerate, at a nice CAGR rate, and then you have COVID have an inflection point into that trajectory. I think the traditional walk-in van suppliers like Freightliner and DCP or the Ford chassis are going to struggle, especially with motorhome continuing to accelerate or have good numbers. With us bringing out the F2, the F3, and the Mercedes Sprinter M3, We give the customer three more chassis to pick from. Not that they're unlimited supply, but at least gives them options that run much faster. The Transit Cutaway is running probably 60 units an hour out in Kansas City. Sprinter is probably a little bit less, but they're higher volume than Freightliner or DCP would get. you know we're looking at probably q1 maybe to bring out the r2 which is going to be the dodge ram class 2 which is going to be also in the velocity family so we'll actually give them four more chassis to be able to buy on and these are purpose-built walk-in vans so very similar to a walk-in van from shape except it's double the fuel efficiency of a traditional walk-in van, and it's smaller and easier to get around the city. So we see that, you know, with COVID and the delivery customers at peak, basically since March and running the holiday season, that this may be a trend of the future at this level, and they're going to need to fill out their fleet. So we're excited about orders coming here at the end of the year and into 2021.

Very helpful, Daryl. And I think that puts well with what I was going to ask next, which is, can you speak to maybe your ability to fulfill from the FBS backlog in 2021? Obviously, like the gating factor typically historically for you guys has been chassis availability, but it sounds like at least if you were to get a strong mix from the Velocity platform that Chassis may no longer be the large constraint on your ability to fulfill from backlog. And so just curious as to maybe if you could speak to capacity and utilization there and then how quickly we can fulfill next year if we do see sort of maybe a bit of a backlog of orders, so to speak, that flows through from the parcel fleet guys next year.

Yeah, I'll take it again, Matt. So again, I think if we go back in history a little bit and talk about our strategy, which was to build out the footprint we have and have a model plant, if you will. So I'm going to tell you, the model plant isn't fully baked, but right now our footprint is nicely situated. And we have the ability, right? So right now we're building truck bodies in Pennsylvania, Michigan, and California. we have the ability to move truck body out of Michigan and open that plan up to build velocity. And then we have some space in South Carolina that we can move around in order to build velocity down there on the Mercedes chassis. We're currently looking at additional space opportunities in Kansas City that will help us build the transit. So we have flexibility to move other product around and open up some space to build the velocity, which we're pretty well down the path and ready to pull the trigger here, probably in Q4 sometime to start that move.

Okay. Very helpful, Daryl. I'll jump back in queue, guys. Thanks. Thanks, Dan.

Thanks. The next question today comes from Steve Dyer of Craig Hallam. Please go ahead.

Thanks, guys. Heck of a quarter. Congratulations. As it relates to sort of the implied Q4 guidance, I understand kind of makeshift and holidays and some things like that kind of working against you. from a margin perspective. Just what it implies for revenue and volumes, it usually, you know, it seems a bit more severe than it typically is. And I'm trying to sort of gauge how much of that is just your trademark conservatism versus anything else you may see. I don't know if you're constrained from a labor perspective or, you know, because I think it should be generally better revenue opportunity than outfit, but maybe some commentary there. Thanks.

Yeah, I mean, I think on the revenue side of things, I think Q3 was a fantastic quarter, particularly in the FES business. And if you think about the leverage they were able to get and the volume they were able to get out and respond to customers and pull in demand, things were sort of hitting on all cylinders from that perspective. Part of that was was the mix within products even where we had, we were able to deliver on fleet volume and so consistent trucks going down the line, which shifts a little bit into Q4 where we have sort of more varied backlog. And so that, being able to sort of change the lines and change customer bills and specs and those types of things are impacting some of the output differences between Q3 and Q4 as we, you know, again, brought volume in to satisfy customer demands ahead of the peak holiday season here.

Okay. In terms of the incremental backlog, the big boost you saw in October, just kind of curious if that, you know, sort of maybe the composition of that, how concentrated that was, or was it a couple of big customers? Was it fairly out? Any color there?

Yeah, Steve, I'll take it. We saw it from, I would say, a couple of the smaller parcel delivery companies out of maybe, say, the top four. So we were getting those conversations we're having with the two bigger ones, We're excited about them, and I think, as I said before, we're looking to have something before the end of the year out of both of those guys. So it was none of the big guys. It was mainly the smaller ones, which they're grabbing as much volume as we can get. And I think that's what you're seeing right now is it's a race to see who could lock up the chassis. going into 2021. So there's a little bit of a race going on. And I think there's some horse trading and some big negotiations with the OEM chassis manufacturers that all the big players are talking to on the parcel and commerce delivery.

Got it. That's very helpful, Darrell. Thanks. A question just kind of on labor. You were sort of recently quoted in saying you want to add something like 10% to your workforce over the next year or so in sort of anticipation of this demand. Is that, and I know you've had a lot of hiring fairs and so forth, has that been a constraint at all? I mean, your Q3 results would suggest you're doing just fine and having success there, but is that, do you anticipate that being a constraint at all going forward or are you having good success?

No, I think, Steve, we've shown good success, as you mentioned, in Q2 down at Bristol. And the increase that I talked about was company-wide. So as you can imagine, it's probably not going to be at Bristol. That's where I talked about Michigan a little bit and probably into South Carolina. In both those locations, we feel we have the ability to hire the headcount we need. The real constraint we have is down at the Bristol location, doing the motorhome business, humming along pretty good. But again, we've been successful getting that second shift started and able to move the product out for Q3. But the hiring is probably going to be not in Bristol.

Okay, got it. Lastly, for me, I guess just kind of a two-part question, as it relates to capital allocation, you're generating a ton of cash and a lot of options for places to put it, whether it's, you know, in my view, you have a cheap stock, you can buy back stock, you can make acquisitions, you could, you know, pay down the debt, all of those types of things. But how do you sort of think about the allocation of that capital for greatest return? And then as it relates to acquisitions, you've done kind of two-pronged. One has been you know, sort of buying capacity around the country or expanding capacity, and the other has sort of been, I guess, what I would call horizontal acquisitions, whether it's Strobes or Duramax or Royal. Any sort of color on how you think about that capital allocation and acquisition opportunities going forward? That's it. Thanks.

Yeah, I'll start off here, and maybe Daryl can add some comments. You know, I think to your point where we're in a solid position from a capital allocation standpoint, we we are cash flow certainly picked up here in the second half of the year. We expect that to continue. We. We continue to have a pretty solid pipeline. I think from an M&A perspective and we we feel that there are opportunities to drive accretive returns through that and we feel like their mag fits squarely into that. Into that equation and and there's other opportunities out there that will be similar. And then I think, you know, we continue to discuss internally growth investments as we think about velocity launch or as we execute a velocity launch, as well as other expansion opportunities. We feel like there's the opportunity to sort of accelerate organic growth, both from a footprint perspective to Daryl's points, but also from a footprint perspective, a product perspective, and potentially a technology perspective. And so those are certainly high on the list. And then, you know, from a buyback perspective to your, you know, specifically to your question, we've got 800,000 shares available under the current authorization. And, you know, we certainly understand that. So do you have anything on the acquisition side?

No, I think, you know, Steve, we're always looking for that third leg. But right now it seems there's a lot of PE money out there that may be paying for higher than what we'd be willing to jump into. So we're continuing to look. We still have our pipeline meetings every Friday. And if something nice comes along, we'd be very interested. Again, I think we've talked about the leverage ratio at being 0.5 here currently. I think we'll be comfortable somewhere 2.5. So we could do a sizable deal if the opportunity comes

comes to the top of the table.

All right. Got it. Uh, well done guys. Thanks.

Thank you.

The next question comes from Steve O'Hara of Sedodian company. Please go ahead.

Yeah. Hi, good morning. Uh, thanks for taking the question.

Good morning.

Uh, just on the, um, you know, the kind of the e-commerce shift. I mean, I think, uh, you know, Goldman or somebody had noted that, um, you know, I think, you know, previously they had noted, uh, or, you know, they thought it had pulled forward by a few years, and I think the most recent was more like, you know, five years or something like that. I mean, can you talk about, you know, what that might do to the demand environment, you know, maybe in the medium term? So, you know, if the e-commerce growth was expected to be, you know, 10%, you know, CAGR, but now you've kind of leapfrogged, you know, a few years forward, and now you've got to kind of catch up to that. I mean, does that imply that, you know, the medium term there's a significant order book out there waiting, or are they kind of meeting that need with, you know, some other method?

Yeah, good question, Steve. And I'll tell you what we have learned since our last conference call where we talked about the conversations we're having and that the big parts of the delivery companies are trying to figure out what – the volume is going to remain after COVID. And I think the Goldman Sachs article or the report you mentioned, I think Morgan Stanley came out with one late last night that is all positive in the parcel delivery space from a demand, especially with the brick and mortar stores closing. And I always go back to even before COVID, e-commerce was on a 14 to 18% CAGR rate, depending on which company report you looked at. I think if we take Goldman Sachs, which was 14 CAGR rate year over year, they didn't put a term on it. And then with COVID, they said it increased six points, sorry, eight points up to 22. That's the one you're representing that pulled forward. Something that you have to consider, and we're trying to understand that right now, is with the acceleration in parcel delivery and the vehicles needed, and they've been doing that now for about two, two and a half years, the replacement cycle is going to be accelerated due to the more parcels there's delivering. So if the walk-in vans would have been a 15-year life, I think with all the increase in parcel delivery, that's going to shorten And then if you look at the cargo vans that are running around in Class 2 space, those are thinking maybe a five to seven, and those are going to shorten as well. So not only do we have the CAGR rate on the parcel going up, we also have to add on top of that the replacement cycle that's going to come sooner. So in the next midterm to the longer term, I see continued growth in this market. Um, and look, it may go up and down a little bit, uh, if COVID does totally go away, but you know, we're coming into that holiday season and the more I read, it's just more people are going to not go to the stores and continue to shop online. So, uh, the longer that drags out, I believe the muscle memory is going to be harder to come back to where it was before COVID.

Yeah, no, I think that makes sense. Um, And then maybe just on the RV side, you know, it looked like, maybe I missed it, but the backlog, I think, increased pretty nicely there as well, you know, year over year at least. And is that, would you characterize that as more demand or share gains there? Maybe, you know, how do you flesh that out a little bit?

Yeah, that's a good question. We didn't actually talk about that. We've talked about the backlog side. It's both. So some of it, when I have two options, I usually say they're 50-50. So let's say that increased volume is split between two. One is the demand, and one is because we're exclusive on more products with our customers. So it's both. And I don't know, maybe John or someone else has a percentage better than 50%. But I think we're adding in, I think it was three different models we gained exclusivity on with one of our customers. And then you have the natural increase due to people wanting to RV versus air travel and stay in hotels. So it's split down the middle of both of those.

Okay. Okay. And then maybe on the EV side, I guess, you know, the election still kind of undecided at this point. But I mean, is there a thought about, you know, what, you know, a Democratic president might mean for The EV side, I mean, it seems like the opportunities may be, you know, more on the West Coast now, but do you see that, you know, growing a little faster, and is that, you know, good or bad for you guys long term?

Yeah. Steve, another good question. I think if, you know, we always go back to our strategy where we have a national footprint now. If you look at the product lines, we've always said we want to bridge that gap on the EVs until the OEMs have a product available. And I think at the time or times that we've talked about it, I've also said, you know, we're not sure when it's coming, but we want to be ready. Right. So there's a lot of variables in the economy, right? Both micro macro in the government subsidies, different states. We can't, you know, plan for everything. So what we want to do is make sure that when we are doing our strategy that we are ready, whether it's, you know, it's not fair, I don't think, fair to our investors to say, well, we're just going to wait for the OEMs to have their chassis in 2022 or 23 and miss out on opportunity. So that's why we bridge the gap, just in case something like what you're describing happens, or just in case another state gives more subsidies to the EV product. So what I'll tell you is we're ready regardless of what. And we can do it at any of the 10 states that we operate in today. We can do the conversion from ICE to EV at all of our locations.

Okay. All right. Thanks a lot for the time. Appreciate it. Thanks, Steve.

The next question is a follow-up from Mike Schliske of Collier Securities. Please go ahead.

Hey there, guys. Thanks for taking up these extra questions here. And I kind of want to follow up on the last two questions. On the EV story here, I recall seeing you actually announced that you are starting to supply several parcel companies with their initial orders of EVs from Utilamaster, if I'm not mistaken. So I guess I would want to know how that's going, but I kind of want to know more broadly, there are some other startups in the EV walk-in van space, more than one, and do you think any have kind of made any substantial inroads thus far? And I also want to know, even if it's converted, if your EV walk-in van is priced competitively with folks who try to make theirs in their own facility from the ground up.

Mike, I just want to make sure I'm clear. The shift group doesn't take anything for granted. So every time a new player comes into the space, we gain as much due diligence as we can. Frankly, even talk to them. Because a lot of, as I mentioned before, a lot of the EV startups are great at inventing, but they lack some skill set in actually building the product. So we're talking to them, even the ones that are coming in. We continue to talk to, I hate to put a number out there, but more than a handful of companies that we're working with have arrangements with, agreements with, to build product. So that, to me, we're all over just making sure. Again, we want to stay in our swim lane. We don't build ice chassis today, and we're not going to get into developing an EV operating system. We can use somebody else's, but we are really good at either contract manufacturing or assembly, and that's what we're talking to them about. As for how are the customers evaluating our EV product, We're getting great feedback from them. We're making a couple of changes on some of the vehicles that we put out there. And I think it's going to be, if they want them, we'll be ready to supply them. And that's still the problem that Steve talked about. I think if the election goes one way or the other, there will be probably more EVs required around the country. Not sure at what point that will start. Or it stays the same as it is today where it relates only to California. So again, we want to be ready at any of our locations. And if you look at our class one through six, the number that we can electrify, we're ready. And we're positioned to answer the call if we get it from our customers.

And just to tie a bow on the answer there, so I guess you've got pretty good volumes in general across your facilities, can you maybe compare your pricing and your ability to deliver a good-priced product with some of the startups that might be out there? Are you able to provide, even if it's just converted, which there's nothing wrong with that, a competitively priced EV at the current time to these other folks?

Yeah, we believe we've done the price analysis, Mike. And I think some of the people that are offering products after today at a certain price may be a little optimistic, be able to achieve that price when you start adding it up. And I think their price may take the incentives into account. So that's some of the things you have to try to uncover or unwrap as you're looking at pricing. But we feel our vehicle, especially... When we can do them in our current plants and our overhead is obviously going to be lower because we cover it with our traditional vehicles, we think we can be as competitive, more competitive with them.

Thank you. This does conclude our question and answer session. I would like to turn the conference back over to Juris Daygrabs for any closing remarks.

Thanks for joining everyone and to learn more about Shift Company. We plan to keep you updated on our progress on a regular basis. Next week we are participating in the Baird virtual conference on Wednesday on the 11th. I think there's a few slots available if you want to check with them. Again, thanks for participating and have a great day.

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