Mayville Engineering Company, Inc.

Good day, and welcome to the Mayville Engineering Company fourth quarter 2019 earnings call. Today, all participants will be in listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. If you would like to withdraw your question, please press star then two. Please note that today's event is being recorded. At this time, I would like to turn the conference over to Mr. Nathan Elwell with Investor Relations. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans, and forecasts. Because these forward-looking statements involve risks, assumptions, and uncertainties, our actual results could differ materially from those in the forward-looking statements. For more information regarding such risks and uncertainties, please see our filings with the Securities and Exchange Commission, including our filing on Form 10-Q for the period ended June 30, 2019. We assume no obligation and do not intend to update any such forward-looking statements except as required by federal securities laws. Second, this call will involve a discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at MECinc.com. Joining me on the call today is Bob Kamphuis, Chairman, President, and Chief Executive Officer, and Todd Butts, Chief Financial Officer, and Ryan Raber, Executive Vice President of Strategy, Sales and Marketing. First, Bob will provide an overview of our performance, then Todd will review our financial results and guidance. With that, I'll hand the call over to Bob.

Thank you, Nathan. Good morning, everyone, and welcome to our fourth quarter and full year earnings call. 2019 was a pivotal year in MEC's history, one in which we had several noteworthy accomplishments. First accomplishment, and the reason we're all here today, we completed our initial public offering in early May, which eliminated ESOP repurchase obligations in the future and allowed us to pay down a significant amount of debt. Second, we successfully completed the integration of the DMP operations. For the full year, we produced net sales of $519.7 million. and adjusted EBITDA of $53.1 million. Our full year results highlight the ongoing potential for our business, but our most recent two quarters obviously reflected the rapid shift in demand in many of the end markets we served, which began late in the third quarter and continued through the end of the year. These dynamic shifts led to many near-term production schedule changes for most of our key customers. Impacting both the legacy MEC and former DMP operations, the changes were most prevalent within the commercial vehicle, construction, and agricultural markets. Furthermore, as we discussed during our third quarter earnings call, the UAW union labor issues impacted some of our commercial vehicle customers and presented us with additional challenges that negatively impacted production schedules. While the strikes were certainly sources of frustration for our team and certainly our customers, I'm glad that they were resolved quickly and are no longer an issue moving forward. Our fourth quarter unfolded generally as we anticipated, and despite these demand shifts, we're pleased that our results match the updated expectations we established last October for revenue and adjusted EBITDA. I'm particularly encouraged by the ongoing progress we're making with the former DMP locations, and I'm very excited about the opportunities for growth and collaboration now that we are efficiently operating as one company. We quickly and diligently adjusted our cost structure following the demand shift in the third and fourth quarters, and as previously mentioned, did complete the consolidation of the company's Virginia plant and shift and others across several MEC facilities. Additionally, higher customer shutdown days, increased healthcare costs and lower engineered scrap revenues during the fourth quarter had an adverse impact on the business. Those things we overcame and I'm pleased with our speed of changes made on the cost side as we prepared for 2020. As you probably saw, we issued our 2020 financial and market outlook in January. which Todd will review later. But I want to spend a few minutes discussing our current thinking regarding the markets that we serve as well as our recent results. We provided our outlook by market which will give you a sense of our anticipated breakdown of business for the year. Keep in mind that this information is directional and will likely change as the year progresses. and new programs ramp up while others may be reduced or discontinued. With that caveat in place, we expect the following breakdown by market. We anticipate the commercial vehicle market will comprise approximately 32% of net sales and is expected to be down 25 to 35% compared to 2019. The construction market is expected to represent approximately Thank you for joining us. The military market, also a bright spot, will comprise approximately 8% of net sales, 1 to 3% higher in comparison to 2019. And finally, we expect the remaining 10% of 2020 sales to be attributed to the all other markets we serve, down 4 to 8% compared to 2019. I'll spend a few minutes diving into what we've seen at each market to hopefully give you a sense for how we arrived at our forecast. In line with our updated October guidance and the overall market weakness, our commercial vehicle sales continued to trend down during the fourth quarter. While we had been preparing for this pullback for quite some time, the speed was greater and timing was sooner than expected. When we started 2019, we originally believed that the demand pullback would occur during the first half of 2020. but it started in late September, much earlier than initially forecasted, as customers decided to destock and significantly reduce their inventories. We expect the trough for Class 8 truck demand to continue throughout 2020 but believe that maintaining our strong relationships with our customers, including the DMP customers, and having open dialogue will help us maintain and expand our market position during the downturn. Similarly, the construction and ag markets both continued to fall sequentially in Q4 compared to Q3, as customers continued to reduce their inventory with desocking efforts. It is our belief that desocking will continue in 2020 and that we will begin to see stabilization and modest improvements as the year progresses. As I mentioned within the overall market weakness, power sports continues to be a bright spot for us. The relative strength in this market speaks to the progress we've made in market share growth and the addition of a meaningful new OEM partnership in this market space. We also continue to generate positive traction within the military market based on new product wins and production demands. Going forward, we expect that this market will continue to provide new opportunities for revenue growth. In the other markets we serve, we are anticipating generally softer market demand across a number of different markets, including mining, rail, and power generation. While we are confident that we can demonstrate our agility and adaptability in the medium to long term, our forecast range reflects both the MEC legacy and DMP businesses will continue to be adversely impacted by market factors primarily out of our control in the short term. In particular, OEM schedules with more dedicated capacity associated with the commercial vehicle market make this segment more difficult to realign in the short term. Also in the near term, we are seeing the benefit of the flexible automation and capital investments that we made in 2019, which have aided the necessary cost adjustments that come with volume changes. We've been able to realize efficiency improvements sooner and at a faster rate. We'll have lower than initially planned capital expenditures in 2020. We are firm believers in focusing our attention to factors within our control and firmly believe that the investments in automation and the cost improvements that we've implemented position the company for success in the medium to long term. Having provided this context, there are several key programs and customer relationships that I'd like to mention. Throughout 2019, we saw several volume increases with certain military projects for light vehicles, and we believe that these orders and our share will continue to grow in 2020. We continue to win more JLT business and we look forward to launching new programs in the coming months and year ahead. I'm also pleased to report that we have added a new customer in a new industry and will be supporting warehouse conveyors and package management. This is our first contract with this blue chip customer in the marketplace and a great opportunity to grow a long-term relationship. In addition, We recently won an outsourcing project with one of our largest power sports customers as they continue to align their capacities after the consolidation of one of their facilities. In the commercial vehicle market, we continue to see customers focus on their next generation product, reflecting both voice of the customer improvements and changes to the trucks for future regulatory changes. MECC continues to participate in new product development and we've recently had some key wins that will grow our share with product launches beyond 2020. We continue to focus on cross-selling in 2020 with continued traction and leveraging the full MEC capabilities with the prior DMP customer base. Our engineering and sales teams continue to drive additional quotation activity and we're actively engaged with our customers' new product engineers in design for manufacturability, leading to initial prototype orders. So while we acknowledge that the positive developments all have varying size and timeframes, we are excited to expand market share, cross-selling capabilities and embark on new opportunities, forming new relationships with new customers and enter and grow in new industries. Tying back to my opening comments, I'm also pleased to report the integration of the DMP acquisition is now substantially complete and that the teams have now been operating as a single, streamlined and cost-efficient company for the past several months. We fully expect to realize the related full-year financial benefits in 2020 and to discover new value-additive opportunities from a stronger, more seamless and aligned MEC team, both in operations and sales in the coming years. Our approach regarding potential acquisitions remains the same. We continue to carefully evaluate opportunities for growth through product and process adjacency and market and geographic expansion. We'll maintain our disciplined approach, consider both current and future market dynamics, and assess each potential opportunity with a rigorous return on future investment focused on that approach. As a reminder, in conjunction with our third quarter earnings, our board of directors also approved a significant increase in our share buyback threshold from 4 million, raising it to 25 million through 2021. As we discussed last quarter, We strongly believe that the authorization of this increase to the share repurchase program reiterates our conviction that the stock is undervalued at current levels. We have already begun to utilize the capital available under this program, although sparingly, and we will continue to be opportunistic and diligent in regard to buying back the shares to maximize the full potential of our investments. Before I pass the call on to Todd, I just wanted to take a moment to recognize that the company ended the year in terrific financial position. At the end of 2019, we had lowered our outstanding debt balance to approximately $73 million compared to approximately $180 million at the end of the prior year. In 2019, we made solid and meaningful capital investments that strengthened our cost position. and throughput capabilities. We're pleased with the progress that we're making in these areas. In the coming years, we'll continue to prioritize strengthening our cost position, our balance sheet, and generating a substantial percentage of free cash flow from adjusted EBITDA. Now I'll hand the call to Todd to discuss our financial results and guidance. Todd?

Thanks, Bob. I'll begin with a look at our 2019 full-year financial performance with some color on our fourth quarter before providing commentary on our balance sheet, liquidity, and outlook for 2020. As noted in our press release, we recorded full-year net sales of $519.7 million as compared to $354.5 million for 2018, an increase of $165.2 million. The DMP locations accounted for $188.6 million of the change, and was slightly offset by declines in our legacy business. For the fourth quarter, net sales were 102.3 million as compared to 91.4 million for the same prior year period, an increase of 10.9 million. The former DMP locations contributed 33.1 million of the change, offset by declines in our legacy MEC business. Both the MEC legacy business and former DMP businesses were adversely impacted by sudden declines in market demand that began in late third quarter and continued through the fourth quarter. These declines were most apparent in the commercial vehicle, agricultural, and construction end markets served. These market demand changes drove destocking activities, which had a more pronounced impact on the legacy MEC businesses than the former GMP locations, especially in the fourth quarter. Destocking stems from lower retail sales, resulting in customer decisions to reduce dealer inventory levels by reducing and curtailing near-term production schedules. In addition, several key customers in the CV market experienced labor union issues spanning the third and fourth quarters of 2019, negatively impacting production schedules for both the former DMP and the legacy MEC locations. For the full year 2019, manufacturing margins were 58.7 million as compared to 50.6 million for the prior year. an increase of $8.1 million. The former DMP locations contributed $21.1 million of the change or offset by declines to the legacy MEC locations. For the fourth quarter, manufacturing margins were $4 million as compared to $10.4 million for the same prior year period. On a percentage basis, manufacturing margin percentages were 11.3% for the full year as compared to 14.3% for the prior year or a decline of 300 basis points. For the fourth quarter, manufacturing margin percentages were 3.9% as compared to 11.4% for the same prior year period, or a decline of 750 basis points. The sudden declines in market demand, destocking, and impact of customer labor issues adversely impacted volumes and the labor absorption associated with them in the late third quarter through the fourth quarter. These circumstances, along with the cost connected with working through the consolidation of the company's Virginia facilities, shift consolidations across multiple facilities, increased healthcare costs, coupled with fewer working days in the fourth quarter, negatively impacted our costs, and collectively produced an unusually high amount of underabsorbed manufacturing expenses and lower manufacturing margins, most notably in the fourth quarter. With our cost structure now better positioned, we expect that manufacturing margins and manufacturing margin percentages will return to more normalized levels. I'll spend a few minutes touching on our expense activity for both the full year and the fourth quarter. Amortization expenses were $10.7 million for the full year of 2019 as compared to $4.1 million for 2018. For the fourth quarter, amortization expenses were $2.7 million as compared to $1.3 million for the same prior year period. The increases for these comparable periods solely relate to the amortization of identifiable intangible assets from the DMP acquisition. Depreciation expenses were $22.3 million for the full year 2019 as compared to $16.4 million for 2018. For the fourth quarter, depreciation expenses were $5.7 million as compared to $4.3 million for the same prior year period. BMP accounted for $3 million and $0.7 million of increases for year-over-year and quarter-over-quarter comparisons, respectively. The remaining increase in depreciation expense relates to continued investment in new automation and technologies. Profit sharing, bonuses, and deferred compensation expenses were $25.1 million for the full year 2019 as compared to $8.1 million for 2018, an increase of $17 million. The increase was due to one-time expenses of $10.2 million in deferred compensation plan expense and $9.9 million in long-term incentive plan or LTIP expense, both driven by the IPO. These one-time expenses were slightly offset by a $2.6 million decline in annual bonus adjustments related to the decline in financial performance stemming from the aforementioned market changes. For the fourth quarter of 2019, profit-sharing bonuses and deferred compensation expenses were at a negative 0.2 million as compared to 2.7 million for the same prior year period. Similarly, the decrease was due to adjustments related to the decline in financial performance previously mentioned. Other selling, general, and administrative expenses were $25.5 million for the full year 2019, as compared to $12.3 million for 2018. The increase of $13.2 million was driven by $5.7 million of one-time IPO-related expenses, $5.3 million of net comparative contributions from the DMP locations, with a balance mostly attributable to additional costs associated with being a public company. For the fourth quarter, other selling general administrative expenses were $5.2 million, as compared to $3.8 million for the prior year quarter, an increase of $1.4 million. Similarly, the increase was driven by $0.7 million from the former DMP locations, with the balance mostly attributable to additional costs associated with B&A Public Company. The contingent consideration payable related to the DMP earn-out was adjusted to zero during the third quarter of 2019. resulting in a $6.1 million non-cash revaluation adjustment for the year. The company's position that no earn-out payment is due has been confirmed with DMP's former shareholders. Interest expense was $6.7 million for the full year of 2019, as compared to $3.9 million for 2018. The $2.8 million increase is due to higher debt levels, slightly offset by the significant pay down during the second quarter of 2019 with the use of IPO proceeds. Interest expense for the fourth quarter of 2019 was $0.9 million as compared to $1.5 million for the same prior year period. This decline is due to lower comparable debt levels and a net positive cash flow generated by the business during the fourth quarter, combined with favorable interest rates obtained through the amended and restated credit agreement that became effective at the end of the third quarter. Income tax benefits were $4.1 million and $3.9 million for the full year and fourth quarters of 2019, respectively. These benefits are the result of the company's legacy business converting from an S to a C corporation on May 12, 2019, coupled with the one-time IPO and DMP acquisition-related expenses incurred during the year and the unusually high underabsorbed manufacturing expenses incurred during the fourth quarter. We anticipate an effective tax rate of approximately 26% going forward. I will now comment on EBITDA and adjusted EBITDA for both the full year and for the fourth quarter. EBITDA and EBITDA margin percent were $30.9 million and 5.9% respectively for the full year 2019, as compared to $41.8 million and 11.8% respectively for 2018. The $10.9 million decline in EBITDA was mostly driven by the one-time IPO increased expense for deferred compensation and LTIB, coupled with one-time IPO and DMP-related expenses, along with the adverse impact of the sudden market demand changes DeStocking, and Customer Labor Issues. These items were slightly offset by the DMP Contingent Consideration Revaluation Adjustment in the addition of DMP. Adjusted EBITDA and adjusted EBITDA margin percent were 53.1 million and 10.2 percent respectively for the full year of 2019 as compared to 43.7 million and 12.3 percent respectively for 2018. The increase in adjusted EBITDA was primarily driven by the acquisition of DMP, slightly offset by the underabsorbed manufacturing costs due to the aforementioned adverse impacts associated with market demand changes, destocking, and customer-related labor issues. For the fourth quarter of 2019, EBITDA and adjusted EBITDA each declined slightly more than $3 million as compared to the prior year period. EBITDA margin percent and adjusted EBITDA margin percent also declined for the fourth quarter of 2019, as compared to the same prior year period. These declines were similarly driven by the market dynamics previously discussed. With our cost structures now in a better position, we expect our EBITDA numbers and metrics will return to more normalized levels. Next, I'd like to address our balance sheet and liquidity figures. Cash flow provided by operating activities was $33.3 million during the full year of 2019 as compared to $36.7 million for 2018. The $3.4 million decline was due to the $10.6 million LTIP payout plus approximately $5 million of payments specific to the IPO, which are offset by strong cash flows generated by the legacy MEC and former DMP locations. Capital expenditures were $25.8 million for the full year 2019 as compared to $17.9 million for 2018. The $7.9 million increase relates to the addition of DMP in conjunction with the timing of certain new technology and automation investments. This accelerated timing also allows us to increase our efficiency improvements at a faster rate and will reduce our planned capital expenditures for 2020, which are now expected to be between $12 million and $16 million. Total outstanding debt, which includes long-term debt and revolving credit notes, was $72.6 million for the year ended 2019, as compared to $179.9 million for 2018. The $107.3 million decline is attributable to the $101.8 million of proceeds received from the IPO in addition to healthy cash flows generated by the business during the year, slightly being offset by one-time related IPO expenses and share buybacks. As previously disclosed, the company's board of directors approved an increase in the company's share buyback program in the third quarter of this year to $25 million through 2021. The company has utilized $2.6 million available under this program as of December 31, 2019. Additionally, we completed an amended and restated credit agreement during the third quarter of this year. This new agreement simplifies our debt structure while providing increased borrowing capacity of up to $300 million through a combination of a $200 million revolving credit line and a $100 million accordion. This new agreement also provides more favorable pricing and less restrictive debt covenants. As of the end of 2019, our amended and restated credit agreement provides us with approximately $225 million in capacity. We are firmly committed to ensuring that the company maintains its strong financial position as we continue to survey the market for attractive acquisitions that fit our strategy, along with opportunistically exercising the share repurchase program in the coming years. Our decisions regarding acquisitions and share repurchases will continue to align with our stated goal of effecting EBITDA leverage ratio of three times or less. With that, I'd like to reiterate our outlook for 2020, which Bob highlighted a few moments ago. Based on the company's prior year performance, the overall economic climate, current customer guidance, and industry trends, we are reaffirming our 2020 outlook as follows. Net sales are expected to be between $425 million and $465 million. Adjusted EBITDA is expected to be between $39 million and $50 million, which excludes stock-based compensation for 2020. Free cash flow is expected to be greater than 50% of adjusted EBITDA. With that said, I will now turn the call back over to Bob for closing remarks.

Thank you, Todd. Despite the challenges that surface near the end of the year, we're still confident in our long-term business prospects. and we are well positioned for success in our CERB markets based on our market leading position, our dedicated customer focus and strong balance sheet. We have and will continue to make necessary cost adjustments in the short term and opportunistically implement our flexible and agile selling and production processes wherever we can. Particularly at this point and as a reminder, Mech is a U.S. domestic company serving U.S. domestic customers, and we have a strong track record of adopting and adjusting our business as markets shift to succeed over the medium to long term. We have done it before, and we are doing it again now. I just wanted to take another moment to thank and commend our employee shareholders for their hard work and diligence this past year. The dedication of our workforce is something that I take great pride in and something that I do not take lightly. While we have faced some adversity recently, 2019 was a significant year for us and one that was necessary in order to take our organization to new heights in the future. With our prepared comments complete, we'd like to open up the call for questions. Operator, please go ahead.

We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Steven Volkman of Jefferies. Please proceed.

Hi. Good morning, gentlemen.

Good morning, Steve.

So, Bob, thanks for the sort of the rundown across the different end markets. That's quite helpful. I guess my first question, and I'm trying to kind of drill in on your guidance a little bit. So, the first question is, Are these end markets kind of stable at these current rates? Do you think anything is still deteriorating as you sort of went through the fourth quarter and into January and just kind of trying to figure out if we're sort of seeing a bottoming process here or if there's still some risk to certain end markets?

Sure. Well, let me just comment first on the commercial vehicle markets. Certainly those in our plan is a continued decline through the year. That market will likely be bottoming towards the end of this year and into next year, with likely some lift coming in the latter part of next year. But for this year, we believe that we have the downside and the change in our range of revenues. Off-road ag and construction markets, certainly inventory destocking is still taking place. We believe that that will moderate during the year and that there will be a return to a different level, albeit with some of the typical seasonality in the agriculture area that that change might be a little bit invisible with the seasonal generally lower second half. Other markets, you know, it will be based on things that we are able to accomplish in the marketplace. For instance, in power sports, the gain in market share. And in the military area, the somewhat growth but also market share gains that we would expect. But we have Some of that downside risk, or if it did not occur, factored into our range as well.

Okay. And I guess the flip side, you know, during the IPO process, we talked a lot about the ability to sort of backfill during times like these with additional customers or additional business with existing customers. Have you factored in any of that into 2020 or do we think about that more as like a 2021?

Yeah, we factored very little of that into our numbers. So I think that would push us to the upper side of the range that we talked about.

Okay, good. I'll pass it on and get back in queue. Thank you.

Thanks, Steve.

Our next question comes from Mig Dobre of Baird. Please go ahead.

Yes, thank you. Good morning. Can you hear me okay?

Yes, Mig. Good morning. Hi there.

Can you maybe help us understand your thinking in terms of the cadence of the revenues through the year? At the midpoint, you're guiding down 14, but I'm suspecting that we're going to start much slower than that and probably the back half looking better. So how do you think about it? What's in your forecast?

Hey, Meg, this is Ryan here. So kind of like Bob said, there's some sequential declines that we're anticipating in the Class A market that would kind of quarter over quarter sequentially lower. But a lot of the questions around, you know, de-stocking, we believe, you know, the sooner that ends, the better the revenues will be. So as we think about the full year and certainly staying close to our customers or watchable inventories as well as, you know, age of fleets and things that could drive some increased replacement cycles where Some of those markets we would answer as the back half has the potential to be stronger than the front half.

Maybe to put a finer point on it, do you actually envision your business growing in aggregate at any point in 2020, the fourth quarter or maybe even the third?

I would say that, again, we're watching the markets very closely and Our expectation is that once these stocking activities end, I would expect, as Ryan stated, at the back half, we'll start to gain some momentum and we'll see that sales growth begin to happen. As Bob alluded to earlier, we've added some new customers and some markets, and as those programs come into the full run rate, we are optimistically looking to see growth in the second half.

Okay. Last question for me. Can you talk a little bit about some of the actions that you've done on the expense side? I mean, you've obviously done a lot to integrate DMP and maybe also some variable cost takeouts. How do we think about savings? What's incremental in terms of savings for 20 versus 19? Thank you.

Certainly. So, you know, that's a great question. And one of the things that's unfortunately being masked by the lower volumes in 2020 is all the good improvements we've made. The integration of DMP, as Bob alluded to, is now behind us. The cross-selling activities are taking hold. The consolidation of plants are yielding the benefits that we expected. And in fact, we've seen a positive increase in our manufacturing margin percentage of over 250 basis points. Unfortunately, all those nice cost reductions and restructurings we've done is being masked by the underabsorbed overhead. and that really nets it down to maybe more of a break even on a percentage. We're slightly better on a percentage basis year over year, even with all these kind of, let's say, market headwinds currently. So when the markets do rebound, I think we're in a very good position to really see that uptick in the margins.

Our next question comes from Andrew Kaplowitz of Citi. Please go ahead.

Hey, good morning, guys.

Good morning, Andy.

Bob, so you mentioned before the abrupt changes that your customers made late last year in commercial vehicles, ag and construction. Maybe following on to Steve's question, have you seen any more of these abrupt changes in 2020? And is there any precedent in the business that you've seen for how to think about the coronavirus stuff and its potential impact on net customers?

Sure. Let me first talk about the business in general. Even before we had acquired Defiance to round out our commercial vehicle presence, we were in the commercial vehicle market. So we've seen these types of cycles before and have adjusted our costs appropriately as we have this time as well. That market and other markets were adjusting the way we have in the past. It has to do with getting rid of the variable costs, always sharpening our processes through continuous improvement efforts, as well as our utilization and pricing regarding the materials and supplies that go into our end product. but the big things we can do at these points are also just keep our foot on the gas on continuous improvement. With regard to the coronavirus topic, really there's very little risk that we have in our throughput. I think there's two risks and the one that comes from MECC is very minimal. The risk that might be a little greater that would not involve us when a customer has something coming from overseas for a particular vehicle that they can't get, in which case they won't need our component either. But that also represents some opportunity to us as we talk to our customers and remind them of our availability, our capability to very quickly move to support them That message is in the marketplace as well.

Hey, Andy, that one did well.

Thank you for joining us today. and, you know, on an ongoing basis, you know, we've got more on the hopper that we'd hope in the quarters ahead we'd be able to talk about as well.

Ron, maybe I could stop and just ask, like, any of these sort of new products, you know, How did they gestate into maybe like a new product line itself? You know, like obviously you've got these end markets that you've talked about, but I guess, you know, the holy grail would be that you can take some of the other stuff and make it sort of a new segment. Is that a possibility here over the next couple of years?

I mean, we continue to push into a lot of the other that we currently have. This would be the one we described on the call today would be are all uniquely new and something we hadn't participated in before. And some of this, Andy, goes back to what we talk about as flexible, redeployable automation. The parts themselves and the way we make these parts isn't uniquely different from agriculture or construction. It's just adding another leg onto the stool, utilizing the same capabilities we have and being active in the market, opportunistic about the potential clients we're doing work with, and this one really took off pretty quickly for us.

I guess, Andy, I'll add to Ryan's comment. I think you were asking, could we be a product company? And certainly we have a broad amount of capabilities within our business to do a lot of different processes and a lot of different components. That is one of the things that we continue to study. as we look forward and say, is there a product area that we could or should be participating in? We don't have anything to report there or specific guidance to give you on that topic today, but with our capabilities, there's certainly a lot of things that we can get involved with.

and Bob, just a quick follow-up on that. As valuations have come down for potential targets and your balance sheet is good, you know, does that give you more opportunity or you need to be careful here, you know, given where the cycle is?

Yeah, I think it's a balance, a certain amount of care but also a certain amount of, I'll call it, deep understanding before we pull the trigger on an opportunity. So we want to be cautious, but we also want to be opportunistic and push for this type of growth.

Thanks, guys.

The next question comes from Larry DeMaria with William Blair. Please proceed.

Thanks. Good morning, everybody. Good morning, Larry. Good morning, Larry. Hey, guys. So, obviously, we discussed the repositioning of the company with regards to commercial vehicle markets and DMP, and you're expecting, obviously, as everyone is, a far weaker 2020, but you're looking for a bit of a recovery in 21. So, I'm just trying to understand, as you reallocate those CV-related resources, presumably, you'll have slack capacity for some time because 21 won't get back to, obviously, the peak levels we saw. So, what are you doing to reallocate those resources because obviously they're going to be slack for a while.

Ryan, do you want to grab that? I think, Larry, it's part of what we described on the call of going out and getting new markets and new customers. So we've always talked about the potential for takeover work from our competition, reconsolidation of the supply base and the opportunities that brings organically within who we already know them. We continue to see outsourcing at OEM levels, so as they go through their business cycles, evaluate market dynamics that are out there. We certainly have the broad-based capability to, in many ways, do what our customers do better, just because of our flexibility and span of work that we do. And then the other piece is these new customers that we're able to bring in as we target new industries and and find ways to use the equipment we have to serve new areas. So that's something we're constantly looking at as a group. We agree that certainly 21 isn't going to get back to the 2019 peak market and we want to continue to grow the business.

And you're specifically moving these assets from truck to other areas or more truck customers or as I understand it's harder to do on the truck side?

Yeah, I mean, the harder to do on the truck side kind of relates more to the selling cycle itself, Larry, than necessarily harder to move product into a given machine tool or manufacturing asset. A lot of the commercial truck activity we have today tends to be more in product redesign at the customer level due to regulatory greenhouse gas emissions, et cetera. The product lifecycle would be shorter outside of CV to get takeover work. But again, the equipment, probably with the exception of maybe some of our fuel tanks, could run any of the products that we're looking at.

And as you guys reallocate these resources, and as you mentioned, OEMs maybe bring some of their outsourced parts into better suppliers like your shelves, is this – we've With the exception of the destocking and some of the acute end markets, the truck cycle has been pretty well telegraphed, obviously. Is this going in line with your expectations that you would have thought six or 12 months ago, or is it going slower? How's it going? I know you're bringing some stuff in, but obviously we're still expecting deep declines.

Well, I guess as we've said, Larry, the CB market, when we came into 2019, we expected it to start in the first half of 2021. regarding declines, and it came four months earlier than that. So that's one of the things that moved the needle, but we're ready for it. We know that when these things come here, here's the playbook you use to adjust. Now that we're a bigger business, we have bigger capabilities to look at other opportunities. Some of that can be applied to some of these other markets away from, I'll say, the dedicated fuel tank or exhaust stack type business. If you're making fabricating brackets or cab components or other things, those assets can be redeployed pretty readily. So that's what we're working on.

So with that in mind, is there stuff in your plan that you've presented with the last quarter and today for 2020 that Is there stuff that's still on the come, or that's more or less bankable business? Because I would think that early in the year there's more upside to get more business than not.

Yeah, our plan and what we've communicated to everyone has very little of that in it. So that would be some upside to get us to the upper end of that range.

Okay, thank you. Last question, sorry. But can you give us a sense of utilization in 19 and what it was, what it's expected to be in 2020? Thank you, and good luck this year.

Sure. I would say it was roughly, on average, somewhere around a 70-ish percent throughout the year if you took it from heavier utilization to lesser utilization in the second half. So we're somewhere in that probably mid-50s range to date.

Okay, thank you.

Our next question comes from Steven Fisher of UBS. Please proceed.

Thanks. Good morning, guys.

Good morning, Steve. Good morning, Steve.

Good morning. Just wanted to follow up on a couple of the earlier questions. In terms of the destocking, can you just, so we're clear on exactly what the messaging is from the customers and your planning for manufacturing, Is the destocking expected to be completed in the second quarter for commercial vehicles, construction, and ag, or are there different timelines for the various of those end markets based on what your customers are telling you at this point?

I think there's varying times that are really the ones to answer that. I guess we've got plans that would kind of take us through the first half, but everyone's going to behave a little bit differently.

Okay, but your general expectation is by the end of the first half, the destocking is done?

Yeah, I'd say in a general sense, you know, there's some nuances with, you know, small ag versus large ag, rental type construction equipment versus larger earth moving and mining. So there's a little variability in how we would answer that. But I'd say in a general sense, yes.

Okay. I know Andy was asking about the coronavirus before. Are your customers actually talking to you yet about curtailing any of the production because they wouldn't need your parts yet, or is that too soon?

It's too soon to say, but it's certainly a topic of discussion and follow-up testing their supply base to say what are going to be my problems. And so it'll continue to evolve, I think.

I just want to maybe add something there, Steve. So we are in discussions just to understand from the demand side. I think this is another great thing. When Bob mentioned we're U.S.-based production, U.S.-based ship facilities, there are in some cases where This works to our favor that customers have risks that need to be mitigated. Certainly, we sit here today with available capacity. We're in discussions, I'll say, to be kind of in a rapid fashion the solution to some of those problems that might exist out there. So while there's a general concern in the market for us, does it impact their unit shipments? It also presents an opportunity to kind of do what we do, and that's support them and and be here domestically to support the factories here locally.

That makes sense. And then lastly, I think, Todd, you may have mentioned this, but just wondering what is it that's driving your capital spending to be lower than expected?

Well, we had a robust year in 2019. You know, some of those assets became available sooner than expected. We put them in place. So it's really the two year plan was around 40 million and that's still consistent. It was more front-end loaded in 2019. And certainly that's playing into some of the benefits we're seeing. When I talked earlier about over 250 basis point improvement, that new technology and automation is really yielding the benefits we expected. It's just that under-absorbed position just offsets it and kind of masks it a bit, right? And again, I think we're well-positioned when volumes return to really see that incremental margin in that mid-20s return. Gotcha. Thanks a lot.

Again, if you do have a question, please press star then one on your telephone keypad. Our next question comes from Stephen Volkman of Jefferies. Please proceed.

Thanks, guys. So a couple of follow-ups, if I could. First, Ryan, just If I came to you and said I need a new whatever widget bracket, how quickly could you actually start delivering? I'm just trying to get a sense of how quickly we might see some impact of people looking for sources closer to home or second sources or something.

Yeah, I mean, in the most expedient fashion, Steve, we've literally turned stuff around in a matter of days. I'll qualify that a little bit with Do we need production tooling or not? But keep in mind one of the parts of our value proposition is offering a prototype low volume reverse engineering type capability where we employ some pretty sophisticated welders and engineers on staff to kind of be the blacksmiths in the business to get done what they need. So in a really extreme case, a matter of days, we can turn around some pretty simple Again, in kind of normal course, you'd run a program, I'd say, 8 to 12 weeks in just kind of normal course. But in unique circumstances, there definitely are ways to expedite the product launch, and we certainly would be willing, and we've done that in the past, to react in that speed.

Okay, great. That's helpful. And then maybe for Todd, I'm curious if there's anything we should be sort of thinking about with respect to some of these other items that go into adjusted EBITDA. So, I don't know, gain sharing or, you know, other income or any of those things. Is there anything we should be kind of baking in as we try to model 2020?

No, I mean, in fact, you know, I think that variance in EBITDA and adjusted EBITDA will narrow considerably The IPO and a lot of those one-time costs are very much behind us. We have some trickle-in, some other unique costs, but it's very modest, maybe a few hundred thousand. In a general sense, those unique items that affected and impacted us last year, I don't foresee reoccurring. I think those items you're describing really won't impact us.

Great. Okay. Thank you, guys.

This concludes our question and answer session. At this time, I would like to turn the call back over to Bob Kamphouse, Chairman, President, and CEO, for any closing remarks.

Well, I'll just close by saying thank you for your time today. We'll look forward to continuing to update you on our progress in the months and quarters ahead. Thanks for your time.

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