Good morning and welcome to the Mayville Engineering Company Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Nathan Elwell of Investor Relations. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks, assumptions and uncertainties, our actual results could differ materially from those in the forward-looking statements.

Thank you, Nathan. Good morning, everyone. As we look back at 2020, we're pleased with the way we’ve responded to the pandemic challenges we faced. Not only did we effectively adapt our operations to continue working throughout the year to support our customers, we were still able to focus on optimizing our cost structure through facility and process improvement and strengthen our financial position. I give credit to our leadership groups throughout the company for being creative and quickly formulating improvement plans and our entire team for their resilience and diligently implementing those plans and continually adapting to the changing environment. Agility, adaptability and realignment are strengths of our business culture of MEC. The fourth quarter provided a positive end to a challenging year. In short, we did exactly what we told you we would do last quarter. All things considered we're pleased with our performance for the quarter and our progress for the year. We continue to maximize the efficiency of our manufacturing operations. And we are seeing the positive impact of these initiatives in our results. For the fourth quarter of 2020, we delivered net sales of $95.3 million, slightly lower than fourth quarter of 2019, but a sequential increase from the third quarter of 2020. Most importantly, we've produced adjusted EBITDA and adjusted EBITDA margin of $9.3 million and 9.8% for the fourth quarter respectively, both of which are significantly higher than the same period last year, as we are now more efficient and have reacted to the changes that occurred late in 2019.

Thanks, Bob. I'll begin with the highlights of our full year financial performance and then discuss our fourth quarter for providing commentary on our balance sheet liquidity and our thoughts on guidance. As noted in our press release, we’ve recorded full year 2020 net sales of $357.6 million, as compared to $519.7 million for the same prior year period a decrease of 31.2%. The decline was driven by volume reductions related to de-stocking activities and market demand changes mostly driven by the pandemic. Despite the lower volumes, our customer relationships and manufacturing programs remain intact. Adjusted EBITDA and adjusted EBITDA margin percent for the full year 2020 finished at $32.8 million and 9.2% as compared to $54.7 million and 10.5% for 2019 resulting in a decremental margin of 13.5% as compared to our historical average of 17.5%. The improved decremental margin percentage is attributed to our effective implementation of cost reduction activities, including the Greenwood South Carolina closure, a full year of DMP synergies, and leveraging our recent investments in new technologies and automation. It is important to note that these cost adjustments are permanent, providing a clear path and a 15% adjusted EBITDA margin expectation when manufacturing volumes returned to pre-pandemic levels in the coming years. Despite the challenges posed by the pandemic, we generated a strong cash flow resulted in significant debt pay down of approximately $28 million, resulting in an ending debt balance of $47.9 million and the leverage ratio of approximately 1.5 times as of year-end. Now I'll provide guidance on the financial performance for the fourth quarter. We recorded fourth quarter net sales of $95.3 million as compared to $102.3 million for the same prior year period a decrease of 6.8%. The decline is due to market related manufacturing volume reductions, again mostly driven by the pandemic. Manufacturing margins are $11 million for the fourth quarter of 2020 as compared to $4 million for the same prior year period an increase of 174%. Prior year manufacturing margins were adversely impacted by sudden declines in market demand, customer related labor union issues and de-stocking activities, resulting in unusually high amount of under absorbed manufacturing expenses during the period.

Thank you, Todd. We're pleased with our recent results on the progress we're able to make during the difficult year, while not back to pre-pandemic levels. As Todd mentioned, we are seeing volumes improve across many customers and end markets. And most of the commentary from our customers about the future is positive. In the fourth quarter, we did exactly what we said we would do and I'm pleased we're able to end the year on a high note. Assuming the economy continues to stabilize and improve. We are bullish about our prospects in 2021 and beyond as we pursue further productivity gains through new technologies and automation and explore important internal and external growth opportunities. On behalf of the Board and our Management team, I want to thank each and every MEC employee and shareholder for the dedication they have shown during very trying circumstances over the past year. We continue to be vigilant regarding the pandemic, and believe our employees are now used to operating with these restrictions in place. Despite the disruption, their persistence and consistent strong performance has ensured we have maintained all of our customer relationships and manufacturing programs and now are in a position to respond as customers ask us to ramp up volumes. With our current business as well as opportunities on the horizon, we are well positioned to drive growth in the years ahead. With that said operator we'd like to open up the call for questions.

We will now begin the question and answer session. We'll pause momentarily to assemble the roster. First question comes from Mig Dobre, Baird. Please go ahead.

Thank you. Good morning, everyone.

Good morning Mig.

Hi, Mig.

I -- thank you for the ranges that you've given us by end market in terms of your mix for ‘21. Just a quick question on 2020, can you give us a sense for commercial vehicles how much that contributed to your to your revenue in 2020?

Yes, that was in 33% range, I think, right around 33.

Okay, thank you for that. And your reference consensus sort of being generally in line with kind of how you're thinking about 2021 at this point. 2021, is likely to be a year of good volume growth. So I guess my question is, as you're sort of looking at your operations currently, what is -- what do you see as your ability to be able to meet that that higher demand? Do you see any challenges ramping up production, either related to your own operations or your own supply chain in this regard?

Yes, I'll take the comment about supply chain first. And I guess, there has been some steel shortages in the marketplace that we are aware of, obviously, steel pricing has increased significantly. But most of our contracts are passed through on the material costs. On the availability side, we've actually done very well on probably better than most. So we've worked very hard at that all the time Mig. And as far as there are some very modest imports that come into our product before we ship it. And we're working on those things as well. It's almost immaterial to talk about. On the internal side with the equipment and investments that we've made, that helps mute some of the people requirements that otherwise would have to be taking place. We still have pockets, it's different locations, different geographies, geographies have different challenges. But again, I think our investment in automation is showing that that we did the right thing and will continue to do the right thing with those investments. So I -- we won't be without challenges, but I think we're continuing to work at minimizing them.

Okay, it sounds to me, and I don't want to put words in your mouth here. But it sounds to me that you're fairly confident that you're going to be able to essentially keep up with your customer demand in 2021. And I suspect that not all your competitors are going to be able to do that. And even your own customers, the ones that are having internal fabrication operations and whatnot are probably going to struggle to some extent, ramping up. As you look back at the prior industrial downturn or recession. Is there an argument to be made that you will be able to gain some share or incremental business just given your ability to ramp your own production higher and hopefully take some share that way? What if you in this regard?

Right, I think history is one thing, but we were less automated at those times. Hopefully with our additional automation, we have more leverage potential there. But we're going to be very careful about it. We want to look at that opportunistically. And it's not just about share. It's about profitable share. So that's what we're focused on and doing the right things overall for the business.

I see. And that actually, this is my second line of questioning which is surrounding margin. You talked about the fact that raw material costs are generally a pass through, but I know that some of this is embedded in your own business, right? I mean, if I'm thinking about consumables on a welding side, that's something that you have to deal with that I presume, and it's not something easily passed through to the customer. So how do you think about the impact of that on your financial model in 2021? Should we expect you to adjust pricing accordingly? And do you think you can be at least neutral from a price cost perspective?

We're working hard at doing that. I guess, when we looked at things like automation, actually, some of the equipment is more energy efficient for the consumables that go through a weld wire, weld gas things like that, you're using equal amounts as you would in a less automated situation. So we -- and we also have continuous improvement activities by site that we manage kind of on a corporate wide basis, so that we're sharing best practices and best ideas between locations. So that's a prime focus and we work hard at it. Our hope is to be able if we have some crazy increases in those things that go into overhead or perishables. We'll probably see a little bit of diminishment. But on the flip side as we look at our backlog of work, if things perhaps need to be adjusted upwards, we'll have some of those discussions with our customers.

I see. And then last question for me. You talked about the 15% margin goal and reiterated that you're confident on reaching that. I'm sort of curious as to how you're thinking about the manufacturing margin, and what's embedded within that outlook. If my memory serves me right, your prior peak manufacturing margin was right around -- right under 15, I should say. So within that framework, should we expect that figure to be higher than it's been in the past? And as you think about 2021, based on the discussion that we just had, how should we think about manufacturing margin in ‘21? Thank you.

Mig, this is Todd. Yes, definitely, as I stated in the script it was, we do expect when we get back to let's call it normalize or pre-pandemic levels at that manufacturing margin percentage will be above historical averages. So when you think of the peak -- as peaking around 50%, getting back to pre-pandemic levels, we would expect that to be north of that percentage and probably in that, I would say 16 to 18 percentage point range. But certainly we think at ‘21, I expect it to be improved from 2020. But again, what we think that the under applied overhead because of lesser volumes compared to 2019, it's not going to get back to that, I would say 15% this year. But again, once we started getting into leverage our investments and our overhead with pre-pandemic level volume, we do expect that to be north of the 15%. And then we achieve that 15% adjusted EBITDA margin.

Thank you. Appreciate it.

Thank you. Next question from Andy Kaplowitz with Citi Group. Please go ahead.

Hey, good morning, guys.

Hi, Andy.

Good morning.

Good morning Andy.

Maybe I could ask Mig’s question one other way on the margins. You guys have said in the past that given the cost out and footprint consolidation that you've done that you might be able to average high 20% incremental sales recover is that possible in ‘21? I know you said you're comfortable with consensus. But obviously, there's price versus cost. And all that kind of stuff you just talked about. So is that possible in ‘21?

Yes, 22.5 % as our historical average, we do believe that still achievable in 2021. Now, you won't see the 30% and 40%, you don't even 100% type incremental that you saw when you compare it to 2020 to some of the 2019 fourth quarter, but we will still be above the 22.5% in my mind the cost reductions we've made.

Got it. That's helpful Todd. And then Bob, maybe just for a little more clarity and maybe Todd answer this also. So if we look back at Q4, I mean, you talked about not yet reaching pre-pandemic levels in ‘21. But if we look back at 2020 in Q4, I would assume some of the businesses some end markets already above pre-pandemic levels, given you're only down 6%, or whatever it was, and powersports has been relatively obvious maybe military but any sort of more commentary on the end markets themselves and sort of what's already sort of recovered if you may versus what's not recovered.

Sure. Well, when we say pre-pandemic, there's a couple of definitions. 2019 was one year and pre-pandemics is kind of first quarter of last year. Obviously, the commercial vehicle market was in a downturn going into 2020 and has since bottomed and it's coming back. So that one, we've seen that begin on the third quarter and strengthen in the fourth and we think we'll continue to improve throughout ‘21. So that's what we're talking about is that's one example of what we're talking about when we say pre-pandemic. Other markets, likewise, we've seen the inventory de-stocking become complete, during the second quarter, third quarter period of time. And those markets have bounced back. So when it comes to the recreational products, obviously, they were not essential manufacturers, so they ate their inventory during the second and third quarter and now are replacing inventory and trying to keep up with demand. So everything has been moving pretty much in a very positive direction. So that gets the color I can put around that.

And Bob, maybe just following the , like in terms of restocking powersports, sure, and you said maybe that sort of levels off at some point in ‘21. Is that still your thinking? And then for end markets like small ag, for example, and there was de-stocking that seem to end? Do you think that any markets will really need restocking in ‘21 decides powersports?

I guess I'm going to ask Ryan, if he has a more close impression on that one. But I guess I'll start by saying we'd agree that they'll come a point where inventory is restocked on the recreational side. And then the other markets yes Ryan you have some comments?

Yes, I guess you mentioned small ag and definitely there was a quick depletion of inventory kind of in the middle of 2020. That has led to a little bit of restocking there. We would also see it a little bit in the construction market as Bob noted in his remarks, the housing market has been strong. We've seen a lot of the rental companies increase CapEx year-over-year, in certain pockets of equipment tied particular to more of the housing sector. There is a little bit of restocking activity that has taken place there in the construction market.

Thanks Ryan. And then maybe one more for me, can you give us an update and where you are in terms of acquiring new customers and entering new verticals? I know you talked about it a little bit, Bob in the prepared remarks. But you've been talking about opportunities in the past like warehousing, packaging, how are you thinking about new potential business contribution to ‘21? I know it's sort of in the other segment, but anything that really excites you in ‘21 and beyond?

Well, I guess we'll be able to talk about it more when they occur and if they occur, but we're pretty positive about the opportunity and the potential out there, Andy. And so I think that's my comment on that. If -- when we can report it, we will report it.

And Bob are you seeing any evidence of existing customers re-shoring at all, or maybe pushing outsourcing more?

Sure. And that's part of that story and creates those kinds of opportunities. So absolutely, that's part of part of the piece behind that.

Great, thanks, guys.

You're welcome.

Your next question comes from Stephen Volkmann of Jefferies. Please go ahead.

Hi guys…

Good morning Steve.

Hi, this is for Steve. I just had a quick question on any temporary cause coming back in ‘21 and just probably cadence on it. I know you mentioned that travel expense and related expenses were down this year. Any guidance on what we can expect in 2021?

Yes, I guess on those topics, there will be -- we do expect some employee benefits, retirement benefits to return to a more normalized level last year, as Todd mentioned about the fourth quarter, we kind -- we filled the bucket in the fourth quarter to make a full -- almost full contribution to the 401(k) is for our employees, we anticipate that that will be at a full level in 2021, which will make those dollars higher, along with the expectation on other incentives. On the costs for travel et cetera, we've all learned a lot this past year about how to conserve costs, how to save time, and it's not just in the -- on the factory floor, but in the front of office. And we will be monitoring that carefully. I don't see those types of spendings for travel and entertainment and such hotels and meals increased to the 2019 levels. They'll probably sneak up a little bit from 2020. But, I think we all learned some new things this past year. And we're going to take advantage of that to use our time more effectively.

That's helpful. Thank you.

You're welcome.

Thank you. Next is a follow up question from Mig Dobre of Baird. Please go ahead.

Thanks for taking the follow up. Just a quick one, Bob, you talked about the M&A environment. And I think I heard you say that it was kind of slow. So I guess my question is, I know them before the pandemic, did you guys had a pretty active and fairly full pipeline and you operate, obviously in a very fragmented industry? What are all the puts and takes here in terms of when some of these deals would become maybe available? And you'd start converting on that? Then I'm also kind of wondering if now that we've been through this sort of big shock, if your own thinking in terms of the things that you'd like to add to your portfolio change, right. I mean, if you're either looking for sort of new geographies around the country or new verticals that you might not have examined before or even sort of new manufacturing capabilities that extend beyond the core of what Mayville Engineering has been known for?

I guess, Mig, I'll take a couple of pieces here. Those prospects that we had are still there. And some of them have retrenched and are waiting for a better day to present themselves for sale. I think that's both from a PE standpoint and from a private owner standpoint. But we still have those contacts and it just doesn't seem as robust today as it had done. I think that will change over time. As people figure out the end of COVID and all the other risks and issues that are out there. With regard to what we're looking for, our definition is still the same and product line expansion, product line extension, geographic expansion, and then looking for the markets to serve. So now, between doing that through M&A or through internal growth, if we can do it in a in a meaningful way with the internal growth, it seems like a more cost effective way to do it. And, we will always try to prioritize the best return opportunities and achieve all those investment criteria. And so it can be both.

Well, if opportunities don't avail themselves to you. Based on just my own modeling, it looks to me like your leverage ratio will exit 2021 close to close to zero. And I'm wondering if that's the case at that point. Would you consider some form of returning capital to your shareholders either in a special dividend or something like that?

Yes. So we've got three things that we invest in. One is, we have -- we still have some more internal ROI opportunities to help us be even less dependent on people by doing re-deployable automation. Secondly, we have internal growth opportunities. And as we address those, that will be with as much automation as possible. And then thirdly, would be M&A opportunities that will be another use of cash. So all three of those things will be going on this year. And the mix today, I can't sit here and tell you what that's going to be. But I don't think our balance sheet will be debt free at the end of the year. There's opportunities for growth, and we're going after that.

All right, fair enough. Thank you, guys.

Thanks, Mig.

Thank you. The next question is from Chip Rewey of Rewey Asset Management. Please go ahead.

Good morning, guys. A couple of quick questions, more one-on-one type stuff for you. I understand you have the raw material pass through but especially with steel popping, wondered if there's a lag on those contracts where it's a 90-day lag or anything like that. And I guess I'll just ask for and you can dig into these last two as deeply as you want on the call. On the construction side, can you just break out top line resi versus commercial? And on the commercial vehicle, again are you in the engine or are you in the tractor and the trailer and for that market specifically? How much forward visibility do you have -- do you see to short-term or do you can you see longer term 6 to 9 to 12 months ?

I'm going to ask Ryan Raber to address those more details on that.

Yes, the commercial vehicles mainly heavy duty and medium duty truck not really much trailer in there obviously have long range forecasts to use from industry publications, but generally 3 to 12 months of visibility from the customers. On the construction market, we don't really have any top line breakout we do by -- I'll say the sub sector, so nothing to note there. Can you remind me your first question that you asked?

Sure, just on the raw material pass through, do you guys have a 30-day, 60-day, 90-day lag that we have to just think about?

Yes, all those tend to be a little bit different based on who the customer is we have some that are kind of more real time where you're looking on monthly. There's others that look at quarterly. So it really depends on which customer they each kind of run their own individual program consistent over time. So if there is any lead lag that always kind of works its way out as you go up and down through the cycles.

Very monetarists on that topic or what I should say.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Bob Kamphuis for closing remarks. Thank you.

Thank you all. Thank you for your time today and your continued interest in MEC. We look forward to talking with you at conferences, whether they're in person or electronic and roadshows throughout the year. Thanks again for your time and interest.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.