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.