Mayville Engineering Company, Inc.

Nadia, and I'll be coordinating the call today. If you would like to ask a question, please press star, followed by one on your telephone keypad. I will now hand over to your host, Stefan Nehling at Valium Advisors to begin. Stefan, please go ahead.

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our fourth quarter and full year 2023 results conference call. Leading the call today is MECS 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 MECinc.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 on webcast. 2023 was a year of significant progress for the entire MEC organization. as we continue to advance a multi-year business transformation journey. Our entire team came together under a one-max, one-mission mindset that emphasizes performance excellence and a collaborative, customer-first approach. Last year, we sharpened our commercial focus, expanding within higher-value market adjacencies while improving our operational discipline, leveraging automation and process efficiencies. We introduced a balanced capital allocation strategy, investing in innovation and robotics, prioritizing high return capital light advancements with payback periods of less than 18 months and inorganic growth while returning capital to shareholders through $2 million worth of opportunistic open market share repurchases. Our fourth quarter performance was a solid finish to the year. one highlighted by continued organic revenue growth, substantial year-over-year margin expansion, improved profitability, and a second consecutive quarter of record pre-cash flow generation. During the fourth quarter, demand conditions were generally favorable, primarily driven by new project launches in our power sports, commercial vehicle, and other end markets. Continued strength in our military end market coupled with tailwinds from public infrastructure-driven demand in our construction and access market. 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. As expected and as previously communicated, Our fourth quarter results were impacted by the UAW strikes that were resolved in November together with the ongoing ramp-up of production at our Hazel Park facility. In combination, these factors impacted fourth quarter adjusted EBITDA by $2.9 million. During the fourth quarter, we generated a second consecutive quarterly record $19.9 million of free cash flows. Consistent with our capital allocation priorities, we reduced our outstanding borrowings by more than $21 million in the fourth quarter, bringing our ratio of net debt to trailing 12 months adjusted EBITDA to 2.1 times. As we have stated in the past, our goal is to reduce our leverage to be between one and a half times and two times by the end of 2024, and we are well on track to do so. In our press release issued after market closed yesterday, we introduced 2024 financial guidance, which consists of net sales in the range of 620 to 640 million, adjusted EBITDA in a range of 72 to 76 million, and free cash flow in a range of 35 to 45 million. Our financial guidance assumes continued positive momentum in our business, even amid some transitional cyclical demand softness in select end markets. As we move through the year, we expect that new customer project launches and further optimization of our existing plant capacity will position us to deliver on our forecast. While Todd will provide specific assumptions around our 24 guidance shortly, The key takeaway for everyone on the call is that we have a high degree of confidence in this forecast, one that puts us well on pace to deliver on the multi-year targets we introduced at our investor day in late 2023. Recall that by year-end 2026, we expect to deliver between $750 and $850 million in revenues, expand adjusted EBITDA margins to between 14% and 16%, and generate free cash flow between 65 and 75 million. We believe these targets accurately underscore the significant value creation potential of our business over the coming years, consistent with our unwavering focus on total shareholder returns. I would emphasize that given discussions with our customers on the trajectory of utilization improvement, we expect to see balanced organic growth and margin improvement throughout 2024. We are expecting demand headwinds in key end markets throughout the year, but will be mitigated by our continued new project launches at Hazel Park and continued market share gains. Furthermore, we continue to expect that our Hazel Park facility will achieve 100 million of annualized sales by the end of 2024, consistent with our prior commentary Even so, we do believe that the facility will still experience cost under absorption this year, albeit at a lower rate than in 2023. In the context of the multi-year growth targets we introduced during our investor day this past September, we expect the macro demand environment will mask some of the tangible improvements we are making in the business While positioning us for mid-single-digit to low-double-digit organic growth in 2025 and 2026 as demand recovers, new projects reach full volume ramp, and our MSA acquisition begins realizing substantial cross-selling synergies. Let's now turn to a review of market conditions across our five primary end markets. Let's begin with commercial vehicle market, which represents approximately 38% of our trailing 12-month revenues. During the fourth quarter, commercial vehicle revenues decreased by 1% on a year-over-year basis, primarily due to $5 million of estimated net sales impact of the UAW strikes. While normalizing for the impact of the labor union strikes, sales to our commercial vehicle market would have been up 8.4% year-over-year during the quarter. Our performance during the quarter reflects softening overall demand as the industry navigates regulatory changes, as well as a general slowing in the economic activity, but was offset by new project launches, which we expect will be a tailwind for MECC throughout 2024. Currently, ACT research forecasts the Class 8 vehicle production to decrease 16.2% year-over-year in 2024, to 285,000 units. The current projection indicates that build rates will reach peak levels for the year during the first quarter, stable to the fourth quarter of 2023. ECT expects build rate declines through the second and third quarter of over 20% year-over-year, and then recovering modestly during the fourth quarter. For MEC, we expect our new CV project launches to continue ramping in the first and second quarter and completing around mid-year, which will help us maintain comparable sales to this end market relative to 2023. It is also worth highlighting that ACT currently expects Class 8 production to recover in 2025, growing 7.7% compared to 2024, with continued growth of 18.4% from 2025 to 2026, which supports our organic growth expectations over the next two years. Next is the construction and access market, which represented approximately 18% of our trailing 12-month revenues. Construction and access revenues increased 1.7% on a year-over-year basis in the fourth quarter as steady demand in non-residential and public infrastructure markets more than offset softness within residential markets. We expect this trend to continue through 2024, particularly as public infrastructure spending begins to drive incremental demand in this end market, resulting in our expectation of relatively flat growth for the year in this market. The power sports market represented approximately 17% of our trailing 12-month revenues and increased by 27.7% on a year-over-year basis in the fourth quarter. We continue to benefit from market share gains, which include new customer programs and were partially offset by a cooling in consumer discretionary spending. Fourth quarter growth in this market was also aided by customer supply chain disruptions that occurred in the fourth quarter of 2022, but have since normalized. Given current market conditions, we anticipate customers slowing demand as higher interest rates curb discretionary consumer spending. but we expect these dynamics will be more than offset by an ongoing new project launches at MEC, resulting in our expectation of high single digit growth in 2024. I would note that our new project launches relate to high end models where demand has been fairly insulated from the impacts of higher interest rates. Our agricultural market represented approximately 10% of trailing 12 month revenues and increased 15.2% on year-over-year basis during the fourth quarter. The increase during the quarter was primarily driven by market share gains, which offset continued overall softness in our legacy business. In regards to 2024, we expect our market share gains to offset slowing end-user demand in the overall ag industry and excess levels of dealer inventory within large ag maintaining comparable sales to this end market relative to 2023. Our military market represented approximately 6% of trading 12-month revenues and increased 12.9% on year-over-year basis in the fourth 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, our fourth quarter results do not represent our declining volumes we expect in 2024 due to final fulfillment of expiring projects at the end of 2023. I will also point out that the majority of the revenues from the recently acquired MSA business are represented within our other end market category, which grew by nearly 12 million year over year in the fourth quarter. This end market also saw solid organic growth during the quarter as a new project with a battery thermal management customer continued to ramp up. As I mentioned a moment ago, the MSA integration has gone very smoothly. However, our fourth quarter revenues were modestly impacted by the broader UAW strikes. Nonetheless, we continue to see strong coding activity from existing customers as we make headway on our cross-selling efforts. In 2024, we see MSA generating between 20 to 30 million of incremental net sales, with the revenue synergies beginning to ramp up in the second half of the year. Long-term, we continue to expect MSA to achieve 100 million of sales by 2026, with at least 25 million coming from revenue synergies with legacy MEC customers. During the fourth quarter, we continue to progress in the implementation of our MBX value creation framework, further positioning us to deliver above-market growth through the cycle. Commercially, we are targeting expansion within higher-value, high-growth adjacent markets, including fleet electrification as well as energy transition, while expanding our share of wallet among our current customer base. Demand for lightweight materials fabrication remains a significant market opportunity for MEC entering 2024. While steel fabrication has been our core area of focus for much of our history, recent customer investments in the aforementioned energy transition related technologies require solutions expertise with comparably lighter weight materials such as aluminum and composites. Our recent acquisition of MSA puts us in a strong position to capitalize on this market more fully. We also remain highly focused on deploying value-based pricing models across our customer programs. Year to date, the teams have been working tirelessly to implement a programmatic pricing model, and we expect these initiatives to drive meaningful financial results in 2024. We had some strong new wins in the fourth quarter, including the following. Starting out, we were able to win significant content with one of our top customers, across turf, agriculture, and construction markets. Many of these new awards were a result of the capacity we have installed in Hazel Park, and we look forward to launching these next generation products. During the fourth quarter, we continue to expand, share supporting the expansion of our customer relationship with supplying battery thermal management products to multiple end customers. This relationship will continue to expand as our customer grows their electric vehicle battery systems while we are also working on significant outsourcing programs with this customer. In the quarter, we expanded share with our access customer as they expand their capacity utilizing MEC as a supplier of choice to support their growing production. We made progress in filling our new aluminum extrusion capacity with an award from a construction product customer. We expect further wins through synergies with this account, and we are very happy to see where our sales pipeline is on extrusions as we continue our cross-selling focus. 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. Operationally, we are focused on driving further productivity and utilization enhancements, including the centralization of management functions to optimize our performance across our manufacturing footprint. To that end, we restructured our operations management team during the fourth quarter which we expect to help further streamline the implementation and oversight of our MBX initiatives. As before, we have continued our rigorous implementation approach centered around our quarterly President's Kaizens implemented by monthly operational and commercial excellence Kaizens. Overall, our team has performed over 125 MBX lean events through the end of 2023 with a focus on implementing lean inventory management processes, improving our inventory returns from approximately six times to approximately eight times, and sustainability of cost-saving measures identified. Going into 2024, our financial guidance reflects contribution from our initiatives in the areas of business process efficiency, asset optimization, productivity, and operational standardization. In addition, the execution of these initiatives puts us on track to achieve the 100 to 150 basis points of margin improvement we expect by 2026. In summary, we expect that for the full year 2024, we will deliver 2 million to 4 million from our MBX lean initiatives and another 1 million to 2 million from our commercial pricing initiatives net of inflationary pressures in adjusted EBITDA. In terms of capital allocation, we remain very focused on aggressively reducing our outstanding borrowings, putting us on pace to achieve a net leverage ratio of between one and a half times to two times by the end of 2024. Our expected $35 million to $45 million in free cash flow generation this year will be used predominantly for this purpose, along with our opportunistic share repurchases under our existing 25 million authorization. Opportunistic M&A remains a key part of our multi-year growth and business transformation strategy as we look to expand into high growth adjacent end markets. To that end, while we are aggressively reducing our leverage, our team is building a backlog of potential acquisition targets that will meet our criteria. As we are able to achieve our targeted net leverage levels, we will be opportunistic in pursuing M&A that continues to build on our market-leading capabilities and position the company to further capitalize on multiyear secular growth trends in energy transition and OEM outsourcing. In summary, as I have highlighted today, our fourth quarter results capped off a successful year in our multiyear transformation efforts. 2024 will be a year of transition for MEC as our organic growth initiatives take hold and set us up for significant multi-year growth exiting the second half of this year. 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 invested capital, whether through organic investments, acquisitions, or the repurchase of our own common equity. As we look forward to the coming year, we will continue to hone and refine our approach to capital allocation as we seek to maximize value for all our shareholders. With that, I will now turn the call over to Todd to review our financial results.

Thank you, Jay. I'll begin my prepared remarks with an overview of our fourth quarter and full year financial performance, followed by an update on our balance sheet and liquidity that will conclude with a review of our 2024 financial guidance. Total sales for the fourth quarter increased 15.6% on a year-over-year basis to $148.6 million, driven by a combination of the MSA acquisition and improved organic sales volumes. partially offset by the $5 million impact from the UAW strikes, which was primarily in our CV market, as well as softening demand in our agricultural end market. When excluding the MSA acquisition, organic net sales growth was 6.1% on a year-over-year basis. Our manufacturing margin was $18.2 million in the fourth quarter, as compared to $13 million in the same prior year period. The increase is primarily driven by increased organic volumes, MBX initiatives, and the acquisition of MSA. These tailwinds were partially offset by the impact of unabsorbed fixed costs associated with the new project launches, operational restructuring expense, and the impact of the UAW strikes. Our manufacturing margin rate was 12.3% for the fourth quarter of 2023 as compared to 10.1% for the prior year period or an increase of 220 basis points. Profit sharing, bonus, and deferred compensation expenses decreased by $500,000 to $3.6 million for the fourth quarter of 2023, which is driven by the stock forfeitures related to restructuring of our operations team. Other selling, general, and administrative expenses were $7.2 million for the fourth quarter of 2023 as compared to $6 million for the same prior year period. The increase was primarily driven by an additional $1.1 million of legal expenses relating to our former fitness customer. Interest expense was $3.6 million for a fourth quarter of 2023 as compared to $1.2 million in the prior year period due to higher interest rates and higher borrowing under our credit facility. The increase in borrowings is due to the acquisition of MSA which closed on July 1, 2023. We continue to expect debt reduction during 2024 that may provide for further interest rate step-downs as we achieve our net leverage goal of between 1.5 and 2 times by year-end. Additionally, as we go into 2024, we expect that the applicable interest rate will be approximately the same as the fourth quarter, pending any reductions in the Fed policy rate. Adjusted EBITDA increased to $17.7 million versus $11.6 million for the same prior year period. Adjusted EBITDA margin percent increased by 290 basis points to 11.9% in the current quarter as compared to 9% for the same prior year period. Increase in our adjusted EBITDA margin was primarily due to the increased organic volumes, the MSA acquisition, MBX initiatives, and a $500,000 improvement in our fixed cost absorption at Hazel Park, partially offset by the $1.6 million impact from the UAW strikes. Adjusting even to margin progression is evident and demonstrates early advancement towards our 2026 goal of 14 to 16%. Now I'd like to provide a brief summary of our full year 2023 results. Net sales for the full year were $588.4 million an increase of 9.1% as compared to the full year 2022. Our full year 2023 net sales growth includes organic net sales growth of 4.3%. Our full year 2023 manufacturing margin was $69.7 million as compared to 61.1 million in 2022. This reflects a manufacturing margin rate of 11.8% of net sales, which is an increase of 50 basis points as compared to 11.3% in 2022. Full year 2023 adjusted EBITDA was $66.1 million as compared to $60.8 million in 2022. Our adjusted EBITDA margin percent during 2023 was 11.2%, which was comparable to 2022, but note that our 2023 results include $6.2 million of losses associated with the ramp up of production at our Hazel Park facility and the $1.6 million impact from the UAW strikes. Turning now to our statement of cash flows and balance sheet. Free cash flow during the fourth quarter of 2023 was a positive $19.9 million as compared to a negative $690,000 in the prior year period. As Jag mentioned, This is our second consecutive quarter of record free cash flow generation since the IPO. The improvement in free cash flow year-over-year was primarily due to the $13 million decline in capital expenditures resulting from the completion of the Hazel Park facility and improved inventory turns as we continue to implement lean inventory management processes. As of the end of the fourth quarter of 2023, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents was $149.5 million as compared to $74.9 million at the end of the fourth quarter of 2022 and resulted in a net leverage ratio of 2.1 times as of December 31st. As we have stated previously, it is our intention to use free cash flow generation to reduce our net leverage ratio to between 1.5 and 2 times by the end of 2024. During the fourth quarter alone, we repaid $21.8 million of borrowings using available free cash flow. Turning now to a discussion of our 2024 financial guidance. For the full year 2024, we expect the following. Net sales of between $620 million and $640 million. Adjusted EBITDA of between $72 million and $76 million. and free cash flow of between $35 million and $45 million. Please note that our risk-adjusted outlook takes into account the expected macro softening in the second half of the year, stable raw material and scrap income pricing, as well as the under-absorbed fixed overhead costs associated with the Hazel Park facility as we ramp up to the $100 million run rate by year-end. Our current full-year 2024 net sales guidance reflects organic net sales growth of between 1.5% and 2.5%, driven by new project wins associated with the ramp-up of production at our Hazel Park facility. Additionally, our guidance reflects the Hazel Park facility achieving an annualized run rate of $100 million of sales entering into 2025, which is in line with our previous expectations and will have no material impact to adjusted EBITDA as we're expecting this facility to achieve a break-even return in 2024. Our 2024 net sales guidance also reflects a pro-rata contribution from MSA of between $20 to $30 million in the first half of the year. And we expect to achieve revenue synergies in the second half of the year, which are in line with the expectations we articulated at our investor day in September of 23. Furthermore, embedded within our 2024 adjusted EBITDA guidance is a $2 to $4 million reduction in costs associated with our MBX operational excellence initiatives, $1 to $2 million of strategic value-based pricing initiatives net of inflationary pressures, along with a $4 to $6 million prorotic contribution from the MSA acquisitions. In regards to SG&A, we expect that our SG&A expenses will grow to the high end of our near-term SG&A target of 4.5% to 5.5% of net sales during 2024. This increase is due to the higher compliance costs associated with SOX implementation, a full year of MSA SG&A expenses, and general inflationary costs. This increase was contemplated in the guidance we provided at our investor day in September and we continue to target reducing our SG&A at a percentage of net sales to between 4.5% and 5% by 2026. Regarding our 2024 free cash flow guidance, we currently expect that our capital expenditures for the full year will be in the range of between $15 and $20 million, focusing the high return capital aid automation advancement with payback periods of less than 18 months. such as recently implemented cobot technologies and other investments to support organic growth. Based on our free cash flow guidance, we expect to achieve our target of between one and a half and two times net debt leverage by year end. Please note that our organic growth assumptions for 2024 are risk adjusted to reflect the degree of macro uncertainty that currently exists across some of our key end markets and the impact that this uncertainty may have on the demand for new projects as they launch throughout the year. Lastly, I would like to reiterate that 2024 will be a transitional year, one that positions MEC to deliver mid-single digit to low double digit organic growth in 2025 and 2026 as the macro demand environment rebounds, new project wins reach their full run rates, and our MSA acquisition continues to realize cross-selling synergies. With that, operators, 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 remove your question, please press star followed by 2. When preparing to ask your question, please ensure your phone is muted locally. And our first question goes to Mig Dober of Maybill Engineering. Mig, please go ahead. Your line is open.

Hey, guys. This is Peter Kell. I'm carrying on for Mig this morning. Thanks for taking my question. First, you mentioned 5 million negative impact to sales in commercial vehicles in the fourth quarter. Will there be catch-up on this in the first quarter? Is that embedded in full-year guidance at all, any color around that? Hey, good morning, Peter.

Yes, generally I would have said, right, with order books pretty full and significant backlogs for most of OEMs in the CV market, that $5 million miss would carry forward into 2024. Having said that, that same customer continues to have, as they have publicly indicated, some supply chain challenges, you know, as well in Q1. So given that, you know, it's possible that, you know, that could just move into 2024, but also there's a general slowdown expected in 2024 for CD industry as a whole, as we mentioned. So it remains to be seen, you know, so our forecast includes that potential carryover into 2024 in that market.

Great. Thanks for the color there. This one might be a little more specific, but in your end market outlook, just looking at the slide, you now have the ag industry outlook down. It was revised from flat to down, I believe. But the company outlook for MEC to be flat was unchanged. You know, I understand the share gain commentary, but with all the OEMs now talking about sizable declines in large ag, you know, production cuts, probably going to end somewhere in the magnitude of 10%, 15%. You know, what gives you confidence in your outlook for ag on the MEC side being flat year over year? And if it's all share gains, is there a way to add some color or even quantify, you know, what you're looking at there?

Yeah, that's a good question. You're absolutely correct, right? You know, most of our ag customers have indicated a decline in the range of 10% to 15%, both in large ag and small ag as well. As you recall, MSA that we acquired mid-year last year also had some exposure to ag. I would say the incremental ag revenues from MSA, they'll lap right into 2024, is approximately $4 million. So that's one plus. Significant share gains as we talked about, and significant new project launches that we have mentioned in this call and previously will continue to help us maintain a flattish growth in the end market. As you guys have seen from recent ad shows, some of our customers are highlighting some new technologies and new platform launches, right, we are on multiple of those programs. So, you know, that gives us confidence that as the market is, you know, slowing down, but with new project launches and new product launches from our customers, right, we continue to benefit from that growth as well.

All right. Great to hear. One quick last one from me, actually. Any update on the lawsuit, the fitness customer lawsuit? changes to the timeline there?

Yeah, look, you know, the lawsuit, I guess the wheels of justice turned slow. You know, all kidding aside, right, the parties have cross-appealed the court's order on the motion to dismiss. Peloton appealed the portion of the order that denied the motion to dismiss the claim for breach and anticipatory repudiation of contract, and MECC appeal the portion of the order that dismissed the claim for breach of the duty of good faith and fair dealing. Both appeals are pending. Additionally, Peloton filed a counterclaim alleging that Peloton was induced by fraud to enter into supply agreement and seeking the cessation of the supply agreement and damages, among other forms of relief. So we have answered Peloton's counterclaim as well. denying the allegations. So as we continue to, you know, pursue this claim, right, we continue to remain confident in the protections within our agreement. So that's a long way of saying, right, you know, the lawsuit continues and we're confident in eventual outcome, you know, in the legal system.

And, Peter, this is the type of comment I would make or add. One comment I would make is in our guidance, we have reflected about $1.5 million to $2 million of legal costs as this case continues to develop. So just know that when we provide guidance, we've contemplated all those scenarios and included that already in our 24-hour look.

Great. Thanks for all that, guys. Lots to digest there. I will jump back into the queue. Thank you.

Thank you. The next question goes to Tim Moore of EF Hutton. Tim, please go ahead. Your line is open.

Thanks. And, you know, nice EBITDA guidance for this year and free cash flow generation was quite impressive in the fourth quarter. You know, as you embark on that 200 million cumulative free cash flow through 2026 goal, it was also nice to see, you know, the auto worker strike wasn't as bad as originally expected. And, you know, I just wanted to kind of reconcile one thing to Todd and Jag. For your sales guidance for this year, thanks for giving that organic growth guidance. That includes the 20 to 30 million incremental sales until your anniversary on July 1st for the MSA acquisition. It seemed about 10 million like compared to what maybe I was forecasting, but your EBITDA, 46 million, was exactly what I had in my model. How confident are you in that 20% EBITDA margin incremental and You know, I'm just wondering, is there any end markets that might be lighter in the first half of the year for MSA, you know, which doesn't really have commercial vehicles, but you've got the, I don't know, 19% ag sales exposure it had. But, you know, RVs bottomed out. So I guess what I'm kind of getting at is what's maybe the end market delta on sales for MSA in the first half of this year, and what gives you confidence on 20% EBITDA margin? Morning, Tim.

Look, I don't think that there's any particular end market that's got a delta that we're forecasting against what they have indicated in the past.

Todd, anything you want to add? Yeah. Morning, Tim. You know, what I would say is within our guidance, you know, certainly we've contemplated numerous scenarios and we've risk adjusted. When you think of, you know, the first quarter, you know, sequentially coming out of Q4, we would expect to see a rise in volumes and sales of about between 2% and 4%. Second quarter, again, similar growth, but knowing that there's going to be, you know, a decline in the CV market that begins in the second half. Now, we're highly confident we're going to be able to buffer that through our new launches and other activities, but certainly we'll see a little bit of maybe top-line deterioration just because of that offset, right? And, you know, fourth quarter certainly with, you know, just shortened growth. let's call it working days and expected shutdowns. So when you think of all these market dynamics happening, the CV is primarily the largest change, and that really begins in the second half. Ag, we've contemplated. Power sports, again, we're indicating that it's up year over year, despite the macro environment showing it down. Margin progression, again, we expect to continue to see that as Hazel Park comes online in a more significant way in the second half. So as Jake mentioned on the call, our degree of confidence in this forecast is very high. And we did look at it, you know, all end markets and really put a lot of thought into, you know, if things were to deteriorate slightly from where they are today, we're at the low end of that guidance. Certainly if things improve, we're at the higher end. So I think we've encapsulated everything that we think could happen this year. And I would hope that this does reflect, when you look at our markets, our resilience. When you think of our historical ability to kind of offset declining markets. And this is another demonstration of that, that despite our markets, and some of them being down double digit, we're expecting flat type of sales growth. That's because of our ability to reposition and gain market share during these times. And when you think of the progression to 25 and 26, you get that multiplier impact. These markets are expected to rebound. And with that, we're going to get the top line sales utilization. and the nice margin progressions as we move forward.

Let me hit on, Tim, the points that Todd made. When I was joining the company in 2022, I've talked to a lot of customers, a lot of shareholders, and obviously investment community. One of the big concerns that was raised was that Many of the end markets that Mac plays in, whether it's ag or commercial vehicle or construction, they tend to move in the same direction given the macro exposure, and that could be a challenge in a down year. So what we're saying here, as we have laid out clearly end market by end market, when CV is going to be down 16%, we're going to be flat. When ag is going to be down 10% to 15%, we're going to be flat. When power sports is going to be down, let's say mid-single digits, we're going to be up. That demonstrates the significant work the MEC team has put in place over the last number of years to continue to grow our business, continue to gain share, and continue to offset potential downturns with new program launches. And of course, bringing on incremental capacity, not only through Paisel Park, but also through our MBX initiatives, we have unlocked significant open capacity. In previous years where the sales team might have said, hey, we don't have capacity to bring on new business, now we have completely opened that up. We have significant capacity we can bring on so we can confidently continue to sell even though the market may be up. So what that's helping us in a down year is that we have significant backlog that we're going to be able to deliver in 2024. And then when the markets come back up in 2025 and 2026, that's going to be a significant tailwind for us. So that's why we feel really confident about our end market exposure, but more importantly, how we have been able to offset any potential declines in a year where you know, multiple end markets are going to be going, you know, in a downward direction.

That's helpful. And you made a really good point, Jag, on how construction could move with CVs. Because, you know, I was more obsessed with the MSA side. And, you know, given that they have RVs at bottom, that shouldn't be a headwind for you this year. And, you know, they don't have any really CV exposure much now. But, you know, they have the construction access in agriculture. That's helpful. And it was really nice to hear about the open capacity. The open capacity point's a really good point. I know we talked about it. I went to lunch a year ago. So I just got two more quick questions. They're pretty easy, maybe for Todd. Todd mentioned Hazel Park, you know, maybe break even this year. Todd, how are you thinking about how much, you know, under-absorbed costs do you think in the first nine months? Let's say you get to that $25 million quarterly run rate fourth quarter. You know, you're looking like $3 million dragged through the nine months, including launch and onboarding new customer costs.

Yeah, good question, Tim. So really, it's going to be more front-end loaded. So in the first half, we would expect some under-absorption of costs. I'd say $1 million to $2 million range. And then really, that second half, when you think of third quarter, you're starting to get some under-absorption in Q3, but getting closer to that break-even. And certainly, Q4, we'd be in the green or the black, right? And And really, for the whole year, that offsets what you see primarily in the first half. Again, most of these projects that we've been launching and working on over the last, let's call it 12 to 18 months, are really taking shape and hold and launching in the second half of the year. So that's when we'll start to see the utilization happening. And again, break-even for the year, but as we exit Q4 at that $100 million run rate.

Good, good. Yeah, I'll keep my $3 million through nine months. But do you expect the raw material pass-throughs and scrap prices to be neutral this year? I know they were dragged last year.

Yes, that is our expectation. And one of the items that I commented on was that our assumption is material pricing and scrap income pricing will be stable. Now, we don't expect any changes. But again, material pricing, keep in mind, is a pass-through to our customers. So the risk of when prices rise or decline really is very minimal.

Good, good. And just one last one for Jag, and I'll hand over the questions. Just on energy transition, I just think it's so interesting for you. You have that customer win that was pretty big for battery thermal management in Hazel Park. Could Jag just maybe elaborate maybe more on like some specific end markets and types of products you're working on, you know, for the lightweight deposits, aluminum, just the whole energy transition topic, if you can kind of give us a little sneak peek.

Yeah, just a reminder, right? We do not play in passenger vehicles, right? So I want to put that out there, right? There was a lot of news over the last six to nine months around the passenger end markets on EVs, et cetera, right? We have no exposure in that space. Our business development has been mostly around commercial vehicles, potentially power sports, and potentially other end markets. we have taken two approaches. One, we're directly working with a couple of CV customers and a PowerSports customer as they transition their platforms to battery electric vehicles. So we're directly supplying components to their BEV platforms. Secondly, the other customer we have mentioned in the past, who's got multiple systems that they're deploying into multiple vehicle platforms. We're continuing to supply components to them and then they're putting them together as sub-assemblies or assemblies and then they're supplying to other end users and other OEMs. So we're participating in this energy transition both directly and indirectly. Coming back to some of our legacy customers. As our legacy customers, particularly in the CV market, as they refresh their platforms, they're looking to add more and more lightweight materials, even in non-battery electric platforms. But also, as they transition to battery electric platforms, we're finding opportunities to supply aluminum extrusions, aluminum fabrications into the CV market. I just want to mention that we have gotten... multiple customer codes. What that means is they have qualified MSA as a supplier. That's a first step. We have completed IATF certifications and other qualifications for the facilities that MSA operates. So all of this will help us continue to win. We did talk about last quarter a significant win in the CV market for MSA. and we continue to pursue additional CD opportunities and power sports opportunities with MSA capabilities.

That's terrific, and thanks. And I'd love to set up a possibly, hopefully, conservative organic sales growth guidance this year, depending on macro. But that's it for my questions. Thanks.

Thank you, too. Thanks, Bill.

Thank you. The next question goes to Ted Jackson of Northland Securities. Ted, please go ahead. Your line is open.

Good morning, Ted. Thanks very much. Good morning. Hey, so the fun questions I had have been asked, but I got a couple of small ones for you. The first one, just kind of switching back over to the commercial vehicle business and the guidance you gave, are you expecting the second half of your sales in that category to be down relative to the first half? When I listen, is that what I should be thinking about as I read below my model?

Yeah, I think that's a fair assumption, Ted. I think the base business obviously is going to be down. The market is going to be down 16%. We're expecting the first quarter to be reasonably good given the strong backlog on order rates. I think yesterday or so, ACP released another report saying that the February orders held. So I think Q1 we expect it to be pretty good. Q2 will be okay, and then we expect Q3 and Q4 for the base CV business to continue that decline. I mean, we can't really predict which month or which quarter exactly the downturn will be, but it will be second half. Having said that, we have launched our fuel tanks for one of our top customers, as we mentioned last time. So all of that will continue to ramp and should offset some of the declines in the second half with some of the new program launches that we have.

Okay. Simple question for Todd. What do you think the tax rate, what should we do for a tax rate for 24?

Well, you know, certainly as we wrapped up our 2022 tax returns, which were filed in October, we had found some opportunities on, you know, research and development, some other credits that we could utilize. So we did have a little bit of benefit in the fourth quarter, you know, from those activities. And, you know, as you look into you know, the forward guidance, you think of 24 and beyond, you know, I would continue to say that it's 27%. You know, when you think of 21% federal and, you know, about your 6%, 7% state tax rate. So we're going to do everything we can to hopefully, you know, minimize those impacts. But I think as you model that or look at it, to try to go out on a limb and say we can beat the effective tax rate every quarter is probably a bit difficult.

Okay. And then something maybe a little more entertaining, but just skipping over the military segment in terms of top line. You know, I mean, there was nothing really changing with regards to your guidance, but given the fact that the world just is increasingly a more dangerous place and, you know, we've got, you know, two wars of substance going on and all this concern with regard to Taiwan, is there anything that you see on the horizon that would result in a shift in your guidance? I mean, is there – if Congress was to actually get its act together and pass funding and actually give Ukraine money and Israel money, would that change anything here? Is there anything kind of out there that would say, oh, well, we have some wind in our sails? Or is there nothing that would change your outlook for that segment?

Yeah, I don't know. I don't think even if there's a funding release for these two major conflicts get done this year, I don't think they'll change our outlook. Specifically, we're already on two major programs. One is JLPB, other is Humvee. So those are two major programs that we're on. We had a significant program that came to an end at the end of last year. that will not repeat. And that's the reason why we're being fairly prudent about our forecast in the military market. JLTV program is transitioning from one customer to another customer. And then AIM General is our Humvee producer. They're taking over the JLTV program. So we expect that's actually a tailwind for us, but given that we will have more content in the new OEM versus the current OEM, but that program doesn't kick in, the volumes don't kick in until sometime in 2025, right? So that's why 2024, I think, in our forecast is pretty stable and reasonable and where we sit here and then see how this market is going to perform in 2024.

okay that's it for me thanks very much thank you thank you the next question goes to larry de maria of william blair larry please go ahead your line is open uh thanks good morning everybody hey um hazel park uh obviously you seem to have confidence in getting towards that 100 million run rate um i guess The question is, how much of it is already booked versus go get? And I assume most of it at this point is sort of, you know, in the backlog.

Yes, as we indicated in the past, Larry, approximately 75 million of that 100 million is booked. And we feverishly continue to launch those programs. And we expect we'll be able to fill the other delta with new programs that we continue to win and pursue, but also potentially other transfers based on customer requirements where we may put a new program in a different plant and then may end up moving some of that volume into Hazard Park based on customer requests and other factors. But otherwise, we'd be pretty confident about filling that hundred million pipeline with a new business.

Okay. But in other words, there hasn't been any change from the 75 over the 100 books since the last time?

No, we continue to win new programs and we'll continue to look at in a way to slot those programs.

Okay. Thanks. And then, you know, obviously we discussed some of the three in the call, but there's a lot going on this year with MSA, Hazel, some, you know, mixed in markets, but new wins in the outperformers. Can you give a little bit more, maybe a finer point on the cadence of the year for sales and margins, even if it's first year, second half, obviously, you know, because in back half you have CV rolling off, but you have Hazel Park ramping up and maybe that margin has been going away. So I know any kind of color around the actual cadence for the year, like I said, even if it's first half, second half instead of quarterly would be helpful.

Yeah, so Larry, when you think of first half sale from a top line perspective, we would expect sequentially come out of Q4, Q1, you know, like I stated being up, you know, two to 4%, second quarter sequentially up a few percentage points, you know, versus first quarter. But then, and again, your first half is up, right? As you look at the second half, Certainly, we're going to see some declines in the CV market. That 16% annualized reduction rate really begins in the second half. And so with that, even though we have new project launches buffering that, we do expect to see a little bit of sales decline in the second half. And then when you think of fourth quarter, just because it's a shorter number of days and then planned shutdowns that customers do each year around the holidays, we would expect to see even a little more top lines. Now, it doesn't matter. Volumes in the normalized course are really changing. It's just a matter of cadence, and then certainly the CV market being a big driver of that. When you think of EBITDA margin progression, Q1, for the most part, will be a little bit down as you compare it to Q4. And the reason is, I mean, some of it is, again, it's a risk-adjusted budget. We are expecting our healthcare to have significant increases this year, and that's been contemplated in the guidance, as well as the compliance cost that we had mentioned earlier. That really started Q1, day one, when you think of not only SOX integration or migration, but also cybersecurity measures and other things that we're putting in place. So we will be at the higher end of SG&A percentage for 24, And then when you think of that margin profile, sequentially it'll begin to grow. And it's a little bit muted in the second half because, keep in mind, even though Hazel Park will improve and we'll get better utilization there, with the CV market declining, some of our other plants will have less volume. And not that they'll be in an underabsorbed position, but certainly it does put a little pressure and negate some of the impact of the Hazel Park launch. Again, sequentially after Q1, we would expect to see margins, EBITDA margin percentage improve. And when you think of SG&A expenses, it's really a step cost. This is the kind of transitional year. As we look into 2025 and 2026, we expect to be in that low at 4.5% to 5% because we're not going to have that incremental step up going forward.

Okay, thanks. And then just to clarify, we should expect Hazel Park to generate around 25 million sales in 4Q. Is that about right, based on the obviously 100 million run rate?

That is the current plan, Larry.

And will that be a kind of normalized margin, or there will still be some friction in the fourth quarter?

There will be a little bit of friction in the fourth quarter. Certainly, it will be a positive net income or even a result. but it will be still progressing through the quarter. So as you think of, you know, the ending of Q3, we'll still be, you know, going through the volume ramp-ups as we enter Q4. So there'll be a little bit of drag yet to happen.

Okay. Very good. Thank you. Good luck.

Thank you. Thanks, Larry.

Thank you. And as a final reminder, if you would like to ask a question, please press star, followed by one on your telephone keypad. We'll pause for just a moment. Thank you. It appears we have no further questions. I'll now hand back to Jag for any closing comments.

Once again, thank you for joining our call. We appreciate your continued support of MEC and we look forward to updating you on our progress next quarter. Should you have any questions, please contact Noel Ryan or Stephan Neely at VALUM, our Investor Relations Council. This concludes our call today. You may now disconnect.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.