Mayville Engineering Company, Inc.

Good morning and welcome. Mainville Engineering Company's fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd like to turn the conference over to Mr. Nathan Elwell of 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 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-K for the period ended December 31, 2019, and our filing on Form 10-Q for the period ended September 30, 2020. 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 mechinc.com. Joining me on the call today is Bob Kamphouse, Chairman, President, and Chief Executive Officer Todd Butts, Chief Financial Officer, and Ryan Raber, EVP of Strategy, Sales, and Marketing. First, Bob will provide an overview of our performance, then Todd will review our financial results and guidance. Bob, please go ahead.

Thank you, Nathan. Good morning, everyone. As we look back at 2020, we're pleased with the way we responded to the pandemic challenges we faced. Not only did we effectively adapt our operations to continue working throughout the year to support our customers, we were still able to focus on optimizing our cost structure through facility and process improvement and strengthen our financial position. I give credit to our leadership groups throughout the company for being creative and quickly formulating improvement plans and our entire team for their resilience in diligently implementing those plans and continually adapting to the changing environment. Agility, adaptability and realignment are strengths of our business culture at Mac. The fourth quarter provided a positive end to a challenging year. In short, we did exactly what we told you we would do last quarter. All things considered, we're pleased with our performance for the quarter and our progress for the year. We continue to maximize the efficiency of our manufacturing operations, and we are seeing the positive impact of these initiatives in our results. For the fourth quarter of 2020, we delivered net sales of $95.3 million, slightly lower than fourth quarter 2019, but a sequential increase from the third quarter of 2020. Most importantly, we produced adjusted EBITDA and adjusted EBITDA margin of $9.3 million and 9.8% for the fourth quarter respectively, both of which are significantly higher than the same period last year as we are now more efficient and have reacted to the changes that occurred late in 2019. During 2020, we realized significant improvements in our operational efficiency in three main ways. First, by capturing full-year benefits from the acquisition of BMP, which is now fully integrated into our organization and producing the expected synergies. Second, by realizing efficiencies from our ongoing investments in technology and automation. Third, from the consolidation of Greenwood, South Carolina's facility during the second and third quarter of last year. Executing this project successfully reduced our footprint and overhead costs while maintaining our operating and manufacturing capacity, and it was all completed on time and on budget without missing a beat with our customers. Overall, we saw a strong recovery following the second quarter and ended the year on a positive note. I'd like to provide commentary regarding what we are seeing across the diverse and Mark Schroeder. Last year we provided our outlook by market to give a sense for our anticipated breakdown of business for the year. Given that 2020 was such an unusual year and this information is meant to be directional, comparing 21 to 20 will have little value. Therefore, we're providing our thoughts on a 2021 basis only. We anticipate the commercial vehicle market will comprise approximately 35 to 39 percent of net sales. The construction and access market is expected to represent approximately 17 to 21 percent of sales. Power sports is expected to account for 18 to 22 percent of our net sales. We expect the agriculture market to contribute 7 to 11 percent of net sales. The military market will comprise approximately 5 to 9 percent of net sales. And finally, we expect the remaining 6 to 10 percent of 21 sales to be attributed to other markets we serve. In our commercial vehicles market, the near term looks a lot brighter than it did a year ago as we exit the 2020 trough. Our orders during the quarter were in line with our expectations, and we anticipate that the market will remain solid in the near term, given the continued strength of carrier profitability, driving industry, new truck orders, and a growing backlog. We continue to monitor build rates at our customers, closely paying attention, to potential supply chain constraints that could impact our volume at some points in 2021. At the moment, the power sports market appears to be maintaining its positive momentum as outdoor recreation is expected to be a priority for consumers again in 2021. We continue to believe that this is an area of relative strength in the near term as customers work to rebuild their dealer inventories and satisfy customer retail demand. In the construction and access end markets, we see positive signs in residential construction, while uncertainty exists in non-residential and oil and gas markets. We believe that customer destocking was completed in 2020, and we are positioned to respond well to any changes in retail demand going forward. The ag market looks positive today and the market dynamics of increasing crop prices and lower crop inventories that we have seen recently bodes well for this market in the future. Finally, our military segment has continued to be a steady market for us and we expect it to be an ongoing source of strength for the foreseeable future. As a reminder, we have maintained or expanded all of our contracts, or customer relationships and expect our volumes will return in conjunction with our customers. Of course, we're constantly building relationships and looking for new opportunities to expand both our customer base and the markets we serve. Today, we see opportunities for new projects and takeover business. For example, in the fourth quarter, we continued to cross-sell products and expand market share across multiple product lines for one of our important commercial vehicle customers. As they launch their new models of trucks this year, you will see our product development efforts continue to provide organic growth in this business. In the construction market, we were able to expand our relationship with one of our key customers that continues to successfully expand their product line. through our consistent performance and broad capabilities, we continue to grow with them as they expand their market share through their product line expansions. The power sports market continues to be very active with new awards for future model year updates from one client, and we've continued to build relationships with new customers in this market that will lead to new opportunities in 2021 and beyond. In the military market, our customers look to sell their vehicles in international markets. We're seeing new products to grow our market share while also gaining additional volume above historical levels. Overall, the pipeline of new opportunities remains robust, with numerous new products, projects, and markets being actively pursued, which continues to build our excitement within our organization about the potential opportunities for 2021 and beyond. As far as capital allocation priorities are concerned, in addition to investing in the business, deepening current relationships, and pursuing new ones, we remain open to strategic acquisition opportunities which will help us achieve long-term growth. We are seeing some M&A opportunities, although the market still remains relatively quiet. Given the strength of our balance sheet, we are in a strong position to pursue the right deal at the right time that will expand and diversify our product offering, open new industries, and introduce new blue chip customers and markets. As we look back at 2020, it clearly didn't turn out to be the year anyone expected at the start of the year. We were presented with challenges no one has faced before, me included. and I'm proud to say I'm very pleased with how our team responded. We controlled costs effectively. As volumes dropped, we switched gears and implemented the Greenwood consolidation. We pursued new business and ensured we were doing everything possible to deliver for our customers and our shareholders. Although the outlook for the economy is better today than it was six months ago, we will still face external headwinds, in particular, The market is experiencing raw material and component shortages for many OEMs, which runs the gamut from steel to computer chips. This could translate into delays for our customers, which in turn could impact our volumes. We're closely monitoring the trends and will provide updates as soon as we can. However, with conditions generally stabilizing in recent quarters and showing some signs of improvement, we are positive about our future prospects and are focused on three things execution execution execution it will take a bit of time to return to pre-pandemic volume levels but we are well positioned for the future and poised to expand our market leading position i would also like to mention that back in december we made some changes to our board of directors first current director craig johnson indicated he will not seek re-election and would retire from the board at the end of his current term, expiring at the upcoming 2021 Annual Meeting of Shareholders. We have all been very fortunate to have Craig serve on our board for the past 14 years. Our company has grown tremendously during his tenure and his expertise has been an invaluable resource for MEC through times of growth and change. On a personal note, I want to extend my gratitude to Craig for his counsel and support over the years. We all wish him the very best for his retirement in 2021. Second, our board elected Jennifer Kent as a director of the company. With over 20 years of broad business and leadership experience, including managing multiple functions at a public company, Jenny is an excellent addition to our board as a new independent director. In addition to her extensive legal, compliance, and human resources experience, we look forward to gaining her perspectives on diverse areas such as change management, talent development, and legal and compliance risk management. Jenny currently serves as Executive Vice President of Administration, General Counsel, and Secretary at Quad Graphics, a worldwide marketing partner with a strong reputation in print. where she oversees a broad range of corporate functions including legal, compliance, human resources, corporate communications, government affairs, real estate, and safety and environmental management. Finally, before handing the call to Todd, I just want to mention that we remain vigilant when it comes to COVID-19 pandemic. I'm pleased to report that we have not seen any major impact on our operations in recent months and, quite frankly, throughout the time that this has been in existence. And I want to commend our employees for taking the right precautions at work and making the right decisions if they feel unwell to ensure they didn't pass the virus on to coworkers. As this pandemic stretches on, we will not get complacent with our procedures and expect to keep operating effectively and efficiently in the months ahead. Now I'll hand it over to Todd to discuss our financials. Todd? Thanks, Bob. I'll begin with the highlights of our full-year financial performance and then discuss our fourth quarter before providing commentary on our balance sheet, liquidity, and our thoughts on guidance. As noted in our press release, we recorded full-year 2020 net sales of $357.6 million as compared to $519.7 million for the same prior year period, a decrease of 31.2%. The decline was driven by volume reductions related to destocking activities and market demand changes, mostly driven by the pandemic. Despite the lower volumes, all customer relationships and manufacturing programs remain intact. adjusted EBITDA and adjusted EBITDA margin percent for the full year 2020, finished at 32.8 million and 9.2 percent as compared to 54.7 million and 10.5 percent for 2019, resulting in a decremental margin of 13.5 percent as compared to our historical average of 17.5. The improved decremental margin percentage is attributable to our effective implementation of cost reduction activities, including the Greenwood, South Carolina closure a full year of DMP synergies, and leveraging our recent investments in new technologies and automation. It is important to note that these cost adjustments are permanent, providing a clear path to the 15% adjusted EBITDA margin expectation when manufacturing volumes return to pre-pandemic levels in the coming years. Despite the challenges posed by the pandemic, we generated strong cash flow, resulting in significant debt pay down of approximately $28 million. resulting in an ending debt balance of $47.9 million and a leverage ratio of approximately 1.5 times as of year end. NILA will provide guidance on the financial performance for the fourth quarter. We recorded fourth quarter debt sales of $95.3 million as compared to $102.3 million for the same prior year period, a decrease of 6.8%. The decline is due to market-related manufacturing volume reductions, again, mostly driven by the pandemic. Manufacturing margins were $11 million for the fourth quarter of 2020, as compared to $4 million for the same prior year period, an increase of 174%. Prior year manufacturing margins were adversely impacted by sudden declines in market demand, customer labor union issues, and destocking activities, resulting in unusually high amount of underabsorbed manufacturing expenses during the period. Current year manufacturing margins exemplify the impacts of leveraging our recent investments in new technology and automation and implementing permanent cost reduction initiatives, including the closure and consolidation of the Greenwood South Carolina plant and synergies from the BMP acquisition. Manufacturing margin percentages were 11.6% for the fourth quarter of 2020, as compared to 3.9% for the three months ended December 31, 2019, an increase of 770 basis points resulting in an incremental margin percent well in excess of 100% as compared to our historical average of 22.5%. This positive comparison was driven by the effective implementation of the aforementioned permanent cost reduction initiatives and labor efficiency gains driven by our investments in automation. Based on these improvements, manufacturing margin percentages are expected to improve beyond historical averages when volumes return to pre-pandemic levels in the coming years. Profit sharing bonus and deferred compensation expenses were $3.4 million for the fourth quarter of 2020 as compared to $2.2 million of income for the same prior year period, an increase of $3.6 million. The increase in the current period expenses mainly due to the reestablishment of discretionary employer 401 contributions as well as some discretionary bonus that had been eliminated in the second quarter of 2020 due to pandemic uncertainty. Other selling, general, and administrative expenses were $4.4 million for the fourth quarter of 2020 as compared to $5.2 million for the same prior year period, which included $0.5 million of one-time IPO and DMP acquisition-related expenses. Excluding the one-time charges from last year, these expenses decreased $0.3 million due to the synergies achieved through the integration of DMPs, lower travel expenses due to the pandemic, and other cost savings initiatives. Interest expense was $0.6 million for the fourth quarter of 2020, as compared to $0.9 million for the same prior year period. The $0.3 million decline is due to our lower debt levels and lower interest rates this quarter, as compared to 2019. Income tax benefit was $1 million and $2.1 million for the three and 12 months ended December 31, 2020, respectively, with an annual effective tax rate of approximately 23%. Our federal net operating loss carry forward was approximately $12 million as of year end, which was driven by pre-tax losses caused by the aforementioned volume reductions in 2020 and the one-time IPO and DMP acquisition related expenses in 2019. The NOL does not expire and will be used to offset future pre-tax earnings. We continue to anticipate our long-term effective tax rate to be approximately 26% based on current tax regulations. adjusted EBITDA and adjusted EBITDA margin were $9.3 million and 9.8% for the fourth quarter of 2020 as compared to $5.5 million and 5.4% for the same prior year period. These increases are directly attributable to our permanent cost reduction initiatives, leveraging recent investments in new technology and automation and short-term adjustments to realign the business due to the aforementioned volume declines. Again, these cost adjustments are permanent. provided a clear path for our 15% adjusted EBITDA margin goals when volumes return to pre-pandemic levels in the coming years. Now let me address our balance sheet and liquidity figures. As previously mentioned, despite a very challenging first half of the year due to the pandemic, we are very pleased with our results and ability to generate cash flow, which directly resulted in a debt reduction of approximately $28 million in 2020. with total funded debt of $47.9 million at year end, which equates to a leverage ratio of approximately 1.5 times. Capital expenditures were $7.8 million for the 12 months ended December 31, 2020, as compared to $25.8 million for the same prior year period, a decrease of $18 million. The decline was driven by a 2019 investment cycle that focused heavily on investments in new technology and automation versus more of a focus on leveraging those assets in investments in 2020. In the normal course of business, we continue to expect our annual CapEx to average approximately $20 million per year, which is a combination of maintenance capital along with continuing investment in new technology and automation. As previously discussed, we amended our credit agreement at the end of the second quarter of 2020 in order to provide an added level of insurance against future macroeconomic events. allowing us to remain focused on serving our customers and managing our business. The amendment increased the maximum leverage ratio from 3.25 times to 4.25 times throughout the fourth quarter of 2020. And we'll adjust each quarter thereafter until returning to the original 3.25 times in the fourth quarter of 2021. Now I'd like to briefly discuss our outlook for 2021. As noted in our press release and based on the continuation of the COVID pandemic, which is driving near-term labor and material availability concerns. And consistent with most of our top customers, we are not providing a specific quantitative financial outlook at this time. However, we believe that we should be able to build and improve upon our second half 2020 performance during 2021 with fairly consistent performance throughout the year. At this time, we believe our 2021 results will exceed our 2020 performance but not return to pre-pandemic levels. Generally, we see our numbers in line with current consensus estimates. With that said, I will turn the call back over to Bob for closing remarks. Thank you, Todd. We're pleased with our recent results and the progress we were able to make during the difficult year. While not back to pre-pandemic levels, as Todd mentioned, we are seeing volumes improve across many customers and end markets, and most of the commentary from our customers about the future is positive. In the fourth quarter, we did exactly what we said we would do, and I'm pleased we were able to end the year on a high note. Assuming the economy continues to stabilize and improve, we are bullish about our prospects in 2021 and beyond as we pursue further productivity gains through new technologies and automation and explore important internal and external growth opportunities. On behalf of the board and our management team, I want to thank each and every MEC employee shareholder for the dedication they have shown during very trying circumstances over the past year. We continue to be vigilant regarding the pandemic and believe our employees are now used to operating with these restrictions in place. Despite the disruption, their persistence and consistent strong performance has ensured we have maintained all of our customer relationships and manufacturing programs and now are in a position to respond as customers ask us to ramp up volumes. With our current business as well as opportunities on the horizon, we are well positioned to drive growth in the years ahead. With that said, operator, we'd like to open up the call for questions.