Mayville Engineering Company, Inc.

Hello, and welcome to today's Mayville Engineering Company fourth quarter and full year earnings call. My name is Bailey, and I will be the operator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Nathan Elwell, Investor Relations. Nathan, please go ahead.

Thank you, Bailey. 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 SEC, including our filing on Form 10-K for the period ended December 31st, 2020. We assume no obligation and do not intend to update any such forward-looking statements except as required by federal security laws. Second, this call will involve discussion of certain non-GAAP financial measures Reconciliation of these measures to the closest gap financial measure is included in the earnings press release, which is available at metinc.com. Joining me on the call today are Bob Camphouse, 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. Let's start with 2021. We've effectively executed throughout 21 and produced significantly better results than the previous year, despite the inflationary pressures and labor challenges that we all experienced, compounded by labor and supply chain disruptions affecting our customers' production schedules. As we look back at 2021, We are pleased with the way we navigated through these challenges and continue to see strong medium and long-term demand trends across all the end markets we serve. We have added new takeover business and new customers in the power sports end market. We look forward to delivering on the 2021 deferred customer volumes in 2022 and stand ready to successfully execute on the strong demand for our services for the current year and beyond. For the fourth quarter, we produced net sales of 113 million. The 19% increase of 17.7 million was primarily driven by contractual raw material prices and pass-throughs to customers, improved volumes, and commercial pricing increases. We delivered adjusted EBITDA of 9.2 million as supply chain disruptions impacted our customer schedules during the quarter and led to some of our volumes being deferred into 2022. Our fourth quarter performance internally was particularly impacted by significant supply changes at Class 8 truck OEMs, which stems from their supply chain issues and microchip shortages. For us, this also resulted in operational choppiness and inefficiencies impacting our profitability. As we navigated these challenges, it was important to maintain our skilled labor force so we are ready to address the strong demand as supply chain issues start to improve. Although recruiting quality employees remains a challenge, we have been able to cost-effectively grow our capacity through investments in flexible redeployable automation and process improvements. We also expect to recover general inflationary pressures on raw materials, labor, and other product content through contractual material price adjustments and increased commercial pricing. As volumes have only been deferred from 21, we are confident that our volumes will increase as the customer's supply chain issues start to subside during 2022. Additionally, MEC's supply chain is 98% concentrated in the U.S. We have maintained our supply of raw materials and components and are prepared to effectively execute as our customers step up their volumes. The end markets we serve continue to forecast strong demand outlooks over the mid and long term. More specifically, by market, the commercial vehicle market continues to show strong market demand but has seen the most impact from supply chain disruption, which is predicted to continue during 2022, particularly during the first half of the year. However, the ongoing strong freight demand and strong backlogs at the OEMs leads us to believe this will continue to be a strong market for MECC over the medium to long term. Turning to Power Sports, Power Sports continues to be a strong and growing end market for MEC with elevated volumes due to overall strength of retail demand for outdoor recreational products, coupled with low dealer inventories that we expect to be restocked over 2022. The construction and access end markets have continued to show strength in residential construction with non-res starting to see some signs of improvement. We believe that we'll continue to see further signs of volume improvement and with low dealer inventories, further demand requirements to restock fleets. The ag market continues to see low machine inventory and strengthening demand, advancements Equipment productivity combined with low global crop inventories and strong crop prices will continue to drive improving volumes over the mid to long term. Concluding with our military segment, which continues to be a stable market for us with customers having a solid backlog for U.S. government contracts, we continue to see potential for increased revenues due to vehicle updates plus new opportunities for service-related demand. While supply chain disruptions persist, pandemic-related problems have stabilized and declined somewhat and we anticipate volumes will gradually improve as 2022 progresses. Further, our new business pipeline remains very strong. We continue to build relationships and convert on new opportunities to expand our customer base and the markets we serve. During 2021, we expanded business opportunities with new and existing customers looking to expand capacity to support strong and market demands. These came through new product and new model launches, takeover business with several top power sports customers, aftermarket programs and new product line offerings by customers, as well as reshoring and outsourcing by OEMs. I'll walk through some of the more exciting and noteworthy opportunities we see today. The commercial vehicle market has continued to launch new products, which has led to market share gains for us. We have been focused on cross-selling our products during the model changeovers, and we expect to continue to grow as customers launch their next generation of products. The power sports market continues to be a very active space for us. We are growing our market share with current customers by adding new programs and with new and takeover programs with new customers, which has led to power sports accounting for 20% of our 2021 revenues. Our expansion in power sports means we now work with all the major players in the UTB power sports market. In the military and market, our market share on tactical wheeled vehicles continues to expand with our customers, launching their next generation of products, plus expansion in the service parts, demand, and new product development activities that have the potential to bolster revenues in the coming years. Overall, our new business pipeline remains robust, with numerous products being actively pursued We are excited about all of the avenues of growth with current and potential new customers and will keep you updated on the latest developments over the coming quarters. Turning to our fitness customer, as you probably saw on February 9th, we provided a business update which included commentary regarding our new customer in that fitness market. In that update, we noted that due to circumstances beyond our control, we would not go into production for this customer on the original planned date. We had, however, remained on track with the investment and build-out for this fitness customer and would have been ready to begin production when originally planned. As you saw in our earnings release from last night, there have been some new developments. On February 18th, we received an update from the customer which informed us that it does not forecast any demand for any products or parts that are subject to our agreement for the remainder of the agreement's term, which ends in March of 2026. Needless to say, we are disappointed with how this has unfolded in recent months. As such, we have taken and will continue to take steps to reduce operating costs and capital investments for this project where appropriate. From an accounting standpoint, this update also resulted in an impairment charge recorded in fourth quarter 2021 results of $16.9 million. Todd will be covering this topic in more detail in his segment. But it's important to reiterate that we remain confident in the protections provided by our agreement with the customer and will vigorously pursue this matter to ensure the terms are honored. Our new facility in Hazel Park, Michigan has other important activities going on beyond those related to the fitness customer. As mentioned in our last quarterly earnings call, we are putting in place additional state-of-the-art flexible redeployable automation and capacity to support the growth of our base business. We will be ramping up in the second half of this year and into 2023 to support meaningful volume from new projects and market growth with customers in the markets we already serve. Hazel Park will continue to be an important part of our future growth story. The location allows us to hire the technology-skilled workforce we need in an excellent location in southeast Michigan while leveraging our experience and world-class process know-how. and continuing to demonstrate MEK's agility, adaptability, and realignment for serving these market-leading customers. As we look further into 22 and beyond, we continue to see a good pipeline of M&A opportunities and focus on analyzing potential targets that could open new end markets, develop new relationships with potential new blue-chip customers, and possibly add new geographies. Strategic fit and rational valuation are the top considerations when considering opportunities, and we continue to review and pursue logical potential leads. In summary, our fourth quarter performance reflected the supply chain challenges faced by our customers, but we are seeing very positive demand signals across all end markets, and significant potential new business opportunities. And we will remain ready to increase our production volumes as needed. We've invested in the right technologies, facilities, and workforces that allow us to successfully address this demand. And our 2022 outlook, which Todd will talk through shortly, shows we are rapidly working back towards exceeding our record 2019 performance. I'd now like to turn the call over to Todd to discuss our financial results in more detail. Todd? Thanks, Bob. I'll begin with a look at our full-year financial performance and then discuss our fourth quarter before providing commentary on our balance sheet, liquidity, and thoughts on guidance. As we noted in our press release, we recorded full-year net sales of $454.8 million as compared to $357.6 million for the same prior year period. The 27% increase was driven by increased volume due to improved market conditions and commercial pricing increases implemented in the fourth quarter to combat inflationary pressures. These increases were slightly offset by customer supply chain issues and the timing lag related to contractual raw material pricing passages to our customers. Manufacturing margins were $51.4 million for the year ended December 31, 2021. as compared to $31.5 million for the same prior year period. The improvement of approximately 63% was primarily driven by production volume increases, higher scrap income, improved absorption of manufacturing overhead costs, as well as efficiencies gained from the closure of the Greenwood South Carolina facility in 2020. These favorable impacts were partially offset by the timing of raw material pricing passed through our customers and inflationary pressures on wages, benefits, materials, and other general manufacturing supplies during the year. Additionally, the company incurred approximately $2.9 million in launch costs and $700,000 in inventory write-offs related to decrement with the new fitness customer during 2021. The prior year period was impacted by customer shutdowns related to COVID-19 pandemic, along with lower demand related to stocking activities, particularly in the commercial vehicle, agricultural, construction and access equipment end markets. Manufactured margin percentages increased 250 basis points from 8.8% in 2020 to 11.3% for 2021, based upon improved operating conditions and other factors already mentioned. Profit-sharing, bonus, and deferred compensation expenses were $11.5 million for the year ended December 31, 2021, as compared to $8.3 million in the prior year. The increase of $3.2 million was principally driven by the return of normalized discretionary 401ks and bonus accruals as business activity and sales volumes improved in 2021. Other selling, general, and administrative expenses were $20.4 million for the year ended December 31, 2021, as compared to $19 million for the prior year, stemming from higher salary, travel, and entertainment expenses, which were artificially low in the prior year due to the pandemic. Inca tax benefit was $1.9 million on a pre-tax loss of $9.4 million for the full year 2021, as compared to a tax benefit of $2.1 million on a pre-tax loss of $9.2 million for the same prior year period. Our federal net operating loss to report was $18.5 million as of December 31, 2021. The NWEL 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. 2021 adjusted EBITDA finished in line with our prior guidance at $46.2 million after adding back the recent impairment charge recorded in the fourth quarter and which was well above the prior year of $32.8 million. Adjusted EBITDA margin percent increased by 100 basis points to 10.2% in the current year. as compared to 9.2% for the same prior year period. Our adjusted even margin and margin percentages were favorably impacted by increased sales, but negatively impacted by the timing of raw material pricing pass-throughs, inflationary pressures, and loss loss in Hazel Park during the year. I will now provide an update on the financial performance of our fourth quarter. We recorded fourth quarter net sales of approximately $113 million, as compared to $95 million for the same prior year period. The 19% increase was primarily driven by contractual raw material pricing pass-throughs, improved volumes, and commercial price increases as compared to prior years. Manufacturing margins were $9.4 million for the fourth quarter of 2021 as compared to $11 million for the same prior year period. The decrease was driven by continued inflationary pressures along with the timing of contractual raw material price increases passed through to our customers in the current period. The company also incurred $2 million in launch costs and $700,000 in inventory write-offs related to the agreement with the new fitness customer during the fourth quarter. These items were moderately offset by increased production volume, commercial price increases, higher scrap income, and improved absorption of manufacturing overhead. Manufacturing margin percentages were 8.3% for the fourth quarter of 2021, as compared to 11.6% for the three months ended December 31st, 2020. Decline of 330 basis points. This decrease was due primarily to the timing of material price factors, launch and inventory costs related to the new Hazel Park facility, labor variances caused by production disruptions related to customer supply chain issues, and increases in the cost of labor. When the impact of these temporary items are removed, our normalized manufacturing margin percentage would have been 12.8%. Profit sharing, bonus, and deferred compensation expenses were $3.5 million for the fourth quarter of 2021, which was in line with the $3.4 million recorded for the same prior year period. Other selling, general, and administrative expenses were $5 million for the fourth quarter of 2021, as compared to $4.4 million for the same prior year period. The increase was principally attributed to higher salary, travel, and entertainment expenses, which were, again, artificially lower in the prior year due to the pandemic. Adjusted EBITDA after adding back the impairment finished at $9.2 million for the fourth quarter of 2021, as compared to $9.3 million for the same prior year period. Adjusted EBITDA margin percentage declined by 170 basis points to 8.1% in the quarter, as compared to 9.8% for the same prior year period. and represent a negative incremental margin of 1%. Again, if we remove the aforementioned temporary items, our adjusted EBITDA would have been approximately $12.5 million. Our incremental margins would have been in line with our historical averages of 22.5%. Now let me address our capital expenditures, balance sheet, and liquidity figures. Overall capital expenditures for 2021 were $39.3 million, as compared to $7.8 million during 2020. The increase is primarily due to the $19.7 million investment in the new Hazel Park facility, with the remainder being for the continued investment in technology and automation versus focusing on reserving cash flow during the height of the pandemic. As of the end of 2021, total outstanding debt, which includes bank debt and capital lease obligations, was $68.8 million. That's compared to $48 million at the end of 2020. The increase in debt relates to working capital increases due to rising steel prices, higher production levels, which have rebounded from the pandemic closing 2020, and increased capital expenditures related to the new Hazel Park facility. Turning to the impairment charge related to the fitness customer, given the recent communication from the customer that Bob outlined earlier, U.S. generally accepted accounting principles require us to assess whether the asset specifically purchased to meet obligations under the agreement with the customer were impaired. As a result, we recorded an impairment charge of $16.9 million. This impairment comprised $700,000 of inventory, which was recorded as the cost of goods sold, and $16.2 million of lethal improvements and equipment-related assets. Additionally, in accordance with U.S. GAAP, we have not met all the requirements at this point that are necessary to allow us to record a loss recovery or a gain contingency. It's important to reiterate that we remain confident in protections provided by our agreement with the customer and will vigorously pursue this matter to ensure that service are honored. Now I'd like to discuss 2022 guidance. As Bob stated earlier, although the supply chain uncertainty continues, we anticipate volumes will gradually improve as we go through 2022. Our new business pipeline remains strong as we continue to build relationships and convert on new opportunities with existing new and existing customers looking to expand capacity and support robust end-market demand. As a result of the end-market dynamics we currently expect, that sales between $480 million and $530 million will be generally stable in material pricing and adjusted EBITDA between $58 million and $70 million. Additionally, based on a recent event with our fitness customer, we are still assessing our full-year capital plan. and as such are not in a position to offer updated capital guidance for the year at this time. What we can say is that 2022 capital expenditures are expected to be above 2021 levels as we make the final payments for capital commitment previously made to meet contractual obligations related to our business customers, as well as our continued investment in new technology and automation for our base business. These items will enhance our production capabilities and allow us to take on more business in the years ahead. Please note this outlook assumes no revenues associated with our business customer and that our end markets remain stable. Supply chain constraints do not dramatically worsen and that business activity continues to trend positively. On a positive note, we do expect to return a record year of adjusted EBITDA performance in 2022. I will now turn the call back over to Bob. Thank you, Todd. With our solid balance sheet, ongoing operational improvements, solid customer relationships, favorable outsourcing and reshoring trends, and encouraging demand dynamics in the end markets we serve, we have a positive outlook. Our business model is strong, resilient, and agile. We are well positioned to execute our growth plans, which is demonstrated by the projected growth and record performance implied by our 2022 outlook. We believe our volumes will improve as the customer supply chain disruptions continue to subside and they work to meet the vigorous demand in their respective end markets, particularly in the second half of 2022. With that, operator, we'd like to open the calls for questions now.