Mayville Engineering Company, Inc.

company third quarter 2023 earnings call. My name is Brica and I will be the moderator for today's call. All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end today. If you would like to ask a question please press star then one on your telephone keypad. I would now like to pass the conference over to your host Stefan Neely To begin, so, Stefan, please go ahead.

Thank you, Operator. On behalf of our entire team, I'd like to welcome you to our third quarter 2023 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 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. As anticipated, our third quarter results demonstrated significant year-over-year growth in revenues, adjusted EBITDA, and a free cash flow. These strong results were the product of continued steady end market demand and targeted market share gains, particularly in our commercial vehicle, military, and power sports markets. Early in the third quarter, we closed on the acquisition of MidStates Aluminum, or MSA, which was also a contributor to our revenue and earnings growth in the third quarter. In addition to the cross-selling opportunities afforded by MSA's aluminum fabrication and extrusion capabilities, our core business continues to enjoy a robust sales pipeline entering 2024. Even as we look forward into a potentially more muted environment for end market growth, We are optimistic about our ability to deliver above market growth through the cycle by expanding our share of wallet with our current customers and improving the utilization of our existing assets. Importantly, our operational and commercial self-help initiatives are continuing to deliver improved profitability and cash generation through improved cost absorption, value-based pricing, and enhanced working capital efficiency. During the third quarter, we generated a record 16.1 million of free cash flow, representing cash conversion in excess of 80%, a new record for our business. Consistent with our capital allocation priorities, we reduced our outstanding borrowings by more than 17 million in the third quarter, while repurchasing $1 million worth of common equity leaving $17 million under our existing $25 million authorization as of September 30th. This year alone, we have repurchased $2 million worth of shares under our existing authorization. In September, we hosted our inaugural Invest Today event at our Hazel Park facility outside of Metro Detroit. At the event, we introduced a three-year roadmap for MEC, one that leverages the key pillars of our MBX framework to drive long-term value creation for our shareholders. At the event, we underscored how we intend to drive organic sales growth, adjusted EBITDA margin, and improve free cash flow generation while continuing to develop a leading manufacturing platform of scale within key growth markets such as energy transition. As a team, we are committed to excellence through accountability, and introduced new three-year financial targets at the event, which our entire team is focused on achieving. By the year end 2026, we expect to deliver between 105 and 135 million of annual adjusted EBITDA, along with annual net sales between 750 and 850 million, adjusted EBITDA margins between 14 to 16%, and annual free cash flow generation of 65 to 75 million. While these are ambitious targets, they are entirely achievable. Our third quarter results demonstrate early progress towards this plan. We remain focused on delivering rateable, consistent growth into 2024, building upon our track record of execution. While we are very pleased with our third quarter performance, it is important to highlight that these results include continued cost under absorption associated with planned ramp ups at our Hazel Park and Atkins facilities. Fixed cost under absorption at Hazel Park alone impacted the third quarter adjusted EBITDA and adjusted EBITDA margin by 1.7 million and 110 basis points respectively. Excluding the impact of the Hazel Park ramp up, our normalized adjusted EBITDA was 13.2%. We continue to expect that Hazel Park will ramp up fully by the end of 2024, contributing $100 million in annual revenues with adjusted EBITDA margins of approximately 15% in 2025. As of September 30th, we currently had commitment for all but approximately 25 million of the projected 100 million in annual revenue contribution of that facility. Turning now to a review of market conditions across our five primary end markets. Let's begin with commercial vehicle market, which represents approximately 40% of our trailing 12-month revenues. During the third quarter, commercial vehicle revenue increased 6.6% on a year-over-year basis driven by strong demand and elevated bill rates. Customer demand requirements continue to indicate slowing demand going into the end of the year and into 2024 as the industry navigates regulatory changes as well as a general slowing in economic activity. Currently, ACT research forecasts the Class 8 vehicle production to increase 6.6% year-over-year in 2023. to 336,000 units. The current projection indicates that build rates will slow during the fourth quarter and decline by nearly 4% on a year-over-year basis. For 2024, ACT projections reflect a deeper softening in demand through the middle of the year, with current production estimates reflecting an 18.5% decline for the full year 2024. Furthermore, We are currently experiencing volume disruptions associated with the United Auto Workers strike with one of our customers. This has impacted our volumes for their products so far during the fourth quarter and will continue to do so until an agreement is reached. Next is the construction and access market, which represented approximately 18% of our trailing 12-month revenues. Construction access revenue declined 2.3% on a year-over-year basis in the third quarter, given weaker fundamentals within the residential housing market, which continues to be impacted by the elevated interest rate environment. While residential construction trends appear to have dropped, and infrastructure and energy market demand remain stable, we still expect to see demand softness year-over-year through the remainder of 2023 and into 2024 with the potential for modest improvement later in 2024. The power sports market represented approximately 16% of our trailing 12-month revenues and increased by 7.7% on a year-over-year basis in the third quarter. We continue to benefit from market share gains, which include new customer programs, which were partially offset by cooling in consumer discretionary spending. Given current market conditions, we anticipate customers will seek to bolster demand through rebates and incentives going into the holiday season. As we look forward into 2024, indications are that continued slowing in demand will result in growth deceleration as dealer inventory levels have normalized. Our agriculture market represented approximately 10% of trailing 12-month revenues and increased 4.6% on a year-over-year basis during the third quarter. The increase during the quarter was primarily driven by growth in large ag demand along with contribution of MSA's ag-related sales, which offset continued overall softness in our legacy small ag market. This trend is in line with our expectations as global food stocks remain tight and crop prices remain elevated. Given elevated crop prices, we believe producer demand will increase through the end of the year and into 2024 with some deceleration going into the middle of 2024. The demand tailwinds in large ag going into 2024 should mostly offset softness in small ag demand. Our military market represented approximately 6% of trailing 12-month revenues and increased 70% on a year-over-year basis in the third quarter, driven by new program wins and bill 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 during the fourth quarter and into 2024 due to the expected expiration of some legacy projects. I would also point out that with the completion of MSA acquisition during the quarter, the majority of MSA revenues are represented within our other end market category, which grew by over 12 million year over year in the third quarter. The MSA acquisition closed on July 1st, and since then, our teams have been hard at work with integration and cross-selling activities. Overall, the MSA integration is going well, and we're on track to have them fully integrated by the end of the year as expected. Importantly, as we highlighted at our investor day, we see MSA generating over 100 million of sales by 2026, with at least 25 million coming from revenue synergies with legacy MEC customers. As of end of September, we are progressing as expected toward the target, as well as the expected cost synergies that we are targeting through the implementation of our MBX lean manufacturing framework and MSA. Shifting now to an update on our MBX initiative. During the third quarter, we continued 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 MBX framework. As we highlighted at our investor day, MBX is rooted in organic commercial growth, improved cost absorption through lean manufacturing practices, value-based pricing, and working capital efficiency. These key areas of self-help initiatives will allow us to create sustainable value, and deliver above-market growth through the cycle. Commercially, we are targeting growth in higher-value, high-growth adjacent markets, including clean technologies and energy transition, in addition to expanding our share of wallet among our current customer base. Achieving this goal is dependent on improved utilization of our equipment through better labor productivity, as well as utilizing existing capacity at MSA and Hazel Park. Allow me to share some of the commercial milestones we achieved during the third quarter. Starting out, we are pleased to report that we have been awarded purchase orders for our first cross-selling win after the acquisition of MSA. Our first award was in the commercial vehicle space, which was the largest market opportunity within our cross-selling targets. we have continued to build momentum in our code activity and we expect to continue to win awards for the coming quarters. Given the third quarter, we continued the expansion of our customer relationship to supply battery thermal management products to multiple end customers as the EV transition continues to progress. This relationship will continue to expand as our customer grows their electric vehicle battery systems while we also are starting to work on significant outsourcing programs with this customer. In the quarter, we further expanded a new customer relationship in the power sports market with new program wins on new products. We expect to see continued significant growth with this new customer relationship as we look ahead into 2024. We also made progress on securing additional market share within our large ag and construction customers. These new parts were related to next generation products and continue to build momentum on winning new business with the capacity we have installed in Hazel Park. We have continued to gain additional market share as our commercial vehicle customers plan for their vehicle updates, both on next generation products and battery electric vehicle platforms. We expect to continue to grow share over the next two years with the amount of change that will occur in this industry. As we highlighted during our investor day, our 2026 net sales targets are dependent on capturing incremental customer commitments of 65 to 125 million, including MSA cross-selling synergies. Based on our current level of sales activity and recent wins, we remain confident that this is achievable. The other pillar of MBX is commercial excellence. where our focus is to implement strategic and value-based pricing models across our customer programs. Here to date, the teams have been working tirelessly to implement a programmatic pricing model. On the operational excellence front, we have continued our rigorous implementation approach centered around our quarterly President's Kaizens, supplemented by monthly operational and commercial excellence Kaizens. During the third quarter, we completed 25 Kaizens with a focus on sustainability of cost savings measures identified. Overall, our team has performed over 100 MBX lean events through the end of the third quarter. These savings put us on track to achieve the 40 to 70 basis points of margin improvement reflected in our 2023 guidance as well as the 100 to 150 basis points of margin improvement we expect to achieve by 2026. Given the current demand environment, the execution we have achieved with our MBX initiatives, and the ongoing ramp-up of new program launches, we continue to expect consistent margin performance and free cash flow conversion to close out the year. Looking ahead to 2024, we anticipate some modest softening across our end markets given broader expectations for a general slowing in the U.S. economic growth next year. However, we anticipate ongoing operational and commercial growth initiatives will position us to deliver above market growth. Our ability to deliver above market growth into 2024 depends in part on driving improved asset optimization across our system, continued price discipline, and sustained cost management all of which were on pace to deliver. 2024 will be a year of rateable progress for us, one where we expect to begin to fully realize the benefits of MBX initiatives, which are expected to support sustained organic growth, margin expansion, and improve working capital efficiency. As before, we intend to prioritize cash generation towards aggressive reduction in outstanding borrowings putting us on pace to achieve a net leverage ratio between 1.5x and 2.0x by the end of 2024. Since the announcement of the MSA acquisition, we have received numerous indications of interest from potential acquisition candidates, many of which fit nicely within our acquisition criteria for lightweight materials and high growth end market exposure. While we will continue to build a solid funnel of high-quality acquisition candidates, our chief focus for the near term will be on reducing net leverage to ensure continued balance sheet optionality through the cycle. In summary, as I have highlighted today, we delivered on several important strategic growth milestones during the third quarter, all of which play a role in building a leading integrated solutions platform equipped to take share in higher value underserved growth markets. As a team, we remain highly focused on delivering a high say-do ratio, one where a continued focus on program execution is at the center of all we do. Collectively, we remain focused on delivering a superior return on investor capital, whether through organic investments, acquisitions, or the repurchase of our own common equity. As we look to the coming year, we will continue to hone and refine our approach to capital allocation as we seek to maximize value for all of our shareholders. With that, I will now turn the call over to Todd to review our financial results.