The Shyft Group, Inc.

Good morning and welcome to the SHIFT Group's fourth quarter and full year 2023 conference call and webcast. All participants will be in 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. Please go ahead.

Good morning and thank you for joining us. I'm joined by John Dunn, President and Chief Executive Officer, and John Duyard, Chief Financial Officer. Their prepared remarks will be followed by a question and answer session. 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 risks that could cause actual results to be materially different from those expressed or implied. Primary risks that management believes could materially affect our results are identified in our Forms 10-K and 10-Q filed with the SEC. We'll be discussing non-GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials posted on our website. We'll start with opening comments from our CEO, John Dunn, before turning the call over to John Duyard for a review of 2023 performance, as well as our 2024 outlook. We'll then open the line for Q&A. Please turn to slide three, and John Dunn will begin today's prepared remarks.

Thank you, Randy, and good morning to everyone. As I noted on our call back in October, I'm excited to be leading this fantastic company. Over the last 50 years, Shift has grown to a national leader in many specialty vehicle markets while consistently demonstrating the ability to innovate, partner with customers, and maintain financial stability. In past roles, I've delivered ambitious growth by focusing on building solid teams and driving commercial and operational excellence. I spent my career in the automotive sector with experience launching vehicles for General Motors and having senior leadership roles for tier one auto suppliers. One of which grew annual sales from 50 million to $1.5 billion in North America. I look forward to building on Shift's great legacy and leveraging my experience to deliver a higher level of performance. Having just completed my first full year at Shift, including the last four months as CEO, I continue to be impressed by the industry-leading products and the team's capabilities. Together with the leadership team, we have defined an operating framework which will serve as the foundation to drive sustainable financial growth and deliver value for our shareholders going forward. Our approach includes a relentless focus on building high performing teams to foster collaboration and drive results, delivering operational excellence, improving efficiency in all aspects of the business while bringing innovative and high quality products to our customers. And keeping customers at the center of everything we do, from sales to design to delivery, we are here to enable our customers' success. Shift's recent performance has been impacted by end market demand softness, and we are acting with urgency to return the business to historical profitability. As we transition to slide four, I will talk Walk you through the actions we have taken over the past four months, which reflect this operating framework. It all starts with a team and our immediate focus was on team alignment to drive operational rigor and financial growth. We top graded key roles, including production and sales leadership to improve immediate performance and build bench strength. We promoted Jacob Farmer into our FES president role. He previously led our SV business. Jacob is a proven leader and we are confident that he will continue to drive the necessary improvements already underway in FES and utilize his experience within SV to strengthen coordination across the company. We look for better ways to enable our businesses to ensure that they had the appropriate tools and support needed to be successful. We have simplified our internal reporting rhythms and identified opportunities to push down functional support into the businesses where it is needed most. An example of this is in our marketing function, which now reports directly into our segments. Transitioning to operational excellence, we understand the importance of product quality and process efficiency, as well as Salesforce effectiveness, and overall customer satisfaction. We are focused on improvements in all of these areas. In December, for the first time, we pulled together our sales team from across the company. We held product training and identified cross-selling opportunities. Coming out of the sales summit, we adjusted our sales compensation structure to incentivize business with new customers and to establish targets for our sales team to sell all shift brands. We have a portfolio of industry leading products and need to make sure we are selling them broadly to the market. By taking a more comprehensive approach, we will expand our reach and diversify our customer base. Operationally, we've identified opportunities including deeper cross-company synergies in procurement and ways to optimize our footprint. I look forward to updating you on the output of these initiatives on our upcoming calls. Another area of focus, given its strategic importance to SHIFT and our customers, has been the Blue Arc EV program. I've spent time with the team. validating the overall market opportunity, reviewing the project plan in depth, and assessing our manufacturing capability. I'm impressed by the quality of the product, the robustness of the design, and what the team has been able to accomplish. I had direct conversations with our key customers who communicated their excitement for our Blue Ark vehicle and its role in their fleet strategy. After assessing progress and interest, We prioritize the class three to four walk-in van as the most efficient path to getting Blue Arc to market. While we discussed other class sizes and vocations historically, we have refined our focus in 2024, which will drive lower spending versus 2023. Let's turn to slide five, and I'll give you more detail around the status of our Blue Arc program. Our team continues to make solid progress on overall vehicle development, including the battery performance. We previously discussed battery quality issues impacting our ability to go into production. We worked with our supplier Proterra to solve the issues until the recent purchase of Proterra by Volvo. Currently, we are exploring a new commercial agreement with Volvo. In parallel, we accelerated the battery integration in our Class 3 to 4 vehicle with battery supplier Our Next Energy. We recently completed performance testing and are pleased to confirm the vehicle range is over 200 miles. These results meet customer requirements and are consistent with our prior vehicle testing. From a vehicle standpoint, we have finalized the design and the first production intent units have been manufactured in our Charlotte, Michigan facility. With the revised program timeline, we expect final testing in the coming months to complete and start production in late 2024. In conclusion, our team has built an outstanding vehicle. While there is more work to do, I am confident this will be a growth driver for SHIFT. We will provide additional detail around Blue Arc as John Douillard discusses our outlook later in the presentation. With that, I'll turn it over to him to discuss our financial results.

Thanks, John. Please turn to slide seven and I'll start with our full year 2023 financial results and highlights. Overall, 2023 was a challenging year for SHIFT as deterioration in the parcel and motorhome markets impacted overall performance. In the year, we delivered $872 million of revenue and $40 million of adjusted EBITDA, which was in line with our recent expectations. Excluding the impact of EV expenses, our core business delivered adjusted EBITDA of $73 million or 8.3% of sales. We delivered tremendous performance in our specialty vehicles business with 20% adjusted EBITDA margin for the full year. And we drove solid cash generation, allowing us to fund key growth initiatives, including BlueArk. Throughout the year, we flexed our operations, moving productions between sites and adjusting headcount as needed in response to the decreased sales volume. Overall, we reduced headcount by approximately 30% from the beginning of the year. Despite the sales volume pressure, our team focused on driving cash flow and reducing working capital, resulting in free cash flow of $36 million, up $75 million versus the prior year. Turning to slide eight, I will now provide an overview of our fourth quarter financial results. Sales were $202.3 million, down 33% from $302 million in the prior year. Net loss of $4.4 million or a loss of 13 cents per share compared to net income of $17.8 million or 50 cents per share in the previous year. Fourth quarter 2023 results included a tax benefit of $4.8 million. In the fourth quarter adjusted EBITDA was $2.3 million or 1.1% of sales down from $30.7 million or 10.2% of sales in the fourth quarter of 22. These results include EV program spend of $9.3 million up from $7.6 million in the prior year. Including these expenses adjusted EBITDA was 5.7% of sales. Adjusted net loss for the quarter was $0.9 million. while adjusted EPS decreased to a loss of 3 cents per share. I'll now walk you through our results by operating segment on slide 9. In the quarter, fleet vehicles and services achieved sales of $119 million, down 44.1%, compared to $212.9 million a year ago, reflecting softness in the last mile delivery end markets. These results include $15 million of pass-through chassis revenue related to the USPS truck body program. Adjusted EBITDA for the quarter was a loss of $2.6 million versus income of $27.7 million a year ago, with lower profitability driven by sales volume and negative product mix, which includes the impact of the USPS pass-through sales. Adjusted EBITDA margin was negative 2.2% of sales compared to 13% in the fourth quarter last year. FES backlog was $325 million at the end of the year, down 15% versus the prior quarter. In specialty vehicles, our team closed out a strong year with another quarter of record profitability. As our infrastructure-focused vocational truck businesses continued to deliver solid growth and operational improvements, offsetting ongoing market weakness in motorhome chassis. Fourth quarter sales were $83.4 million, a 10.6% decrease from $93.2 million in the prior year. Adjusted EBITDA was $19 million, or 22.8% of sales, compared to $15.9 million or 17.1% of sales in the same period last year. SV backlog was $84.3 million at the end of the year, up 4% versus prior quarter. Please turn to slide 10 for our 2024 outlook. We continue to be excited about the long-term growth prospects of the company. Our focus and investment into infrastructure-related businesses is paying off as reflected in the strength of SV's performance. While the last mile parcel delivery business has been soft recently, we continue to maintain a leading position and the long-term growth projections remain intact for the industry. As we enter 2024, we continue to take a cautious view on your term demand for both parcel and motorhome volume. And we expect the softness we experienced in the second half of 2023 to persist likely through mid year. In response, as John Dunn discussed earlier, Our team is taking urgent actions, both commercially by identifying cross-selling synergies and diversifying our customer base, and on spending, including a focused approach to Blue Arc. Given these factors and notwithstanding further changes in the operating environment, we are introducing our 2024 outlook as follows. Sales to be in the range of $850 to $900 million. While we plan for Blue Arc to be in production later this year, we've not included any revenue estimate in our forecast at this time. Adjusted EBITDA of $40 to $50 million, including $20 to $25 million of BlueArk spending. Given the expected slow start to the year, we anticipate that first quarter adjusted EBITDA will be approximately breakeven. Adjusted EPS is expected to be in the range of $0.28 to $0.51 per share, and free cash flow of $25 to $35 million. Before I close out this section, I would like to reinforce our core business's ability to generate cash. Over the last four years, through a challenging cycle, we have generated approximately $100 million of free cash flow while self-funding a transformational EV initiative and return capital to shareholders. Going forward, as our end markets recover and with continued focus on working capital, we believe we are well-positioned to generate cash flow and continue to confidently invest in our future. With that, I will turn it back over to John Dunn for closing remarks.

Thank you, John. Turning to slide 11, we have excellent core businesses with leading market positions, well-recognized brands, and our customers rely on us every day. We are preparing for the future with our Blue Arc EV truck and continue to offer innovative solutions to our customers. The team is acting with utmost urgency to deliver improved 2024 results. We are laser focused on execution, efficiency, and leveraging our internal strengths. As John Douillard discussed earlier, our core businesses are excellent at generating cash through the cycle. Looking ahead, we've established a framework to drive improved performance at shift. Our experienced and highly engaged team is committed to creating value for our customers and shareholders. I'm very excited about SHIFT's future and look forward to the years to come. Thank you. And with that, operator, we are now ready for the Q&A portion of the call.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Matt Caranda with Roth MKM.

Hey, guys. Good morning. It's Mike Zabrin on for Matt. Morning, Mike. Morning. Maybe just starting on the guide. Sounds like we're signaling a second half-weighted year. Maybe just speak to some of the visibility we have into that.

Yeah, I think, you know, as we talked about, the demand softness that we saw in the second half of the year, particularly as we got into Q4, we expect that to continue, which is through the first half of the year, which is consistent with what we've talked about previously. I think when you look at the order activity in the business, particularly on the FBS side of the business, I think we did see improvement in the second half of the year, 23, versus the first half. but still remains relatively soft. We did see, you know, a strong orders month in January, which is a positive, but we're not at a point yet where we're, you know, we're saying that the market is opening up or turning at this point. And so we want to be cautious as we continue here through the first half of the year on how quickly this market opens up. And I think, you know, with that, we'll be cautious from a cost perspective as well. But I think as you look at the year Q1 2020, As I indicated, we'll be roughly break-even. We'll see a step up in Q2 and would expect to see improved performance in the second half.

Got it. Makes sense. Maybe moving to bookings. Bookings looks a bit better year-over-year, though still relatively tepid compared to prior years. Maybe just speak to What are we hearing from FBS fleets in terms of refresh and expansion demand this year?

Yeah, I think, I mean, some of the dynamics that we've talked about previously with some of our major customers I think are still in play. You've got the reorganization going on with FedEx. You know, we've got an EV transition from an Amazon perspective. And so we continue to have, I'd say, healthy dialogues across our customer base. But those are impacting short-term ordering patterns. I think the nice part as we look at some of the recent orders is that there isn't as much parcel in there as there has been historically. And so when we talk about diversifying the business, I think there is an opportunity there. But we expect, based on the dialogue and interactions we're having with our customers, that there will be an increase in parcel activity here in the coming months. It's just hard to pinpoint exactly when that will be.

Okay. Makes sense. Any way to think about how much we need in new bookings this next year in FES and SV to hit the guide?

I think when you look at it overall, ending the year at $400 million of backlog, we've got an $875 million guide. We'll say the FES business backlog has been, you know, sequentially down for a couple quarters in a row. Some of that is also extending a bit. So that FES backlog will likely, some of that will likely push into 25. And so there is an element of conversion there, but we've got, you know, we've got $400 to $500 million if you just take that backlog number in our sales guidance.

Makes sense. That's helpful, John. Thank you. Maybe last one for me, for John Dunn maybe. John, maybe if you could discuss some of the strengths and weaknesses you see on the shift platform and then just hone in on maybe what changes do you plan to make relative to prior leadership and where might there be continuity?

Yeah. So we started with the, thank you, Mike, with the first slide saying that our mission hasn't changed, the core business and where we're taking the company. It's stable. We believe in that model and we're going forward. Some of the strengths that we have is great products, great relationships with our customers. Where we saw there's opportunities as I went around and interacted with different locations is to do more as a one shift organization and leverage our strengths and bring expertise from one area into other areas. A clear example we mentioned in the discussion was procurement, bringing together our total spend and really leverage that spend in the market to get better pricing.

That makes sense. That's all from me, guys. Thank you.

Thanks, Mike. Operator, next, please.

Yes, thank you. And the next question comes from Mike Schleske with DA Davidson.

Hey, good morning. Thanks for taking my questions. To follow up on that last question and your last answer there, John, do you think that SHIP is in need of any kind of a cost restructuring or changes to the footprint or the headcount going forward, or is it kind of you feel you've got enough volumes to meet the current capacity of the company and There's enough work to go around for all the folks who work at Shift Group currently.

What we're seeing is that we're really making sure our plants are agile so they can run different products and we better leverage that footprint. In the past, we were very singularly focused, so one brand would be built in one facility. And as we see the market kind of fluctuate, there's an opportunity to flex products into other facilities and really fully utilize our our installed capacity. We continue to monitor the demand and we'll make those adjustments as needed. But a great example was in Bristol, which is our traditional walk-in van plant. As we saw walk-in van demand go down, we flexed truck body production into that plant and have ramped that up successfully. And we're looking to do more of that sharing of the footprint going forward.

Okay. Thanks for that. And then, you know, I'd be curious to talk about chassis supply. It sounds like when you've got walk-in van work, you've got chassis that you can get to put on it. But I'm more curious about vocational and specialty. Do you have, at this point, a much better feel for your allocations and the timing of deliveries to get those chassis, maybe this time versus maybe this time last year? Or any kind of updates you can give us there would be appreciated.

We start with the FVS side. We're seeing the chassis coming through. So we don't have that significant issue we had about a year ago. It's getting the customers to really reengage. And as John mentioned, especially in parcel, it's been lighter than we had hoped. And we monitor that closely. So to be very clear, the limiting factor isn't chassis availability. It's really getting the customers to get reengaged. From the other side of the business, we have the SD side. The chassis are flowing, and we're doing our work on them and getting them to dealers. It's also not an issue right now with chassis at a significant level.

Fantastic. Maybe one last one for me. Given the relatively strong cash we've got that's going to continue here in 24 and pretty much no debt, Do you have any feel for John Dunn, the ability of shift or the desire to expand through M&A to get some more scale in some of these businesses or expanding to some new products from the truck buyer side? Any feel you can get for us for M&A given your relative strength versus some other folks who might be a little bit more sub-scale would be appreciated.

Can I answer it? The first step is we really want to drive the performance of our core business, and that's the real focus right now. to get that operating at the highest level. We need to get Blue Arc launched, and that's why we narrowed the scope to make sure we get that to market as soon as possible and deliver that to customers. In parallel, we do see opportunities where we can do acquisitions, M&A, and we are looking at a couple opportunities there, but really don't want to lose focus on what we need to do and the urgency around making sure that core business is running at the right level.

Follow up there, John. When you just work on the Class 3-4 Blue Arc, any feel for how that might affect your 25 projections for Blue Arc? Your previous projections back in 2022 had $500 million plus for sales for the overall line. What is it, do you think, with just the Class 3-4 and the current trajectory of the program? Where might that be in 2025 now?

What we're seeing is we want to get this vehicle to market and really gauge the interest. I think there's been a lot of publications out there about the acceptance rate and the speed of the acceptance rate. So we know we're going to have that strong demand eventually. Will that timing happen in 2025 like we originally thought? We're watching that closely, but that may be a year or two out beyond that. So we're being cautious. And I think that's why you see us narrowing the focus. Get a product out in the market, understand its reception, and not over-commit the company in this EV space. Also, going back to your other question, does make cash available to do acquisitions and strengthen our core business as well. So we want to make sure we stay balanced as we go forward in the coming years.

And I think, Mike, just to add to that, I think... You know, as we look at sort of the production ramp up in the timeline, you know, we're probably out a year, right? I mean, just a year ago, we were talking about second half production 23, the battery issues. Now we're talking about later 24. And so as we look at it, the program is essentially pushed a year from that perspective, our plans to do to a couple hundred units this year. And then we'll start to see that ramp. And I would expect some of the financial milestones that you talked about to push out a year as well. But it gets back to John's point on adoption and acceptance. From a customer perspective, he hit on it in his prepared remarks, but there is still a lot of enthusiasm about what this product can do and how it stacks up from a competitive standpoint. And so we feel very good about it, and we want to make sure that we get that right vehicle on the road.

Great. Thanks so much. I appreciate the discussion.

Thanks, Mike.

Operator? Yes, thank you. And the next question comes from Steve Dyer with Craig Hallam.

Thanks. Good morning. Most of mine have been answered at this point. Just as it relates to Blue Arc a little bit more, How much of the delay do you feel like is attributable just to supply chain and battery issues and things like that? And then how much would you sort of associate with just sort of a little bit softer demand in overall parcel and people sort of moderating their chatter on that in the last six or nine months?

Really, the driver of the delay was the battery. That threw us a curve with Proterra being bought by Volvo Inc. And we had technical issues, candidly, with Proterra as well, all related to the battery. The vehicle is fantastic. When we get the vehicle on the road, the customers use it. A lot of enthusiasm around the vehicle. So our challenge is really to make sure we have a battery that meets all the requirements. We have a new partner in one. They were the original intended battery supplier for our Class 5, so it wasn't a new supplier to us. just pulling them ahead into this Class 3-4 walk-in van. So there was some work already done, which helps us accelerate, but we're going through that validation to make sure when we put a vehicle out to market, it's going to be at the right quality level and really deliver the performance long-term that we expect and our customers expect.

So given that, it sounds like this year is primarily a testing and validation year again, and you still feel like demand is quite solid there?

We do. Meeting with customers, I met with customers personally, and there's a lot of enthusiasm around the vehicle, excitement to just get it in their hands. But we don't want to rush it. We want to make sure that that battery – the final touches and that performance is at the right level. You get one chance to make sure they're satisfied.

Yep. And then can you just kind of refresh our memory, the Randy Marion order, if there were sort of any timelines or parameters around that when you announced it and sort of when you would expect that to begin shipping?

Yeah, I think... I think the, you know, the Randy Marion order when we announced it was a multi-year order. You know, certainly as we look at the demand side of things and what our production looks like, it will be one of the first customers that we deliver to here in the second half of the year.

I lost you there at the end, John, but we can take that offline.

Go ahead. I was just saying, they'll be one of the first customers that we deliver to in the second half of the year.

The first group of vehicles, they're blended right in that, and they will give vehicles as soon as we're ready to give it to them.

Gotcha. Okay. Last question for me, just housekeeping. You talked about share repurchases. How many repurchase shares did you repurchase, I guess, both in Q4 and then also the year, if you have that in front of you?

Yeah, we didn't repurchase anything in Q4. For the year, we repurchased a million.

A million.

About a million shares. Okay. And was that pretty front half loaded? I'm just trying to recall what you've said previously. No, it was mixed between Q1, Q3. Correct. Gotcha. Okay. Thanks very much.

Thank you. And the next question comes from Greg Lewis with VTIG.

Hey, thank you and good morning. Thanks for taking my questions. John, in the prepared remarks, you mentioned the ongoing dialogue with Volvo around the battery. I guess when should we think about this being finalized and then just thinking about some of the challenges we had over the last year, realizing Volvo is a little bit different of a company than the previous supplier. What are the thoughts around maybe a plan B here just to avoid potential I don't know, supply chain issues down the road.

Thanks, Greg. What we're looking at, and maybe didn't come across as clear as it could have, we're all in right now working with one, that new battery source. They're who we're focused the validation on. In parallel, we don't want to just walk away from Proterra, which is now Volvo. And so we're still waiting to understand what Volvo, their intention is. They're going through that reorganization with the Proterra group, and we expect to know more in the next four to six weeks on how we want to proceed. The key point there is we'll invest the resources needed to solve some of the challenges, the issues we had with the battery. But our goal is to be dual source. So we would like them to solve their problem and have that be an option as well.

Okay, great. And then just John, on the EBITDA guidance, you know, for Q1 and full year, you know, obviously, you know, specialty was, you know, degrading Q4. You know, is there some seasonality why, you know, it looks like those EBITDA margins are going to come under pressure in Q1, I guess, before, you know, looking at, you know, playing with numbers and guidance before kind of rebounding to that kind of Q4 run rate? Is that the right way to be thinking about that?

In SVE specifically or broadly?

No, just specifically around specialty.

Yeah, I mean, I think the SVE business had a tremendous year. I think 20% EBITDA margins for the year, which ramped really sequentially throughout the year as well. We've said historically that business is more of a heightened business over the long term as we think about it, and so we'll That is what we're expecting as we enter 2024. I think when you look at the total company, you know, volume will be a little bit pressured in the first quarter just based on how demand and the backlog is laying out. And so there will be sequential declines as well, which put pressure on the Q1 margins before we see volumes return as we move through the year.

Okay. Thank you. Thanks, Greg.

Thanks.

Thank you. And this concludes our question and answer session. I would like to turn the floor back over to Randy Wilson for any closing comments.

Thank you, Operator. I'd like to thank everyone for joining today's call. We look forward to connecting with you over the coming weeks as the SHIFT management team will be hosting investor meetings at the Raymond James Institutional Investor Conference in Orlando on March 4th, the NTA Work Truck Week in Indianapolis on March 6th and 7th, and the 36th Annual Roth Capital Conference in Dana Point on March 18th. Thank you for your interest in the shift group. As always, please reach out if you have any follow-up questions. Have a great day. With that, operator, please disconnect the call.

Thank you. As mentioned, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.