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.

Thank you, Jag. I'll begin my prepared remarks with an overview of our second quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the second quarter increased 0.5% on a year-over-year basis to $139 million, driven by a combination of improved sales volumes and continued price discipline, partially offset by lower material price pass-throughs to customers. Excluding the impact of material price pass-throughs our second quarter sales would have increased 6.5% on a year-over-year basis. Our manufacturing margin was $16.1 million in the second quarter, as compared to $18.3 million in the same prior year period. The decrease was driven by an increase in employee health insurance claims, unabsorbed fixed costs associated with project launches, a $500,000 impact from a one-time field replacement claim, and a $700,000 decline in scrap income. Our manufacturing margin rate was 11.6% for the second quarter of 2023 as compared to 13.2% for the prior year period. The decrease of approximately 160 basis points was due to the reasons just discussed. When excluding the impact of these items, our manufacturing margin would have been 14.6% or an increase of 140 basis points as compared to the prior year. Profit sharing bonus and deferred compensation expenses increased by $1.5 million to $2.7 million for the second quarter of 2023, primarily driven by lower deferred compensation expense during the prior year period related to fluctuations within the financial markets. Other selling, general, and administrative expenses were $7.4 million for the second quarter of 2023, as compared to $6.4 million for the same prior year period. The increase is primarily attributable to the $900,000 of expenses related to the MSA acquisition, which was added back to adjusted EBITDA during the second quarter. As such, we continue to believe that SG&A expenses on a go-forward basis will be approximately 4.5% to 5.5% of sales. Interest expense was $2 million for the second quarter of 2023. as compared to $765,000 in the prior year period due to higher interest rates and higher borrowings under our credit facility. Due to the increase in our borrowings at the end of the quarter associated with the MSA acquisition, we expect that our interest expense will be higher on an absolute basis going forward based on our current borrowing rates. Adjusted EBITDA decreased to $15.3 million versus $18.2 million for the same prior year period. Adjusted EBITDA margin percent declined by 210 basis points to 11% in the current quarter, as compared to 13.1% for the same prior year period. The decrease in our adjusted EBITDA margin was due to a $1.8 million increase in employee health insurance costs and the $1.4 million impact of the ramp-up of Hazel Park. Turning now to our statement of cash flows and balance sheets. Cash flow provided by operating activities during the second quarter of 2023 was $0.2 million as compared to $16.1 million in the prior year period. The expected decrease in operating cash flow was entirely due to the $17.6 million deferred compensation payout made to our former chief executive officer. Excluding the impact of this payout, our cash provided by operating activities would have been $17.8 million during the second quarter. an increase of 10.6% relative to the prior year period. Our resulting free cash flow conversion rate exceeded 75%, and we are projecting to generate an additional $25 to $35 million in free cash flow in the second half of the year. Capital expenditures for the second quarter of 2023 were $3.9 million as compared to $13.4 million during the second quarter of 2022. The decrease in capital expenditures is the result of the completion of the initial capital investment in the Hazel Park, Michigan facility, which was finished in the second half of 2022. As of the end of the second quarter of 2023, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents was $89.7 million as compared to $79 million at the end of the second quarter of 2022. Cash and cash equivalents included in net debt was $90.1 million, which relates to the $90 million of funds held in escrow to fund the MSA acquisition, which closed on July 1st. Furthermore, as of June 30th, our net leverage ratio was 1.6 times. Initially, as noted in our press release on June 29th, we entered into an amended and restated credit agreement that provides for an additional $50 million of availability under our credit facility while retaining an uncommitted accordion feature of $100 million. The new credit agreement also allows for a maximum leverage ratio of 3.5 times, up from 3.25 times in our previous agreement. Furthermore, when accounting for the four-quarter leverage holiday following an acquisition, that takes our total maximum net leverage ratio to four times for the next year. As we have stated, it is our intention to use free cash flow generation to reduce our net leverage ratio to between 1.5 and 2 times over the next 18 months. Now, turning to our 2023 guidance, today we are increasing our financial guidance for the full year 2023 due to the closing of the MSA acquisition. For the full year 2023, we expect the following. Net sales of between $580 million and $610 million. Adjusted EBITDA of between $66 million and $71 million. and capital expenditures of between $15 million and $20 million. Our increased financial guidance captures continued steady customer demand and improved plant utilization resulting in adjusted EBITDA margin expansion relative to the first half of the year. In addition to these dynamics in our legacy business, our increased guidance range includes the expected 30 to 35 million of incremental revenues and 4 to 6 million of incremental adjusted EBITDA associated with the MSA acquisition. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted locally. Our first question comes from . Your line is open.

Hey, good morning, guys. It's Joe Grabowski. I'm from this morning. Good morning, Joe. Hey, good morning. I had a number of questions around guidance. Just want to make sure that I understand it. Maybe starting with raw material price pass-throughs, it looks like you're expecting uh a continued drag in the second half but better than the first half maybe you know a total of around six million dollars in the second half um just wanted to confirm that i'm i'm calculating that correctly yeah joe i i think you're thinking of that in the right manner year to date we've had about 17 million dollars of material price pass through relative the first half of 22. that

really declined in the second half, as we did see steel in the later half of last year already start to come down. So that change from year to year will be left in the second quarter or second half of the year.

Got it. Just to add to that, Joe, just wanted to point out that from a headline perspective, right, even though we show only a half a percent sales improvement in Q2, without the material pass-throughs, as you just indicated, right, our revenues are actually up into 6.5%. So I just want to drive home that point. Sometimes that point can be missed in reading our results given the material pass-throughs.

Right. No, definitely understood. And then on the adjusted EBITDA guidance, obviously you're layering in MSA. But XMSA, I guess maybe you took down the midpoint of the range just a little bit. Again, I want to make sure I have that right and what caused the core midpoint to go down a little bit.

I wouldn't say that we took down the guidance or probably tightened the range is how I would position that. It's simply for a couple of reasons. I'm sure you have questions around our construction access segment. Our construction access market continues to be soft, as we indicated in prepared remarks, and some of that volume is missed volume for the year, whereas even though we had similar supply chain disruptions with a couple of our CV customers in Q2, we expect that to be picked up in Q3 as the customers continue to make up those volumes, right? So given some of that, we just wanted to get ahead of that and then tighten the tighten the range a bit. And, you know, if our construction access market recovers in the second half, we could still come in towards the higher end of that range. But at this point, we're trying to be a little bit more conservative and trying to tighten our range for the year.

And, Joe, on the EBITDA front, when you think about the base business, the legacy business, without MSA, the addition of that, A lot of those challenges have already occurred in the first half. I do want to highlight that we have about a 200 basis point margin improvement on the legacy business as we look into the second half of this year. A lot of the things we've talked about with the project launches in Hazel Park and a few other locations, those are going to start moving into production, utilizing those assets. MBX continues to gain ground. And as Jake said on the call, we have some pricing initiatives as well. So we feel really good about the margin expansion into the back half.

Yeah, no, I saw that. It looks like maybe assuming around a 12.5% EBITDA margin in the second half with the guidance midpoints, which is definitely an improvement from the first half. Just a couple of quick questions on MSA, and then I'll pass it along. I believe MSA revenue in 2022 was 86 million. You're going to own it for half a year and you're guiding to 33 to 30, I'm sorry, you're guiding to 30 to 35 million. So maybe just explain kind of the delta between the 86 million last year and the, you know, again, half a year, 30 to 35 million.

Yeah, so when we began talking to MSA late last year, beginning of this year, we knew coming into 2023, their revenues were going to be, you know, approximately times two, right, you know, of the second half revenues we're projecting here. That's because of one, you know, segment that they were participating in, that is the RV market. They had significant sales in 2022. we knew that RV market was going to be down. And in fact, they were probably realized almost zero revenues in 2023 from that end market. So we knew that coming in and our intent from the beginning was to use that capacity, extra capacity that's going to be available at MSA to drive further sales synergies with our commercial vehicle market. and our power spores and our ag customers, right? So that's why we're not concerned about where MSA revenues are in 2023. We expect to gain significant revenue synergies in 2024 and 2025 and beyond. We will provide additional details on those synergies at our investor day coming up in next month.

Got it. And last question, and I'll pass it on. You've owned MSA for a little over a month now. Any initial learnings, anything that maybe you didn't expect when you told us about the deal back in June?

I can tell you today that since we announced the transaction and closed the transaction, I've been there more times than any other non-MEVA location within our network, given that it's only 30 minutes away from our headquarters. Every single time I leave MSA facilities, I am more excited about MSA and the future of MSA. And my enthusiasm continues to grow every time I talk to the employees. that came on board with MSA. My enthusiasm continues to grow as we continue, our sales teams continue to talk to our existing customers in some of the markets I just mentioned. So the future for MSA within MEC is bright, and I couldn't be prouder of the MEC team and the MSA team that came together, worked really hard for almost nine months to make this a reality. So yeah, the future for MSA is bright, and I'm really excited about it, as you can tell from my comments.

Absolutely. That sounds great. Thanks for taking my questions, guys. Good luck.

Thank you. We now turn to Vlad Bystryky with Citi. Your line is open.

Good morning, guys. Thanks for taking my call. Good morning. So can you talk about the conversations that you're having with customers about their reshoring plans and whether you're actually seeing evidence of them moving forward with these plans, you know, and therefore contributing to growth runway for Mac?

Sure. I think, you know, Glad if you remember when I came on board about a year ago, we talked quite a bit about both reshoring and onshoring. So I would sort of capture those trends in one bucket rather than a separate bucket. So many of our customers in power sports and other markets, particularly power sports, I'll take those as examples. They had components that they were producing in Asia, let's say, and many of them continue to bring some of those components back into the U.S. or North America, and we continue to be a beneficiary of those reshoring projects. Even in the prepared remarks, we talked about a customer in PowerSports that we're winning more business with. All of those prove to us that that reshoring trend is real, and MECC has been a beneficiary. At the same time, many of the other applications that we supply components to are some large applications. Think of the military. Think of agriculture or commercial vehicles. The components, the size and weight and volume of these components are large, and they were never made overseas. So that portion of our business continues to be strong, and we don't expect to benefit from the reshoring aspect of that. But what we are benefiting in those markets is from outsourcing, where customers, I can give you multiple examples of our customers, where they are choosing between make or buy of those components. And as we previously discussed, We have a CV customer where we are completely taking over production of their fuel tanks from one of their, you know, manufacturing locations. So we're investing in a significant, you know, production line with significant capital in our absence facility where in Q3 we're actually going to, you know, launch a brand new fuel tank for one of our large CV customers. That's a complete outsourcing. So they're going to rip apart their production line as soon as we're up and running and exit using that component internally, right? Why are they doing that? And I can give you multiple examples of that, you know, outsourcing efforts at our customers. Capital is tight. Resources are tight. They would rather choose to deploy their engineers, you know, technicians and production associates to us. next-generation products such as battery electric vehicles and so on. So that's another area where we're gaining significant share of wallet in our end markets to continue to take over business from our customers.

That's really helpful, Collar Jack. Appreciate it. And then maybe just one follow-up for me on MBX. You seem very focused and excited around the commercial pricing initiatives you have underway. Can you talk about some of the specific changes that you're implementing in that commercial pricing initiative and how you expect those initiatives to structurally impact profitability going forward?

Yeah. Certainly, at our investor day, we'll be able to provide additional color in more detail. But today, what I can tell you is that in the past year, certainly in the past six to nine months, we have done a significant number of TPI Kaizens, what I call a Transactional Process Improvement Kaizens, if you're familiar with that parlance. where we have looked at our pricing methodology, our pricing frameworks, our pricing processes. We have continuously tried to improve how we not only capture value for our customers, but also how we capture value for MEC. Historically, it would have been a cost plus type of pricing we're on a journey to a value selling pricing, right? So what that does is we're not there yet. You know, it's a multi-year journey. I've done that with multiple companies in my past. So that value selling journey, our value pricing journey takes a while. But, you know, the beginning steps are, you know, disciplined, structured, programmatic approach to pricing. And that's probably where we are right now. And we've implemented many of those steps within MECC. We expect to see a good readout starting in the second half of this year. And part of it is preventing leakages, right? That means, you know, instead of passing on a top line, let's say, make up a number, 3%, right? But then are you really capturing the 3%? What is your net capture rate of the 3%? You just passed on to a particular customer, right? So that's where we found significant opportunities for improvement. We continue to plug holes. We continue to drive the net capture rate to be higher. And then the second step in that process is really around cost to serve, thinking about cost to serve. So if there's a customer X and a customer Y, what should be our margin expectations? So we started layering in things like, their AR terms, their payment terms, their complexity of their components, the value addition that we need with these customers, All of these have been now programmatically put in place so that going forward, we're much more educated about the value addition we're providing to our customers and how do we capture in turn value back to MECC. So I think I'm really excited about what this body of work can do for MECC long term. As I said, certainly the first basic steps and the foundation has been laid in the first half. We expect to see readouts starting in the second half, and we expect to continue on that journey of value pricing going forward.

Great. That's helpful, Jack. Thanks. We'll be back in the queue. Thank you.

Our next question comes from Ted Jackson with Northland Securities. Your line is open. Thank you.

So most of my key questions have been asked, but I have just a couple more market-oriented ones. One would be on the construction and access side. So you yourself commented that we might be hitting the trough in residential. And for lack of a better term, I think Caterpillar more or less said the same thing, that they felt that the residential market, at least in North America, was stabilizing. Is that reflected in your view with regards to second half? Or we indeed see the residential construction market, you know, stabilize and, you know, kind of firm up. Would that cause a revisit or a change in kind of how you view your markets? That'd be my first question.

Yeah, that's right, Ted. I think, you know, we are, you know, as, you know, it's on slide five right in our deck. Even though the market continues to signal softness, we do think that it is hitting a trough and we are reasonably optimistic that the second half will be a stable market for us. As you know, we have both construction equipment and access equipment in our end market. I think it's approximately 60-40 split, 60% construction and 40% access is how I would describe our split. And access market, I talked about our end customer continuing to see supply chain disruptions. In their prepared remarks this week, they said they were probably at about a 75% supplier rate, however they described that. So what that meant in Q2 for us was we were planning on hitting a higher rate with them, but then as they could not keep up with their supply chain, they took their volumes down. That impacted us, even though they may be bullish on their end market and their backlog, you know, we haven't seen that uptick in their take-up rate, right, you know, through us, right? So that's why we're being cautious on access. And construction, you're absolutely right. I know there are some green shoots in home building, you know, as we're seeing tighten the supply of existing homes and the builders continue to, plan, you know, new permits, et cetera. So perhaps the second half might be the period where we could see some, you know, residential construction pick up. That absolutely will help us. And similarly, you know, we are, like everybody, we're continuing to see potential benefits of Or rather, we're waiting to see potential benefits of non-residential construction and infrastructure, you know, build spending in the market, right? So there's, you know, a little bit of that optimism for us in the second half. But otherwise, right, you know, generally speaking, you know, we're watching the trends in that market.

Thanks. And then my next question, and I have one more after this, is just on the military market. You had substantial growth there. You know, you discussed that some of it was done by new programs, some of it by build rate increases. You expect volume growth to moderate in the second half. But when you kind of strip down and get in there, you know, what's the-you know, what's more important in terms of driving that growth? Is it the new programs or is it the rate increases? And then on the build rate increases, I mean, would you view the underpinning of that, you know, to be blunt, you know, the war in Ukraine and, you know, the need to replenish military equipment and supplies because of shipment of those products or those, you know, vehicles, if you would, into the Ukraine conflict?

Yeah, so the two major programs we're on are AM General's Humvee program and Oshkosh's JLTV program, right? Those are the two main ones we're primarily on. You know, Humvees have been, we've seen a significant increase in Humvee production rates given the war in Ukraine and, as you said, right, depletion of some of the U.S. inventory, but also a lot of drawdown to support Ukraine war. So that, you know, we're hopeful that they'll continue to impact positively our second half. And JLTVs, we'll have to watch and see. We have limited exposure to JLTVs through Oshkosh. But, you know, with AM General winning that program, right, you know, we expect to be an active supplier to AM General on the GLTV program going forward. So that could be a 2024, 2025 impact probably. And at least we're moderating our growth rates in the second half just to be a little bit more prudent and cautious, not really knowing what the drawdowns could do to additional production of these military vehicles.

Great. That was a nice color. My last question is just on the MSA acquisition and the, you know, the capacity. As I recall during the call when you did the announcement, you said that there was about 30% capacity that was being unutilized at that point. And my question is pretty simple, is, you know, looking forward, how long do you think it will take for you to fill that capacity?

It's a great question. We are actively working to fill that capacity, as you can imagine, Ted. One of the reasons why we were so attracted to MSA is because as a small company, MSA could not get on supplier lists at any of our CD customers, any of our PowerSports customers, etc., right? The moment we announced our transaction, the moment we closed our transactions, we have begun conversations with many of our major brand name OEMs that we're currently on the books with. So we're in the process of certifying MSA. There's one simple certification called IATF. That takes a couple of months to get that done. We're in the middle of that certification with MSA. And some of our customers already are working with us directly to get MSA on the list of suppliers to be able to supply aluminum exclusions and fabrications to their end markets. So that process is very active as we speak here. And that might take a few months, you know, a couple to a few months. Hopefully by the end of this year, we'll be on some of our customer lists. That means as new business gets generated, MSA will be a recipient of those bid packages, those quote packages, and will continue to ramp up bidding for new business on many of our current MEC customers. So I expect 2024 to start seeing some wins and take advantage of existing capacity at MSA.

Great. So I just want to finish with a comment to say, you know, it was very impressive, the cash flow generation that you all put off this quarter. It kind of shows, you know, what the future holds for MEC. And I look at the capacity that you can fill with MSA and then Hazleton, and it's just super exciting to see where this business is going to go in 2024 and 2025.

Thank you for the recognition, Pat. Really appreciate that. We're happy to answer any questions on cash flows, but we're very excited about cash flow generation, not only in the second half, but as you said, going forward. Everyone can see our moderating of our CapEx plans for not only 2023, but hopefully it's in line with that sort of range going forward. and given our potential to continue to drive additional cash flow generation and MBX initiatives driving working capital reductions, driving down our inventories, better payment terms. We're negotiating with our customers to get our receivables in order. All of these activities are going to drive continued increased cash flow generation at max. And that is the story that we're really proud of and how hard the teams have been working on to generate those cash flows. And I am really excited about what that can do to our debt levels, what that can do to reducing our leverage back down to under two within the next 12 to 18 months. So that's where we're focused on. And again, I appreciate you recognizing the potential and upside at Macs.

Our final question today comes from Tim Moore with EF Huffman. Your line is open.

Good morning, Tim. Thanks, most of my questions. Good morning. Most of my questions were already answered, but I have three remaining to ask. Jag, I know I don't want to steal your thunder for your September investor day. That's clearly going to provide more details on the MBX initiatives. But just so I understand, for now, you expect a 40 to 70 basis points margin boost from MBX this year. I'm just trying to think about next year. I know it's maybe too early to answer this, but could it be a similar amount of a margin boost next year? And would that include or exclude the incremental margin boost you're going to get from Hazel Park reaching its full utilization by the end of next year?

Thank you for the question, Tim. And obviously, we're not in a position to provide any guidance for next year. Having said that, I think, you know, that complicated spec sheet math you were trying to do, we're not there yet. But, you know, I think, you know, but the line of thinking is right. I think, you know, we do expect a tailwind from our MBX, you know, ramp up in 2024. We do expect a tailwind from our Hazel Park. ramp up next year. And, you know, that sort of framework-wise for sure, right? It's a good way to think about it. And on Hazel Park, no one has asked the question, or maybe you will, but I'll answer this prematurely. And that is, we talked about the $100 million of ramp up of revenues in Hazel Park exiting 2024, right? The question I think, you know, people might have is, you know, hey, how are you making progress on that front? You know, how is that working out? Well, I can tell you we're on track to, you know, get, you know, close to 20, we said 2025, right, in that range of revenues out of Hazel Park this year. We're on track for that. But what that doesn't tell the story is that, let's call it approximately $20 million of revenues coming out of Hazel Park this year. That equates to $75 million of revenue at a full ramp, right? So the parks we're qualifying, they'll generate $20 million revenue, and let me repeat, equates to $75 million of revenues on an ongoing basis at a full ramp. So out of the $100 million of revenues for Hazel Park, approximately 75 million of revenues have been sold, right, on the books today, right? So that's where we're starting up, right? So all the effort and the emphasis on Hazel Park is the right emphasis for the company because 75 million of that 100 million is sold, and we're starting that up as we speak, right? So I just want to make the point, you know, since no one has asked me that question so far.

Jack, thanks. I think you kind of beat me to maybe some of my next question with that. I'm wondering just maybe how the onboarding of the battery thermal management cluster has gone. I know it was delayed intentionally from the March quarter into the June quarter, and that was for quality assurance reasons. Is that going now, and will most of that be in Hazel Park?

Right now, right, most of that will be in Hazel Park, Tim. Good memory from your point of view. And similar to my comment on IATF certification for MSA, we're in the process of getting the same IATF certification in Hazel Park, and that's been sort of the hurdle, if you will, to get that customer online. We're in the final phases of getting that customer online at Hazel Park. We expect Q3 to be the quarter when we'll start production for that battery electric vehicle component customer.

Great. That's very helpful. I'm quite familiar with what they're doing, but on their end. And just lastly, I think you kind of alluded to this in some of your opening remarks. I mean, what is the update on supply chain shortages for your customers? I mean, has that narrowed over the past couple of months. I'm just wondering, is it same as it was in the March quarter or is it better?

Yeah, it's a good question. As I alluded to in my earlier remarks, there were two end markets where we experienced some supply chain disruptions from our customers. So one is CV. In the commercial vehicle market, two large customers we work with both had a decent amount of disruptions So one of them had approximately five days of line-down days during the quarter. What that meant was they shut down their lines so that the rest of the suppliers can just catch up with all the products that they need to get to the assembly line. And they're back in Q3, and we expect that volume to be captured in Q3. It's not lost volume. It's just delayed volume from Q2. The second TV customer had similar frame rail issues coming out of one of their suppliers out of Mexico. So they were down and with reduced run rates in Q2. And in fact, they're working in Q3 weekends and we're supporting them with weekend production, Saturday production, so that they can catch up in Q3, right? So those two customers, and I'm not concerned about, right, it was just a delayed revenues from one quarter to another quarter. We'll catch up on that. And, you know, with all the headlines on TV market, right, Their order book seems to be strong and it's okay for us. On Axis in particular, as I discussed, I'm still cautious on our view of whether our customer can actually catch up. In the last volume in Q2, is potentially last volume for the year. And as I said, that's one of the reasons for us to tighten our ranges for the year.

Jag, that was terrific color on the commercial vehicle side and helps explain beyond the price pass through drag. So for the top line. But thanks. I'm glad you're going to recapture that. And that's it for my questions. Thank you, Tim. Appreciate it.

This concludes our Q&A. I'll now hand back to Jack Reddy, President and CEO, for closing remarks.

Well, once again, thank you for joining our call. As we announced on July 20th, we intend to host an Investor Day on September 14th at our Hazel Park facility in Metro Detroit area. At this event, we look forward to providing a more comprehensive update on our strategy and our expectations for the coming years. Should you have any questions or be interested in attending the event, please contact Noel Ryan or Stephan Neely at Valum, our Investor Relations Council. This concludes our call today. You may now disconnect.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.