Mayville Engineering Company, Inc.

Good morning. Thank you for attending today's Mayville Engineering Company fourth quarter 2022 earnings conference call. My name is Alicia and I'll be your moderator for today's call. All lines will be muted in 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 one on your telephone keypad. I would now like to pass the conference over to your host, Noel Ryan with Valum. You may now proceed.

Thank you, Operator. On behalf of our entire team, I'd like to welcome you to our fourth quarter 22 results conference call. Leading the call today is MEC's President and CEO, Jag Reddy, and Todd Butts, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties including the risk described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mechinc.com. Following our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to Jack.

Thank you, Noel, and welcome to those joining us. Today, I will provide a high-level review of our fourth quarter and full year performance. This will be followed by an update on demand conditions across each of our end markets and a progress update on our MBX initiative. During the fourth quarter, we continue to build on the momentum evident across our business, highlighted by 13.8% euro-rear net sales growth and 26.2% euro-rear adjusted EBITDA growth. Total sales volumes increased 13.3% on a euro-rear basis in the fourth quarter, driven by broad-based demand across most end markets, but partially offset by continued disruptions in our customer supply chains. We also benefited from targeted commercial price increases in the period, which more than offset general inflationary pressures on labor and other product content. For the fourth quarter, our adjusted EBITDA margin increased 240 basis points to 10.5% when compared to the year-ago period, when excluding the impact of the planned production ramp at our Hazel Park facility. For the full year 2022, we delivered significant year-over-year growth in net sales, adjusted EBITDA, and net income. These improvements were driven by a combination of volume growth, fixed cost absorption, commercial price discipline, and operational improvements. We achieved these strong, full-year results despite the continued supply chain disruptions impacting our customers' production schedules, which resulted in deferred sales volumes for MEC throughout 2022. Our team remains committed to improving business transparency through robust external reporting. Following recent discussions with coverage analysts and investors, we have begun to provide revenue mixed data by end market, detailed revenue and EBITDA bridges that highlight our period-over-period performance, and broken out the revenue impact of raw material pass-throughs. We believe these incremental disclosures should prove helpful to understand our business and performance better. Turning now to a review of our market conditions across our five primary end markets. Let's begin with commercial vehicle market, which represented 39% of 2022 revenues. Commercial vehicle revenue increased 36% on an year-over-year basis, driven by freight strength and fleet upgrades. Based on current customer demand requirements, we expect steady demand during the first half of 2023, followed by a slowing in the second half of the year going into 2024 as the industry navigates an emissions regulation change. While the potential for pre-buy exists, we believe this will be of moderate impact to 2023. Currently, ACT research forecasts the Class VIII vehicle production to decline 3.1% year-over-year in 2023 to 305,259 units. While supply chain constraints have continued to impact some commercial vehicle customers, we expect to see this continue to improve during the next several quarters. OEMs still have sizable backlogs and used equipment prices have remained elevated, which gives us confidence in our current production schedules. We continue to monitor a potential softening in freight fundamentals and remain ready to adapt to any market changes. Next is the construction and access market, which represented 21% of 2022 revenues. Construction and access revenues increased 21% on a year-over-year basis, driven by fleet restocking demand amid lower dealer inventories. Our construction access end market is currently experiencing the impact of higher interest rates on the residential housing market. Looking out to the remainder of 2023, we believe soft residential new construction demand will be partially offset by volume growth across our non-residential infrastructure and energy markets. Low-deal inventories, aging equipment, and the growing need to restart fleets are factors that play in our favor providing a volume growth offset to softening residential construction. The power sports market represented 16% of 2022 revenues and declined 3% on year-over-year basis. This decline was primarily the result of softening of demand due to the discretionary nature of consumer spending offset somewhat by dealer restocking. However, Customer inventories remain low, and some level of restocking of the dealer channel will occur in 2023. As we have mentioned previously, we expect recent share gains within power sports will position us to outpace potential softness that may occur in this market over the coming year. Our agricultural market represents 11% of 2022 revenues and increased 15% on a year-over-year basis. Global food stocks remain tight, leading to elevated crop prices. Meanwhile, the inventory of both new and used machinery remains low. Given elevated crop prices, we believe producer demand will increase in 2023, supporting further large ag equipment demand. Small ag is expected to be flat to a modest decline with ample inventory and slowing demand after higher volumes the last couple of years. Our military market represented 5% of 2022 revenues and increased 3% on a year-over-year basis driven by new program wins and new vehicle introductions. Our consumers have solid contractual backlogs with the U.S. government, and we continue to see good volumes based on new vehicle introductions and related programs. Customer coding activity and order rates remain strong though we remain mindful of the potential for softening in the broader macroeconomic outlook this year. However, currently we are seeing no indications of slowing in our customer space of activity. While supply chain disruptions continue to impact several of our customers, we anticipate these issues will ease as we move through 2023. Shifting now to an update on the recent progress we have made with our MBX initiatives. We announced the launch of our MBX initiative during the third quarter of 2022. At its core, MBX is an operating system that we're leveraging to drive both operational and commercial excellence. MBX represents a key area of strategic focus for our team as we position MEC to achieve consistent above-market performance through the cycle. MBX is founded on achieving commercial and operational excellence through continuous improvement. Operationally, our focus is to achieve increased standardization, lean manufacturing, and automation of our various production processes, which in turn lead to improved execution, better productivity, and the reduction of costs across our value chain. Additionally, we plan to leverage MBX in other areas that support our operations, such as sales, purchasing, and finance. We continue to hold our quarterly president's guidance In the fourth quarter, we held an event at our Byron Center facility in Michigan. Dedicated teams drove multiple lean events focused on improving operational value streams, increasing utilization of stamping capital, and enhancing procurement strategy. At the commercial level, we continue to see meaningful opportunities to capitalize on multi-year trends toward reshoring and outsourcing by OEMs. Not only will these trends benefit us from a volume and utilization perspective, they also position us to be more strategic in our approach to pricing as customers pivot toward domestic skilled labor pools that can provide an on-time quality product. At the same time, we are focused on commercial expansion, which for us amounts to targeted expansion within high-growth adjacent markets while continuing to build our share of wallet with existing customers who value our full suite of design, prototyping, manufacturing, and aftermarket services. We made significant progress during the second half of 2022 as we grew our share of wallet with existing customers and explored emerging growth opportunities with new customers. We also further improved our productivity as we seek to better optimize our capacity. Allow me to share some of the commercial progress we've made in recent months. During the fourth quarter, we continue to make significant progress working with a large public company customer, making components for thermal management of electric vehicle batteries and battery enclosures. We continue to win new business and expand with this recently acquired customer. We're also engaged in an outsourcing project of current business with the same customer that involves support for building infrastructure. We expect this project work to continue to grow and evolve in 2023. Given the impending changes to vehicle emissions regulations beginning in 2024, we are working on multiple projects with current commercial vehicle customers, supporting vehicle updates that are slated to occur during the next 12 months. We believe these new launches position MEC to gain additional share of wallet representing an important organic growth catalyst. In addition to the upcoming emissions changes, many of our commercial vehicle customers are continuing to develop their battery electric vehicle offerings. Outside of our current components being used on these vehicles, we are working on battery electric vehicle specific parts and expect to expand our content per vehicle. In summary, we remain focused on driving above-market growth through rateable EBITDA margin expansion. Our volume growth comes from existing and new customers and in new and adjacent markets. We expect to achieve margin expansion through productivity improvements, including capacity optimization and improved price discipline. From a capital allocation perspective, our top priorities include inorganic growth and debt repayment, followed by investments in organic growth. In 2023, capital expenditures are expected to be between $20 to $25 million, representing a more than 50% decline from the full year 2022. Given a decline in expected CapEx, we anticipate an increase in free cash flow generation during 2023, positioning us to self-fund smaller strategic growth investments. While today our fabrication expertise is mainly within steel, we will look to expand our expertise within lightweight, next-generation materials such as aluminum, plastics, and composites. As a vertically integrated Tier 1 supplier of scale, MEC remains uniquely equipped to deliver a one-stop solution that combines design, prototyping, manufacturing, and aftermarket services expertise across the entire product lifecycle. Before turning the call over to Todd, I want to provide an update on our Hazel Park facility and the ongoing litigation with our former fitness customer. As we announced last quarter, we commenced production at our Hazel Park facility on time and in line with our plans. We will continue the ramp up of production at Hazel Park through 2023 and into 2024. While we expect the facility will be a margin headwind for us while production ramps up in 2023, Hazel Park represents an important and exciting component of our growth strategy. The facility provides us with state-of-the-art operations, a market with a stable labor pool, and the much needed capacity to support incremental customer demand. We're also leveraging the facility as part of our operational excellence initiatives in our efforts to realign our manufacturing footprint to better meet customer needs and improve efficiencies. As we look forward to 2024, we expect the facility will no longer be a drag on our margins and will exit the year with a run rate of $100 million in annual revenues, half of which will come from new customers and the other half coming from new and existing programs with current customers. On August 4, 2022, the company filed a lawsuit against Peloton Interactive Inc. in the Supreme Court of the State of New York, New York County. In the lawsuit, the company alleges that Peloton breached the March 2021 supply agreement between the parties pursuant to which MEC was to manufacture and supply custom component parts for certain of Peloton's exercise bikes. In January 2023, in response to Peloton's motion to dismiss, the court allowed the company's breach of contract claim to proceed. The lawsuit is ongoing. and these in the discovery phase. With that, I will now turn the call over to Todd to review our financial results for the fourth quarter and full year.