Hello, and welcome to the Mayville Engineering Company 2Q 2021 Earnings Conference Call. . I would now like to turn the conference over to Nathan Elwell, Investor Relations. Sir, Elwell, 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 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 at 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. I'm pleased to report that many of the positive trends we outlined last quarter continued into the second quarter. Thanks to the diligent efforts of our team, we produced net sales of $120.2 million this quarter, virtually doubled the amount delivered in the second quarter of 2020. Adjusted EBITDA of $14 million drove operating income of $4.8 million and both tremendously improved compared to the prior year period. Like many companies, the second quarter of 2020 was the toughest part of the pandemic for MEC. And as things continue to improve in 2021, we have outperformed on almost every metric on a year-over-year basis. Across the board, our end markets continue to strengthen and volumes continue to steadily grow as we transition back towards normal working conditions. Based on the visibility we have today, we remain optimistic about the future. We finished the quarter with an adjusted EBITDA of 11.7%, which was well ahead of the prior year and in line with our expectations. Having said that, our bottom line performance has been impacted somewhat by the normal lag in contractual raw material price increases and general inflationary pressures. As volumes continue to improve, we expect to make further progress towards our goal of 15% adjusted EBITDA margins. Todd will cover this in more detail in his remarks. Going forward, we remain focused on investing in technology and automation to improve our productivity potential and take on the growing demand we are seeing from our customers, particularly through the launch of business in Hazel Park, Michigan. It is worth noting that while COVID cases are very low in many of our communities that we operate in, we are remaining vigilant regarding the health and safety of our workforce. This is a top priority. As…

Thanks, Bob. I'll begin with a look at our second quarter financial performance before providing commentary on our balance sheet, liquidity and guidance. As we noted in our press release, we recorded second quarter net sales of $120.2 million as compared to $62.6 million for the same prior year period. The approximate 92% increase was primarily driven by higher sales volumes due to the strengthening market conditions in 2021 versus the prior year. In addition, the lack of operational shutdowns and issues related to the COVID-19 pandemic, which impacted our customers most heavily in the second quarter of 2020. Manufacturing margins were $16.3 million for the second quarter of 2021 as compared to a loss of $1.2 million for the same prior year period, an increase of approximately 1,500%. The increase was driven by the aforementioned sales volume improvements, the utilization of investments in new technology and automation and the permanent cost reduction in overhead costs and related prior year restructuring costs of $1.8 million following the closure of our Greenwood, South Carolina facility. These improvements were slightly offset by the lag in contractual raw material price increases incurred in the current period, which we expect will be recovered in the near term. Additionally, the company incurred $0.1 million of the expected $3.5 million to $5.1 million of launch costs related to the new Hazel Park, Michigan facility for our new customer in the fitness equipment market. Manufacturing margin percentages were 13.5% for the second quarter of 2021 as compared to a negative 1.8% for the 3 months ended June 30th, 2020, an increase of approximately 1,500%. In line with the higher sales volumes and permanent cost reductions associated with our cost optimization initiatives, incremental quarter-over-quarter manufacturing margins were 30.3%. The profit sharing bonus and deferred compensation expenses were $3.2…

Thank you, Todd. Thanks to the strong work ethic and focus on safety of MEC's employee shareholders. We are in a solid position today as our business and the world continues to rebound from the pandemic-related downturn last year. While demand trends are all showing green, we are being limited by the various supply chain, people constraints and price inflation that will continue to impact MEC and our customers and the overall economy for the rest of 2021. We are navigating through these headwinds and are well positioned over both the near and long term to drive improvements and expand our market-leading position. We are pleased with our results for the first half of the year, and our outlook bodes well for the second half of 2021 and beyond. With this said, I'd like to open the call for questions. Operator?

. And the first question comes from Mig Dobre with Baird.

I guess I want to start with the discussion on supply chain and sort of what you're seeing from your customers, as you've highlighted disruptions to their production schedules, which, obviously, we've been hearing about that throughout earnings season. You don't expect things to get worse, but I'm sort of curious as to, first, is there a good way to kind of quantify what the impact on your business might have been in the second quarter from these changes and in production schedules? And then do you expect your customers to be able to make up production either in the third quarter or the fourth quarter?

Sure. I guess on the first question, Mig, there was -- I won't say it was minimal, but it was -- it wasn't that big of an impact on us. It would have helped certainly our results for the second quarter had we not faced some of those issues, and I think people would have been more pleased with our results than they already are. But on the supply side and I guess what we see happening, we do think that it's stabilizing. We think there are better days ahead, especially on the employment side as some of the federal assistance goes away on the unemployment benefits and school begins and health care or day care for children and schools are open again. So we're looking forward to better days there. I think the worst part is behind us. So that's the people part. On the supply side, certainly, that helps our other domestic suppliers become more capable of fulfilling their obligations to our customers. On the import side, I think our ports are getting better for bringing product in, but they're not where they should be yet. So there'll be -- and I'm not certain on how that one is going to shake out. From a customer standpoint, I think they are looking forward, and they will want to be able to make up that volume. It will depend on these headwinds as to whether they'll be able to do so.

Then in your updated outlook, I'm trying to figure out here if we should be thinking that revenue here is up sequentially and do you expect normal seasonality into the fourth quarter? Or sort of how do you have things kind of planned out for the rest of the year from a revenue standpoint?

Yes. I would say we're looking at a solid second half. I think the resources and output that we're -- that we've shown we're capable of doing in the first half will continue and maybe modestly up a bit in real output, not price-adjusted output. So we see our output improving and they're being largely the material cost adjustments going into those revenue increases. And with that, very modest accretion to earnings because of that, but some.

But are you able to maybe parse out the third versus the fourth quarter? I'm just trying to think as to how we should be thinking of revenue sequentially here. If it builds in the third quarter and then slows down into the fourth with holiday shutdowns? Or is there a different way that you might be thinking about this?

So Mig, when you look at third and fourth quarters, really, it fills a little bit because of the price pass-throughs that happened in the third quarter. And so it really stabilizes. And really when you look at third and fourth quarters, they're very much very similar from a top line sales perspective other than when you take off the impact in the fourth quarter for the holiday shutdown. So really, that production is very much stabilized in the back half and very consistent.

Then last question for me. If I'm looking at your top line guidance, I just want to make sure that I understand the $20 million raise, how much of that was this pricing pass-through that you're talking about relative -- versus maybe some of the end markets themselves performing a little bit different than what you previously expected?

Yes. So on that $20 million lift, we would say about approximately 2/3 of that was related to price pass-through. Some of it is just strengthening market conditions.

And the next question comes from Andrew Kaplowitz with Citi.

This is Eitan Buchbinder on for Andy. Similar to your new fitness customer, have you seen further demand from both old and new customers to localize their supply chain during Q2? And how much runway would you say that a potential reshoring trend has to go?

Yes. I think we're -- we continue to see opportunities there. Obviously, supply chain constraints, both domestically and globally cause the customers to reevaluate their situation. So I can't really put a number on what that means. But I can say we continue to pursue additional opportunities, both on an outsourced basis domestically, but then also as you think about reshoring, onshoring for folks that are using an international supply chain.

And you've previously mentioned potential opportunities regarding warehousing and packaging. So what are you seeing in terms of that business potentially contributing to revenue over the coming quarters?

Yes, I mean, it was -- I guess, a couple of years now or at least 1.5 years that we brought on some new customers in that space, which continue to grow. We haven't necessarily highlighted those in our past few calls, but definitely we continue to build strength in the market. Overall, when we think about the impact of just the change in consumer spend and the goods, it's good for our commercial truck market when you think about freight movement, those all have to sit across docks, warehouses, et cetera, and the 2 end up kind of being tied. So we feel good about the customers we have. We also see additional opportunities in multiple ways that could be in the automation within the conveyors and warehouses themselves to carts and many other things. So we're optimistic in the future that, that will continue to grow for us.

And one last one, if I can. Given the impact of lag price realization and ramping launch costs, how are you thinking about the cadence of margin in Q3 and Q4?

So margins in Q3 and Q4 will have that same drag effect on. We think the dilution, like I stated, about 150 basis points compared to our normal sort of run rate. So that is going to have a little bit of a dilutive effect in the second and -- third and fourth quarters. So I do expect it to be slightly beneath where we were in second quarter. But again, with timing, I think we could improve upon that.

And the next question comes from Larry De Maria with William Blair.

So obviously, you reiterated your 15% EBITDA -- adjusted EBITDA margin target on the sales return to pre-pandemic levels, which presumably happens next year. Just wanted to understand how we go from 11% or so this year to 15%, your confidence in getting to those numbers, or just further confidence in hitting those numbers, because that's obviously where our expectations are.

Yes. I guess a couple of things, and I'll ask Todd to provide some further color, perhaps. But our margins will be better. Our direct margins and our overhead absorption will be better with that higher volume. So there should be 2 factors contributing to that improvement. It also depends on where raw material prices sit. If raw material prices remain high, we pass that along, but we don't pick up additional margin on that. So that has its own impact on that. It's had its impact in the second quarter and plus the lag, and we'll have the same ramifications in the second half.

Yes. So as Bob mentioned, when you think about pre-pandemic levels, in 2019 we were at $520 million. And we've all talked about that 15% occurring once we reset sort of level of volume. And when we think of today's material pricing, if you were to push that back into '19, that would have created about $40 million of additional sales, right, with no further bottom line improvement. So really, it's that production volume. So when you look at our estimates this year at $470 million to $490 million, we're still well beneath our pre-pandemic run rate from a production standpoint when you think of that overhead absorption and that favorable impact. So this quarter, because of that lag, we had a very large step-up in material prices from Q1 to Q2. There'll be a modest increase in Q3, and the expectation is to stabilize or come down in Q4. We took the bulk of that kind of margin, I'd say, impact in the second quarter. And when you compare that back to 2019, we stabilized that. Again, it's a short-term impact. We're very confident when you couple material prices stabilizing with the overhead absorption and the cost reductions we've already done, we have that pathway to 15-plus percent.

That's kind of my point, is that we're targeting 15%, but if material prices don't cooperate, 15% is not going to happen. It will -- so should we be thinking about an absolute number next year of $90 million or more, is a better bogey to think about, considering material cost could be so volatile?

Well, the material cost -- if material costs stabilize and you don't see that volatility from quarter-to-quarter, so we won't have that quarter-to-quarter impact, we still can reach 15% adjusted EBITDA. Now we need to have that kind of higher level volume -- sales volume, you think of it, because again it's a material, it's just a pass-through. But if we were to achieve, let's say, 550 in sales next year, even with a higher material price, we still can achieve 15% EBITDA. We just can't have that volatility from quarter-to-quarter because that drags on our quarter-to-quarter margins, right, and there's a short-term impact.

And then you're on track with the new customer, supplier. Any concerns or comments with regards to, are they on track? Is there a supply chain outside of you on track? Have you looked into that at all? I just want to understand how confident you are.

I guess, first, we're focusing internally on our commitments to the schedule, to the cost to the preparedness. And we are right on path and on track with our expectations internally. The other things, when we look into those or try to look into those, we'll stay focused on what we're responsible for taking care of and certainly keep our eye on those things, but there's nothing really to report there either. It all appears to be going as expected.

. If there is nothing else at the present time, this concludes the question-and-answer session. I would like to return the call to Bob Kamphuis, Chairman, President and CEO, for any closing comments.

Thank you. Thank you all for your time today and your continued interest in MEC. We look forward to talking with some of you later today at the Jefferies Conference. So with that, we'll say goodbye. But thanks, again, for your attention today. Appreciate it.

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