Mayville Engineering Company, Inc.

Good day and welcome to the Mayville Engineering Company first quarter 2021 earning conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star then one on your phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nathan Elwell, investor relations. Please go ahead.

Thank you. Welcome, everyone. 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-K for the period ended December 31, 2020. We assume no obligation and do not intend to update any such forward-looking looking statements, except as required by federal securities laws. Second, this call will involve 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 Campos, Chairman, President, and Chief Executive Officer, Todd Butts, Chief Financial Officer, and Ryan Rayburn, EVP 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 turn the call over to Bob. Please go ahead.

Thank you, Nathan. Good morning, everyone. With the first quarter now complete, I'm pleased to report that we sustained our positive momentum from the second half of last year into 2021. When you compare where we are now compared to a year ago, the difference is amazing. We're proud of the resolve and commitment and determination that everybody in our organization has displayed during these trying times. Of course, the health and safety of our workforce remains our top priority and we remain committed to the highest level of safety for our employees. Let's talk about the financials. We delivered strong financial results during the first quarter, generating net sales of $112.6 million. adjusted EBITDA of $13 million, and operating income of $4.1 million. We improved on both the top and bottom line compared to last year when the pandemic started to impact us in mid-March 2020, and our team began encountering some exceptional challenges. Our improved top line performance is primarily a result of our end markets being in a stronger position than they were at this time last year. Our volumes continue to improve after the strong third quarter 2020 recovery and are gradually moving back towards the record levels we saw in 2019. We are optimistic that they will continue to move in the right direction. Our bottom line improvements are a testament to the hard work to optimize our cost structure over the past year. At an 11.6% adjusted EBITDA margin for the quarter, we saw improvement both on a year-over-year basis and on a sequential basis. And as volumes continue to improve, we expect to make progress towards our expected goal of a 15% adjusted EBITDA. In addition to the benefits from our investments in process improvement, automation and technology, we are seeing the cost benefits associated with the closure of our Greenwood, South Carolina facility last year. As a reminder, we maintained all of our company-wide production capacity despite this closure by moving key equipment to other existing roof lines. As we continue to mature as a public company, we are additionally seeing process improvements and related reductions in some of the SG&A costs, compared to past years that are also helping to improve our profitability. To put it simply, our current business is in a strong position and will continue to generate significant cash flow. As we progress into the rest of 2021 and beyond, we will continue to invest in process improvements, technology, and automation to allow additional growth with lower than historic hiring requirements. Now I'd like to outline our current thinking on the end markets we serve, which are in a similar position to the fourth quarter earnings call in early March. The commercial vehicle market is in a much healthier position today compared to a year ago. Class A truck orders throughout North America remain robust, matching the order flow that our team saw through the quarter. Given that freight demand continues to be strong, We believe that the market will remain positive in the near term. Power sports continues to be a bright spot for our business as the demand for outdoor recreation-oriented products remains very strong. We anticipate that retail demand will continue to be strong and our customers will continue to rebuild their dealer inventories in the coming quarters to meet that demand. The construction and access end markets continue to show signs of improvement in residential construction, particularly for equipment that is tied to housing and equipment rental. While non-residential and oil and gas markets have been rather unpredictable recently, we think these areas have stabilized and are starting to show signs of improvement. Between the potential infrastructure bill combined with the start of dealer restocking, and improving oil prices, we think these markets could start to improve over the coming quarters. Improving crop prices coupled with relatively low crop inventories lead us to be optimistic regarding the ag market, and we anticipate that this area will continue to see stable to improving volumes in the near to mid-term. Concluding with our military segment, this market continues to be a stable market for us with our customers having a solid backlog for U.S. government contracts. Additionally, we are also seeing the potential for increased revenues due to international vehicle sales by these customers. Throughout all of our end markets, we have maintained great partnerships with our customers during the difficult period over the last 12 months which which speaks to the quality of the work we produce and the trust we have built with our customers, in some cases over many years. It was an encouraging start to 2021, but we're still navigating our way through this pandemic and some headwinds remain. So far this year, we have observed supply chain disruptions at our customers and some, although fairly modest, for ourselves. Of course, raw material and component shortages and cost increases and everything from steel and lumber to computer chips is not unique to MEC or our industry. These challenges are pervasive in the global economy today, and we are doing everything we can to mitigate the impact and adjust customer pricing accordingly. While these instances have been manageable for our team, we are constantly monitoring the supply chain to make sure that we are the best equipped to deal with future challenges. For example, during the first quarter we did see higher steel prices, which we are able to recover, but still have a short-term negative impact due to the timing in some customer contracts. While this was largely offset by higher scrap prices, there was a modest negative impact on the first quarter's profitability, and we expect to see similar issues in the coming quarter while costs continue to rise and until costs stabilize. We also expect some of our customers could see supply chain disruptions caused by others that will have an effect on our volumes, but we believe most of the issues will be manageable and temporary in nature. In addition, we continue to be impacted by a challenging labor market. As it stands today, the pool of readily available and skilled workers is relatively shallow, an issue that has become more pronounced as stimulus checks have been issued and schools remain somewhat closed. We are actively working through this challenge with recruiting strategies and HR initiatives as we anticipate that this headwind will continue to linger throughout the rest of the year. As I mentioned earlier, we are reducing our recruiting needs by investing in process improvements and flexible redeployable technology and automation. Despite these obstacles, I'm very confident in our team's ability to effectively navigate this dynamic economic climate, especially given all that we've proven as an organization over the past year. That brings us to the future and the strides that we have made to position the company for growth. As you probably saw last month, we announced an important new strategic relationship with a leading US-based fitness company, where we signed a long-term agreement to produce key components for their equipment. We were chosen as their manufacturing partner due to our market leadership, broad capabilities, and reputation for delivering the best quality, reliability, and engineering expertise. The company was looking to further augment its U.S.-based production capabilities and particularly appreciated our unique capabilities and unmatched dependability. So 2021 is going to be an investment year for this new business. In addition to our base business CapEx plan, we will be investing between $35 and $45 million, primarily focused on automation and technology. We expect to qualify equipment and processes throughout the remainder of 2021 with production scheduled to start in early 2022. While there will not be a revenue impact in 2021 based on current plans, this customer is expected to become a top 10 customer in 2022. This is clearly an important new customer and new market for MECC. and a perfect example of the market diversification that we have highlighted as a long-term priority for our business. This type of product localization for the U.S. market is something we believe will be a growing trend for both current and potential customers. This venture leverages our existing manufacturing expertise into new products using our core skills such as cutting, forming, welding, and painting. Based on our customers' preferences, we aren't in a position to provide any more detail about this engagement, including their name, but we look forward to working with a new partner and forging a strong relationship in the years ahead. In relation to this new partnership, we just announced yesterday that we're planning to open a new facility in Michigan to focus on this new customer relation. preserving our capacities and our base business for our existing customers. The facility will be outfitted with state-of-the-art equipment and will be located in the greater Detroit area, making it ideal for recruiting the appropriate workforce. We're in the process of selecting the right facility which will have an approximate 250,000 square feet of manufacturing space. Once up and running, We envision having approximately 300 employees working full time at this facility. We are thankful to the state of Michigan for providing $2.5 million in financial incentives to bring this project to their area. We're pleased to be expanding our operations in the state of Michigan and to bring new job opportunities to this community. In addition to this major development, We're constantly building relationships and looking for opportunities to expand both our customer base and the sectors we serve. Today, we see opportunities for new projects and takeover business. For instance, during the first quarter, we continued to expand our market share for one of our important commercial vehicle customers. We're in the process of ramping up to meet the needs of their new model introduction and continue to be awarded new parts to our collaborative developmental efforts as they expand the offerings of their new trucks. We have also been able to expand our market share of next generation tactical wheeled vehicles that we'll be launching over the course of the next couple of years. In addition to future programs, we are seeing strong activity on current programs and expect further market expansion market share expansion over the coming quarters. We continue to be very active in the power sports market both on new programs with current customers and on programs with potential customers which we expect to add to our customer list in the coming quarters. Over the course of the past year we've also expanded our relationship with a fairly new customer in the material handling market and over the last quarter we've added new components and are excited to see this relationship continue to grow as e-commerce expands. Overall, the new business pipeline remains robust, with numerous projects being actively pursued. We are very excited about all of these new avenues of growth and will keep you updated on the latest developments over the coming quarters. In addition, we were pleased to be recognized by one of our top customers, PACCAR, with two major honors recently. First, the 2021 Supplier Performance Management Award, which evaluated our performance in the areas of product development, operations, and aftermarket support in alignment with PACCAR's key business objectives, as well as recognizing our collaboration and continuous improvement efforts with PACCAR. Second, we also received the 2020 10 PPM quality award where we were recognized for meeting PACCAR's 10 parts per million quality standard. We take pride in the fact that our supply performance helps produce best-in-class trucks and we value the long-term strategic partnership that we have built with such an important brand as PACCAR. Moving on to capital allocation, we have had a strong balance sheet for quite some time. And over the past year, we've done a great job of reducing our debt load even further and creating an even stronger balance sheet. We have the flexibility to not only make the appropriate investments in projects that help improve efficiency and drive internal growth, but to also consider other investment opportunities. Of course, we maintain a close eye on the broader landscape for potential M&A opportunities. In recent months, the deal pipeline has significantly improved and has rebounded from the pandemic-driven slowdown last year. As always, we will diligently analyze potential targets that could allow our organization to enter new geographies, new end markets, new products, and develop new relationships with other potential Blue Chip customers. Above all else, Strategic value and valuation will remain top of our mind when we review these opportunities, and we look forward to pursuing intriguing deals in the months and years ahead. All in all, we are pleased with the progress we made during the first quarter, including addressing rapid cost changes, potential raw material and supply shortages, and workforce availability challenges while investing in our future through process improvement automation, and technology. At the same time, we secured a new long-term contract with a strategic blue chip customer in a new market and remain encouraged by the overall trends that we are seeing in virtually all of our end markets. As we move towards the middle of the year, we remain laser-focused on execution, delivering industry-leading customer service, and are fully committed to building upon our market-leading position in the coming months. I'd now like to turn the call to Todd to discuss our financial results and our 2021 outlook.