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.

We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. We'll pause momentarily to assemble the roster. First question comes from Mig Dobre of Baird. Please go ahead. Mig Dobre of Baird. Thank you.

Good morning, everyone. Good morning, Mig.

Good morning, Mike. Hi. Thank you for the ranges that you've given us by end market in terms of your mix for 21. Just a quick question on 2020. Can you give us a sense for commercial vehicles, how much that contributed to your revenue in 2020?

Yeah, that was in the 33% range, I think, right around 33%. Okay, thank you for that.

You know, your reference consensus sort of being generally in line with kind of how you're thinking about 2021 at this point. You know, 2021 is likely to be a year of good volume growth, so I guess My question is, as you're sort of looking at your operations currently, what do you see as your ability to be able to meet that higher demand? Do you see any challenges ramping up production, either related to your own operations or your own supply chain in this regard?

Sure. I'll take the comment about supply chain first. And I guess... There has been some steel shortages in the marketplace that we are aware of. Obviously, steel pricing has increased significantly, but most of our contracts are pass-through on the material costs. On the availability side, we've actually done very well and probably better than most. So we work very hard at that all the time. and as far as there are some very modest imports that come into our product before we ship it and we're working on those things as well but it's almost immaterial to talk about. On the internal side, with the equipment and investments that we've made, that helps mute some of the people requirements that otherwise would have to be taking place. We still have And it's pockets. It's different locations, different geographies. They have different challenges. But again, I think our investment in automation is showing that we did the right thing and we'll continue to do the right thing with those investments. So we won't be without challenges, but I think we're continuing to work at minimizing them.

Okay. It sounds to me, and I don't want to put words in your mouth here, but it sounds to me that you're fairly confident that you're going to be able to essentially keep up with your customer demand in 2021. And I suspect that not all your competitors are going to be able to do that, and even your own customers, the ones that are having internal fabrication operations and whatnot, are probably going to struggle to some extent ramping up. As you look back at the prior industrial downturn or recession, is there an argument to be made that you will be able to gain some share or incremental business, just given your ability to ramp your own production higher and hopefully take some share that way? What has history taught you in this regard?

History is one thing, but we were less automated at those times. Hopefully with our additional automation, we have more leverage potential there. But we're going to be very careful about it. We want to look at that opportunistically. And it's not just about share, it's about profitable share. So that's what we're focused on and doing the right things overall for the business.

I see. And that's actually my second line of questioning, which is surrounding margins. You talked about the fact that raw material costs are generally a pass-through. But I know that some of this is embedded in your own business, right? I mean, if I'm thinking about consumables on a welding side, you know, that's something that you have to deal with that, I presume. And it's not something easily passed through to the customer. So how do you think about the impact of that on your financial model in 2021? Should we expect you to adjust pricing accordingly? And do you think you can be and a number of other people.

We're working hard at doing that. I guess when we looked at things like automation, actually some of the equipment is more energy efficient. For the consumables that go through it, weld wire, weld gas, things like that, you're using equal amounts as you would in a less automated situation. We also have... and other continuous improvement activities by site that we manage kind of on a corporate wide basis so that we're sharing best practices and best ideas between locations. So that's a prime focus and we work hard at it. Our hope is to be able, you know, if we have some crazy increases in those things that go into overhead or perishables, we'll probably see a little bit of diminishment But on the flip side, as we look at our backlog of work, if things perhaps need to be adjusted upwards, we'll have some of those discussions with our customers.

I see. And then last question for me. You talked about the 15% margin goal and reiterated that you're confident. on reaching that. I'm sort of curious as to how you're thinking about the manufacturing margin and what's embedded within that outlook. If my memory serves me right, your prior peak manufacturing margin was right around or right under 15, I should say. So within that framework, should we expect that figure to be higher than it's been in the past? and, you know, as you think about 2021, based on the discussion that we just had, how should we think about manufacturing margin in 21? Thank you.

This is Todd. Yes, you definitely, as I stated in the script, was, you know, we do expect when we get it back to, let's call it, normalized or pre-pandemic levels that that manufacturing margin percentage will be above historical averages. So when you think of the peak, Thank you for joining us. But again, once we start getting to leverage our investments and our overhead with pre-pandemic level volume, we do expect debt to be north of the 15%, and then we achieve the 15% adjusted EBITDA margin.

Thank you. Appreciate it.

Thank you. Next question is from Andy Klopowitz, Citigroup. Please go ahead.

Hey, good morning, guys. Good morning, Andy.

Morning.

Maybe I could ask Nick's question one other way on the margins. You guys have said in the past that, you know, given the cost out and footprint consolidation that you've done, that you might be able to average high 20% incrementals as sales recover. Is that possible in 21? I know you said you're comfortable with consensus, but obviously there's price versus cost and all that kind of stuff you just talked about. So is that possible in 21?

Yeah, the 22.5% as our historical average, we do believe that's still achievable in 2021. Now, you won't see the 30 and 40, even 100% type incremental that you saw when you compare 2020 to some of the 2019 fourth quarter, but we will still be above the 22.5% in my mind, the cost reductions we've made.

Got it. That's helpful, Todd. And then, Bob, maybe just for a little more clarity, maybe Todd will answer this also. So, if we look back at Q4, I mean, you talked about not yet reaching pre-pandemic levels in 21, but if we look back at 2020 in Q4, I would assume some of the businesses, some of the end markets were already above pre-pandemic levels, given you're only down 6% or whatever it was. Power Sports is being relatively obvious, maybe military, but any sort of more commentary on the end markets themselves and sort of what's already sort of recovered, if you may, versus what's not recovered?

Sure. Well, when we say pre-pandemic, there's a couple of definitions. 2019 was one year, and pre-pandemic says kind of first quarter of last year. Obviously, the commercial vehicle market was in a downturn period going into 2020 and has since bottomed and it's coming back. So that one we've seen that begin in the third quarter and strengthen in the fourth, and we think will continue to improve throughout 21. So that's what we're talking about. That's one example of what we're talking about when we say pre-pandemic. and other markets likewise. We've seen the inventory destocking become complete during the second quarter, third quarter period of time and those markets have bounced back. So when it comes to the recreational products, obviously they were not essential manufacturers so they ate their inventory during the second and third quarter and now are replacing inventory and trying to keep up with demand. So everything has been moving pretty much in a very positive direction. So that's, I guess, the color I can put around that.

And, Bob, maybe just follow up on that. Like, in terms of restocking, you know, power sports, sure, you know, and you said maybe that sort of levels off at some point in 21. Is that still your thinking? And then, you know, for end markets like small ag, for example, you know, there was destocking that seemed to end. Do you think that any markets will really need restocking in 21 besides power sports?

You know, I guess I'm going to ask Ryan if he has a more close impression on that one, but I guess I'll start by saying we'd agree that there'll come a point where inventory is restocked on the recreational side. And in the other markets, I guess, do you have some comments?

Yeah, I guess you mentioned small ag, and definitely there was a quick depletion of inventory kind of in the middle of 2020. that has led to a little bit of restocking there. We would also see it a little bit in the construction market. As Bob noted in his remarks, the housing market has been strong. We've seen a lot of the rental companies increase capex year over year in certain pockets of equipment, tied in particular to more of the housing sector. There is a little bit of restocking activity that's taken place there in the construction market.

Thanks for that, Ryan. And then maybe one more from me. Can you give us an update on where you are in terms of acquiring new customers and entering new verticals? I know you talked about it a little bit, Bob, in the prepared remarks, but you've been talking about opportunities in the past like warehousing, packaging. I was already thinking about new potential business contribution to 21. I know it's sort of in the other segment, but anything that really excites you in 21 and beyond?

Well, I guess we'll be able to talk about it more when they occur. and if they occur. But we're pretty positive about the opportunity and the potential out there, Andy. And so I think that's my comment on that. When we can report it, we will report it.

And, Bob, are you seeing any evidence of existing customers reshoring at all or, you know, maybe pushing outsourcing more?

Sure, and that's part of that story and creates those kind of opportunities. So absolutely, that's part of the piece behind that.

Great. Thanks, guys.

You're welcome.

Again, if you have a question, please press star then 1. Pause and momentarily assemble the roster. The next question comes from Stephen Bolton of Jefferies. Please go ahead.

Hey, guys. Hey, this is Rob. I'm for Steve. I just had a quick question on any temporary cost coming back in 21 and just probably cadence on it.

I know you mentioned that travel expense and related expenses are down this year.

Any guidance on what we can expect in 2021?

I guess on those topics, we do expect some employee benefits, retirement benefits, to return to a more normalized level. Last year, as Todd mentioned, about the fourth quarter, we kind of refilled the bucket in the fourth quarter to make an almost full contribution to the 401Ks for our employees. We anticipate that that will be at a full level in 2021, which will make those dollars higher, along with the expectation on other incentives. On the cost for travel, et cetera, we've all learned a lot this past year about how to conserve cost, how to save time. And it's not just on the factory floor, but in the front office. and we will be monitoring that carefully. I don't see those types of spendings for travel and entertainment and such hotels and meals increased to the 2019 levels. They'll probably sneak up a little bit from 2020. But I think we all learned some new things this past year and we're gonna take advantage of that to use our time more effectively. That's all, Cole. Thank you. You're welcome.

Thank you. Next is a follow-up question from . Please go ahead.

Thanks for taking the follow-up. Just a quick one. You know, Bob, you talked about the M&A environment, and I think I heard you say that it was kind of slow. So I guess my question is, I know that before the pandemic hit, you guys had a pretty active and fairly full pipeline, and you operate, obviously, in a very fragmented industry. What are all the puts and takes here in terms of when some of these deals would become maybe available and you'd start converting on that? But I'm also kind of wondering if now that we've been through this sort of big shock, if your own thinking in terms of the things that you'd like to add to your portfolio changed, right? I mean, if you're either looking for sort of new geographies around the country or new verticals that you might not have examined before or even sort of new manufacturing capabilities that extend beyond the core of what Mabel Engineering has been known for.

I guess, Meg, I'll take a couple of pieces here. Those prospects that we had are still there. and some of them have retrenched and are waiting for a better day to present themselves for sale. I think that's both from a PE standpoint and from a private owner standpoint. But we still have those contacts and it just doesn't seem as robust today as it had been. I think that will change over time. as people figure out the end of COVID and all the other risks and issues that are out there. With regard to what we're looking for, our definition is still the same, and product line expansion, product line extension, geographic expansion, and then looking for new markets to serve. So now... We'll always try to prioritize the best return opportunities and achieve all those investment criteria. So it can be both.

Well, if opportunities don't avail themselves to you, based on just my own modeling, it looks to me like your leverage ratio will exit 2021 close to zero. And I'm wondering if that's the case at that point, would you consider some form of returning capital to your shareholders, either as a special dividend or something like that?

Yeah, so we've got three things that we invest in. One is we still have some more internal ROI opportunities to help us be even less dependent on people by doing redeployable automation. Secondly, we have internal growth opportunities, and as we address those, that will be with as much automation as possible. and then thirdly would be M&A opportunities that will be another use of cash. So all three of those things will be going on this year. And the mix today, I can't sit here and tell you what that's gonna be, but I don't think our balance sheet will be debt free at the end of the year. There's opportunities for growth and we're going after that.

All right, fair enough, thank you guys.

Thanks, Megan.

Thank you. The next question is from Chip Rui of Rui Asset Management. Please go ahead.

Good morning, guys. A couple quick questions, more 101-type stuff for you. I understand you have the raw material pass-through, but especially with steel popping, wondered if there's a lag on those contracts where it's a 90-day lag or anything like that. and I guess I'll just ask Serena, you can dig into these last two as deeply as you want on the call. On the construction side, can you just break out top line resi versus commercial? And on the commercial vehicle, again, are you in the engine? Are you in the tractor and the trailer? And for that market specifically, how much forward visibility do you have? Do you see just short term or can you see longer term, six to nine to 12 months? And I really appreciate it. Thank you.

I'm going to ask Ryan Raber to address those more detailed points.

Yeah, the commercial vehicle is mainly heavy-duty and medium-duty truck, not really much trailer in there. Obviously, we have long-range forecasts we use from industry publications, but generally three- to 12-month visibility from the customers. On the construction market, we don't really have any top-line breakout. We do buy... I'll say the subsectors, so nothing to note there. Can you remind me your first question that you asked?

Sure, just on the raw material pass-throughs, do you guys have a 30-day, 60-day, 90-day lag that we ought to just think about?

Yeah, all those tend to be a little bit different based on who the customer is. We have some that are kind of more real-time where you're looking at a monthly There's others that look at quarterly, so it really depends on which customer. They each kind of run their own individual program consistent over time, so if there is any lead lag, that always kind of works its way out as you go up and down through the cycles.

Very modest risk on that topic, or reward, I should say.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Bob Campos for closing remarks. Thank you.

Thank you all. Thank you for your time today and your continued interest in MECC. We look forward to talking with you at conferences, whether they're in person or electronic and road shows throughout the year. Thanks again for your time and interest.

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