The Shyft Group, Inc.

Good day, ladies and gentlemen, and welcome to the SHIFT Group's first quarter 2021 earnings results. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Juris Paygrabs. Sir, the floor is yours.

Thank you, Dagma, and good morning, everyone, and welcome to the SHIFT Group's first quarter 2021 earnings call. Joining me on the call today are Darrell Adams, our President and Chief Executive Officer, and John Dooley, our Chief Financial Officer. For today's call, we have a presentation deck, which has been filed with the SEC, that 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 on 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 segment update before moving on to a more detailed review of the results and our outlook for the remainder of 2021. We will then open the line for Q&A. I would also like to remind everyone that with the divestiture of the emergency response business last year on February 1st, 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, 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, Jairus. Good morning, everyone. Thank you for joining us for the first quarter 2021 results. Our performance in the first quarter continues to demonstrate the success of our business strategy, which encompasses growth and higher margin product offerings within our core markets, increasing market share within our expanding geographic footprint, and ongoing productivity improvements within our operations. As you see on slide four, the strategy coupled with our commitment to invest in innovation, sorry, innovative products designed to meet customer needs resulted in our backlog increasing over 90% to a record $667 million for the quarter. We are excited with this level of our backlog and our strong start to the year as we achieved first quarter revenues of $198 million and adjusted EBITDA of $19.2 million. Please turn to slide five, where I'll provide a segment update. I'd like to start by sharing what we are experiencing with respect to the supply chain uncertainty and chassis availability due to the semiconductor shortage. During the first quarter, we saw little impact on our operations. However, based on our feedback from OEMs and suppliers, chassis deliveries will be impacted at some level for the next several quarters. We will continue to monitor the situation and adapt... accordingly although with their higher than expected backlog we remain confident we will deliver on our original guidance for 2021 starting with fleet vehicle and services we continue to make progress in a variety of areas from an operations perspective our ongoing focus and investment in manufacturing capability continues to have an impact as we set a new record in production at the bristol facility The velocity launch is progressing well. We are slightly ahead of our ramp curve and have started hiring our second shift to accomplish the next phase of the ramp curve. We are extremely happy with the quality of the product at this early stage of the launch and look forward to seeing the velocity product on the road. Underscoring our flexible manufacturing strategy, we successfully completed the initial build of 500 truck bodies at our Kansas City facility. on developing and introducing purpose-built vehicles to meet our customers wide-ranging needs continues to boost our backlog we have talked in the past about the velocity m3 and i'm happy to report that we secured an initial order for more than 350 units we continue to make progress on the velocity r2 product and are preparing a demo vehicle for testing with a major customer this month Moving to our specialty vehicle segment, we generated significant growth in sales and adjusted EBITDA as our efforts continue to produce positive results. Our motorhome market share during the quarter increased to 30.5%. That's up over four points since 2018. It reflects the strength of our product offerings and our brand among motorhome buyers. As part of this effort to drive sales and market share growth, we are introducing nine new technologies on our upcoming 22 and 23 model year chassis. Across our service body business, we've had several positive developments in the quarter that exemplify our strategy and ability to create value from acquisitions. Our rail truck body team achieved record revenue in March while also doubling its backlog year over year. Our recently expanded service body outfit center in Charlotte, Michigan was granted GM ship-through status, which will benefit both Royal and Durameg as we move forward. As it relates to innovation, Royal has expanded its service body offering to include an E-coated steel body that meets or exceeds our competitors' corrosion-resistant levels, now enabling broader market use in northern states where harsher weather conditions exist. And at Durameg, we continue to make manufacturing improvements and are on track to deliver on our integration plan. With that, I'll turn the call over to John to discuss SHIFT's financial results for the first quarter in more detail, as well as provide an update on our 2021 outlook, beginning at slide six.

Thank you, Daryl, and good morning, everyone. Please turn to slide seven, and I'll provide an overview of our financial results for the first quarter. As Daryl indicated, the SHIFT group had a solid start to the year, achieving double-digit revenue growth and seeing significant order volume that has taken our backlog to a record high. This start positions us well despite the current uncertainty in the broader supply chain. Revenue for the first quarter was $197.9 million, up 11.8% from the year-ago quarter. Income from continuing operations was $11.5 million compared to $11.7 million a year ago. Note that prior year results included a $2.6 million favorable tax item related to the CARES Act, which was partially offset by restructuring costs. Taking these prior year adjustments into consideration, adjusted net income increased 12 percent to $12.8 million from $11.4 million in the prior year. Diluted earnings per share from continuing operations was 32 cents per share compared to 33 cents per share in the first quarter of 2020. Adjusted EPS increased 13 percent to 36 cents per share from 32 cents per share a year ago. First quarter 2021 adjusted EBITDA from continuing operations increased $19.2 million, increased to $19.2 million from $18.4 million, while as a percent of sales, adjusted EBITDA from continuing operations declined to 9.7% compared to 10.4% of sales in the same period last year. Let me now take you through the results by operating segment, beginning with fleet vehicles and services on slide eight. Our FES business had a solid first quarter, working diligently to prepare for the anticipated production ramp in the coming months while securing significant orders. The business delivered revenue of $131.7 million compared to $105.7 million a year ago. The decline was primarily due to lower cargo van upfit and field services volume, which was partially offset by increased walk-in van sales year over year. FBS adjusted EBITDA was $18.2 million versus $21.7 million a year ago. Adjusted EBITDA margin was 13.8% of sales, which includes the impact of pre-production costs related to the velocity launch, lower sales volumes, and product mix, which collectively more than offset productivity gains. Led by our innovative new product offerings, including the Velocity M3, we saw significant order growth that resulted in FBS backlog for $589.6 million, record high. FBS backlog was up 38% sequentially and up a remarkable 95% compared to prior year. While last mile delivery remains strong and contributes to a significant portion of the backlog, we are encouraged to see increased order activity from other vocations, such as laundry and linen, which were slower through most of 2020. Please turn to slide nine for the specialty vehicles segment overview. The momentum that specialty vehicles had in the second half of last year carried over to 2021 as the business delivered strong revenue growth in motorhome and service bodies. Sales were $66.2 million, an increase of $24.9 million, or 60.5%, driven by a 56% increase in luxury motor coach chassis volume and 109% increase in service body revenue, which is inclusive of the Durameg acquisition. On an organic basis, SV grew 41% in the quarter. Adjusted EBITDA was $7 million, or 10.6% of sales, compared to 3.7 million, or 9% of sales, in the same period last year, which was primarily driven by higher sales volumes and productivity gains partially offset by mix. This was the third consecutive quarter of double-digit adjusted EBITDA, reflecting the benefits of our manufacturing initiatives and our acquisition strategy. SV backlog was up 81% to $76.9 million, which included 39% growth in motorhome chassis backlog and a $20.6 million increase in our service body backlog, again demonstrating our ability to create value and execute on commercial synergies in our acquisitions. Please turn to the liquidity and outlook update on slide 10. We saw significant year-over-year improvement in our working capital management in the quarter, picking up where our team left off in 2020. While seasonally negative, cash flow from operating activities increased 92% year over year. At the end of Q1, we had total liquidity of $136 million, including $10 million of cash on hand and $126 million in borrowing availability. Our current leverage ratio stands at 0.6 times adjusted EBITDA, which provides us with ample liquidity to fund our operations and to continue to invest in our growth strategy. We also returned $4.2 million to shareholders in the quarter in the form of the regular dividend and the repurchase of 100,000 shares at an average price of 33.45 per share. CapEx for the quarter was approximately $6 million and included investment in velocity production equipment and fabrication equipment at a number of facilities, which we are using to drive throughput and operational efficiencies across our company. As noted in our prior earnings call, We expect CapEx for the full year to be in the range of $20 to $25 million. Overall, we are pleased with the start to the year and the continued strength of our operations. As widely noted across the industry, there is a high level of uncertainty in the supply chain currently, and we will continue to closely monitor the chassis constraints and other supply dynamics. That said, given the continued strong demand, and the high volume of Q1 orders now in backlog, we believe we are well positioned for the year and are confident in our ability to offset the anticipated chassis shortfall and ultimately deliver on our initial guidance. Based on this current view, we are pleased to reaffirm our 2021 guidance as follows. Revenue in the range of $850 to $900 million, adjusted EPS of $95 to $105 million, and adjusted EPS of... $1.65 to $1.85 per share. Now I'll turn the call back to Daryl for closing remarks.

Thank you, John. Please turn to slide 11, where I'll provide closing remarks for the SHIFT group. Our results for the first quarter demonstrate the success of our business strategy, the strength of our end markets, and the tremendous efforts of the entire SHIFT team. We plan to continue investing in our future growth, both organically and through acquisitions. These investments will be centered on new products and technologies to meet customer demand with a particular focus on new platforms, including EV. At the shift group, we understand and appreciate the need for a greener tomorrow. As we gather customer insights, listen to their needs and the requests of us, and also evaluate the broad set of market offerings, we feel that we are capable to be a major contributor in this transition. Leveraging our decades of chassis development and build experience, we have begun investing in the development of a purpose-built chassis solution that will efficiently aid in the customer's transition to an EV future. We will provide further details on this endeavor in the coming months. In summary, we are off to a strong start in 2021 with all business units performing well and positioned to support the anticipated ramp-up in our business for the remainder of the year. With that, operator, we are now ready for the Q&A portion of the call.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Questions will be taken in the order they were received. If at any time your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, if you do have a question, please press star 1 on your telephone keypad at this time. Our first question comes from Steve Dyer with Craig Halem. Please state your question.

Thanks. Good morning, guys. You talked a little bit about supply chain. Is it primarily chassis or is it more widespread than that? And I guess along those lines, just looking at your backlog, I think my takeaway is there was probably fairly significant upside to your guidance as the year goes along if you can get all those as you'd like. Is that fair to say?

Yeah, Steve, it is. I mean, with today's vehicles, semiconductors seem to be practically in every electronic product that's out there. It's mainly in the chassis, but we're managing through the supply base, but we just want to identify it. But to your point, with the build and backlog, and if we can get chassis, we have a heck of an opportunity to beat the guidance.

Is it similar to a couple years ago? I mean, it seems like we've been talking about chassis for a couple years now, as you guys probably are tired of talking about it. I mean, is it like a couple years ago where it's literally, you know, you get a bunch of them and you crank up the plant for a quarter and then you don't get any for a month? I mean, is it kind of hand-to-mouth like that?

Not right now, but we assume that it will get to that point. And, yeah, we... you know, back in 18 when we had the chassis issue, as you remember, that's why we developed the velocity. So we developed the velocity on three other OEM platforms, and now the chip issue is affecting those as well. So we continue to chase it, and I think that's, you know, I don't think it's going to stop, right? I mean, as we get into the EV piece of this, it's going to continue to take additional semiconductors and other electronic items. So You know, I think it's just for the industry needs to catch up to the demand. And once they do that, I think it's going to be fine.

Do you have a good enough sense as to whether it's where the bulk of the impact is going to be? I mean, should we be sort of bracing for a tougher Q2 and then things ease as the year goes on? Or is it just too unknown right now?

I mean, I think if you listen to what the OEMs have been saying, I think 2Q from a production standpoint is the trough for them. I would say as we get through April and really into maybe later in the second quarter, we have a supply of chassis on hand and in flow to support Q2. And so it'll really be maybe more of a second-half dynamic for us. But I think that said, you know, we're still in a position here to ramp – significantly in the second quarter with the work done by the team from our perspective. And so I think there's certainly some impact and, frankly, a ton of uncertainty as you look in the back of the year, but we feel very comfortable with where we are from a guidance perspective and how it will play out.

Okay. Last one for me, and I'll turn it over. I'm wondering what you're seeing in the labor market. front hearing a lot about not only shortages of bodies, but also price pressures. How are you guys managing in your locations?

Steve, I think the two biggest locations are Bristol and Charlotte. We mentioned on the previous call that we made some adjustments to the pay and retention items in Bristol. We continue to monitor that, but right now we're not seeing it. We're seeing the A good flow. And in Charlotte, we were ramping up. And due to the chassis shortage, we're not going to accelerate as fast. But we were finding employees there as well. So, you know, I think Bristol will continue to have, you know, struggles due to the motorhome growth. But in Charlotte, and we're managing through it. And in Charlotte, we feel comfortable hitting the number of people we need for the ramp up on velocity once the chassis continue to flow. Got it. Thanks, guys. Thank you.

Our next question comes from Matt Caranda with Roth Capital. Please state your question.

Hey, guys. Thanks. Just wanted to talk FES and the order environment that we're seeing. Obviously running at a very high plateau, it looks like implied in your numbers versus the fourth quarter. But wanted to see if you could maybe just touch on sort of the mix of the order book in Q1 that was velocity versus legacy product. And then just for the rest of the year, is there going to be seasonality to the bookings cadence for the rest of the year? Any slowdown expected relative to these very high levels or are we just sort of running all out still on the bookings front?

Yeah, so I think that as we look at it, again, really strong volume in the first quarter, and that's continued into April as well. Velocity is a significant part of that. I think if you look at what we previously announced in terms of a 3,000-unit order, our backlog levels are approximately double that at this point, and so velocity is We feel very good about how Velocity is positioned in the market and the need that it fits from a customer perspective. I think that said, we continue to see all aspects of the business from walk-in van, truck body. I noted the fact that we're starting to see some laundry and linen as well as some, I'll call it more retail type customers pick up from an ordering perspective as well. So it's a little bit broader than it was maybe in the fourth quarter, but still pretty positive for us. And I think maybe to your question on the seasonality piece, I would expect at some point, particularly given the customer ordering patterns historically, that we'll see a slowdown here in Q3, more as they prepare for their 2022 purchases, given the fact that we're essentially sold out on the FDS side of the business, plus or minus, given how the semiconductor issue plays out.

Okay, great. And then I wanted to ask more specifically on the chassis supply issue. Obviously, you know, Velocity was sort of started up, you know, in the wake of some of the old legacy chassis issues that you had several years ago. Just wanted to see if you could break down or maybe qualitatively talk about the flow of chassis on the legacy product versus velocity and how we should be thinking about your ability to fulfill velocity versus legacy product as we move through the year here.

Yeah, I think, Matt, most of the – so the – Velocity F products, which is built on the transit, is where we're having some issues. We still continue to run the R2, which the vehicle is getting sent out for a demo unit, but that plant right down in Saltillo is still operating, so we're still doing upfit there. Unfortunately, in Kansas City, where the transit is, we have the Velocity chassis out of there, and then our upfit in Kansas City is having some chassis issues. But we are, and as well as Detroit Custom Chassis, but we are seeing chassis flow from Freightliner. So we're a little curious to why Freightliner and Stellantis can still continue to build and Ford and GM are struggling. So I think it's a timing issue with these guys and maybe some of their plants. Some of them came out of that Texas issue with the frost and when they had to shut down, um, they're trying to catch up. So I do think it'll, it'll work itself out, but yeah, we, we thought we had the answer, uh, when we had chassis issues in 18 with these three new products. Um, and you know, and Mercedes is still shipping to M three is coming on board, which is positive. So, um, Maybe, you know, longer term, having the five or six chassis will level us out if anybody has a problem. But right now, they're trying to build up the velocity on the transit, and they're struggling to get us chassis. Okay, fair enough. And then last one for me. Sorry, go ahead. Sorry, Matt. That's just not an issue with us, right? That's a...

uh industry issue which is affecting anybody that's trying to get chassis so it's nothing particular to us it's a across the board with all the uh upfitters and builders today right yeah fair enough um and then just last one on fps backlog um i guess uh did i hear you correctly in saying that you're you're probably sold out on fps slots through the end of the year Just wanted to see how quickly we think we can deliver on that backlog. And obviously it's a high quality problem to have, having a really high backlog. But at what point does that high backlog start to deter orders? Is there any concern around sort of how that plays out?

Yeah, I would say at this point it has not deterred orders. You know, it kind of gets to Steve's question earlier. I think our backlog puts us in a position to certainly be at the high end or potentially above guidance. And so it's really a question of flow, but it's been nice to see sort of continued demand here. We've seen, you know, little to no cancellations, you know, from customers given the fact that they haven't been able to get chassis. And so we're viewing this more as a timing, from a timing perspective, but feel very comfortable with where we are from a 2021 standpoint.

Okay, great. Makes sense. I'll jump back in queue, guys. Thank you.

Thanks, Matt.

Our next question comes from Mike Schilske with Collier Securities. Please state your question.

Hey, good morning, guys. I just wanted to confirm. Hey, there. I just wanted to confirm in the first quarter here, the backlog that you have is all demand-based backlog. It didn't have any or very few issues with getting chassis and shipping during the first quarter itself. So all the backlog is a, you know, positive business, not negative shortages related, correct?

That's correct, Mike. And even through April, to Daryl's point, we've seen limited impact to our operations.

Great. And just to follow up on Matt's question, do you have enough orders on the chassis from your Stellantis' or your Daimler's if you still have issues with Ford and GM in the back half of the year. Is that how you plan to kind of, you know, navigate if and when things do get a little bit tight for you on certain brands, just build whatever you can get and there's enough in the backlog to meet that full year guidance, right, at the current time?

Yeah, Mike, it'd be nice if our customers would let us do that, but They order the brand of vehicles they want, so they're willing to wait for the chassis. So if the people that did order the Stellantis vehicles will be getting them, Mercedes will be getting them. I'm sure Ford, when they start back up, you know, later this month or even if it moves in early June, they're going to ramp up pretty quick and get the supply flowing again. So, no, we can't just switch over. The customers wouldn't appreciate that. So we just have to stick with the orders and the specs that they put in the PO.

I guess the kind of question was more can you just shift around what gets built, you know, knowing that's the right – they're not going to change their brand, but they – You can pull forward and pull back dates as you get the chassis, or are you very set on certain dates with certain customers?

I guess I don't totally understand your question. So if we were – the plant in Saltillo, we can't really – receive more chassis because we do have the orders that we put in with Stellantis to give us the quantity we have. Right now the supply is so tight they wouldn't be able to increase that volume, if that's what you're asking, so we can move it to another plant and build ahead. That would not be able to happen.

I'll follow up with that question separately. Let me just move on quickly to some of your expansion plans, if there are any. I did see that you did get a local or state subsidy in Pennsylvania, for example, to build a new facility there. I wasn't sure how hot you're running in Pennsylvania right now and whether any other states might be candidates to give you some kind of tax break or subsidy to build some more capacity going forward.

Yeah, I mean, I think in terms of Pennsylvania, we've been operating there for a number of years now. Certainly the East Coast and the Northeast market is essential for us from a truck body perspective. Yeah, as you look at what we're trying to do there, and our search continues for a facility, but really trying to develop the model plant where we can build the velocity, do upfit, mount service bodies, as well. And so we're really looking to expand the operations there and across the product portfolio. I would say, you know, as you look at 2021, I think you'll see limited impact from that and potentially some investment later in the year. But that's kind of where we are.

Okay. My last topic here is on your EV strategy. It's interesting to hear you've got some kind of platform and development Is your plan to kind of develop one EV platform for classes two through six that has kind of, you know, modular capabilities as far as battery or length or stuff like that? And or is it going to be an outsourced platform where someone's going to be giving you kind of like with a motive, they'll be sending you the skateboard and you'll be doing your usual body build work on top of it? Just some more sense as to kind of what you're planning there as far as having your own EVs.

You almost had me, Michael. I didn't give you the answer, but we're going to hold off on that until probably our analysts day to share some more details.

All right. All right. I'll pass along. Thanks so much, Joe. I tried.

Yeah, you did. You did. I'll give you that.

Have a good one.

Thank you.

Okay. Our next question comes from Felix Lotion with Raymond James. Please state your question.

Hey, good morning, everybody. Good morning, Felix. Hey, I was hoping we could touch on EBITDA margins real quick, and specifically in the fleet vehicle segment. I think, obviously, down slightly year over year, but you did mention that the velocity pre-production costs were weighing on that in the quarter. Is there any way that you could quantify how much of a drag that was to margins?

Yeah, it was about, as you look at the FES business, it was about two points.

Okay. Okay, that's super helpful. And then I'm really trying to think through some of the bigger picture margin puts and take within that segment. Obviously, pre-production ramp, it sounds like chassis supply wasn't as much of an issue in 1Q, but I imagine premium freight and other supply chain headwinds were maybe in there anyway. I guess bigger picture question, John, I'm just trying to parse through some of the puts and takes and how you think about the margin profile of that segment longer term.

Yeah. You know, I think historically we've talked about that business being in the 15% to 17% range from an EBITDA perspective. I think we're, you know, we're certainly comfortable with that. I think as you look at the quarter, we had the pre-production costs, which, you know, I think is understandable given the ramp here and we expect in the second quarter, some of the inflation dynamics that Daryl alluded to really on the labor side of things and some rate changes we did to secure labor and employment there is also a headwind in the quarter. And then we were also impacted by year over year by some of the mixed dynamics, particularly with upfit as well as our field, we had a large field services order last year that did not repeat this year. And so those are two of our higher margin product lines or product offerings. And so we had some natural mix headwinds this year. And so I think that 15 to 17% range is still a good number for us.

Okay, very helpful. And then just my last one, I'm curious if we could touch on the M3 a little bit. I know you mentioned, I think, 350 orders already in one queue. Can you maybe broadly talk about how that product has been received in the market? And then just on the production ramp there, it sounds like chassis is not as much of an issue right now. But if you could just touch on how you think how quickly you can ramp through the year on that product specifically.

Yeah, I'll take it. So we have, you know, not every customer likes the Mercedes M3 just as a chassis. I think there's a cost to it, right? It's a little bit more costly than, let's say, a Dodge Ram, ProMaster, or even a Transit. So customers that like it, in order to fulfill their need, right, we need to build on all of them, just like we do on a Freightliner or a Ford custom chassis today. So in particular, there's only a couple that like it. So we like the 350 order. It's a nice order for the year, and We expect to be hearing back from them, I think, probably later this year for 2022. But the beautiful thing is with the Velocity, whatever chassis it is can go down the exact same line that we have in Charlotte. So it just goes back to the success of our design, the talent of the engineers. in our flexible manufacturing process where we want to be able to build, you know, multiple products in the same facility. So we don't get, you know, we can level out the order flow or the build orders and not shut the plant down. So we're happy with that order. And obviously that vehicle just came out, you know, the Ford was first, F was first, and then Mercedes and ours coming. So we're happy with what we see.

Very helpful. Appreciate the time.

Thank you.

That was our final question. I'll turn the call back over to Juris for closing remarks.

Thank you, Dagma. Please turn to slide 13 for some additional information. Many of you on today's call should have received an email to save the date for the upcoming Virtual Analyst Investor Day next month on Tuesday, June 8th. At the virtual event, we plan to share our long-term strategic outlook and financial goals. If you would like to attend, we encourage you to register at our website. We'll be providing additional details on the event in the coming weeks and look forward to your participation. Also, in early June, you'll have an opportunity to meet with us virtually at the upcoming Craig Halem Conference. With that, I'd like to thank you for participating in today's call and have a great day. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.