The Shyft Group, Inc.

The SHIFT Group's second quarter 2023 conference call and webcast. All participants will be in a listen-only mode until the question and answer session of the conference call. As a reminder, this call is being recorded. I would now like to introduce Randy Wilson, Vice President, Investor Relations and Treasury of the SHIFT Group. Mr. Wilson, you may proceed.

Thank you for joining this morning's call. I'm joined by Daryl Adams, President and Chief Executive Officer, and John Doyard, Chief Financial Officer. Their prepared remarks will be followed by a question and answer session. For today's call, we've included our presentation deck that's been filed with the SEC and is also available on our website. Before we begin, please turn to slide two of the presentation for our safe harbor statement. Today's conference call contains forward-looking statements which are subject to risk that could cause actual results to be materially different from those expressed or implied. Primary risks that management believes can materially affect our results are identified in our Forms 10-K and 10-Q filed with the SEC. We will be discussing non-GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. During today's call, we will provide a business update before moving on to a more detailed review of the results and our updated 2023 outlook. We'll then open the line for Q&A. Please turn to slide three, and I'll turn it over to Darrell Adams.

Thank you, Randy. Good morning, and thank you for joining us to review our second quarter 2023 results. Overall, results in the quarter were in line with our expectations, highlighted by strong performance in specialty vehicles and robust cash generation. We made great progress on the execution of our long-term strategic priorities, delivering on key Blue Arc electric vehicle milestones. And consistent with our prior communications, we remain on track for blue arc production in the second half of the year. Excuse me. While fleet vehicles and services grew modestly in the quarter, we experienced further weakness in end market conditions as well as operational efficiencies that impacted our overall performance. Second quarter sales were down 3% year over year with strength in both our truck and service body product lines more than offset by softness in last mile delivery and motorhome. Despite the sales decline, we delivered 16 million of adjusted EBITDA up 16% versus last year, led by record margin performance in specialty vehicles. We made solid progress on reducing working capital, resulting in 30 million of operating cash flow and ending the quarter in a strong financial position. Turning to our market commentary on slide four, long-term outlook remains favorable in our key end markets, including last-mile delivery and infrastructure. And we believe we are well positioned as an industry leader in these areas. However, throughout the second quarter, we saw accelerated signs of demand weakness due to broader economic condition and evolving market dynamics. I will now provide additional details on what we are seeing within our businesses, starting with fleet vehicle and services. We previously discussed concerns and a level of uncertainty in the last mile delivery market. After speaking with our customers and listening to their public commentary, There are several factors influencing immediate buying decisions, including continued year-over-year declines in parcel package volume, as well as specific customer dynamics regarding fleet strategy. As a result, we have seen customers defer and cancel orders, leading to higher dealer inventory levels and reduced OEM chassis production. We experienced the impact of reduced chassis supply late in the second quarter, and we now expect to see more significant reductions in chassis production levels in the second half of the year. At the same time, we're also hearing from customers that there is an ongoing need for vehicles, which gives us confidence in the long-term prospects for last-mile delivery vehicles. While orders have been deferred, it is clear that fleet replacement needs, e-commerce growth projections, and regulatory requirements to reduce emissions will drive future vehicle purchases. In response to the current environment, we are taking decisive actions within FVS, including adjusting operations to efficiently support current volumes while focusing on long-term productivity drivers, driving improved product quality and on-time customer deliveries, and refocusing our sales efforts by expanding to new customers and vocations. Moving to specialty vehicles, our work truck products, including service bodies, Isuzu contract manufacturing, and police vehicle outfit continue to form well supported by increased infrastructure spending and demand for vocational vehicles. We expect these positive trends to continue and we are focused on executing our strategy to expand our products and geographies to support the growing needs of the market. For example, we recently launched our Royal XP body and opened our Nashville facility, which encompasses both service bodies and police vehicle outfit. For our motorhome chassis business, the broader RV industry has been challenged by general economic conditions after multiple years of growth. Entering 2023, we expected to see softening demand. However, in the second quarter, we have seen the demand decline accelerate and RV manufacturers have further reduced their production schedules in light of higher dealer inventory. That said, despite declines in the market, we continue to increase our market share in the greater than 400 horsepower diesel segment. and we experienced recent market share highs in the quarter. Looking forward, industry reports suggest that there will be a market improvement in 2024. However, we remain cautious about this outlook and have adjusted our business accordingly. Overall, we are confident we have positioned the SHIFT Group in markets with a long-term secular growth, including last-mile delivery, infrastructure, and electric vehicles. We have demonstrated the ability to manage challenging market conditions like the ones we are facing today, And we have industry-leading brands, flexible operations, and a talented team that will enable us to win in the future. Turning to slide five, I'll provide an update on our Blue Arc EV progress and the key milestones we expect to achieve in the second half of the year to have a successful product launch. As we review our Blue Arc operational plans, we consider these lessons learned from our decades of manufacturing experience and are ensuring that Blue Arc vehicles are built with the quality and value for the best in class products in the market. We are currently field testing our vehicle with a key customer and the initial feedback is positive, which gives us confidence in the vehicle's capability. We are excited by the vehicle's test performance in the hot weather conditions, as well as the feedback that we have received from multiple drivers as they have delivered packages on their daily routes. In addition, our suppliers are actively working to finalize component testing and provide final certification ahead of start of production. We are nearing completion of the facility construction and are conducting operator training through virtual and slow builds at our Michigan campus. We are completing the standard operating procedures and are on track for the initial production of 50 units for delivery to customers in the fourth quarter. We are committed to building out a highly qualified Blue Arc dealer network to ensure fleet customers receive the products and services they expect. We have previously talked about a nationwide dealer and service network made up of a small group of dealers and an established service provider. We remain in the process of finalizing agreements to support this structure while also establishing banking relationships to ensure dealers can support their floor plan needs. While arraignments are being finalized, dealers are highly engaged with customers and there continues to be a high level of interest in our product. We are incredibly excited about Blue Rocks Prospects and our team's ability to execute this product launch in the second half of the year. With that, I'll now turn it over to John to discuss our second quarter financial results.

Thank you, Daryl. Good morning, everyone. Please turn to slide seven and I'll provide an overview of our financial results for the second quarter of 2023. Overall, we delivered second quarter results that were in line with our expectations with solid year-over-year adjusted EBITDA growth. We continue to see pockets of strength across the company, particularly in our specialty vehicles segment. Sales for the second quarter were $225.1 million, down 3.1% from the year-ago quarter. Net income was $4.7 million, or 13 cents per share, compared to net income of $5.3 million, or 15 cents per share in the previous year. Second quarter net income was negatively impacted by approximately $3 million of expenses related to our CEO transition, as well as actions taken to adjust our cost structure given the lower volumes. In the second quarter, adjusted EBITDA was $15.9 million, or 7% of sales, up from $13.7 million, or 5.9% of sales in the second quarter of 2022. These results include EV program spend of $7.4 million, up slightly from the prior year. Excluding these expenses, adjusted EBITDA was 10.4% of sales, up 140 basis points year-over-year. Adjusted net income improved to $8.7 million, compared to $7.5 million in the year-ago quarter, while adjusted EPS rose to 25 cents per share from 21 cents per share last year. I'll now walk you through our second quarter results by operating segment, beginning with fleet vehicles and services on slide eight. In the quarter, the FES team delivered solid working capital reduction and meaningful year-over-year improvements in truck body output, while taking short-term and structural cost actions in a highly dynamic environment. FES achieved sales of $139 million, up 1.5% compared to $136.9 million a year ago, with sales growth from truck body and aftermarket more than offsetting declines in our last mile delivery products. Truck body sales in the quarter included $7.5 million of chassis pass-through revenue. Adjusted EBITDA for the quarter was $12.5 million versus $14.5 million a year ago. Adjusted EBITDA margin was 9% of sales compared to 10.6% in the second quarter last year. As we transition to the second half of the year, the SBS team remains focused on adjusting production to support softer near-term last mile demand while driving operational improvements to address ongoing margin challenges. Please turn to slide nine for the specialty vehicle second quarter results. We are pleased with our SB results as the business delivered strong year-over-year profitability growth and record margin performance. The team also achieved a significant milestone with Isuzu, We have now delivered more than 100,000 N-series trucks through our partnership over the last 12 years. Overall second quarter sales were $87.6 million, an 8.1% decrease from $95.3 million in the prior year driven by motorhome volume decline. Adjusted EBITDA was $17.4 million or 19.8% of sales compared to $12.9 million or 13.5% of sales in the same period last year. As we close out the SV comments, we would like to recognize the addition of Jacob Farmer to the shift group as president of our specialty vehicle segment. Jacob is a proven operations leader with broad industry experience, and we look forward to benefiting from his contributions. Please turn to slide 10 for our 2023 outlook. Entering the year, we were cautious regarding our outlook as there was uncertainty across our key markets driven by broader economic challenges. As a result, we responsibly monitored and managed our cost structure to align with expected demand while continuing to deliver for our customers and focusing on generating cash flow. By the end of June, total headcount was down approximately 25% versus the start of the year, and the team was able to drive a solid working capital reduction. However, as we progressed through the second quarter, our prior concerns surrounding a challenging demand environment materialized and conditions further deteriorated for last mile delivery vehicles, motorhome chassis we saw last mile delivery orders canceled and purchases deferred ultimately leading to lower second half oem chassis production all these factors significantly impacted our volume expectations for the year given these factors our updated outlook for the full year 2023 notwithstanding further changes in the operating environment is as follows sales to be in the range of 850 million dollars to 950 million dollars compared to the previous outlook of $1 to $1.2 billion. Adjusted EBITDA of $40 to $60 million compared to the previous outlook of $70 to $100 million. Blue Arc production remains on track, and we currently estimate 50 units to be produced and delivered in 2023 as we take a disciplined approach to our initial production. We also expect to drive positive incremental cash flow in the year as we continue to drive down working capital. We will continue to responsibly monitor and manage the business in the second half while protecting our Blue Arc product launch and maintaining a focus on long-term growth. Please turn to the capital allocation update on slide 11. Our balance sheet continues to be a strength and differentiator for the company, and despite a challenging environment, we were able to improve our financial position in the quarter. For the second quarter, we generated $29.7 million in operating cash flow, reflecting significant improvement over the prior year as we completed and reduced work and process vehicles. Company's capital structure remains strong with a net leverage ratio of approximately 0.6 times and a $400 million revolver, which provides a strong access to capital. We are funding organic growth opportunities, including the investment in BlueArk EV and $6.5 million in capital expenditures. Before turning it back to Daryl, I want to take a minute to reiterate the financial strength of the company. Over time, Shift has proven to be a successful cash flow generator. In the last 18 months, we have deployed $125 million of capital, including $75 million into organic growth investments that will accelerate growth in the coming years, the largest being BlueArk. In addition, we have returned nearly $50 million to shareholders through dividends and share repurchases during that period. We expect to drive additional second half cash flow and maintain our financial strength as we close out the year. We are also confident that BlueArk will generate positive cash flow in the coming years and provide solid returns on our investment. Overall, we have strong liquidity and are confident in our growth story, giving us the financial flexibility to efficiently deploy capital and maximize shareholder value. With that, I'll turn the call back to Daryl for closing remarks. Thank you, John.

Please turn to slide 12. At the SHIFT Group, we have created a compelling industrial growth company. and will remain nimble in response to changing market conditions while maintaining a long-term strategic focus. With our financial strength, investment innovation, and focus on secular growth markets, we have positioned the company to be a leader and drive shareholder value over the long term. Before I conclude, I'd like to acknowledge the recent announcement of my transition and personally thank the investment community for their support and interest in the SHIFT Group. I look forward to continuing to lead the company until my successor is in place. Thank you. And with that, operator, we're now ready for the Q&A portion of the call.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then 2. The first question is from Greg Lewis of BTIG. Please go ahead.

Thank you and good morning, everybody, and thanks for taking my questions. You know, I was hoping to dig a little bit more into the updated guidance, just, you know, as kind of we look at the updated revenue, the step down in the revenue. And I realize you were talking about that in some of the prepared remarks, but could you talk a little bit about that step down in terms of, Is that primarily deferrals? Were there any cancellations? And just in any kind of color around the types of customers and where that kind of – in which businesses that was kind of being stepped down in.

Sure. Good morning, Greg. This is John. I mean, I think when you look at it, and we touched on this in some of the prepared remarks, I think we saw – both deferrals and cancellations from an order perspective. I think you look at the midpoint, and we went from about $1.1 billion down to the 900, so 200 million. I would say it's predominantly within the FES business. There is a portion that is motorhome, just given the overall dynamics there. But when you look at FES, we've, you know, talked about there being some noise in the system on dealer inventories historically. that that seems to have materialized as we discussed. And really what we're seeing is in response to that chassis production reduce. And so, you know, as we've had sort of an elevated backlog over the last couple quarters, we've seen some cancellations given they haven't been able to match that from a chassis perspective. And so that's really impacted the outlook in the second half of the year. I think some of the dynamics that Daryl talked about, you know, he talked about specific customer dynamics. You know, there are some, you know, every customer sort of has their own sort of actions at this point. But, you know, we're seeing sort of reorganizations internally. We've talked about cost actions and CapEx restrictions historically with these, or recently with these customers as well. And so there's a bit of a pause as the environment settles and package volumes continue to be down. And we expect that to continue through at least the end of the year and potentially even into early next year. And so, you know, again, we've taken sort of a cautious view of what that looks like, but the biggest drivers have been in the FDS business.

Okay, great. And thank you for that. And then, you know, and you also did allude to, you know, some of the, you know, I don't know, the cost cutting and kind of the right sizing of the business, you know, and realizing that, you know, You know, this has really only been going on for a brief period of time with some of the commentary from, you know, your customers. But as we stand here in July, are we kind of where we need to be? Or could we see some other, you know, moves to kind of protect margins? You know, just to your comment, John, about, you know, the lack of visibility maybe all the way out into early next year.

Yeah, I mean, I think the – You know, I think as we entered the year, we did have a cautious view. So it's not like we've taken immediate cost actions following some of the late quarter news that we've had. We've been sort of managing the cost structure of the business throughout the first half of the year. And so I think that's beneficial for us. You know, we'll continue to be flexible from a manufacturing perspective, as we always have been. Right now, we're looking at different ways to leverage the capacity that we have and potentially shift some production and products around to ensure that we're meeting customer expectations and getting the appropriate output. And so we'll continue to do those things as well as to the extent that, you know, there are times where there's no volume, we will certainly flex from an hourly perspective. But we feel like we've gotten ahead of this. Not to say that we won't continue to monitor and look at this going forward, but we feel like we were a bit ahead of it.

Okay, good to hear. Thank you for taking my questions. Have a good rest of the day. Thanks, Greg. Thanks, Greg.

The next question is from Mike Schliske of D.A. Davidson. Please go ahead.

Yes, hi, good morning, and thanks for taking my questions. The weakness that you've been talking about in the e-commerce world, is that a sector-wide thing, or is it maybe just one or possibly two customers that are causing that right now?

I missed the first part of your question, but I think as you look at each, I mean, there's only a handful of large parcel customers that are out there. I would say there's specific dynamics with each of them. But I think the themes are consistent across. I mean, certainly elevated dealer inventories. I think, you know, if you look at any of the parcel companies right now, they're reporting year-over-year package declines. And, you know, certainly specific reorganizations and those types of things are attributable to one company. I think all of that sort of adds up to a point of pause from a purchases perspective. And that's really what we're seeing from out in the environment. I think Daryl made the comment early in his remarks. We continue to have positive discussions with our customers, right? They continue to tell us that there's a need for vehicles. It's just balancing sort of CapEx expectations in the short term with how they're managing their fleets over the long term. And so we expect, you know, those from a demand perspective, we expect that to come together at some point. but it's probably pushed out a little bit. Could there be some activity later in the year? Potentially. But we think that, again, we want to be somewhat cautious here over the next couple quarters.

Okay, thanks for that. Can you comment on the fleet age for some of your larger final mile customers? Are they still going to outside third party white van providers to ensure they have just enough trucks to just meet everyday demand, everyday delivery demand? Or has the fleet age caught up to prior levels?

Yeah, Mike, this is Darryl. I'm not sure we can give you an exact number on fleet age, but To your question about the white trucks, I think we've mentioned on previous calls, we have a parcel delivery company depot right next to our office here, or close to our office. They had a lot of those white trucks, and now those white trucks are now gone. So I think, to John's point in my commentary, the package volume is going down post-COVID, and those vans were needed because they couldn't get the vehicles. They got their vehicles. Those vans are gone. So it's a dynamic environment trying to figure out exactly what's the right formula. The customers are trying to figure that out. And we're right with them and having conversations. So the point is that's going to keep coming. The point is the fleet age and the replacement cycle. And what we're making sure is that our FES division is ready. to take on those orders and flex back up once the volume comes. And that's what we're doing right now, right? Any good manufacturing company will take this opportunity and put some different processes in place to make sure when it comes back that they're ready to be more efficient at the time. That's what we're doing.

Okay. Great. Maybe one last one. does your 2024 outlook for blue arc still appear to be in line i guess relatedly does your kind of um you mentioned a certain run rate you hit in 2025 in blue arc does that also appear to still be in line and just a little more detail on people who have been testing the vehicles what they've been saying especially would be really appreciated yeah i think uh you know daryl made the comments in his ev update i think the feed you know we've been in field testing now

The vehicle has performed very well. The customer feedback from the broader team as well as the drivers has been fantastic. And so we're really pleased with the progress that we've made there, and we'll continue to execute those types of field tests and demos with customers going forward. I think as you look at where we are from a production standpoint, You know, our expectation is that we'll have capacity for, you know, up to sort of 1,500 as we get into next year, which will continue to ramp as we get into 2025. And so, you know, certainly we'll see an acceleration of production and delivery expectations as we move forward.

Okay. I'll leave it there. Thanks for the time, guys.

Thanks, Mike. Thanks, Mike.

The next question is from Matt Karanda of Roth MKM. Please go ahead.

Hey, guys. It's Mike Zabrin on for Matt. Hey, Matt. As it relates to the guidance, we talked about revenue already and how much is coming out of FVS and SV. Maybe just moving over to adjusted EBITDA, we cut about $35 million at the midpoint. Maybe just speak to how much is coming from FVS and SV. Is it a similar dynamic? And then just put a finer tune to actions that were taken this year to cut costs.

Yeah, I think as you look at it, I think it's more heavily weighted towards the FES business, but primarily related to the volume decline, as we've talked about. When you look at some of the cost actions that we've taken, we talked about roughly a 25% reduction in headcount through the first half of the year, which will continue to flex and adjust as necessary to manage the second half. We've also been managing discretionary I think, you know, key for us is to protect the Blue Arc investment as we are confident in what that will return here in the future. And so we've been able to manage other investments, you know, from whether it's in, you know, IT, marketing, you know, go through the functions. And so those are the two biggest pieces. And we'll continue to look at other items as we get into the second half of the year, but those are the key actions. There hasn't necessarily been any facility consolidation or anything like that. I think the additional thing that we are doing is looking to leverage the facility and footprint capacity that we have by transferring products, which I talked about earlier as well.

Got it. That makes sense. I guess, spiraling off that, how should we think about the cadence of EBITDA margins in the back half of the year for both FBS and SV? Do SV margins come down a bit from here? Do FBS margins improve at all? Just a little bit more color here would be helpful.

Yeah, I mean, I would expect, as you think about sort of the quarterly profile, I would expect the second half of the year to be relatively balanced. I think when you look at it from a margin perspective, You probably see a step down in SV off their record highs in the quarter. And I would say FVS continues to operate where they are with some of the volume pressures that we have in the second half of the year offset by the productivity actions that we're looking to drive.

That's helpful. There's one more for me. On the backlog, Any line of sight into when demand improves? I know we kind of talked about it's a little bit dependent on package volumes, but do we expect more cancellations in the next few quarters, or do you think we've seen the worst cancellations and deferrals in 2Q?

I think from a cancellation perspective, I think we're probably past the – or probably troughed here in the second quarter, I think. When you look at when the demand comes back, I think there's a couple variables, one being dealer inventory. I think there needs to be some comfort in what package volume does, or we need to see that start to turn as well, which may happen here in the second half of the year. I think, you know, I point back to Gerald's comments that we continue to have good discussions with customers about the need for vehicles. And so there's a bit of a pause or a timing shift here. That's impacting the second half of the year, but the long-term continues to be – the outlook continues to be very solid from our perspective. And so you'll continue to manage the business through the second half and do that in an efficient manner and be ready to return to production when it comes back.

Got it. Makes sense. That's all from me, guys. Thanks.

Thank you.

The next question is from Felix Boschen of Raymond James. Please go ahead.

Hey, good morning, everybody. Hey, I was wondering if you have a rough number for us or a rough bogey on what percent of the FBS backlog today is not tied to parcel customers?

I would say that it is probably more balanced than what it has been the last couple quarters. I don't have a precise number for you. We can certainly look into that. But we've seen sort of a shift, particularly with the growth in the truck body, sort of that mid-mile business shift away from parcel. So I'd say it's more balanced than what it has been historically. Okay.

Okay. And then I wanted to circle back to BlueArk. And I'm kind of wondering two things, but number one, what's sort of the next milestones that investors should be looking out for, whether that's dealer partnerships, hard orders, more testing with customers, just maybe if you could help us understand those dynamics better. And then the 50 vehicles and 4Q, I think when you did the EV day, that number was a little bit higher. Can you maybe talk about what's driving that difference?

Yeah, sure, Felix, Daryl. I think the next milestones you're going to see will probably be some dealer agreements and then the service provider agreement. And then, you know, not sure if we'll have a press release when we roll off the first vehicle or not, but then it'd be getting the vehicle off the end of the line after we complete the training of the operators and the virtual and slow builds. So on the, you know, the number was higher and I think We talked about it in the past. I don't remember exactly what forum, but one of the brake suppliers that we initially went with wasn't going to have a component, so we needed to go to the current brake supplier, and their testing was a little bit longer. They did both winter and summer. The other one was only doing one battery of testing, so that pushed it out a little bit. And their certification, so they Once they get done with the brake testing, they need to certify it internally, and that's the process they're in now. So what we don't want to do is get the vehicles out there without having all the certifications we need to make sure it's a safe vehicle. So that was the main delay, and there was a little bit of some battery testing that went on, but that's all behind us now. So we just want to make sure the vehicle is safe and ready to go for the customer, and we're not going to jeopardize any of that. So you don't think it's a demand-driven thing? No.

Okay. I appreciate that. And then just my last one, you know, I was just curious if we could, John, maybe compare FBS margins, you know, today implied for 2023 versus levels that you all did in 2019 and 2020 on seemingly a similar revenue base. But, you know, I understand overall in the corporate P&L there's heightened R&D spend associated with BlueArk. Ricky, can you maybe talk about some of the margin differentials in FBS and how we should think about maybe the back half of the year to 2024 in the context of what you guys used to do?

Yeah, I mean, I think, as I mentioned, I think the second half of the year looks pretty close to what the second quarter looked like from an FBS standpoint. When you look at, I mean, certainly when volumes were up and parcel delivery vehicles were units were high, we delivered significantly higher margins than where we are today. I think as you look at that shift of the business more towards truck body versus parcel, I think there's a bit of a mixed aspect from that perspective. But I think it's also important to note out that there are inefficiencies that we continue to get after or experience. And I think if you look at it, part of that is just volume related and the absorption on some of the capacity, which I've mentioned, we're looking to fill to offset some of that. But some of the material issues that have plagued us for over a year, as we go back and rework some of those vehicles, it's created more cost inefficiencies and been a challenge from that perspective as well. And so there's still a couple points of margin headwinds that we have from just an operational perspective that the team is working to get us through as we get into later in the year and into 2024. And so I'd expect margin expansion as we move forward, but I think we'll continue to manage it through the second half of the year with some further volume challenges and the leverage that that creates or leverage issues that creates offset by some of the productivity improvements that we expect.

Got it. I appreciate the time this morning. Thanks, Bill.

Thanks, Phyllis.

The next question is from Ryan Sigdahl of Craig Hallam Capital Group. Please go ahead.

Good morning. Ryan on for Steve Dyer. I'm curious on market share. You guys commented on SCV and the high horsepower chassis, but on FES, are you guys seeing any dynamics there where there's share shift moving around given the current dynamics?

Hi, Ryan.

This is Daryl.

No, it's... FVS is one of the harder ones because there isn't really any good data. It's all self-reporting. And I think I've mentioned multiple times in the past, right, it depends on year-over-year orders. But on average, we don't see any deterioration. It's, you know, two suppliers. It's us and Morgan. So it would be, you know, maybe this year they get a different order from one customer that we had last year. So it does move around. But Overall, not seeing any deterioration. It's a wide market challenge that's going on right now with parcel delivery volumes going down. And I think you read that in all of the parcel delivery company commentary that I mentioned during my part of the call.

And I think just to add to that, Ryan, I think if, you know, as you look at the OEM chassis manufacturer reaction of cutting production for the second half of the year. I think that points to it being more of an industry challenge than a specific company or market share issue.

And then just secondly, any price changes, I guess, where your customers are trying to press for price reductions within the backlog or in future negotiations, which is causing them to kind of pause and causes feel made here?

Nothing I would say that's impacting moving forward from an ordering perspective. Certainly a more challenging pricing environment than where we sat 12 months ago, but nothing specific to point out from that perspective.

Last one for me, just Remind me, dealer inventories versus direct business, kind of the mix of how much is in each and then how long you think it'll take to normalize the dealer channel inventory?

Yeah, I mean, to Daryl's point, our business is a little bit lumpy from a customer perspective, but it's relatively balanced between direct, I'll call it direct and dealer on the FES side of the business. Sometimes it's tilted one way or the other. We would expect to see some of that clear through as we get into next year. I think we don't want to get ahead of ourselves and assume that it's just going to turn around here in the second half of the year. And so we expect it to be a softer environment here through at least the next three quarters, three or four quarters, maybe even through mid-next year. So we'll continue to monitor that. Again, I'd point back to the conversations we're having with customers is that they need vehicles. And so At some point, that's going to break, and we'll see an increased demand. I think we're just in a period of pause. Thanks, guys. Appreciate it. Thank you.

Thanks, Ryan.

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

Thank you. I'd like to thank all investors for participating in today's conference call. We look forward to hosting investors in September at the RVC Global Industrials Conference in Las Vegas, the Raymond James Vehicle Technology Day held virtually, and the DA Davidson 22nd Annual Diversified Industrials and Service Conference in Nashville. We thank you for your interest in the shift group. And with that, operator, please disconnect the call.