Mayville Engineering Company, Inc.

Hello, and welcome to the Mayville Engineering Company 2Q21 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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 touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Nathan Atwell on investor relations. Mr. Atwell, 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 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 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 Campos, 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. With that, I'll hand the call over to Bob. Please go ahead.

Thank you, Nathan. Good morning, everyone. I'm pleased to report that many of the positive trends we outlined last quarter continued into the second quarter. Thanks to the diligent efforts of our team, we produced net sales of $120.2 million this quarter. virtually doubled the amount delivered in the second quarter of 2020. Adjusted EBITDA of $14 million drove operating income of $4.8 million, and both tremendously improved compared to the prior year period. Like many companies, the second quarter of 2020 was the toughest part of the pandemic for MEC, and as things continued to improve in 2021, we have outperformed on almost every metric on a year-over-year basis. Across the board, our end markets continue to strengthen and volumes continue to steadily grow as we transition back towards normal working conditions. Based on the visibility we have today, we remain optimistic about the future. We finished the quarter with an adjusted EBITDA of 11.7%, which was well ahead of the prior year and in line with our expectations. Having said that, Our bottom line performance has been impacted somewhat by the normal lag in contractual raw material price increases and general inflationary pressures. As volumes continue to improve, we expect to make further progress towards our goal of 15% adjusted EBITDA margins. Todd will cover this in more detail in his remarks. Going forward, we remain focused on investing in technology and automation to improve our productivity potential and take on the growing demand we are seeing from our customers, particularly through the launch of business in Hazel Park, Michigan. It is worth noting that while COVID cases are very low in many of our communities that we operate in, we are remaining vigilant regarding the health and safety of our workforce. This is a top priority. As I already mentioned, the end markets we focus on today continue to have a positive outlook. The commercial vehicles market is in a much healthier position today compared to a year ago. The Class 8 truck backlog remains robust and aligns with 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. Power sports remain strong as the demand for outdoor recreation-oriented products remains at elevated levels. 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 improvement in residential construction particularly for equipment that is tied to housing and equipment rental. While non-residential and oil and gas markets have not seen a significant recovery yet, we think these areas have stabilized and are just starting to show signs of improvement. Between the infrastructure bill combined with the start of the deal of restocking and rising oil prices, we think better days are ahead in these markets. On another note, improving crop prices coupled with relatively low crop inventories lead us to be optimistic and our customers 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, which 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 vehicle updates being implemented by our customers. As demand trends continue to be positive, supply side headwinds continue to be a limiting factor to our customers' growth. We are seeing varying degrees of supply chain disruption that is impacting our customers, which in turn temporarily impacts the volumes they need for MECC. and we expect these issues to continue for the foreseeable future. Like the rest of the country, we continue to see inflationary pressure on raw material, labor availability, and component pricing across the board, which is something every company is currently facing. MACD has the right mechanisms in place to minimize these impacts on our bottom line in a timely manner. such as contractual raw material price increases that get passed along to our customers, offset by enhanced continued investment in new technologies and automation. MEC also continues to work diligently to minimize the potential impact to our customers. In addition, one of our top customers experienced union labor issues during the second and into the third quarter, including a short strike. While the issue has now been resolved, that has been additional disruption to production schedules, which in turn has impacted our volumes as well. Although the supply chain issues are expected to continue, they are not getting noticeably worse, and we are proactively managing any challenges we face. While our margins are seeing a temporary impact from the lag in contractual price increases passed through to our customers, We expect to recover these costs in the near term. One other nationwide issue is the ongoing challenging labor market. Our creative recruiting strategies and HR initiatives are working well, but finding skilled employees will continue to be an issue in the second half of the year, which is another reason we are focused on investing in flexible, redeployable technology and automation. I wanted to return to the new strategic relationship with a leading U.S.-based fitness company, which we announced last quarter. Our new client was looking to expand its U.S.-based production capabilities, and as the largest fabricator in the U.S. with an unmatched reputation for capability, quality, and service, they naturally partnered with MECC. With the long-term agreement in place, we will spend the second half of the year starting up our operations, so we are ready to begin production of key components in the first quarter of 22 as planned. As you probably saw in connection with this new relationship, we announced plans in June to open a major new manufacturing facility in Hazel Park, Michigan. Adding this facility will align our production capacity with the demand for the new customer, and we plan to add almost 400 skilled employees in Michigan. in the coming years. After reviewing alternative sites and states, we selected Hazel Park partly because of the availability of a highly skilled manufacturing workforce in this particular area. We signed a 10-year lease for a 450,000 square foot facility. You may remember we were originally looking at a 287,000 square foot facility. but the growing demand potential led us to increase the size of the facility considerably. As part of the agreement, remember we also received a $2.5 million incentive package from the state of Michigan. As we've stated for this new project, 2021 is an investment year with $35 to $45 million of automation and technology projects planned, which are expected to be deployed in the second half of this year. This partnership won't impact our 2021 revenue, but based on current projections, we expect the new customer to be a strong top 10 customer in 2022. This is also a perfect example of the market diversification that is a long-term strategic priority for us. We expect to see more of these types of product localization opportunities in the years ahead. As we've previously stated, We can't provide additional details about this customer or the agreement, but we are pleased to be forging a strong relationship with this new Blue Chip customer. 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, in addition to our recent award, Our new customer in the fitness equipment market is discussing further opportunities to support them in other product areas. We also continue to expand our market share for one of our important commercial vehicle customers. As they ramp up their new models, we are continuing to expand our relationship through our quick turnaround with mid-life design changes. 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're seeing strong activity on current programs as well as service orders and expect further market share expansion over the coming quarters. The power sports market continues to be a very active space for us. both on new programs with current customers that will start production next year and on programs with new customers that we have recently added to this market. In the construction market, we have seen our customers expand their product offerings, which has allowed us to gain additional volume across our current products. 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. Turning to capital allocation, this remains a priority and it remains consistent. Our balance sheet is very strong as we've paid down our debt load in recent years and quarters. We have the ability to make important investments to support long-term growth and consider external investment opportunities. Today, we see a stronger M&A pipeline than we have since before the pandemic and remain focused on analyzing potential targets that could open up new end markets, offer complementary product expansion and extensions, develop new relationships with potential blue chip customers, and possibly add new geographies. Above all else, strategic fit, and rational valuation are the top considerations when considering opportunities, and we continue to review and pursue logical potential deals. Our recent performance and current outlook on the business all remain very positive. As we address the supply-related challenges and manage the strong demand trends that we are seeing in virtually all of our end markets, These trends are set to continue in the second half of this year. I'd now like to turn the call to Todd to discuss our financial results in more detail. Todd? Thanks, Bob.