Good day, and welcome to the Mayville Engineering Company First Quarter 2021 Earnings conference call. [Operator Instructions] I would now like to turn the conference over to Nathan Elwell, Investor Relations. Please go ahead. Nathan Elwell;Lincoln Churchill Advisors;Co-Founder: Thank you. Welcome, everyone. Thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information that 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. For more information regarding such risks and uncertainties, please see our filings with the Securities and Exchange Commission, including our filing on Form 10-K for the period ended December 31, 2020. We assume no obligation and do not intend to update any such forward forward-looking statements, except as required by federal securities laws. Second, this call will involve a discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available@mecinc.com. Joining me on the call today is Bob Kamphuis, Chairman, President and Chief Executive Officer, Todd Butz, Chief Financial Officer and Ryan Raber, EVP of Strategy, Sales and Marketing. First, Bob will provide an overview of our performance, then Todd will review our financial results and guidance. With that, I'll turn the call over to Bob. Please go ahead.

Thank you, Nathan. Good morning, everyone. With the first quarter now complete, I'm pleased to report that we sustained our positive momentum from the second half of last year into 2021. When you compare where we are now compared to a year ago, the difference is amazing. We're proud of the resolve and commitment and determination that everybody in our organization has displayed during these trying times. Of course, the health and safety of our workforce remains our top priority, and we remain committed to the highest level of safety for our employees. Let's talk about the financials. We delivered strong financial results during the first quarter, generating net sales of $112.6 million, adjusted EBITDA of $13 million and operating income of $4.1 million. We improved on both the top and bottom line compared to last year when the pandemic started to impact us in mid-March 2020, and our team began encountering some exceptional challenges. Our improved top line performance is primarily a result of our end markets being in a stronger position than they were at this time last year. Our volumes continue to improve after the strong third quarter 2020 recovery and are gradually moving back towards the record levels we saw in 2019. We are optimistic that they will continue to move in the right direction. Our bottom line improvements are a testament to the hard work to optimize our cost structure over the past year. At an 11.6% adjusted EBITDA margin for the quarter, we saw improvement both on a year-over-year basis and on a sequential basis. And as volumes continue to improve, we expect to make progress towards our expected goal of a 15% adjusted EBITDA. In addition to the benefits from our investments in process improvement, automation and technology, we are seeing the cost…

Thanks, Bob. I'll begin with a look at our first quarter financial performance before providing commentary on our balance sheet, liquidity and our thoughts on guidance. As we noted in our press release, we recorded first quarter net sales of $112.6 million as compared to $108.6 million for the same prior year period. The approximate 4% increase was mainly driven by higher sales volumes due to stronger market conditions in 2021 versus the prior year operational shutdowns and issues related to the COVID-19 pandemic, which started in March of 2020. Manufacturing margins were $14.8 million for the first quarter of 2021 as compared to $11.8 million for the same prior year period, an increase of approximately 25%. The increase was driven by the aforementioned volume increases, utilization of investments in new technology and automation and the permanent reduction in the overhead costs following the closure of the Greenwood, South Carolina facility. The year-over-year improvement also relates to pandemic related issues in the last 2 weeks of the first quarter of 2020, which included customer plant shutdowns and initial COVID related inventory obsolescence and health care provisions. Manufacturing margin percentages were 13.1% for the first quarter of 2021 as compared to 10.9% for the first 3 months of 2020; an increase of 220 basis points. In line with higher sales volumes and permanent cost reductions associated with our cost optimization initiatives, incremental quarter-over-quarter manufacturing margins were 73.1%, which were well ahead of historical averages. Profit sharing bonus and deferred compensation expenses were $2.9 million for the first quarter of 2020 as compared to $1.3 million for the same prior year period. The increase was primarily driven by the return of standard discretionary employer 401(k) and bonus accruals as business activity returned to more normalized levels. Other selling, general and administrative expenses…

Thank you, Todd. As I stated in my opening remarks, we're in a strong market position today, especially compared to where we stood a year ago. A lot of business improvements, coupled with a determination to succeed have been accomplished during the past year, and I want to take this opportunity to express my gratitude to all of our employee shareholders, including my management team and Board of Directors. Thanks to everyone's efforts, MEC is in a much better position today than we were when we first entered the pandemic in March of 2020. It's important to remember, however, that lingering pandemic coupled with supply chain costs and component shortage related headwinds are likely to impact the overall economy for the rest of 2021. Despite these changes and challenges, we remain confident in our team's ability and adaptability to navigate through the headwinds and deliver the financial results in line with the outlook we provided today, including the launch of the new project. This is an exciting time for our company with our current business in a great position to continue to improve and generate strong cash flow, plus the potential for additional growth avenues that are opening up ahead of us. Clearly, there are further important tasks to accomplish, but this team is prepared and focused, and I look forward to sharing more updates with you in the future and in the quarters ahead. With this said, I'd like to open up the call for questions. Operator?

[Operator Instructions] Our first question comes from Mig Dobre with R.W. Baird.

It's Joe Grabowski on for Mig this morning. I have several questions related to the new fitness customer. So I'll just kind of start there. And I guess the first one is the $3.5 million to $5.1 million of launch expenses, how are those expected to fall per quarter?

Obviously, as this process matures and gains strength, likely modest in the second quarter and growing to the largest piece in the fourth quarter.

Okay. Great. That's helpful. And then the separate announcement you put out yesterday, talking about several potential facilities. Am I to assume you're basically looking at existing sites that aren't being used currently that you can move into? Is that the plan?

It would be sites that are available. And some of them may be newer, some of them may be previously used, but they all will be available in the time frame that we're looking for.

Okay. So we're not talking about greenfield construction again, we're kind of talking about existing facilities?

Well, maybe a newer facility that is a greenfield, but it's in process already, and will be available when we want it.

Got it. Okay. And then, I mean, I guess, just conceptually, a piece of fitness equipment isn't as large as a [ truck ] piece of construction equipment, for example. It seems -- I don't know, it just seems to me that a 250,000 square foot facility for components to go into fitness equipment. I mean it seems large. Are you kind of factoring in additional expansion for that facility? Or will that 250,000 square feet basically satisfy the current demand of the contract?

Basically sized to the contract. Remember, we also have a lot of automation in this factory. So a very good leverage of the employment base that will need to operate it. So 250,000 will get you a pretty good revenue level.

Yes. Okay. And then you talked about a shallow employee base right now, it's hard to attract new employees. Are you pretty confident you'll be able to get the factory staffed when you need it to be?

Yes. That's -- that was a key attribute we're looking to when we were doing our site planning, and we looked at numerous states and this location gave us the best opportunity for that as well as a few other things relating to costs and energy, et cetera

Great. Okay. Final question. Assuming that your core end markets continue to progress the way they are right now and then with these incremental sales, 2022 sales are likely to be at least back to 2019 levels, if not above. So will this new contract, will this new product, be supportive of your 15% EBITDA margin goal?

Most definitely.

Our next question comes from Andy Kaplowitz with Citi.

This is Piyush on behalf of Andy Kaplowitz. Can you give some additional color on your end markets based on your guidance, while things are not at the pre-pandemic levels, trends seem mostly positive? Can you provide some commentary on what you would consider as recovered versus what you think is still not recovered as we think about the remainder of the year?

Sure. Ryan, you want to take that question?

Yes. I think certainly, since the third quarter of last year, we've seen the majority of our end markets have a pretty positive trajectory. If you take commercial truck, for example, 2019 was certainly forecasted at higher levels than we are today, but we expect the upward trend to continue. And as we look into the years ahead, 2022, 2023, the goal is to obviously eclipse where we were in 2019. So the setup is good. As Bob noted in his comments, we see certainly strength in commercial vehicle and the construction and access end markets. The fundamentals in ag remains strong. Coming into the year, we weren't sure how long power sports would remain at elevated retail levels and the restocking needed, and we think that has only gotten stronger. Since the last time we had spoken and our military market has remained pretty stable. So we continue to see positive signs pretty much everywhere across the business. And obviously, the new customer that we're adding will add a new market into the mix that we also are very optimistic about.

Got it. Good to hear that. And can you touch upon your M&A strategy given the new credit agreement? Do you think M&A gets pushed out a little as you focus on the new customer and facility? And you basically touched upon this on your -- in your prepared remarks, but maybe elaborate on the M&A pipeline that is out there, given how the economy is shaping up, what end markets are you guys focusing on from an M&A perspective?

Yes. Well, I guess I'll just say this, we'll be sticking to our investment strategy of new customers, new markets, new geographies, product line expansion, product line extension. Those are our base criteria, and it appears that, that funnel is filling very quickly. We obviously want to make sure that things are perfect, and we're spreading out the workload a little bit regarding the launch of the new project as well as M&A, but M&A projects come to you when they want to, not necessarily when you want them to. Our balance sheet is prepared to take it on. Our team is prepared to take it on. We've tried to keep a few capacities that we can pull on either internally or externally to assist us where needed. So we'll take it as it comes. And -- but we still will put that heavy scrutiny on the strategic part and the valuation of that.

Our next question comes from Larry de Maria with William Bar.

The first question, I just wanted to understand. Sales were up close to 4%. Most of the OEMs are putting up solid double-digit sales increases. So I'm just kind of curious, what's the disconnect between the sales -- OEMs putting up 10%, 20%, 30%, 40% increases in the first quarter and then your guys increase? And then can you also discuss the ability to price? Because I think it's -- obviously, it's a mechanism pass-through mechanism, so it shouldn't be a problem with pricing, but can you just kind of help me with those 2 things?

I think -- I'm going to ask Ryan to kind of review it a little bit by market. But there are some details there that I think would lead you to our results. And some of them, depending on where that customer was in the first quarter last year, it might look like a big jump forward to them. But compared to our revenues. I think everything is lined up. We have not lost any wallet share, if anything, we're gaining wallet share. So I guess, Ryan, do you have a…

Yes, I guess we're tied in closely to their build rates, Larry. So obviously, as they're building trucks, tractors, combines, whatever that may be, we're flowing through the same way. There could be changes in inventory that take place both on our side or even in their end markets with how they're thinking progression throughout the year. But as Bob noted, there hasn't been any wallet share loss, and we continue to support the customers and meet the needs of the line rates of their business. In terms of pricing, we obviously are looking at all the input costs, the cost of steel has accelerated and went up over the past couple of quarters. We do have agreements with customers that match the price to cost, but at times, those are lagging just in the mechanisms and how those are implemented. But we do expect, over time, that, that reaches parity points and won't impact the business over the long term.

Okay. That's good. And I know you're talking about on your guide to the production plans. But I talked about the first quarter, with sales up 3%, 4%. What was down to offset, I mean, Caterpillar comment, [ CNH ] this morning, they all put up big sales increases. So I just don't understand why you guys were up the 3% to 4%, something must have offset it.

I'm sure a portion was in our first quarter of last year, when COVID and the pandemic set in, we had multiple weeks of just customer shutdowns where zero shipments were taking place. Obviously, that impacted year-over-year. And then as we look into this year, all I can really say, Larry, is we've seen the growth in line rates and build rates that they've had were aligned well, and there's probably some equation on how they're recognizing their build rates into what their retail volume is, but we've seen the growth. We don't have any major markets that are really down year-over-year. Everything we've seen has shown signs of strength. And as we think about it sequentially, really going back through the third quarter, we're matched up really well to what the customers are telling us.

And then a second question regarding the new customer. If -- correct me if I'm wrong, I've been on a bunch of calls this morning, but you're going to spend up to $45 million on the ramp. And therefore -- and you expect a 3-year payback, so something like $15 million a year, $45 million over the next 3 years, you're going to get back. Number one, is there a ramp to that? And is that right? That's what we should expect? And then sales would be obviously be in the $100 million plus per year with the new customer? And secondly, what's the risk with this customer? If they fail or something happens, are you on the hook for this? Or are they sharing the risk with you? Can you just help us understand that?

I think a couple of points there, in our calculation of investment, it would be that CapEx plus the learning curve. So you would add in the $3.50 million to $5 million, and our -- we of looking at it. So the return less than 3 years, your math is correct. And with regard to your other question regarding the risk associated with it, it's a risk shared contract that gives us and them protection that they need and we need.

Okay. Very good. Should we be modeling this linear or a ramp over the next few years?

Larry, this will really ramp up over the first couple of quarters of next year, so pretty quickly. And then by the time we hit really the back half of 2022, we would be running at an annualized rate that would continue into the years ahead.

[Operator Instructions] Our next question comes from Steven Fisher with UBS.

I apologize I got on the call a little bit late, so I'm not sure if you addressed this already. But in some prior quarters, you talked about the potential to have a 15% EBITDA margin when you get to the $500 million sales level. And so you're just shy of that with expected market growth rates. I wonder if that is within a line of sight over the next year or so on the top line? And if so, how confident are you in still being able to achieve that 15% margin level?

Todd, do you want to answer that one?

Yes. This is Todd. Great question. And certainly, it's something we're watching very closely. And yes, we feel very confident once we get back to that pre-pandemic and down a level that the 15% EBITDA -- adjusted EBITDA margin expectation is achievable. In fact, when you look at this quarter, just a little bit -- 12%. But really, if you strip back and if you factor in some of the period costs a little bit with the material leg that Bob spoke to, that's kind of a short-term impact. And then you tack on about $10 million, $15 million worth of sales, and you get that absorption of fixed overhead, we're kind of there today already. So it's really hitting at sustained volume at that $500 million plus level that we will see the 15% EBITDA margin returns.

Okay. So it sounds like that's something we could keep in mind for perhaps 2022?

Definitely.

This concludes the question-and-answer session. I would like to turn the conference back over to Bob Kamphuis, Chairman, President and CEO, for any closing remarks.

Thank you for the question-and-answer session. I appreciate everyone's time today and your continued interest in MEC. We look forward to talking with you at upcoming conferences and road shows throughout this year. Have a great day, and glad to see everything going in the right direction. Thanks for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect