Mayville Engineering Company, Inc.

Hello and welcome to the Mayville Engineering Company second quarter 2023 earnings call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. I'd like to hand over to Stephan Neely with Balaam Advisors. The floor is yours. Please go ahead.

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our second quarter 2023 results conference call. Leading the call today is MEX 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 risks 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. With that, I would like to turn the call over to Jack.

Thank you, Stephan, and welcome to those joining us on the call and webcast. Our second quarter results demonstrated favorable demand conditions across our key end markets, together with early benefits of targeted price actions, cost discipline, and improved asset optimization. In recent months, we have experienced solid organic sales momentum across key customer accounts, which has supported improved utilization across our operations, a key area of focus for our entire leadership team. Through our MBX value creation strategy, MAC has become an increasingly cash-generative business focused on targeted commercial expansion within higher value markets, improved operational efficiency, and disciplined capital allocation. For the quarter, we have delivered more than $18 million in free cash flow, excluding a one-time deferred compensation payout continuing to position us to fund a combination of organic and inorganic growth investments together with opportunistic open market repurchases of our common equity. To that end, during the second quarter, we repurchased $1 million worth of common equity under our $25 million shares repurchase program, with $18 million remaining under the existing authorization as of June 30th. In July, we closed on our acquisition of MidStates Aluminum, providing us with a strategic entry point into high-value, lightweight materials fabrication, positioning MEC to grow our share wallet with existing accounts, most notably in our commercial vehicle, power sports, and agriculture end markets, while building leading market positions within emerging high-potential industries. The integration is moving forward seamlessly with both MEC and MSA teams collaborating to provide our combined customer base with a full lifecycle of on-demand solutions that include design, engineering, and custom fabrication. I will discuss the revenue and cost synergy opportunities here in more detail shortly. While demand conditions remain stable during the second quarter, near-term supply chain disruptions and fixed cost under absorption from new program launches impacted adjusted EBITDA and adjusted EBITDA margin rate. Fixed cost under absorption at Hazel Park alone impacted the second quarter adjusted EBITDA and adjusted EBITDA margin by 1.4 million and 100 basis points, respectively. Excluding the impact of the Hazel Park ramp-up, our normalized adjusted EBITDA margin rate was 12%. We currently expect Hazel Park to reach full utilization by year end 2024, which, based on our current estimates, could contribute an additional 15 to 20 million of annualized EBITDA to our business. Turning now to a review of market conditions across our five primary end markets. Let's begin with our commercial vehicle market, which represents 40.7% of our trailing 12-month revenues. During the second quarter, commercial vehicle revenue increased 2% on a year-over-year basis, driven by strong demand and elevated build rates. Customer demand requirements continue to indicate slowing demand in the second half of the year and into 2024 as the industry navigates regulatory changes as well as general slowing in economic activity. However, Projected build rates for the second half of the year have consistently improved relative to where they were a quarter ago amid resilient macroeconomic conditions. Currently, ACT research forecasts that Class VIII vehicle production to increase 4.3% year-over-year in 2023 to 328,000 units, followed by a 15% decline in 2024. While supply chain constraints have continued to impact our commercial vehicle customers, this has only resulted in deferred volumes that will be delivered in the second half of the year. Next is the construction and access market, which represented 19.3% of our trailing 12-month revenues. Construction and access revenue declined 10% on a year-over-year basis in the second quarter, given weaker fundamentals within the residential housing market, which continues to be impacted by the elevated interest rate environment. Our sales during the quarter were also impacted by customer supply chain constraints. While residential construction trends appear to have dropped and infrastructure and energy market demand remains stable, we still expect to see demand softness year-over-year through the remainder of 2023 with the potential for improvement in 2024. The power sports market represented 16.6% of our training 12-month revenues and increased by 7% on year-over-year basis in the second quarter. We continue to benefit from market share gains, which includes new customer programs, which were partially offset by a cooling in customer discretionary spending. Given current market conditions, we anticipate customers will seek to bolster demand through rebates and incentives over the course of the current year. On balance, we see the opportunity to grow our share of wallet in the current year, positioning us to drive incremental sales growth in the power sports market. Our agriculture market represented 10% of trailing 12-month revenues and decreased 13% on year-over-year basis during the second quarter. The decrease during the quarter was primarily driven by a decline in small ag equipment demand as large ag continues to be strong. This trend is in line with our expectations as global food stocks remain tight and crop prices remain elevated, while 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, which should mitigate the softness in small ag demand. Our military market represented 5.8% of trailing 12-month revenues and increased 66% on a year-over-year basis in the second quarter, driven by new program wins and build rate increases. Our customers have solid contractual backlogs with the U.S. government, and we continue to see good volumes based on new vehicle introductions and related programs. However, we foresee volume growth moderating later in the year due to the expected expiration of some legacy projects. Through the end of the second quarter, customer coding activity and order rates remain strong, though we remain mindful of how quickly the economic activity can change and the potential for a slowdown as we move through the year. At this time, we see no indications of slowing in our customer's pace of activity. Shifting now to an update on our MBX initiative. During the second quarter, we continue to progress in the implementation of our MBX value creation framework. I am pleased to report that we are on track to achieve the objectives we laid out last fall when we first announced the MDX initiative. We will provide further details at our inaugural investor day planned for September, but I would like to highlight a few key updates from this quarter. MDX represents a key area of strategic focus for our team as we position MEC to achieve consistent above-market performance throughout the cycle and capitalize on multi-year reshoring and outsourcing megatrends among major OEMs. At a commercial level, our focus remains on expanding our integrated solution suite within both existing customer accounts together with targeted growth in higher value growing adjacent markets, including clean tech and energy transition. Allow me to share some of the commercial milestones we achieved during the second quarter. During the second quarter, we continue to launch new products and expand our relationship supplying battery thermal management products. This relationship will continue to expand as our customer grows their electric vehicle battery systems. Leveraging the significant growth in the power sports market we had in 2022, particularly with the new customer, we expanded further with new products and we are building momentum through the second half of 2023 with significant launch activity. Within the second quarter, we made progress on securing additional market share within our large agriculture and construction customer. These new parts were related to next generation products and were won based on our strong engineering efforts during the product development process. Given the upcoming emissions regulation changes occurring over the coming years, Many of our commercial vehicle customers are continuing to develop their next generation products, including battery electric vehicle offerings. We are focused on expanding our market share during these product changes, and we continue to make progress in the quarter for vehicles that will begin production in 2024. The other pillar of MBX is commercial excellence, where our focus is to implement strategic and value-based pricing models across our customer programs. Year-to-date, the teams have been working tirelessly to implement a programmatic pricing model. We have already seen some benefits from these efforts through the second quarter, but we expect to see pricing benefits ramp up further in the second half of the year. On the operational excellence front, we have continued our rigorous implementation approach centered around our quarterly presence guidance supplemented by monthly operational and commercial excellence Kaizens. During the second quarter, we completed 36 Kaizens with a focus on sustainability of cost-saving measures identified. Overall, our team is tracking to the savings and KPI target improvements that underpin our 2023 financial expectations. We look forward to providing a comprehensive update on these improvements along with multi-year performance targets at our first ever investor day next month at our Hazel Park, Michigan facility. On the commercial expansion front, the second quarter was very eventful for us with the announcement of the MSA acquisition, our first since becoming a public company. As we announced on July 5th, we successfully completed the acquisition on July 1st and the integration is well underway and on track to our expectations. Given the steady demand in our end markets, together with improved plant utilization and six months of contributions from the MSA acquisition, we anticipate 100 to 200 basis points of second half adjusted EBITDA margin expansion relative to the first half of the year. From a capital allocation perspective, having completed the MSA acquisition, our primary focus will be on utilizing free cash flow to repay our debt. At this time, we intend to reduce net leverage to below two times within the next 18 months. Given our current forecast, we anticipate strong free cash flow conversion in the second half of 2023 and going into the full year 2024. As evidenced in the second quarter, our free cash conversion exceeded 75% when excluding a one-time deferred compensation payout, and we expect strong conversion to recur in the second half of the year. While our capital spending year-to-date has been minimal, we expect our total capex for the year will be in the $15 to $20 million range. Our capital investment strategy remains rooted in pursuing opportunistic investment in equipment that will yield attractive returns on capital. In summary, we delivered on several important strategic milestones during the second quarter, consistent with our MBX value creation priorities. Looking to the second half of the year, demand conditions remain stable across our end markets, even as we maintain our price discipline. The MSA integration is on track, providing MEC customers with an expanded suite of capabilities and integrated solutions that will support our longer-term margin expansion targets we remain committed to. With the addition of MSA, we are focused on executing a seamless integration and look forward to the growth opportunities that we will be positioned to pursue going into next year. With that, I will now turn the call over to Todd to review our financial results.